MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Rogers Corporation is a global enterprise with manufacturing facilities located
in the United States, Europe, China and Korea and sales offices in the United
States, Europe, China, Japan, Hong Kong, Taiwan, Korea and Singapore. The
Company also has joint ventures with two Japanese Companies, Inoac Corporation
and Mitsui Chemicals, Inc., and Chang Chun Plastics, Co., Ltd in Taiwan.
The Company's revenues and cash flows are driven by the development,
manufacturing, and distribution of specialty materials that are focused on the
communications, computer, imaging, transportation and consumer markets.
These materials based businesses are guided by clearly developed strategic
business plans for profitable growth. The current focus is on worldwide markets
for printed circuit materials, high performance foams, and polymer materials and
components. An increasingly large percentage of these materials 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's future market opportunities and business growth are dependent in
part upon its ability to drive research and development efforts to favorably
position itself in emerging markets and commercialize new materials to enable
next generation technologies. In this regard, the Company is focused on such
markets as third generation ("3G") cellular telephone base stations;
feature-rich cellular telephones; near object detection and adaptive cruise
control technology for the automotive market; and the satellite television
market driven by the introduction of new three and four room dish packages. The
Company faces many challenges to successfully take advantage of its business
plan. These challenges include staying in the forefront of new and emerging
technologies through research and development and in managing manufacturing
capacity due to volatility in its target markets, as evident by the recent surge
in the Company's printed circuit materials business. The Company is addressing
these challenges by its continuing commitment of resources to research and
development with a strategic target of investing 6% of sales annually and by
establishing new manufacturing facilities in Carol Stream, Illinois and Suzhou,
China, expanding its Belgium manufacturing facilities, and leveraging available
capacity with its joint ventures. The Company will continue to focus on these
opportunities and attempt to favorably position itself in accordance with its
strategic business plan.
The Company uses a 52- or 53-week fiscal year calendar ending on the Sunday
closest to the last day in December of each year. Fiscal 2003 was a 52-week year
ending on December 28, 2003. Fiscal 2004 is a 53-week year ending on January 2,
2005. The Company will include the extra week in its first quarter ending April
4, 2004.
1
Results of Operations
- ------------
2003 vs. 2002:
------------ --------------- ---------------- -----------------
(Dollars in Millions) 2003 2002 Change % Change
------------ --------------- ---------------- -----------------
Net Sales $243.3 $219.4 $23.9 11%
Manufacturing Margins 32.3% 31.6% 0.7% 2%
Selling and Administrative 43.3 39.3 4.0 10%
Research and Development 13.7 13.6 0.1 1%
Operating Income 21.6 14.2 7.4 52%
Equity Income in
Unconsolidated Joint
Ventures 6.6 8.7 (2.1) (24)%
Other Income Less Other
Charges 6.6 2.2 4.4 200%
Sales
Net sales increased by 11% to $243.3 million in 2003 from $219.4 million in
2002. 2002 net sales included $30.3 million from the Moldable Composites
Division ("MCD") that was divested in 2002. Excluding MCD, net sales increased
$54.2 million, or 29%, from 2002 to 2003. The major cause of the increase was
the growth in sales in the Printed Circuit Materials ($31.8 million, or 39%) and
High Performance Foams ($4.4 million, or 7%) segments, and from the fourth
quarter acquisition of the 50% of Durel Corporation ("Durel") that the Company
did not already own ($20.8 million of sales included in consolidated net sales
during the year ended December 28, 2003). The growth in Printed Circuit
Materials stemmed mainly from increased sales of flexible circuit materials into
the cellular and handheld mobile device markets and high frequency materials
into the satellite television and base station markets. The increase in the High
Performance Foams segment was due to increased sales of urethane foams used in
various industrial applications.
Manufacturing Margins
Manufacturing margins increased from 31.6% in 2002 to 32.3% in 2003. The impact
of higher revenues in Rogers' higher margin businesses coupled with productivity
improvements continues to drive stronger manufacturing margins; however, the
gains have been somewhat offset by the continued start-up investment associated
with the Company's plant openings in Suzhou, China and Carol Stream, Illinois.
The start-up costs will most likely continue at varying levels through the
second quarter of 2004.
Selling and Administrative Expenses
Selling and administrative expenses increased from $39.3 million in 2002 to
$43.3 million in 2003, but remained approximately the same as a percentage of
net sales, at 18%. This increase was driven primarily by the inclusion of costs
for the recently acquired Durel business ($1.0 million), increased support of
the Asian operations ($2.8 million), and higher incentive compensation expenses
($1.1 million).
2
Restructuring Charges
In 2002, the Company incurred restructuring charges of approximately $2.2
million. These charges were associated solely with the severance benefits for 62
employees of which 48 had been terminated prior to the end of fiscal 2002. The
remaining employees were notified prior to year-end and subsequently terminated
at various dates in 2003. These workforce reductions were initiated in order to
appropriately align resources with the Company's business requirements, given
varied ongoing operational initiatives, including non-strategic business unit
consolidations, plant rationalizations, outsourcing low value production and/or
moving it to lower production cost environments, and support function
reorganizations to streamline administrative activities. As of December 28,
2003, there was no balance remaining in the restructuring accrual as all of the
accrual was used for its intended purpose.
