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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 October 3, 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 October
29, 2004 was 16,756,670.
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1
ROGERS CORPORATION
FORM 10-Q
October 3, 2004
INDEX
Page No.
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 6-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 21
Item 6. Exhibits 21-22
Signature 22
Exhibits
- --------
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 Nine Months Ended
October 3, September 28, October 3, September 28,
2004 2003 2004 2003
------ ----- ---- ----
Net Sales $ 86,740 $ 56,497 $ 277,733 $ 157,534
Cost of Sales 62,430 37,791 188,372 107,614
Selling and Administrative Expenses 13,447 10,269 42,343 29,085
Research and Development Expenses 5,412 3,484 14,979 9,132
------------ --------------- ----------- -----------
Total Costs and Expenses 81,289 51,544 245,694 145,831
------------ --------------- ----------- -----------
Operating Income 5,451 4,953 32,039 11,703
Equity Income in Unconsolidated Joint Ventures 2,265 1,969 5,451 5,918
Other Income less Other Charges 867 1,469 3,036 5,240
Interest Income, Net 31 48 131 179
------------ --------------- ----------- -----------
Income Before Income Taxes 8,614 8,439 40,657 23,040
Income Taxes 2,153 2,110 10,164 5,760
------------ --------------- ----------- -----------
Net Income $ 6,461 $ 6,329 $ 30,493 $ 17,280
============ =============== =========== ===========
Net Income Per Share:
Basic $ 0.39 $ 0.40 $ 1.87 $ 1.10
============ =============== =========== ===========
Diluted $ 0.38 $ 0.39 $ 1.78 $ 1.07
============ =============== =========== ===========
Weighted Average Shares Outstanding:
Basic 16,460,393 15,897,262 16,342,241 15,711,719
============ =============== =========== ===========
Diluted 17,140,023 16,324,737 17,120,095 16,214,377
============ =============== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)(Unaudited)
October 3, December 28,
2004 2003
---- ----
Assets
Current Assets:
Cash and Cash Equivalents $ 27,021 $ 31,476
Short-term Investments 2,000 3,005
Accounts Receivable, Net 58,959 52,981
Account Receivable, Joint Ventures 5,492 3,178
Note Receivable, Current 2,100 2,100
Inventories 42,758 27,501
Current Deferred Income Taxes 4,914 4,914
Other Current Assets 4,612 1,942
------------- -----------
Total Current Assets 147,856 127,097
Notes Receivable, Long-Term 6,300 7,800
Property, Plant and Equipment, Net of Accumulated
Depreciation of $117,909 and $104,885 137,582 131,157
Investments in Unconsolidated Joint Ventures 17,974 10,741
Pension Asset 6,886 6,886
Goodwill 21,220 16,697
Other Intangible Assets 7,347 8,424
Other Assets 6,069 5,638
------------- ------------
Total Assets $ 351,234 $ 314,440
========== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 18,864 $ 20,442
Accrued Employee Benefits and Compensation 16,977 15,359
Accrued Income Taxes Payable 13,045 9,104
Other Accrued Liabilities 6,413 5,118
----------- -----------
Total Current Liabilities 55,299 50,023
Noncurrent Deferred Income Taxes 10,663 14,058
Noncurrent Pension Liability 11,229 14,909
Noncurrent Retiree Health Care and Life Insurance Benefits 6,198 6,198
Other Long-Term Liabilities 2,482 2,383
Shareholders' Equity:
Capital Stock, $1 Par Value:
Authorized Shares 50,000,000; Issued
Shares 16,763,935 and 16,326,229 16,764 16,326
Additional Paid-In Capital 49,905 43,261
Retained Earnings 204,813 174,320
Accumulated Other Comprehensive Income 5,126 4,895
Authorized but Unissued Treasury Stock
(308,904 and 330,516 shares) (11,245) (11,933)
----------- ----------
Total Shareholders' Equity 265,363 226,869
----------- ----------
Total Liabilities and Shareholders' Equity $ 351,234 $ 314,440
========== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
Nine Months Ended
October 3, September 28,
2004 2003
------ ------
OPERATING ACTIVITIES:
Net Income $ 30,493 $ 17,280
Adjustments to Reconcile Net Income to Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 13,226 9,645
Deferred Income Taxes (954) --
Equity in Undistributed Income of Unconsolidated
Joint Ventures, Net (5,451) (5,918)
Pension and Postretirement Benefits (307) (1,468)
Other, Net (1,032) (374)
Changes in Operating Assets and Liabilities, Net of Effects of
Acquisition of Businesses:
Accounts Receivable (5,646) (10,408)
Accounts Receivable, Joint Ventures (2,313) 14
Inventories (14,791) 408
Other Current Assets (810) (298)
Accounts Payable and Accrued Expenses (485) 1,093
----------- ---------
Net Cash Provided By Operating Activities 11,930 9,974
INVESTING ACTIVITIES:
Capital Expenditures (19,951) (11,345)
Short-Term Investments 1,005 6,628
Acquisition of Business, Net (3,205) --
Investments in Unconsolidated Joint Ventures and Affiliates, Net (1,794) 4,633
Other Investing Activities -- 568
------------ ----------
Net Cash (Used in) Provided by Investing Activities (23,945) 484
FINANCING ACTIVITIES:
Proceeds from Sale of Capital Stock, Net 6,717 2,374
Proceeds from Disposition of Treasury Stock 719 598
----------- ----------
Net Cash Provided by Financing Activities 7,436 2,972
Effect of Exchange Rate Changes on Cash 124 (457)
----------- ------------
Net (Decrease) Increase in Cash and Cash Equivalents (4,455) 12,973
Cash and Cash Equivalents at Beginning of Year 31,476 22,300
--------- ----------
Cash and Cash Equivalents at End of Quarter $ 27,021 $ 35,273
======== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Exchange of Note Receivable as Partial Payment for Acquired Business $ 1,833 $ --
========= ==============
The accompanying notes are an integral part of the condensed consolidated
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 statements of financial position 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 and nine-month periods
ended October 3, 2004 and September 28, 2003. Income taxes paid were $4.2
million and $0.5 million in the first nine months of 2004 and 2003,
respectively. The effective tax rate continued to include benefits from foreign
tax credits, research and development credits, and favorable tax rates on
certain foreign sales income.
