A message from Bruce Hoechner, CEO, Rogers Corporation:

Read the corporate financials news release: Rogers Corporation Reports Results for the Third Quarter of 2015.

Screen shot 2013-11-01 at 10.53.55 AMIn Q3 2015, Rogers achieved another quarter of strong non-GAAP earnings, delivering $0.79 per diluted share, exceeding our previously announced guidance. Although net sales decreased by 1.6% from Q3 2014 to $160.4 million, we delivered non-GAAP operating margin of 14.7%, which is in line with our goal of 15%. The Company believes our revenue decline is linked to the impact of the uncertain global macroeconomic conditions. This situation has resulted in the delay of infrastructure spending, leading to weaker demand in certain applications across all three business segments. During the third quarter, we maintained a disciplined approach to cost management and continued our focus on operational excellence initiatives. These efforts contributed to our solid margin performance, despite sizable market headwinds. While we are cautious in the near term based on current market conditions, we remain confident in the longer-term growth expectations in our key megatrend markets. I will speak more about the growth outlook for our key markets later.

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I’d like to review the four elements of our growth strategy. This roadmap has proven to be the right approach, and we firmly believe that it will lead us to a strong recovery when the global markets improve. As a market-driven organization, we believe the diversity of Rogers’ three megatrend categories provides an effective counterbalance for the variability of any specific market. For example, the impact of slower-than-expected recovery in China’s wireless telecommunications base station buildout has been partially offset by the strong demand in advanced driver assistance systems.

We remain confident that we are in the right global growth markets based on the projected long-term growth rates in key applications. In the area of innovation leadership, we are pleased to announce the September 2015 opening of the Rogers Innovation Center in Asia.

Our approach has been to collaborate with leading researchers to bring breakthrough technology to our customers. China has great capabilities in this area, so we expanded our scope to give us better access to the technology development in that region. I am encouraged by what I see in the pipeline from our innovation centers, as well as from the business segments where our R&D teams continue to focus on next-generation solutions. During 2015, we have increased our R&D investment to over 4% of revenues to support this strong pipeline of next-generation and new technology to meet market demand. Our focus on synergistic M&A is making a positive contribution to revenues, as well as providing greater technological capabilities and market access to Rogers. We are pleased with the smooth integration of Arlon, which is now substantially complete.

Most importantly, the business has performed consistently, exceeding our revenue and profitability targets we established at the outset of the integration. Rogers’ bottom-line performance is evidence of our solid execution of our operational excellence initiatives. With fluctuating market conditions like the ones we face now, we are aggressively controlling what we can by operating the business more efficiently. And we are making great progress in implementing process and system improvements across the Company, from the manufacturing floor to our back-office functions.

Our approach includes formalized programs such as Six Sigma and supply and demand planning, as well as active engagement from front line employees for operations improvements. Together, these approaches are assisting all three of our business segments to improve yields and lower costs. Our interim three-year financial goals serve as a checkpoint in our long-term plan. While we are facing some unanticipated market headwinds, we remain confident in our long-term growth prospects of achieving 15% revenue growth through a combination of organic and acquired growth. Net sales for the quarter were $160.4 million, a 1.6% decrease from Q3 2014. Non-GAAP earnings exceeded guidance, with EPS of $0.79 per diluted share. On a currency adjusted basis, organic net sales declined 14.1% compared to Q3 2014. Fluctuations in foreign currency exchange rates unfavorably impacted Rogers’ revenue by approximately 4.6%.

During the quarter, the legacy Arlon business helped to substantially offset the decline in organic sales, contributing $27.8 million in net sales, and EPS of $0.19. Gross margin declined 250 basis points from 39.6% in Q3 2014 to 37.1% in Q3 2015. As previously mentioned, our discipline around operational efficiency helped us deliver non-GAAP operating margin of 14.7%, which was down 270 basis points from a record high of 17.4% in Q3 2014.

