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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 April 3, 2005
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
29, 2005 was 16,436,187.
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1
ROGERS CORPORATION
FORM 10-Q
April 3, 2005
INDEX
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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 6-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22-23
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24-25
Item 6. Exhibits 25-26
Signature 26
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
April 3, April 4,
2005 2004
------ -------
Net Sales $ 86,545 $ 97,670
Cost of Sales 63,141 64,285
Selling and Administrative Expenses 14,400 14,895
Research and Development Expenses 5,060 4,641
----------- -----------
Total Costs and Expenses 82,601 83,821
----------- -----------
Operating Income 3,944 13,849
Equity Income in Unconsolidated Joint Ventures 1,732 1,289
Other Income less Other Charges 841 1,092
Interest Income, Net 228 78
----------- -----------
Income Before Income Taxes 6,745 16,308
Income Taxes 1,620 4,077
----------- -----------
Net Income $ 5,125 $ 12,231
========== ==========
Net Income Per Share:
Basic $ 0.31 $ 0.76
========== ==========
Diluted $ 0.30 $ 0.72
========== ==========
Weighted average shares outstanding:
Basic 16,404,381 16,176,715
========== ==========
Diluted 16,878,856 16,973,190
========== ==========
The accompanying notes are an integral part of the condensed financial
statements.
3
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except per share amounts)(Unaudited)
April 3, January 2,
2005 2005
---- ----
Assets
Current Assets:
Cash and Cash Equivalents $ 40,707 $ 37,967
Short-term Investments - 2,000
Accounts Receivable, Net 53,735 57,264
Account Receivable from Joint Ventures 4,719 5,176
Note Receivable, Current 2,100 2,100
Inventories 44,930 49,051
Current Deferred Income Taxes 9,064 9,064
Asbestos-Related Insurance Receivables 7,154 7,154
Other Current Assets 3,066 3,158
------------- -----------
Total Current Assets 165,475 172,934
Notes Receivable 4,200 4,200
Property, Plant and Equipment, Net of Accumulated
Depreciation of $115,998 and $111,215 137,894 140,384
Investments in Unconsolidated Joint Ventures 17,749 18,671
Pension Asset 5,831 5,831
Goodwill 21,928 21,928
Other Intangible Assets 7,018 7,144
Asbestos-Related Insurance Receivables - Noncurrent 28,803 28,803
Other Assets 5,247 5,300
------------- ------------
Total Assets $ 394,145 $ 405,195
========== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 15,107 $ 21,117
Accrued Employee Benefits and Compensation 13,293 18,427
Accrued Income Taxes Payable 9,045 8,177
Asbestos-Related Liabilities 7,154 7,154
Other Accrued Liabilities 4,560 2,512
----------- -----------
Total Current Liabilities 49,159 57,387
Deferred Income Taxes 13,808 14,111
Pension Liability 14,763 14,757
Retiree Health Care and Life Insurance Benefits 6,483 6,483
Asbestos-Related Liabilities 29,045 29,045
Other Long-Term Liabilities 1,872 2,045
Shareholders' Equity:
Capital Stock, $1 Par Value:
Authorized Shares 50,000,000; Issued and Outstanding
Shares 16,350,133 and 16,437,790 16,350 16,437
Additional Paid-In Capital 36,216 41,769
Retained Earnings 219,543 214,418
Accumulated Other Comprehensive Income 6,906 8,743
----------- ----------
Total Shareholders' Equity 279,015 281,367
----------- ----------
Total Liabilities and Shareholders' Equity $ 394,145 $ 405,195
========== =========
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 3, April 4,
2005 2004
------ ------
Operating Activities
- --------------------
Net Income $ 5,125 $ 12,231
Adjustments to Reconcile Net Income to Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 5,279 4,789
Deferred Income Taxes -- (1,371)
Equity in Undistributed Income of Unconsolidated
Joint Ventures, Net (1,732) (1,289)
Pension and Postretirement Benefits 1,317 1,442
Other, Net (1,366) (1,318)
Changes in Operating Assets and Liabilities, Net of Effects of
Acquisition of Businesses:
Accounts Receivable 3,475 (5,389)
Accounts Receivable, Joint Ventures 457 982
Inventories 3,682 (4,312)
Other Current Assets 46 187
Accounts Payable and Accrued Expenses (9,523) (662)
------------- ---------
Net Cash Provided by Operating Activities 6,760 5,290
Investing Activities
- --------------------
Capital Expenditures (4,160) (6,640)
Acquisition of Business, Net -- (3,005)
Investments in Unconsolidated Joint Ventures and Affiliates 2,813 2,744
Short-Term Investments 2,000 --
------------- ---------
Net Cash Provided by (Used in) Investing Activities 653 (6,901)
Financing Activities
- --------------------
Proceeds from Sale of Capital Stock, Net 2,048 2,943
Purchase of Stock (6,995) --
Proceeds from Issuance of Shares to Employee Stock Ownership Plan 399 298
------------- ---------
Net Cash Provided by (Used in) Financing Activities (4,548) 3,241
Effect of Exchange Rate Changes on Cash (125) 131
------------- ---------
Net Increase in Cash and Cash Equivalents 2,740 1,761
Cash and Cash Equivalents at Beginning of Year 37,967 31,476
------------- ---------
Cash and Cash Equivalents at End of Quarter $ 40,707 $ 33,237
======== =========
Supplemental Disclosure of Noncash Activities
- ---------------------------------------------
Contribution of Shares to Fund Employee Stock Ownership Plan $ 369 $ 337
========= ==========
The accompanying notes are an integral part of the condensed financial
statements.
5
ROGERS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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 U.S. generally accepted accounting
principles. 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 January 2, 2005.
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 2005 is a 52-week year ending
on January 1, 2006.
Certain prior period amounts have been reclassified to conform to the current
period classification.
Income Taxes
The Company's effective tax rate was 24% and 25%, respectively, for the
three-month periods ended April 3, 2005 and April 4, 2004. Income taxes paid
were $21,000 and $480,050 in the first three months of 2005 and 2004,
respectively. In 2005, the effective tax rate benefited primarily from favorable
tax rates on certain foreign business activity, foreign tax credits and research
and development credits, which reduced the effective tax rate by 7, 3 and 2
percentage points, respectively.