Inventories
Inventories were as follows:
October 3, December 28,
(Dollars in thousands) 2004 2003
---- ----
Raw materials $ 13,791 $ 6,230
Work in process and finished goods 28,967 21,271
---------- ----------
$ 42,758 $ 27,501
========= =========
6
Comprehensive Income
Comprehensive income, net of related tax, was as follows:
Three-Months Ended Nine-Months Ended
October 3, September 28, October 3, September 28,
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Net income $ 6,461 $ 6,329 $ 30,493 $ 17,280
Foreign currency translation adjustments 560 410 231 2,734
------------- ------ ---------- ----------
Comprehensive income $ 7,021 $ 6,739 $ 30,724 $ 20,014
========== ========= ========= =========
Accumulated balances related to each component of Accumulated Other
Comprehensive Income were as follows:
October 3, December 28,
(Dollars in thousands) 2004 2003
-------- --------
Foreign currency translation adjustments $ 9,140 $ 8,909
Minimum pension liability (4,014) (4,014)
------------ ----------
Accumulated Other Comprehensive Income $ 5,126 $ 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 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 was 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 $4.6 million and $5.2 million in the third quarter of 2004
and 2003, respectively, and $13.2 million and $17.3 million in the first nine
months 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 October 3, 2004, and to its outstanding trade
receivables if those amounts were to become uncollectible for various financial
reasons, such as insolvency.
7
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 periods indicated:
Three-Months Ended Nine-Months Ended
(In thousands, except per share amounts) October 3, September 28, October 3, September 28,
2004 2003 2004 2003
---- ---- ---- ------
Numerator:
Net income $ 6,461 $ 6,329 $ 30,493 $ 17,280
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 16,460 15,897 16,342 15,712
Effect of dilutive stock options 680 428 778 502
---------------- -------------- --------------- -------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 17,140 16,325 17,120 16,214
============== ============= ============== =============
Basic earnings per share $ 0.39 $ 0.40 $ 1.87 $ 1.10
=============== ============== =============== ==============
Diluted earnings per share $ 0.38 $ 0.39 $ 1.78 $ 1.07
=============== ============== =============== ==============
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. However, 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 periods
indicated would have been reduced to the pro-forma amounts indicated below:
Three-Months Ended Nine-Months Ended
(In thousands, except per share amounts) October 3, September 28, October 3, September 28,
2004 2003 2004 2003
---- ---- ---- ------
Net income, as reported $ 6,461 $ 6,329 $ 30,493 $ 17,280
Less: Total stock-based compensation expense
determined under Black-Scholes option
pricing model, net of related tax effect 1,231 598 8,728 1,879
------------ ----------- ----------- ----------
Pro-forma net income $ 5,230 $ 5,731 $ 21,765 $ 15,401
=========== ========= ========= ==========
8
Basic earnings per share:
As reported $ 0.39 $ 0.40 $ 1.87 $ 1.10
Pro-forma 0.32 0.36 1.33 0.98
Diluted earnings per share:
As reported $ 0.38 $ 0.39 $ 1.78 $ 1.07
Pro-forma 0.31 0.35 1.27 0.95
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, the variation each year in the number of
stock options granted, and the potential variations in the assumptions used in
the Black-Scholes model for calculating pro-forma compensation expense.
An average vesting period of three years was used for the assumption regarding
stock options granted, except for options for approximately 328,000 shares that
were granted in the second quarter of 2004 that vested immediately. These
options increased second quarter 2004 pro-forma stock based compensation expense
by approximately $5.7 million, or $0.33 per pro-forma diluted share. Shares
obtained through the exercise of options issued under this grant, however,
cannot be sold until after the fourth anniversary of the grant date. 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 periods indicated are:
Pension Benefits Other Benefits
---------------- --------------
Three-Months Nine-Months Three-Months Nine-Months
Ended Ended Ended Ended
(Dollars in thousands) 2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Service cost $ 984 $ 683 $ 2,951 $ 2,048 $ 149 $ 103 $ 446 $ 309
Interest cost 1,537 1,529 4,611 4,589 136 115 408 344
Expected return on plan assets (1,768) (1,433) (5,303) (4,297) -- -- -- --
Amortization of prior service cost 125 177 376 531 -- -- -- --
Amortization of net (gain) loss 140 203 421 608 32 -- 97 --
---------- ---------- --------- ---------- ------- ------ ------ --------
Net periodic benefit cost $ 1,018 $ 1,159 $ 3,056 $ 3,479 $ 317 $ 218 $ 951 $ 653
======== ======== ======= ======= ====== ====== ======= ======
Employer Contributions
The Company made a voluntary contribution to its qualified defined benefit
pension plans in the third quarter of 2004 of $1.9 million (voluntary
contributions approximated $5.6 million and $3.2 million for the full year in
2003 and 2002, respectively). In addition, the Company made a contribution of
$1.4 million to the Durel pension plan. The Company is in the process of
terminating this plan, as eligible participants have been transferred into
Rogers' plan commensurate with Rogers' acquisition of Durel.
