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ROG > SEC Filings for ROG > Form 10-Q on 30-Apr-2014All Recent SEC Filings

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Form 10-Q for ROGERS CORP


30-Apr-2014

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, 2013. 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 uncertain outlook for global economic growth, particularly in several of our key markets; uncertainty regarding resolution of the United States fiscal cliff and debt ceiling issues; 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, 2013 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: 1) continued growth of the internet and the variety of ways in which it can be accessed, (2) expansion of mass transit, and (3) further investment in clean technology. These trends and their related markets all require materials that perform to the highest standards, a characteristic 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 selected 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. 2014 First Quarter Executive Summary
In the first quarter of 2014, we achieved net sales of $146.6 million, a 16.4% increase from the first quarter of 2013 net sales of $126.0 million. We delivered solid revenue improvements quarter over quarter resulting in a record first quarter, driven primarily by the Printed Circuit Materials (PCM) and the Power Electronics Solutions (PES) operating segments. Net sales in PCM increased 34.4% from $43.6 million in first quarter of 2013 to $58.5 million in the first quarter of 2014 and net sales in PES increased 19.0% from $34.3 million in the first quarter of 2013 to $40.8 million in the first quarter of 2014. These improvements were partially offset by a decline in net sales of 2.9% at our High Performance Foams (HPF) operating segment from $42.4 million in the first quarter of 2013 to $41.2 million in the first quarter of 2014.
Income from continuing operations increased by 108.6% from $7.0 million in the first quarter of 2013 to $14.6 million in the first quarter of 2014. In the first quarter of 2013, income from continuing operations included approximately $0.9 million of special charges primarily related to activities targeted at streamlining the organization, including approximately $0.5 million in severance charges from a workforce reduction and approximately $0.4 million in other charges primarily related to the move of certain manufacturing operations from the PES manufacturing facility in Eschenbach, Germany to a lower cost facility in Hungary. Excluding these charges, non-GAAP income from continuing operations improved by 85.7% quarter over quarter and, as a percentage of net sales, from 6.2% of net sales in the first quarter of 2013 to 9.9% of net sales in the first quarter of 2014. We also experienced strong improvement in gross margin, which increased from 32.8% in the first quarter of 2013 to 36.8% in the first quarter of 2014. The quarterly improvement was primarily the result of increased operating leverage on the incremental sales volume enhanced by cost savings initiatives.
Going forward, we expect to to achieve continued success in our core markets, with pressure in certain sectors, particularly in the mobile internet device market for our HPF products, as we expect rapid technology advancements and increased competition to negatively impact sales volumes and profitability. However, we do believe many opportunities for growth exist, particularly as we expand our presence across new markets and regions, as we further diversify our product portfolio in the markets we serve today.


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
                                                     March 31, 2014         March 31, 2013
Net sales                                                  100.0  %               100.0  %
Gross margin                                                36.8  %                32.8  %

Selling and administrative expenses                         18.8  %                20.0  %
Research and development expenses                            3.3  %                 4.2  %
Operating income (loss)                                     14.6  %                 8.6  %

Equity income in unconsolidated joint ventures               0.7  %                 0.5  %
Other income (expense), net                                 (0.8 )%                (0.5 )%
Interest income (expense), net                              (0.5 )%                (0.7 )%
Income (loss) before income tax expense (benefit)           14.0  %                 7.9  %

Income tax expense (benefit)                                 4.0  %                 2.3  %

Income (loss) from continuing operations                     9.9  %                 5.6  %