Inventories
Inventories were as follows:
April 3, January 2,
(Dollars in thousands) 2005 2005
---- ----
Raw materials $ 15,562 $ 16,121
Work in process and finished goods 29,368 32,930
--------- ---------
$ 44,930 $ 49,051
========= =========
6
Comprehensive Income
Comprehensive income were as follows:
(Dollars in thousands) April 3, April 4,
2005 2004
---- ----
Net income $ 5,125 $ 12,231
Foreign currency translation
adjustments (1,837) 142
--------- ---------
Comprehensive income $ 3,288 $ 12,373
========= =========
Accumulated balances related to each component of Accumulated Other
Comprehensive Income as of April 3, 2005 and January 2, 2005 were as follows:
(Dollars in thousands) 2005 2004
---- ----
Foreign currency translation
adjustments $ 10,797 $ 12,634
Minimum pension liability (3,891) (3,891)
--------- ----------
Accumulated Other Comprehensive Income $ 6,906 $ 8,743
========= =========
Recent Accounting Standards
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS") No. 123 (revised 2004),
"Share Based Payment" (SFAS 123R), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123R supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and amends
SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS 123R is
similar to the approach described in SFAS 123. However, SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
On April 14, 2005, the Securities and Exchange Commission announced that it
would provide for a phased-in implementation process for SFAS 123R. This ruling
effectively delayed the Company's adoption of the standard until the first
quarter of 2006. The Company will continue to evaluate the provisions of SFAS
123R to determine its impact on its financial condition, results of operations
and liquidity upon adoption.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends the guidance in Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and spoilage. Among other provisions, the new rule requires that these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of fiscal 2006. The Company is
currently evaluating the effect that the adoption of SFAS 151 will have on its
consolidated results of operations and financial condition but does not expect
SFAS 151 to have a material impact.
7
Note 2 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share in conformity with SFAS No. 128, "Earnings per Share", for the first three
months ended April 3, 2005 and April 4, 2004:
(Dollars in thousands, except per share amounts)
2005 2004
---- ----
Numerator:
Net income $ 5,125 $ 12,231
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 16,404 16,177
Effect of dilutive stock options 475 796
-------- --------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 16,879 16,973
======== ========
Basic earnings per share $ 0.31 $ 0.76
======== ========
Diluted earnings per share $ 0.30 $ 0.72
======== ========
Note 3 - 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 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 123. 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 123, the Company's net earnings and earnings per
share for the three month periods ended April 3, 2005 and April 4, 2004 would
have been reduced to the pro forma amounts indicated below:
(Dollars in thousands, except per share amounts)
2005 2004
---- ----
Net income, as reported $ 5,125 $ 12,231
Less: Total stock-based compensation expense
determined under Black-Scholes option
pricing model, net of related tax effect 804 857
--------- --------
Pro-forma net income $ 4,321 $ 11,374
======== =========
Basic earnings per share:
As reported $ 0.31 $ 0.76
Pro-forma 0.26 0.70
Diluted earnings per share:
As reported $ 0.30 $ 0.72
Pro-forma 0.26 0.67
8
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
variation in vesting periods of future stock options that might be granted, the
variation each year in the number of stock options granted, and the potential
variations in the future 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 353,000 shares that
were granted in the second quarter of 2004 and for options for 5,500 shares that
were granted in the first quarter of 2005 that vested immediately. Shares
obtained by employees through the exercise of options issued under these 2005
grants, however, cannot be sold until after the fourth anniversary of the grant
date.
Note 4 - 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 3, 2005 and April 4, 2004 are:
Pension Benefits Other Benefits
(Dollars in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 1,044 $ 1,022 $ 173 $ 126
Interest cost 1,605 1,613 156 133
Expected return on plan assets (1,982) (1,799) -- --
Amortization of prior service cost 124 125 -- --
Amortization of net loss 114 194 83 28
---------- ---------- --------- --------
Net periodic benefit cost $ 905 $ 1,155 $ 412 $ 287
========= ======== ======= ======
Employer Contributions
The Company made no contributions to its qualified defined benefit pension plans
in the first quarter of 2005. The Company anticipates making a voluntary
contribution to at least one of its qualified defined benefit pension plans in
2005 (voluntary contributions approximated $3.3 million during fiscal 2004.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
In December 2003, the US Congress passed and the President signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act"). The Act includes a prescription drug benefit under Medicare Part D as
well as a federal subsidy beginning in 2006. This subsidy will be paid to
sponsors of postretirement health care benefit plans that provide a benefit that
is at least actuarially equivalent (as defined in the Act) to Medicare Part D.
In May 2004, the FASB issued FSP FAS 106-2, which provides accounting guidance
to sponsors of postretirement health care plans that are impacted by the Act.
The FSP is effective for interim or annual periods beginning after June 15,
2004. Although detailed regulations necessary to implement the Act have not yet
been finalized, the Company believes that drug benefits offered to the salaried
retirees under Postretirement Welfare plans will qualify for subsidy under
Medicare Part D. During the third quarter of 2004, the effects of this subsidy
were factored into the 2004 annual expense. The reduction in the benefit
obligation attributable to past service cost was approximately $545,000 and was
recorded as an actuarial gain in 2004 that will be amortized over the remaining
service period of active employees (approximately $49,000 and $51,000 was
amortized in 2004 and will be amortized in 2005, respectively). The reduction in
expense for 2004 and the first quarter of 2005 related to the Act is
approximately $126,000 and $35,000, respectively.
9
Note 5 - Equity
Common Stock Repurchase
From time to time the Company's Board of Directors authorizes the repurchase, at
management's discretion, of shares of the Company's capital stock. The most
recent regular authorization was approved on October 28, 2004 and provided for
the repurchase of up to an aggregate of $25,000,000 in market value of such
stock. As of April 3, 2005, the Company had repurchased approximately 240,000
shares of stock for a total of $10.2 million as a result of this plan, including
169,900 shares of stock for a total of approximately $7.0 million in the first
quarter of 2005.
Note 6 - 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 3,
2005 and April 4, 2004:
(Dollars in millions) 2005 2004
---- -----
Printed Circuit Materials
Net Sales $ 39.6 $ 45.1
Operating Income 3.8 8.5
High Performance Foams
Net Sales 23.4 22.1
Operating Income 1.3 0.6
Polymer Materials & Components
Net Sales 23.5 30.5
Operating Income (Loss) (1.2) 4.7
Inter-segment sales have been eliminated from the sales data in the previous
table.
Note 7 - Joint Ventures
As of April 3, 2005, the Company had four joint ventures, each 50% owned, which
are accounted for by the equity method of accounting. Equity income of $1.7
million and $1.3 million for the first three months ended in 2005 and 2004 is
included in 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
The summarized financial information for these joint ventures is included in the
following table for the three-month periods ended April 3, 2005 and April 4,
2004.
(Dollars in thousands) 2005 2004
---- ----
Net sales $ 24,692 $ 13,874
Gross profit 7,696 6,033
Net income 3,921 1,851
10
The effect of transactions between the Company and its unconsolidated joint
ventures were immaterial to the Company's financial statements in all periods
presented above.
