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Text: The slides for today's call can be found on the Investors section of our website-along with the news release that was issued today.
These uncertainties include economic conditions, market demands and competitive factors.
Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures-to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the Investors section of our website.
Turning to slide three.
Rogers delivered solid third quarter results led by growth in key strategic markets and strong operational execution.
Q3 net sales were $202 million.
Gross margin was 37.4%, earnings were $0.37 per share and adjusted earnings were $1.45 per share.
Next sales, gross margin and adjusted earnings per share all improved sequentially and exceeded our previously announced guidance ranges.
Strong demand in the EV/HEV ADAS portable electronics and defense markets drove the higher-than-expected sales.
EV/HEV sales grew double digits sequentially driven by strong demand for battery pad and ceramic substrate applications.
ADAS sales experienced a sharp recovery in Q3, but the broader automotive market remains below pre-pandemic levels.
The substantial growth in sales for the portable electronics market resulted from improved seasonal demand bolstered by a fast ramp in 5G smartphones.
Defense market sales increased at a rapid pace in Q3, adding to the impressive year-to-date performance.
We have a long history of success in this market and recent design wins and new product introductions are adding to our growth.
Sales in the wireless infrastructure market were lower in Q3 as supply chain challenges resulting from trade restrictions slowed the 5G rollout in China.
We have yet to see broad recovery in the general industrial and mass transit markets.
Visibility to the timing of a recovery in these markets remains less clear.
Rogers continued to achieve strong results with our operational excellence initiatives, which helped drive our improved gross margin performance.
The higher gross margin and effective management of expenditures and working capital resulted in strong free cash flow of $48 million.
We are pleased with our Q3 results and our year-to-date performance in the face of challenging market conditions.
Our strong results highlight the benefits of both our diversified market and operational excellence strategies.
Turning to slide five.
I'll next discuss the outlook for some of our key markets.
Beginning with advanced mobility, Rogers' differentiated materials technology is a key performance enabler for this market.
The long-term outlook for the EV/HEV market continues to be robust with industry experts projecting a compound annual growth rate of approximately 35% over the next five years.
The trends driving this outlook include continued investment by automakers in EV and HEV technologies, regulatory measures and increasing consumer demand.
Recent strong sales in Europe highlight the continued resiliency in this emerging segment of the automotive market.
Year-to-date European sales are at record levels and third parties expect that full year 2020 sales will be three times higher than 2019.
As I'll discuss, Rogers is well positioned to capitalize on growth across the full spectrum of EVs and HEVs.
We also have a leading position in the ADAS market, where our high-frequency circuit materials are distinguished by our performance and reliability.
Over the next five years, this market is expected to grow at a CAGR of between 15% and 20%.
Driving this growth is higher penetration rates of ADAS units which are increasingly becoming standard safety features on new vehicle models.
Also, as vehicle autonomy gradually increases over time, the average number of RADAR sensors per vehicle is expected to grow.
In advanced connectivity, we are optimistic about the growth prospects in the portable electronics market led by 5G smartphone sales.
Third-party estimates point to modest growth in the total smartphone market over the next five years with a CAGR of about 4%.
However, the 5G portion of that market is expected to grow at a much faster 35% CAGR.
This is significant for Rogers as advanced features incorporated in 5G handsets have created a greater content opportunity.
The higher content ranges from 10% to 15% in mid-range devices up to 30% more content for certain premium products.
With our high-performing materials and reputation for reliability, we are well positioned to capitalize on this growth.
We are encouraged by the positive long-term outlook for growth in Advanced Defense Systems.
Defense spending is increasingly shifting to technology programs such as missile defense and radar systems, which drive increasing demand for Rogers' advanced circuit materials.
Our long history of providing high reliability solutions for demanding applications and our differentiated engineering capabilities puts us in a strong position to continue our success in this market.
We also continue to leverage our innovation to develop new technologies that support advanced communications, radar and guidance systems.
As mentioned, we are gaining traction with recent product introductions and we remain focused on developing future advanced materials solutions.
All three of our business units are focused on the significant growth opportunities we see ahead in advanced mobility, which includes the EV, HEV and ADAS markets.
Today, I'll focus on our advanced mobility solutions specific to EV/HEV, beginning with EMS. EV/HEV battery performance, reliability and safety are of great importance to automakers and their customers.
Leveraging our expertise in polyurethane materials, we have developed high-performance solutions that enable improved battery reliability for full electric and hybrid electric vehicles.
Battery compression pads for plug-in HEVs and EVs are the largest opportunity in this market, where content can be greater than $30 per vehicle.
We have numerous design wins and a strong pipeline of additional opportunities with leading OEMs and battery manufacturers.
We have a strong market position in high-performance ceramic substrates, which are used across the full spectrum of EVs and HEVs.
As a reference point, the contact opportunity for our substrates ranges from $5 in a 48-volt mild hybrid to around $40 in a full electric vehicle.
Increasingly, EV and HEV designs are incorporating wide band gap semiconductors, which require high-performance packaging.
This advanced technology provides substantial efficiency improvements which results in increased vehicle range and lower-cost batteries while reducing the size of the inverters.
