SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2003* 2002** 2001 2000 1999
----------------------------------------------------------------------
SALES AND INCOME
Net Sales $243,329 $219,438 $216,037 $248,215 $247,839
Income Before Income Taxes 35,034 24,809 20,979 37,634 25,877
Net Income 26,275 18,607 15,734 26,720 18,631
PER SHARE DATA
Basic 1.67 1.20 1.03 1.79 1.24
Diluted 1.61 1.16 .98 1.69 1.19
Book Value 14.18 11.81 10.62 9.65 7.94
FINANCIAL POSITION (YEAR END)
Current Assets 127,097 89,775 84,916 92,849 72,547
Current Liabilities 50,023 34,780 29,692 38,745 36,741
Ratio of Current Assets to
Current Liabilities 2.5 to 1 2.5 to 1 2.9 to 1 2.4 to 1 2.0 to 1
Cash, Cash Equivalents, and
Short-Term Investments 34,481 28,928 20,891 10,100 9,955
Working Capital 77,074 54,995 55,224 54,104 35,806
Property, Plant and Equipment-
Net 131,157 99,883 98,454 94,199 84,652
Total Assets 314,440 257,701 223,809 221,514 183,406
Long-Term Debt less Current
Maturities -- -- 1,315 9,116 9,740
Shareholders' Equity 226,869 183,038 163,062 145,813 116,417
Long-Term Debt as a Percentage
of Shareholders' Equity 0% 0% 1% 6% 8%
OTHER DATA
Depreciation and Amortization 13,615 13,571 13,712 12,507 10,375
Research and Development
Expenses 13,665 13,596 12,570 12,493 10,791
Capital Expenditures 17,951 22,682 18,032 22,744 13,621
Number of Employees (Average) 1,197 1,251 1,376 1,358 1,197
Net Sales per Employee 203 175 157 183 207
Number of Shares Outstanding at
Year-End 15,995,713 15,496,261 15,356,284 15,102,670 14,664,652
* 2003 consolidated results include three months of operations of Durel
Corporation (acquired on September 30, 2003).
** Moldable Composites Division was divested in the fourth quarter of 2002.
CONSOLIDATED BALANCE SHEETS
1
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
(Dollars in Thousands, except per share amounts) 2003 2002
-----------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $31,476 $22,300
Short-Term Investments 3,005 6,628
Accounts Receivable, Less Allowance for Doubtful
Accounts of $1,446 and $1,102 52,981 32,959
Accounts Receivable, Joint Ventures 3,178 1,414
Note Receivable, Current 2,100 2,100
Inventories 27,501 18,069
Current Deferred Income Taxes 4,914 4,985
Other Current Assets 1,942 1,320
---------------- ----------------
Total Current Assets 127,097 89,775
Notes Receivable 7,800 9,900
Property, Plant and Equipment, Net of Accumulated
Depreciation of $104,885 and $90,285 131,157 99,883
Investments in Unconsolidated Joint Ventures 10,741 21,860
Pension Asset 6,886 8,951
Goodwill 16,697 16,697
Other Intangible Assets 8,424 5,507
Other Assets 5,638 5,128
---------------- ----------------
Total Assets $314,440 $257,701
================ ================
2
(Dollars in Thousands, except per share amounts) December 28, December 29,
2003 2002
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $20,442 $10,125
Accrued Employee Benefits and Compensation 13,359 10,414
Accrued Income Taxes Payable 9,104 8,249
Other Accrued Liabilities 7,118 5,992
---------------- ----------------
Total Current Liabilities 50,023 34,780
Noncurrent Deferred Income Taxes 14,058 8,308
Noncurrent Pension Liability 14,909 22,658
Noncurrent Retiree Health Care and Life
Insurance Benefits 6,198 6,197
Other Long-Term Liabilities 2,383 2,720
Commitments and Contingencies - -
Shareholders' Equity:
Capital Stock, $1 Par Value:
Authorized Shares 50,000,000; Issued
Shares 16,326,229 and 15,856,748 16,326 15,857
Additional Paid-In Capital 43,261 36,600
Retained Earnings 174,320 148,045
Accumulated Other Comprehensive Income (Loss),
Net of Taxes 4,895 (4,693)
Treasury Stock (330,516 and 360,487 shares) (11,933) (12,771)
---------------- ----------------
Total Shareholders' Equity 226,869 183,038
---------------- ----------------
Total Liabilities and Shareholders' Equity $314,440 $257,701
================ ================
The accompanying notes are an integral part of the consolidated financial
statements.
3
CONSOLIDATED STATEMENTS OF INCOME
For each of the years in the three-year period ended December 28, 2003
(Dollars in Thousands, Except Per Share Amounts) 2003 2002 2001
------------- ---------------- --------------
Net Sales $243,329 $219,438 $216,037
Cost of Sales 164,789 150,183 149,179
Selling and Administrative Expenses 43,304 39,335 39,247
Research and Development Expenses 13,665 13,596 12,570
Acquisition and Restructuring Costs -- 2,150 1,995
------------- ---------------- --------------
Total Costs and Expenses 221,758 205,264 202,991
------------- ---------------- --------------
Operating Income 21,571 14,174 13,046
Equity Income in Unconsolidated Joint Ventures 6,571 8,705 3,123
Other Income Less Other Charges 6,572 2,156 4,830
Interest Income (Expense), Net 320 (226) (20)
------------- ---------------- --------------
Income Before Income Taxes 35,034 24,809 20,979
Income Taxes 8,759 6,202 5,245
------------- ---------------- --------------
Net Income $26,275 $18,607 $15,734
============= ================ ==============
Net Income Per Share:
Basic $1.67 $1.20 $1.03
------------- ---------------- --------------
Diluted $1.61 $1.16 $0.98
------------- ---------------- --------------
Shares Used in Computing:
Basic 15,774,744 15,470,697 15,274,479
------------- ---------------- --------------
Diluted 16,318,885 16,023,273 16,001,965
------------- ---------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the years in the three-year period ended December 28, 2003
(Dollars in Thousands, Except Capital Stock Amounts)
Accumulated
Additional Other Total
Capital Stock Paid-In Retained Comprehensive Treasury Shareholders'
Capital Earnings Income (Loss) Stock Equity
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $15,485,570 $32,262 $113,704 $(2,203) $(13,436) $145,813
Comprehensive Income:
Net Income 15,734 15,734
Other Comprehensive Loss:
Foreign currency
translation (793) (793)
Minimum pension
liability (1,034) (1,034)
----------------
Total Comprehensive Income 13,907
Stock Options Exercised 307,051 2,519 2,826
Stock Issued to Directors 11,571 459 470
Shares Reacquired and
Cancelled (65,008) (2,032) (2,097)
Tax Benefit on Stock Options
Exercised 2,143 2,143
- ------------------------------------------------------------------------------------------------------------------
Balance at December 30, 2001 15,739,184 35,351 129,438 (4,030) (13,436) 163,062
Comprehensive Income:
Net Income 18,607 18,607
Other Comprehensive Income
(Loss):
Foreign currency
translation 4,172 4,172
Minimum pension
liability (4,835) (4,835)
----------------
Total Comprehensive Income 17,944
Stock Options Exercised 152,177 1,697 1,849
Stock Issued to Directors 6,908 319 326
Shares Reacquired and
Cancelled (41,521) (1,262) (1,303)
Treasury Stock Issuance (139) 665 526
Tax Benefit on Stock Options
Exercised 634 634
- ------------------------------------------------------------------------------------------------------------------
Balance at December 29, 2002 15,856,748 36,600 148,045 (4,693) (12,771) 183,038
Comprehensive Income:
Net Income 26,275 26,275
Other Comprehensive
Income:
Foreign currency
translation 5,864 5,864
Minimum pension
liability 3,724 3,724
----------------
Total Comprehensive Income 35,863
Stock Options Exercised 561,610 6,528 7,089
Stock Issued to Directors 7,734 232 240
Shares Reacquired and
Cancelled (99,863) (3,307) (3,407)
Treasury Stock Issuance (259) 838 579
Tax Benefit on Stock Options
Exercised 3,467 3,467
- ------------------------------------------------------------------------------------------------------------------
Balance at December 28, 2003 $16,326,229 $43,261 $174,320 $4,895 $(11,933) $226,869
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the years in the three-year period ended December 28, 2003
(Dollars in thousands)
2003 2002 2001
-------------------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net Income $26,275 $18,607 $15,734
Adjustments to Reconcile Net Income to Cash Provided by
Operating Activities:
Depreciation and Amortization 13,615 13,571 13,712
Deferred Income Taxes 4,828 2,561 (395)
Tax Benefit Related to Stock Award Plans 3,467 634 2,143
Equity in Undistributed Income of Unconsolidated Joint
Ventures, Net (6,571) (8,705) (3,123)
Loss (Gain) on Disposition of Assets 250 860 (103)
Noncurrent Pension and Postretirement Benefits (3,559) 2,954 1,489
Other, Net (241) (908) (584)
Changes in Operating Assets and Liabilities Excluding
Effects of Acquisition and Disposition of Assets:
Accounts Receivable (11,579) (10,207) 13,158
Inventories (1,664) 3,627 4,771
Other Current Assets (453) (170) 14
Accounts Payable and Other Accrued Liabilities 5,294 3,203 (7,801)
-------------------------------------