Note 8 - Commitments and Contingencies
The Company is currently engaged in the following legal proceedings:
Environmental Remediation in Manchester, Connecticut
In the fourth quarter of 2002, the Company sold its Moldable Composites Division
("MCD") 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 fourth quarter of 2004, the Connecticut
Department of Environmental Protection ("DEP") accepted the Company's plan of
remediation, which was subsequently accepted by the Town of Manchester in the
first quarter of 2005 subject to the Company performing a study on the condition
of a sewer line that will cost the Company approximately $25,000. In accordance
with SFAS No. 5, "Accounting for Contingencies," the Company continues to
maintain a reserve of approximately $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
expects the study of the sewer line to be completed in the second quarter of
2005 and the remediation to be completed by the end of 2005 or soon thereafter.
The Company will be responsible for monitoring the site for at least two years
after completion of the remediation.
Superfund Sites
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 for these claims have been immaterial and have been
primarily covered by insurance policies, for both legal and remediation costs.
In one particular case, the Company has been assessed a cost sharing percentage
of 2.47% in relation to the range for estimated total cleanup costs of $17 to
$24 million. The Company has confirmed sufficient insurance coverage to fully
cover this liability and has recorded a liability and related insurance
receivable of approximately $0.5 million, which approximates its share of the
low end of the range.
In all its superfund cases, the Company has been deemed by the respective PRP
administrator to be a de minimis participant and only allocated an insignificant
percentage of the total PRP cost sharing responsibility. Based on facts
presently known to it, the Company believes that the potential for the final
results of these cases having a material adverse effect on its results of
operations, financial position or cash flows is remote. These cases have been
ongoing for many years and the Company believes that they will continue on for
the indefinite future. No time frame for completion can be estimated at the
present time.
PCB Contamination
The Company has been working with the 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 and has monitored the site since the clean up was completed. In the
fourth quarter of 2004, additional PCB's were detected in one of the wells used
for monitoring the site. The Company has reported the results to the DEP and is
awaiting the government's response. The Company anticipates that it will be
required to install an additional well cluster at the site and expects the cost
of this new well to be approximately $40,000. Since inception, the Company has
spent approximately $2.5 million in remediation and monitoring costs related to
the site. The future costs of monitoring the site are expected to be de minimis
and, although it is reasonably possible that the Company will incur additional
remediation costs associated with the newly found PCB's, the Company cannot
estimate the range of costs based on facts and circumstances known to it at the
present time. The Company believes that this situation will continue for several
11
more years, particularly considering the newly identified PCB presence at the
site. No time frame for completion can be estimated at the present time.
Asbestos Litigation
Overview
- --------
Over the past several years, there has been a significant increase in certain
U.S. states in asbestos-related product liability claims brought against
numerous industrial companies where the third-party plaintiffs allege personal
injury from exposure to asbestos-containing products. The Company has been
named, along with hundreds of other industrial companies, as a defendant in some
of these claims. In virtually all of these claims filed against the Company, the
plaintiffs are seeking unspecified damages or, if an amount is specified, it
merely represents jurisdictional amounts or amounts to be proven at trial. Even
in those situations where specific damages are alleged, the claims frequently
seek the same amount of damages, irrespective of the disease or injury.
Plaintiffs' lawyers often sue dozens or even hundreds of defendants in
individual lawsuits on behalf of hundreds or even thousands of claimants. As a
result, even when specific damages are alleged with respect to a specific
disease or injury, those damages are not expressly identified as to the Company.
In fact, there are no cases in which the Company is the sole named defendant.
The Company did not mine, mill, manufacture or market asbestos; rather, the
Company made some limited products, which contained encapsulated asbestos. Such
products were provided to industrial users. The Company stopped the manufacture
of these products in 1987.
Claims
- ------
The Company has been named in asbestos litigation primarily in Illinois,
Pennsylvania, and Mississippi. As of April 3, 2005, there were approximately 211
pending claims compared to 232 pending claims at January 2, 2005. The number of
open claims during a particular time can fluctuate significantly from period to
period depending on how successful the Company has been in getting these cases
dismissed or settled. In addition, most of these lawsuits do not include
specific dollar claims for damages, and many include a number of plaintiffs and
multiple defendants. Therefore, the Company cannot provide any meaningful
disclosure about the total amount of the damages sought.
The rate at which plaintiffs filed asbestos-related suits against a number of
defendants, including the Company, increased in 2001, 2002 and the first half of
2003 because of increased activity on the part of plaintiffs to identify those
companies that sold asbestos containing products, but which did not directly
mine, mill or market asbestos. In addition, a significant increase in the volume
of asbestos-related bodily injury cases arose in Mississippi beginning in 2002
and extended through mid-year 2003. This increase in the volume of claims in
Mississippi was apparently due to the passage of tort reform legislation
(applicable to asbestos-related injuries), which became effective on September
1, 2003 and which resulted in a large number of claims being filed in
Mississippi by plaintiffs seeking to ensure their claims would be governed by
the law in effect prior to the passage of tort reform.
Defenses
- --------
In many cases, plaintiffs are unable to demonstrate that they have suffered any
compensable loss as a result of exposure to the Company's asbestos-containing
products. Management continues to believe that a majority of the claimants in
pending cases will not be able to demonstrate exposure or loss. This belief is
based in large part on two factors: the limited number of asbestos-related
products manufactured and sold by the Company and the fact that the asbestos was
encapsulated in such products. In addition, even at sites where a claimant can
verify his or her presence during the same period those products were used,
liability of the Company cannot be presumed because even if an individual
contracted an asbestos-related disease, not everyone who was employed at a site
was exposed to the Company's asbestos-containing products. Based on these and
other factors, the Company has and will continue to vigorously defend itself in
asbestos-related matters.
12
Dismissals and Settlements
- --------------------------
Cases involving the Company typically name 50-300 defendants, although some
cases have had as few as 6 and as many as 833 defendants. The Company has,
however, settled a small number of cases for which all costs have been paid by
the Company's insurance carriers. The Company has obtained dismissals of many of
these claims. In the first quarter of 2005 and full year 2004, the Company was
able to have approximately 34 and 85 claims dismissed, respectively, and settled
4 and 8 claims, respectively. In the first quarter of 2005, the Company's
insurance carriers paid an aggregate of approximately $3.0 million for such
settlements. Although these historical figures provide some insight into the
Company's experience with asbestos litigation, no guarantee can be made as to
the dismissal and settlement rate the Company will experience in the future.
