UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission file number 1-4347
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ROGERS CORPORATION
(Exact name of Registrant as specified in its charter)
-------------------------------
Massachusetts 06-0513860
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
P.O. Box 188, One Technology Drive, Rogers, Connecticut 06263-0188
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 774-9605
-------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------- --------------
The number of shares outstanding of the Registrant's common stock as of April
30, 2004 was 16,568,744.
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1
ROGERS CORPORATION
FORM 10-Q
April 4, 2004
INDEX
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Page No.
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Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Financial Position 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17-18
Signatures 18
Exhibits
Amendment to Section 9.5 of the Rogers Corporation Executive Supplemental
Retirement Agreement Exhibit 4.1
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.1/31.2
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32
2
Part I - Financial Information
Item 1. Financial Statements
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)(Unaudited)
Three Months Ended
April 4, March 30,
2004 2003
------ -------
Net Sales $ 97,670 $ 51,878
Cost of Sales 64,285 35,390
Selling and Administrative Expenses 14,895 9,701
Research and Development Expenses 4,641 2,838
------------ ------------
Total Costs and Expenses 83,821 47,929
----------- -----------
Operating Income 13,849 3,949
Equity Income in Unconsolidated Joint Ventures 1,289 2,542
Other Income less Other Charges 1,092 1,086
Interest Income, Net 78 75
--------------- ---------------
Income Before Income Taxes 16,308 7,652
Income Taxes 4,077 1,913
------------- --------------
Net Income $ 12,231 $ 5,739
=========== ============
Net Income Per Share:
Basic $ 0.76 $ 0.37
============= =============
Diluted $ 0.72 $ 0.36
============= ==============
Weighted average shares outstanding:
Basic 16,176,715 15,571,819
========== ==========
Diluted 16,973,190 16,038,416
========== ==========
The accompanying notes are an integral part of the condensed financial statements.
3
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)(Unaudited)
April 4, December 28,
2004 2003
---- ----
Assets
Current Assets:
Cash and Cash Equivalents $ 33,237 $ 31,476
Short-term Investments 3,005 3,005
Accounts Receivable, Net 58,723 52,981
Account Receivable, Joint Ventures 2,196 3,178
Note Receivable, Current 2,100 2,100
Inventories 32,219 27,501
Current Deferred Income Taxes 4,914 4,914
Other Current Assets 1,681 1,942
------------- -----------
Total Current Assets 138,075 127,097
----------- ---------
Notes Receivable, Long-Term 7,800 7,800
Property, Plant and Equipment, Net of Accumulated
Depreciation of $109,529 and $104,885 132,589 131,157
Investments in Unconsolidated Joint Ventures 9,321 10,741
Pension Asset 6,886 6,886
Goodwill 18,186 16,697
Other Intangible Assets 7,671 8,424
Other Assets 7,111 5,638
------------- ------------
Total Assets $ 327,639 $ 314,440
========== =========
Liabilities and shareholders' equity
Current Liabilities:
Accounts Payable $ 19,561 $ 20,442
Accrued Employee Benefits and Compensation 11,732 13,359
Accrued Income Taxes Payable 13,710 9,104
Other Accrued Liabilities 6,271 7,118
----------- -----------
Total Current Liabilities 51,274 50,023
---------- ----------
Noncurrent Deferred Income Taxes 10,281 14,058
Noncurrent Pension Liability 14,916 14,909
Noncurrent Retiree Health Care and Life Insurance Benefits 6,198 6,198
Other Long-Term Liabilities 2,484 2,383
Shareholders' Equity:
Capital Stock, $1 Par Value:
Authorized Shares 50,000,000; Issued
Shares 16,526,871 and 16,326,229 16,527 16,326
Additional Paid-In Capital 45,968 43,261
Retained Earnings 186,551 174,320
Accumulated Other Comprehensive Income 5,037 4,895
Treasury Stock (319,954 and 330,516 shares) (11,597) (11,933)
------------ ------------
Total Shareholders' Equity 242,486 226,869
----------- ----------
Total Liabilities and Shareholders' Equity $ 327,639 $ 314,440
========== =========
The accompanying notes are an integral part of the condensed financial statements.