Net Sales
Net sales increased by 16.4% from $126.0 million in the first quarter of 2013 to $146.6 million in the first quarter of 2014. The increase in net sales is primarily attributable to volume increases in the Printed Circuit Materials and Power Electronics Solutions operating segments, which achieved 34.4% and 19.0% quarter over quarter growth, respectively; partially offset by a decline in net sales in the High Performance Foams operating segment of 2.9% quarter over quarter. See "Segment Sales and Operations" below for further discussion on segment performance.
Gross Margin
Gross margin as a percentage of net sales increased by 400 basis points from 32.8% in the first quarter of 2013 to 36.8% in the first quarter of 2014. 2013 gross margin included approximately $0.2 million of special charges related to relocation costs associated with the move of certain manufacturing operations from the Power Electronics Solutions manufacturing facility in Eschenbach, Germany to a lower cost facility in Hungary. Excluding these charges, non-GAAP gross margin improved by 380 basis points from 33.0% in the first quarter of 2013 to 36.8% in the first quarter of 2014. The year over year non-GAAP improvement was primarily the result of the incremental contribution from the increase in net sales that contributed approximately 240 basis points to the increase and the favorable impact from streamlining savings that contributed approximately 48 basis points of improvement. The remaining net improvement of 92 basis points is attributable primarily to production efficiencies that enabled us to leverage our existing asset base to achieve the increase in volumes. In addition, we continue to implement improvements in supply chain, product quality and procurement, which also favorably impacted margin performance.
Selling and Administrative Expenses
Selling and administrative expenses increased 9.5% from $25.2 million in the first quarter of 2013 to $27.6 million in the first quarter of 2014. First quarter 2013 results included approximately $1.0 million in special charges comprised of $0.3 million in costs related to the move of certain manufacturing operations from the Power Electronic Solutions manufacturing facility in Eschenbach, Germany to a lower cost facility in Hungary and $0.7 million of severance related charges. Excluding these charges, non-GAAP selling and administrative expenses increased $3.4 million quarter over quarter. The overall increase in non-GAAP expenses is due to a variety of factors, including $2.6 million of incremental incentive and equity compensation costs, $0.5 million of environmental reserves and other net increases of approximately $2.0 million for incremental expenditures in certain key strategic areas, such as sales and marketing, strategic planning, information technology and executive recruiting - expenditures all targeted at better positioning the Company for future growth. General inflation and merit increases of $1.5 million were more than offset with cost savings of approximately $3.2 million related primarily to changes in our defined benefit pension plans and the streamlining activities initiated in 2012 and 2013. As a percentage of sales, non-GAAP selling and administrative expenses decreased from


19.2% in the first quarter of 2013 to 18.8% in the first quarter of 2014. The decline in selling and administrative expenses as a percentage of sales is primarily attributable to the significant increase in net sales quarter over quarter as we were able to achieve higher sales volumes while controlling selling and administrative spending levels.

Research and Development Expenses
Research and development (R&D) expenses decreased 7.7% from $5.3 million in the first quarter of 2013 to $4.9 million in the first quarter of 2014. As a percentage of net sales, R&D costs decreased from 4.2% of net sales in the first quarter of 2013 to 3.3% of net sales in the first quarter of 2014. The lower rate is due primarily to the significant increase in net sales quarter over quarter. 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 meet our short term technology needs. We also are increasing investments that are targeted at developing new platforms and technologies focused on long term growth initiatives, as evidenced by our partnership with Northeastern University in Boston, Massachusetts that has resulted in the creation of the Rogers Innovation Center on its campus. As a result, we expect to increase R&D expenditures as the Innovation Center ramps up, as our long term goal is to reinvest approximately 6% of net sales back into R&D activities. Equity Income in Unconsolidated Joint Ventures Equity income in unconsolidated joint ventures increased from $0.5 million in the first quarter of 2013 to approximately $1.0 million in the first quarter of 2014. The increase is due to generally improved demand across most end markets. Other Income (Expense), Net
In the first quarter of 2014, other income (expense), net, was expense of $1.2 million as compared to an expense of $0.6 million in the first quarter of 2013. The difference in these amounts is primarily related to unfavorable foreign currency exchange transaction losses of $0.2 million and commodity hedging contracts of $0.7 million.
Interest Income (Expense), Net
Interest income (expense), net, declined by 17.3% from $0.9 million of expense in the first quarter of 2013 to $0.7 million of expense in the first quarter of 2014. This decline was due primarily to lower interest expense on our debt facility, as we have paid down the principal from $98.0 million at the beginning of 2013 to $73.8 million at the end of the first quarter of 2014. Income Taxes
Our effective tax rate resulted in an expense of 28.9% on income in the first quarter of 2014 as compared to an expense of 29.2% in the first quarter of 2013. In both 2014 and 2013, 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


