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ROGERS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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; 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 31 -------------------------------------------------------------------------------- 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 Second Quarter Executive Summary In the second quarter of 2014, we achieved net sales of $153.5 million, a 15.9% increase from the second quarter of 2013 net sales of $132.5 million. Revenue increased quarter over quarter resulting in a record second quarter performance with quarter over quarter increases across all of our operating segments. Net sales in Printed Circuit Materials (PCM) increased 34.9% from $45.6 million in the second quarter of 2013 to $61.5 million in the second quarter of 2014, net sales in Power Electronics Solutions (PES) increased 5.2% from $40.8 million in the second quarter of 2013 to $42.9 million in the second quarter of 2014, and net sales in High Performance Foams (HPF) increased 7.2% from $39.9 million in the second quarter of 2013 to $42.8 million in the second quarter of 2014. Income from continuing operations increased by 95.2% from $5.6 million in the second quarter of 2013 to $10.9 million in the second quarter of 2014. In the second quarter of 2013, income from continuing operations included approximately $3.7 million of special charges primarily related to activities targeted at streamlining the organization, including approximately $2.1 million in severance charges from a workforce reduction, approximately $1.1 million in curtailment charges related to changes in our defined benefit pension plans in the United States, approximately $0.3 million in charges related to the ratification of a new union contract for Connecticut employees and approximately $0.2 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 17.2% quarter over quarter and, as a percentage of net sales, from 7.0% of net sales in the second quarter of 2013 to 7.1% of net sales in the second quarter of 2014. We also experienced strong improvement in gross margin, which increased from 33.5% in the second quarter of 2013 to 37.2% in the second quarter of 2014. The quarterly improvement was primarily the result of increased operating leverage on the incremental sales volume enhanced by improved operating efficiencies across our operating segments. Offsetting some of these favorable results was a 35.0% increase in selling and administrative expenses from $25.5 million in the second quarter of 2013 to $34.5 million in the second quarter of 2014. The drivers for this increase were incremental incentive and equity compensation costs, incremental expenditures in certain key strategic areas, costs associated with the Chief Financial Officer (CFO) transition, severance costs and other cost increases. Going forward, we expect to achieve continued success in our core markets, despite pressure in certain sectors, particularly in the mobile internet device market for our HPF products. In this market, 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 and as we further diversify our product portfolio in the markets we serve today. 32 --------------------------------------------------------------------------------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 Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross margin 37.2 % 33.5 % 37.0 % 33.2 % Selling and administrative expenses 22.5 % 19.3 % 20.7 % 19.6 % Research and development expenses 4.2 % 4.7 % 3.8 % 4.5 % Restructuring and impairment charges - 3.4 % - % 1.8 % Operating income (loss) 10.6 % 6.1 % 12.5 % 7.3 % Equity income in unconsolidated joint ventures 0.7 % 0.6 % 0.7 % 0.5 % Other income (expense), net - (0.1 )% (0.4 )% (0.3 )% Interest income (expense), net (0.5 )% (0.6 )% (0.4 )% (0.7 )% Income (loss) before income tax expense (benefit) 10.7 % 6.0 % 12.4 % 6.8 % Income tax expense (benefit) 3.6 % 1.7 % 3.8 % 2.0 % Income (loss) from continuing operations 7.1 % 4.3 % 8.6 % 4.8 % Net Sales Net sales increased by 15.9% from $132.5 million in the second quarter of 2013 to $153.5 million in the second quarter of 2014. On a year to date basis, net sales increased by 16.1% from $258.4 million in the first half of 2013 to $300.1 million in the first half of 2014. The increase in net sales on both a quarterly and year to date basis is attributable to volume increases in all operating segments - Printed Circuit Materials (34.9% and 34.7%, respectively), Power Electronics Solutions (5.2% and 11.5%, respectively), and High Performance Foams (7.2% and 2.0%, 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 370 basis points from 33.5% in the second quarter of 2013 to 37.2% in the second quarter of 2014. 