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ROG > SEC Filings for ROG > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for ROGERS CORP


30-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the "Company", "Rogers", "we", "us", "our" and similar terms include Rogers Corporation and its subsidiaries, unless the context indicates otherwise.
In the following discussion and analysis, we sometimes provide financial information that was not prepared in accordance with U.S. generally accepted accounting principles (GAAP). Management believes that this non-GAAP information provides meaningful supplemental information regarding the Company's performance by excluding certain expenses that are generally non-recurring or otherwise may not be indicative of the core business operation results. In general, the Company believes that the additional non-GAAP financial information provided herein is useful to management and investors in assessing the Company's historical performance and for planning, forecasting and analyzing future periods. However, non-GAAP information has limitations as an analytical tool and should not be considered in isolation from, or as alternative to, financial information prepared in accordance with GAAP. Any time we provide non-GAAP information in the following narrative we identify it as such and in close proximity provide the most directly comparable GAAP financial measure as well as the information necessary to reconcile the two measures.

Forward Looking Statements
This information should be read in conjunction with the unaudited financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year-ended December 31, 2012. Certain statements in this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "believes," "estimates," "should," "target," "may," "project," "guidance," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results or performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changing business, economic, and political conditions both in the United States and in foreign countries, particularly in light of the sovereign debt crisis being experienced globally and the uncertain outlook for global economic growth, particularly in several of our key markets; increasing competition; any difficulties in integrating acquired businesses into our operations and the possibility that anticipated benefits of acquisitions or divestitures may not materialize as expected; delays or problems in completing planned operational enhancements to various facilities; our achieving less than anticipated benefits and/or incurring greater than anticipated costs relating to streamlining initiatives or that such initiatives may be delayed or not fully implemented due to operational, legal or other challenges; changes in product mix; the development and marketing of new products and manufacturing processes and the inherent risks associated with such efforts and the ability to identify and enter new markets; the outcome of current and future litigation; our ability to retain key personnel; our ability to adequately protect our proprietary rights; the possibility that we may be required to recognize impairment charges against goodwill and non-amortizable assets in the future; increases in our employee benefit costs could reduce our profitability; the accuracy of our analysis of our potential asbestos-related exposure and insurance coverage; the fact that our stock price has historically been volatile and may not be indicative of future prices; changes in the availability and cost and quality of raw materials; changes in environmental regulation, which could increase expenses and affect operating results; our ability to accurately predict reserve levels; our ability to obtain favorable credit terms with our customers and collect accounts receivable; our ability to service our debt; certain covenants in our debt documents could adversely restrict our financial and operating flexibility; fluctuations in foreign currency exchange rates; and changes in tax rates and exposure which may increase our tax liabilities. Such factors also apply to our joint ventures. We make no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statements, unless required by law. Additional information about certain factors that could cause actual results to differ from such forward-looking statements include, but are not limited to, those items described in our filings with the Securities and Exchange Commission, including Item 1A, Risk Factors, to the Company's Form 10-K for the year-ended December 31, 2012 and previously filed Form 10-Q's.

Executive Summary
Company Background and Strategy
We are a global enterprise that provides our customers with innovative solutions and industry leading products in a variety of markets, including portable communications, communications infrastructure, consumer electronics, mass transit, automotive, defense and clean technology. We generate revenues and cash flows through the development, manufacture, and distribution of specialty material-based products that are sold to multiple customers, primarily original equipment manufacturers (OEMs) and contract manufacturers that, in turn, produce component products that are sold to end-customers for use in various applications. As such, our business is highly dependent, although indirectly, on market demand for these end-user products. Our ability to forecast future sales growth is largely dependent on management's ability to anticipate changing market conditions and how our customers


