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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4347
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ROGERS CORPORATION
(Exact name of Registrant as specified in its charter)
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Massachusetts 06-0513860
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
P.O. Box 188, One Technology Drive, Rogers, Connecticut 06263-0188
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 774-9605
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of July 29,
2005 was 16,253,786.
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-1-
ROGERS CORPORATION
FORM 10-Q
July 3, 2005
INDEX
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Page No.
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Part I - Financial Information
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statements of Financial Position 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26-27
Item 6. Exhibits 28-29
Signature 29
Exhibits
- --------
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 Exhibit 31.1/31.2
Certifications Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 Exhibit 32
-2-
Part I - Financial Information
Item 1. Financial Statements
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)(Unaudited)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
2005 2004 2004 2005
---- ---- ---- ----
Net Sales $ 83,356 $ 93,323 $ 169,902 $ 190,993
Cost of Sales 58,979 61,657 122,295 125,941
Selling and Administrative Expenses 15,122 13,402 29,350 28,896
Research and Development Expenses 5,177 4,926 10,236 9,569
Impairment Charges 20,030 -- 20,030 --
------------ ------------ ------------ ------------
Total Costs and Expenses 99,308 79,985 181,911 164,406
------------ ------------ ------------ ------------
Operating Income (Loss) (15,952) 13,338 (12,009) 26,587
Equity Income (Loss) in Unconsolidated
Joint Ventures (331) 1,897 1,400 3,186
Other Income less Other Charges 10 478 852 2,170
Interest Income, Net 134 22 362 100
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (16,139) 15,735 (9,395) 32,043
Income Tax Expense (Benefit) (7,325) 3,934 (5,707) 8,010
------------ ------------ ------------ ------------
Net Income (Loss) $ (8,814) $ 11,801 $ (3,688) $ 24,033
============ ============ ============ ============
Net Income (Loss) Per Share:
Basic $ (0.54) $ 0.72 $ (0.23$1.48
============ ============ ============ ============
Diluted $ (0.54) $ 0.68 $ (0.23$1.40
============ ============ ============ ============
Weighted Average Shares Outstanding:
Basic 16,271,291 16,389,617 16,337,836 16,283,166
============ ============ ============ ============
Diluted 16,271,291 17,247,002 16,337,836 17,110,131
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except per share amounts)(Unaudited)
July 3, January 2,
2005 2005
---- ----
Assets
Current Assets:
Cash and Cash Equivalents $ 34,092 $ 37,967
Short-term Investments -- 2,000
Accounts Receivable, Net 52,156 57,264
Account Receivable from Joint Ventures 6,523 5,176
Note Receivable, Current 2,100 2,100
Inventories 42,634 49,051
Current Deferred Income Taxes 9,064 9,064
Asbestos-Related Insurance Receivables 7,154 7,154
Other Current Assets 3,526 3,158
-------- --------
Total Current Assets 157,249 172,934
Notes Receivable 4,200 4,200
Property, Plant and Equipment, Net of Accumulated
Depreciation of $119,543 and $111,215 123,863 140,384
Investments in Unconsolidated Joint Ventures 17,484 18,671
Pension Asset 5,831 5,831
Goodwill 21,928 21,928
Other Intangible Assets 1,259 7,144
Asbestos-Related Insurance Receivables - Noncurrent 28,803 28,803
Other Assets 5,388 5,300
-------- --------
Total Assets $366,005 $405,195
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 14,387 $ 21,117
Accrued Employee Benefits and Compensation 14,718 18,427
Accrued Income Taxes Payable 7,552 8,177
Asbestos-Related Liabilities 7,154 7,154
Other Accrued Liabilities 3,640 2,512
-------- --------
Total Current Liabilities 47,451 57,387
Deferred Income Taxes 5,236 14,111
Pension Liability 12,769 14,757
Retiree Health Care and Life Insurance Benefits 6,483 6,483
Asbestos-Related Liabilities 29,045 29,045
Other Long-Term Liabilities 1,441 2,045
Shareholders' Equity:
Capital Stock, $1 Par Value:
Authorized Shares 50,000,000; Issued and Outstanding
Shares 16,263,736 and 16,437,790 16,263 16,437
Additional Paid-In Capital 32,141 41,769
Retained Earnings 210,730 214,418
Accumulated Other Comprehensive Income 4,446 8,743
-------- --------
Total Shareholders' Equity 263,580 281,367
-------- --------
Total Liabilities and Shareholders' Equity $366,005 $405,195
======== ========
The accompanying notes are an integral part of the condensed financial
statements.