2013 gross margin included approximately $0.5 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 330 basis points from 33.9% in the second quarter of 2013 to 37.2% in the second quarter of 2014. The year over year non-GAAP improvement was primarily the result of the increase in net sales that contributed approximately 220 basis points. The remaining net improvement of 110 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. On a year to date basis, gross margin as a percentage of net sales increased by 380 basis points from 33.2% in the first half of 2013 to 37.0% in the first half of 2014. 2013 gross margin included approximately $0.7 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 360 basis points from 33.4% in the first half of 2013 to 37.0% in the first half of 2014. The year to date improvement was primarily the result of the increase in net sales that contributed approximately 230 basis points. The remaining net improvement of 130 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. 33 -------------------------------------------------------------------------------- Selling and Administrative Expenses Selling and administrative expenses increased 35.0% from $25.5 million in the second quarter of 2013 to $34.5 million in the second quarter of 2014. Second quarter 2013 results included approximately $0.2 million in special charges related to 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 selling and administrative expenses increased $9.2 million quarter over quarter. As a percentage of sales, non-GAAP selling and administrative expenses increased 340 basis points from 19.1% in the second quarter of 2013 to 22.5% in the second quarter of 2014. The overall increase in non-GAAP expenses is due to a variety of factors, including $4.1 million of incremental incentive and equity compensation costs, $3.9 million for incremental expenditures in certain key strategic areas, such as sales and marketing, strategic planning, information technology and executive recruiting as well as costs related to the CFO transition, severance and other cost increases of $3.3 million. These increases were partially offset by approximately $2.1 million of reduced expenses related primarily to changes in our defined benefit pension plans initiated in 2013. Going forward, management is pursuing additional strategies to further de-risk the pension plans which would decrease the financial volatility of the plan; however, it could also result in less expense savings, particularly if the investment mix is shifted more heavily to fixed income securities from equity securities. On a year to date basis, selling and administrative expenses increased 22.2% from $50.8 million in the first half of 2013 to $62.1 million in the first half of 2014. Year to date 2013 results included approximately $1.2 million in special charges comprised of $0.5 million in costs related to the move of certain manufacturing operations from the Power Electronics 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 $12.6 million. As a percentage of sales, non-GAAP selling and administrative expenses increased by 150 basis points from 19.2% in the first half of 2013 to 20.7% in the first half of 2014. The overall increase in non-GAAP expenses is due to a variety of factors, including $6.7 million of incremental incentive and equity compensation costs, $5.9 million for incremental expenditures in certain key strategic areas, such as sales and marketing, strategic planning, information technology and executive recruiting as well as costs related to merit increases, the CFO transition, severance and other cost increases of $5.2 million. These increases were offset by approximately $5.2 million in expense reductions related primarily to changes in our defined benefit pension plans initiated in 2013. Going forward, management is pursuing additional strategies to further de-risk the pension plans which would decrease the financial volatility of the plan; however, it could also result in less expense savings, particularly if the investment mix is shifted more heavily to fixed income securities from equity securities. Research and Development Expenses Research and development (R&D) expenses increased 2.7% from $6.3 million in the second quarter of 2013 to $6.4 million in the second quarter of 2014. As a percentage of net sales, R&D costs decreased from 4.7% of net sales in the second quarter of 2013 to 4.2% of net sales in the second quarter of 2014. Year to date, R&D expenses decreased by 2.1% from $11.5 million in the first half of 2013 to $11.3 million in the first half of 2014. As a percentage of net sales, R&D costs decreased from 4.5% in the first half of 2013 to 3.8% in the first half of 2014. The lower rate is due primarily to the significant increase in net sales. From a gross spending perspective, 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 Burlington, Massachusetts campus. As a result, we expect to increase R&D expenditures as the Rogers 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 $0.8 million in the second quarter of 2013 to approximately $1.1 million in the second quarter of 2014. On a year to date basis, equity income in unconsolidated joint ventures increased from $1.3 million in the first half of 2013 to $2.0 million in the first half of 2014. The increases are due to generally improved demand across most end markets. Other Income (Expense), Net In the second quarter of 2014, other income (expense), net, was expense of $0.1 million as compared to an expense of $0.2 million in the second quarter of 2013. The difference in these amounts is primarily related to favorable foreign currency exchange transaction gains of $0.2 million offset by higher commissions paid to the joint ventures of $0.1 million. On a year to date basis, in the first half of 2014 we recognized expense of approximately $1.3 million as compared to an expense of $0.8 million in the first half of 2013. The difference in these amounts is primarily related to unfavorable commodity hedging transactions. Interest Income (Expense), Net 34 -------------------------------------------------------------------------------- Interest income (expense), net, declined by 13.2% from $0.8 million of expense in the second quarter of 2013 to $0.7 million of expense in the second quarter of 2014. On a year to date basis, interest income (expense), net, declined by 15.4% from $1.7 million of expense in the first half of 2013 to $1.5 million of expense in the first half of 2014. These declines were 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 $70.0 million at the end of the second quarter of 2014. Income Taxes Our effective tax rate was 33.9% in the second quarter of 2014 as compared to 29.0% in the second quarter of 2013. The higher tax rate in the second quarter of 2014 resulted from improved operating performance in higher tax jurisdictions. On a year to date basis, the effective tax rate was 31.1% in the first six months of 2014 as compared to 29.1% in the first six months 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 Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Net sales $ 61.5 $ 45.6 $ 120.0 $ 89.1 Operating income (loss) 10.3 4.0 22.3 7.8 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. Q2 2014 versus Q2 2013 Net sales in this segment increased by 34.9% from $45.6 million in the second quarter of 2013 to an all-time quarterly record of $61.5 million in the second quarter of 2014. The quarter over quarter increase in net sales is due primarily to a 73.2% increase 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 33.0% quarter over quarter as auto manufacturers continue to adopt this safety feature into their designs. We also experienced a 60.4% increase in net sales for certain applications in handheld devices for improved internet connectivity. Operating income improved by 157.7% from $4.0 million in the second quarter of 2013 to $10.3 million in the second quarter of 2014. Second quarter 2013 results included approximately $0.9 million of special charges, including $0.7 million related to severance costs and $0.2 million of costs associated with the ratification of a new union contract for Connecticut union employees. Excluding these items, non-GAAP operating income improved by 110.9% from $4.9 million in the second quarter of 2013 to $10.3 million in the second quarter of 2014. As a percentage of net sales, excluding the 2013 special charges, second quarter of 2014 operating income was 16.7%, a 600 basis point increase as compared to the 10.7% achieved in the second quarter of 2013. This significant increase is due primarily to the increase in net sales as we were able to achieve this growth by utilizing our existing manufacturing capacity. Results were also favorably impacted by the continuous efforts targeted at manufacturing efficiency improvements. This was partially offset with $2.6 million of higher allocated selling and administrative expenses incurred during the second quarter of 2014. See the "Results of Operations" section above for a discussion of these costs. YTD 2014 versus YTD 2013 Net sales in this segment increased by 34.7% from $89.1 million in the first half of 2013 to $120.0 million in the first half of 2014. This increase in net sales is due primarily to a 67.2% increase 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 34.8% quarter over quarter as auto manufacturers continue to adopt this safety feature into their designs. We also experienced a 57.9% increase in net sales for certain applications in handheld devices for improved internet connectivity. 