Research and Development
Research and development expenses in 2003 were consistent with 2002. As a
percentage of sales, 2003 costs are slightly lower when compared to 2002, 5.6%
to 6.2%, respectively. This decrease is due primarily to the timing of
developmental projects. The Company's strategic plan is to invest an average of
6% of sales annually into research and development and it is expected that
future expenditures will be consistent with this targeted investment level,
particularly with the planned ramp up for the recent Durel acquisition and the
start-up of the new polyolefin operations in Carol Stream.
Equity Income in Unconsolidated Joint Ventures
Equity income in unconsolidated joint ventures decreased $2.1 million from $8.7
million in 2002 to $6.6 million in 2003. The decrease was primarily due to the
acquisition of Durel, the Company's former 50% joint venture, and its inclusion
in the Company's consolidated results in the fourth quarter of 2003 (Durel's
equity income in the fourth quarter of 2002 was approximately $2.0 million).
Equity income from the Company's joint ventures other than Durel remained
reasonably consistent from 2003 to 2002. The operations and the performance of
the joint ventures are described further in the "Joint Ventures" section below.
Other Income Less Other Charges
Other income less other charges increased from $2.2 million in 2002 to $6.6
million in 2003. This increase was primarily due to increased royalties,
principally associated with the intellectual property license entered into in
connection with the divestiture of MCD ($3.4 million).
Income Taxes
The effective tax rate was 25% in 2003 and 2002. In 2003, as in 2002, the
effective tax rate continued to benefit from foreign tax credits, research and
development credits, and nontaxable foreign sales income.
3
In December 2002, the Belgian government enacted a tax rate decrease effective
for years ending in 2003 or later. All ending deferred tax balances attributable
to Belgian operations were modified from the 40.17% tax rate to the new 33.99%
tax rate for U.S. GAAP purposes to reflect this change. The effect of this
change on 2003 earnings of Belgian operations was approximately a $284,000
decrease in current tax expense.
The Company had used the equity method of accounting for the profit and loss of
its 50% ownership of Durel Corporation prior to September 30, 2003. A deferred
tax liability was provided on historical earnings annually. Prior to the
acquisition by Rogers of the remaining 50% of Durel's stock, Durel, as
anticipated, paid a $3 million dividend to Rogers that qualified for the
dividend received deduction benefit. Therefore, 80% of the dividend was not
subject to U.S. tax and the corresponding deferred tax liability for the
distribution of equity was eliminated, resulting in a net tax benefit of
$840,000. Also, in conjunction with the acquisition accounting for the purchase,
the remaining deferred tax liability for the undistributed earnings of Durel was
accounted for as a decrease to goodwill as the deferred tax liability was no
longer required.
It is the Company's policy that no U.S. taxes are provided on undistributed
earnings of consolidated foreign subsidiaries because such earnings are expected
to be permanently reinvested.
The Company provides deferred taxes for the undistributed earnings of its
Japanese high performance foams joint venture. The net deferred tax asset for
foreign tax credits available in excess of the expected tax on the undistributed
income is entirely offset by a corresponding valuation allowance due to the
future uncertainty of the recognition of such credits as they may be limited
under the U.S. tax code.
The Company also claims a U.S. benefit for nontaxable foreign sales income
as allowed under the current extraterritorial income exclusion ("ETI"). The
World Trade Organization has upheld a challenge of this directive by the
European Union and the U.S. is currently considering alternatives to replace it.
Without knowing the outcome, the impact this issue will have on future earnings
is uncertain. If ETI is repealed and new legislation is enacted that does not
replace the ETI benefit to the Company, the lost benefit may adversely affect
the Company's overall effective tax rate and therefore earnings. The decrease in
the effective tax rate attributable to this item is 3.5% and 4.5% for 2003 and
2002, respectively.
Backlog
The Company's backlog of firm orders was $48.3 million at December 28, 2003 and
$21.7 million at December 29, 2002. The increase in 2003 is due primarily to the
acquisition of Durel and growth in orders in the Printed Circuit Materials
segment.
2002 vs. 2001:
--------------- -------------- ----------------- -----------------
(Dollars in Millions) 2002 2001 Change % Change
--------------- -------------- ----------------- -----------------
Net Sales $219.4 $216.0 $3.4 2%
Manufacturing Margins 31.6% 30.9% 0.7% 2%
4
Selling and Administrative 39.3 39.2 0.1 0%
Research and Development 13.6 12.6 1.0 8%
Operating Income 14.2 13.0 1.2 9%
Equity Income in
Unconsolidated Joint
Ventures 8.7 3.1 5.6 181%
Other Income Less Other
Charges 2.2 4.8 (2.6) (54)%
Sales
Net sales were $219.4 million in 2002, up from $216.0 million in 2001. The major
cause of the increase in revenue was due to the increase in sales in the High
Performance Foams segment mitigated by overall decreases in the Company's other
two business segments. The increase in sales in High Performance Foams stemmed
from increased sales of urethane foam products in the industrial and printing
markets and the polyolefin foam acquisition. The decreases in the other two
segments were due, in part, to the continued softness in the wireless
infrastructure market and the divestiture of MCD in November 2002.