Settlements are made without any admission of liability. Settlement amounts may
vary depending upon a number of factors, including the jurisdiction where the
action was brought, the nature and extent of the disease alleged and the
associated medical evidence, the age and occupation of the claimant, the
existence or absence of other possible causes of the claimant's alleged illness,
and the availability of legal defenses, as well as whether the action is brought
alone or as part of a group of claimants. To date, the Company has been
successful in obtaining dismissals for many of the claims and has settled only a
limited number. The majority of settled claims were settled for immaterial
amounts, and such costs have been paid by the Company's insurance carriers. In
addition, to date, the Company has not been required to pay any punitive damage
awards.
Potential Liability
- -------------------
In late 2004, the Company determined that it was reasonably prudent, based on
facts and circumstances known to it at that time, to perform a formal analysis
to project its potential future liability and related insurance coverage for
asbestos-related matters. This determination was made based on several factors,
including the growing number of asbestos related claims and recent settlement
history. As a result, National Economic Research Associates, Inc. ("NERA"), a
consulting firm with expertise in the field of evaluating mass tort litigation
asbestos bodily-injury claims, was engaged to assist the Company in projecting
the Company's future asbestos-related liabilities and defense costs with regard
to pending claims and future unasserted claims. Projecting future asbestos costs
is subject to numerous variables that are extremely difficult to predict,
including the number of claims that might be received, the type and severity of
the disease alleged by each claimant, the long latency period associated with
asbestos exposure, dismissal rates, costs of medical treatment, the financial
resources of other companies that are co-defendants in claims, uncertainties
surrounding the litigation process from jurisdiction to jurisdiction and from
case to case, and the impact of potential changes in legislative or judicial
standards, including potential tort reform. Furthermore, any predictions with
respect to these variables are subject to even greater uncertainty as the
projection period lengthens. In light of these inherent uncertainties, the
Company's limited claims history and consultations with NERA, the Company
believes that five years is the most reasonable period for recognizing a reserve
for future costs, and that costs that might be incurred after that period are
not reasonably estimable at this time. As a result, the Company also believes
that its ultimate net asbestos-related contingent liability (i.e., its indemnity
or other claim disposition costs plus related legal fees) cannot be estimated
with certainty.
Insurance Coverage
- ------------------
The Company's applicable insurance policies generally provide coverage for
asbestos liability costs, including coverage for both resolution and defense
costs. Following the initiation of asbestos litigation, an effort was made to
identify all of the Company's primary and excess insurance carriers that
provided applicable coverage beginning in the 1950s through the mid-1980s. There
appear to be three such primary carriers, all of which were put on notice of the
litigation. In late 2004, Marsh Risk Consulting ("Marsh"), a consulting firm
with expertise in the field of evaluating insurance coverage and the likelihood
of recovery for asbestos-related claims, was engaged to work with the Company to
project the insurance coverage of the Company for asbestos-related claims.
Marsh's conclusions were based primarily on a review of the Company's coverage
history, application of reasonable assumptions on the allocation of coverage
consistent with industry standards, an assessment of the creditworthiness of the
insurance carriers, analysis of applicable deductibles, retentions and policy
limits, and the experience of NERA and a review of NERA's report.
13
Cost Sharing Agreement
- ----------------------
To date, the Company's primary insurance carriers have provided for
substantially all of the legal and defense costs associated with its
asbestos-related claims. However, as claims continue to escalate, the Company
and its insurance carriers have determined that it would be appropriate to enter
into a cost sharing agreement to clearly define the cost sharing relationship
among the carriers and the Company. As of November 5, 2004, an interim cost
sharing agreement was established that provided that the known primary insurance
carriers would continue to pay all legal and defense costs associated with these
claims until a definitive cost sharing arrangement was consummated. The Company
expects a definitive cost sharing agreement to be finalized during the latter
part of 2005, at which time the final terms of the cost sharing relationship
would be agreed to by these respective parties.
Impact on Financial Statements
- ------------------------------
Given the inherent uncertainty in making future projections, the Company plans
to have the projections of current and future asbestos claims periodically
re-examined, and the Company will update them if needed based on the Company's
experience, changes in the underlying assumptions that formed the basis for
NERA's and Marsh's models, and other relevant factors, such as changes in the
tort system and the Company's success in resolving claims. Based on the
assumptions employed by and the report prepared by NERA and other variables, in
the fourth quarter of 2004 the Company recorded a reserve for its estimated
bodily injury liabilities for asbestos-related matters, including projected
indemnity and legal costs, for the five-year period through 2009 in the
undiscounted amount of $36.2 million. Likewise, based on the analysis prepared
by Marsh, the Company recorded a receivable for its estimated insurance recovery
of $36.0 million. This resulted in the Company recording a pre-tax charge to
earnings of $200,000 in 2004. As of April 3, 2005, these balances have not been
adjusted as facts and circumstances surrounding the assumptions used in the
original models have remained materially consistent since the initial analysis
was performed.
The amounts recorded by the Company for the asbestos-related liability and the
related insurance receivable described above were based on currently known facts
and a number of assumptions. However, projecting future events, such as the
number of new claims to be filed each year, the average cost of disposing of
each such claims, coverage issues among insurers, and the continuing solvency of
various insurance companies, as well as the numerous uncertainties surrounding
asbestos litigation in the United States, could cause the actual liability and
insurance recoveries for the Company to be higher or lower than those projected
or recorded.
There can be no assurance that the Company's accrued asbestos liabilities will
approximate its actual asbestos-related settlement and defense costs, or that
its accrued insurance recoveries will be realized. The Company believes that it
is reasonably possible that it will incur additional charges for its asbestos
liabilities and defense costs in the future, which could exceed existing
reserves, but such excess amount cannot be estimated at this time. The Company
will continue to vigorously defend itself and believes it has substantial
unutilized insurance coverage to mitigate future costs related to this matter.
Other Environmental Matters
In 2004, the Company became aware of a potential environmental matter at its
facility in Korea involving possible soil contamination. The Company is
currently in the initial stages of performing an assessment on the site to
determine if any contamination exists. At present, it is not possible to
determine the likelihood or to reasonably estimate the cost of any potential
adverse outcome based on the facts and circumstances currently known to the
Company.
The Company is also aware of a potential environmental matter involving soil
contamination at one of its European facilities. The Company is currently
assessing this matter and believes that it is probable that a loss contingency
exists relating to this site and that a reasonably estimable range of loss is
between $200,000 and $400,000. The Company has recorded a reserve in 2004 that
approximates the low end of the range. As of April 3, 2005, the Company believes
that this reserve continues to be appropriate based on facts and circumstances
presently known at this time.
In addition to the above issues, the nature and scope of the Company's business
brings 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.