Net Cash Provided by Operating Activities 29,662 26,027 39,015
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital Expenditures (17,951) (22,682) (18,032)
Acquisition of Business, Net of Cash Acquired (17,656) (8,060) (2,000)
Disposition of Business -- 10,300 --
Proceeds from Repayments of Loans to Joint Ventures -- 5,000 --
Proceeds from (Investment in) Notes Receivable 2,100 (1,500) --
Proceeds from (Purchase of) Short-Term Investments 3,624 (6,628) --
Proceeds from Sale of Property, Plant and Equipment -- -- 225
Dividends Received from (Investment in) Unconsolidated Joint Ventures 4,494 2,962 (1,417)
Proceeds from Other Investing Activities 568 -- --
-------------------------------------
Net Cash Used in Investing Activities (24,821) (20,608) (21,224)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from Short- and Long-Term Borrowings -- 4,463 1,830
Repayments of Debt Principal -- (6,522) (9,733)
Repayment of Life Insurance Loans -- (3,087) --
Proceeds from Disposition of Treasury Stock 579 526 --
Proceeds from Sale of Capital Stock, Net 3,682 673 729
-------------------------------------
Net Cash Provided by (Used in) Financing Activities 4,261 (3,947) (7,174)
Effect of Exchange Rate Changes on Cash 74 (63) 174
-------------------------------------
Net Increase in Cash and Cash Equivalents 9,176 1,409 10,791
Cash and Cash Equivalents at Beginning of Year 22,300 20,891 10,100
-------------------------------------
Cash and Cash Equivalents at End of Year $31,476 $22,300 $20,891
-------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Note Received from Sale of Business $-- $10,500 $--
Escrow Associated with Divestiture of Business -- 200 --
Receivable for Closing Balance Sheet Adjustments -- 509 --
The accompanying notes are an integral part of the consolidated financial
statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Rogers Corporation manufactures specialty materials, which are sold to targeted
markets around the world. These specialty materials are grouped into three
distinct business segments (see Note K). High Performance Foams include urethane
foams, silicone materials, and polyolefin foams. These foams are sold
principally to manufacturers in the communications, computer, imaging,
transportation, and consumer markets. Printed Circuit Materials include circuit
board laminates for high frequency printed circuits, flexible circuit board
laminates for flexible interconnections, and industrial laminates for shielding
of radio and electromagnetic interference. Printed Circuit Materials are sold
principally to printed circuit board manufacturers and equipment manufacturers
for applications in the computer, communications, and consumer markets. Polymer
Materials and Components are composed of elastomer components, nitrophyl floats,
electroluminescent lamps and inverters, nonwoven materials, and busbars for
power distribution. Polymer Materials and Components are sold principally to the
imaging, transportation, consumer, and communications markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Rogers Corporation
and its wholly-owned subsidiaries (the "Company"), after elimination of
significant intercompany accounts and transactions. Certain prior period amounts
have been reclassified to conform to the current year presentation.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less are
considered cash equivalents. These investments are stated at cost, which
approximates market value.
SHORT-TERM INVESTMENTS
Short-term investments represent investments in fixed and floating rate
financial instruments with maturities of twelve months or less from time of
purchase. They are classified as held-to-maturity as the Company has the ability
and intent to hold these investments to the maturity date and they are recorded
at amortized cost. The fair market value of held-to-maturity securities
approximates amortized cost at December 28, 2003 and December 29, 2002.
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.
FOREIGN CURRENCY TRANSLATION
All balance sheet accounts of foreign subsidiaries are translated at rates of
exchange in effect at each year-end, and income statement items are translated
at the average exchange rates for the year. Resulting translation adjustments
are made directly to a separate component of shareholders' equity. Currency
transaction adjustments, which are not material, are reported as income or
expense.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
In circumstances where the Company is 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
allowances are established as deemed appropriate. The remainder of the allowance
is based upon historical trends and current market assessments.
7
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES
Inventories are valued at the lower of cost or market. Certain inventories,
amounting to $1,853,000 at December 28, 2003, and $3,302,000 at December 29,
2002, or 7% and 18% of total Company inventories in the respective periods, are
valued by the last-in, first-out ("LIFO") method. The cost of the remaining
portion of the inventories was determined principally on the basis of standard
costs, which approximate actual first-in, first-out ("FIFO") costs.
Inventories consist of the following:
(Dollars in thousands) December 28, December 29,
2003 2002
--------------------------------
Raw materials $6,230 $4,438
Work-in-process 13,190 5,606
Finished goods 8,081 8,025
--------------------------------
$27,501 $18,069
================================
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost, including
capitalized interest. For financial reporting purposes, provisions for
depreciation are calculated on a straight-line basis over the following
estimated useful lives of the assets:
Years
Buildings 20 -- 45
Building improvements 10 -- 25
Machinery and equipment 5 -- 15
Office equipment 3 -- 10
GOODWILL AND INTANGIBLE ASSETS
Goodwill, representing the excess of the cost over the net tangible and
identifiable assets of acquired businesses, is stated at cost. Prior to 2002,
goodwill was being amortized on a straight-line method over periods ranging from
10-40 years. Beginning with the first quarter of 2002 the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives. The statement requires that
these assets be reviewed for impairment at least annually. All other intangible
assets are amortized over their estimated useful lives. The Company performed
its impairment analysis during 2003 and 2002 and determined that the long-lived
assets were not impaired.
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 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. 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 would be
required to be recorded.
Purchased patents and licensed technology are capitalized and amortized on a
straight-line basis over their estimated useful lives, generally from 2 to 17
years.
8
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The following table presents the Company's results of operations to exclude
amounts no longer being amortized under SFAS No. 142:
(Dollars in Thousands, except per share amounts) 2003 2002 2001
---------------------------------------------
Reported net income $26,275 $18,607 $15,734
Adjustment:
Goodwill amortization - - 765
---------------------------------------------
Adjusted net income $26,275 $18,607 $16,499
---------------------------------------------
Basic net income per share
Reported $1.67 $1.20 $1.03
Adjusted 1.67 1.20 1.08
Diluted net income per share
Reported 1.61 1.16 0.98
Adjusted 1.61 1.16 1.03
ENVIRONMENTAL AND PRODUCT LIABILITY
Environmental investigatory, remediation, operating, and maintenance costs are
accrued 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 potential
responsible parties, 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.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the carrying values of financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable, accounts
payable, and accrued liabilities approximate fair value as a result of the
short-term maturities of these instruments.
CONCENTRATION OF CREDIT RISK
The Company extends credit on an uncollateralized basis to almost all customers.
Concentration of credit and geographic risk with respect to accounts receivable
is limited due to the large number and general dispersion of accounts which
constitute the Company's customer base. The Company periodically performs credit
evaluations of its customers. At December 28, 2003 and December 29, 2002, there
were no customers accounting for greater than ten percent of the Company's
accounts receivable. The Company has not experienced significant credit losses
on customers' accounts.
