NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
As used herein, the terms “Company,” “Rogers,” “we,” “us,” “our” and similar terms mean Rogers Corporation and its subsidiaries, unless the context indicates otherwise.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for their fair presentation in accordance with GAAP. All significant intercompany transactions have been eliminated.
Certain statement of financial position reclassifications have been made to prior period balances in order to conform to the current period’s presentation.
Interim results are not necessarily indicative of results for a full year. For further information regarding our accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
.
Note 2 – Fair Value Measurements
The accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
|
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
From time to time we enter into various instruments that require fair value measurement. Assets and liabilities measured on a recurring basis, categorized by the level of inputs used in the valuation, included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Carrying amount as of September 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Foreign currency contracts
|
|
$
|
(382
|
)
|
|
$
|
—
|
|
|
$
|
(382
|
)
|
|
$
|
—
|
|
Copper derivative contracts
|
|
$
|
1,534
|
|
|
$
|
—
|
|
|
$
|
1,534
|
|
|
$
|
—
|
|
Interest rate swap
|
|
$
|
(638
|
)
|
|
$
|
—
|
|
|
$
|
(638
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Carrying amount as of December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Foreign currency contracts
|
|
$
|
(170
|
)
|
|
$
|
—
|
|
|
$
|
(170
|
)
|
|
$
|
—
|
|
Copper derivative contracts
|
|
$
|
1,277
|
|
|
$
|
—
|
|
|
$
|
1,277
|
|
|
$
|
—
|
|
Note 3 – Hedging Transactions and Derivative Financial Instruments
We are exposed to certain risks related to our ongoing business operations. The primary risks being managed through our use of derivative instruments are foreign currency exchange rate risk and commodity pricing risk (primarily related to copper). During the first quarter of 2017, we also entered into an interest rate swap to hedge interest rate risk. We do not use derivative financial instruments for trading or speculative purposes. The valuation of derivative contracts used to manage each of these risks is described below:
|
|
•
|
Foreign Currency
- The fair value of any foreign currency option derivative is based upon valuation models applied to current market information such as strike price, spot rate, maturity date and volatility, and by reference to market values resulting from an over-the-counter market or obtaining market data for similar instruments with similar characteristics.
|
|
|
•
|
Commodity -
The fair value of copper derivatives is computed using a combination of intrinsic and time value valuation models. The intrinsic valuation model reflects the difference between the strike price of the underlying copper derivative instrument and the current prevailing copper prices in an over-the-counter market at period end. The time value valuation model incorporates the constant changes in the price of the underlying copper derivative instrument, the time value of money, the underlying copper derivative instrument’s strike price and the remaining time to the underlying copper derivative instrument’s expiration date from the period end date. Overall, fair value is a function of five primary variables: price of the underlying instrument, time to expiration, strike price, interest rate, and volatility.
|
|
|
•
|
Interest Rates
- The fair value of interest rate swap instruments is derived by comparing the present value of the interest rate forward curve against the present value of the swap rate, relative to the notional amount of the swap. The net value represents the estimated amount we would receive or pay to terminate the agreements. Settlement amounts for an “in the money” swap would be adjusted down to compensate the counterparty for cost of funds, and the adjustment is directly related to the counterparties’ credit ratings.
|
The guidance for the accounting and disclosure of derivatives and hedging transactions requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the statements of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies for hedge accounting treatment as defined under the applicable accounting guidance. For derivative instruments that are designated and qualify for hedge accounting treatment as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss). This gain or loss is reclassified into earnings in the same line item of the condensed consolidated statements of operations associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows of the hedged item (i.e., the ineffective portion) if any, is recognized in the condensed consolidated statements of operations during the current period. As of
September 30, 2017
only our interest rate swap qualified for hedge accounting treatment as a cash flow hedge. For the
three and nine
months ended
September 30, 2017
, there was hedge ineffectiveness of approximately
$0.1 million
and
$0.2 million
, respectively which was recorded in the condensed consolidated statement of operations. As of
September 30, 2016
, we did not have any contracts designated as cash flow hedges.
Foreign Currency
During the quarter ended
September 30, 2017
, we entered into Korean Won, Japanese Yen, Euro, Hungarian Forint and Chinese Renminbi forward contracts. We entered into these foreign currency forward contracts to mitigate certain global transactional exposures. These contracts do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our condensed consolidated statements of operations.
As of
September 30, 2017
the notional values of these foreign currency forward contracts were:
|
|
|
|
|
|
Notional Values of Foreign Currency Derivatives
|
KRW/USD
|
|
₩
|
3,281,770,000
|
|
JPY/EUR
|
|
¥
|
350,000,000
|
|
EUR/USD
|
|
€
|
4,635,239
|
|
EUR/HUF
|
|
€
|
369,885
|
|
USD/CNY
|
|
$
|
6,083,500
|
|
Commodity
We currently have
twenty
outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions (PES) and Advanced Connectivity Solutions (ACS) operations. These contracts are held with financial institutions and minimize the risk associated with a potential rise in copper prices. These contracts provide some coverage over the forecasted 2017 and 2018 monthly copper exposure and do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our condensed consolidated statements of operations. The notional values of our copper contracts outstanding as of
September 30, 2017
were:
|
|
|
Volume of Copper Derivatives
|
October 2017 - December 2017
|
122 metric tons per month
|
January 2018 - March 2018
|
140 metric tons per month
|
April 2018 - June 2018
|
139 metric tons per month
|
July 2018 - September 2018
|
93 metric tons per month
|
October 2018 - December 2018
|
23 metric tons per month
|
Interest Rates
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on
$75.0 million
of our
$450.0 million
revolving credit facility. This transaction has been designated as a cash flow hedge and qualifies for hedge accounting treatment. See Note 12, “Debt” for further discussion regarding the credit facility.
Effects on Statements of Operations and of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
The Effect of Current Derivative Instruments on the Financial Statements for the period ended September 30, 2017
|
|
Fair Values of Derivative Instruments as of September 30, 2017
|
|
|
|
|
Gain (Loss)
|
|
Other Assets (Liabilities)
|
Foreign Exchange Contracts
|
|
Location
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
(198
|
)
|
|
$
|
(382
|
)
|
|
$
|
(382
|
)
|
Copper Derivatives
|
|
|
|
|
|
|
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
474
|
|
|
$
|
578
|
|
|
$
|
1,534
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
Contract designated as hedging instrument
|
|
Other comprehensive income (loss)
|
|
$
|
100
|
|
|
$
|
(415
|
)
|
|
$
|
(638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
The Effect of Current Derivative Instruments on the Financial Statements for the period ended September 30, 2016
|
|
Fair Values of Derivative Instruments as of September 30, 2016
|
|
|
|
|
Gain (Loss)
|
|
Other Assets (Liabilities)
|
Foreign Exchange Contracts
|
|
Location
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
29
|
|
Copper Derivatives
|
|
|
|
|
|
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
(94
|
)
|
|
$
|
(163
|
)
|
|
$
|
490
|
|
Note 4 – Inventories
Inventories are valued at the lower of cost or market. Inventories were as follows at the end of the periods noted below:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
September 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
43,857
|
|
|
$
|
29,788
|
|
Work-in-process
|
30,859
|
|
|
26,440
|
|
Finished goods
|
39,402
|
|
|
34,902
|
|
Total inventories
|
$
|
114,118
|
|
|
$
|
91,130
|
|
Note 5 – Acquisitions
Diversified Silicone Products
On January 6, 2017, we acquired the principal operating assets of Diversified Silicone Products, Inc. (DSP), pursuant to the terms of the Asset Purchase Agreement by and among the Company, DSP and the principal shareholders of DSP (the Purchase Agreement). Pursuant to the terms of the Purchase Agreement, we acquired certain assets and assumed certain liabilities of DSP for a total purchase price of approximately
$60.2 million
.