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, introducing a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. The Company expected
the drug benefits provided to former salaried employees would qualify for this
subsidy. In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." As provided under FSP No.
106-1, the Company elected to defer accounting for the effects of the Act until
authoritative guidance on the accounting for the federal subsidy was issued or
9
until a significant event occured that ordinarily would call for the Company to
remeasure the plans' assets and obligations.
In May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." FSP No. 106-2 provides guidance on accounting for
the effects of the Act for employers that sponsor postretirement health care
plans that provide drug benefits. The Company adopted FSP No. 106-2 in the third
quarter of 2004 and, as permitted, elected retroactive application to December
31, 2003 (the measurement date following enactment of the Act). Accounting for
the effect of the federal subsidy will reduce the accumulated postretirement
benefit obligation by $546,000 at December 31, 2003 and will reduce annual
fiscal year 2004 expense by $126,000. Of the $126,000 reduction in annual fiscal
2004 expense, $49,000 is associated with the amortization of the actuarial
experience gain, $34,000 is the resulting reduction in interest costs on the
accumulated benefit pension obligation and $43,000 is the reduction in the
current period service costs.
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 periods indicated:
Three-Months Ended Nine-Months Ended
(Dollars in millions) October 3, 2004 September 28, 2003 October 3, 2004 September 28, 2003
--------------- ------------------ --------------- -------------------
Printed Circuit Materials
Net Sales $ 45.3 $ 30.0 $ 137.8 $ 76.2
Operating Income 7.0 5.0 27.0 8.8
Polymer Materials & Components
Net Sales $ 20.7 $ 9.2 $ 75.3 $ 29.7
Operating Income (Loss) (1.7) (1.2) 2.9 (2.2)
High Performance Foams
Net Sales $ 20.7 $ 17.3 $ 64.6 $ 51.6
Operating Income 0.2 1.2 2.1 5.1
Total
Net Sales $ 86.7 $ 56.5 $ 277.7 $ 157.5
Operating Income 5.5 5.0 32.0 11.7
Inter-segment sales are immaterial and have been eliminated from the sales data
in the previous table.
Note F - Joint Ventures
As of October 3, 2004, the Company had four joint ventures, each 50% owned,
which are accounted for by the equity method of accounting. Equity income of
$5.5 million and $5.9 million for the first nine 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
10
The summarized financial information for these joint ventures is included in the
following table for the nine-month periods ended October 3, 2004 and September
28, 2003. The 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 is 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. Financial information for the
nine-month period ended September 28, 2003 includes the Company's 50% interest
in its former joint venture, Durel Corporation, which became 100% owned by
Rogers on September 30, 2003, after which date its operating results are
included in the Company's consolidated results. Results for the nine-month
periods ended October 3, 2004 and September 28, 2003 are as follows:
(Dollars in thousands) 2004 2003
---- ----
Net sales $ 60,318 $ 90,814
Gross profit 21,419 33,202
Net income 12,057 11,331
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 Connecticut Department of Environmental Protection ("CT DEP") 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 CT DEP requires additional
remediation. In accordance with SFAS No. 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. This
remediation plan is contingent upon approval by the Town of Manchester, which
has an easement right on the land as a sewer line passes through the property.
The town has requested that a study be performed to determine the adequacy of
the remediation as it relates to the future use of the sewer line. Rogers has
not yet accepted the town's request, but has estimated that the high end of the
potential cost of this study, including an estimate for remediation related to
the sewer line, is approximately $100,000, which will not be accrued until the
study occurs and until it is deemed probable that the Company will actually
incur these additional costs. 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 active cases involving waste disposal sites. In certain cases, these
proceedings are at a stage where it is still not possible to estimate the
ultimate 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. However, the costs
incurred since inception of all claims have been immaterial and have been
primarily covered by insurance policies, for both legal and remediation costs.
In addition, in all cases, the Company has been deemed by the respective PRP
administrator to be a de minimus participant and only allocated an insignificant
percentage of the total PRP cost sharing responsibility. Based on facts
presently known to it, the Company does not believe that the final outcome of
these proceedings will have a material adverse effect on its financial position.
As such, the Company has not recognized any material expense to date nor has it
recognized any significant accruals associated with the existing or potential
claims.
11
In recent years, the Company has worked with the 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 of expenditures
against this provision. The remaining amount in the reserve is primarily for
testing, monitoring, sampling and minor residual treatment activity. Management
believes, based on facts currently available, that the balance of this provision
is adequate to complete the project.
In 2004, the Company became aware of a potential environmental matter at its
facility in Korea involving potential soil contamination. The Company is
currently in the initial stages of assessing this matter and it is not possible
to determine the likelihood of a potential adverse outcome based on the facts
and circumstances known to the Company at the present time.
The Company is also aware of a potential environmental matter involving soil
contamination at one of its European facilities. Similar to the situation in
Korea, the Company is currently assessing this matter and is not able to
determine the likelihood of a potential adverse outcome based on the facts and
circumstances known to the Company at the present time.