14
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 impact on the results of operations, financial position,
or cash flows of the Company.
Note 9 - Restructuring
On January 21, 2004, the Company announced that it would cease operations at its
South 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 $2.3 million related primarily to severance that
has been or will be paid to employees upon termination and completion of service
requirements. In addition, the Company recognized a $0.8 million curtailment
charge on its defined benefit pension plan in the fourth quarter of 2004 as a
result of the termination of employees as the amortizable prior service cost
related to terminated employees was accelerated into 2004 as a result of the
shutdown.
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 $2.3 million in restructuring
charges in 2004 beginning in the first quarter for the cessation of operations
in the South Windham, Connecticut facility, which is included in selling and
administrative expenses on the statement of income. Actual costs charged against
the reserve to date are approximately $1.4 million, including $0.3 million in
the first quarter of 2005, and the Company expects to pay the remaining amounts
over the course of 2005 and the first half of 2006. No additional costs were
incurred in the first quarter of 2005.
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 recognized approximately
$330,000 in charges associated with severance payments that have been or will be
made to employees as a result of this plan in accordance with SFAS No. 146.
Actual payments made to date are approximately $215,000, including approximately
$72,000 in the first quarter of 2005, with the remainder to be paid over the
course of 2005. No additional costs were accrued in the first quarter of 2005.
Note 10 - Related Parties
In the beginning of fiscal year 2002, the Company acquired certain assets of the
high performance polyolefin foam business of Cellect LLC, including intellectual
property rights, inventory, machinery and equipment, and customer lists, for
approximately $10 million in cash, plus a potential earn-out over five years
based upon performance. 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 with the balance of $1.0 million
due at the conclusion of the supply agreement. In the third quarter of 2004, the
Company ceased production activities at Cellect and is currently manufacturing
polyolefins exclusively at its Carol Stream facility. As of April 3, 2005, the
Company has an account receivable from Cellect of $1.5 million, which primarily
represents the net balance of various transactions during the term of the
agreement. This amount is net of the residual $1.0 million due in connection
with the post-closing agreement. 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. The Company is currently finalizing its
net financial position with Cellect, and does not anticipate the ultimate
outcome of its financial settlement with Cellect will have a material effect on
the Company's results of operations, financial position or cash flows.
15
Note 11 - 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 $3.9 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 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, which includes amounts recorded in the fourth
quarter of 2004 to finalize the purchase accounting for the acquisition:
(Dollars in thousands)
Purchase Price $ 3,902
Less: Identified assets and liabilities:
Cash 495
Accounts receivable 255
Inventory 351
Property, plant and equipment 404
Intangible assets 800
Other assets 93
Accounts payable and other accruals (434)
Deferred tax liability (235)
Other liabilities (51)
---------
Goodwill $ 2,224
=======
Due to the insignificant effect of KF on Rogers' consolidated statement of
financial position and operating results, no pro-forma information has been
presented.
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' 2004 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.
Business Overview
Rogers Corporation is a global enterprise that provides its customers with
innovative solutions and industry leading products in three business segments:
Printed Circuit Materials, High Performance Foams 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 portable communications devices, communications infrastructure,
computer and office equipment, ground transportation, defense and aerospace, 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 growth is largely dependent on management's
ability to anticipate changing market conditions and how the Company's customers
will react to these changing conditions;
16
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 demand or price per unit with respect to the
effect on net sales.
The Company's current focus is on worldwide markets that have an increased
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
facilities 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
automotive applications. To better position itself from a strategic standpoint
in certain markets, the Company completed the move in 2004 of both its
polyolefin foam manufacturing operations from St. Johnsville, New York to its
new facility in Carol Stream, Illinois, and its elastomer component and float
manufacturing operations from South Windham, Connecticut to Suzhou, China. The
Company believes that these relocations will enable it to better serve its
customers and take advantage of more opportunities in the Asian marketplace. The
Company continues to focus on its Six Sigma initiatives, as it plans to increase
employee participation in this effort in 2005 by training more Green Belts and
project champions. Six Sigma is a quantitative process improvement methodology
used by the Company to help streamline and improve its processes - from
manufacturing to transactional and from product to service. The Company
continuously has projects in progress as it is focused on gaining both
operational and transactional efficiencies as a result of its Six Sigma efforts.
To date, the Company's ongoing estimated cost savings and value creation is
greater than two-times its ongoing investment.
In the first quarter of 2005, sales were $86.5 million, a decline of 11%
compared to the record first quarter results of 2004. Operating profit also
declined from $13.8 million in the first quarter of 2004 to $3.9 million in the
first quarter of 2005. Significant factors that affected operating results in
the first quarter of 2005 as compared to the first quarter of 2004 include: (i)
a decline of $5.4 million in sales and $4.7 million in operating profit in the
Printed Circuit Materials segment, primarily due to a decrease in sales of both
high frequency and flexible circuit products, compounded by an unfavorable
change in sales mix; and (ii) a decline of $7.0 million in sales and $5.9
million in operating profit in the Polymer Materials and Components segment,
driven by a softening in sales at Durel in its inverter and monochrome cell
phone display products and a decline in sales of elastomer components. For
further discussion on segment results, see "Segment Analysis" below.
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 2004 as
compared to 2003 and expects to continue sequential growth in 2005 in certain
applications, such as urethane foams and electroluminescent lamps, the Company
has seen and expects to continue to experience some sequential softening in
various flexible circuit material applications, such as those for cellular
phones, due to model volatility and the fact that many customers have increased
inventories to normalize seasonal purchasing requirements, as well as a number
of programs coming to end of life.
With regard to operating performance, as a number of the Company's various
strategic initiatives are completed, such as the shift of polyolefin operations
to Carol Stream, Illinois and the movement of elastomer component and float
manufacturing to China, the Company is now focused on the continued ramp up of
other product line production in China and moving up the learning curve with its
new process technology in Carol Stream. The Company expects to experience cost
savings resulting from the elimination of duplicate operational costs that
existed in 2004 during these transitional phases and from improvements in
production efficiencies. 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. Although the Company expects improved
operating results in the second half of 2005, actual results will be highly
dependent 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 described
above.
17
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
------------------
April 3, April 4,
2005 2004
---- ----
Net Sales 100.0% 100.0%
Manufacturing Margin 27.0% 34.2%
Selling and Administrative Expenses 16.6% 15.3%
Research and Development Expenses 5.8% 4.8%
Operating Profit 4.6% 14.2%
Equity Income in Unconsolidated Joint Ventures 2.0% 1.3%
Other Income 1.0% 1.1%
Net Income 5.9% 12.5%
Net Sales
Net sales for the first quarter of 2005 were $86.5 million as compared to $97.7
million in the first quarter of 2004, a decrease of $11.2 million, or 11%. The
High Performance Foams segment reported an increase in sales of almost 6%, which
was offset by sales declines of 12% and 23% in the Printed Circuit Materials and
Polymer Materials and Components segments, respectively. See "Segment Analysis"
below for further discussion on segment performance.