The Company invests its excess cash principally in investment grade government
and corporate debt securities. The Company has established guidelines relative
to diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to reflect changes in market
conditions. The Company has not experienced any significant losses on its cash
equivalents or short-term investments.
9
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company recognizes income taxes under the liability method. No provision is
made for U.S. income taxes on the undistributed earnings of consolidated foreign
subsidiaries because such earnings are substantially reinvested in those
companies for an indefinite period. Provision for the tax consequences of
distributions, if any, from consolidated foreign subsidiaries is recorded in the
year the distribution is declared.
REVENUE RECOGNITION
Revenue is recognized upon delivery of goods and transfer of title to customers,
when persuasive evidence of an arrangement exists, the price is fixed or
determinable, and collection is reasonably assured.
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
(Dollars in Thousands, Except Per Share Amounts) 2003 2002 2001
---------------------------------------------
Numerator:
Net income $26,275 $18,607 $15,734
Denominator:
Denominator for basic earnings per share -
weighted-average shares 15,774,744 15,470,697 15,274,479
Effect of stock options 544,141 552,576 727,486
---------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 16,318,885 16,023,273 16,001,965
=============================================
Basic earnings per share $1.67 $1.20 $1.03
=============================================
Diluted earnings per share $1.61 $1.16 $0.98
=============================================
USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
HEDGING ACTIVITY
The Company, on occasion, uses derivative instruments, including swaps, forward
contracts, and options, to manage certain foreign currency and interest rate
exposures. Derivative instruments are viewed as risk management tools by the
Company and are not used for trading or speculative purposes. Derivatives used
for hedging purposes must be designated and effective as a hedge of the
identified risk exposure at the inception of the contract. Accordingly, changes
in fair value of the derivative contract must be highly correlated with changes
in the fair value of the underlying hedged item at inception of the hedge and
over the life of the hedge contract.
Derivatives used to hedge forecasted cash flows associated with foreign currency
commitments or forecasted commodity purchases are accounted for as cash flow
hedges. Gains and losses on derivatives designated as cash flow hedges are
recorded in other comprehensive income and reclassified to earnings in a manner
that matches the timing of the earnings impact of the hedged transactions. The
ineffective portion of all hedges, if any, is recognized currently in earnings.
ADVERTISING COSTS
Advertising is expensed as incurred and amounted to $1,387,000, $1,303,000, and
$1,694,000 for 2003, 2002, and 2001, respectively.
10
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
TREASURY STOCK
From time to time the Company's Board of Directors authorizes the repurchase, at
management's discretion, of shares of the Company's capital stock. The most
recent regular authorization was approved on August 17, 2000 and provided for
the repurchase of up to an aggregate of $2,000,000 in market value of such
stock. On October 24, 2001, the Company's Board of Directors authorized, at
management's discretion, the repurchase of shares of the Company's capital stock
in order to provide participants in the Rogers Corporation Global Stock
Ownership Plan For Employees (see Note I), an employee stock purchase plan, with
shares of such stock. In 2003, a total of 29,971 shares of Treasury Stock were
used to fund the Company's obligation for the Rogers Corporation Global Stock
Ownership Plan For Employees. At December 28, 2003 and December 29, 2002,
Treasury Stock totaled 330,516 and 360,487 shares, respectively, and is shown at
cost on the balance sheet as a reduction of Shareholders' Equity.
STOCK-BASED COMPENSATION
Under various plans, the Company may grant stock and stock options to directors,
officers, and other key employees. Stock-based compensation awards are accounted
for using the intrinsic value method prescribed in APB 25, "Accounting for Stock
Issued to Employees" and related interpretations. Stock-based compensation costs
for stock options are not reflected in net income as all options granted under
the plans had an exercise price equal to market value of the underlying common
stock on the date of the grant. Stock-based compensation costs for stock awards
are reflected in net income over the awards' vesting period.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized in the financial statements for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 2003, 2002, and 2001, consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
(Dollars in Thousands, Except Per Share Amounts)
2003 2002 2001
-----------------------------------------
Net income, as reported $26,275 $18,607 $15,734
Less: Total stock-based compensation expense determined
under Black-Scholes option pricing model, net of related
tax effect 2,694 2,283 2,965
-----------------------------------------
Pro forma net income $23,581 $16,324 $12,769
-----------------------------------------
Basic earnings per share:
As Reported $1.67 $1.20 $1.03
Pro Forma 1.49 1.06 0.84
Diluted earnings per share:
As Reported 1.61 1.16 0.98
Pro Forma 1.45 1.01 0.80
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years, due to such things as the
vesting period of the stock options, and the potential for issuance of
additional stock options in future years.
An average vesting period of three years was used for the assumption regarding
stock options issued in 2003, 2002, and 2001. Regular options granted to
officers and other key U.S. employees usually become exercisable in one-third
increments beginning on the second anniversary of the grant date.
11
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENT 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, that 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 arrangements existing prior to
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.
12
NOTE B - PROPERTY, PLANT AND EQUIPMENT
(Dollars in Thousands) December 28, December 29,
2003 2002
---------------- ----------------
Land $10,978 $5,433
Buildings and improvements 89,372 61,905
Machinery and equipment 103,815 83,357
Office equipment 19,466 17,242
Installations in process 12,411 22,231
---------------- ----------------
236,042 190,168
Accumulated depreciation (104,885) (90,285)
---------------- ----------------
$131,157 $99,883
================ ================
Depreciation expense was $13,522,000 in 2003, $13,521,000 in 2002, and
$12,947,000 in 2001.
13
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS
Identifiable intangible assets are comprised of the following:
- -0-
December 28, 2003 December 29, 2002
(Dollars in Thousands)
------------------------------------
Trademarks and patents $2,724 $1,579
Technology 5,684 4,200
Covenant not to compete 981 600
------------------------------------
9,389 6,379
Accumulated amortization (965) (872)
------------------------------------
$8,424 $5,507
====================================
Amortization expense for 2003, 2002, and 2001 amounted to $93,000, $50,000, and
$765,000, respectively. Estimated amortization expense during each of the next 5
years is expected to be between $100,000 and $150,000.
The changes in the carrying amount of goodwill for the two-year period ended
December 28, 2003, by segment, is as follows:
Polymer
High Printed Materials and
Performance Circuit Components
(Dollars in Thousands) Foams Materials Total
---------------------------------------------------------
Balance as of December 30, 2001 $8,500 $6,100 $764 $15,364
Polyolefin foam acquisition in
fiscal 2002 (Note M) 2,626 -- -- 2,626
---------------------------------------------------------
Balance as of December 29, 2002 and
December 28,2003 $ 11,126 $ 6,100 $ 764 $ 17,990
=========================================================
14
NOTE D - SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED JOINT VENTURES AND
RELATED PARTY TRANSACTIONS
As of December 28, 2003, the Company has three joint ventures, each 50% owned,
that are accounted for by the equity method. On September 30, 2003, the Company
acquired the remaining 50% interest in Durel Corporation ("Durel") from 3M and,
as of the acquisition date, included Durel's operations in the Company's
consolidated results. Equity income of $6,571,000, $8,705,000, and $3,123,000
for 2003, 2002 and 2001, respectively, relates to the following joint ventures:
Joint Venture Location Business Segment Fiscal Year-End
- ----------------------------------------------------------------------------------------------------------
Rogers Inoac Corporation ("RIC") Japan High Performance Foams October 31
Polymide Laminate Systems, LLC ("PLS") U.S. Printed Circuit Materials December 31
Rogers Chang Chun Technology Co., Ltd. ("RCCT") Taiwan Printed Circuit Materials December 31
Equity income related to Durel is included for the first nine months of 2003 and
the full year 2002 and 2001.
The summarized financial information for these joint ventures is included in the
following tables. Note that there is a difference between the Company's
investment in unconsolidated joint ventures and its one-half interest in the
underlying shareholders' equity of the joint ventures due primarily to two
factors. First, the Company's major initial contribution to one of the joint
ventures was technology that was valued differently by the joint venture than it
was on the Company's books. Secondly, the translation of foreign currency at
current rates differs from that at historical rates. Correspondingly, there is a
difference between the Company's recorded investment in unconsolidated joint
ventures and a 50% share of the equity of those joint ventures. Also, financial
information for the years-ended December 28, 2003 and December 29, 2002 includes
nine months and twelve months of Durel's results of operations, respectively.