4
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
Three Months Ended
April 4, March 30,
2004 2003
------ ------
OPERATING ACTIVITIES:
Net Income $ 12,231 $ 5,739
Adjustments to Reconcile Net Income to Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 4,789 3,392
Deferred Income Taxes (1,371) --
Equity in Undistributed Income of Unconsolidated
Joint Ventures, Net (1,289) (2,542)
Loss on Disposition of Assets -- 250
Noncurrent Pension and Postretirement Benefits 1,442 (1,665)
Other, Net (1,318) (195)
Changes in Operating Assets and Liabilities, Net of Effects of
Acquisition of Businesses
Accounts Receivable (5,389) (390)
Accounts Receivable, Joint Ventures 982 (345)
Inventories (4,312) 175
Other Current Assets 187 (334)
Accounts Payable and Accrued Expenses (662) (1,486)
----------- -----------
Net Cash Provided By Operating Activities 5,290 2,599
INVESTING ACTIVITIES:
Capital Expenditures (6,640) (3,744)
Acquisition of Business, Net (3,005) --
Investments in Unconsolidated Joint Ventures and Affiliates 2,744 1,633
Short-Term Investments -- 4,592
Other Investing Activities -- 369
------------ ----------
Net Cash (Used in) Provided by Investing Activities (6,901) 2,850
FINANCING ACTIVITIES:
Proceeds from Sale of Capital Stock, Net 2,943 404
Proceeds from Disposition of Treasury Stock 298 258
----------- ----------
Net Cash Provided by Financing Activities 3,241 662
Effect of Exchange Rate Changes on Cash 131 (224)
----------- ------------
Net Increase in Cash and Cash Equivalents 1,761 5,887
Cash and Cash Equivalents at Beginning of Year 31,476 22,300
--------- ----------
Cash and Cash Equivalents at End of Quarter $ 33,237 $ 28,187
======== =========
The accompanying notes are an integral part of the condensed financial statements.
5
ROGERS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, the accompanying balance sheets and related interim statements of
income and cash flows include all adjustments, consisting only of normal
recurring items, necessary for their fair presentation in accordance with
accounting principles generally accepted in the United States. All significant
intercompany transactions have been eliminated.
Interim results are not necessarily indicative of results for a full year. For
further information regarding Rogers Corporation's (the "Company" or "Rogers")
accounting policies, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended December 28, 2003.
The Company uses a 52- or 53-week fiscal calendar ending on the Sunday closest
to the last day in December of each year. Fiscal 2004 is a 53-week year ending
on January 2, 2005. The Company included the extra week in its first quarter
results.
Certain prior period amounts have been reclassified to conform to the current
period classification.
Income Taxes
The Company's effective tax rate was 25% for the three months ended April 4,
2004 and March 30, 2003. Income taxes paid were $480,050 and $99,000 in the
first three months of 2004 and 2003, respectively. The effective tax rate
continued to benefit from foreign tax credits, research and development credits,
and favorable tax rates on certain foreign sales income.
Inventories
Inventories were as follows:
April 4, December 28,
(Dollars in thousands) 2004 2003
---- ----
Raw materials $ 5,819 $ 6,230
Work in process and finished goods 26,400 21,271
---------- ----------
$ 32,219 $ 27,501
========== ==========
Comprehensive Income
Comprehensive income, net of related tax, for the first three months ended were
as follows:
(Dollars in thousands) 2004 2003
---- ----
Net income $ 12,231 $ 5,739
Foreign currency translation adjustments 142 840
---------- ----------
Comprehensive income $ 12,373 $ 6,579
========== ==========
6
Accumulated balances related to each component of Accumulated Other
Comprehensive Income as of April 4, 2004 and December 28, 2003 were as follows:
(Dollars in thousands) 2004 2003
---- ----
Foreign currency translation adjustments $ 9,051 $ 8,909
Minimum pension liability (4,014) (4,014)
------------ ----------
Accumulated Other Comprehensive Income $ 5,037 $ 4,895
=========== =======
Recent Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") No. 51," ("FIN 46"). FIN
46 clarifies the application of ARB No. 51, "Consolidated Financial Statements",
to certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. Certain disclosure requirements of FIN 46 were
effective for financial statements issued after January 31, 2003. The adoption
of FIN-46 did not have a material impact on the Company's financial statements.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The Company was required to adopt the provisions
of FIN 46-R in the first quarter of 2004. As a result of its review, the Company
determined that it had one variable interest entity ("VIE"); however, the
Company determined that it was not the primary beneficiary and, as such, did not
consolidate the entity in accordance with FIN 46-R. The VIE identified by the
Company is Polyimide Laminate Systems, LLC ("PLS"), a 50% owned joint venture
with Mitsui Chemicals, Inc. The joint venture sells adhesiveless laminates for
trace suspension assemblies and was established in October 1999. Sales of PLS
were approximately $22.6 million in fiscal 2003 and $5.2 million and $2.4
million in the first quarter of 2004 and 2003, respectively. The Company's
maximum exposure to loss as a result of its involvement with PLS is limited to
its equity investment, which was approximately $40,000 at April 4, 2004.