Manufacturing Margins
Manufacturing margins increased from 30.9% in 2001 to 31.6% in 2002. This was
due primarily to the continued cost saving initiatives implemented in 2001 and
2002. Some of these cost saving measures included: Six Sigma, lean
manufacturing, raw material cost reductions, business unit consolidations, plant
rationalizations, outsourcing low value production and/or moving it to lower
production cost environments, and workforce reductions.
Selling and Administrative
Selling and administrative expenses remained approximately the same in both
total dollars and as a percentage of sales, at 18%.
Restructuring
In 2002 the Company incurred restructuring charges of $2.2 million. These
charges were associated solely with the severance benefits for 62 employees of
which 48 had been terminated prior to year-end. The remaining employees were
notified prior to year-end. The separation date of these residual employees
occurred on varied dates in 2003. These workforce reductions were initiated in
order to appropriately align resources with the Company's business requirements,
given varied ongoing operational initiatives, including non-strategic business
unit consolidations, plant rationalizations, outsourcing low value production
and/or moving it to lower production cost environments, and support function
reorganizations to streamline administrative activities.
Restructuring charges in 2001 totaled $500,000 that related primarily to
severance benefits for employees terminated within the Printed Circuit Materials
segment, which stemmed from the merging of two business units within the
segment.
5
Research and Development
Research and development expenses were $13.6 million in 2002 compared to $12.6
million in 2001. This increase was due to the cost of additional technical
personnel commensurate with the continuing increased focus on new product
development.
Equity Income in Unconsolidated Joint Ventures
Equity income in unconsolidated joint ventures increased $5.6 million from $3.1
million in 2001 to $8.7 million in 2002. The increase was due to a significant
increase in joint venture income, primarily from Durel (as described further in
the joint venture section below).
Other Income Less Other Charges
Other income less other charges decreased to $2.2 million in 2002 from $4.8
million in 2001. This decrease was largely due to lower royalty income in 2002.
Income Taxes
The effective tax rate was 25% in both 2002 and 2001. In 2002, as in 2001, the
effective tax rate continued to benefit from foreign tax credits, research and
development credits, and nontaxable foreign sales income.
In December 2002, the Belgian government enacted a tax rate decrease effective
for years ending in 2003 or later. All ending deferred tax balances in 2002
attributable to Belgian operations were modified from the 40.17% tax rate to the
new 33.99% tax rate for U.S. GAAP purposes to reflect this change.
Backlog
The Company's backlog of firm orders was $21.7 million at December 29, 2002 and
$23.3 million at December 30, 2001. The decrease in 2002 versus 2001 was due
primarily to the divestiture of MCD, partially offset by increased orders in the
majority of the Company's ongoing businesses.
Segment Sales and Operations
PRINTED CIRCUIT MATERIALS:
------------- ------------- ----------------
(Dollars in Millions) 2003 2002 2001
------------- ------------- ----------------
Net Sales $114.2 $82.4 $88.3
Operating Income 15.3 4.8 6.1
Sales of Printed Circuit Materials increased a record 39% in 2003 to $114.2
million from $82.4 million in 2002. Sales decreased 7% in 2002. Sales in 2003
were driven by increased flexible circuit laminate revenues of 61% as the
cellular and handheld mobile device markets surged and the Company achieved
growth in market share. High frequency material revenue increased 35% as the
Company experienced strong sales in the satellite television market, as well as
6
accelerating wireless infrastructure sales as more 3G base stations were built.
Sales in 2002 were negatively impacted by the softness in the wireless
infrastructure market. While overall sales were down in 2002, sales were only
slightly off from the Company's overall expectations, due to increased market
share for high frequency materials in satellite television receivers, design
wins in flexible laminates for cell phone applications and sales to a major U.S.
customer seeking increased flexible circuit sales into the hard disk drive
industry.
Printed Circuit Materials operating income was $15.3 million in 2003 and $4.8
million in 2002. The increase was attributable to higher sales volume (as
discussed above) and productivity improvements. In 2002, operating income was
lower by $1.3 million than in the prior year. The lower level of sales was the
major factor leading to the decrease in 2002.
HIGH PERFORMANCE FOAMS:
------------- ------------- ----------------
(Dollars in Millions) 2003 2002 2001
------------- ------------- ----------------
Net Sales $69.5 $65.1 $49.7
Operating Income 2.6 8.1 4.6
Sales of High Performance Foams were $69.5 million, up 7% from $65.1 million in
2002. This increase was attributable to the improvement in sales of urethane and
silicone foams into the cellular telephone, automotive and wireless
infrastructure markets; as well as sales growth in China. These increases were
partially offset by a decrease in sales of polyolefin foams due to specification
issues in several applications and declines in the Bun product line to a level
leading the Company to announce in January 2004 its intention to suspend sales
of this product line. Favorable developments in this segment included the
Company's initiation of plans and efforts to co-develop increased capacity for
its urethane products with its Japanese joint venture, the expeditious move of
its silicone product operations into the new Carol Stream facility in Illinois
early in the year without disruption to its customers, and the start-up of its
first new polyolefin production line in Carol Stream late in 2003, which was
based on a completely new process technology. In addition, the new polyolefin
line, in conjunction with a new pilot line also established in late 2003 in the
Company's central research and development center, has set the stage for a ramp
up in product development and new customer product trials which are well
underway at key customers. The Company remains committed to and is optimistic
about the technologies acquired in the polyolefin technology acquisition.