We used borrowings of
$30.0 million
under our credit facility in addition to cash on hand to fund the acquisition.
DSP is a custom silicone product development and manufacturing business and expands the portfolio of Rogers’ Elastomeric Material Solutions business (EMS) in cellular sponge and specialty extruded silicone profile technologies, while strengthening existing expertise in precision-calendered silicone and silicone formulating and compounding.
The acquisition has been accounted for in accordance with applicable purchase accounting guidance. On a preliminary basis, we recorded goodwill primarily related to the expected synergies from combining operations and the value of the existing workforce. We also recorded other intangible assets related to acquired customer relationships, developed technology, trademarks, and a covenant not to compete. As of the filing date of this Form 10-Q, the final purchase accounting and purchase price allocation for the DSP acquisition are substantially complete, however, we continue to refine our preliminary valuation of certain acquired assets and the valuations below remain subject to change. The following table represents the preliminary fair market values assigned to the acquired assets and liabilities in the transaction:
|
|
|
|
|
(Dollars in thousands)
|
January 6, 2017
|
Assets:
|
|
Accounts receivable
|
$
|
2,724
|
|
Prepaid expenses
|
21
|
|
Inventory
|
2,433
|
|
Property, plant & equipment
|
1,589
|
|
Other intangible assets
|
35,860
|
|
Goodwill
|
17,793
|
|
Total assets
|
60,420
|
|
|
|
|
Liabilities:
|
|
|
Accounts payable
|
179
|
|
Accrued expenses
|
50
|
|
Total liabilities
|
229
|
|
|
|
|
Fair value of net assets acquired
|
$
|
60,191
|
|
The other intangible assets consist of customer relationships valued at
$30.5 million
, developed technology valued at
$1.8 million
, trademarks valued at
$3.3 million
, and a covenant not to compete valued at
$0.3 million
. The fair value of acquired identified intangible assets was determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 under the fair value measurements and disclosure guidance.
The weighted average amortization period for the other intangible asset classes are
11.8
years for customer relationships,
4.3
years for developed technology,
11.7
years for trademarks, and
4.1
years for a covenant not to compete, resulting in amortization expenses ranging from
$1.1 million
to
$2.0 million
annually. The estimated annual future amortization expense is
$0.5 million
for the remainder of 2017,
$1.9 million
for 2018, and
$1.8 million
for each of 2019, 2020, and 2021.
During the first
nine
months of
2017
, we incurred transaction costs of
$0.5 million
related to the DSP acquisition, which were recorded within selling, general and administrative expenses in the condensed consolidated statements of operations.
The results of DSP have been included in our condensed consolidated financial statements only for the period subsequent to the completion of the acquisition on January 6, 2017, through
September 30, 2017
. DSP’s net sales for the
three and nine
months ended
September 30, 2017
totaled
$5.9 million
and
$16.8 million
, respectively.
DeWAL
On November 23, 2016, we acquired all of the membership interests in DeWAL Industries LLC (DeWAL), pursuant to the terms of the Membership Interest Purchase Agreement, dated November 23, 2016, by and among the Company and the owners of DeWAL for an aggregate purchase price of
$135.5 million
.
We used borrowings of
$136.0 million
under our credit facility to fund the acquisition.
DeWAL is a leading manufacturer of polytetrafluoroethylene and ultra-high molecular weight polyethylene films, pressure sensitive tapes and specialty products for the industrial, aerospace, automotive, and electronics markets.
The acquisition has been accounted for in accordance with applicable purchase accounting guidance. We recorded goodwill, primarily related to the expected synergies from combining operations and the value of the existing workforce. We also recorded other intangible assets primarily related to customer relationships, developed technology, trademarks, and a covenant not to compete. As of the filing date of this Form 10-Q, the final purchase accounting and purchase price allocation for the DeWAL acquisition are substantially complete; however, we continue to refine our preliminary valuation of certain acquired assets and the valuations set forth below remain subject to change. The following table represents the preliminary fair values assigned to the acquired assets and liabilities in the transaction:
|
|
|
|
|
(Dollars in thousands)
|
November 23, 2016
|
Assets:
|
|
Cash and cash equivalents
|
$
|
1,539
|
|
Accounts receivable
|
7,513
|
|
Other current assets
|
691
|
|
Inventory
|
9,915
|
|
Property, plant & equipment
|
9,932
|
|
Other intangible assets
|
73,500
|
|
Goodwill
|
35,755
|
|
Other long-term assets
|
101
|
|
Total assets
|
138,946
|
|
|
|
|
Liabilities:
|
|
|
Accounts payable
|
2,402
|
|
Other current liabilities
|
1,062
|
|
Total liabilities
|
3,464
|
|
|
|
|
Fair value of net assets acquired
|
$
|
135,482
|
|
The other intangible assets consist of customer relationships valued at
$46.7 million
, developed technology valued at
$22.0 million
, trademarks valued at
$4.3 million
, and a covenant not to compete valued at
$0.5 million
. The fair value of acquired identified intangible assets was determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 under the fair value measurements and disclosure guidance.
The weighted average amortization period for the other intangible asset classes are
13.5
years for customer relationships,
8.6
years for developed technology,
5.2
years for trademarks, and
3.8
years for a covenant not to compete, resulting in amortization expenses ranging from
$2.4 million
to
$4.3 million
, annually. The future estimated annual amortization expense is
$0.7 million
for the remainder of 2017,
$3.7 million
for 2018,
$4.1 million
for 2019, and
$4.3 million
for 2020 and 2021.
During the first
nine
months of
2017
, we incurred transaction costs of
$0.1 million
related to the DeWAL acquisition, which were recorded within selling, general and administrative expenses in the condensed consolidated statements of operations. In 2016, we incurred transaction costs of
$2.1 million
related to this acquisition.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of Rogers, DSP and DeWAL, as if the DSP acquisition had occurred on January 1, 2016 and the DeWAL acquisition had occurred on January 1, 2015. The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the DSP and DeWAL acquisitions been completed as of January 1, 2016, and January 1, 2015, respectively, and should not be taken as indicative of our future consolidated results of operations.
|
|
|
|
|
|
|
(Dollars in thousands)
|
Three Months Ended September 30, 2016 (unaudited)
|
|
Nine Months Ended September 30, 2016 (unaudited)
|
Net sales
|
183,560
|
|
|
537,960
|
|
Net income
|
16,288
|
|
|
34,829
|
|
Note 6 – Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the
nine
months ended
September 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in tables and footnotes in thousands)
|
Foreign currency translation adjustments
|
|
Funded status of pension plans and other postretirement benefits (1)
|
|
Unrealized gain (loss) on derivative instruments (2)
|
|
Total
|
Beginning Balance December 31, 2015
|
$
|
(41,365
|
)
|
|
$
|
(47,082
|
)
|
|
$
|
(11
|
)
|
|
$
|
(88,458
|
)
|
Other comprehensive income (loss) before reclassifications
|
6,605
|
|
|
—
|
|
|
—
|
|
|
6,605
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
105
|
|
|
11
|
|
|
116
|
|
Net current-period other comprehensive income (loss) (3)
|
6,605
|
|
|
105
|
|
|
11
|
|
|
6,721
|
|
Ending Balance September 30, 2016
|
$
|
(34,760
|
)
|
|
$
|
(46,977
|
)
|
|
$
|
—
|
|
|
$
|
(81,737
|
)
|
|
|
|
|
|
|
|
|
Beginning Balance December 31, 2016
|
$
|
(46,446
|
)
|
|
$
|
(45,816
|
)
|
|
$
|
—
|
|
|
$
|
(92,262
|
)
|
Other comprehensive income (loss) before reclassifications
|
23,136
|
|
|
—
|
|
|
(487
|
)
|
|
22,649
|
|
Actuarial net gain (loss) incurred in the fiscal year
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
Amounts reclassified from accumulated other comprehensive (income) loss
|
—
|
|
|
36
|
|
|
222
|
|
|
258
|
|
Net current-period other comprehensive income (loss) (4)
|
23,136
|
|
|
71
|
|
|
(265
|
)
|
|
22,942
|
|
Ending Balance September 30, 2017
|
$
|
(23,310
|
)
|
|
$
|
(45,745
|
)
|
|
$
|
(265
|
)
|
|
$
|
(69,320
|
)
|
(1) Net of taxes of
$9,122
and
$9,160
as of
September 30, 2017
and
December 31, 2016
, respectively. Net of taxes of
$9,821
and
$9,879
as of
September 30, 2016
and
December 31, 2015
, respectively.