Printed Circuit Materials
(Dollars in millions)             Three Months Ended
                          March 31, 2014      March 31, 2013
Net sales               $     58.5           $           43.6
Operating income (loss)       12.0                        3.8

The Printed Circuit Materials (PCM) operating segment is comprised of high frequency circuit material products used for making circuitry that receive, process and transmit high frequency communications signals, in a wide variety of markets and applications, including wireless communications, high reliability, and automotive, among others.
Q1 2014 versus Q1 2013
Net sales in this segment increased by 34.4% from $43.6 million in the first quarter of 2013 to an all-time quarterly record of $58.5 million in the first quarter of 2014. The quarter over quarter increase in net sales is due primarily to a 61.2% surge in orders for high frequency materials to support wireless base station and antenna applications in connection with the global 4G/LTE infrastructure build-out, particularly in China,. Further, demand in automotive radar applications for Advanced Driver Assistance


Systems increased by 36.9% quarter over quarter as auto manufacturers continue to adopt this safety feature into their designs. We also experienced a 34.9% increase in net sales for high reliability applications for aerospace and defense and a 6.1% increase in net sales for satellite TV applications. Operating income improved by 215.8% from $3.8 million in the first quarter of 2013 to $12.0 million in the first quarter of 2014. First quarter 2013 results included approximately $0.2 million of special charges related to severance costs. Excluding these items, non-GAAP operating income improved by 200.9% from $4.0 million in the first quarter of 2013 to $12.0 million in the first quarter of 2014. As a percentage of net sales, excluding the 2013 special charges, first quarter of 2014 operating income was 20.4%, a 1,130 basis point increase as compared to the 9.1% achieved in the first quarter of 2013. This significant increase is due primarily to the incremental contribution on the net sales increase as we were able to achieve this growth by utilizing our existing manufacturing capacity. Results were also favorably impacted by streamlining initiatives and cost improvements in the manufacturing process.

High Performance Foams

(Dollars in millions)             Three Months Ended
                          March 31, 2014      March 31, 2013
Net sales               $     41.2           $           42.4
Operating income (loss)        5.7                        6.6

The High Performance Foams (HPF) 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 general industrial, mobile internet devices, consumer and transportation markets for gasketing, sealing, and cushioning applications.
Q1 2014 versus Q1 2013
Net sales in this segment declined by 2.9% from $42.4 million in the first quarter of 2013 to $41.2 million in the first quarter of 2014. This decline in net sales was driven primarily by a 12.8% decline in net sales into the mobile internet device market, as market dynamics negatively impacted volumes. Specifically, the introduction of smaller tablet devices, improved material utilization improvements by customers, a shift in market share within our customer base, and the adoption of new technologies allowing thinner form factors all contributed to the declines in this rapidly changing market. The decrease was partially offset by a 21.2% increase into clean energy and consumer applications, where demand remained strong for our cushioning, sealing and impact protection materials.
Operating income declined by 13.2% from $6.6 million in the first quarter of 2013 to $5.7 million in the first quarter of 2014. First quarter 2013 results included approximately $0.2 million of special charges related to severance costs. Excluding these charges, non-GAAP operating income declined by 15.5% from $6.8 million in the first quarter of 2013 to $5.7 million in the first quarter of 2014. As a percentage of net sales, excluding the 2013 special charges, first quarter of 2014 operating income was 13.9%, a 210 basis point decline as compared to the 16.0% achieved in the first quarter of 2013. This decline is primarily attributable to the contribution lost on the lower sales volumes into the mobile internet device market as well as an unfavorable product sales mix, partially offset by improved operating leverage as a result of the streamlining initiatives initiated in 2012 and 2013.