Note B - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share in conformity with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share", for the first three months ended:
(In thousands, except per share amounts) 2004 2003
---- -------
Numerator:
Net income $ 12,231 $ 5,739
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 16,177 15,572
Effect of dilutive stock options 796 466
----------------- ---------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 16,973 16,038
============== =============
Basic earnings per share $ 0.76 $ 0.37
=============== ==============
Diluted earnings per share $ 0.72 $ 0.36
=============== ==============
7
Note C - Stock-Based Compensation
Under various plans, the Company may grant stock and stock options to directors,
officers, and other key employees. Stock-based compensation awards are accounted
for using the intrinsic value method prescribed in APB 25, "Accounting for Stock
Issued to Employees" and related interpretations. Stock-based compensation costs
for stock options are generally not reflected in net income as options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Stock-based compensation costs
for stock awards are reflected in net income over the awards' vesting period.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized in the financial statements for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share for the three
month periods ended April 4, 2004 and March 30, 2003 would have been reduced to
the pro forma amounts indicated below:
(Dollars in thousands, except per share amounts) 2004 2003
---- ----
Net income, as reported $ 12,231 $ 5,739
Less: Total stock-based compensation expense determined
under Black-Scholes option pricing model, net of
related tax effect 857 645
------------ -----------
Pro-forma net income $ 11,374 $ 5,094
========= =========
Basic earnings per share:
As reported $ 0.76 $ 0.37
Pro-forma 0.70 0.33
Diluted earnings per share:
As reported $ 0.72 $ 0.36
Pro-forma 0.67 0.32
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years, due to such things as the
vesting period of the stock options, and the potential for issuance of
additional stock options in future years.
An average vesting period of three years was used for the assumption regarding
stock options issued. Regular options granted to officers and other key U.S.
employees usually become exercisable in one-third increments beginning on the
second anniversary of the grant date.
Note D - Pension Benefit and Other Postretirement Benefit Plans
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost for the three-month periods ended
April 4, 2004 and March 30, 2003 are:
Pension Benefits Other Benefits
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 1,022 $ 683 $ 126 $ 103
Interest cost 1,613 1,530 133 115
Expected return on plan assets (1,799) (1,432) -- --
Amortization of prior service cost 125 177 -- --
Amortization of net (gain) loss 194 202 28 --
---------- ---------- --------- ---------
Net periodic benefit cost $ 1,155 $ 1,160 $ 287 $ 218
======== ======== ======= ======
8
Employer Contributions
As previously disclosed in its financial statements for the year ended December
28, 2003, the Company will most likely make a voluntary contribution to its
qualified defined benefit pension plans in 2004 for an amount consistent with
the trend established in prior years (voluntary contributions approximated $5.6
million and $3.2 million for the full year in 2003 and 2002, respectively). As
of April 4, 2004, the Company has not made any such new contributions to its
pension plans.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The Company anticipates that the benefits it pays
after 2006 will be lower as a result of the new Medicare provisions; however,
the retiree medical obligations and costs reported herein do not reflect the
impact of this legislation. Financial Accounting Standards Board Staff Position
No. 106-1 permits companies to defer the recognition of the new Medicare
provisions' impact due to unresolved questions about some of the new Medicare
provisions and a lack of authoritative accounting guidance about certain matters
related to the Act. The final accounting guidance, once available, could require
changes to previously reported information.
Note E - Segment Information
The following table sets forth the information about the Company's operating
segments in conformity with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" for the three-month periods ended April 4,
2004 and March 30, 2003:
Printed Polymer High
Circuit Materials & Performance
(Dollars in millions) Materials Components Foams Total
----------------------------------------------------------------------------------------------------------
2004
Net Sales $ 45.1 $30.5 $ 22.1 $ 97.7
Operating Income 8.5 4.7 0.6 13.8
2003
Net Sales $24.2 $10.4 $17.3 $ 51.9
Operating Income (Loss) 2.6 (0.7) 2.1 4.0
Inter-segment sales, which are generally priced with reference to costs or
prevailing market prices, have been eliminated from the sales data in the
previous table.
Note F - Joint Ventures
As of April 4, 2004, the Company had four joint ventures, each 50% owned, which
are accounted for by the equity method of accounting. Equity income of $1.3
million and $2.5 million for the first three months ended in 2004 and 2003 is
included on the consolidated statements of income. Each of the joint ventures is
described below:
Joint Venture Location Business Segment
------------- -------- ----------------
Rogers Inoac Corporation Japan High Performance Foams
Rogers Inoac Suzhou Corporation China High Performance Foams
Polyimide Laminate Systems, LLC U.S. Printed Circuit Materials
Rogers Chang Chun Technology Co., Ltd. Taiwan Printed Circuit Materials
9
The summarized financial information for these joint ventures is included in the
following table for the three-month periods ended April 4, 2004 and March 30,
2003. Note that there is a difference between the Company's investment in
unconsolidated joint ventures and its one-half interest in the underlying
shareholders' equity of the joint ventures due primarily to two factors. First,
the Company's major initial contribution to one of the joint ventures was
technology that was valued differently by the joint venture than it was on the
Company's books. Secondly, the translation of foreign currency denominated
investments at current rates differs from that at historical rates.