(2) Net of taxes of
$151
and
$0
as of
September 30, 2017
and
December 31, 2016
, respectively. Net of taxes of
$0
and
$5
as of
September 30, 2016
and
December 31, 2015
, respectively.
(3) Net of taxes of
$58
and
$5
for the pension plans and postretirement benefits and unrealized gain (loss) on derivatives, respectively.
(4) Net of taxes of
$38
and
$(151)
for the pension plans and postretirement benefits and unrealized gain (loss) on derivatives, respectively.
Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Quarter Ended
|
|
Nine Months Ended
|
September 30,
|
|
September 30,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
25,532
|
|
|
$
|
16,065
|
|
|
$
|
73,460
|
|
|
$
|
36,370
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
18,181
|
|
|
17,996
|
|
|
18,126
|
|
|
17,990
|
|
Effect of dilutive shares
|
407
|
|
|
187
|
|
|
377
|
|
|
227
|
|
Weighted-average shares outstanding - diluted
|
18,588
|
|
|
18,183
|
|
|
18,503
|
|
|
18,217
|
|
Basic earnings per share
|
$
|
1.40
|
|
|
$
|
0.89
|
|
|
$
|
4.05
|
|
|
$
|
2.02
|
|
Diluted earnings per share
|
$
|
1.37
|
|
|
$
|
0.88
|
|
|
$
|
3.97
|
|
|
$
|
2.00
|
|
Certain potential options to purchase shares may be excluded from the calculation of diluted weighted-average shares outstanding where their exercise price is greater than the average market price of our capital stock during the relevant reporting period. For the quarter ended
September 30, 2017
,
no
shares were excluded. For the quarter ended
September 30, 2016
,
13,500
shares were excluded.
Note 8 – Stock-Based Compensation
Equity Compensation Awards
Performance-Based Restricted Stock Units
As of
September 30, 2017
, we had performance-based restricted stock awards from 2015, 2016 and 2017 outstanding. These awards generally cliff vest at the end of a
three
year measurement period. However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed during the vesting period. Participants are eligible to be awarded shares ranging from
0%
to
200%
of the original award amount, based on certain defined performance measures. Compensation expense is recognized using the straight-line method over the vesting period, unless the employee has an accelerated vesting schedule.
The 2015 awards have two measurement criteria on which the final payout of each award is based: (i) the three year return on invested capital (ROIC) compared to that of a specified group of peer companies, and (ii) the three year total shareholder return (TSR) on the performance of our capital stock as compared to that of a specified group of peer companies. The 2016 and 2017 awards have one measurement criteria: the three year TSR on the performance of our capital stock as compared to that of a specified group of peer companies. In accordance with the applicable accounting literature, the ROIC measurement criteria of the 2015 awards is considered a performance condition. As such, the fair value of the ROIC portion is determined based on the market value of the underlying stock price at the grant date, with cumulative compensation expense recognized to date being increased or decreased based on changes in the forecasted pay out percentage at the end of each reporting period. The TSR measurement criteria of the awards is considered a market condition. As such, the fair value of this measurement criteria was determined on the date of grant using a Monte Carlo simulation valuation model, with related compensation expense fixed on the grant date and expensed on a straight-line basis over the life of the awards that ultimately vest and with no changes for the final projected payout of the awards.
Below were the assumptions used in the Monte Carlo calculation:
|
|
|
|
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
Expected volatility
|
|
33.6%
|
|
29.6%
|
Expected term (in years)
|
|
3.0
|
|
3.0
|
Risk-free interest rate
|
|
1.38%
|
|
0.93%
|
Expected volatility
– In determining expected volatility, we have considered a number of factors, including historical volatility.
Expected term
– We use the vesting period of the award to determine the expected term assumption for the Monte Carlo simulation valuation model.
Risk-free interest rate
– We use an implied “spot rate” yield on U.S. Treasury Constant Maturity rates as of the grant date for our assumption of the risk-free interest rate.
Expected dividend yield
– We do not currently pay dividends on our capital stock; therefore, a dividend yield of
0%
was used in the Monte Carlo simulation valuation model.
Forfeiture Rate
– We previously estimated the forfeiture rate based on historical experience and our expectations regarding future terminations. To the extent our actual forfeiture rate was different from our estimate, stock-based compensation expense was adjusted accordingly. In accordance with the adoption of ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
on January 1, 2017, we now account for forfeitures as they occur. The adoption of this standard, with respect to treatment of forfeitures, did not have a material impact on our condensed consolidated financial statements in the period of adoption.
The following table summarizes the change in number of non-vested performance-based restricted stock awards outstanding since
December 31, 2016
:
|
|
|
|
|
Performance-Based Restricted Stock Awards
|
Non-vested awards outstanding at December 31, 2016
|
151,769
|
|
Awards granted
|
56,147
|
|
Stock issued
|
(34,442
|
)
|
Awards forfeited
|
(4,047
|
)
|
Non-vested awards outstanding at September 30, 2017
|
169,427
|
|
During the
three and nine
months ended
September 30, 2017
, we recognized compensation expense for performance-based stock awards of approximately $
1.4 million
and $
2.9 million
, respectively. During the
three and nine
months ended and
September 30, 2016
, we recognized compensation expense for performance-based stock awards of approximately
$1.1 million
and
$3.2 million
respectively.
Time-Based Restricted Stock
As of
September 30, 2017
, we had time-based restricted stock grants from 2014, 2015, 2016 and 2017 outstanding. The 2014, 2015, 2016 and 2017 grants all ratably vest on the first, second and third anniversaries of the original grant date. We recognize compensation expense on all of these awards on a straight-line basis over the vesting period. The fair value of the award is determined based on the market value of the underlying stock price at the grant date.
The following table summarizes the change in number of non-vested time-based restricted stock awards outstanding since
December 31, 2016
:
|
|
|
|
|
Time-Based Restricted Stock Awards
|
Non-vested awards outstanding at December 31, 2016
|
239,189
|
|
Awards granted
|
77,505
|
|
Stock issued
|
(132,373
|
)
|
Awards forfeited
|
(5,500
|
)
|
Non-vested awards outstanding at September 30, 2017
|
178,821
|
|
During the
three and nine
months ended
September 30, 2017
we recognized compensation expense for time-based restricted stock awards of approximately
$1.6 million
and
$4.2 million
, respectively. During the
three and nine
months ended
September 30, 2016
we recognized compensation expense for time-based restricted stock awards of approximately
$1.6 million
and
$4.3 million
, respectively.
Forfeiture Rate
– We previously estimated the forfeiture rate based on historical experience and our expectations regarding future terminations. To the extent our actual forfeiture rate was different from our estimate, stock-based compensation expense was adjusted accordingly. In accordance with the adoption of ASU 2016-09 on January 1, 2017, we now account for forfeitures as they occur. The adoption of this standard, with respect to treatment of forfeitures, did not have a material impact on our condensed consolidated financial statements in the period of adoption.
Deferred Stock Units
We grant deferred stock units to non-management directors. These awards are fully vested on the date of grant and the related shares are generally issued on the 13 month anniversary of the grant date unless the individual elects to defer the receipt of those shares. Each deferred stock unit results in the issuance of
one
share of Rogers’ capital stock. The grant of deferred stock units is
typically done annually during the second quarter of each year. The fair value of the award is determined based on the market value of the underlying stock price at the grant date.
