SELECTED FINANCIAL DATA
(Dollars in Thousands, Except per Share Amounts)
- ----------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
SALES AND INCOME
- ----------
Net Sales $216,037 $248,215 $247,839 $216,574 $189,652
Income Before Income
Taxes 20,979 37,634 25,877 19,126 22,005
Net Income 15,734 26,720 18,631 13,771 16,500
PER SHARE DATA
- ----------
Basic 1.03 1.79 1.24 .91 1.10
Diluted .98 1.69 1.19 .87 1.05
Book Value 10.62 9.65 7.94 7.24 6.26
FINANCIAL POSITION (YEAR-END)
- ----------
Current Assets 84,916 92,849 72,547 69,164 74,325
Current Liabilities 29,692 38,745 36,741 32,305 33,983
Ratio of Current Assets
to Current
Liabilities 2.9 to 1 2.4 to 1 2.0 to 1 2.1 to 1 2.2 to 1
Cash, Cash Equivalents, and
Marketable Securities 20,891 10,100 9,955 9,849 21,555
Working Capital 55,224 54,104 35,806 36,859 40,342
Property, Plant and
Equipment - Net 98,454 94,199 84,652 79,969 57,359
Total Assets 223,809 221,514 183,406 176,174 158,440
Long-Term Debt less Current
Maturities 1,315 9,116 9,740 13,687 13,660
Shareholders' Equity 163,062 145,813 116,417 110,231 94,378
Long-Term Debt as a Percentage
of Shareholders' Equity 1% 6% 8% 12% 14%
OTHER DATA
- ----------
Depreciation and
Amortization 13,712 12,507 10,375 8,439 6,614
Research and Development
Expenses 12,570 12,493 10,791 10,352 9,608
Capital Expenditures 18,032 22,744 13,621 28,965 17,739
Number of Employees
(Average) 1,376 1,358 1,197 1,122 993
Net Sales per Employee 157 183 207 193 191
Number of Shares Outstanding
at Year-End 15,356,284 15,102,670 14,664,652 15,235,332 15,087,398
15
F-3
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
For the year 2001, net sales were $216.0 million, down 13% from
$248.2 million in 2000. Combined Sales, which include half of
the sales of Rogers' four unconsolidated 50% owned joint
ventures, totaled $276.2 million.
Income before income taxes declined 44% to $21.0 million while
net profits decreased 41% to $15.7 million. Diluted earnings per
share for the year were $0.98, down from $1.69 in 2000 and basic
earnings per share were $1.03 in 2001, down from $1.79 in 2000.
Lower than expected income taxes resulting from a combination of
lower income and increased tax credits yielded an effective tax
rate of only 25% for the Company for 2001. Excluding a one-time
charge of $0.09 for professional fees and restructuring charges
taken in the second quarter of 2001, and the positive $0.06
realized in the fourth quarter from a decrease in taxes and a
resulting increase in net profits, diluted earnings per share for
2001 would have been $1.01.
The decrease in earnings resulted primarily from the lower level
of sales along with reduced net joint venture income.
Sales and Operating Profits
Sales - 2001 over 2000
Net sales were $216.0 million in 2001, down from $248.2 million
in 2000. Combined Sales, which include half of the sales of
Rogers' four unconsolidated 50% owned joint ventures, totaled
$276.2 million, compared to $316.8 million in 2000. The major
causes of the decrease in revenue were the widespread slowdown in
the wireless communications industry and the general downturn in
the overall global economy.
Sales - 2000 over 1999
Net sales were $248.2 million in 2000, up slightly from $247.8
million in 1999. Combined Sales totaled $316.8 million, compared
to $285.0 million in 1999. Beginning in January 2000, sales of
a specialty flexible circuit laminate sold to Hutchinson
Technology, Inc. (HTI), were invoiced through Polyimide Laminate
Systems, LLC (PLS), Rogers' joint venture with Mitsui Chemicals,
Inc. If these sales were treated the same way as reported in
1999, Rogers' net sales would have shown an increase of 14.3% in
2000 from 1999. On the same basis, Combined Sales would have
shown an increase of 17.5% in 2000 over 1999. The Company's
favorable 2000 results were primarily attributable to strong
sales to the computer and wireless communication markets. Sales
of silicone and urethane materials and high frequency circuit
materials were at record levels during 2000.