Advanced Connectivity Solutions

ACS achieved record third-quarter net sales of $66.2 million, driven by $16.6 million from Arlon, which is an increase of 4.4% over Q3 2014. We saw healthy revenue for 4G/LTE antenna applications, as well as advanced driver assistance systems, and aerospace and defense applications. The demand in these segments was not enough to offset the weakness in power amps for wireless base stations and higher inventory levels still being worked off in the supply chain. The ACS team is committed to manufacturing process efficiency and implementing process and system enhancements to reduce costs and improve on-time delivery for our customers. Based on what we’re seeing in the marketplace, such as uncertainty from the equipment providers, we’re cautious in the near-term. We maintain our belief that global coverage and capacity requirements for 4G/LTE infrastructure will drive stronger demand in the mid- to long-term. For base station antenna applications, we believe the inventory in the supply chain is balanced, and we expect demand to remain strong as more multiband antennas are deployed to support the 4G/LTE rollout and wireless data traffic requirements. In the automotive market, we expect to see strong growth in advanced driver assistance systems, where the compounded annual growth rate is projected to be 31% through 2020.

Elastomeric Material Solutions

EMS achieved a net sales of $46.8 million, including $6 million from Arlon, which is roughly flat year-over-year. Solid top-line results and mass transit and automotive were more than offset by weaker demand in portable electronics. As we reported last quarter, the demand shift in portable electronics is twofold. First is the decline in overall mobile phone volume, and, more specifically, feature phone volume. Second is the continued migration away from the use of LCD phone gaskets in smartphone and tablet designs. The EMS organization is addressing the headwinds in the portable electronics market by refocusing the business on other growth categories. We continue to see opportunities in the general industrial and mass transit markets, where experts predict strong long-term demand despite near-term softness due to market conditions, as well as in consumer impact and protection. And we see more opportunities for growth through geographic expansion in all of these segments. In addition to pursuing these growth opportunities, EMS has implemented a number of process improvements that are contributing to ongoing yield increases and cost savings. Enhancements to sales and operations planning have led to greater accuracy in production planning and on-time delivery, improving customer satisfaction.

Power Electronics Solutions

PES net sales were $36.6 million, a decrease of 21.3% compared to Q3 2014. On a currency adjusted basis, PES sales declined 9.7% from the prior year. We believe slowing investments in infrastructure caused by weakened economic conditions has delayed spending that is a substantial part of the PES business. Foreign exchange rates have also impacted PES significantly, more than our two other segments, due to the customer and manufacturing locations of the business. Our results reflect steady demand in EV/HEV applications, as well as a moderate increase in laser diodes. This performance was more than offset by weaker demand in mass transit variable frequency motor drives, and certain renewable energy applications. Within the PES markets, we see long-term growth in EV/HEV markets based on worldwide demand for improved fuel efficiency and a reduction in CO2 emissions. This focus is also driving growth in vehicle electrification, or X-By-Wire applications, where the compounded annual growth rate is expected to be 13% through 2020. We see tempered demand in the near-term, due to continued delays in infrastructure spending. From an operational standpoint, PES continues to invest in automation and process technology to improve — improvements to lower costs and increase throughput. These efforts are also leading to yield increases, more consistent product quality, and a substantial reduction in cycle time.

Megatrends

This quarter, 65% of Rogers’ Q3 revenues came from our megatrend markets. While the short term is less clear due to economic conditions, we believe that the macro trends in our specific markets point to continued growth in the coming years. The Internet connectivity, for example, consumer demand for mobile video content is expected to drive a 57% compounded annual growth rate in mobile data traffic over the next four years. In relation to clean energy, consumer demand and government mandates for fossil fuel alternatives are contributing to a strong growth outlook in the EV/HEV market, where the compounded annual growth rate is 32% through 2020. In addition, experts are predicting a compounded annual growth rate of more than 6.4% through 2020 in industrial motor drive applications. Our newest megatrend, safety and protection, also presents many opportunities. This megatrend is driven, in large part, by the strong demand for applications in automotive radar systems, where industry experts are predicting a compounded annual growth rate of more than 30% through 2019.

Another key opportunity for Rogers lies in the personal protective equipment market, where government regulations and workplace mandates are driving compounded annual growth rate of 7.3% through 2020. I’d like to take a moment to expand upon this week’s announcement regarding CFO David Mathieson’s upcoming retirement from Rogers. Since joining us from early retirement nearly a year and a half ago, David assisted us through the successful acquisition of Arlon, led the restructuring of our debt, raised our visibility in the capital markets, and further developed our global finance organizational capabilities. He is leaving a lasting, positive impact at Rogers. I personally want to wish David all the best as he returns to his retirement. We expect to announce David’s successor in the near-term.

Additional detail can be found in the following documents:

Q3 2015 Earnings Call Full Transcript

Q3 2015 Financials Press Release

Q3 2015 Earnings Call Slides

 

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