The following table summarizes the change in number of deferred stock units outstanding since
December 31, 2016
:
|
|
|
|
|
Deferred Stock Units
|
Awards outstanding at December 31, 2016
|
11,900
|
|
Awards granted
|
9,250
|
|
Stock issued
|
(11,900
|
)
|
Awards outstanding at September 30, 2017
|
9,250
|
|
During the
three and nine
month periods ended
September 30, 2017
, we recognized compensation expense associated with the deferred stock units of
$0.1 million
and
$1.0 million
, respectively. During the
three
months ended
September 30, 2016
, we recognized
no
compensation expense associated with the deferred stock units. During the
nine
months ended
September 30, 2016
, we recognized
$0.7 million
of compensation expense associated with the deferred stock units.
Stock Options
Stock options have been granted under various equity compensation plans, and they generally became exercisable in one-third increments on the second, third and fourth anniversaries of the grant dates. The maximum contractual term for all options was normally
ten years
. We used the Black-Scholes option-pricing model to calculate the grant-date fair value of an option. We have
no
t granted any stock options since the first quarter of 2012.
A summary of the activity under our stock option plans during the
three and nine
month periods ended
September 30, 2017
and changes during the
nine
months then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted- Average Exercise Price Per Share
|
|
Weighted-Average Remaining Contractual Life in Years
|
|
Aggregate Intrinsic Value
|
Options outstanding at June 30, 2017
|
64,958
|
|
|
$
|
37.01
|
|
|
3.0
|
|
$
|
4,651,550
|
|
Options exercised
|
(1,400
|
)
|
|
$
|
24.20
|
|
|
|
|
|
|
Options forfeited
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Options outstanding at September 30, 2017
|
63,558
|
|
|
$
|
37.29
|
|
|
2.8
|
|
$
|
6,100,702
|
|
Options exercisable at September 30, 2017
|
63,558
|
|
|
$
|
37.29
|
|
|
2.8
|
|
$
|
6,100,702
|
|
Options vested at September 30, 2017
|
63,558
|
|
|
$
|
37.29
|
|
|
2.8
|
|
$
|
6,100,702
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted- Average Exercise Price Per Share
|
Options outstanding at December 31, 2016
|
116,575
|
|
|
$
|
37.76
|
|
Options exercised
|
(53,017
|
)
|
|
$
|
36.33
|
|
Options forfeited
|
—
|
|
|
$
|
—
|
|
Options outstanding at September 30, 2017
|
63,558
|
|
|
$
|
37.29
|
|
During the
nine
months ended
September 30, 2017
, the total intrinsic value of options exercised (i.e., the difference between the market price at time of exercise and the price paid by the individual to exercise the options) was
$3.0 million
, and the total amount of cash received from the exercise of these options was
$1.9 million
.
Employee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) that allows eligible employees to purchase, through payroll deductions, shares of our capital stock at a discount to fair market value. The ESPP has
two
six
month offering periods each year, the first beginning in January and ending in June and the second beginning in July and ending in December. The ESPP contains a look-back feature that allows the employee to acquire shares of our capital stock at a
15%
discount from the underlying market price at the beginning or end of the applicable period, whichever is lower. We recognize compensation expense on this plan ratably over the offering
period based on the fair value of the anticipated number of shares that will be issued at the end of each offering period. Compensation expense is adjusted at the end of each offering period for the actual number of shares issued. Fair value is determined based on two factors: (i) the
15%
discount on the underlying stock’s market value on the first day of the applicable offering period and (ii) the fair value of the look-back feature determined by using the Black-Scholes model. We recognized approximately
$0.1 million
of compensation expense associated with the plan in each of the
three
month periods ended
September 30, 2017
and
2016
and approximately
$0.3 million
of compensation expense associated with each of the
nine
month periods ended
September 30, 2017
and
2016
.
Note 9 – Pension Benefits and Other Postretirement Benefit Plans
We have
three
qualified noncontributory defined benefit pension plans: 1) the Rogers Corporation Employee’s Pension Plan for unionized hourly employees (the Union Plan); 2) the Rogers Corporation Defined Benefit Pension Plan for all other U.S. employees hired before December 31, 2007 who are salaried employees or non-union hourly employees (the Rogers Plan); and 3) the Hourly Employees Pension Plan of Arlon Inc., Microwave Material and Silicone Technologies Divisions, Bear, Delaware for employees of the acquired Arlon business (the Bear Plan). The Company also maintains the Rogers Corporation Amended and Restated Pension Restoration Plan effective as of January 1, 2004 and the Rogers Corporation Amended and Restated Pension Restoration Plan effective as of January 1, 2005 (collectively, the Nonqualified Plans). The Nonqualified Plans serve to restore certain retirement benefits that might otherwise be lost due to limitations imposed by federal law on qualified pension plans, as well as to provide supplemental retirement benefits, for certain senior executives of the Company. In addition, we sponsor multiple fully insured or self-funded medical plans and life insurance plans for certain retirees. The measurement date for all plans is December 31 for each respective plan year.
Components of Net Periodic (Benefit) Cost
The components of net periodic (benefit) cost for the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Pension Benefits
|
|
Retirement Health and Life Insurance Benefits
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
Change in benefit obligation:
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
37
|
|
|
$
|
68
|
|
|
$
|
111
|
|
Interest cost
|
1,837
|
|
|
1,872
|
|
|
5,519
|
|
|
5,658
|
|
|
20
|
|
|
19
|
|
|
51
|
|
|
57
|
|
Expected return on plan assets
|
(2,302
|
)
|
|
(2,698
|
)
|
|
(6,920
|
)
|
|
(8,110
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(411
|
)
|
|
(373
|
)
|
|
(1,191
|
)
|
|
(1,119
|
)
|
Amortization of net loss (gain)
|
445
|
|
|
445
|
|
|
1,311
|
|
|
1,339
|
|
|
16
|
|
|
(19
|
)
|
|
(15
|
)
|
|
(57
|
)
|
Net periodic (benefit) cost
|
$
|
(20
|
)
|
|
$
|
(381
|
)
|
|
$
|
(90
|
)
|
|
$
|
(1,113
|
)
|
|
$
|
(363
|
)
|
|
$
|
(336
|
)
|
|
$
|
(1,087
|
)
|
|
$
|
(1,008
|
)
|
Employer Contributions
We made required contributions of
$0.4 million
and
$0.3 million
to our qualified defined benefit pension plans in the first
nine
months of
2017
and
2016
, respectively. We are not required to make additional contributions to these plans in
2017
.
In the
three and nine
month periods ended
September 30, 2017
and
2016
, we did not make any voluntary contributions to our defined benefit pension plans.
As there is no funding requirement for the non-qualified unfunded noncontributory defined benefit pension plan or the retiree health and life insurance benefit plans, benefit payments made during the year are funded directly by the Company.
Pension Plan Merger and Proposed Termination
In October 2017, the Company merged the Rogers Plan and the Bear Plan (the Merged Plan). The Company currently intends to terminate the Merged Plan and has requested a determination letter from the Internal Revenue Service (IRS). The termination of the Merged Plan remains subject to final approval by both management and the IRS. The Company plans to provide for lump sum distributions or annuity payments in connection with the termination of the Merged Plan and we expect the settlement process to be completed in late 2018 or early 2019. The Company lacks sufficient information as of
September 30, 2017
to determine the financial impact of the proposed plan termination. The actuarial assumptions used to calculate pension cost and true-up the pension liability are reviewed annually and will be updated at December 31, 2017. At this time, there are no plans to terminate the remaining Union Plan.
Note 10 – Segment Information
Our reporting structure is comprised of the following operating segments: ACS, EMS, PES, and Other. We believe this structure aligns our external reporting presentation with how we currently manage and view our business internally.