will react to these changing conditions. It is also highly limited due to the short lead times demanded by our customers and the dynamics of serving as a relatively small supplier in the overall supply chain for these end-user products. In addition, our sales represent a number of different products across a wide range of price points and distribution channels that do not always allow for meaningful quantitative analysis of changes in demand or price per unit with respect to the effect on sales and earnings.
Strategically, our current focus is on three mega trends that we believe will fuel the future growth of our Company - continued growth of the internet and the variety of ways in which it can be accessed, expansion of mass transit, and further investment in clean technology. These trends and their related markets all require materials that perform to the highest standards, which has been a key strength of our products over the years. We are also focused on growing our business both organically and through strategic acquisitions or technology investments that will add to or expand our product portfolio, as well as strengthen our presence in existing markets or expand into new markets. We will continue to focus on business opportunities and invest in expansion around the globe. Our vision is to be the leading innovative, growth oriented, and high technology materials solutions provider for our selective markets. To achieve this vision, we must have an organization that can cost effectively develop, produce and market products and services that provide clear advantages for our customers and markets.
2013 Third Quarter Executive Summary
In the third quarter of 2013, we achieved net sales of $142.8 million, a 10.6% increase from the third quarter of 2012 net sales of $129.1 million. Income from continuing operations decreased by 77.0% from $59.1 million in the third quarter of 2012 to $13.6 million in the third quarter of 2013. However, in the third quarter of 2013, income from continuing operations included approximately $1.0 million of special charges primarily related to activities targeted at streamlining the organization, including approximately $0.8 million in severance charges from a workforce reduction and approximately $0.2 million in other charges primarily related to the move of Curamik's finishing operations from Germany to Hungary. In the third quarter of 2012, income from continuing operations included approximately $47.2 million of net special benefits comprised primarily of the following: (i) $50.0 million of net discrete tax benefits, the most significant of which was the reversal of the valuation allowance on the majority of our U.S. deferred tax assets, which was partially offset by (ii) $1.3 million in net pension settlement charges related to our former President and Chief Executive Officer; (iii) $1.0 million of net charges related to the shutdown and partial relocation of our High Performance Foams manufacturing facility in Bremen, Germany; and (iv) $0.5 million of severance and other related charges. Excluding these charges, non-GAAP income from continuing operations improved by 23.2% quarter over quarter and, as a percentage of net sales, from 9.2% of net sales in the third quarter of 2012 to 10.2% of net sales in the third quarter of 2013. We also experienced strong improvement in gross margin, which increased from 33.3% in the third quarter of 2012 to 35.8% in the third quarter of 2013. The quarterly improvement was primarily the result of increased operating leverage on the incremental sales volume enhanced by cost savings initiatives.
Overall, these results highlight the fact that we delivered solid revenue improvements quarter over quarter, driven primarily by two out of three of our core business segments. The Power Electronics Solutions segment comprised of the Curamik Electronics Solutions (CES) operating segment and the Power Distribution Systems (PDS) operating segment experienced a strong rebound. Quarter over quarter, CES experienced a 45.8% increase in net sales from $22.1 million in the third quarter of 2012 to $32.1 million in the third quarter of 2013, while PDS experienced a 40.4% increase in net sales from $9.4 million in 2012 to $13.2 million in the third quarter of 2013. Further contributing to these improvements was our Printed Circuit Materials operating segment, which experienced an increase in net sales of 8.4% from $43.4 million in the third quarter of 2012 to $47.1 million in the third quarter of 2013. These improvements were partially offset by a decline in sales of 7.5% at our High Performance Foams operating segment from $48.0 million in the third quarter of 2012 to $44.4 million in the third quarter of 2013.
We also delivered solid margin improvements quarter over quarter. From an operations perspective, the cost savings generated from streamlining activities that were initiated in 2012 continue to be realized, as we expect to achieve an annualized cost savings of approximately $20.0 million in 2013. Further, the additional initiatives that occurred during the first half of 2013 are expected to generate approximately $12.0 million in annualized cost savings by the first quarter of 2014. The 2013 initiatives included changes to our defined benefit pension plans, as benefits under these plans will no longer accrue to employees active in the plans. We expect to incur net benefits related to this action of approximately $6.8 million, starting in the third quarter of 2013. Overall, we recognized approximately $7.6 million of savings in the third quarter of 2013, which is consistent with our projections. Some of these cost savings will be offset by investments in other initiatives targeted at growing our business in the future, such as increased spending on sales and marketing and research and development initiatives, as well as spending targeted at improving our functional infrastructure, including information technology and process improvement initiatives.
We are continuing to pursue initiatives aimed at further streamlining our cost structure in order to maintain our improved operating leverage. We will also focus on external investments and initiatives targeted at growing sales, while focusing internally at improving our operational processes to drive further cost savings throughout the organization and expanding the presence of our existing product portfolio.


