Rogers Corporation has a market cap of $656 million; its shares were traded at around $42.13 with a P/E ratio of 20.5 and P/S ratio of 1.2.
Highlight of Business Operations:Gross margin as a percentage of sales decreased from 34.4% in the third quarter of 2011 to 33.0% in the third quarter of 2012. On a year to date basis, gross margin as a percentage of sales decreased from 33.2% in the first nine months of 2011 to 30.7% in the first nine months of 2012. Third quarter and year to date 2012 results included approximately $0.4 million and $1.6 million, respectively, of special charges related to the shutdown of the Power Distribution Systems operations in Arizona; High Performance Foams operations in Bremen, Germany; and Composite Materials operations in Rogers, Connecticut. These charges resulted from accelerated depreciation as the useful lives of certain equipment used in the manufacturing process were shortened, as well as additional inventory reserves. These charges negatively impacted 2012 third quarter and year to date results by approximately 30 and 40 basis points, respectively. The decline in sales volumes in the three and nine months ended September 30, 2012 as compared to the prior year periods also negatively impacted margins. The decreased contribution on those sales negatively impacted margins by approximately 150 and 180 basis points, respectively, in the three and nine months ended September 30, 2012. Further, inventory fluctuations negatively impacted margin comparisons over these periods as inventory levels declined by approximately 6.1% and 10.5%, respectively, during the third quarter and first nine months of 2012 as we managed inventory closely to better align inventory levels with the lower sales volumes experienced during the year. Inventory increased in the third quarter of 2011 by 13.1% and in the first nine months of 2011 by 35.8% (excluding the impact of the newly acquired Curamik business) primarily as a result of the increase in sales volumes experienced during the first half of 2011, as well as the startup of production in our Printed Circuit Materials manufacturing operation in Suzhou, China. The negative impact to margins in the third quarter and first nine months of 2012 as a result of these fluctuations was approximately 160 and 120 basis points, respectively. Lastly, our streamlining initiatives initiated in the first half of 2012 favorably impacted margins in the third quarter and first nine months of 2012 by approximately
Selling and administrative expenses declined 4.4% from $27.5 million in the third quarter of 2011 to $26.3 million in the third quarter of 2012. 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. Excluding this charge, selling and administrative expenses, as a percentage of sales, remained consistent in the third quarter of 2012 as compared to the third quarter of 2011 at 18.6% even though net sales declined by 11.6% in the period. The overall decline in spending, excluding the above mentioned charge, of $3.2 million can be attributable primarily to a reduction of $3.7 million in incentive and equity compensation costs due to the lower level of performance of the business in 2012 as compared to 2011. This decline was partially offset by a $0.9 million increase in costs related to the defined benefit pension and retiree medical plans in the third quarter of 2012 as compared to the third quarter of 2011, due to unfavorable changes to market assumptions that drive the pension calculations for accounting purposes. The remaining net decrease in selling and administrative costs for the quarter can be primarily attributable to the streamlining and cost reduction efforts that were initiated in the first half of 2012.
Research and development (R&D) expense decreased by 9.8% from $5.4 million in the third quarter of 2011 to $4.8 million in the third quarter of 2012. Year to date, R&D expense declined by 9.3% from $16.2 million in the first nine months of 2011 to $14.7 million in the first nine months of 2012. As a percentage of sales, research and development expenses were relatively consistent both on a quarterly and year to date basis. In the third quarter of 2012, R&D expenses as a percentage of sales were 3.7% as compared to 3.6% in the third quarter of 2011 and, on a year to date basis, 3.9% in 2012 as compared to 3.8% in 2011. The overall decline in spending on both a quarterly and year to date basis can be primarily attributable to our intent to invest a certain percentage of our sales back into R&D activities, as our spending was aligned with fluctuations in sales levels. Going forward, in the near term, we believe that our R&D spending as a percentage of sales will continue to remain consistent with levels incurred in the most recent quarters and average in the 3.5%-4.0% range.
Operating income declined by 27.3% from $22.0 million in the first nine months of 2011 to $16.0 million in the first nine months of 2012. 2012 year to date results included approximately $6.1 million of special charges, including $2.9 million related to the shutdown of the silicone foams manufacturing facility in Bremen, Germany, $2.5 million of net severance related charges as a result of our streamlining initiatives, and $0.7 million in pension settlement charges (as further described in the "Selling and Administrative Expenses" section above). Excluding these charges, operating results improved slightly with a 0.2% increase over the year to date periods due in part to lower costs as a result of the streamlining initiatives, which created better operating leverage on lower sales volumes, as well as an overall favorable sales mix. These favorable results were partially offset by approximately $2.0 million of additional costs incurred in 2012 as compared to 2011 related to the startup of the PORON® XRD® product line.
On a year to date basis, net sales declined by 32.6% from $104.3 million in the first nine months of 2011 to $70.3 million in the first nine months of 2012. This decline was due primarily to the continued lower demand in wind energy and industrial motor drive applications, which declined 20.9% and 43.9%, respectively, in the first nine months of 2012 as compared to the first nine months of 2011, as well as further inventory corrections in the supply chain. We believe that these markets will remain at these levels for the near term, but the long term outlook remains positive. Also contributing to the decline in sales is the impact of foreign currency exchange rates, which contributed approximately $5.5 million to the overall sales decline as the USD appreciated against the Euro by approximately 10.1% on a year to date basis. The segment transacted approximately 82% of its sales in the first nine months of 2012 in Euro as compared to 77% in the first nine months of 2011. These declines were partially offset by increasing demand for Curamik Electronics Solutions direct bonded copper materials in x-by-wire technology for the automotive industry, which increased 4% period over period. This technology replaces traditional mechanical systems with electrical systems in automobiles to help improve overall performance and fuel efficiency.
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