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 claims. In most of these
claims, the plaintiffs are seeking unspecified damages. The Company believes the
issue stems from a small number of products that contained encapsulated
asbestos, manufactured by the Company many years ago for only a limited number
of applications. The Company strongly believes it has valid defenses to
outstanding and potential claims and intends to continue defending itself
vigorously. In addition, the Company believes that it has sufficient insurance
with solvent carriers to cover all material costs associated with these claims,
including legal and settlement costs. To date, the Company has not incurred any
significant out-of-pocket costs in connection with these lawsuits and any
settlements thereof. In addition, the Company and its insurance carriers to date
have been very successful in obtaining dismissal of many cases without payment
whatsoever and only in a very limited number of circumstances settled such cases
for immaterial amounts. Although it is impossible to predict the outcome of
pending or future claims, in light of the nature of the products involved and
based upon past claims experience and unutilized 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. As such, the Company has not recognized any material
expense to date nor has it recognized any significant accruals associated with
existing or potential claims.
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.
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 relocation of
manufacturing operations of the Company's molded polyurethane materials and
nitrile rubber floats to the Company's facility in Suzhou, China was completed
in the third quarter of 2004. Charges associated with this transaction are
projected to be approximately $2 million and relate primarily 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 has recorded $1.4 million in restructuring
charges in 2004, including $0.5 million in the third 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. Actual costs charged against the
reserve to date are approximately $0.4 million.
12
On October 5, 2004, the Company announced a restructuring plan resulting in a
headcount reduction at its Durel division. The terminations occurred early in
the fourth quarter of 2004 and, as such, the Company will recognize
approximately $330,000 in charges associated with severance payments that will
be made to employees as a result of this plan in accordance with SFAS No. 146.
Note I - Related Parties
In the beginning of fiscal year 2002, the Company acquired certain assets of the
high performance polyolefin foam business of Cellect LLC ("Cellect"), including
intellectual property rights, inventory, machinery and equipment, and customer
lists, for approximately $10 million in cash, plus a potential earn-out in five
years based upon performance. The acquisition was accounted for as a purchase
pursuant to SFAS No. 141, "Business Combinations". As such, the purchase price
was allocated to property, plant and equipment and intangible assets based on
their respective fair values at the date of acquisition.
In June 2004, the Company entered into a post-closing agreement with Cellect
that amended the terms of the original acquisition agreement, particularly as it
related to the earn-out provision. Under the post-closing agreement, the Company
agreed to accelerate the earn-out provision to the third quarter of 2004 and to
fix the amount of the earn-out at $3.0 million. The obligation was partially
satisfied in the second quarter of 2004 through a $200,000 cash payment to
Cellect and the exchange of a $1.8 million note receivable the Company had from
Cellect. As of October 3, 2004, the Company has accounts receivable from Cellect
of $1.7 million, which primarily represents advanced payments for production in
connection with the Company's toll manufacturing agreement with Cellect. In the
third quarter of 2004, the Company ceased production activities at Cellect and
is currently manufacturing polyolefins exclusively at its Carol Stream facility.
The Company is currently finalizing its net financial position with Cellect and
expects to finalize its arrangement with Cellect by the end of fiscal 2004. In
accordance with SFAS No. 141, the $3.0 million earn-out was recognized as
additional purchase price and capitalized as goodwill in the second quarter of
2004.
Note J - Acquisitions
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
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
=======
13
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. The following table summarizes the estimated fair
values of the acquired assets as of the date of acquisition:
(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
========
Note K - Subsequent Events
On October 28, 2004, the Company's Board of Directors approved the investment of
up to $25 million for the purchase of shares from time to time as part of a
stock buy-back program. The repurchase of shares will be determined at the
Company's discretion and will be dependent on market conditions. The share
buy-back program will be completed or cancelled within twelve months from the
approval date.
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 made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements 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 are incorporated by reference herein. Such factors
could cause actual results to differ materially from those expressed in the
forward-looking statements. The Company undertakes no duty to update any
forward-looking statement to conform the statement to actual results or to a
change in its expectations.
14
Business Overview
Rogers Corporation is a global enterprise that provides its customers with
innovative solutions and industry leading products in three business segments:
High Performance Foams, Printed Circuit Materials, and Polymer Materials and
Components. These segments generate revenues and cash flows through the
development, manufacturing, and distribution of specialty materials that are
focused on the communications, computer, imaging, transportation and consumer
markets. In these markets, Rogers primarily serves as a supplier of diverse
products for varied applications to multiple customers that in turn produce
end-user products; as such, Rogers' business is highly dependent, although
indirectly, on market demand for these end-user products. The Company's ability
to forecast future sales and growth is largely dependent on management's ability
to anticipate changing market conditions and how the Company's customers will
react to these markets; it is also highly limited due to the short lead times
demanded by the Company's customers and the dynamics of serving as a relatively
small supplier in the overall supply chain for these end-user products. In
addition, the Company's sales represent a number of different products across a
wide range of price points and distribution channels that do not always allow
for meaningful quantitative analysis of changes in sales volumes or price per
unit with respect to the effect on net sales.
The Company's current focus is on worldwide markets that have a growing
percentage of materials being used to support growing high technology
applications, such as cellular base stations and antennas, handheld wireless
devices, satellite television receivers, hard disk drives and automotive
electronics. The Company continues to focus on business opportunities in Asian
markets, as evidenced by the continued growth in production at the Company's
facility in Suzhou, China and expanding Asian sales offices. The Company also
continues to focus on new products and emerging technologies and opportunities,
such as electroluminescent lamps in cell phone keypads and polyolefin foams in
water shield automotive applications. The Company has completed the move of its
polyolefin manufacturing operations from St. Johnsville, New York to its new
facility in Carol Stream, Illinois, which will enable the Company to focus on
production efficiencies in the fourth quarter of 2004 and beyond.