High Performance Foams revenue increased 31% in 2002 as the Company's urethane
foams realized increased sales due to better penetration in the electronic
handheld device and printing markets. The new polyolefin foam business, which
was acquired in early 2002, also contributed to the year's improved sales.
Despite the severe downturn in the aircraft industry, silicone foam sales only
experienced a moderate decrease.
Operating income from High Performance Foams was $2.6 million in 2003 and $8.1
million in 2002. The decrease in operating income in 2003 was primarily due to
significantly higher than planned transition costs associated with the move of
7
polyolefin production from St. Johnsville, New York to the Carol Stream facility
and an unfavorable sales mix. Operating profit was higher in 2002 by $3.5
million as compared to 2001 primarily due to the higher level of urethane
product sales, the incremental sales due to the polyolefin acquisition, and
improvement in manufacturing operations.
POLYMER MATERIALS AND COMPONENTS:
------------- ------------- ----------------
(Dollars in Millions) 2003 2002 2001
------------- ------------- ----------------
Net Sales $59.6 $71.9 $78.0
Operating Income 3.7 1.3 2.3
Sales of Polymer Materials and Components decreased 17% in 2003 and 8% in 2002.
2002 sales included $30.3 million of sales from MCD that was divested in
November 2002. Excluding MCD, sales were up $18.0 million, or 43%, over 2002.
This increase was driven by higher sales of the busbar and non-woven businesses
and the consolidation of the Durel Division (formerly a 50% owned joint venture
with 3M), with sales of $20.8 million in the fourth quarter of 2003, offset by a
decrease in elastomer components products. In 2002, sales decreased from 2001
due to the divestiture of MCD in November 2002 (2001 included a full year of MCD
sales) and a continued decline in the Company's elastomer components products.
Polymer Materials and Components operating income increased $2.4 million to $3.7
million in 2003 from $1.3 million in 2002. Operating income decreased $1.0
million in 2002. The increase in 2003 was mainly attributable to the Durel
acquisition and commensurate inclusion of Durel's operating income in the
Company's consolidated fourth quarter results (Durel's results for the first
three quarters of 2003 were previously recorded in equity income in
unconsolidated joint ventures for the Company's proportional equity income
share), offset by a decrease in sales of the elastomer components products.
Lower sales were the primary cause of the decrease in operating income in 2002.
Joint Ventures
Durel Corporation:
Durel manufactures electroluminescent lamps and designs and sells semiconductor
inverters. Durel was a 50% owned joint venture with 3M until the Company
acquired the remaining 50% interest on September 30, 2003 (see "Acquisitions and
Divestitures"). Through the first three quarters of 2003, Durel recorded sales
of $51.3 million as compared to $59.0 million for the comparable period in 2002.
The decrease from 2002 to 2003 stemmed from the impact of the continued shift of
cell phones and hand held devices to color displays. In the second half of 2003,
several new programs, such as keypad backlighting applications for flexible
lamps as well as various automotive applications, were further developed and are
expected to positively impact Durel's operations in fiscal 2004. Sales in the
fourth quarter totaled $20.8 million (as compared to $25.0 million in the fourth
quarter of 2002) and are included in the Company's consolidated results.
Durel recorded sales in 2002 that were 41% higher than in 2001. Both sales and
profits set new yearly records in 2002. The record year was the result of newly
8
adopted automotive applications and well-timed design wins in new cell phone
models.
Rogers Inoac Corporation ("RIC"):
Sales increased 36% in 2003 from 2002. This increase was driven by a number of
application wins resulting in market share growth in various industrial markets,
including cell phones and automotive.
In January 2002, RIC sold its elastomer components product line to the Company's
Japanese joint venture partner, Inoac Corporation ("Inoac"). The sale has
allowed the joint venture to focus solely on its high performance foams
business. This transaction has had no significant impact on earnings.
Sales of RIC decreased by 38% from 2001 to 2002. This decrease is attributed to
RIC selling its elastomer components product line to Inoac Corporation.
Comparing 2002 to 2001, without the elastomer components product line, sales
would have increased by 20%. RIC's high performance foam sales benefited in 2002
from increased activity in Asia in the industrial portion of its business.
Polyimide Laminate Systems, LLC ("PLS"):
Sales of PLS, the Company's joint venture with Mitsui Chemicals, Inc. that sells
adhesiveless laminates for trace suspension assemblies, were 15% lower in 2003
and 1% higher in 2002. Sales decreased in 2003 due to a ramp up in the fourth
quarter of 2002 by its sole customer coupled with the fact that this customer
increased its allocation of purchases to other suppliers in 2003 to further
mitigate its risk of reliance on a sole supplier. PLS has retained a significant
portion of this customer's business and anticipates activity with this customer
will continue to be significant in the future. The increase in sales in 2002 was
due to increased orders from its customer which experienced a substantial
increase in demand in the fourth quarter, resulting in record fourth quarter
sales. This substantial increase was due to lower yields at some end users who
were transitioning to higher density disk drive recording heads.