In November 2016, we acquired DeWAL, a leading manufacturer of polytetrafluoroethylene, ultra-high molecular weight polyethylene films, pressure sensitive tapes and specialty products for the industrial, aerospace, automotive, and electronics markets. In January 2017, we acquired the principal operating assets of DSP, a custom manufacturer of silicone sheet, extrusions, stripping and compounds. We are in the process of integrating both DeWAL and DSP into our EMS segment.
The following table sets forth the information about our segments for the periods indicated; inter-segment sales have been eliminated from the net sales data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
|
|
|
|
|
|
Advanced Connectivity Solutions
|
$
|
72,713
|
|
|
$
|
65,518
|
|
|
$
|
225,595
|
|
|
$
|
206,115
|
|
Elastomeric Material Solutions
|
82,239
|
|
|
54,391
|
|
|
236,673
|
|
|
146,476
|
|
Power Electronics Solutions
|
46,409
|
|
|
39,777
|
|
|
132,966
|
|
|
113,391
|
|
Other
|
5,422
|
|
|
5,573
|
|
|
16,801
|
|
|
17,332
|
|
Total
|
$
|
206,783
|
|
|
$
|
165,259
|
|
|
$
|
612,035
|
|
|
$
|
483,314
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Connectivity Solutions
|
$
|
14,465
|
|
|
$
|
7,605
|
|
|
$
|
47,362
|
|
|
$
|
34,334
|
|
Elastomeric Material Solutions
|
17,846
|
|
|
10,932
|
|
|
44,826
|
|
|
21,584
|
|
Power Electronics Solutions
|
5,429
|
|
|
2,767
|
|
|
14,024
|
|
|
4,540
|
|
Other
|
1,847
|
|
|
1,842
|
|
|
5,576
|
|
|
5,544
|
|
Total
|
39,587
|
|
|
23,146
|
|
|
111,788
|
|
|
66,002
|
|
|
|
|
|
|
|
|
|
Equity income in unconsolidated joint ventures
|
1,384
|
|
|
898
|
|
|
3,359
|
|
|
2,220
|
|
Other income (expense), net
|
1,596
|
|
|
676
|
|
|
2,126
|
|
|
320
|
|
Interest expense, net
|
(1,639
|
)
|
|
(811
|
)
|
|
(4,834
|
)
|
|
(3,047
|
)
|
Income before income tax expense
|
$
|
40,928
|
|
|
$
|
23,909
|
|
|
$
|
112,439
|
|
|
$
|
65,495
|
|
Note 11 – Joint Ventures
As of
September 30, 2017
, we had
two
joint ventures, each
50%
owned, which were accounted for under the equity method of accounting.
|
|
|
|
|
Joint Venture
|
Location
|
Reportable Segment
|
Fiscal Year-End
|
Rogers INOAC Corporation (RIC)
|
Japan
|
Elastomeric Material Solutions
|
October 31
|
Rogers INOAC Suzhou Corporation (RIS)
|
China
|
Elastomeric Material Solutions
|
December 31
|
We recognized equity income related to the joint ventures of
$1.4 million
and
$3.4 million
for the
three and nine
months ended
September 30, 2017
, respectively. We recognized equity income related to the joint ventures of
$0.9 million
and
$2.2 million
for the
three and nine
months ended
September 30, 2016
, respectively. These amounts are included in the condensed consolidated statements of operations.
The summarized financial information for the joint ventures for the periods indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
$
|
14,020
|
|
|
$
|
12,773
|
|
|
$
|
38,653
|
|
|
$
|
32,934
|
|
Gross profit
|
$
|
5,463
|
|
|
$
|
4,119
|
|
|
$
|
14,832
|
|
|
$
|
10,877
|
|
Net income
|
$
|
2,768
|
|
|
$
|
1,796
|
|
|
$
|
6,718
|
|
|
$
|
4,440
|
|
Receivables from and payables to joint ventures arise during the normal course of business from transactions between us and the joint ventures. We had receivables of
$2.7 million
and
$2.4 million
due from RIC and RIS as of
September 30, 2017
and
December 31, 2016
, respectively. We owed payables of
$2.7 million
and
$1.6 million
to RIC and RIS as of
September 30, 2017
and
December 31, 2016
, respectively.
Note 12 – Debt
On June 18, 2015, we entered into a secured
five
year credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the Second Amended Credit Agreement). The Second Amended Credit Agreement provided (1) a
$55.0 million
term loan; (2) up to
$295.0 million
of revolving loans, with sublimits for multicurrency borrowings, letters of credit and swing-line notes; and (3) a
$50.0 million
expansion feature.
On February 17, 2017, we entered into a secured five year credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the Third Amended Credit Agreement), which amended and restated the Second Amended Credit Agreement. The Third Amended Credit Agreement refinanced the Second Amended Credit Agreement, eliminated the term loan under the Second Amended Credit Agreement, increased the principal amount of the revolving credit facility to up to
$450.0 million
borrowing capacity, with sublimits for multicurrency borrowings, letters of credit and swing-line notes, and provided an additional
$175.0 million
accordion feature. Borrowings may be used to finance working capital needs, for letters of credit and for general corporate purposes in the ordinary course of business, including the financing of permitted acquisitions (as defined in the Third Amended Credit Agreement).
Borrowings under the Third Amended Credit Agreement can be made as alternate base rate loans or euro-currency loans. Alternate base rate loans bear interest that includes a base reference rate plus a spread of
37.5
to
75.0
basis points, depending on our leverage ratio.
The base reference rate is the greater of the prime rate; federal funds effective rate (or the overnight bank funding rate, if greater) plus 50 basis points; or adjusted 1-month LIBOR plus 100 basis points.
Euro-currency loans bear interest based on adjusted LIBOR plus a spread of
137.5
to
175.0
basis points, depending on our leverage ratio.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Third Amended Credit Agreement, we are required to pay a quarterly fee of
20
to
30
basis points (based upon our leverage ratio) of the unused amount of the lenders’ commitments under the Third Amended Credit Agreement.
The Third Amended Credit Agreement contains customary representations, warranties, covenants, mandatory prepayments and events of default under which our payment obligations may be accelerated. If an event of default occurs, the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees. The financial covenants include requirements to maintain (1) a leverage ratio of no more than
3.25
to 1.00, subject to an election to increase the maximum leverage ratio to
3.50
to 1.00 for one fiscal year in connection with a permitted acquisition, and (2) an interest coverage ratio of no less than
3.00
to 1.00.
All obligations under the Third Amended Credit Agreement are guaranteed by each of our existing and future material domestic subsidiaries, as defined in the Third Amended Credit Agreement (the Guarantors). The obligations are also secured by a Third Amended and Restated Pledge and Security Agreement, dated as of February 17, 2017, entered into by us and the Guarantors which grants to the administrative agent, for the benefit of the lenders, a security interest, subject to certain exceptions, in substantially all of the non-real estate assets of the Guarantors. These assets include, but are not limited to, receivables, equipment, intellectual property, inventory, and stock in certain subsidiaries.
All revolving loans are due on the maturity date, February 17, 2022. We are not required to make any quarterly principal payments under the Third Amended Credit Agreement, however, during the second and third quarters of 2017, we made discretionary principal payments of
$50.0 million
and
$60.0 million
, respectively, to reduce the amount outstanding on our credit facility. As of
September 30, 2017
we have
$131.2 million
in outstanding borrowings under our credit facility.
At
September 30, 2017
, we have
$2.4 million
of outstanding deferred debt issuance costs consisting of
$1.4 million
related to the term loans under the Second Amended Credit Agreement and
$1.0 million
related to the Third Amended Credit Agreement. These
costs will be amortized over the life of the Third Amended Credit Agreement, which will terminate in February 2022. We incurred amortization expense of
$0.1 million
and
$0.2 million
in the
three
months ended
September 30, 2017
and
2016
related to these deferred costs. We incurred amortization expense of
$0.4 million
in the
nine
months ended
September 30, 2017
and
2016
related to these deferred costs.