Finally, the balance sheet information as of December 28, 2003 excludes Durel
amounts, which were consolidated as of September 30, 2003.
SUMMARIZED INFORMATION FOR JOINT VENTURES
(Dollars in Thousands) December 28, December 29,
2003 2002
--------------- ---------------
Current Assets $24,360 $44,386
Noncurrent Assets 7,619 30,218
Current Liabilities 9,817 24,412
Noncurrent Liabilities 5 668
Shareholders' Equity 22,158 49,524
(Dollars in Thousands) Year Ended
----------------------------------------------------
December December December 30,
28,2003 29,2002 2001
--------------- --------------- ----------------
Net Sales $106,432 $136,861 $121,763
Gross Profit 38,558 50,836 33,050
Net Income 13,033 17,790 5,928
Other Information:
(Dollars in Thousands) 2003 2002 2001
-------------- --------------- ---------------
Commission Income from PLS $3,472 $3,601 $3,811
50% Loan Guarantee for Durel
Corporation -- -- 3,877
Loan to Durel Corporation -- -- 5,000
15
NOTE D - SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED JOINT VENTURES AND
RELATED PARTY TRANSACTIONS, CONTINUED
Durel Corporation, which had a 50% indirect loan guarantee from the Company, met
its obligations under the financing arrangement during the second half of 2002.
No payments were required and no losses were incurred under this guarantee by
the Company. This guarantee was terminated with the repayment of this debt.
Durel repaid its loan in full to the Company during 2002. The arrangement
expired in September of 2002 and was not extended.
Sales made between the unconsolidated joint ventures and the Company were
immaterial in all years presented above.
16
NOTE E - PENSION BENEFITS AND OTHER POSTRETIREMENT BENEFIT PLANS PENSIONS
The Company has two qualified noncontributory defined benefit pension plans
covering substantially all U.S. employees. The plans provide defined benefits
based on years of service and final average salary. The Company also has
established a nonqualified unfunded noncontributory defined benefit pension plan
to restore certain retirement benefits that might otherwise be lost due to
limitations imposed by federal law on qualified pension plans. Also, Durel had a
qualified noncontributory defined benefit pension plan covering substantially
all of its employees. As a result of the acquisition, the Company terminated the
Durel plan effective December 31, 2003 and brought qualified employees into the
Rogers' defined benefit plan beginning on January 1, 2004.
In addition, the Company sponsors three unfunded defined benefit health care and
medical and life insurance plans for retirees. The measurement date for all
plans for 2003 and 2002 is December 28, 2003 and December 29, 2002,
respectively.
Obligations and Funded Status
Other
Pension Benefits Postretirement Benefits
---------------------- -----------------------
(In Thousands) 2003 2002 2003 2002
---------------------- -----------------------
Change in benefit obligation:
Benefit obligation at beginning
of year $88,832 $74,090 $6,328 $5,654
Service cost 2,731 2,518 412 389
Interest cost 6,118 5,571 458 407
Actuarial losses 7,695 9,571 2,382 524
Benefit payments (4,243) (3,644) (669) (433)
Acquisitions 4,699 -- -- --
Curtailment -- (1,742) -- (213)
Plan amendments (6) 2,468 -- --
---------------------- -----------------------
Benefit obligation at end of
year $105,826 $88,832 $8,911 $6,328
====================== =======================
Change in plan assets:
Fair value of plan assets
at beginning of year $60,542 $65,160 $-- $--
Actual return on plan assets 18,455 (4,474) -- --
Employer contributions 5,824 3,449 669 433
Benefit payments (4,243) (3,593) (669) (433)
Acquisitions 3,282 -- -- --
---------------------- -----------------------
Fair value of plan assets
at end of year $83,860 $60,542 $-- $--
====================== =======================
Funded status $(21,966) $(28,291) $(8,911) $(6,328)
Unrecognized net (gain)/loss 16,627 22,783 2,013 (369)
Unrecognized prior service cost 4,019 4,734 -- --
Unrecognized transition asset -- (314) -- --
---------------------- -----------------------
Accrued benefit cost at end of
year $(1,320) $(1,088) $(6,898) $(6,697)
====================== =======================
Amounts recognized in the statement of financial position consist of:
Other
Pension Benefits Postretirement Benefits
---------------------- -----------------------
(In Thousands) 2003 2002 2003 2002
---------------------- -----------------------
Prepaid benefit cost $4,567 $4,294 $-- $--
Accrued benefit liability (14,680) (22,701) (6,898) (6,697)
Intangible asset 2,319 4,838 -- --
Deferred tax asset 2,460 4,743 -- --
Accumulated other comprehensive
Loss 4,014 7,738 -- --
---------------------- -----------------------
Net amount recognized at end of
year $(1,320) $(1,088) $(6,898) $(6,697)
====================== =======================
NOTE E - PENSION BENEFITS AND OTHER POSTRETIREMENT BENEFIT PLANS, CONTINUED
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with an accumulated benefit obligation in
excess of plan assets were $105,826,000 $92,781,000 and $83,860,000,
respectively, as of December 28, 2003, and $88,832,000, $78,948,000 and
$60,542,000, respectively, as of December 29, 2002.
Components of Net Periodic Benefit Cost
Other
Pension Benefits Postretirement Benefits
---------------------------- ---------------------------
(In Thousands) 2003 2002 2001 2003 2002 2001
--------------------------- ---------------------------
Service cost $2,731 $2,518 $2,120 $412 $389 $282
Interest cost 6,112 5,571 4,897 458 407 359
Expected return on plan assets (5,730) (6,191) (5,819) -- -- --
Amortization of prior service cost 715 969 509 -- (5) (92)
Amortization of net (gain) loss 1,125 219 156 -- -- --
Transition cost (314) (356) (355) -- -- --
Curtailment (Gain)/Loss -- 613 -- -- (213) --
--------------------------- ---------------------------
Net periodic benefit costs $4,639 $3,343 $1,508 $870 $578 $549
=========================== ===========================
Additional Information
Other
Pension Benefits Postretirement Benefits
------------------------------ -----------------------------
(In Thousands) 2003 2002 2001 2003 2002 2001
------------------------------ -----------------------------
(Decrease) increase in minimum
liability included in other
comprehensive income $(6,007) $7,799 $-- $-- $-- $--
Assumptions
Weighted-average assumptions used to determine benefit obligations at year end:
Other
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------------------------- ---------------------------------
Discount rate 6.25% 6.75% 6.25% 6.75%
Rate of compensation increase 4.00% 4.00% -- --
Weighted-average assumptions used to determine net benefit cost for years ended:
Other
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------------------------- ---------------------------------
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected long-term rate of return on
plan assets 9.00% 9.40% -- --
Rate of compensation increase 4.00% 4.00% -- --
For measurement purposes as of December 28, 2003, Rogers assumed an annual
healthcare cost trend rate of 10% for covered healthcare benefits in 2004. The
rate was assumed to decrease gradually to 5% in 2009 and remain at that level
thereafter. As of December 29, 2002, Rogers assumed an annual healthcare cost
trend rate of 8.5% for covered healthcare benefits in 2003. The rate was assumed
to decrease gradually to 5% in 2008 and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
--------------------------------------
Effect on total of service and interest cost $96,495 $(84,514)
Effect on other postretirement benefit
obligation $537,713 $(497,227)
18
NOTE E - PENSION BENEFITS AND OTHER POSTRETIREMENT BENEFIT PLANS, CONTINUED
Plan Assets
Rogers' pension plan weighted-average asset allocations at December 28, 2003 and
December 29, 2002, by asset category are as follows:
Current Target
Allocation Plan Assets
Asset Category at December
- --------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------
Equity securities 65% 67% 49%
Debt securities 35% 33% 51%
----------------------------------
Total 100% 100%
==================================
Investment Strategy
Rogers' pension assets are invested with the objective of achieving a total rate
of return over the long-term that is sufficient to fund future pension
obligations. Overall investment risk is mitigated by maintaining a diversified
portfolio of assets (as reflected in the above tables).