Operating Income - 2001 over 2000
Manufacturing margins declined from 33% in 2000 to 31% in 2001.
The Company was able to sustain good manufacturing margins, even
with significantly lower revenues, due to implementation of a
number of cost saving initiatives. Some of these measures
included: production furloughs, receiving discounts for early
payment of payables, reduced raw material pricing and the closing
of most facilities during the last week of the year.
Selling and administrative expenses decreased slightly in total
dollars, but increased as a percentage of sales from 16% in 2000
to 18% in 2001. The increase in percentage of sales is primarily
due to the decreased sales volume experienced by the Company.
Acquisition/Restructuring costs for 2001 were $2.0 million. On
February 7, 2001, the Company entered into a definitive agreement
to purchase the Advanced Dielectric Division (ADD) of Tonoga,
Inc. (commonly known as Taconic), which operates facilities in
Petersburgh, New York and Mullingar, Ireland. On May 11, 2001,
the Company announced that active discussions with Taconic to
acquire the ADD business had been suspended and it was not
anticipated that the acquisition would occur. Accordingly, $1.5
million in costs associated with this potential acquisition were
written off during the second quarter. On October 23, 2001, the
Company terminated the acquisition agreement.
16
F-4
On October 24, 2001, a breach of contract lawsuit was filed
against the Company in the United States District Court for the
District of Connecticut seeking damages in the amount of $25
million or more, as well as specific performance and attorneys'
fees (Tonoga, Ltd., d/b/a Taconic Plastics Ltd., Tonoga, Inc.,
Andrew G. Russell, and James M. Russell v. Rogers Corporation).
The complaint alleges that the Company breached its agreement to
purchase Taconic's Advanced Dielectric Division. The Company
believes several conditions precedent to a closing contained in
the relevant agreement were not satisfied by Taconic, and that
the litigation is without merit. The Company intends to
vigorously defend the lawsuit.
In the second quarter of 2001, the Company incurred a
restructuring charge in the amount of $500,000. This amount
primarily consists of $300,000 in severance benefits for the
termination of 19 employees in the Printed Circuit Materials
segment and $200,000 in costs associated with the merging of two
business units within the segment. All 19 of these employees
were terminated during the second quarter. The balance in the
accrual at December 30, 2001 was $25,000.
Research and development (R&D) expenses were $12.6 million in
2001 compared to $12.5 million for the same period in 2000. This
increase is due to the cost of technical employees added in 2000.
Such spending is being maintained so as to preserve the R&D
infrastructure to keep the Company well positioned for growth in
the future.
Operating Income - 2000 over 1999
Manufacturing margins rose from 29% in 1999 to 33% in 2000. The
2000 margins continued the improvement started in 1999 and were
the best in the Company's history. This increase was due to a
continuing effort to install new, more productive equipment and
to increase the utilization of existing equipment. Additionally,
in 1999 manufacturing profit was held down by the lower margins
from sales of FLEX-I-MID materials to HTI. These materials were
produced for the Company by Mitsui Chemicals, Inc., in Japan, and
carried a lower margin than materials that the Company
manufactures. In 2000, these sales were made directly by PLS.
Selling and administrative expenses, as a percentage of sales,
increased slightly from 15% in 1999 to 16% in 2000. A higher
level of information systems expenses was incurred to improve
performance for all users. Also incurred in 2000 were one-time
licensing and consulting costs. The Company continued to
strengthen its global sales and marketing capabilities
particularly through expansion. Rogers Korea, Inc., a sales and
marketing office with warehousing facilities, officially opened
in Seoul, Korea, in the second quarter of 2000. Rogers
Technologies Singapore, Inc., a sales and marketing office with
warehousing facilities, officially opened in Singapore in the
third quarter of 2000. The local presence provided by these
operations allows the Company to more effectively service its
growing customer base in these areas.