35 -------------------------------------------------------------------------------- Operating income improved by 185.6% from $7.8 million in the first half of 2013 to $22.3 million in the first half of 2014. First half 2013 results included approximately $1.1 million of special charges, including $0.9 million related to severance costs and $0.2 million of costs associated with the ratification of a new union contract for Connecticut union employees. Excluding these items, non-GAAP operating income improved by 150.6% from $8.9 million in the first half of 2013 to $22.3 million in the first half of 2014. As a percentage of sales, excluding the 2013 special charges, first half of 2014 operating income was 18.5%, a 860 basis point increase as compared to the 9.9% achieved in the first half of 2013. This increase is due primarily to the increase in net sales as we were able to achieve this growth by utilizing our existing manufacturing capacity. Results were also favorably impacted by the continuous efforts targeted at manufacturing efficiency improvements. This was partially offset with $3.7 million of higher allocated selling and administrative expenses incurred during the first half of 2014. See the "Results of Operations" section above for a discussion of these costs. High Performance Foams (Dollars in millions) Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Net sales $ 42.8 $ 39.9 $ 84.0 $ 82.4 Operating income (loss) 4.6 3.5 10.3 10.1 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. Q2 2014 versus Q2 2013 Net sales in this segment increased by 7.2% from $39.9 million in the second quarter of 2013 to $42.8 million in the second quarter of 2014. This increase in net sales was driven primarily due to increased demand in battery applications for hybrid electric vehicles (118.1%), mass transit (18.5%) and consumer applications for cushioning, sealing and impact protection materials (18.2%). High performance foams demand into the mobile internet device market, including feature phones was down 1.5% quarter over quarter and we expect continued challenges in this market as we move forward. Operating income increased by 31.4% from $3.5 million in the second quarter of 2013 to $4.6 million in the second quarter of 2014. Second quarter 2013 results included approximately $1.4 million of special charges, including $1.2 million related to severance costs and $0.2 million of costs associated with the ratification of a new union contract for Connecticut union employees. Excluding these charges, non-GAAP operating income declined by 7.8% from $4.9 million in the second quarter of 2013 to $4.6 million in the second quarter of 2014. As a percentage of net sales, excluding the 2013 special charges, second quarter of 2014 operating income was 10.7%, a 170 basis point decline as compared to the 12.4% achieved in the second quarter of 2013. This decline is primarily attributable to the increase of $0.9 million in allocated selling and administrative expenses incurred during the second quarter of 2014. See the "Results of Operations" section above for a discussion of these costs. These costs were partially offset by the net sales increase during the second quarter of 2014. YTD 2014 versus YTD 2013 Net sales in this segment increased by 2.0% from $82.4 million in the first half of 2013 to $84.0 million in the first half of 2014. This increase in net sales was driven primarily due to increased demand in battery applications for hybrid electric vehicles (100.2%), mass transit (14.0%) and consumer applications for cushioning, sealing and impact protection materials (11.0%). High performance foams demand into the mobile internet device market, including feature phones was down 10.3% year over year and we expect continued challenges in this market as we move forward. Operating income increased by 2.0% from $10.1 million in the first half of 2013 to $10.3 million in the first half of 2014. Results in the first half of 2013 included approximately $1.6 million in special charges, including $1.4 million related to severance costs and $0.2 million of costs associated with the ratification of a new union contract for Connecticut union employees. Excluding these items, non-GAAP operating income declined by 12.0% from $11.7 million in the first half of 2013 to $10.3 million in the first half of 2014. This decline is primarily attributable to the increase of $1.9 million in allocated selling and administrative expenses incurred during the first half of 2014. See the "Results of Operations" section above for a discussion of these costs. These costs were partially offset by the net sales increase during the first half of 2014. 