Manufacturing Margins
Manufacturing margins as a percentage of sales decreased from 34.2% in the first
quarter of 2004 to 27.0% in the first quarter of 2005. The decrease in margins
is primarily attributable to declines in the Polymer Materials and Components
and Printed Circuit Materials segments. In Polymer Materials and Components,
margins at Durel declined as inverter sales decreased significantly
quarter-over-quarter and new production on electroluminescent keypad
applications began to ramp up. Also, elastomer component and float products
experienced negative gross margins in the first quarter of 2005 as the Company
continues to experience challenges in ramping up production of these products in
China. Margins in the Printed Circuit Materials segment were negatively affected
by a decline in sales in both high frequency and flexible products and an
unfavorable change in sales mix.
Selling and Administrative Expenses
Selling and administrative expenses for the first three months of 2005 were
$14.4 million as compared to $14.9 million in the first quarter of 2004. As a
percentage of sales, selling and administrative expenses increased from 15.3% in
the first quarter of 2004 to 16.6% in the first quarter of 2005. Overall,
spending levels were comparable quarter-over-quarter; however, the Company was
able to leverage its existing overhead base to support the higher level of sales
experienced in the first quarter of 2004, which drove the percentage of sales
for the first quarter of 2005 up in comparison to the first quarter of 2004.
Research and Development Expenses
Research and development expenses increased 9.0% from $4.6 million in the first
quarter of 2004 to $5.1 million in the first quarter of 2005. As a percentage of
sales, research and development expenses were 5.8% of sales in the first quarter
of 2005 as compared to 4.8% in the comparable prior period. The rate increase as
compared to the prior year is partially a result of the decrease in sales in the
first quarter of 2005 and timing of development projects.
18
The Company plans to reinvest approximately 6% of sales in research and
development activities each year and its first quarter 2005 spending rate is in
line with its expectations.
Equity Income in Unconsolidated Joint Ventures
Equity income in unconsolidated joint ventures increased from $1.3 million in
the first quarter of 2004 to $1.7 million in the first quarter of 2005. The
increase was primarily due to the continued success of the Company's high
performance foams joint ventures, which continue to show strong growth with new
industrial foam application wins as equity income increased by almost 33% in the
first quarter of 2005 as compared to the comparable period in 2004. Also, sales
at Rogers' joint venture in Taiwan, Rogers Chang Chun Technology Co., Ltd.
(RCCT), increased by almost 44% compared to the first quarter of 2004, although
sales of this joint venture have softened sequentially compared to the fourth
quarter of 2004 as flexible laminate circuit material sales have had various
programs come to end of life.
Income Taxes
The Company's effective tax rate for the first quarter of 2005 was 24%, down
from the 25% effective tax rate in the first quarter of 2004. In 2005, the
effective tax rate benefited primarily from favorable tax rates on certain
foreign business activity, foreign tax credits and research and development
credits, which reduced the effective tax rate by 7, 3 and 2 percentage points,
respectively.
Segment Analysis
(Dollars in millions) First Quarter
------------------------------------------
2005 2004 $ Change % Change
------------------------------------------
Printed Circuit Materials:
Net Sales $ 39.6 $ 45.1 $ (5.4) (12%)
Operating Profit 3.8 8.5 (4.7) (55%)
High Performance Foams:
Net Sales 23.4 22.1 1.3 6%
Operating Profit 1.3 0.6 0.7 106%
Polymer Materials and Components:
Net Sales 23.5 30.5 (7.0) (23%)
Operating Profit (Loss) (1.2) 4.7 (5.9) (126%)
Net sales of Printed Circuit Materials in the first quarter of 2005 were $39.6
million, a decrease of 12% from the first quarter of 2004. Segment operating
profit declined from $8.5 million in the first quarter of 2004 to $3.8 million
in the first quarter of 2005. These decreases are attributable to sales declines
of 10% and 21% in high frequency materials and flexible products, respectively.
In high frequency, the first quarter of 2004 represented a record quarter for
sales. High frequency sales levels declined sequentially throughout the course
of 2004, but increased by approximately 23% in the first quarter of 2005 as
compared to the fourth quarter of 2004, although not back to the levels of the
first quarter of 2004. High frequency sales in the first quarter of 2005 were
driven by strength in cell phone base station infrastructure applications, as
3G-infrastructure spending continues to increase, and in the LNB satellite
business, marking what the Company believes may be the beginning of an upturn in
these markets. The Company anticipates that sales into the satellite market will
also be strong in the second quarter of 2005. In flexible products, sales
declined approximately 44% sequentially from the fourth quarter of 2004. This
sales decline was driven primarily by a number of cellular telephone programs
coming to end of life. The Company is focused on growth in sales of its flexible
products in 2005 and 2006 through recent design wins and further diversification
of the customer base. The Company recently introduced a new family of flexible
circuit materials that addresses the growing need for denser circuits and
thinner constructions. However, the Company anticipates that significant sales
for these new flexible circuit materials will not occur until 2006.
19
High Performance Foams net sales increased almost 6% to $23.4 million and
operating profits more than doubled to $1.3 million in the first quarter of
2005. Sequentially, High Performance Foams net sales were only slightly below
the record sales levels experienced in the fourth quarter of 2004. The increases
from the first quarter of 2004 to the first quarter of 2005 were driven
primarily by strong sales of polyurethane foams in industrial and consumer
applications, as sales increased 13%. This increase was mitigated by a 32%
decline in sales of polyolefin foam products as the Company continues to work at
improving yields and throughput in the polyolefin production process and also
works to develop new, significantly higher valued products to improve operating
results.
The Polymer Materials and Components segment had sales of $23.5 million in the
first quarter of 2005, a decrease of 23% from the first quarter of 2004.