Research and development expenses were $12.5 million in 2000
compared to $10.8 million for the comparable period in 1999, a
16% increase. This reflects an increase in technical staff that
allowed the Company to continue improvement in core capabilities,
while also placing greater emphasis on new product development.
Other Income and Expense - 2001 over 2000
Net interest income for 2001 was lower than 2000 due to lower
rates earned on excess available cash and less interest being
capitalized. The amount of capitalized interest for 2000 was
approximately $400,000 higher than in 2001.
Other income less other charges increased slightly from 2000 to
2001. Commission income from PLS and joint venture income earned
was $2.5 million less in 2001. This decrease was more than
offset by an increase in royalty income, a one-time licensing
fee, and changes in various reserves.
Other Income and Expense - 2000 over 1999
Net interest income increased approximately $400,000 from 1999 to
2000. The decrease in interest expense accounted for most of
this change. This resulted from a reduction of long-term debt in
2000 and higher 1999 interest expense due to a penalty associated
with the early payment of debt.
Other income less other charges increased $6.2 million from 1999
to 2000. Joint venture income and commission income earned from
the Company's joint ventures accounted for this increase. The
income from the newly formed PLS joint venture was included in
manufacturing profit in 1999.
Income Taxes
The effective tax rates were 25% in 2001, 29% in 2000, and 28% in
1999. In 2001, the tax rate benefited primarily from foreign tax
credits, research and development credits, and nontaxable foreign
sales income. In 2000 and 1999, the Company had similar benefits
reducing the effective tax rate. In 1999, the Company also
incurred current taxes on its foreign joint venture income that
had an offsetting decrease to deferred taxes due to the related
reduction in the valuation allowance deemed to be necessary by
the Company under FAS No. 109. The deferred tax valuation
allowance is recorded on the net deferred tax asset associated
with its foreign joint venture income.
17
F-5
Backlog
The Company's backlog of firm orders was $23.3 million at
December 30, 2001 and $31.8 million at December 31, 2000. The
decrease is due primarily to reduced orders.
Segment Sales and Operations
Sales of High Performance Foams decreased 16% in 2001. This same
segment increased 15% and 11% in 2000 and 1999, respectively.
While foam revenues continued to be lower in the second half of
2001, sales of these materials into cellular phone handsets began
to rebound with the elimination of the inventory overhang that was
present throughout the first half of the year. The increases in
both 1999 and 2000 were due to significantly higher sales of both
urethane and silicone foam materials, particularly for wireless
communications and computer applications.
Operating Income from High Performance Foams was $4.6 million in
2001, $11.2 million in 2000, and $7.8 million in 1999. The
decrease in operating income in 2001 was primarily due to the
lower level of sales. Improvement in manufacturing yields and the
higher sales volume resulted in the significant improvement from
1999 to 2000.
Sales of Printed Circuit Materials decreased 12% in 2001 and 5% in
2000, while there was an increase of 8% in 1999. If 1999 sales
data were restated to exclude the sales to HTI, the sales increase
would have been 34% in 2000. Due to the widespread economic
downturn in 2001, sales into the wireless area were lower than in
2000. Worldwide sales of high frequency circuit materials far
exceeded the Company's expectations in 2000. Rogers has become a
leading supplier of such materials to the computer and wireless
communications markets. Wireless communication base stations,
satellite television receivers, and wireless communication
antennas are the current primary uses for these materials.
Worldwide sales of high frequency circuit materials had also set a
record in 1999. Sales to the wireless communications market were
particularly strong. This was significantly offset by the
disappointing sales levels of flexible materials that the Company
manufactures, reflecting the softness in demand being experienced
by its major customer for such materials. Sales of FLEX-I-MID
adhesiveless laminate materials to HTI dropped sharply in the
fourth quarter of 1999 as this customer continued to work off its
inventories resulting in a smaller year-over-year increase.
Printed Circuit Materials operating income was $6.2 million in
2001, $12.2 million in 2000, and $7.5 million in 1999. The lower
level of sales was the major factor leading to the decrease in
2001. Additionally, the restructuring charge of $500,000 was
included in this segment in 2001. It is expected that this
initiative will save in excess of $1.0 million annually.