-4-
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)(Unaudited)
Six Months Ended
July 3, July 4,
2005 2004
-------- --------
Operating Activities
Net Income (Loss) $ (3,688) $ 24,033
Adjustments to Reconcile Net Income (Loss) to Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 10,476 9,004
Deferred Income Taxes (8,118) (954)
Equity in Undistributed Income of Unconsolidated
Joint Ventures, Net (1,400) (3,186)
Pension and Postretirement Benefits 707 (2,884)
Other, Net (3,168) (1,491)
Impairment Charges 20,030 --
Changes in Operating Assets and Liabilities, Net of Effects of
Acquisition of Businesses:
Accounts Receivable 3,794 (7,259)
Accounts Receivable, Joint Ventures (2,071) (133)
Inventories 5,323 (9,159)
Other Current Assets 138 273
Accounts Payable and Accrued Expenses (10,795) 1,838
-------- --------
Net Cash Provided by Operating Activities 11,228 10,082
Investing Activities
Capital Expenditures (12,051) (13,538)
Acquisition of Business, Net -- (3,005)
Investments in Unconsolidated Joint Ventures and Affiliates 2,813 (1,794)
Short-Term Investments 2,000 (4,995)
-------- --------
Net Cash Used in Investing Activities (7,238) (23,332)
Financing Activities
Proceeds from Sale of Capital Stock, Net 3,691 6,837
Purchase of Capital Stock from Shareholders (11,987) --
Proceeds from Issuance of Shares to Employee Stock Ownership Plan 897 719
-------- --------
Net Cash Provided by (Used in) Financing Activities (7,399) 7,556
Effect of Exchange Rate Changes on Cash (466) (52)
-------- --------
Net Decrease in Cash and Cash Equivalents (3,875) (5,746)
Cash and Cash Equivalents at Beginning of Year 37,967 31,476
-------- --------
Cash and Cash Equivalents at End of Quarter $ 34,092 $ 25,730
======== ========
Supplemental Disclosure of Noncash Activities
Contribution of Shares to Fund Employee Stock Ownership Plan $ 806 $ 689
Exchange of Note Receivable as Partial Payment for Acquired Business -- 1,833
The accompanying notes are an integral part of the condensed financial
statements.
-5-
ROGERS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, the accompanying
statements of financial position and related interim statements of operations
and cash flows include all adjustments, consisting only of normal recurring
items, necessary for their fair presentation in accordance with U.S. generally
accepted accounting principles. All significant intercompany transactions have
been eliminated.
Interim results are not necessarily indicative of results for a full year. For
further information regarding Rogers Corporation's (the "Company" or "Rogers")
accounting policies, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended January 2, 2005.
The Company uses a 52- or 53-week fiscal calendar ending on the Sunday closest
to the last day in December of each year. Fiscal 2005 is a 52-week year ending
on January 1, 2006.
Certain prior period amounts have been reclassified to conform to the current
period classification.
Income Taxes
The Company's effective tax rate was (45%) and 25%, respectively, for the three
month period ended July 3, 2005 and July 4, 2004 and (61%) and 25% for the first
six months of 2005 and 2004, respectively. The Company's annual effective tax
rate, excluding the effects of the impairment charge, at the end of the second
quarter of 2005 was 20% as compared to 25% at the end of the second quarter of
2004, and 24% at the end of the first quarter of 2005. Income taxes paid were
$21,000 and $480,050 in the three months ended July 3, 2005 and July 4, 2004,
and $41,000 and $3.7 million for the first six months of 2005 and 2004,
respectively. In 2005, the effective tax rate benefited primarily from (i)
one-time non-cash pre-tax charges of $21.4 million taken on certain assets of
the Company's polyolefin business (33.5 percentage point decrease), (ii)
favorable tax rates on certain foreign business activity, foreign tax credits
and research and development credits, which reduced the effective tax rate by 7,
4 and 2 percentage points, respectively, and (iii) a 4 percentage point decrease
due to lower forecasted income levels in 2005. As a result of the benefit
related to the non-cash charges for which tax deductions will be realized over
an extended time period, the Company's deferred tax liabilities decreased by
approximately $8.1 million as of July 3, 2005.