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on
$75.0 million
of our
$450.0 million
revolving credit facility. See further discussion in Note 3 Hedging Transactions and Derivative Financial Instruments.
Restriction on Payment of Dividends
Our Third Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our leverage ratio does not exceed
2.75
to
1.00
. If our leverage ratio exceeds
2.75
to
1.00
, we may nonetheless make up to
$20 million
in restricted payments, including cash dividends, during the fiscal year, provided that no default or event of default has occurred and is continuing or would result from the payments. Our leverage ratio did not exceed
2.75
to
1.00
as of
September 30, 2017
.
Capital Lease
We have a capital lease obligation related to our manufacturing facility in Eschenbach, Germany. Under the terms of the leasing agreement, we have an option to purchase the property upon the expiration of the lease in
2021
at a price which is the greater of (i) the then-current market value or (ii) the residual book value of the land including the buildings and installations thereon. The total obligation recorded for the lease as of
September 30, 2017
is
$5.7 million
. Depreciation expense related to the capital lease was
$0.1 million
for each of the three months ended
September 30, 2017
and
2016
. For the
nine
months ended
September 30, 2017
and
2016
, depreciation expense related to the capital lease was
$0.2 million
and
$0.3 million
, respectively. Accumulated depreciation at
September 30, 2017
and
December 31, 2016
was
$4.1 million
and
$3.4 million
, respectively. These expenses are included as depreciation expense in cost of sales on our condensed consolidated statements of operations.
We also incurred interest expense on the capital lease of
$0.1 million
for each of the three month periods ended
September 30, 2017
and
2016
. For the
nine
month periods ended
September 30, 2017
and
2016
, interest expense incurred on the capital lease was
$0.1 million
and
$0.3 million
, respectively. Interest expense related to the debt recorded on the capital lease is included in interest expense on the condensed consolidated statements of operations.
Note 13 – Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the period ending
September 30, 2017
, by segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Advanced Connectivity Solutions
|
|
Elastomeric Material Solutions
|
|
Power Electronics Solutions
|
|
Other
|
|
Total
|
December 31, 2016
|
$
|
51,693
|
|
|
$
|
91,531
|
|
|
$
|
62,983
|
|
|
$
|
2,224
|
|
|
$
|
208,431
|
|
Foreign currency translation adjustment
|
—
|
|
|
768
|
|
|
7,479
|
|
|
—
|
|
|
8,247
|
|
Purchase accounting adjustment
|
—
|
|
|
116
|
|
|
—
|
|
|
—
|
|
|
116
|
|
DSP acquisition
|
—
|
|
|
17,793
|
|
|
—
|
|
|
—
|
|
|
17,793
|
|
September 30, 2017
|
$
|
51,693
|
|
|
$
|
110,208
|
|
|
$
|
70,462
|
|
|
$
|
2,224
|
|
|
$
|
234,587
|
|
Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
(Dollars in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trademarks and patents
|
$
|
10,161
|
|
|
$
|
1,882
|
|
|
$
|
8,279
|
|
|
$
|
6,825
|
|
|
$
|
1,156
|
|
|
$
|
5,669
|
|
Technology
|
73,779
|
|
|
31,382
|
|
|
42,397
|
|
|
68,880
|
|
|
24,365
|
|
|
44,515
|
|
Covenant not to compete
|
1,729
|
|
|
1,020
|
|
|
709
|
|
|
1,419
|
|
|
932
|
|
|
487
|
|
Customer relationships
|
128,357
|
|
|
20,262
|
|
|
108,095
|
|
|
96,148
|
|
|
14,311
|
|
|
81,837
|
|
Total definite-lived other intangible assets
|
214,026
|
|
|
54,546
|
|
|
159,480
|
|
|
173,272
|
|
|
40,764
|
|
|
132,508
|
|
Indefinite-lived other intangible assets
|
4,662
|
|
|
—
|
|
|
4,662
|
|
|
4,168
|
|
|
—
|
|
|
4,168
|
|
Total other intangible assets
|
$
|
218,688
|
|
|
$
|
54,546
|
|
|
$
|
164,142
|
|
|
$
|
177,440
|
|
|
$
|
40,764
|
|
|
$
|
136,676
|
|
Gross and net carrying amounts and accumulated amortization may differ from prior periods due to foreign exchange rate fluctuations.
Amortization expense for the
three and nine
months ended
September 30, 2017
was approximately
$3.8 million
and
$11.0 million
,
respectively. Amortization expense for the
three and nine
months ended
September 30, 2016
was approximately
$2.7 million
and
$8.0 million
, respectively. The estimated future amortization expense is
$3.9 million
for the remainder of 2017 and
$15.4 million
,
$15.2 million
,
$11.9 million
and
$11.0 million
for 2018, 2019, 2020 and 2021, respectively.
On November 23, 2016, we acquired DeWAL, and on January 6, 2017, we acquired the principal operating assets of DSP. For further detail on the goodwill and other intangible assets recorded in connection with the acquisitions, see Note 5, “Acquisitions”.
The indefinite-lived other intangible assets were acquired as part of the acquisition of Curamik Electronics GmbH. These assets are assessed for impairment annually or if changes in circumstances indicate that the carrying values may not be recoverable.
The definite-lived other intangible assets are amortized using a fair value methodology that is based on the projected economic use of the related underlying asset. The weighted average amortization period as of
September 30, 2017
, by other intangible asset class, is presented in the table below:
|
|
|
|
Other Intangible Asset Class
|
|
Weighted Average Amortization Period (Years)
|
Trademarks and patents
|
|
7.3
|
Technology
|
|
6.1
|
Customer relationships
|
|
10.4
|
Covenant not to compete
|
|
3.4
|
Total definite-lived other intangible assets
|
|
9.1
|
Note 14 – Commitments and Contingencies
We are currently engaged in the following environmental and legal proceedings:
Voluntary Corrective Action Program
Our location in Rogers, Connecticut is part of the Connecticut Voluntary Corrective Action Program (VCAP). As part of this program, we partnered with the Connecticut Department of Energy and Environmental Protection (CT DEEP) to determine the corrective actions to be taken at the site related to contamination issues. We evaluated this matter and completed internal due diligence work related to the site in the fourth quarter of 2015. We recorded an accrual of
$3.2 million
as of
December 31, 2015
for remediation costs expected to be incurred based on the facts and circumstances known to us at that time. During the third quarter of 2016, the CT DEEP approved a change to our remediation plan for the site that will reduce our overall expected costs. Accordingly, we reduced the accrual by
$0.9 million
as a result of a change in the level of remediation that needs to take place. This benefit was recorded as an offset to selling, general, and administrative expenses in the condensed consolidated statement of operations. Remediation activities on the site continue, totaling approximately
$0.5 million
through
September 30, 2017
, and the remaining accrual for future remediation efforts was
$1.8 million
.
Superfund Sites
We are currently involved as a potentially responsible party (PRP) in
one
active case involving a waste disposal site, the Chatham Superfund Site. The costs incurred since inception for this claim have been immaterial and have been primarily covered by insurance policies, for both legal and remediation costs. In this matter, we have been assessed a cost sharing percentage of approximately
2%
in relation to the range for estimated total cleanup costs of
$18.8 million
to
$29.6 million
. We believe we have sufficient insurance coverage to fully cover this liability and have recorded a liability and related insurance receivable of approximately
$0.4 million
as of
September 30, 2017
, which approximates our share of the low end of the estimated range. We believe we are a de minimis participant and, as such, have been allocated an insignificant percentage of the total PRP cost sharing responsibility. Based on facts presently known to us, we believe that the potential for the final results of this case having a material adverse effect on our results of operations, financial position or cash flows is remote. This case has been ongoing for many years and we believe that it will continue for the indefinite future. No time frame for completion can be estimated at the present time.