During the third quarter of 2004, sales continued to be strong, increasing $30.2
million or 54% from the third quarter in 2003. Operating profit increased
approximately $500,000 or 12% in the third quarter of 2004 as compared to the
same prior year period. Factors that affected operating results in the third
quarter of 2004 as compared to the same prior year period include: (i) the
consolidation of Durel into the Company's operating results, which accounted for
approximately $10.4 million in sales in 2004, but did not contribute
incrementally to operating income as the operation effectively broke even due in
part to a relatively lower level of sales for this business, stemming from
several programs reaching end of life, and start up costs associated with a new
product launch; (ii) approximately $15 million of higher sales and $2.0 million
of higher operating profit in its Printed Circuit Materials segment, primarily
due to the increase in sales of high frequency and flexible products; (iii)
approximately $3 million of higher sales in the High Performance Foams segment
driven primarily by strength in urethane foam sales into the industrial market,
although operating income decreased for this segment by approximately $1.0
million due in part to final transition costs for the polyolefin foams
production move to Carol Stream, Illinois; and (iv) $0.5 million in
restructuring costs related to the transition of manufacturing operations of the
Company's elastomer component products from Windham, Connecticut to Suzhou,
China.
The Company's sales volumes are impacted and can swing significantly based on
multiple factors, including, but not limited to: end user market trends,
suppliers and competitors, availability of raw materials, commercial success of
new products, and market development activities. The Company has experienced
recent upturns and downturns due to these varied factors and while the Company
has projected sales volumes for resource planning and strategic considerations,
the Company anticipates these factors will continue to impact actual results and
its ability to accurately forecast and plan resources and initiatives
accordingly. While the Company experienced significant sales growth in the first
part of 2004 and expects to continue sequential growth in certain applications,
such as urethane foams and flexible circuit materials, the Company has seen and
expects to continue to experience some sequential softening in various high
frequency material applications, such as satellite television receivers and
power amplifiers, as many customers have increased inventories to normalize
seasonal purchase requirements, and in various Durel lamp and inverter products
as a number of programs come to end of life.
With regard to operating performance, as the Company's various strategic
initiatives are completed, such as the shift of polyolefin operations to Carol
Stream, the movement of elastomer component manufacturing to China, and the
continued ramp up of other production in China, the Company expects to
15
experience cost savings resulting from the elimination of duplicate operational
costs that existed during these transitional phases and from improvements in
production efficiencies as the Company completes the start up phase of these new
facilities. The Company expects these events, along with other cost-saving
initiatives, such as Six Sigma and the continued implementation of an enterprise
wide information system, will have a positive effect on the future operating
results of the Company. However, based on the dynamic nature of the Company's
markets, products, and supply chain, the constant emerging operational
challenges in meeting its customers evolving needs, and the expected trends in
sales and product mix discussed above, the Company's expectations are for
relatively consistent operating margins in the fourth quarter and incremental
improvement throughout 2005.
Results of Operations
The following table sets forth, for the periods indicated, selected Company
operations data expressed as a percentage of net sales.
Three Months Ended Nine Months Ended
October 3, September 28, October 3, September 28,
2004 2003 2004 2003
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Manufacturing Margin 28.0% 33.1% 32.2% 31.7%
Selling and Administrative Expenses 15.6% 18.2% 14.7% 18.5%
Research and Development Expenses 6.2% 6.2% 5.4% 5.8%
Operating Profit 6.2% 8.7% 12.1% 7.4%
Equity Income in Unconsolidated Joint Ventures 2.7% 3.4% 2.0% 3.7%
Other Income 1.0% 2.7% 0.6% 3.3%
Net Income 7.5% 11.0% 11.0% 11.0%
Net sales for the third quarter of 2004 were $86.7 million as compared to $56.5
million in the third quarter of 2003, an increase of 54%. Net sales in the third
quarter of 2004 included $10.4 million in sales from the Durel division that was
acquired in the fourth quarter of 2003. Excluding Durel, net sales increased
$19.8 million, or 35%, compared to the third quarter of 2003. On a year-to-date
basis, net sales increased 76% from $157.5 million in 2003 to $277.7 million in
2004. Excluding Durel, net sales increased $79.7 million, or 51%, compared to
the first nine months of 2003. Each of Rogers' business segments reported
significant increases in net sales as compared to the comparable period in 2003.
See "Segment Analysis" below for further discussion of segment performance.
Manufacturing margins as a percentage of sales decreased from 33.1% in the third
quarter of 2003 to 28.0% in the third quarter of 2004 and increased slightly on
a year-to-date basis from 31.7% in 2003 to 32.2% in 2004. The decrease in third
quarter margin percentage was caused by a number of factors, including: (i) an
unfavorable sales mix in the printed circuit materials segment, as sales of
lower margin products out grew sales of higher margin products year on year;
(ii) transition costs associated with the shifts in manufacturing of polyolefin
foams to Carol Stream, Illinois and of elastomer component products to Suzhou,
China; (iii) the lack of profitability in Durel, as Durel effectively broke even
due in part to relatively lower levels of sales, as several programs reached end
of life, and high levels of start up costs associated with completing production
for new flexible lamp keypad applications; and (iv) various production quality
issues in high frequency and Durel, which have been resolved. These items were
partially offset by higher third quarter revenues in high performance foams
(19.7% increase) and printed circuit materials (51.0% increase). The Company
anticipates that margins should remain relatively consistent in the fourth
quarter of 2004 and begin to improve incrementally in 2005, partially as a
result of anticipated cost savings associated with the recent shift of
manufacturing operations to Illinois and China. In addition, Durel should begin
to experience margin improvements through stronger sales, better yields, and
lower expenses, as they finalize the start up of the new key pad lamp product
launch and benefit from a restructuring program that was initiated and completed
early in the fourth quarter of 2004 (see "Restructuring" section below).