Significantly higher sales, excluding HTI sales now made by PLS,
coupled with more efficient manufacturing facilities, led to the
increase in operating income in 2000. New equipment has produced
immediate process improvements with enhanced product flow and
efficiency and increased utilization of equipment has also
contributed to the improvement.
Sales of Polymer Materials and Components decreased 12% in 2001
and 2% in 2000, respectively, but increased by 25% in 1999.
The sales decrease in 2001 was due to the general economic climate,
not to a known decrease in market share. The increase in 1999 was
primarily attributable to the acquisition of most of the
engineered molding compounds business of Cytec Fiberite in January
1999. The dampening sleeve business was purchased from Imation
Corp. in late 1998 and also contributed to the sales increase in
1999.
Polymer Materials and Components operating income was $2.3
million, $6.1 million, and $9.1 million for 2001, 2000, and 1999,
respectively. Lower sales, especially those with high
contribution margins, were the cause of the decrease in operating
income in both 2001 and 2000. Additionally, the last phase of the
transition of the Cytec Fiberite business was completed in 2001,
which involved start-up costs. The purchase of the dampening
sleeve business and the engineered molding compounds business
resulted in significant contributions to the Company's performance
in 1999.
Joint Ventures
Durel Corporation:
Durel Corporation, the Company's 50% owned joint venture with 3M
in electroluminescent lamps, recorded sales in 2001 which were
20% lower than in 2000. New cell phone models featuring Durel
products, whose introduction had been delayed during the first
nine months of 2001 due to an inventory glut, started to ramp
into production in the fourth quarter of 2001. Durel's profits
for 2001 were also lower but were higher in the fourth quarter
than in all of the previous three quarters of 2001 combined.
On June 28, 2001, Durel was informed that the patent infringement
lawsuit it filed against Osram Sylvania Inc., which had been
decided in Durel's favor in February 2000, had been reversed by
the U.S. Court of Appeals. In December 2001, Durel and Osram
Sylvania agreed to a worldwide cross-licensing of the disputed
patents and an agreement not to assert future patents against
either company's existing products.
Durel experienced record sales in 2000 and, along with lower
expenses associated with the Osram Sylvania litigation, had a
significant increase in profitability. Continued penetration of
the cellular telephone handset market drove the growth during
2000. Durel dou-
18
F-6
bled manufacturing capacity in 2000. To meet the
demand from this rapidly growing market, Durel also began
construction of a 75,000 square foot addition that was completed
in 2001.
Durel achieved 50% growth in sales in 1999 that included late-
year contracts from two of the largest manufacturers of cellular
telephones. This growth was driven by a more than 130% increase
in sales of Durel's products for wireless telephones and other
handheld electronic devices. These sales gains helped Durel
achieve record earnings in 1999 despite a very significant
increase in legal costs associated with the patent infringement
lawsuit.
Rogers Inoac Corporation (RIC):
Sales of RIC, the Company's joint venture with Inoac Corporation
in Japan, decreased 14% from 2000 to 2001 due to general economic
conditions. In January 2002, RIC sold its Endur product line to
the Company's joint venture partner, Inoac Corporation. The sale
allows the joint venture to focus on high performance foams,
which is consistent with the Company's strategy. No significant
earnings impact will result from this transaction.
Profits in 2000 were significantly higher than in 1999 due to
increasing sales of urethane foams for handheld electronic
devices and general overall economic strength in Southeast Asia.
In 1999, RIC was successful in moving PORON materials into more
industrial applications.
Polyimide Laminate Systems, LLC (PLS):
Sales from our PLS joint venture were 17% higher in 2001. In
2001 and 2000, this product, which is manufactured by Mitsui
Chemicals, Inc. under a Rogers' technology license, was sold by
PLS. Since PLS is now making these sales directly, Rogers' share
of such sales is reported in Combined Sales rather than in net
sales. In 1999, Rogers' net sales included $30.7 million of
sales of a specialty flexible circuit board laminate to HTI.