Rogers is well positioned to capitalize on this growing trend.
Our new generation of silicon nitride-substrates helps to maximize the performance of silicon carbide devices in demanding EV applications.
Power interconnects provide an additional content opportunity in EV/HEV and like our substrate solutions, the dollar content can range broadly.
Power interconnects are critical components in EVs and they ensure the safety and reliability of the vehicle.
We are encouraged by design wins we have secured with several leading entrants to the EV market.
Rogers' growth strategy is built on four pillars, which include being a market-driven organization, delivering innovation leadership, utilizing synergistic M&A and driving operational excellence.
I'd like to highlight our operational excellence strategy, which we apply to our manufacturing activities and all parts of our business.
Beginning with our manufacturing operations, we have gained significant traction in recent quarters, which has resulted in sustainable improvements to our gross margin.
At the core of our success is our standardized and scalable operating system that leverages lean manufacturing to drive performance improvements in the areas of safety, quality, cost and flexibility across all our global site and supply chain.
Some of the guiding principles of our system include establishing a proactive safety culture with 100% employee engagement, driving operational excellence through a lean manufacturing culture that embraces continuous improvement, and optimizing our global manufacturing footprint to maximize capital utilization while best serving our global customer base.
Each of these elements has a strategy behind it to drive scalable, systematic and measurable improvements while delivering increased value to our customers.
Here are some examples of the results that we are seeing from applying this standardized system.
First, we have seen substantial improvements in yields, scrap rate and on-time deliveries in all three of our business units compared to the prior year.
This has benefited our financial performance and improved customer satisfaction.
Second, our system has provided a structure to make decisions about optimizing our global factory footprint.
As announced, we are making adjustments to certain manufacturing facilities in Europe and Asia.
These actions will significantly benefit the company by better aligning capacity with end market demand, improving factory utilization and increasing our cost competitiveness.
Third, in addition to our manufacturing improvement efforts, we are engaged in an enterprisewide continuous improvement initiative focused on optimizing all business processes.
This will drive further operating expense efficiency, as we leverage our commercial and administrative infrastructure and complement our manufacturing improvement efforts.
Recapping the key messages from today's call.
We are pleased with the solid results for the quarter resulting from our diversified market strength and the consistent execution of our operational improvement initiatives.
We are encouraged by the strength in many of our key strategic markets even as a recovery is not yet evident in other areas.
In the slides ahead, I'll review our third quarter results, followed by our fourth quarter guidance.
Turning to slide nine.
As Bruce mentioned, Rogers delivered solid results in the third quarter that exceeded our guidance for revenues, gross margin and adjusted EPS.
We delivered GAAP earnings per share of $0.37 per fully diluted share which was above the midpoint of our guidance range.
In the third quarter, we recorded restructuring and impairment charges of $9.4 million related to manufacturing footprint optimization plans involving certain Europe and Asia locations mentioned earlier.
Additional restructuring charges of between $2.5 million and $4.5 million are expected in the fourth quarter.
Many of the restructuring actions will not commence until late in Q4 and into the first half of 2021, at which point, we will have a comprehensive view of the annual benefits from the planned actions.
In addition, consistent with our communication last quarter, we incurred $11.7 million of expense in Q3 from the acceleration of our amortization of intangible assets from the DSP acquisition.
Neither the restructuring charges nor the accelerated amortization were included in our adjusted fully diluted earnings per share for Q3 of $1.45.
Turning to slide 10.
Our Q3 revenues of $201.9 million increased $10.7 million or 6% compared to the second quarter of 2020.
EMS revenues increased 21% to $86.4 million.
PES revenues increased 6% to $47.9 million while ACS revenues decreased 10% to $63.7 million sequentially.
Currency exchange rates favorably impacted third quarter revenues by approximately 1% compared to the second quarter.
The sequential EMS revenue increase resulted primarily from significantly higher portable electronic application revenues which grew 72% sequentially and accounted for over 35% of the segment revenues.
The revenue increase was spread across many of the large OEMs as the early momentum we witnessed at the end of the second quarter gained significant traction in Q3, bolstered by 5G handsets-and increased content in certain 5G phones.
In addition, revenues from EV, HEV battery pad applications grew 77% sequentially as the adoption of our materials into new design wins with battery makers for significant OEMs continue to demonstrate the application advantage of our PORON product.
We expect the demand for both portable electronics and EV/HEV applications to remain robust in Q4.
Revenues for general industrial applications, which comprise over 35% of the segment revenues, declined 2% sequentially.
The rate of decline in Q3 lessened significantly from the second quarter's sequential decline.
We are a bit cautious regarding q4 demand for general industrial applications as the increase in COVID-19 cases could slow the momentum of the economic recovery.
The increase in the PES revenues compared to Q2 was driven by a 20% increase in EV/HEV application revenues, which account for just under 30% of the segment revenues.
The sequential increase reflects the continued momentum in the market.
In addition, traditional automotive revenues for x-by-wire applications grew 60% sequentially and-resulting from the automotive recovery that commenced in Q2.