Rogers Chang Chun Technology Co., Ltd. ("RCCT"):
RCCT, the Company's joint venture with Chang Chun Plastics Co., Ltd. that was
established in late 2001 to manufacture flexible circuit material for customers
in Taiwan, experienced its first sales in 2002. Sales increased in 2003 by 71%
from 2002. This increase was due to significant application wins late in 2003 in
the Taiwan market that are expected to drive sales growth even further in fiscal
2004. The Company also plans to utilize this facility to alleviate some of the
capacity constraints it has experienced in the United States due to the overall
increase in the Company's flexible laminate business.
Product and Market Development
9
Rogers' research and development team is dedicated to growing the Company's
businesses by developing cost effective products that improve the performance of
customers' products. Research and development as a percentage of sales was
approximately 6% in 2003, 2002, and 2001.
The Company's investment in technology resulted in several new product launches
during 2003. A more compressible Poron(R) grade was developed and launched to
address more demanding needs in cell phone applications and has resulted in
several new adoptions of the material in customer's products. The LCP (Liquid
Crystalline Polymer) platform was expanded in 2003 with the launch of R/Flex(R)
3850, a two copper layer, more temperature resistant flexible laminate product
that will allow customers to build thin multilayer constructions. The RO4000(R)
family continued to be expanded with the introduction of RO4350i(R), a high
frequency laminate product with enhanced copper bond and a new lower cost grade
for satellite receiver applications. In addition, Senflex(R)F, a new higher
performance elastomeric grade was developed to expand the product offerings of
our recently acquired polyolefin foams business.
Acquisitions and Divestitures
On January 30, 2004, the Company announced its acquisition of KF Inc. ("KF"), a
Korean manufacturer of liquid level sensing devices for the automotive market,
through a stock purchase agreement of approximately $3.5 million. In fiscal
2003, sales of KF were approximately $3 million. Under the terms of the
agreement, KF has become a wholly owned subsidiary of Rogers and will be
included in Rogers consolidated results in the first quarter of fiscal 2004. The
acquisition will be accounted for as a purchase pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". As
such, the purchase price will be allocated to assets and liabilities based on
their respective fair values at the date of acquisition in accordance with
accounting principles generally accepted in the United States.
On September 30, 2003, the Company acquired from 3M Company its 50% interest in
Durel Corporation, a joint venture of Rogers and 3M, for $26 million in cash.
Effective September 30, 2003, the operations of Durel were fully integrated and
consolidated into Rogers Corporation. The new business unit is being called the
Durel Division and its financial and operating results are being included as
part of Rogers' Polymer Materials and Components business segment. The
acquisition has been accounted for as a purchase pursuant to SFAS No. 141.
In early 2002, the Company acquired much of the intellectual property and most
of the polyolefin foam product lines of Cellect LLC. This polyolefin foam
business is being integrated into Rogers High Performance Foams operations in
Carol Stream, Illinois. This business was modestly accretive to earnings in
2002; however, in 2003, the Company had greater than planned lead times and
transition costs in integrating production into the Carol Stream facility, thus
negatively impacting product sales and earnings. The Company anticipates that
this transition will be complete in the second quarter of 2004 and expects that
sales and profitability of this polyolefin foam business will significantly
10
increase as a result. Continued market response to this acquisition has been
very positive.
On November 18, 2002, the Company completed the divestiture of MCD, located in
Manchester, Connecticut. MCD was sold to Vyncolit North America Inc., a
subsidiary of the Perstorp Group, Sweden. Under the terms of the agreement, the
Company expects to receive a total of approximately $21.0 million for the
business assets (excluding the intellectual property) and a five-year royalty
stream from the intellectual property license. Half of the $21.0 million was
paid in cash upon consummation of the transaction. A note receivable was
provided for the remainder of the proceeds that will be paid over a five-year
period. The first installment of $2.1 million plus accrued interest was received
in the fourth quarter of 2003. There was no material gain or loss on the sale
transaction.
In early 2001, the Company had entered into a definitive agreement to purchase
the Advanced Dielectric Division ("ADD") of Tonoga, Inc. (commonly known as
Taconic). In May 2001, the Company announced that active discussions with
Taconic to acquire the ADD business had been suspended and it was anticipated
that the acquisition would not occur. Accordingly, $1.5 million in costs
associated with this potential acquisition were written off during the second
quarter of 2001. In October 2001, the Company formally terminated the
acquisition agreement.
Liquidity and Capital Resources
Rogers' financial position continued to be strong at the end of 2003 and
included cash and cash equivalents of $31.5 million compared to $22.3 million at
the end of 2002. The $9.2 million increase in cash in 2003 included a $26.0
million cash payment for the purchase of Durel in the fourth quarter which was
partially offset by cash acquired in the acquisition of $8.7 million and by a
voluntary contribution of $5.6 million to the Company's pension plans. During
2003, the Company's cash flows from operations of $29.7 million (compared to
$26.0 million in 2002) were the primary source of funds for the Company's
operating and capital needs, as the Company has no outstanding debt.