Operating results for the segment declined by $5.9 million from the first
quarter of 2004 to an operating loss of $1.2 million in the first quarter of
2005. These quarter-over-quarter decreases result primarily from a 30% decline
in sales at Durel, which is commensurate with the end of life on monochrome cell
phone programs. Sequentially, segment sales increased by 17% in the first
quarter of 2005 from the fourth quarter of 2004. Durel had sequential sales
growth of 20% in the first quarter of 2005 as compared to the fourth quarter of
2004 as Durel continued to experience success in its flexible electroluminescent
keypad lamp applications during the quarter as the program is ahead of original
forecasts and the Company is investing in additional capacity for future
production requirements. Durel is currently in production on several lamps for
backlighting keypads for five cell phone manufacturers and the Company expects
continued growth by the end of 2005. Sales of elastomer component and float
products declined by 32% from the first quarter of 2004 as the Company ramped up
production and customers purchased excess inventory in 2004 in anticipation of
the Company's move of this product line to China. Sequentially, sales remained
relatively flat in comparison to the fourth quarter of 2004. The Company has
made steady progress with this business in China and has recently experienced
expansion of the float business as most of the start-up issues associated with
the move to China have been resolved. The Company is also expanding production
of busbars into China and shipped the first product from that operation in the
first quarter of 2005. Sales of busbars increased approximately 6% in the first
quarter of 2005 as compared to the first quarter of 2004 and 29% sequentially as
compared to the fourth quarter of 2004. This sequential sales growth was driven
by power drive and transportation applications in Europe and the Company is
optimistic about future sales opportunities for busbars in China.
Liquidity, Capital Resources and Financial Position
Rogers' management believes that the Company's ability to generate cash from
operations to reinvest in the business is one of its fundamental strengths, as
demonstrated by the Company's financial position continuing to remain strong in
the first quarter of 2005. The Company remains debt free and is able to finance
its operating needs through internally generated funds. Management believes that
over the next twelve months internally generated funds plus available lines of
credit will be sufficient to meet the capital expenditure requirements and
ongoing needs of the business. However, the Company continually reviews and
evaluates the adequacy of its lending facilities and relationships.
At April 3, 2005, cash, cash equivalents and short-term investments totaled
$40.7 million as compared to $40.0 million at January 2, 2005. Cash increased
even though the Company repurchased approximately $7.0 million of its common
stock as part of its share repurchase program and spent approximately $4.2
million on capital requirements. Working capital increased slightly from $115.5
million at January 2, 2005 to $116.3 million at April 3, 2005.
Significant changes in the Company's balance sheet accounts are as follows:
o Accounts receivable declined approximately $3.5 million from $57.3
million at January 2, 2005 to $53.7 million at April 3, 2005 primarily
due to the collection of annual royalty payments of approximately $3.2
million in the first quarter of 2005.
o Inventories decreased by $4.1 million from $49.0 million at January 2,
2005 to $44.9 million at April 3, 2005. The decrease is due primarily
to declines in elastomer component inventory ($1.3 million), as the
inventory build that took place in 2004 in preparation for the move of
the Company's production to China is now returning to more normalized
levels as the move has been completed, declines in flexible product
inventory ($1.0 million), as the overall market softening has led the
Company to cut back on raw material purchases and work off of existing
inventories, and declines in inventories at Durel ($1.4 million), as
purchases of inverters have been reduced commensurate with the
decrease in sales volume and additional reserves were recorded on
certain inverter inventory.
20
o Accrued employee benefits and compensation decreased from $18.4
million at January 2, 2005 to $13.3 million at April 3, 2005 due
mainly to annual incentive compensation payouts of approximately $7.0
million in the first quarter of 2005 that related to 2004 operating
performance; offset partially by accruals for employee benefits for
the 2005 fiscal year (approximately $2.0 million).
Cash flows from operations were approximately $6.8 million in the first quarter
of 2005 as compared to $5.3 million in the first quarter of 2004. This increase
was caused primarily by reductions in certain working capital accounts,
including inventory and accounts receivable (as discussed above). Both
inventories and accounts receivable decreased in the first quarter of 2005 as
the Company's sales levels and related production requirements were less than in
the first quarter of 2004. These decreases were mitigated by lower net income in
the first quarter of 2005 ($5.1 million) as compared to the first quarter of
2004 ($12.2 million).
Contingencies
During the first quarter of 2005, the Company did not become aware of any
material developments related to environmental matters or other contingencies.
The Company has not had any material recurring costs and capital expenditures
related to environmental matters, except for payments by its insurance carriers
of $3.0 million for settlements of asbestos-related matters. Refer to Note 7 of
the unaudited condensed consolidated financial statement for further discussion
on ongoing environmental and contingency matters.
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 2005.
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 LLC, including intellectual
property rights, inventory, machinery and equipment, and customer lists, for
approximately $10 million in cash, plus a potential earn-out over 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 with the balance of $1.0 million due at the conclusion of the supply
agreement. In the third quarter of 2004, the Company ceased production
activities at Cellect and it was manufacturing polyolefins exclusively at its
Carol Stream facility. As of April 3, 2005, the Company has accounts receivable
from Cellect of approximately $1.5 million, which primarily represents the net
culmination of varied transactions during the term of the agreement. This amount
is net of the residual $1.0 million due in connection with the post-closing
agreement. 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. The Company is currently finalizing its net financial
position with Cellect, and does not anticipate the ultimate outcome of its
financial settlement with Cellect will have a material effect on the Company's
results of operations, financial position or cash flows.
21
New Accounting Policies
Stock-Based Compensation
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment" (SFAS 123R), which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123R supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure will no longer
be an alternative.
On April 14, 2005, the Securities and Exchange Commission announced that it
would provide for a phased-in implementation process for SFAS No. 123R. This
ruling effectively delayed the Company's adoption of the standard until the
first quarter of 2006. The Company will continue to evaluate the provisions of
SFAS 123R to determine its impact on its financial condition, results of
operations and liquidity upon adoption.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in
Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and spoilage. Among other provisions, the new rule requires that these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of fiscal 2006. The Company is
currently evaluating the effect that the adoption of SFAS 151 will have on its
consolidated results of operations and financial condition but does not expect
SFAS 151 to have a material impact.
Critical Accounting Policies
There have been no significant changes in the Company's critical accounting
policies during the first quarter of 2005.
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 2005. 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 set forth in Exhibit 13 to the
Company's Form 10-K for fiscal year 2004.
Item 4. Controls and Procedures
a. As of the end of the period covered by this report, management of Rogers
conducted an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Acting Chief Financial
Officer, of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on this evaluation, and due to the material weakness in the Company's
internal control over financial reporting in the Company's accounting for
deferred income taxes as discussed below and as reported in the Company's
Annual Report on Form 10-K for the year-ended January 2, 2005, the Chief
Executive Officer and Acting Chief Financial Officer concluded that, as of
April 3, 2005, the Company's disclosure controls and procedures were not
effective.
b. Management of Rogers is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control system was designed to provide reasonable assurance to the
Company's management and the board of directors regarding the preparation
and fair presentation of published financial statements.
22
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined effective can provide
only reasonable assurance with respect to financial statement preparation
and presentation.