Rogers Chang Chun Technology Co., Ltd. (RCCT):
On June 29, 2000, Rogers signed a joint venture agreement with
Chang Chun Plastics Co., Ltd. (CCP), a $1.1 billion Taiwanese
specialty chemical manufacturer. Combining Rogers' leading-edge
flexible circuit materials technology with CCP's outstanding
manufacturing capabilities and long established market position
in Taiwan will enable the joint venture to be a leading flexible
circuit materials supplier in Taiwan. This joint venture had a
smooth and successful start-up of its manufacturing operations
during the fourth quarter of 2001 and should begin shipping
production materials and generating sales early in the second
quarter of 2002.
QUARTERLY RESULTS OF OPERATIONS
- ----------
(Dollars in Thousands, Except Per Share Amounts)
Basic Diluted
Net Manufacturing Net Net Income Net Income
Quarter Sales Profit Income Per Share Per Share
- ----------------------------------------------------------------------------
2001 Fourth $ 48,094 $ 14,611 $ 3,900 $ .25 $ .24
Third 51,031 15,792 3,219 .21 .20
Second 53,162 15,801 1,894 .12 .12
First 63,750 20,654 6,721 .44 .42
- ----------------------------------------------------------------------------
2000 Fourth $ 60,952 $ 20,591 $ 7,434 $ .49 $ .47
Third 62,357 20,695 6,936 .46 .44
Second 61,266 20,072 6,442 .43 .41
First 63,640 21,147 5,908 .40 .37
- ----------------------------------------------------------------------------
The results of operations in the fourth quarter of 2001 include a benefit
of approximately $1 million resulting from an adjustment to the Company's
effective income tax rate.
Acquisitions
As of December 31, 2001 (fiscal year 2002), the Company acquired
much of the intellectual property and most of the polyolefin foam
product lines of Cellect LLC. This polyolefin foam business will
be integrated into Rogers
19
F-7
High Performance Foams and later combined with an existing Rogers'
business in Illinois. It is expected that this new business will be
modestly accretive to earnings in 2002. Initial market response to
this purchase has been very positive.
Effective January 1999, the Company acquired the engineered
molding compounds business of Cytec Fiberite. This acquisition
has added capabilities that have enhanced the Company's moldable
composites business.
Sources of Liquidity and Capital
Net cash provided by operating activities amounted to $39.0
million in 2001, $23.7 million in 2000 and $32.5 million in 1999.
The year-to-year increase from 2000 to 2001 was due primarily to
the lower level of accounts receivable and a company-wide
initiative put in place to reduce inventory levels. The decrease
from 1999 to 2000 was due to a $6.0 million loan granted to one
of the Company's unconsolidated joint ventures and a higher level
of inventories, offset partially by increased profits and
depreciation. Inventories were increased to support higher
customer demand and in particular at the Moldable Composites
Division where inventory was increased in anticipation of the
final move of the Cytec Fiberite equipment from Winona, Minnesota
to Manchester, Connecticut.
Capital expenditures totaled $18.0 million in 2001, $22.7 million
in 2000 and $13.6 million in 1999. Despite the economic climate,
the Company continued to invest in its long-term future. The
Company completed the construction of a building addition in
Arizona that was started in 2000. Additional press capacity for
high frequency materials was installed late in 2001 and will come
on line early in 2002. The Company has slowed the qualification
of the new Ghent, Belgium high frequency circuit laminate
facility to match the current needs of the marketplace. This
facility will be brought on line as needs warrant. The increase
in expenditures in 2000 was directly related to higher sales of
products manufactured by the Company. To satisfy this growing
demand, the Company completed a 50% capacity increase in Arizona
for its RO4000 high frequency circuit materials. The Company
began construction of the building addition in Arizona and
acquired additional acreage in both Arizona and Ghent, Belgium in
2000. In 1999 capital expenditures were at more traditional
levels and no major expansion projects were initiated and
completed during the year.
Cash generated from the Company's operating activities exceeded
capital spending in all three years presented, and spending was
financed through these internally generated funds.
The Company has an unsecured multi-currency revolving credit
agreement with two domestic banks and can borrow up to $75
million, or the equivalent in certain other foreign currencies.