The 2002 cash flow was driven by the strength in cash provided by from
operations, strong cash flows from the joint ventures that enabled Durel
Corporation to pay down its working capital loan from the Company, and positive
results from the continuation of the company-wide initiative to reduce inventory
levels.
Capital expenditures totaled $18.0 million in 2003 and $22.7 million in 2002. In
2003, the Company continued its expansion at the facilities opened in 2002 that
included the purchase of a new building in Carol Stream, Illinois to accommodate
the then newly acquired polyolefin product lines and the existing silicone foam
business. The Company also invested in its new manufacturing campus in Suzhou,
China, which was also initiated in 2002. During 2002 and 2001, the Company
established a new manufacturing facility for high frequency laminates in Ghent,
Belgium. This facility became operational in January 2003 and expanded to full
capacity in late 2003.
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Cash generated from the Company's operating activities exceeded capital spending
in both years, 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 $50.0 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 50.0 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 28, 2003. 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.
In September 2001, Rogers N.V., a Belgian subsidiary of the Company, signed an
unsecured revolving credit agreement with a European bank. This agreement had a
credit limit of 6.2 million Euros and an original expiration date of May 2005.
All outstanding balances owed under this credit agreement were repaid in 2002
and the agreement was subsequently cancelled in 2003.
Capital expenditures in 2004 are forecasted to approximate between $30-$35
million. Management believes that over the next twelve months, internally
generated funds plus available lines of credit will be sufficient to meet the
capital expenditures and ongoing needs of the business. However, the Company
continually reviews and evaluates the adequacy of its lending facilities and
relationships.
Contractual Obligations
The following table summarizes the Company's significant contractual obligations
as of December 28, 2003:
Payments Due by Period
-----------------------------------------------------------------------
--------------- ------------- ----------- ------------- ---------------
Within 1 1-3 Years 3-5 Years After 5 Years
(Dollars in Thousands) Total Year
--------------- ------------- ----------- ------------- ---------------
--------------- ------------- ----------- ------------- ---------------
Operating Leases $1,347 $616 $533 $117 $81
Purchase Obligations 1,505 1,505 -- -- --
Capital Commitments 6,978 6,978 -- -- --
--------------- ------------- ----------- ------------- ---------------
Total $9,830 $9,099 $533 $117 $81
=============== ============= =========== ============= ===============
The Company entered into a stock purchase agreement on January 30, 2004 to
acquire KF Inc. for approximately $3.5 million. The cash outlay for this
commitment occurred in the first quarter of 2004. The Company's capital
commitments include a capital investment of $2.1 million into the Company's
expanded joint venture activities with Inoac in Suzhou, China.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are
in the opinion of management reasonably likely to have, a current or future
effect on the Company's financial condition or results of operations.
Dividend Policy
The Company evaluates from time-to-time the desirability of paying a dividend;
however, at present, the Company expects to maintain a policy of emphasizing
longer-term growth of capital rather than immediate dividend income.
Environmental Activities and General Litigation
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 four
active cases involving waste disposal 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 settled a dispute, in January 2003, regarding the alleged improper
disposal of PCB's by the Company at the Woodstock facility.
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 $25.0 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 lawsuit was
associated with the Company's termination, in October 2001, of an acquisition
agreement for the purchase of ADD of Taconic (see "Acquisitions and
Divestitures"). In September 2002, a confidential settlement agreement
concerning all matters raised in this litigation was negotiated and entered
into. The settlement had no material financial impact.
Over the past several years, there has been a significant increase in certain
U.S. states in asbestos-related product liability claims against numerous
industrial companies. The Company has been named, along with hundreds of other
industrial companies, as a defendant in some of these cases. The Company
strongly believes it has valid defenses to these claims and intends to defend
itself vigorously. In addition, the Company believes that it has sufficient
insurance to cover all material costs associated with these claims. Based upon
past claims experience and available insurance coverage, management believes
that these matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
In addition to the above issues, the nature and scope of the Company's business
bring it in regular contact with the general public and a variety of businesses
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and government agencies. Such activities inherently subject the Company to the
possibility of litigation, including environmental and product liability matters
that are defended and handled in the ordinary course of business. The Company
has established accruals for matters for which management considers a loss to be
probable and reasonably estimable.
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
or product liability matters, except as disclosed in the Notes to Consolidated
Financial Statements. Refer to Note J of the Notes to Consolidated Financial
Statements for a discussion of the above matters and the related costs.
New Accounting Standards
FASB Interpretation No. 46
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") No. 51," ("FIN 46"). FIN
46 clarifies the application of ARB No. 51, "Consolidated Financial Statements,"
to certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. Certain disclosure requirements of FIN 46 were
effective for financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December
2003),"Consolidation of Variable Interest Entities" ("FIN 46-R") to address
certain FIN 46 implementation issues. The effective dates and impact of FIN 46
and FIN 46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003:
The Company must apply either the provisions of FIN 46 or early adopt
the provisions of FIN 46-R at the end of the first interim or annual
reporting period ending after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003: The Company is required to
adopt FIN 46-R at the end of the first interim or annual reporting
period ending after March 15, 2004.