PCB Contamination
We have been working with CT DEEP and the United States Environmental Protection Agency, Region I, in connection with certain polychlorinated biphenyl (PCB) contamination at our facility in Woodstock, Connecticut. The issue was originally discovered in the soil at the facility in the late 1990s, which has been remediated. Further contamination was later found in the groundwater beneath the property, which was addressed with the installation of a pump and treat system in 2011. The future costs related to the maintenance of the groundwater pump and treat system now in place at the site are expected to be minimal. We believe that the remaining remediation activity will continue for several more years and no time frame for completion can be estimated at the present time.
PCB contamination at this facility was also found in the buildings and courtyards original to the site, in addition to surrounding areas, including an on-site pond. We have completed remediation activities for the buildings and courtyards. We currently have a reserve of
$0.2 million
for the pond remediation recorded in our condensed consolidated statements of financial position. We believe this reserve will be adequate to cover the remaining remediation work related to the pond contamination based on the information known at this time. However, if additional contamination is found, the cost of the remaining remediation may increase.
Asbestos Litigation
We, like many other industrial companies, have been named as a defendant in a number of lawsuits filed in courts across the country by persons alleging personal injury from exposure to products containing asbestos. We have never mined, milled, manufactured or marketed asbestos; rather, we made and provided to industrial users a limited number of products that contained encapsulated asbestos, but we stopped manufacturing these products in the late 1980s. Most of the claims filed against us involve numerous defendants, sometimes as many as several hundred.
The following table presents information about our recent asbestos claims activity:
|
|
|
|
|
Asbestos
Claims Activity
|
Claims outstanding at December 31, 2016
|
605
|
|
New claims filed
|
284
|
|
Pending claims concluded
|
(226
|
)
|
Claims outstanding at September 30, 2017
|
663
|
|
For the
nine
months ended
September 30, 2017
,
211
claims were dismissed and
15
claims were settled. Settlements totaled approximately
$2.4 million
for the
nine
months ended
September 30, 2017
.
We recognize a liability for asbestos-related contingencies that are probable of occurrence and reasonably estimable. In connection with the recognition of liabilities for asbestos related matters, we record asbestos-related insurance receivables that are deemed probable. Our estimates of asbestos-related contingent liabilities and related insurance receivables are based on an independent actuarial analysis and an independent insurance usage analysis prepared annually by third parties. The actuarial analysis contains numerous assumptions, including general assumptions regarding the asbestos-related product liability litigation environment and company-specific assumptions regarding claims rates (including diseases alleged), dismissal rates, average settlement costs and average defense costs. The insurance usage analysis considers, among other things, applicable deductibles, retentions and policy limits, the solvency and historical payment experience of various insurance carriers, the likelihood of recovery as estimated by external legal counsel and existing insurance settlements.
We review our asbestos-related forecasts annually in the fourth quarter of each year unless facts and circumstances materially change during the year, at which time we would analyze these forecasts. Currently, these analyses project liabilities and related insurance receivables over a
10
-year period. It is probable we will incur additional costs for asbestos-related claims following this
10
-year period, but we do not believe that any related contingencies are reasonably estimable beyond such period based on, among other things, the significant proportion of future claims included in the analysis and the lag time between the date a claim is filed
and its resolution. Accordingly, no liability (or related asset) has yet been recorded for claims that may be asserted subsequent to 2026.
As of
December 31, 2016
, the asbestos-related claims and insurance receivables for the
10
-year projection period were
$52.0 million
and
$48.4 million
, respectively. As of
September 30, 2017
, there have been no changes to these projections.
To date, the defense and settlement costs of our asbestos-related product liability litigation have been substantially covered by insurance. We have identified continuous coverage for primary, excess and umbrella insurance from the 1950s through the mid-1980s, except for a period in the early 1960s, with respect to which we have entered into an agreement for primary, but not excess or umbrella, coverage. In addition, we have entered into a cost sharing agreement with most of our primary, excess and umbrella insurance carriers to facilitate the ongoing administration and payment of claims by the carriers. The cost sharing agreement may be terminated by any party, but will continue until a party elects to terminate it. As of the filing date for this report, the agreement has not been terminated. As previously disclosed, however, we expect to exhaust individual primary, excess and umbrella coverages over time, and there is no assurance that such exhaustion will not accelerate due to additional claims, damages and settlements or that coverage will be available as expected. Accordingly, while we believe it is reasonably possible that we may incur losses and defense costs in excess of our accruals in the future, we do not have sufficient data to provide a reasonable estimate or range of such losses and defense costs, at this time.
The amounts recorded for the asbestos-related liability and the related insurance receivables described above were based on facts known at the time and a number of assumptions. However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of such claims, the length of time it takes to dispose of such claims, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States could cause the actual liability and insurance recoveries for us to be higher or lower than those projected or recorded.
There can be no assurance that our accrued asbestos liabilities will approximate our actual asbestos-related settlement and defense costs, or that our accrued insurance recoveries will be realized. We will continue to vigorously defend ourselves and believe we have substantial unutilized insurance coverage to mitigate future costs related to this matter.
General Litigation
In addition to the above issues, the nature and scope of our business brings us in regular contact with the general public and a variety of businesses and government agencies. Such activities inherently subject us to the possibility of litigation, including environmental and product liability matters that are defended and handled in the ordinary course of business. We have established accruals for matters for which management considers a loss to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation, after taking into account insurance coverage and the aforementioned accruals, will have a material adverse impact on our results of operations, financial position or cash flows.
Note 15 – Share Repurchase
On
August 6, 2015
, we initiated a share repurchase program (the Program) of up to
$100.0 million
of the Company’s capital stock. We initiated the Program to mitigate potentially dilutive effects of stock options and shares of restricted stock granted by the Company, in addition to enhancing shareholder value. The Program has no expiration date, and may be suspended or discontinued at any time without notice. As of
September 30, 2017
,
$52.0 million
remained available to repurchase under the Program.
No
shares of capital stock were repurchased during the
nine
months ended
September 30, 2017
. All previous repurchases were made using cash from operations and cash on hand.
Note 16 – Income Taxes
Our effective income tax rate was
37.6%
and
32.8%
for the
three
months ended
September 30, 2017
and
2016
, respectively. The increase was primarily due to a change in valuation allowance associated with deferred tax assets that are capital in nature and changes in the pretax income mix across jurisdictions with disparate tax rates, partially offset by excess tax deductions on stock based compensation recognized in 2017.
Our effective income tax rate was
34.6%
and
44.5%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The decrease was primarily due to withholding taxes on off-shore cash movements and the change in our assertion that certain foreign earnings are permanently reinvested recorded in 2016, excess tax deductions on stock based compensation recognized in 2017 and a decrease in current year accruals of uncertain tax positions. This was partially offset by a decrease in reversal of reserves associated with uncertain tax positions, a change in valuation allowance associated with deferred tax assets that are capital in nature and changes in the pretax income mix across jurisdictions with disparate tax rates.
During the quarter, we established a valuation allowance of
$1.9 million
on a deferred tax asset associated with a capital investment because its realizability was determined to no longer meet the more likely than not threshold.
Historically, our intention was to permanently reinvest the majority of our foreign earnings indefinitely or to distribute them only when it was tax efficient to do so. As a result of certain internal restructuring transactions effectuated to more closely align our foreign subsidiaries from an operational, legal and geographic perspective and improve management of financial resources, with respect to offshore distributions, we modified our assertion of certain foreign subsidiary earnings considered permanently reinvested in 2016. In connection with this change, we recorded a deferred tax liability of
$3.4 million
associated with distribution-related foreign taxes on prior years’ undistributed earnings of certain of our Chinese subsidiaries in the second quarter of 2016. These taxes become due when distributed to other offshore subsidiaries. In addition, we incurred
$5.5 million
of withholding taxes related to distributions from China in the second quarter of 2016. With few exceptions, U.S. income taxes have not been provided on undistributed earnings of international subsidiaries. We continue to intend to reinvest these earnings permanently outside the U.S. or to repatriate the earnings only when it is tax efficient to do so.