Correspondingly, there is a difference between the Company's recorded investment
in the unconsolidated joint ventures and a 50% share of the locally recorded
equity of those joint ventures. Financial information for the three month period
ended March 30, 2003 includes the Company's 50% interest in its former joint
venture, Durel Corporation, which became 100% owned by Rogers on September 30,
2003 and is included in the Company's fourth quarter 2003 consolidated results.
Results for the three month periods ended April 4, 2004 and March 30, 2003 are
as follows:
(Dollars in thousands) 2004 2003
---- ----
Net sales $ 13,874 $ 34,037
Gross profit 6,033 12,930
Net income 1,851 4,765
Sales made to unconsolidated joint ventures by the Company were immaterial in
all periods presented above.
Note G - Commitments and Contingencies
The Company is subject to federal, state, and local laws and regulations
concerning the environment and is currently engaged in proceedings related to
such matters.
In the fourth quarter of 2002, the Company sold its Moldable Composites Division
located in Manchester, Connecticut to Vyncolit North America Inc., a subsidiary
of the Perstorp Group, Sweden. Subsequent to the divestiture, certain
environmental matters were discovered at the Manchester location and Rogers
determined that under the terms of the arrangement, the Company would be
responsible for estimated remediation costs of approximately $500,000 and
recorded this reserve in 2002. In the first quarter of 2004, the Company learned
that the Environmental Protection Agency ("EPA") could require the Company to
perform additional remediation at the site. The Company's updated estimates for
this remediation range from its initial estimate of $500,000 (if the Company is
only required to perform the amount of remediation initially anticipated) to $2
million if the EPA requires additional remediation. In accordance with FAS 5,
"Accounting for Contingencies", the Company continues to carry a reserve of
$500,000, which represents a probable and reasonably estimable amount to cover
the anticipated remediation costs based on facts and circumstances known to the
Company at the present time. The Company will continue to monitor this situation
as more information regarding the remediation becomes available.
The Company is currently involved as a potentially responsible party ("PRP") in
four cases involving waste disposal sites. These proceedings are at a stage
where it is still not possible to estimate the cost of remediation, the timing
and extent of remedial action that may be required by governmental authorities,
and the amount of liability, if any, of the Company alone or in relation to that
of any other PRPs. Where it has been possible to make a reasonable estimate of
the Company's liability, a provision has been established. Insurance proceeds
have only been taken into account when they have been confirmed by or received
from the insurance company. Actual costs to be incurred in future periods may
vary from these estimates. Based on facts presently known to it, the Company
does not believe that the outcome of these proceedings will have a material
adverse effect on its financial position.
In recent years, the Company has worked with the Connecticut Department of
Environmental Protection ("CT DEP") related to certain polychlorinated biphenyl
("PCB") contamination in the soil beneath a section of cement flooring at its
Woodstock, Connecticut facility. The Company completed clean-up efforts in 2000,
monitored the site in 2001, 2002, and 2003, and will continue to monitor the
site for the next two years. On the basis of estimates prepared by environmental
engineers and consultants, the Company had recorded a provision of $2.6 million
prior to 2004 and charged $2.5 million against this provision. In the first
quarter of 2004, expenses of approximately $10,000 have been charged against the
provision. The remaining amount in the reserve is primarily for testing,
monitoring, sampling and minor residual treatment activity. Management believes,
10
based on facts currently available, that the balance of this provision is
adequate to complete the project.
Over the past several years, there has been a significant increase in certain
U.S. states in asbestos-related product liability claims against numerous
industrial companies. The Company has been named, along with hundreds of other
industrial companies, as a defendant in some of these cases. The Company
strongly believes it has valid defenses to these claims and intends to defend
itself vigorously. In addition, the Company believes that it has sufficient
insurance to cover all material costs associated with these claims. Based upon
past claims experience and available insurance coverage, management believes
that the resolution of these matters will not have a material adverse effect on
the consolidated financial position, results of operations, or cash flows of the
Company.
In addition to the above issues, the nature and scope of the Company's business
bring it in regular contact with the general public and a variety of businesses
and government agencies. Such activities inherently subject the Company to the
possibility of litigation, including environmental and product liability matters
that are defended and handled in the ordinary course of business. The Company
has 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 effect on the financial position of the Company.