Power Electronics Solutions
The Power Electronics Solutions (PES) operating segment is comprised of two
product lines - curamik® direct-bonded copper (DBC) substrates that are used
primarily in the design of intelligent power management devices, such as IGBT
(insulated gate bipolar transistor) modules that enable a wide range of products
including highly efficient industrial motor drives, wind and solar energy
converters and electrical systems in automobiles, and RO-LINX® busbars that are
used primarily in power distribution systems products in mass transit and clean
technology applications.

(Dollars in millions)           Three Months Ended
                         March 31, 2014     March 31, 2013
Net sales               $    40.8          $         34.3
Operating income (loss)       1.6                    (1.6 )

Q1 2014 versus Q1 2013
Net sales in this segment increased by 19.0% from $34.3 million in the first quarter of 2013 to $40.8 million in the first quarter of 2014. This increase was led by a strong rebound in demand for curamik® DBC substrates in renewable energy (36.8% increase), automotive (76.0% increase) and variable frequency motor drive applications (19.4% increase) across all targeted regions. In addition, RO-LINX® power distribution products experienced increased orders for locomotive applications in Asia and Europe, resulting in a 19.6% increase in net sales. China has recently announced an increase in overall rail spend for 2014 which should benefit this segment as these projects unfold.
Operating results for the quarter improved from an operating loss of $1.6 million in the first quarter of 2013 to an operating profit of $1.6 million in the first quarter of 2014. First quarter 2013 results included approximately $0.9 million of special charges comprised primarily of $0.3 million of severance costs related to a workforce reduction, as well as approximately $0.6 million in costs related to the startup of inspecting operations in Hungary. Excluding these charges, non-GAAP operating results improved from a loss of $0.7 million in the first quarter of 2013 to income of $1.6 million in the first quarter of 2014. As a percentage of net sales, excluding 2013 special charges, first quarter of 2014 operating income was 3.8%, a 590 basis point improvement as compared to the (2.1%) operating loss in the first quarter of 2013. This increase is primarily due to the profit contribution related to the increase in net sales and favorable impacts from streamlining initiatives, including the move of certain finishing operations from Germany to Hungary.

Other
(Dollars in millions)             Three Months Ended
                          March 31, 2014       March 31, 2013
Net sales               $     6.1             $            5.7
Operating income (loss)       2.2                          2.0

Our Other reportable segment consists of our elastomer rollers and floats, as well as our inverter distribution business. Q1 2014 versus Q1 2013
Net sales increased by 7.6% from $5.7 million in the first quarter of 2013 to $6.1 million in the first quarter of 2014. This increase is primarily due to the demand for inverters, which increased 25.3% quarter over quarter. There was also stronger demand for elastomer rollers and floats products, which increased 5.9% quarter over quarter.
Operating income increased by 10% from $2.0 million in the first quarter of 2013 to $2.2 million in the first quarter of 2014. The overall improvement in operating results in this segment is attributable primarily to the increase in volume and operational efficiencies achieved through streamlining initiatives.


Liquidity, Capital Resources and Financial Position We believe that our ability to generate cash from operations to reinvest in our business is one of our fundamental strengths. We believe that our existing sources of liquidity and future cash flows that are expected to be generated from our operations, together with our available credit facilities, will be sufficient to fund our operations, capital expenditures, research and development efforts, and debt service commitments, as well as our other operating and investing needs, for at least the next twelve months. We continue to have access to the remaining portion of the line of credit available under the Amended Credit Agreement, as amended, (as defined in the Credit Facilities section which follows), should any issue or strategic opportunities arise. We continually review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives.

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