36-------------------------------------------------------------------------------- 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 Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Net sales $ 42.9 $ 40.8 $ 83.7 $ 75.1 Operating income (loss) (0.7 ) (1.4 ) 0.8 (3.0 ) Q2 2014 versus Q2 2013 Net sales in this segment increased by 5.2% from $40.8 million in the second quarter of 2013 to $42.9 million in the second quarter of 2014. This increase was led by a rebound in demand for curamik® DBC substrates in vehicle electrification (49.0% increase) and variable frequency motor drive applications (19.4% increase) across all targeted regions. In addition, RO-LINX® power distribution products experienced increased orders in mass transit (4.8%) and variable frequency drives (216.1%) in Asia and Europe. Operating results for the quarter improved from an operating loss of $1.4 million in the second quarter of 2013 to an operating loss of $0.7 million in the second quarter of 2014. Second quarter 2013 results included approximately $2.8 million of special charges comprised primarily of $2.4 million of severance costs related to a workforce reduction, as well as approximately $0.4 million in costs related to the startup of inspection operations in Hungary. Excluding these charges, non-GAAP operating income decreased by 152.1% from $1.4 million in the second quarter of 2013 to a loss of $0.7 million in the second quarter of 2014. The second quarter of 2014 operating income as a percentage of net sales declined 520 basis points compared to the second quarter of 2013. This decline is primarily attributable to the increase of $0.6 million in allocated selling and administrative expenses incurred during the second quarter of 2014. See the "Results of Operations" section above for a discussion of these costs. These costs were partially offset by the profit contribution related to the increase in net sales and favorable impacts from operational efficiencies, including the move of certain finishing operations from Germany to Hungary. YTD 2014 versus YTD 2013 Net sales in this segment increased by 11.5% from $75.1 million in the first half of 2013 to $83.7 million in the first half of 2014. This increase was led by a rebound in demand for curamik® DBC substrates in renewable energy (22.4% increase), vehicle electrification (62.0% increase) and variable frequency motor drive applications (19.4% increase) across all targeted regions. In addition, RO-LINX® power distribution products experienced increased orders in mass transit (2.7%) and variable frequency drives (170.1%) in Asia and Europe. Operating income increased by 126.7% from a loss of $3.0 million in the first half of 2013 to income of $0.8 million in the first half of 2014. Results in the first half of 2013 included approximately $3.7 million in special charges, including $2.8 million related to severance costs and $0.9 million in costs related to the startup of inspecting operations in Hungary. Excluding these items, non-GAAP operating income improved by 22.5% from $0.7 million in the first half of 2013 to $0.8 million in the first half of 2014. This increase is primarily due to the profit contribution related to the increase in net sales and favorable impacts from operational efficiencies, including the move of certain finishing operations from Germany to Hungary. These improvements were partially offset by an increase of $1.4 million in allocated selling and administrative expenses incurred during the first half of 2014. See the "Results of Operations" section above for a discussion of these costs 37-------------------------------------------------------------------------------- Other (Dollars in millions) Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Net sales $ 6.3 $ 6.2 $ 12.4 $ 11.8 Operating income (loss) 2.1 2.0 4.3 4.0 Our Other reportable segment consists of our elastomer rollers and floats, as well as our inverter distribution business. Q2 2014 versus Q2 2013 Net sales increased by 2.0% from $6.2 million in the second quarter of 2013 to $6.3 million in the second quarter of 2014. This increase is primarily due to the demand for elastomer rollers and floats products, which increased 1.5% quarter over quarter. There was also stronger demand for inverters, which increased 6.8% quarter over quarter. Operating income increased by 5.0% from $2.0 million in the second quarter of 2013 to $2.1 million in the second quarter of 2014. 2013 results included approximately $0.1 million of special charges related to severance costs. The overall improvement in operating results in this segment is attributable primarily to the increase in volume and improved operational efficiencies. YTD 2014 versus YTD 2013 Net sales increased by 4.7% from $11.8 million in the first half of 2013 to $12.4 million in the first half of 2014. This increase is primarily due stronger demand for elastomer rollers and floats products, which increased 3.6% year over year. There was also stronger demand for inverters, which increased 15.5% year over year. Operating income increased by 7.5% from $4.0 million in the first half of 2013 to $4.3 million in the first half of 2014. First half 2013 results included approximately $0.1 million of special charges related to severance costs. The overall improvement in operating results in this segment is attributable primarily to the increase in volume and improved operational efficiencies. 38-------------------------------------------------------------------------------- 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 intending to have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives. |