Note H - Restructuring
On January 21, 2004, the Company announced that it would cease operations at its
Windham, Connecticut facility by the end of 2004. The manufacturing operations
for Rogers' molded polyurethane materials and its nitrile rubber floats,
currently manufactured at the plant, are being relocated to the Company's
facility in Suzhou, China. Charges associated with this transaction are
projected to be slightly above $2 million and relate to severance that will be
paid to employees upon termination.
In accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits", the Company recorded a $0.6 million restructuring
charge in the first quarter of 2004 which is included in selling and
administrative expenses on the income statement. The additional estimated costs
are expected to be recognized in the financial statements during the remainder
of 2004. No actual costs have been incurred to date.
Note I - Related Parties
In 2001, the Company acquired certain assets of Cellect LLC ("Cellect"),
including intellectual property rights, inventory and customer lists. In
connection with this acquisition, the Company entered into various operating and
financing agreements with Cellect to purchase certain production from Cellect
while the Company completed construction of a plant facility in Carol Stream,
Illinois to manufacture the products acquired from Cellect. The Company has a
note receivable and accounts receivable from Cellect of $1.8 million and $2.4
million, respectively, at April 4, 2004 as compared to $1.8 million and $2.9
million, respectively, at December 28, 2003. These receivables relate to these
agreements that allow the Company to provide, at its discretion, advances to
Cellect to support its supply requirements to the Company. Any residual amount
in accounts receivable is due at the conclusion of the supply agreement
(currently June 30, 2004). The note receivable is due in January 2007, which
corresponds to the date upon which any earn-out payments under the acquisition
agreement are due. The risk of collection on these balances is mitigated by the
Company's production purchases from Cellect, right of offset on production
purchases and any earn-out payments, as well as the Company's security interest
in substantially all the assets of Cellect as collateral on the note
arrangement.
Note J - Acquisitions and Divestitures
KF Inc.
On January 31, 2004, the Company acquired KF Inc. ("KF"), a Korean manufacturer
of liquid level sensing devices for the automotive market, through a stock
purchase agreement for approximately $3.5 million. The acquisition allows the
Company to position itself for further growth and expansion in the float
business in Asia. Under the terms of the agreement, KF is a wholly owned
11
subsidiary of Rogers and was included in the Company's consolidated results
beginning on January 31, 2004. The acquisition was accounted for as a purchase
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations". As such, the purchase price was allocated to the
acquired assets as of the date of acquisition. The following table summarizes
the estimated fair values of the acquired assets as of the date of acquisition:
(Dollars in thousands)
Cash $ 495
Accounts receivable 255
Inventory 406
Property, plant and equipment 404
Intangible assets 2,689
Other assets 94
-----------
Total assets 4,343
Accounts payable and other accruals 435
Deferred tax liability 358
Other liabilities 50
----------
Total liabilities 843
---------
Purchase price $ 3,500
=======
Due to the insignificant effect of KF on Rogers' consolidated statement of
financial position and operating results, no pro-forma information has been
presented.
Durel Corporation
On September 30, 2003, the Company acquired from 3M Company ("3M") its 50%
interest in Durel Corporation, a joint venture of Rogers and 3M, for $26 million
in cash plus $0.5 million in closing costs. Effective September 30, 2003, the
operations of Durel were fully integrated and consolidated into Rogers
Corporation. The new business unit is called the Durel division and its
financial and operating results are included in Rogers' Polymer Materials and
Components business segment. The acquisition was accounted for as a purchase
pursuant to SFAS No. 141, "Business Combinations", and the purchase price was
allocated to assets and liabilities based on their respective fair values as of
the date of acquisition. In the first quarter of 2004, the Company finalized its
purchase price accounting as follows:
(Dollars in thousands)
Cash $ 4,172
Accounts receivable 4,353
Inventory 4,525
Property, plant and equipment 10,385
Intangible assets 1,291
Other assets 1,363
----------
Total assets 26,089
Accounts payable and other accruals 3,800
Accrued income taxes payable 1,111
Pension liability 2,363
Deferred tax liability 1,799
----------
Total liabilities 9,073
----------
Fair value of assets acquired 17,016
Basis difference in carrying value of Durel investment 3,387
Elimination of deferred tax liability related to Durel 6,097
----------
Purchase price $ 26,500
========
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Statements in this report that are not strictly historical may be deemed to be
"forward-looking" statements which should be considered as subject to the many
uncertainties that exist in the Company's operations and environment. These
uncertainties, which include economic conditions, market demand and pricing,
competitive and cost factors, rapid technological change, new product
introductions, and the like, are discussed in greater detail in Rogers' 2003
Form 10-K filed with the Securities and Exchange Commission and incorporated by
reference. Such factors could cause actual results to differ materially from
those in the forward-looking statements.