Amounts borrowed under this agreement are to be paid in full by
December 8, 2005. The rate of interest charged on outstanding
loans can, at the Company's option and subject to certain
restrictions, be based on the prime rate or at rates from 50 to
112.5 basis points over a Eurocurrency loan rate. The spreads
over the Eurocurrency rate are based on the Company's leverage
ratio. Under the arrangement, the ongoing commitment fee varies
from 30.0 to 37.5 basis points of the maximum amount that can be
borrowed, net of any outstanding borrowings and the maximum
amount that beneficiaries may draw under outstanding letters of
credit. There were no borrowings pursuant to this arrangement at
December 30, 2001. The loan agreement contains restrictive
covenants primarily related to total indebtedness, interest
expense, capital expenditures and net worth. The Company is in
compliance with these covenants.
The Company had designated 390.2 million Belgian francs as a
hedge of its net investment in a foreign subsidiary in Belgium
($9.1 million at December 31, 2000). On July 6, 2001, the Company
repaid the debt at the then current Belgian franc rate, amounting
to $8.2 million. During the years 2001 and 2000, the Company
recorded $900,000 and $600,000, respectively, of net pretax gains
related to the hedge in other comprehensive income in
shareholders' equity.
In September 2001, Rogers NV, a Belgian subsidiary of the
Company, signed an unsecured revolving credit agreement with a
European bank. Under this arrangement Rogers NV now can borrow
up to 6,200,000 Euro. Amounts borrowed under this agreement are
to be repaid in full by May 1, 2005. The rate of interest
charged on outstanding loans is based on the Euribor plus 25
basis points. At December 30, 2001, Rogers NV had borrowings of
1,487,361 Euro ($1,315,000) under this agreement.
As of December 30, 2001, the Company had loaned $5.0 million to
Durel Corporation. Borrowings must be made in increments of
$250,000, may not exceed $8.0 million in the aggregate, will be
at the prime rate of interest, and any amounts repaid by Durel
may subsequently be re-borrowed during the term of the loan
arrangement. The arrangement expires in September of 2002,
unless extended at the sole discretion of the Company.
At December 30, 2001, the Company had indirectly guaranteed 50%
of a loan entered into by Durel. The Company's proportionate
share of the outstanding principal under this guarantee was $3.9
million at December 30, 2001 and $4.3 million at December 31,
2000. The Company believes that Durel will be able to meet its
obligations under this financing arrangement and accordingly no
payments will be required and no losses will be incurred under
this guarantee.
Management believes that over the next twelve months, internally
generated funds plus available lines of credit will be sufficient
to meet the regular needs of
20
F-8
the business. The Company continually reviews and assesses its
lending relationships.
Dividend Policy
In 1992, the Board of Directors voted to discontinue cash
dividends. At present, the Company expects to maintain a policy
of emphasizing longer-term growth of capital rather than immediate
dividend income.
CAPITAL STOCK MARKET PRICES
- ----------
The Company's capital stock is traded on the New York Stock Exchange.
The following table sets forth the composite high and low closing
prices during each quarter of the last two years on a per share basis.
2001 2000
- --------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------
Fourth $ 35.80 $ 27.80 $ 45.25 $ 29.06
Third 31.30 24.95 38.94 31.38
Second 35.60 23.90 39.50 29.84
First 42.00 31.75 35.25 18.03
Environmental Activities
The Company is subject to federal, state, and local laws and
regulations concerning the environment and is involved in the
following matters: 1) the Company is currently involved as a
potentially responsible party (PRP) in two Superfund sites; 2)
the Company is working with consultants and the Connecticut
Department of Environmental Protection to monitor the area where
remediation work was completed to address historic
polychlorinated biphenyl (PCB) contamination at its Woodstock,
Connecticut facility; and 3) The Company and the United States
Environmental Protection Agency have been involved in a dispute
about the alleged improper disposal of PCB's by the Company. The
Company does not believe that the outcome of any of the above
matters will have a material adverse effect on its financial
position nor has the Company had any material recurring costs or
capital expenditures relating to environmental matters, except as
disclosed in the Notes to Consolidated Financial Statements.
Refer to Note I of the Notes to Consolidated Financial
Statements for a discussion of the above matters and the related
costs.