(iii) All entities, regardless of whether an SPE, which were created
subsequent to January 31, 2003: The provisions of FIN 46 were
applicable for variable interests in entities obtained after January
31, 2003. The Company is required to adopt FIN 46-R at the end of the
first interim or annual reporting period ending after March 15, 2004.
The adoption of the provisions applicable to SPEs and all other variable
interests obtained after January 31, 2003 did not have a material impact on the
Company's financial statements as the Company did not enter into any such
arrangements subsequent to January 31, 2003. For arrangement existing prior to
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January 31, 2003, the Company determined that it had one variable interest
entity; however, the Company was not the primary beneficiary and, as such, did
not have to consolidate in accordance with FIN 46. The Company is currently
evaluating the impact of adopting FIN 46-R applicable to non-SPEs created prior
to February 1, 2003, but does not expect a material impact.
FASB Staff Position No. 150-3
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
requires that an issuer classify certain financial instruments as liabilities.
SFAS No. 150 was effective for financial instruments entered into or modified
after May 31, 2003, and was effective at the beginning of the first interim
period beginning after June 15, 2003 for all other instruments. The adoption of
the statement in July 2003 did not have a material impact on the Company's
results of operations or financial position.
Subsequent to adoption, on November 7, 2003, the FASB issued FASB Staff Position
("FSP") 150-3, "Effective Date, Disclosures, and Transition for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". FSP 150-3 deferred the effective date of SFAS No. 150
for certain mandatorily redeemable non-controlling interests until the first
quarter of 2004. The adoption of FSP 150-3 will have no impact on Rogers'
results of operations or 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 for those
involving significant estimation. 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, an
allowance is established. The majority of accounts are individually evaluated on
a regular basis and appropriate reserves are established as deemed appropriate.
The remainder of the reserve is based on management's estimates and takes into
consideration historical trends and current market assessments. The risk
associated with this estimate is that the Company would not become aware of
potential collectibility issues related to specific accounts and become exposed
to potential unreserved losses. Historically, the Company's estimates and
assumptions around the allowance have been reasonably accurate and the Company
has processes and controls in place to closely monitor customers and potential
15
credit issues. For additional information, see related party discussion that
follows regarding Cellect.
Inventory allowances: The Company maintains an obsolescence and slow-moving
allowance for inventory. Products and materials that are specifically identified
as obsolete are fully reserved. Most products that have been held in inventory
greater than one year are fully reserved unless there are mitigating
circumstances, including forecasted sales or current orders for the product. The
remainder of the allowance is based on management's estimates and fluctuates
with market conditions, design cycles and other economic factors. Risks
associated with this allowance include unforeseen changes in business cycles
that could affect the marketability of certain products and an unforecasted
decline in current production. Management closely monitors the market place and
related inventory levels and has historically maintained reasonably accurate
allowance levels.
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.
Environmental and Product Liability: The Company accrues for its environmental
investigation, remediation, operating and maintenance costs when it is probable
that a liability has been incurred and the amount can be reasonably estimated.
The most likely cost to be incurred is accrued based on an evaluation of
currently available facts with respect to each individual site, including
existing technology, current laws and regulations and prior remediation
experience. Where no amount within a range of estimates is more likely, the
minimum is accrued. For sites with multiple PRPs , the Company considers its
likely proportionate share of the anticipated remediation costs and the ability
of the other parties to fulfill their obligations in establishing a provision
for those costs. Liabilities with fixed or reliably determinable future cash
payments are discounted. Accrued environmental liabilities are only reduced by
potential insurance reimbursements when they have been confirmed or received
from the insurance company. The Company is exposed to the uncertain nature
inherent in such remediation and the possibility that initial estimates are too
conservative. To mitigate these risks, the Company closely monitors existing and
potential environmental matters and has historically been reasonably accurate in
its assumptions and estimates.
Product liability claims are accrued on the occurrence method based on insurance
coverage and deductibles in effect at the date of the incident and management's
assessment of the probability of loss when reasonably estimable. Risk factors
include the uncertain nature of new product liability claims and unfavorable
resolutions to existing claims that could have an adverse effect on the Company.
Goodwill: Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair value. Fair values are primarily
established using a discounted cash flow methodology. The determination of
discounted cash flows is based on the businesses' strategic plans and long-range
planning forecasts. The revenue growth rates included in the plans are
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management's best estimates based on current and forecasted market conditions,
and the profit margin assumptions are projected by each segment based on the
current cost structure and anticipated cost reductions. There are inherent
uncertainties related to these factors and management's judgment in applying
them to the goodwill valuation analysis. If different assumptions were used in
these plans, the related undiscounted cash flows used in measuring impairment
could be different and could result in impairment being assessed, which in turn
would be required to be recorded.