Results of Operations - Three months ended April 4, 2004 vs. three months ended March 30, 2003
(Dollars in millions) First Quarter .
-----------------------------------------------------------------------
2004 2003 Change % Change
---------------------------------------------------
Net Sales $ 97.7 $ 51.9 $ 45.8 88.2%
Manufacturing Margins 34.2% 31.8% 2.4% 7.6%
Selling and Administrative Expenses $ 14.9 $ 9.7 $ 5.2 53.6%
Research and Development Expenses 4.6 2.8 1.8 64.3%
Operating Profit 13.8 4.0 9.8 245.0%
Equity Income in Unconsolidated Joint Ventures 1.3 2.5 (1.2) (48.0)%
Net Sales
Net sales for the first quarter of 2004 were $97.7 million as compared to $51.9
million in the first quarter of 2003, an increase of 88%. Net sales in the first
quarter of 2004 included $18.2 million from the Durel division that was acquired
in the fourth quarter of 2003. Excluding Durel, net sales increased $27.6
million, or 53%, compared to the first quarter of 2003. Each of Rogers' business
segments reported significant increases in net sales as compared to the
comparable period in 2003. The Company's Printed Circuit Materials, Polymer
Materials and Components, and High Performance Foams segments reported increases
of 86%, 193%, and 28%, respectively, over the first quarter of 2003. See
"Segment Analysis" below for further discussion on segment performance.
Manufacturing Margins
Manufacturing margins as a percentage of sales increased from 31.8% in the first
quarter of 2003 to 34.2% in the first quarter of 2004. The increase in margin is
attributable to the impact of significantly higher revenues in the first quarter
of 2004, affording the Company higher leverage on overhead investments, and a
favorable change in sales mix with increased sales in the Company's higher
margin product lines. These favorable effects from sales, coupled with the
Company's continued productivity improvements, were partially offset by the
costs associated with the establishment of additional manufacturing operations
in Suzhou, China and Carol Stream, Illinois.
Selling and Administrative Expenses
Selling and administrative expenses for the first three months of 2004 were
$14.9 million, an increase of $5.2 million over the first three months of 2003.
This increase was primarily due to the inclusion of the Durel division in the
first quarter of 2004 ($2.5 million) and higher incentive compensation costs
($1.0 million). Selling and administrative expenses as a percentage of sales
improved to 15.3% in the first quarter of 2004 from 18.7% in the first quarter
of 2003. This improvement is attributable to the increased sales volume in the
first quarter of 2004 as well as the Company's ability to leverage its overhead
structure to attain such growth while managing costs.
Research and Development Expenses
Research and development expenses increased $1.8 million to $4.6 million in the
first quarter of 2004 as compared to $2.8 million in the first quarter of 2003.
As a percentage of sales, research and development expenses were 4.8% of sales
13
in the first quarter of 2004 as compared to 5.5% in the comparable prior period.
The rate decline as compared to the prior year is a result of the increase in
sales in the first quarter of 2004 and timing of development projects. The
Company expects its research and development spending rate to increase to its
targeted 6% of sales rate by the end of 2004, as it is increasing its investment
in development activity at its Durel division and in other technology
initiatives.
Equity Income in Unconsolidated Joint Ventures
Equity income in unconsolidated joint ventures decreased from $2.5 million in
the first quarter of 2003 to $1.3 million in the first quarter of 2004. The
decrease was primarily due to the acquisition of Durel, which had contributed
$2.1 million to equity income in the first quarter of 2003 but was included in
the Company's consolidated results in the fourth quarter of 2003. Equity income
from the Company's joint ventures other than Durel increased $0.9 million from
the first quarter of 2003 to the first quarter of 2004 primarily due to the
increased sales volume at the Company's joint venture in Taiwan, Rogers Chang
Chun Technology Co., Ltd.
Income Taxes
The effective tax rate in the first quarter of 2004 and 2003 was 25%. The tax
rate has continued to benefit from foreign tax credits, research and development
credits, and nontaxable foreign sales income.
Segment Analysis
(Dollars in millions) First Quarter .
-----------------------------------------------------------------------
2004 2003 Change % Change
---------------------------------------------------
Printed Circuit Materials:
Net Sales $ 45.1 $ 24.2 $ 20.9 86%
Operating Profit 8.5 2.6 5.9 227%
Polymer Materials & Components:
Net Sales 30.5 10.4 20.1 193%
Operating Profit 4.7 (0.7) 5.4 771%
High Performance Foams:
Net Sales 22.1 17.3 4.8 28%
Operating Profit 0.6 2.1 (1.5) (71)%
Sales in the Printed Circuit Materials segment increased 86% from $24.2 million
in the first quarter of 2003 to $45.1 million in the first quarter of 2004. This
dramatic increase is attributable to strong sales of high frequency laminates
into the accelerating wireless infrastructure market as more third generation
(3G) base stations are built, as well as continued strength in the satellite
television receiver market. Also, the Company is experiencing a significant
increase in its flexible circuit laminate sales with the ramp-up of key cell
phone programs, particularly in the clam shell, flip style handsets, as well as
cell phones containing other feature-rich designs, such as integrated cameras.