Asset allocation target ranges were established to meet the Company's investment
objectives. The Company determined the long-term rate of return on plan assets
based on several factors, including its asset allocation targets and the
historical and projected performance on those asset classes and on the plan's
current asset composition.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The Company anticipates that the benefits it pays
after 2006 will be lower as a result of the new Medicare provisions; however,
the retiree medical obligations and costs reported herein do not reflect the
impact of this legislation. Financial Accounting Standards Board Staff Position
No. 106-1 permits Company's to defer the recognition of the new Medicare
provisions' impact due to unresolved questions about some of the new Medicare
provisions and a lack of authoritative accounting guidance about certain matters
related to the Act. The final accounting guidance, once available, could require
changes to previously reported information.
Cash Flows
Contributions
At the current time, the Company has met the minimum funding requirements for
its qualified defined benefit pension plans and is therefore not required to
make a contribution to the plans in 2004. In 2003 and 2002, the Company made
voluntary annual contributions to the pension plans of approximately $5.6
million and $3.2 million, respectively. The Company will most likely make a
voluntary contribution to the pension plans in 2004 for an amount consistent
with the trend established in prior years. For the nonqualified defined benefit
plans and the postretirement welfare plan, the Company will contribute the
amount of benefit payments made during the year.
19
NOTE E - PENSION BENEFITS AND OTHER POSTRETIREMENT BENEFIT PLANS, CONTINUED
Estimated Future Payments
The following benefit payments, which reflect expected future employee service,
as appropriate, are expected to be paid through the utilization of plan assets.
The benefit payments are based on the same assumptions used to measure the
Company's benefit obligation at the end of fiscal 2003.
(Dollars in thousands) Other Postretirement
Pension Benefits Benefits
--------------------------------------------------
2004 $3,823 $658
2005 4,071 670
2006 4,311 707
2007 4,503 740
2008 4,713 775
2009-2013 28,692 3,961
20
NOTE F - EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company sponsors the Rogers Employee Savings and Investment Plan ("RESIP")
for domestic employees. Prior to 2003, the plan allowed such employees to
contribute up to 18% of their compensation through payroll deductions. Effective
January 1, 2003, the plan limitation of 18% on employee pretax contributions was
eliminated. Employees are now able to defer a percentage or flat amount they
choose, up to the yearly IRS limit, which is $12,000 in 2003 and $13,000 in
2004. Currently up to 5% of an eligible employee's annual pre-tax contribution
is matched at a rate of 50% by the Company. In 2003, 2002 and 2001, 100% of the
Company's matching contribution was invested in Company stock. RESIP related
expense amounted to $771,000 in 2003, $813,000 in 2002, and $934,000 in 2001,
including Company matching contributions of $771,000, $813,000, and $903,000,
respectively.
Also effective January 1, 2003, the Company implemented the Economic Growth and
Tax Relief Reconciliation Act ("EGTRRA") Age 50 Catch-Up provision. Participants
that reached age 50 (or older) by December 31, 2003 were eligible to contribute
an additional $2,000 in 2003 and $3,000 in 2004. Therefore, for employees
eligible under EGTRRA, the maximum total amount that could be contributed to the
RESIP in 2003 and 2004 amounted to $14,000 and $16,000, respectively. There is
no Company match for the Catch-Up provision.
21
NOTE G - DEBT
LONG-TERM DEBT
The Company has an unsecured multi-currency revolving credit agreement with two
domestic banks and can borrow up to $50 million, or the equivalent, in certain
other foreign currencies. 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 28, 2003 and December 29, 2002. 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 a 390.2 million Belgian franc loan as a hedge of its
net investment in its foreign subsidiaries in Belgium (US$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 US$8.2 million. During 2001, the
Company recorded $900,000 of net pretax gains related to the hedge in other
comprehensive income.
In September 2001, Rogers N.V., a Belgian subsidiary of the Company, signed an
unsecured revolving credit agreement with a European bank. This arrangement 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.
INTEREST
Interest costs incurred during the years 2003, 2002, and 2001 were $340,000,
$695,000, and $1,070,000, respectively. Interest paid during the years 2003,
2002, and 2001, was $154,000, $698,000, and $1,050,000, respectively.
RESTRICTION ON PAYMENT OF DIVIDENDS
Pursuant to the multi-currency revolving credit loan agreement, the Company
cannot make a cash dividend payment if a default or event of default has
occurred and is continuing or shall result from the cash dividend payment.
22
NOTE H - INCOME TAXES
Consolidated income before income taxes consists of:
(Dollars in Thousands) 2003 2002 2001
------------- ------------- ---------------
Domestic $28,071 $20,488 $13,144
International 6,963 4,321 7,835
------------- ------------- ---------------
$35,034 $24,809 $20,979
============= ============= ===============
The income tax expense (benefit) in the consolidated statements of income
consists of:
(Dollars in Thousands) Current Deferred Total
------------- -------------- ---------------
2003:
Federal $1,693 $3,624 $5,317
International 2,238 778 3,016
State -- 426 426
------------- -------------- ---------------
$3,931 $4,828 $8,759
============= ============== ===============
2002:
Federal $2,946 $1,844 $4,790
International 615 621 1,236
State 80 96 176
------------- -------------- ---------------
$3,641 $2,561 $6,202
============= ============== ===============
2001:
Federal $3,029 $(1,093) $1,936
International 1,951 1,533 3,484
State 26 (201) (175)
------------- -------------- ---------------
$5,006 $239 $5,245
============= ============== ===============
Deferred tax assets and liabilities as of December 28, 2003 and December 29,
2002, respectively, are comprised of the following:
(Dollars in Thousands) December 28, December 29,
2003 2002
---------------- ----------------
Deferred tax assets:
Accrued employee benefits and compensation $3,985 $7,211
Accrued postretirement benefits 2,181 2,105
Other accrued liabilities and allowances 3,182 2,807
Investments in joint ventures, net 1,371 --
Tax credit carry forwards 1,988 2,531
Other 203 --
---------------- ----------------
Total deferred tax assets 12,910 14,654
Less deferred tax asset valuation allowance 1,323 506
---------------- ----------------
Net deferred tax assets 11,587 14,148
---------------- ----------------
Deferred tax liabilities:
Depreciation and amortization 20,731 13,711
Investments in joint ventures, net -- 3,713
Other -- 47
---------------- ----------------
Total deferred tax liabilities 20,731 17,471
---------------- ----------------
Net deferred tax liability $(9,144) $(3,323)
================ ================
Deferred taxes are classified on the consolidated balance sheet at December 28,
2003 and December 29, 2002 as a net short-term deferred tax asset of $4,914,000
and $4,985,000, respectively, and a net long-term deferred tax liability of
$14,058,000 and $8,308,000, respectively.
23
NOTE H - INCOME TAXES, CONTINUED
Income tax expense differs from the amount computed by applying the United
States Federal statutory income tax rate to income before income tax expense.
The reasons for this difference are as follows:
(Dollars in Thousands) 2003 2002 2001
------------ ------------ ------------
Tax expense at Federal statutory income tax rate $12,262 $8,683 $7,342
International tax rate differential (62) (619) 409
Net U.S. tax (foreign tax credit) on foreign earnings (1,442) (926) (1,058)
General business credits (900) (582) (400)
Nontaxable foreign sales income (1,225) (1,120) (1,213)
State income taxes, net of Federal benefit 276 114 102
Nontaxable dividend income from joint venture (840) -- --
Valuation allowance change 817 122 (375)
Other (127) 530 438
------------ ------------ ------------
Income tax expense $8,759 $6,202 $5,245
============ ============ ============
In December 2002, the Belgian government enacted a tax rate decrease effective
for years ending in 2003 and 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 2002
international tax rate differential includes this reduction to the deferred
international tax expense of $813,000, net of the current international tax
expense in excess of the U.S. statutory tax rate of $194,000.