Selling and administrative expenses were up 31.1%, or $3.2 million, for the
third quarter of 2004 and up 40.5%, or $11.8 million for the first nine months
of 2004 as compared to the same periods a year ago. This increase was primarily
due to (i) the inclusion of $1.3 million and $4.2 million, respectively, in
16
expenses from the consolidation of the Durel division in the third quarter and
first nine months of 2004; (ii) incrementally higher incentive compensation and
sales commission expenses in the third quarter and first nine month periods of
2004 of $1.0 million and $3.3 million, respectively, which are commensurate with
higher sales and profit volumes; (iii) restructuring charges in the third
quarter and first nine months of 2004 of $0.5 million and $1.4 million,
respectively, incurred as a result of closing the Company's facility in Windham,
Connecticut; and (iv) consulting and audit fees associated with the Company's
Sarbanes-Oxley compliance of $250,000 and $600,000, respectively, in the third
quarter and first nine months of 2004. Selling and administrative expenses as a
percentage of sales improved to 15.6% in the third quarter of 2004 from 18.2% in
the same prior year period and from 18.5% in the first nine months of 2003 to
14.7% in the first nine months of 2004. This improvement is attributable to
increased sales volumes in the third quarter and first nine months of 2004,
coupled with the Company's ability to leverage its overhead structure while
managing costs.
Research and development expenses increased $1.9 million in the third quarter of
2004 and $5.9 million for the first nine months of 2004 from the comparable
prior year periods. As a percentage of net sales, research and development
expenses remained consistent at 6.2% in the third quarter of 2004 as compared to
2003 and decreased slightly for the first nine months of the year from 5.8% in
2003 to 5.4% in 2004. The Company targets a research and development spending
rate of 6% of net sales and expects the current spending rate to continue
through the fourth quarter of 2004 as the Company continues to invest in
research and development activity in its various technology initiatives.
Research and development spending is primarily targeted at developing new
products and enhancing existing products in order to give the Company future
opportunities and competitive advantages in a wide-variety of existing and
potential markets. In general, new products typically will not have a
significant market impact for at least a year from introduction.
Equity income in unconsolidated joint ventures increased from $1.9 million in
the third quarter of 2003 to $2.3 million in the third quarter of 2004 and
decreased in the first nine months of the year from $5.9 million in 2003 to $5.5
million in 2004. Equity income from Durel contributed $1.6 million and $4.8
million, respectively, in the third quarter and first nine months in 2003.
Excluding Durel, equity income increased $2.0 million and $4.4 million,
respectively, in the third quarter and first nine months in 2004 as compared to
comparable prior year periods. The increase was primarily due to the strong
performance of the Company's joint ventures in Taiwan, Rogers Chang Chun
Technology Co., Ltd. ("RCCT"), where sales increased almost 600% from the
comparable three and nine month periods in 2003, and in Japan, Rogers Inoac
Corporation ("RIC"), where sales increased almost 60% and 50%, respectively,
from the comparable three and nine month periods in 2003. Sales at RCCT were
driven by increased market penetration, as the joint venture was effectively a
start up first year entity in 2003, and at RIC by new industrial foam
application wins.
The effective tax rate in the third quarter and first nine months of 2004 and
2003 was 25%. The tax rate as anticipated has continued to include benefits from
foreign tax credits, research and development credits, and nontaxable foreign
sales income.
Segment Analysis
(Dollars in millions) Third Quarter First Nine Months
----------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------
Printed Circuit Materials:
Net Sales $ 45.3 $ 30.0 $ 137.8 $76.2
Operating Profit 7.0 5.0 27.0 8.8
Polymer Materials and Components:
Net Sales 20.7 9.2 75.3 29.7
Operating Profit (Loss) (1.7) (1.2) 2.9 (2.2)
High Performance Foams:
Net Sales 20.7 17.3 64.6 51.6
Operating Profit 0.2 1.2 2.1 5.1
17
Net sales of Printed Circuit Materials for the third quarter and first nine
months of 2004 were $45.3 million and $137.8 million, respectively, an increase
of 51% and 81%, respectively, compared to same periods in 2003. This increase is
primarily attributable to the strong sales of high frequency products, which
experienced increased sales of 26% in the third quarter and 59% in the first
nine months of 2004 as compared to the same periods in 2003. Demand continued to
be strong in the satellite television market and in base station amplifier
applications as more third generation (3G) base stations were built. However,
the Company has seen some sequential softening in these markets and expects the
softening to continue into the fourth quarter. The Company also experienced a
significant increase in its flexible circuit product sales, which increased over
100% in the third quarter and almost 150% for the first nine months of 2004 as
compared to the same periods in 2003. Sales were driven by the wireless
communications and consumer electronics markets, as demand has, and appears will
continue, to escalate for high quality interconnects used increasingly in
complex end-user products, such as high-end cell phones.