The Polymer Materials and Components segment had sales of $30.5 million in the
first quarter of 2004, an increase of $20.1 million from sales of $10.4 million
in the first quarter of 2003. This increase is mainly due to the inclusion of
$18.2 million in sales from the Durel division in the first quarter of 2004. The
Durel division experienced a 12.6% decline in sales as compared to the prior
comparable period in 2003 as a result of the expected end of life on certain
cell phone programs, partially offset by increasing business in the automotive
market. Durel also shipped its first flexible electroluminescent lamp products
late in the first quarter of 2004 for a smart phone application. The remainder
of the increase in sales is attributable to an increase in the Company's power
distribution bus bar business and non-woven products.
First quarter 2004 sales in the High Performance Foams segment were $22.1
million, an increase of 28% as compared to $17.3 million in the first quarter of
2003. Quarterly sales records for both the PORON(R) urethane and BISCO(R)
14
silicone foam product lines drove this increase. The Company also had increased
sales in its industrial, consumer and automotive applications, which was helped
further by an improved U.S. economy, as well as continued growth in Asia.
Financial Condition
Rogers' financial condition continued to be strong in the first quarter of 2004
as cash and cash equivalents increased $1.7 million to $33.2 million from $31.5
million at December 28, 2003. This increase was driven by the strength of the
Company's operations, including its joint ventures, and partially offset by
capital expenditures of $6.6 million and a net cash payment of $3.0 million for
the acquisition of KF Inc. The Company's capital expenditures for the first
quarter of 2004 relate primarily to its continuing investment in its
manufacturing facilities in Carol Stream, Illinois and Suzhou, China. Capital
expenditures for the comparable period in 2003 were $3.7 million and finished at
$17.9 million for the year. The Company expects its capital expenditures to
approach $35.0 million in fiscal 2004.
The Company's cash flow from operations was $5.3 million for the first quarter
of 2004 as compared to $2.6 million for the first quarter of 2003. The increase
was attributable to higher net income in the first quarter of 2004 ($12.2
million in 2004 as compared to $5.7 million in 2003) and a contribution of $3.1
million to its pension plans in the first quarter of 2003. These favorable
effects were partially offset by increases in accounts receivable and inventory,
which increased $5.7 million and $4.7 million, respectively, from December 28,
2003. These increases are commensurate with the higher sales volume in the first
quarter of 2004 and the Company's efforts to ramp up inventory on-hand to meet
future customer needs.
Management believes that cash on hand and internally generated funds will be
sufficient to meet the near term, regular needs of the business. In addition,
the Company has an unsecured multi-currency revolving credit agreement with two
domestic banks and can borrow up to $50 million, or the equivalent, in certain
other foreign currencies. There were no borrowings under this agreement at April
4, 2004 and December 28, 2003.
Restructuring
On January 21, 2004, the Company announced that it would cease operations at its
Windham, Connecticut facility by the end of 2004. The manufacturing operations
for Rogers' molded polyurethane materials and its nitrile rubber floats,
currently manufactured at the plant, are being relocated to the Company's
facility in Suzhou, China. Charges associated with this transaction are
projected to be slightly above $2 million and are related to severance that will
be paid to employees upon termination.
Contingencies
In the fourth quarter of 2002, the Company sold its Moldable Composites Division
located in Manchester, Connecticut to Vyncolit North America Inc., a subsidiary
of the Perstorp Group, Sweden. Subsequent to the divestiture, certain
environmental matters were discovered at the Manchester location and Rogers
determined that under the terms of the arrangement, the Company would be
responsible for estimated remediation costs of approximately $500,000 and
recorded this reserve in 2002. In the first quarter of 2004, the Company learned
that the Environmental Protection Agency could require the Company to perform
additional remediation at the site. The Company's updated estimates for this
remediation range from its initial estimate of $500,000 (if the Company is only
required to perform the amount of remediation initially anticipated) to $2
million if the EPA requires additional remediation. In accordance with FAS 5,
"Accounting for Contingencies", the Company continues to carry a reserve of
$500,000, which represents a probable and reasonably estimable amount to cover
the anticipated remediation costs based on facts and circumstances known to the
Company at the present time. The Company will continue to monitor this situation
as more information regarding the remediation becomes available.