As of January 2, 2005, management's assessment of the effectiveness of its
internal control over financial reporting identified a material weakness in
the Company's internal control over financial reporting for deferred income
taxes. Specifically, management determined that a change was necessary in
the method used to reconcile and account for deferred income taxes to be
consistent with the application of the provisions of Statement of Financial
Accounting Standards No. 109. This material weakness is discussed in
greater detail in the Company's Annual Report on Form 10-K for the
year-ended January 2, 2005.
During the first quarter of 2005, the Company began the process of
implementing controls and procedures to address the material weakness
identified as of January 2, 2005 and believes that, once fully implemented,
these controls and procedures will correct the material weakness discussed
above.
Except as discussed above, there were no changes in the Company's internal
control over financial reporting during its most recently completed fiscal
quarter that have materially affected or are reasonably likely to
materially affect its internal control over financial reporting, as defined
in Rule 13a-15(f) under the Exchange Act.
23
Part II - Other Information
Item 1. Legal Proceedings
See Note 8, "Commitments and Contingencies", to the condensed consolidated
financial statements in Part I, Item 1 of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchase of Equity Securities
(d) Maximum Number
(c) Total Number of (or Approximate Dollar
Shares (or Units) Value) of Shares (or
(a) Total Number of Purchase as Part of Units) that May Yet Be
Shares (or Units) (b) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per share (or Unit) Plans or Programs Plans or Programs
- ------ ------------------ ---------------------- --------------------- ----------------------
February 28, 2005 through April 3, 2005 84,400 $ 40.64 84,400 $ 14,823,758
January 31, 2005 through February 27, 2005 21,100 $ 42.50 21,100 $ 18,253,368
January 3, 2005 through January 30, 2005 64,400 $ 41.44 64,400 $ 19,150,157
On October 28, 2004, the Company's Board of Directors authorized the purchase,
at management's discretion, of up to an aggregate of $25 million in market value
of shares of the Company's capital stock in open market transactions. The
buyback program will be completed or cancelled within twelve months of the
authorization date.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Rogers' Annual Meeting of Shareholders was held on April 28, 2005, during
the second fiscal quarter of 2005.
(b) All of the matters voted upon were approved and the specific votes are as
follows:
1. To elect the members of the Board of Directors:
Number of Shares
-----------------
Name For Withheld
---- --- --------
Leonard M. Baker 14,271,743 274,804
Walter E. Boomer 9,897,565 4,648,982
Edward L. Diefenthal 14,344,293 202,254
Gregory B. Howey 14,212,238 334,309
Leonard R. Jaskol 14,271,940 274,607
Eileen S. Kraus 13,756,268 790,279
William E. Mitchell 13,714,691 831,856
Robert G. Paul 13,764,934 781,613
Robert D. Wachob 14,273,771 272,776
2. To approve the Rogers Corporation 2005 Equity Compensation Plan:
For Against Abstentions Non-Vote
--- ------- ----------- --------
9,286,642 2,913,728 41,851 2,304,326
24
3. To ratify the appointment of Ernst & Young LLP as the Company's
registered public accounting firm for the fiscal year ending January 1,
2006:
For Against Abstentions
--- ------- -----------
14,300,424 240,924 5,199
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 Bylaws of Rogers Corporation, as amended and restated effective
August 26, 2004, were filed as Exhibit 3.1 to the Company's
Current Report of Form 8-K, filed with the Securities and
Exchange Commission on September 1, 2004, were filed as Exhibit
3i to the 2004 Form 10-K.
3j Articles of Amendment, as filed with the Secretary of State of
the Commonwealth of Massachusetts on May 24, 1994, were filed as
Exhibit 3j to the 1995 Form 10-K.
3k Articles of Amendment, as filed with the Secretary of State of
the Commonwealth of Massachusetts on May 8, 1998 were filed
as Exhibit 3k to the 1998 Form 10-K.
3l Articles of Merger of Parent and Subsidiary Corporation, filed
with the Secretary of State of the Commonwealth of Massachusetts
on December 28, 2003, were filed as Exhibit 3l to the 2004 Form
10-K.
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. The April 10, 2000
amendment was filed on Form 8-K on May 16, 2000.
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.
10af Rogers Corporation 2005 Equity Compensation Plan (the "2005
Plan") (incorporated herein by reference to Exhibit 10.1 to
Rogers' Registration Statement No. 333-124489 on Form S-8 dated
April 28, 2005, and filed on April 29, 2005) *.
10ag Form of Incentive Stock Option Agreement under the 2005 Plan
(incorporated herein by reference to Exhibit 10.2 to Rogers'
Registration Statement No. 333-124489 on Form S-8 dated April
28, 2005, and filed on April 29, 2005) *.
10ah Form of Non-Qualified Stock Option Agreement (For Officers and
Employees, with vesting) under the 2005 Plan (incorporated
herein by reference to Exhibit 10.3 to Rogers' Registration
Statement No. 333-124489 on Form S-8 dated April 28, 2005, and
filed on April 29, 2005) *.
10ai Form of Non-Qualified Stock Option Agreement (For Officers and
Employees, without vesting) under the 2005 Plan (incorporated
herein by reference to Exhibit 10.4 to Rogers' Registration
Statement No. 333-124489 on Form S-8 dated April 28, 2005, and
filed on April 29, 2005) *.
25
10aj Form of Non-Qualified Stock Option Agreement (For Non-Employee
Directors) under the 2005 Plan (incorporated herein by reference
to Exhibit 10.5 to Rogers' Registration Statement No. 333-124489
on Form S-8 dated April 28, 2005, and filed on April 29, 2005)*.
10ak Form of Stock Appreciation Right Agreement under the 2005 Plan
(incorporated herein by reference to Exhibit 10.6 to Rogers'
Registration Statement No. 333-124489 on Form S-8 dated April
28, 2005, and filed on April 29, 2005) *.
10al Form of Restricted Stock Agreement under the 2005 Plan
(incorporated herein by reference to Exhibit 10.7 to Rogers'
Registration Statement No. 333-124489 on Form S-8 dated April
28, 2005, and filed on April 29, 2005) *.
10am Amendment, effective April 28, 2005, to 1998 Stock Incentive
Plan (incorporated by reference to Exhibit 10.8 to Rogers'
Current Report on Form 8-K, filed May 2, 2005) *.
10r-1 Amendment No. 1 to Summary of Director and Executive Officer
Compensation, filed herewith *.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Acting Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification of Chief Executive Officer and Acting Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Management Contract.
Part II, Items 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/ Paul B. Middleton
---------------------
Paul B. Middleton
Acting Chief Financial Officer and
Corporate Controller
Dated: May 9, 2005
26