Inventories
Inventories were as follows:
July 3, January 2,
(Dollars in thousands) 2005 2005
---- ----
Raw materials $13,564 $16,121
Work in process and finished goods 29,070 32,930
------- -------
$42,634 $49,051
======= =======
-6-
Comprehensive Income
Comprehensive income were as follows:
Three-Months Ended Six-Months Ended
July 3, July 4, July 3, July 4,
(Dollars in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Net income (loss) $ (8,814) $ 11,801 $ (3,688) $ 24,033
Foreign currency translation adjustments (2,460) 471 (4,297) (336)
-------- -------- -------- --------
Comprehensive income (loss) $(11,274) $ 12,272 $ (7,985) $ 23,697
======== ======== ======== ========
Accumulated balances related to each component of Accumulated Other
Comprehensive Income as of July 3, 2005 and January 2, 2005 were as follows:
(Dollars in thousands) 2005 2004
---- ----
Foreign currency translation adjustments $ 8,337 $ 12,634
Minimum pension liability (3,891) (3,891)
-------- --------
Accumulated Other Comprehensive Income $ 4,446 $ 8,743
======== ========
Recent Accounting Standards
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based
Payment" (SFAS 123R), which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123R supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. However, SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. In April 2005, the Securities and
Exchange Commission extended the compliance dates for SFAS 123R, and therefore,
Rogers will adopt SFAS 123R in the first quarter of fiscal 2006. The Company
will continue to evaluate the provisions of SFAS 123R to determine its impact on
its financial condition, results of operations and liquidity upon adoption.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends the guidance in Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and spoilage. Among other provisions, the new rule requires that these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of fiscal 2006. The Company is
currently evaluating the effect that the adoption of SFAS 151 will have on its
consolidated results of operations and financial condition but does not expect
SFAS 151 to have a material impact.
-7-
Note 2 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share in conformity with SFAS No. 128, "Earnings per Share", for the
periods indicated:
Three-Months Ended Six-Months Ended
July 3, July 4, July 3, July 4,
(Dollars in thousands) 2005 2004 2005 2004
---------------------- ---- ---- ---- ----
Numerator:
Net income (loss) $ (8,814) $ 11,801 $ (3,688) $ 24,033
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 16,271 16,390 16,338 16,283
Effect of dilutive stock options -- 857 -- 827
-------- -------- -------- ----------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 16,271 17,247 16,338 17,110
======== ======== ======== ==========
Basic earnings (loss) per share $ (0.54) $ 0.72 $ (0.23) $ 1.48
======== ======== ======== ==========
Diluted earnings (loss) per share $ (0.54) $ 0.68 $ (0.23) $ 1.40
======== ======== ======== ==========
Note 3 - Stock-Based Compensation
Under various plans, the Company may grant stock and stock options to directors,
officers, and other key employees. Stock-based compensation awards are accounted
for using the intrinsic value method prescribed in APB 25 and related
interpretations. Stock-based compensation costs for stock options are generally
not reflected in net income as options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
the grant. Stock-based compensation costs for stock awards are reflected in net
income over the awards' vesting period.