Results of Operations

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

                                             Three Months Ended                            Nine Months Ended
                                 September 30, 2013      September 30, 2012    September 30, 2013     September 30, 2012
Net sales                               100.0  %                100.0  %              100.0  %               100.0  %
Gross margin                             35.8  %                 33.3  %               34.1  %                31.0  %
Selling and administrative
expenses                                 17.9  %                 20.2  %               19.0  %                19.4  %
Research and development
expenses                                  3.8  %                  3.7  %                4.2  %                 3.9  %
Restructuring and impairment
charges                                   0.9                     1.4  %                1.5                    2.7  %
Operating income (loss)                  13.2  %                  8.0  %                9.4  %                 5.0  %

Equity income in unconsolidated
joint ventures                            1.2  %                  1.5  %                0.8  %                 1.0  %
Other income (expense), net              (0.1 )%                    -  %               (0.2 )%                   -  %
Net realized gain (loss)                    -                       -  %                  -                   (0.9 )%
Interest income (expense), net           (0.6 )%                 (0.9 )%               (0.6 )%                (0.9 )%
Income (loss) before income tax
expense (benefit)                        13.7  %                  8.6  %                9.4  %                 4.2  %

Income tax expense (benefit)              4.3  %                (37.3 )%                2.8  %               (12.8 )%

Income (loss) from continuing
operations                                9.4  %                 45.9  %                6.6  %                17.0  %

Net Sales
Net sales increased by 10.6% from $129.1 million in the third quarter of 2012 to $142.8 million in the third quarter of 2013. On a year to date basis, net sales increased by 7.1% from $374.6 million in the first nine months of 2012 to $401.3 million in the first nine months of 2013. The increase in sales on both a quarterly and year to date basis is primarily attributable to volume increases in three of our Core Strategic segments - Printed Circuit Materials (8.4% and 10.5%, respectively), Curamik Electronics Solutions (45.8% and 19.5%, respectively), and Power Distribution Systems (40.4% and 15.8%, respectively); partially offset by a decline in net sales in High Performance Foams (7.5% and 3.8%, respectively). See "Segment Sales and Operations" below for further discussion on segment performance.
Gross Margin
Gross margin as a percentage of net sales increased by 250 basis points from 33.3% in the third quarter of 2012 to 35.8% in the third quarter of 2013. 2013 gross margin included special charges related to the move of final inspection operations in the Curamik segment from Germany to Hungary that negatively impacted gross margin by approximately 10 basis points during the quarter. 2012 gross margin included special charges related to the shut down of Power Distribution Systems operations in Arizona and High Performance Foams operations in Bremen, Germany that negatively impacted margins by approximately 25 basis points during the quarter. Excluding these charges, non-GAAP gross margin improved by 240 basis points from 33.5% in the third quarter of 2012 to 35.9% in the third quarter of 2013. The quarterly improvement was primarily the result of the incremental contribution from the increase in net sales that contributed approximately 158 basis points to the increase and the favorable impact from streamlining savings that contributed approximately 84 basis points of improvement.
On a year to date basis, gross margin as a percentage of sales increased from 31.0% in the first nine months of 2012 to 34.1% in the first nine months of 2013. 2013 gross margin included special charges related to the move of final inspection operations in the Curamik segment from Germany to Hungary that negatively impacted gross margin by approximately 12 basis points year to date. 2012 gross margin included special charges related to the shut down of Power Distribution Systems operations in Arizona and High Performance Foams operations in Bremen, Germany that negatively impacted margins by approximately 40 basis points year to date. Excluding these charges, non-GAAP gross margin improved by 290 basis points from 31.4% in the first nine months of 2012 to 34.3% in the first nine months of 2013. The year to date improvement was primarily the result of the incremental contribution from the increase in net sales that contributed approximately 111 basis points to the increase and the favorable impact from streamlining savings that contributed approximately 179 basis points of improvement.