Net sales of Polymer Materials and Components increased for the third quarter
and the first nine months of 2004 by 54% and 76%, respectively, from $9.2
million and $29.7 million, respectively, to $20.7 million and $75.3 million,
respectively. This increase is mainly due to the inclusion of $10.4 million and
$40.5 million, respectively, in sales from the Durel division in the third
quarter and first nine months of 2004 that were not included on a consolidated
basis for the comparable period in 2003. The Durel division experienced a 21%
decline in sales in the first nine months of 2004 as compared to the same period
in 2003 as a result of the anticipated trend away from monochrome cell phone
displays and some softening in varied inverter applications. Durel is currently
introducing its new flexible electroluminescent keypad lamp products and is
involved in several new cell phone keypad designs. During the third quarter of
2004, ramp up of this application exceeded Company expectations; however,
relatively lower levels of sales, as several programs reached end of life, and
continued ramp up expenses for the new programs resulted in Durel effectively
breaking even for the quarter and, therefore, resulting in a nominal impact on
operating income for the quarter. Excluding Durel, sales in this segment
increased 12% in the third quarter and 17% in the first nine months of 2004 as
compared to the comparable periods in 2003. This increase is attributable to the
Company's power distribution busbar business, which experienced increased sales
of almost 11% in the third quarter and 22% in the first nine months of 2004 as
compared to the same periods in 2003. The increase in busbars stemmed from
continued success in the electrical traction market, as well as the successful
launch of a new project in the information technology market. This segment also
experienced higher sales of the Company's elastomer component products, which
increased 19% in the third quarter and 16% in the first nine months of 2004 as
compared to the same periods in 2003. The increase in elastomer component
product sales stemmed from new Asian business in the Endur(R) product line and
the acquisition of the Korean float company, which contributed $0.6 million and
$1.8 million to sales in the third quarter and first nine months in 2004,
respectively. Operating performance, however, was negatively affected by the
transition costs of the elastomer components production to China. Management
anticipates this segment should see continued sales and margin improvement,
although incremental and evolving sequentially, as the elastomer components
transition was recently completed in the fourth quarter of 2004, coupled with
anticipated continued commercial success at Durel for keypad lamp applications,
and anticipated continued strength in busbar sales.
High Performance Foams net sales were $20.7 million and $64.6 million,
respectively, for the third quarter and first nine months of 2004, up
approximately 20% and 25%, respectively, from the comparable periods in 2003.
The sales increase is attributable to the continued strength in PORON(R)
urethane foam product sales, which increased 21% and 32%, respectively, in 2004
over the comparable three and nine month periods in 2003. This increase was
driven by higher penetration and new program adoptions in handheld electronics,
automotive, and general industrial applications, and the growth of business in
China. The Company expects the strength in urethane foams to continue, although
most likely not at the same escalating pace as the first nine months of 2004.
Strong sales of BISCO(R) silicone foam products also drove the overall increase
in this segment with sales growth of 32% and 39%, respectively, in the third
quarter and first nine months of 2004 as compared to the same periods in 2003.
This sales growth is primarily due to strong sales in industrial, transportation
and computing applications, which is also anticipated to continue, although most
likely not at the same pace. Polyolefin foam revenues remained relatively flat
and are expected to remain flat in the short term as the Company has and
continues to concentrate on the transition to the new facility in Carol Stream,
Illinois, which was completed in the third quarter of 2004. The costs for this
production shift more than mitigated the positive operating results of the
urethane and silicone foam products, resulting in a net decrease in operating
profit for the segment of $1.0 million and $3.0 million, respectively, in the
third quarter and first nine months of 2004 as compared to the same prior year
periods.
18
The Company expects future cost savings in productivity gains as a
result of the production shift to this new facility and the ramp up of
manufacturing at Carol Stream.
Financial Condition
Rogers' financial condition continued to be strong in the first nine months of
2004. Cash and cash equivalents were $27.0 million at the end of the third
quarter as compared to $31.5 million at December 28, 2003. The Company's cash
flow from operations increased from $10.0 million to $11.9 million from the
comparable nine month period in 2004 as the Company's operations continued to be
strong with year to date net income of $30.5 million, partially offset by
contributions of $3.3 million to its pension plans in the third quarter of 2004
and net year-to-date increases in accounts receivable of $5.6 million and
inventory of $14.8 million. These increases in working capital investments are
commensurate with the higher sales volume in the first nine months of 2004, the
Company's decision to secure higher allotments of raw materials from vendors to
mitigate the shortage of these materials in the marketplace, and the Company's
efforts to ramp up inventory in Asia to address the short lead times of its
Asian customers.
Cash used in investing activities of $23.9 million consisted primarily of a $3
million net cash payment for the acquisition of its Korean subsidiary, KF Inc.;
respective capital infusions of $2.4 million and $2.1 million into its joint
venture in Taiwan, RCCT, and its new joint venture in China, Rogers Inoac Suzhou
Corporation ("RIS"); and capital expenditures of $20.0 million, which related
primarily to the continuing investment in its manufacturing facilities in Carol
Stream, Illinois and in Suzhou, China. Capital expenditures for the comparable
period in 2003 were $11.3 million. These amounts were partially offset by
dividends received from the Company's joint ventures of $2.8 million in 2004.
Receivables from joint ventures increased from $3.2 million at the end of 2003
to $5.5 million at the end of the third quarter in 2004. During the normal
course of business, the joint ventures purchase various raw and processed
materials from the Company for use in production that give rise to these
receivables from the joint ventures. The Company also uses RCCT, its Taiwanese
joint venture, in a toll manufacturing capacity for its flexible printed circuit
materials to help alleviate capacity constraints. In the third quarter of 2004,
the Company issued a short-term loan for $1.5 million to its joint venture in
China, Rogers Inoac Suzhou Corporation, as part of the initial funding of the
new venture.
Management believes that cash on hand and internally generated funds will be
sufficient to meet the near term, normal recurring 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 October 3, 2004.
On October 28, 2004, the Company's Board of Directors approved the investment of
up to $25 million for the purchase of shares from time to time as part of a
stock buy-back program. The repurchase of shares will be determined at the
Company's discretion and will be dependent on market conditions. While this
program will decrease the amount of cash available to the Company, management
still believes that cash on hand, internally generated funds and the revolving
credit agreement discussed above will be adequate to meet the Company's
short-term recurring operating needs.