During the first quarter of 2004, there were no other material developments
relative to environmental matters or other contingencies, except as discussed
above (refer to Note G to the unaudited condensed consolidated financial
statements for ongoing environmental and contingency matters). The Company has
not had any material recurring costs and capital expenditures relating to
environmental matters, except as specifically described in the preceding
statements.
15
Contractual Obligations
There have been no significant changes outside the ordinary course of business
in the Company's contractual obligations during the first quarter of 2004.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are
in the opinion of management likely to have, a current or future effect on the
Company's financial condition or results of operations.
Related Parties
In 2001, the Company acquired certain assets of Cellect LLC ("Cellect"),
including intellectual property rights, inventory and customer lists. In
connection with this acquisition, the Company entered into various operating and
financing agreements with Cellect to purchase certain production from Cellect
while the Company completed construction of a plant facility in Carol Stream,
Illinois to manufacture the products acquired from Cellect. The Company has a
note receivable and accounts receivable from Cellect of $1.8 million and $2.4
million, respectively, at April 4, 2004 as compared to $1.8 million and $2.9
million, respectively, at December 28, 2003. These receivables relate to these
agreements that allow the Company to provide, at its discretion, advances to
Cellect to support its supply requirements to the Company. Any residual amount
in accounts receivable is due at the conclusion of the supply agreement
(currently June 30, 2004). The note receivable is due in January 2007, which
corresponds to the date upon which any earn-out payments under the acquisition
agreement are due. The risk of collection on these balances is mitigated by the
Company's production purchases from Cellect, right of offset on production
purchases and any earn-out payments, as well as the Company's security interest
in substantially all the assets of Cellect as collateral on the note
arrangement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in Rogers' exposure to market risk during
the first quarter of 2004. For discussion of the Company's exposure to market
risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, contained in Rogers' Annual Report contained in Form 10K for the fiscal
year 2003.
Item 4. Controls and Procedures
a. The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act"), as of the end of the period covered by this
report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective in alerting the Company's management
on a timely basis to material information required to be disclosed in our
reports filed under the Exchange Act.
b. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect such controls since the
Evaluation Date.
16
Part II - Other Information
Item 1. Legal Proceedings
See Note G, "Commitments and Contingencies", to the condensed consolidated
financial statements in Part I, Item 1 of the Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Rogers' Annual Meeting of Stockholders was held on April 29, 2004.
(b) The matters voted upon and the results of the vote are as follows:
1. To fix the number of persons constituting the full board of directors at
nine:
For Against Abstentions
--- ------- -----------
14,395,499 4,027 11,124
2. Election of Directors:
Number of Shares
----------------
Name For Withheld
---- --- --------
Leonard M. Baker 13,481,454 929,196
Walter E. Boomer 14,058,224 352,426
Edward L. Diefenthal 14,329,335 81,315
Gregory B. Howey 14,329,335 81,315
Leonard R. Jaskol 14,326,274 84,376
Eileen S. Kraus 14,317,979 92,671
William E. Mitchell 14,326,190 84,460
Robert G. Paul 14,329,335 81,315
Robert D. Wachob 14,328,919 81,731
3. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending January 2, 2005:
For Against Abstentions
--- ------- -----------
14,014,926 384,480 11,244
4. To amend the second sentence of Article II, Section 2 of the By-Laws
to extend the retirement age of directors from the age
of seventy to the age of seventy-two:
For Against Abstentions
--- ------- -----------
14,201,761 170,117 38,772
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
Exhibit 4.1 Amendment dated as of January 1, 2004 to Section 9.5 of the
Rogers Corporation Executive Supplemental Retirement
Agreement dated as of December 5, 2002
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
17
(b) Reports on Form 8-K filed for the three months ended April 4, 2004:
A Form 8-K was filed on January 6, 2004 with respect to the Company's
update of previously released fourth quarter 2003 earnings guidance.
A Form 8-K was filed on January 22, 2004 with respect to the ceasing of
operations at the Company's Windham, Connecticut manufacturing facility.
A Form 8-K was filed on January 30, 2004 with respect to the Company
entering into an agreement with KF Inc. to acquire KF Inc.'s nitrile
butadiene rubber float business.
A Form 8-K was filed on February 5, 2004 with respect to the Company's fourth
quarter and fiscal year 2003 earnings release.
A Form 8-K was filed on April 1, 2004 with respect to the Company's appointment
of Robert D. Wachob as Chief Executive Officer and a member of the Board
of Directors.
Items 2, 3 and 5 are not applicable and have been omitted.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROGERS CORPORATION
(Registrant)
/s/ James M. Rutledge
---------------------
James M. Rutledge
Vice President Finance, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
Dated: May 14, 2004
18