The industrial variable frequency drive business, which accounts for close to 25% of the segment revenues, declined 6% compared to Q2, an indication of the continued weakness in the general industrial market.
ACS revenues decreased sequentially, primarily due to a 42% decline in our wireless infrastructure revenues-which comprise approximately 23% of the segment revenues.
The decline was felt in both 4G and 5G revenues as the supply chain challenges from trade restrictions felt by Huawei have negatively impacted the pace of the China 5G installations.
We believe these challenges will continue to impact 5G revenues into the fourth quarter.
Aerospace and defense revenues, which now account for over 40% of the segment total, grew 11% sequentially from existing and new programs in the defense market.
We expect these defense revenues to be flat to slightly down in the fourth quarter due to the timing of orders for certain programs while we maintain our bullish outlook on our long-term prospects in this market due to the alignment of the advanced defense system requirements with the technical capabilities of our products.
ADAS revenues grew 42% sequentially as the automotive market commenced the recovery in the second quarter and our customers worked through their inventories early in the third quarter.
We expect to see continued strength for ADAS applications in the fourth quarter.
Turning to slide 11.
Our gross margin for the third quarter was $75.5 million or 37.4% of revenues, an increase of 80 basis points over the second quarter.
The increase in gross margin percentage was primarily due to increased volume, a favorable product mix and improved manufacturing execution.
Gross margins increased significantly for EMS in the third quarter due to increased volumes, a favorable mix with higher portable electronic revenues and less expense for excess inventory reserves.
ACS gross margin declined in the quarter due to lower volumes and not having the benefit of the tariff refund accrued in the second quarter.
The unfavorable impacts were partially offset by increased yields.
CES gross margin declined in the quarter, primarily due to an unfavorable product mix.
The impact of the unfavorable mix was partially offset by increased volume and the continued improvement in manufacturing performance.
We continue to be encouraged by the results generated from our increased focus on operational execution.
The gross margin for Q3 2020 was 180 basis points higher than Q3 2019 gross margin of 35.6% on approximately $20 million less revenues.
At the same revenue level and the same product profile as Q3 2019, our Q3 2020 gross margin would have approximated 39%.
Also on slide 11, we detail the changes to adjusted net income for Q3 of $27.1 million compared to adjusted net income for Q2 of $21.1 million.
The adjusted operating income for Q3 of $35 million and 17.3% of revenues was 190 basis points higher than Q2's adjusted operating income.
Adjusted operating expenses for Q3 of $40.5 million or 20.1% of revenues were approximately flat compared to Q2's expenses demonstrating good spending discipline on increasing revenues.
We terminated our interest rate swap agreement late in the third quarter, which resulted in recording additional interest expense of $2.4 million in Q3.
Rogers effective tax rate for the third quarter decreased to 8.1% as a result of reducing evaluation allowance on R&D credits in the quarter.
-We now expect our effective tax rate for 2020 will be approximately 23% to 24% with our long-term rate projected to be in the range of 20% to 22%.
Turning to slide 12.
In the third quarter, the company generated strong free cash flow of $47.9 million and ended the quarter with a cash position of $186.1 million.
In the quarter, we generated $58.7 million from operating activities, including a $22.2 million reduction in working capital and repaid $163 million on our credit facility.
We ended the third quarter with an outstanding balance on our credit facility of $60 millionand a net cash position defined as cash and equivalents in excess of the amount owed under our credit facility of $126.1 million.
In Q3, the company spent $10.8 million on capital expenditures.
We spent $28.9 million year-to-date through September.
And for 2020, expect to be at the low end of our communicated $40 million to $45 million range.
On October 16, the company entered into the fourth amended and restated credit agreement, which effectively extends the maturity of our revolving credit facility from February 2022 to March 2024.
Turning to our fourth quarter guidance on slide 13.
We expect to see strength in portable electronics driven by 5G handsets, strength in EV/HEV driven by the continued marketplace momentum and strength in traditional automotive markets resulting from the recovery in the end market.
We expect the timing of defense orders to weigh on revenues in Q4 and the supply chain challenges caused by trade restrictions to continue to negatively impact the wireless infrastructure market in Q4.
While we see some positive signs pointing toward the beginning of a recovery in general industrial markets, we are cautious in our forecast due to the influence of current developments of COVID-19 containment and outbreaks in different geographies.
As a result, Q4 revenues are estimated to be in the range of $195 million to $210 million.
We expect the Q4 volume and revenue mix profile to approximate our Q3 profile.
Therefore, we guide gross margin in the range of 37% to 38%.
We guide GAAP Q4 earnings in the range of $0.50 to $0.70 per fully diluted share.
On an adjusted basis, we guide fully diluted earnings in the range of $1.30 to $1.50 per share for the fourth quarter.

user
rogers q3 gaap earnings per share $0.37.
q3 gaap earnings per share $0.37.
q3 adjusted earnings per share $1.45.
qtrly gaap net sales $201.9 million versus $221.8 million.
sees q4 net sales $195 million to $210 million.
sees q4 earnings per share$0.50 to $0.70.
sees q4 non-gaap earnings per share $1.30 to $1.50.

assistant