New Accounting Standards
Refer to Note A of the Notes to Consolidated Financial Statements
for a discussion of the new accounting pronouncements and the
potential impact to the Company's consolidated results of
operations and consolidated financial position.
Critical Accounting Policies
Management is required to make certain estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are based on
accounting policies that have been consistently applied and are
in accordance with accounting principles generally accepted in
the United States. The policies that are deemed critical are
those that could have different valuations if another methodology
was used. The Company deems, however, that appropriate reserves
have been established and other methodologies would not yield
results that are materially different. These critical accounting
policies are listed below.
Allowance for Doubtful Accounts: In circumstances where the
Company is made aware of a specific customer's inability to meet
its financial obligations, a reserve is established. The
accounts that have balances outstanding for more than 60 days are
individually evaluated and appropriate reserves are established.
The remainder of the reserve is general in nature and is based
upon historical trends and current market assessments.
Inventories: The Company maintains an obsolescence and slow-
moving reserve. Products and materials that are specifically
identified as obsolete are fully
21
F-9
reserved. Most products that
have been held in inventory greater than one year are fully
reserved unless there are mitigating circumstances. The
remainder of the reserve is general in nature and fluctuates with
market conditions, design cycles and other economic factors.
In addition, the Company values certain inventories using the
last-in, first-out (LIFO) method. Accordingly, a LIFO valuation
reserve is calculated using the link chain index method and is
maintained to properly value these inventories.
Investments in Unconsolidated Joint Ventures: The Company
accounts for its investments in and advances to unconsolidated
joint ventures, all of which are 50% owned, using the equity
method. This method was chosen due to the level of investment
and because the Company has the ability to exercise significant
influence, but not control, over the joint ventures' operating
and financial policies.
Market Risk
The Company is exposed to market risk from changes in interest
rates and foreign exchange rates. The Company does not use
derivative instruments for trading purposes. The Company
monitors foreign exchange and interest rate risks and manages
such risks on specific transactions. The risk management process
primarily uses analytical techniques and sensitivity analysis.
The Company has obligations where the interest rate, although not
fixed, is relatively low compared to the prime interest rate. An
increase in interest rates would not significantly increase
interest expense due to the current makeup of the Company's debt
obligations. Because of the size and structure of these current
obligations, a 100 basis point increase in the prime interest rate
would not result in a material change in the Company's interest
expense or in the fair value of the debt obligations. The fair
value of the Company's investment portfolio or the related
interest income would not be significantly impacted by either a
100 basis point increase or decrease in interest rates due mainly
to the size and short-term nature of the Company's investment
portfolio and the relative insignificance of interest income to
consolidated pretax income, respectively.
The Company's largest foreign currency exposure is against the
Euro, primarily because of its investments in its ongoing
operations in Belgium. Exposure to variability in currency
exchange rates is mitigated, when possible, through the use of
natural hedges, whereby purchases and sales in the same foreign
currency and with similar maturity dates offset one another. The
Company can initiate hedging activities by entering into foreign
exchange forward contracts with third parties when the use of
natural hedges is not possible or desirable.
Forward-Looking Information
Certain statements in this Management's Discussion and Analysis
section and in other parts of this annual report may constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results or performance of
the Company to be materially different from any future results or
performance expressed or implied by such forward-looking
statements. Such factors include changing business, economic, and
political conditions both in the United States and in foreign
countries; increasing competition; changes in product mix; the
development of new products and manufacturing processes and the
inherent risks associated with such efforts; changes in the
availability and cost of raw materials; fluctuations in foreign
currency exchange rates; and any difficulties in integrating
acquired businesses into the Company's operations. Such factors
also apply to the Company's joint ventures where the Company is
able to exercise significant influence, but not control, over
such 50/50 operations. Additional information about certain
factors that could cause actual results to differ from such
forward-looking statements include the following:
Technology and Product Development
The Company's future results depend upon its ability to continue
to develop new products and improve its product and process
technologies. The Company's success in this effort will depend
upon the Company's ability to anticipate market requirements in
its product development efforts, the acceptance and continued
commercial success of the end user products for which the
Company's products have been designed, and the Company's ability
to adapt to technological changes and to support established and
emerging industry standards.