The tax credit carry forwards consist of general business credits of $447,000,
$990,000 and $1,145,000, and alternative minimum tax credits of $1,541,000,
$1,541,000 and $732,000 at December 28, 2003, December 29, 2002 and December 30,
2001, respectively. The general business credits begin to expire in 2023, the
alternative minimum tax credits have no expiration.
A valuation allowance of $982,000, $420,000 and $384,000 at December 28, 2003,
December 29, 2002 and December 30, 2001, respectively, is recorded for the net
U.S. deferred tax asset associated with the excess foreign tax credits from
undistributed foreign earnings available to offset resulting U. S. tax on future
foreign source income. It is uncertain whether the net asset will be realized in
future years due to the various foreign tax credit limitations imposed by the
U.S. tax code. The Company also has recorded a valuation allowance of $341,000
and $86,000 at December 28, 2003 and December 29, 2002, respectively, for the
net operating losses generated by the China subsidiary since its operations
began in 2002. No tax benefit has been provided on the deferred tax asset since
the subsidiary is in a cumulative loss position. The deferred tax asset
valuation allowance increased by $817,000, $122,000 and decreased by $375,000
during 2003, 2002 and 2001, respectively. The Company recognized a U.S. deferred
tax asset in 2003, 2002 and 2001 of $120,000, $2,080,000 and $1,319,000,
respectively, based on the Company's assessment of the realizability of deferred
tax assets on a more likely than not basis.
Undistributed international earnings, on which United States income tax had not
been provided, before available tax credits and deductions, amounted to
$26,767,000 at December 28, 2003, $22,864,000 at December 29, 2002, and
$19,569,000 at December 30, 2001. Tax has not been provided on these
undistributed earnings as it is the Company's practice and intention to continue
to reinvest these earnings.
Income taxes paid were $2,218,000, $1,471,000, and $2,918,000, in 2003, 2002,
and 2001, respectively.
24
NOTE I - SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Accumulated balances related to each component of Accumulated Other
Comprehensive Income (Loss) are as follows:
December 28, December 29,
(Dollars in Thousands) 2003 2002
-------------------------------------
Foreign currency translation adjustments $8,909 $3,045
Minimum pension liability, net of $2,460 and $4,743
in taxes in 2003 and 2002 (4,014) (7,738)
-------------------------------------
Accumulated other comprehensive income (loss) $4,895 $(4,693)
=====================================
Under various plans the Company may grant stock options to officers and other
key employees at exercise prices that range as low as 50% of the fair market
value of the Company's stock as of the date of grant. To date virtually all such
options have been granted at an exercise price equal to the fair market value of
the Company's stock as of the date of grant. In general, regular employee
options in the United States become exercisable over a four-year period from the
grant date and expire ten years after the date of grant. Stock option grants are
also made to non-employee directors, generally on a semi-annual basis. For such
stock options, the exercise price is equal to the fair market value of the
Company's stock and they are immediately exercisable and expire ten years after
the date of grant. Stock grants in lieu of cash compensation are also made to
non-employee directors.
Shares of capital stock reserved for possible future issuance are as follows:
December 28, December 29,
2003 2002
---------------- ----------------
Shareholder Rights Plan 20,681,915 20,243,264
Stock options 3,096,802 3,663,642
Rogers Employee Savings and Investment Plan 89,906 88,344
Rogers Corporation Global Stock Ownership Plan For Employees 447,616 477,587
Long-Term Enhancement Plan 111,771 115,308
Stock to be issued in lieu of deferred compensation 42,730 41,635
---------------- ----------------
Total 24,470,740 24,629,780
================ ================
Each outstanding share of Rogers' capital stock has attached to it a stock
purchase right. One stock purchase right entitles the holder to buy one share of
Rogers' capital stock at an exercise price of $60 per share. The rights become
exercisable only under certain circumstances related to a person or group
acquiring or offering to acquire a substantial block of Rogers' capital stock.
In certain circumstances, holders may acquire Rogers' stock, or in some cases
the stock of an acquiring entity, with a value equal to twice the exercise
price. The rights expire on March 30, 2007 but may be exchanged or redeemed
earlier. If such rights are redeemed the redemption price would be $ 0.005 per
right.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
2003 2002 2001
--------------------------------------------------
Risk-free interest rate 3.76% 3.11% 4.67%
Dividend yield 0% 0% 0%
Volatility factor 38.0% 36.3% 33.6%
Weighted-average expected life 6.8 years 6.1 years 6.1 years
25
NOTE I - SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock option program at year-end 2003,
2002, and 2001, and changes during the years ended on those dates is presented
below:
2003 2002 2001
----------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Exercise Average Average
Stock Options Shares Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 2,688,037 $21.66 2,314,821 $20.04 2,357,214 $17.12
Granted 452,100 37.98 528,560 26.07 270,809 33.24
Exercised (561,610) 12.52 (152,177) 12.15 (307,051) 9.19
Cancelled (48,586) 28.65 (3,167) 30.44 (6,151) 22.84
----------------------------------------------------------------------------------
Outstanding at end of year 2,529,941 $26.47 2,688,037 $21.66 2,314,821 $20.04
==================================================================================
Options exercisable at
end of year 1,471,271 1,807,673 1,668,843
==================================================================================
Weighted-average fair
value of options
granted during year $17.65 $9.38 $13.97
==================================================================================
The following table summarizes information about stock options outstanding at
December 28, 2003:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Outstanding Contractual Exercise Number Exercisable Exercise
Prices at December 28, 2003 Life in Years Price at December 28, 2003 Price
- -----------------------------------------------------------------------------------------------
$3 to $11 68,118 0.7 $8.78 68,118 $8.78
$12 to $28 1,401,301 6.0 $20.26 951,852 $17.63
$29 to $43 1,060,522 8.3 $35.82 451,301 $34.34
- -----------------------------------------------------------------------------------------------
$3 to $43 2,529,941 6.8 $26.47 1,471,271 $22.35
- -----------------------------------------------------------------------------------------------
In 2001, shareholders approved the Rogers Corporation Global Stock Ownership
Plan For Employees, an employee stock purchase plan. The plan provides for the
issuance of up to 500,000 shares of Company stock. Shares may be purchased by
participating employees through payroll deductions that are made during
prescribed offering periods with the actual purchases made at the end of each
offering period. Currently, shares may be purchased at 85% of the stock's
closing price at the beginning or end of each offering period, whichever is
lower, and other rules have been established for participation in the plan.
26
NOTE J - COMMITMENTS AND CONTINGENCIES
LEASES
The Company's principal noncancellable operating lease obligations are for
building space and vehicles. The leases generally provide that the Company pays
maintenance costs. The lease periods range from one to five years and include
purchase or renewal provisions at the Company's option. The Company also has
leases that are cancellable with minimal notice. Lease expense was $1,063,000 in
2003, $1,481,000 in 2002, and $1,320,000 in 2001.
Future minimum lease payments under noncancellable operating leases at December
28, 2003, aggregate $1,347,000. Of this amount, annual minimum payments are
$616,000, $382,000, $151,000, $65,000, and $52,000 for years 2004 through 2008,
respectively.
CONTINGENCIES
The Company is subject to federal, state, and local laws and regulations
concerning the environment and is currently engaged in proceedings related to
such matters.
The Company is currently involved as a potentially responsible party ("PRP") in
four active cases involving waste disposal sites. These proceedings are
generally at a stage where it is still not possible to estimate the cost of
remediation, the timing and extent of remedial action that may be required by
governmental authorities, and the amount of liability, if any, of the Company
alone or in relation to that of any other PRPs. Where it has been possible to
make a reasonable estimate of the Company's probable liability, a provision has
been established. Insurance proceeds have only been taken into account when they
have been confirmed by or received from the insurance company. Actual costs to
be incurred in future periods may vary from these estimates. Based on facts
presently known to it, the Company does not believe that the outcome of these
proceedings will have a material adverse effect on its financial position.