Restructuring
On January 21, 2004, the Company announced that it would cease operations at its
Windham, Connecticut facility by the end of 2004. The relocation of
manufacturing operations of the Company's molded polyurethane materials and
nitrile rubber floats to the Company's facility in Suzhou, China was completed
in the third quarter of 2004. Charges associated with this transaction are
projected to be approximately $2 million and relate primarily 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 has recorded $1.4 million in restructuring
charges in 2004, including $0.5 million in the third 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. Actual costs charged against the
reserve to date are approximately $0.4 million.
19
On October 5, 2004, the Company announced a restructuring plan resulting in a
headcount reduction at its Durel division. The terminations occurred early in
the fourth quarter of 2004 and, as such, the Company will recognize
approximately $330,000 in charges associated with severance payments that will
be made to employees as a result of this plan in accordance with SFAS No. 146.
Contingencies
During the third quarter of 2004, the Company did not become aware of any
material developments related to environmental matters or other contingencies
(refer to Note G to the unaudited condensed consolidated financial statements in
Part I, Item 1 of the Form 10-Q for ongoing environmental and contingency
matters). The Company has not incurred any material recurring costs or capital
expenditures related to environmental matters.
Contractual Obligations
There have been no significant changes outside the ordinary course of business
in the Company's contractual obligations during the first nine months of fiscal
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 material effect
on the Company's financial condition or results of operations.
Related Parties
In the beginning of fiscal year 2002, the Company acquired certain assets of the
high performance polyolefin foam business of Cellect, including intellectual
property rights, inventory, machinery and equipment, and customer lists, for
approximately $10 million in cash, plus a potential earn-out in five years based
upon performance. The acquisition was accounted for as a purchase pursuant to
SFAS No. 141, "Business Combinations". As such, the purchase price was allocated
to property, plant and equipment and intangible assets based on their respective
fair values at the date of acquisition.
In June 2004, the Company entered into a post-closing agreement with Cellect
that amended the terms of the original acquisition agreement, particularly as it
related to the earn-out provision. Under the post-closing agreement, the Company
agreed to accelerate the earn-out provision to the third quarter of 2004 and to
fix the amount of the earn-out at $3.0 million. The obligation was partially
satisfied in the second quarter of 2004 through a $200,000 cash payment to
Cellect and the exchange of a $1.8 million note receivable the Company had from
Cellect. As of October 3, 2004, the Company has accounts receivable from Cellect
of $1.7 million, which primarily represents advanced payments for production in
connection with the Company's toll manufacturing agreement with Cellect. In the
third quarter of 2004, the Company ceased production activities at Cellect and
is currently manufacturing polyolefins exclusively at its Carol Stream facility.
The Company is currently finalizing its net financial position with Cellect and
expects to finalize its arrangement with Cellect by the end of fiscal 2004. In
accordance with SFAS No. 141, the $3.0 million earn-out was recognized as
additional purchase price and capitalized as goodwill in the second quarter of
2004.
Critical Accounting Policies
There have been no significant changes in the Company's critical accounting
policies during the first nine months of fiscal 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in Rogers' exposure to market risk during
the third 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 10-K for the fiscal
year 2003.
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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 Rule 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.
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 this Form 10-Q.
Item 6. Exhibits
List of Exhibits:
3a Restated Articles of Organization, filed with the Secretary of
State of the Commonwealth of Massachusetts on April 6, 1966,
were filed as Exhibit 3a to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 1989 (the 1988
Form 10-K)*.
3b Articles of Amendment to the Articles of Organization, filed
with the Secretary of State of the Commonwealth of Massachusetts
on August 10, 1966, were filed as Exhibit 3b to the 1988 Form
10-K*.
3c Articles of Merger of Parent and Subsidiary Corporations, filed
with the Secretary of State of the Commonwealth of Massachusetts
on December 29, 1975, were filed as Exhibit 3c to the 1988 Form
10-K*.
3d Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on March 29, 1979, were
filed as Exhibit 3d to the 1988 Form 10-K*.
3e Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on March 29, 1979, were
filed as Exhibit 3e to the 1988 Form 10-K*.
3f Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on April 2, 1982, were
filed as Exhibit 3f to the 1988 Form 10-K*.
3g Articles of Merger of Parent and Subsidiary Corporations, filed
with the Secretary of State of the Commonwealth of Massachusetts
on December 31, 1984, were filed as Exhibit 3g to the 1988 Form
10-K*.
3h Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on April 6, 1988, were
filed as Exhibit 3h to the 1988 Form 10-K*.
3i By-Laws of Rogers Corporation, as amended and restated effective
August 26, 2004 (filed as Exhibit 3.1 to the Company's current
report on Form 8-K, filed with the Securities and Exchange
Commission on September 1, 2004 and incorporated herein by
reference). *
4a 1997 Shareholder Rights Plan was filed on Form 8-A dated
March 24, 1997. The June 19, 1997 and July 7, 1997
amendments were filed on Form 8-A/A dated July 21, 1997*.
4b Certain Long-Term Debt Instruments, each representing
indebtedness in an amount equal to less than 10 percent of the
Registrant's total consolidated assets, have not been filed as
exhibits to this Annual Report on Form 10-K. The Registrant
hereby undertakes to file these instruments with the Commission
upon request.
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.
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* In accordance with Rule 12b-23 and Rule 12b-32 under the Securities
Exchange Act of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission, which
documents are hereby incorporated by reference.
Items 2, 3, 4 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: November 12, 2004
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