In particular, the wireless communications market is
characterized by frequent new product introductions, evolving
industry standards, rapid changes in product and process
technologies, price competition and many new potential
applications. The products that the Company manufactures and
sells to the wireless communications market are relatively new.
To be successful in this area, the Company must be able to
consistently manufacture and supply high frequency circuit
materials that meet the demanding expectations of customers for
quality, performance and reliability at competitive prices. The
timely introduction by the Company of such new products could be
affected by engineering or other development program slippages
and problems in effectively and efficiently increasing production
to meet customer needs. In addition, the market for computers is
characterized by rapid technological change, significant pricing
pressures and short
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lead times. Because the Company manufactures
and sells its own circuit materials to meet the needs of this
market, the Company's results may be affected by these factors.
Volatility of Demand
The computer industry and the wireless communications industry
have historically been characterized by wide fluctuations in
product supply and demand. From time to time, the industries have
experienced significant downturns, often in connection with, or
in anticipation of, maturing product cycles and declines in
general economic conditions. These downturns have been
characterized by diminished product demand, production over-
capacity and accelerated price erosion. The Company's business
may in the future be materially and adversely affected by such
downturns.
Environmental Litigation
The Company is currently engaged in proceedings involving two
Superfund sites, as a participant in a group of potentially
responsible parties. The Company's estimation of environmental
liabilities is based on an evaluation of currently available
information with respect to each individual situation, including
existing technology, presently enacted laws and regulations, and
the Company's past experience in the addressing of environmental
matters. Although current regulations impose potential joint and
several liability upon each named party at any Superfund site,
the Company expects its contribution for cleanup to be limited
due to the number of other potentially responsible parties, and
the Company's share of the contributions of alleged waste to the
sites, which the Company believes is de minimis. However, there
can be no assurances that the Company's estimates will not be
disputed or that any ultimate liability concerning these sites
will not have a material adverse effect on the Company.
Capital Expenditures
The level of anticipated 2002 capital expenditures and the
anticipated benefits to be derived from such expenditures could
differ significantly from the forecasted amounts due to a number
of factors including, but not limited to: changes in design,
differences between the anticipated and actual delivery dates for
new machinery and equipment, problems with the installation and
start-up of such machinery and equipment, delays in the
construction or modifications of buildings and delays caused by
the need to address other business priorities, as well as changes
in customer demand for the products the Company manufactures.
Similar risks are inherent in the Company's joint venture
operations.
Raw Materials
The Company from time to time must procure certain raw materials
from single or limited sources that expose the Company to
vulnerability to price increases and the varying quality of the
material. In addition, the inability of the Company to obtain
these materials in required quantities could result in
significant delays or reductions in its own product shipments.
In the past, the Company has been able to purchase sufficient
quantities of the particular raw material to sustain production
until alternative materials and production processes could be
requalified with customers. However, any inability of the
Company to obtain timely deliveries of materials of acceptable
quantity or quality, or a significant increase in the prices of
materials, could materially and adversely affect the Company's
operating results.
Foreign Sales
The Company's international sales involve risks, including
imposition of governmental controls, currency exchange
fluctuation, potential insolvency of international customers,
reduced protection for intellectual property rights, the impact
of recessions in foreign countries, political instability, and
generally longer receivables collection periods, as well as
tariffs and other trade barriers. There can be no assurance that
these factors will not have an adverse effect on the Company's
future international sales, and consequently, on the Company's
business, operating results and financial condition.
Acquisitions
Acquisitions are an important component of the Company's growth
strategy. Accordingly, the Company's future performance will
depend on its ability to correctly identify appropriate
businesses to acquire, negotiate favorable terms for such
acquisitions and then effectively and efficiently integrate such
acquisitions into the Company's existing businesses. There is no
certainty that the Company will succeed in such endeavors.
Other Information
The foregoing list of important factors does not include all such
factors that could cause actual results to differ from forward-
looking statements contained in this report, nor are such factors
necessarily presented in order of importance.
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