In addition to the above proceedings, the Company worked with the Connecticut
Department of Environmental Protection ("CT DEP") related to certain
polychlorinated biphenyl ("PCB") contamination in the soil beneath a section of
cement flooring at its Woodstock, Connecticut facility. The Company completed
clean-up efforts in 2000, monitored the site in 2001, 2002 and 2003, and will
continue to monitor the site for the next two years. On the basis of estimates
prepared by environmental engineers and consultants, the Company recorded a
provision of $2.2 million prior to 1999 and based on updated estimates provided
an additional $400,000 in 1999 for costs related to this matter. Prior to 2003,
$2.5 million was charged against this provision. In 2003, expenses of $65,000
were charged against the provision. The remaining amount in the reserve is
primarily for testing, monitoring, sampling and any minor residual treatment
activity. Management believes, based on facts currently available, that the
balance of this provision is adequate to complete the project.
In this same matter the United States Environmental Protection Agency ("EPA")
alleged that the Company improperly disposed of PCBs. An administrative law
judge found the Company liable for this alleged disposal and assessed a penalty
of approximately $300,000. The Company reflected this fine in expense in 1998
but disputed the EPA allegations and appealed the administrative law judge's
findings and penalty assessment. The original findings were upheld internally by
the EPA's Environmental Appeals Board, and the Company placed that decision on
appeal with the District of Columbia Federal Court of Appeals in 2000. In early
January of 2002, the Company was informed that the Court of Appeals reversed the
decision. As a result of this favorable decision, the $300,000 reserve for the
fine was taken into income in 2001. However, subsequent to the favorable
decision by the Court of Appeals, the EPA continued to pursue this issue and
settlement discussions with the EPA were more protracted and difficult than
originally anticipated. As such, the Company recorded $325,000 for legal and
other costs associated with this matter in 2002. On January 16, 2003, a
settlement agreement was signed with the EPA. The costs associated with the
settlement included a cash settlement payment to the government of $45,000,
which has been paid, a commitment to undertake two energy-related environmental
improvements at its facilities, one of which has been completed, and a financial
commitment for assistance to a local Woodstock, Connecticut Fire Department for
emergency preparedness, which has also been completed. As such, the provision
recorded is expected to be adequate to cover the requirements of the settlement.
27
NOTE J - COMMITMENTS AND CONTINGENCIES, CONTINUED
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 of 2001. On October 23, 2001, the Company terminated the acquisition
agreement. On October 24, 2001, Taconic filed a breach of contract lawsuit
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. In September 2002, a confidential
settlement agreement concerning all matters raised in this litigation was
negotiated and entered into. The settlement had no material impact on the 2002
results.
Over the past several years, there has been a significant increase in certain
U.S. states in asbestos-related product liability claims against numerous
industrial companies. The Company has been named, along with hundreds of other
industrial companies, as a defendant in some of these cases. The Company
strongly believes it has valid defenses to these claims and intends to defend
itself vigorously. In addition, the Company believes that it has sufficient
insurance to cover all material costs associated with these claims. Based upon
past claims experience and available insurance coverage, management believes
that the resolution of these matters will not have a material adverse effect on
the consolidated financial position, results of operations, or cash flows of the
Company.
In addition to the above issues, the nature and scope of the Company's business
bring it in regular contact with the general public and a variety of businesses
and government agencies. Such activities inherently subject the Company to the
possibility of litigation, including environmental and product liability matters
that are defended and handled in the ordinary course of business. The Company
has established accruals for matters for which management considers a loss to be
probable and reasonably estimable. It is the opinion of management that facts
known at the present time do not indicate that such litigation, after taking
into account insurance coverage and the aforementioned accruals, will have a
material adverse effect on the financial position of the Company.
28
NOTE K - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
As of December 28, 2003, the Company has ten business units and three joint
ventures. The business units and joint ventures have been aggregated into three
reportable segments: High Performance Foams, Printed Circuit Materials, and
Polymer Materials and Components. Each segment has common management oversight,
share common infrastructures, and each offers different products and services.
Printed Circuit Materials: There are three business units and two joint ventures
in this segment. Laminate materials, that are primarily fabricated by others
into circuits which are then used in electronic equipment for transmitting,
receiving, and controlling electrical signals, are the products produced by
these operations. These products tend to be proprietary materials which provide
highly specialized electrical and mechanical properties to meet the demands
imposed by increasing speed, complexity, and power in analog, digital, and
microwave equipment. These materials are fabricated, coated and/or customized as
necessary to meet customer demands and are sold worldwide.
High Performance Foams: This segment consists of three business units and one
joint venture. The products produced by these operations consist primarily of
high-performance urethane, silicone and polyolefin foams that are designed to
perform to predetermined specifications where combinations of properties are
needed to satisfy rigorous mechanical and environmental requirements. These
materials are sold worldwide and for the most part are sold to fabricators and
original equipment manufacturers.
Polymer Materials and Components: This segment is comprised of four business
units. The products produced by these operations consist primarily of molded
elastomer components, power distribution components, electroluminescent lamps
and inverters and nonwoven materials. These products have been engineered to
provide special performance characteristics to suit a wide range of markets and
applications. These products are sold worldwide to a varied customer base.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on many factors including sales and operating income of the segments, the
business units and the joint ventures.
The principal manufacturing operations of the Company are located in the United
States, Europe and Asia. The Company markets its products throughout the United
States and sells in foreign markets directly, through distributors and agents,
and through its 50% owned joint ventures in Asia. Approximately 71%, 55%, and
57% of total sales were to the electronics industry in 2003, 2002, and 2001,
respectively. Approximately 42%, 33%, and 34% of the Company's sales of products
manufactured by U.S. divisions were made to customers located in foreign
countries in 2003, 2002, and 2001, respectively. This includes sales to Europe
of 8%, 12%, and 17%, sales to Asia of 31%, 18%, and 15%, and sales to Canada of
2%, 2%, and 1% in 2003, 2002, and 2001, respectively.
The electronics industry accounted for approximately 53%, 62%, and 63% at the
end of 2003, 2002 and 2001, respectively, of the total accounts receivable due
from customers. Accounts receivable due from customers located within the United
States accounted for 32%, 45%, and 71% of the total accounts receivable owed to
the Company at the end of 2003, 2002 and 2001, respectively.
Inter-segment and inter-area sales, which are generally priced with reference to
costs or prevailing market prices, have been eliminated from the data reported
in the following tables.
29
NOTE K - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
BUSINESS SEGMENT INFORMATION
(Dollars in thousands)
Polymer
High Printed Materials and
Performance Circuit Components
Foams Materials Total
- ----------------------------------------------------------------------------------------------------
2003:
Net sales $69,482 $114,244 $59,603 $243,329
Operating income 2,611 15,230 3,730 21,571
Total assets 57,926 175,117 81,397 314,440
Capital expenditures 12,415 2,615 2,921 17,951
Depreciation 2,593 7,945 2,984 13,522
Joint venture equity income
(loss) 2,161 (218) 4,628 6,571
- ----------------------------------------------------------------------------------------------------
2002:
Net sales $65,084 $82,419 $71,935 $219,438
Operating income 8,052 4,802 1,320 14,174
Total assets 59,520 135,062 63,119 257,701
Capital expenditures 13,877 7,072 1,733 22,682
Depreciation 1,996 6,700 4,825 13,521
Joint venture equity income
(loss) 1,778 (351) 7,278 8,705
- ----------------------------------------------------------------------------------------------------
2001:
Net sales $49,745 $88,342 $77,950 $216,037
Operating income 4,583 6,170 2,293 13,046
Total assets 44,908 101,539 77,362 223,809
Capital expenditures 955 15,242 1,835 18,032
Depreciation 2,165 6,152 4,630 12,947
Joint venture equity income
(loss) 1,557 (428) 1,994 3,123
- ----------------------------------------------------------------------------------------------------
Information relating to the Company's operations by geographic area is as
follows:
(Dollars in thousands)
Europe
United States (primarily
Belgium) Asia Total
- ----------------------------------------------------------------------------------------------------
2003:
Net sales $157,276 $50,984 $35,069 $243,329
Long-lived assets 119,062 39,497 3,357 161,916
- ----------------------------------------------------------------------------------------------------
2002:
Net sales $163,127 $41,834 $14,477 $219,438
Long-lived assets 91,274 34,707 1,234 127,215
- ----------------------------------------------------------------------------------------------------
2001:
Net sales $165,321 $45,913 $4,803 $216,037
Long-lived assets 90,129 26,340 -- 116,469
- ----------------------------------------------------------------------------------------------------
The net assets of wholly-owned foreign subsidiaries were $46,861,000 at December
28, 2003 $30,268,000 at December 29, 2002, and $23,691,000 at December 30, 2001.