Selling and Administrative Expenses
Selling and administrative expenses decreased 1.9% from $26.1 million in the third quarter of 2012 to $25.6 million in the third quarter of 2013. Third quarter 2013 results included approximately $0.1 million in special charges related to the move of Curamik Electronics Solutions finishing operations from Germany to Hungary. Third quarter 2012 results included approximately $2.0 million of costs related to the settlement of a pension obligation with the former Chief Executive Officer of the Company. As a percentage of sales, non-GAAP selling and administrative expenses decreased from 18.6% in the third quarter of 2012 to 17.8% in the third quarter of 2013. Excluding these charges, non-GAAP selling and administrative expenses increased $1.4 million quarter over quarter. The overall increase in expenses is due to a variety of factors, including $2.4 million of incremental incentive and equity compensation costs, $0.4 million of higher amortization expense related to Curamik intangible assets, and other net increases of approximately $0.5 million for incremental expenditures in certain key strategic areas, including sales and marketing and other organizational initiatives, in order to better position the Company for future growth. The increases were partially offset with cost savings of approximately $1.9 million related primarily to changes in our defined benefit pension plans and the streamlining activities initiated in 2012 and 2013. On a year to date basis, selling and administrative expenses increased 5.1% from $72.6 million in the first nine months of 2012 to $76.3 million in the first nine months of 2013. Year to date 2013 results included approximately $1.3 million in special charges comprised of $0.6 million in costs related to the move of Curamik Electronics Solutions finishing operations from Germany to Hungary and $0.7 million of severance related charges. Year to date 2012 results included approximately $2.1 million of costs primarily related to the settlement of a pension obligation with the former Chief Executive Officer of the Company. As a percentage of sales, non-GAAP selling and administrative expenses decreased from 18.8% in the first nine months of 2012 to 18.7% in the first nine months of 2013. Excluding these charges, non-GAAP selling and administrative expenses increased $4.4 million year over year. The overall increase in expenses is due to a variety of factors, including $4.6 million of incremental incentive and equity compensation costs, $1.1 million of higher amortization expense related to Curamik intangible assets, and other net increases of approximately $2.6 million for incremental expenditures in certain key strategic areas, including sales and marketing, strategic planning, information technology and executive recruiting, in order to better position the Company for future growth. The increases were partially offset with cost savings of approximately $3.9 million primarily related to changes in our defined benefit pension plans and the streamlining activities initiated in 2012 and 2013. Research and Development Expenses
Research and development (R&D) expenses increased 12.5% from $4.8 million in the third quarter of 2012 to $5.4 million in the third quarter of 2013. As a percentage of net sales, R&D costs increased from 3.7% of net sales in the third quarter of 2012 to 3.8% of net sales in the third quarter of 2013. Year to date, R&D expenses increased by 15.8% from $14.6 million in the first nine months of 2012 to $16.9 million in the first nine months of 2013. As a percentage of net sales, R&D expenses increased from 3.9% of net sales in the first nine months of 2012 to 4.2% of net sales in the first nine months of 2013. This increase in R&D expenditures both on a quarterly and year to date basis is consistent with our long term strategic plan of investing up to 6% of net sales back into R&D activities. In the past year, we have made concerted efforts to begin realigning our R&D organization to better fit the future direction of the Company, including dedicating resources to focus on current product extensions and enhancements to build our short term technology needs, as well as increasing investments that are developing new platforms and technologies that are focused on long term growth initiatives, such as the recently announced partnership with Northeastern University in Boston, Massachusetts that will create the Rogers Innovation Center on their campus.
Equity Income in Unconsolidated Joint Ventures Equity income in unconsolidated joint ventures remained consistent quarter over quarter at approximately $1.8 million. On a year to date basis, equity income in unconsolidated joint ventures declined by 18.9% from $3.7 million in the first nine months of 2012 to $3.0 million in the first nine months of 2013. The decrease was primarily due to the depreciation of the Japanese Yen against the U.S. dollar of approximately 25.0% quarter over quarter and 21.2% year over year, as well as the generally softer demand across most of its end markets. Other Income (Expense), Net
In the third quarter of 2013, other income (expense), net, was expense of $0.1 million as compared to a de minimis amount in the third quarter of 2012. The difference in these amounts is primarily related to foreign currency exchange translation. On a year to date basis, in the first nine months of 2013 we recognized expense of approximately $0.9 million as compared to income of $0.1 million in the first nine months of 2012. The difference in these amounts is primarily related to $0.8 million of foreign currency exchange translation and $0.5 million of income recognized in the second quarter of 2012 related to the sale of certain assets at our Arizona facility. These increases were partially offset by $0.5 million of lower commission expense paid to the joint ventures.