The total amount of unrecognized tax benefits as of
September 30, 2017
was
$6.8 million
, of which
$6.6 million
would affect our effective tax rate if recognized. It is reasonably possible that approximately
$1.6 million
of our unrecognized tax benefits as of
September 30, 2017
will reverse within the next twelve months.
We recognize interest and penalties related to unrecognized tax benefits through income tax expense. As of
September 30, 2017
, we had
$0.7 million
accrued for the payment of interest.
We are subject to taxation in the U.S. and various state and foreign jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2012.
We adopted ASU 2016-09 on January 1, 2017. Upon adoption, we recognized excess tax benefits of approximately
$12.7 million
in deferred tax assets that were previously not recognized in a cumulative-effect adjustment to retained earnings. In addition, the new guidance requires that all of the tax effects related to share-based payments at settlement or expiration be recorded through the statement of operations which resulted in the recognition of
$1.5 million
and
$3.2 million
of income tax benefits during the
three and nine
months ended
September 30, 2017
, respectively. See Note 19 - “Recent Accounting Standards” for further information.
Note 17 – Restructuring and Impairment Charges
In the second quarter of 2017, we completed the physical relocation of our global headquarters from Rogers, Connecticut to Chandler, Arizona. We recorded
$0.6 million
and
$2.4 million
of expense related to this project in the
three
and
nine
months ended
September 30, 2017
. Severance activity related to the headquarters relocation is presented in the table below for the
nine
months ended
September 30, 2017
:
|
|
|
|
|
(Dollars in thousands)
|
Severance Related to Headquarters Relocation
|
Balance at December 31, 2016
|
$
|
470
|
|
Provisions
|
361
|
|
Payments
|
(649
|
)
|
Balance at September 30, 2017
|
$
|
182
|
|
The fair value of the total severance benefits to be paid (including payments already made) in connection with the relocation is
$1.1 million
. This total is being expensed ratably over the required service period for the affected employees.
In the third quarter of 2017, we recognized a
$0.3 million
charge related to the impairment of our remaining investment in BrightVolt, Inc. (formerly known as Solicore, Inc.). As this investment does not relate to a specific operating segment, we allocated it ratably among the
three
main operating segments.
Note 18 – Assets Held for Sale
In the first quarter of 2017, we completed the planned sale of a parcel of land in Belgium that had been classified as held for sale as of December 31, 2016 and recognized a gain on sale of approximately
$0.9 million
in operating income. In the
third
quarter of 2017, we completed the sale of a facility located in Belgium that had been classified as held for sale as of June 30, 2017 and recognized a gain on sale of approximately
$4.4 million
in operating income.
In the second quarter of 2017, we began actively marketing for sale unutilized property in the U.S. consisting of a building and an adjacent parcel of land with a net book value of
$0.9 million
. The asset is no longer being depreciated and is classified as held for sale as of
September 30, 2017
as we expect it to be sold within the next twelve months.
Note 19 – Recent Accounting Standards
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. These improvements expand and refine hedge accounting for both non-financial and financial risk components. Also, this amendment aligns the recognition and presentation of the effects of a hedging instrument and the hedged item in the financial statements. Additionally, this update includes certain targeted improvements to simplify the application of current guidance related to the assessment of hedge effectiveness. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the disclosure requirements and quantifying the financial impact of the adoption of this standard on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Adoption of this standard will be applied prospectively to awards modified on or after the adoption date. The impact of this new standard will depend on the extent and nature of future changes to the terms and conditions of the Company’s share-based payment awards. Historically, the Company has not had significant changes to its share-based payment awards and therefore does not expect adoption of this guidance to have a material effect on the financial statements upon its adoption in 2018.
In March 2017, the FASB issued ASU No. 2017-05 and ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost
. The changes to the standard require employers to report the service cost component in the same line item as other compensation costs arising from services rendered by employees during the reporting period. The other components of net periodic pension benefit costs will be presented in the statement of operations separately from the service cost and outside of a subtotal of operating income from operations. In addition, only the service cost component may be eligible for capitalization where applicable. ASU No. 2017-05 and ASU 2017-07 are effective for annual periods beginning after December 15, 2017. The Company expects to adopt this guidance when effective and the adoption is not expected to have a material effect on the financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, in an effort to simplify the subsequent measurement of goodwill and the associated procedures to determine fair value. The amendments of this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, however, the Company has not yet determined if it will adopt prior to 2020. The adoption of this guidance is not expected to have a material impact on our financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, with the intention to reduce diversity in practice, as well as simplify elements of classification within the statement of cash flows for certain transactions. The update was effective for interim and annual reporting periods beginning after December 15, 2016. The accounting update was to be adopted using a retrospective approach. The Company adopted ASU 2016-15 effective January 1, 2017, and it did not have a material impact on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which contains amendments intended to simplify various aspects of share-based payment accounting and presentation in the financial statements, including the income tax consequences, classification of awards as either equity or liabilities, treatment of forfeitures and statutory tax withholding requirements, and classification in the statement of cash flows. The update was effective for interim and annual reporting periods beginning after December 15, 2016. The new standard required a modified retrospective transition through a cumulative-effect adjustment as of the beginning of the period of adoption, with certain provisions requiring either a prospective or retrospective transition. The Company adopted ASU 2016-09 on January 1, 2017. Upon adoption, the Company recognized excess tax benefits of approximately
$12.7 million
in deferred tax assets that were previously not recognized in a cumulative-effect adjustment to retained earnings. In addition, the new guidance requires that all of the tax effects related to share-based payments at settlement or expiration be recorded through the statement of operations. The Company also adopted the standard with respect to treatment of forfeitures, which did not have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to classify leases as either finance or operating leases and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. An accounting policy election may be made to account for leases with a term of 12 months or less similar to existing guidance for operating leases today. ASU No. 2016-02 supersedes the existing guidance on accounting for leases. The standard is effective for interim and annual reporting periods for fiscal years beginning after December 15, 2018. Early adoption of this standard is permitted and it is to be adopted using a modified retrospective approach. The Company has initiated its implementation plan, which includes evaluating the classification of our lease agreements and quantifying the accounting impact in accordance with the new accounting standard. The Company expects to adopt this accounting standard beginning in fiscal year 2019.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year. In accordance with the agreed upon delay, the updated standard is effective for us beginning in the first quarter of 2018. Early adoption is permitted, but not before the original effective date of the standard. During 2016, the FASB issued new accounting standards updates regarding principal versus agent considerations in determining revenue recognition identifying performance obligations and licensing, collectability, sales tax, non-cash considerations, completed contracts, contract modifications and effect of accounting change. During 2017, the FASB issued new accounting standards updates regarding clarification of determining the customer in a service concession arrangement. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial implementation, without restatement of comparative periods. The Company plans to adopt this standard retrospectively with the cumulative effect recognized at January 1, 2018. The Company has established a cross-functional coordinated implementation team and engaged a third party service provider to assist with the project. The Company has completed its evaluation of contracts. The Company expects that a substantial portion of the business will continue to recognize revenue on a “point in time” basis. The financial impact of adoption primarily relates to recognizing revenue on an “over time” basis due to performance obligations to deliver products that do not have an alternative use to the company whereby the company has an enforceable right to payment evidenced by contractual termination clauses. The cost incurred method will be used to measure the progress to completion as it is the best depiction of the transferring of goods to the customer. The Company is in the process of quantifying the financial impact of the adoption as well as implementing changes to its systems, processes and internal controls, as necessary, to meet the reporting and disclosure requirements.