Net income of these foreign subsidiaries was $4,725,000 in 2003, $2,744,000 in
2002, and $4,819,000 in 2001, including net currency transaction gains of
$17,000 in 2003, $2,000 in 2002, and $117,000 in 2001.
30
NOTE L-RESTRUCTURING COSTS
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.
In 2001 the Company incurred a restructuring charge in the amount of $500,000.
This amount was primarily related to severance benefits for the termination of
19 employees in the Printed Circuit Materials segment which was associated with
the merging of two business units within that segment. As of December 28, 2003,
there was no balance remaining with respect to this charge.
31
NOTE M-ACQUISITIONS AND DIVESTITURES
Acquisitions
Durel Corporation
On September 30, 2003, the Company acquired from 3M Company ("3M") its 50%
interest in Durel Corporation, a joint venture of Rogers and 3M, for $26 million
in cash plus $0.5 million in closing costs. The acquisition allows Rogers to
expand its market presence in Durel's core business lines, to position the
Company for further growth in Durel's markets and gives the Company proprietary
ownership over Durel's research and development capabilities. Effective
September 30, 2003, the operations of Durel were fully integrated and
consolidated into Rogers Corporation. The new business unit is called the Durel
Division and its financial and operating results are included as part of Rogers'
Polymer Materials and Components business segment. The acquisition has been
accounted for as a purchase pursuant to SFAS No. 141, "Business Combinations".
As such, the purchase price has been allocated to assets and liabilities based
on their respective fair values at the date of acquisition. The following table
contains the fair market value assigned to the respective assets and liabilities
of Durel that were acquired by Rogers in the transaction.
(Dollars in thousands)
Cash $4,172
Accounts receivable, net 4,353
Inventory, net 4,525
Property, plant and equipment, net 11,367
Intangible assets 3,108
Other assets 1,363
---------------
Total assets 28,888
Accounts payable and other accruals 3,800
Accrued income taxes payable 1,111
Pension liability 2,363
Deferred tax liability 1,799
---------------
Total liabilities 9,073
---------------
Fair value of net assets acquired 19,815
Basis difference in carrying value of Durel 3,387
Elimination of deferred tax liability related to Durel 3,298
---------------
Purchase price $26,500
===============
In accordance with the purchase accounting rules of SFAS No. 141, the Company
accounted for approximately $865,000 of negative goodwill that resulted from the
transaction by allocating this goodwill to the acquired long-term assets
proportionately based on their respective fair market values.
Of the intangible assets acquired, only the trademark is considered to have an
indefinite life. Accordingly, the remaining intangibles will be amortized over
their estimated useful lives. The amortization period for the non-compete
agreement is four years and developed technology is thirteen years, which
represents the average remaining useful life of the underlying patents.
In-process research and development was amortized immediately in the fourth
quarter of 2003.
In connection with the Company's purchase price allocation, the Company
eliminated the basis difference between the carrying value of its investment in
Durel and its one-half interest in the underlying shareholders' equity of Durel
as of the acquisition date, which was due primarily to the Company's initial
contribution to the joint venture that represented technology and was valued
differently by the joint venture than it was on the Company's books.
Consequently, this difference of $3.4 million was accounted for as part of the
purchase price allocation.
At the acquisition date, the Company had a cumulative deferred tax liability of
approximately $3.3 million related to the equity income from Durel that was
recorded for book purposes, but was not yet taxable. This amount was eliminated
as part of the purchase accounting as Rogers will not be liable for this amount.
The following table contains pro-forma financial information for the Company's
consolidated results of operations assuming the Company had owned Durel for the
two-year period ending December 28, 2003:
32
2003 2002
---------------------------------
Net sales $294,660 $303,500
Operating income 29,553 35,560
Net income 30,867 27,388
Earnings per share
Basic $1.96 $1.77
Diluted 1.89 1.71
Cellect LLC
As of December 31, 2001 (the beginning of fiscal year 2002), the Company
acquired certain assets of the high performance foam business of Cellect LLC
("Cellect") for approximately $10 million in cash, plus a potential earn-out in
five years based upon performance. While there is no contractual limitation on
the earn-out, the actual earn-out will be determined and affected by the sales
and profitability growth through 2006 as compared to the base year of 2001.
These assets included intellectual property rights, machinery and equipment,
inventory, and customer lists for portions of the Cellect plastomeric and
elastomeric high performance polyolefin foam business. The acquisition was
accounted for as a purchase pursuant to SFAS No. 141. As such, the purchase
price has been allocated to property, plant and equipment and intangible assets
based on their respective fair values at the date of acquisition. The following
table summarizes the estimated fair values of the acquired assets on the date of
acquisition:
In thousands
------------------
Purchase price $10,000
Acquisition costs 226
------------------
10,226
Less identified tangible/intangible assets:
Property, plant and equipment 1,600
Trademarks 1,200
Technology 4,200
Covenant not-to-compete 600
------------------
7,600
------------------
Goodwill $2,626
==================
Of the intangible assets acquired, only the covenant not-to-compete is
considered to not have an indefinite life. Accordingly, the remaining
intangibles will not be amortized, but will be reviewed for impairment on an
annual basis. The amortization period for the covenant not-to-compete is three
years and amortization commences in 2007, subsequent to the completion of the
earn-out period.
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
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.
Divestitures
Moldable Composites Division
On November 18, 2002, the Company completed the divestiture of its Moldable
Composites Division ("MCD"), located in Manchester, Connecticut. MCD, which was
included in the Company's Polymer Materials and Components segment, 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, which bears interest at the rate of LIBOR plus 1%, was
provided for the remainder of the sales price which 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.
34
NOTE N - SUBSEQUENT EVENTS
Acquisition of KF Inc.
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 SFAS No. 141. As
such, the purchase price will be allocated to assets and liabilities based on
their respective fair values at the date of acquisition.
Windham, Connecticut Plant Closure
On January 21, 2004, the Company announced that it would cease operations at its
Windham, Connecticut facility by the end of 2004. The manufacturing operations
for Rogers molded polyurethane materials and its nitrile rubber floats,
currently manufactured at the plant, will be relocated to the Company's facility
in Suzhou, China. Charges associated with the transaction are projected to be
slightly above $2 million and are expected to be recognized in the financial
statements during the course of 2004, which are anticipated to be partially
offset by related cost savings.
35
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders
Rogers Corporation
We have audited the accompanying consolidated balance sheets of Rogers
Corporation and subsidiaries as of December 28, 2003 and December 29, 2002, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three fiscal years in the period ended December 28, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rogers Corporation
and subsidiaries at December 28, 2003 and December 29, 2002, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended December 28, 2003, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, effective
December 31, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 2004
36
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts)
Basic Diluted
Net Manufacturing Net Net Income Net Income
Quarter Sales Profit Income Per Share Per Share
- -----------------------------------------------------------------------------------
2003 Fourth* $ 85,795 $ 28,621 $ 8,995 $ .57 $ .54
Third 56,497 18,706 6,329 .40 .39
Second 49,159 14,726 5,212 .33 .32
First 51,878 16,488 5,739 .37 .36
- -----------------------------------------------------------------------------------
2002 Fourth $ 51,516 $ 17,853 $ 5,422 $ .35 $ .34
Third 56,034 17,463 4,770 .31 .30
Second 57,330 17,696 4,531 .29 .28
First 54,558 16,243 3,884 .25 .24
- -----------------------------------------------------------------------------------
* Results of operations of Durel are included in the Company's 2003 fourth
quarter consolidated results of operations. Durel's net sales included in the
Company's consolidated results for this period were $20.8 million.
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.
2003 2002
- --------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------
Fourth $ 45.75 $ 30.63 $ 26.39 $ 20.65
Third 33.70 27.27 28.85 23.35
Second 34.50 29.72 35.80 26.25
First 31.14 23.10 34.00 27.20
37