Realized Investment Gain (Loss), Net
There was no realized investment gain (loss), net, in the third quarter of 2013 or 2012, nor in the first nine months of 2013. In the first nine months of 2012, we incurred a realized investment loss of $3.2 million related to the liquidation of the auction rate securities portfolio, which resulted in net proceeds of approximately $25.4 million. Interest Income (Expense), Net
Interest income (expense), net, declined by 18.1% from $1.1 million of expense in the third quarter of 2012 to $0.9 million of expense in the third quarter of 2013. On a year to date basis, interest income (expense), net, declined by 23.5% from $3.4 million of expense in the first nine months of 2012 to $2.6 million of expense in the first nine months of 2013. This decline was due primarily to lower interest expense on our debt facility, as we have paid down the principal from $122.5 million at the beginning of 2012 to approximately $81.3 million at the end of the third quarter of 2013.
Income Taxes
Our effective tax rate resulted in an expense of 31.4% on income in the third quarter of 2013 as compared to a benefit of 436.7% in the third quarter of 2012. On a year to date basis, the effective tax rate was 30.3% for the first nine months of 2013 as compared to a benefit of 297.2% in the first nine months of 2012. In the third quarter of 2012, our tax rate was lower due to certain one-time discrete items of approximately $50.0 million, the most significant of which was the reversal of the valuation allowance on the majority of our U.S. deferred tax assets of $46.6 million. In the first nine months of 2012, our tax rate was favorably impacted by certain one-time discrete items, including a $1.5 million benefit related to the reversal of a valuation allowance resulting from the liquidation of the auction rate securities portfolio. In both 2013 and 2012, our tax rate benefited from favorable tax rates on certain foreign business activity as compared to our statutory rate of 35%.

Segment Sales and Operations
Core Strategic
High Performance Foams

(Dollars in millions)                            Three Months Ended                             Nine Months Ended
                                       September 30,
                                           2013            September 30, 2012       September 30, 2013      September 30, 2012
Net sales                            $          44.5     $               48.0     $         126.8          $             131.8
Operating income (loss)                          7.5                      8.8                17.6                         16.0

The High Performance Foams operating segment is comprised of our polyurethane and silicone foam products, which are sold into a wide variety of markets for various applications, such as portable communications, consumer, general industrial and transportation markets for gasketing, sealing, cushioning, and impact protection applications.
Q3 2013 versus Q3 2012
Net sales in this segment declined by 7.5% from $48.0 million in the third quarter of 2012 to $44.5 million in the third quarter of 2013. The decrease in net sales is due primarily to the mobile internet market dynamic, as well as improved production utilization rates by our customers. In addition, there were unexpected delays in the introduction of certain next generation tablets. This resulted in a 19% decline in net sales into that specific market. We also experienced a 4% decline in the transportation market primarily due to weaker demand during the quarter. These declines were partially offset by a 9% increase in demand in consumer applications for cushioning, sealing and impact protection materials.
Operating income declined by 14.8% from $8.8 million in the third quarter of 2012 to $7.5 million in the third quarter of 2013. Third quarter 2013 results included approximately $0.1 million of special charges related to severance costs. Third quarter 2012 results included $2.1 million of special charges related primarily to the shutdown of the silicone foams manufacturing facility in Bremen, Germany. Excluding these charges, non-GAAP operating income declined by 30.9% from $11.0 million in the third quarter of 2012 to $7.6 million in the third quarter of 2013. This decline is driven primarily by the lost contribution on the lower sales volumes, as well as higher costs of production due to certain raw material issues that are currently being addressed. These declines are . . .

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