Pension and Other Postretirement Benefits: The Company provides various defined
benefit pension plans for its U.S. employees and sponsors three defined benefit
healthcare and life insurance plans for its U.S. retirees. As a result of the
overall decline in market interest rates, the Company used a lower discount rate
to measure the projected benefit obligation on the plans as of the 2003
measurement date. This resulted in an increase to the projected benefit
obligation for all plans that was offset by the Company's contributions to the
plans in 2003 and the market growth of the plans' assets in 2003. These factors
culminated in a net positive result to the reported obligations, expense, and
funding status for the plans in 2003. In 2002, stock market declines experienced
since the 2002 measurement date reduced the fair value of plan assets and the
Company reduced its discount rate as a result of the overall decline in market
interest rates. As a result, these combined factors had a negative financial
reporting effect in 2002 in terms of reported obligations, expense, and funding
status for the plans. Given the sensitivity of the projected benefit obligation
to changes in the discount rate and of the fair value of assets for the plans
based on the market's actual performance, future changes in market rates and
variances in actual market performance versus forecasted market performance for
plan assets may significantly impact, positively or negatively, the funding
status and funding requirements of the plans and the expense and obligations
reported on for the plans in the future.
Foreign Currency: The Company's financial results are affected by changes in
foreign exchange rates and economic conditions in foreign countries in which the
Company does business. The Company's primary overseas markets are in Europe and
the Far East; thus exposing the Company to exchange rate risk from fluctuations
in the Euro and the various currencies used in the Far East. For fiscal 2003, a
10% increase/decrease in exchange rates would have resulted in an
increase/decrease to sales of approximately $5.5 million and to net income of
approximately $0.5 million.
Related Parties
In 2001, the Company acquired certain assets of Cellect LLC, including
intellectual property rights, inventory and customer lists. In connection with
this acquisition, the Company entered into various operating and financing
agreements with Cellect to purchase certain production from Cellect while the
Company completed construction of a plant facility in Carol Stream to
manufacture the products acquired from Cellect. The Company has a note
receivable and accounts receivable of $1.8 million and $2.9 million,
respectively, at December 28, 2003 from Cellect associated with these agreements
that stem from the Company funding the operation to support Cellect's supply
requirements. Any residual amount in accounts receivable is due at the
17
conclusion of the supply agreement (currently June 30, 2004). The note
receivable is due in January 2007, which corresponds to the date upon which any
earn-out payments under the acquisition agreement are due. The risk of
collection on these balances is mitigated by the production purchases from
Cellect, right of offset on production purchases and any earn-out payments, as
well as the Company's security interest in substantially all the assets of
Cellect as collateral on the note arrangement.
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 or
speculative 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 various borrowing facilities where the interest rates, although
not fixed, are relatively low. Currently, an increase in the associated interest
rates would not significantly impact interest expense on these facilities, as
the Company currently has no debt.
The fair value of the Company's investment portfolio or the related interest
income would not be significantly impacted by either a 100.0 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.
The Company's largest foreign currency exposure is against the Euro, primarily
because of its investments in its ongoing operations in Belgium. In addition to
the Euro exposure, commensurate with the Company's growth and expansion in Asia,
particularly China, the Company is experiencing an escalation of foreign
currency exposure against the currencies in countries such as China, Japan,
Taiwan, Korea, and Singapore. 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; however, no such material hedges were outstanding at
year-end. 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
18
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. Additional information about certain
factors that could cause actual results to differ from such forward-looking
statements include, but are not limited to, 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 continue to be successful in this
area, the Company must be able to consistently manufacture and supply 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 markets for computers and related
equipment, such as printers and electronic hand-held devices, are characterized
by rapid technological change, significant pricing pressures and short lead
times. Because the Company manufactures and sells its own materials to meet the
needs of these markets, the Company's results may be affected by these factors.
Volatility of Demand
The computer and related equipment industry and the wireless communications
industry have historically been characterized by wide fluctuations in product
supply and demand. From time-to-time, these 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 and Product Liability Litigation
The Company is currently engaged in proceedings involving four waste disposal
sites, as a participant in a group of PRPs. The Company's estimation of
environmental liabilities is based on an evaluation of currently available
19
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 PRPs, 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.
The Company is also involved in certain asbestos-related product liability
litigation. The level of such litigation has escalated in certain U.S. states in
the past several years and involves hundreds of companies that have been named
as defendants. The Company believes it has sufficient insurance to cover all
material costs of these claims and that it has valid defenses to these claims
and intends to defend itself vigorously in these matters. However, there can be
no assurances that the ultimate resolution of these matters will be consistent
with Company expectations and will not have a material adverse effect on the
Company.
Capital Expenditures
The level of anticipated 2004 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.
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 Manufacturing and Sales
The Company's international manufacturing and sales involve risks, including
imposition of governmental controls, currency exchange fluctuation, potential
insolvency of international customers, reduced protection for intellectual
20
property rights, the impact of recessions in foreign countries, political
instability, employee selection and retention 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 manufacturing and sales, and consequently, on the Company's
business, operating results and financial condition.
Acquisitions and Divestitures
Acquisitions are an important component of the Company's growth strategy.
Accordingly, the Company's future performance will be impacted by its ability to
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.
In relation to acquisitions and divestitures undertaken, it is common for the
Company to structure the transactions to include earn-out and/or intellectual
property royalty agreements that generally are tied to the performance of the
underlying products or business acquired or divested. Accordingly, the Company's
future performance will be impacted by respective performance of the products
and/or businesses divested and the successful utilization of products and/or
businesses acquired. In addition, there is no guarantee that these underlying
products and/or businesses will perform as forecasted at the time the associated
transactions were consummated.
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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