The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
no compensation cost has been recognized in the financial statements for the
stock option plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards consistent
with the provisions of SFAS 123, the Company's net income (loss) and earnings
(loss) per share for the periods indicated would have been reduced to the pro
forma amounts indicated below:
Three-Months Ended Six-Months Ended
July 3, July 4, July 3, July 4,
(Dollars thousands, except per share amounts) 2005 2004 2005 2004
---- ---- ---- ----
Net income (loss), as reported $ (8,814) $ 11,801 $ (3,688) $ 24,033
Less: Total stock-based compensation expense
determined under Black-Scholes option
pricing model, net of related tax effect 4,148 6,640 4,953 7,497
---------- ---------- --------- ----------
Pro-forma net income (loss) $ (12,962) $ 5,161 $ (8,641) $ 16,536
========== ========== ========= ==========
Basic earnings (loss) per share:
As reported $ (0.54) $ 0.72 $ (0.23) $ 1.48
Pro-forma (0.80) 0.31 (0.53) 1.02
Diluted earnings (loss) per share:
As reported $ (0.54) $ 0.68 $ (0.23) $ 1.40
Pro-forma (0.80) 0.30 (0.53) 0.97
-8-
The effects on pro forma net income (loss) and earnings (loss) per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reported net income for future years, due to
such things as the variation in vesting periods of future stock options that
might be granted, the variation each year in the number of stock options
granted, and the potential variations in the future assumptions used in the
Black-Scholes model for calculating pro-forma compensation expense.
An average vesting period of three years was used for the assumption regarding
stock options granted, except for options for approximately 353,000 shares that
were granted in the second quarter of 2004 and for options for 331,000 shares
that were granted in the first six months of 2005 that vested immediately.
Shares obtained by employees through the exercise of options issued under these
2004 and 2005 grants cannot be sold until after the fourth anniversary of the
grant date.
Note 4 - Pension Benefit and Other Postretirement Benefit Plans
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost for the periods indicated are:
Pension Benefits
----------------
Three-Months Ended Six-Months Ended
July 3, July 4, July 3, July 4,
(Dollars in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 1,041 $ 1,022 $ 2,085 $ 2,044
Interest cost 1,646 1,613 3,250 3,226
Expected return on plan assets (2,041) (1,798) (4,023) (3,597)
Amortization of prior service cost 106 125 231 250
Amortization of net loss 215 193 329 387
--------- -------- ------- -------
Net periodic benefit cost $ 967 $ 1,155 $ 1,872 $ 2,310
========= ======== ======= =======
Other Benefits
--------------
Three-Months Ended Six-Months Ended
July 3, July 4, July 3, July 4,
(Dollars in thousands) 2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Service cost $ 173 $ 126 $ 346 $ 252
Interest cost 156 133 311 266
Expected return on plan assets -- -- -- --
Amortization of prior service cost -- -- -- --
Amortization of net loss 83 28 165 56
------ ------ ------ ------
Net periodic benefit cost $ 412 $ 287 $ 822 $ 574
====== ====== ====== ======
Employer Contributions
The Company made a $2 million contribution to its qualified defined benefit
pension plan in the second quarter of 2005 (contributions approximated $3.3
million during fiscal 2004).
-9-
Medicare Prescription Drug, Improvement and Modernization Act of 2003
In December 2003 the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("the Act") was enacted into law. The Act includes a prescription
drug benefit under Medicare Part D as well as a federal subsidy beginning in
2006. This subsidy will be paid to sponsors of postretirement health care
benefit plans that provide a benefit that is at least actuarially equivalent (as
defined in the Act) to Medicare Part D.
In May 2004, the FASB issued FSP FAS 106-2, which provides accounting guidance
to sponsors of postretirement health care plans that are impacted by the Act.
The FSP is effective for interim or annual periods beginning after June 15,
2004. Although detailed regulations necessary to implement the Act have not yet
been finalized, the Company believes that drug benefits offered to the salaried
retirees under Postretirement Welfare plans will qualify for subsidy under
Medicare Part D. During the third quarter of 2004, the effects of this subsidy
were factored into the 2004 annual expense. The reduction in the benefit
obligation attributable to past service cost was approximately $545,000 and was
recorded as an actuarial gain in 2004 that will be amortized over the remaining
service period of active employees (approximately $49,000 and $51,000 was
amortized in 2004 and will be amortized in 2005, respectively). The reduction in
expense related to the Act was approximately $126,000 in 2004 and $69,000 in the
first half of 2005. The reduction in expense for the first and second quarter of
2005 is $35,000 and $34,000, respectively.
Note 5 - Equity
Common Stock Repurchase
From time to time the Company's Board of Directors authorizes the repurchase, at
management's discretion, of shares of the Company's common stock. The most
recent regular authorization was approved on October 28, 2004 and provided for
the repurchase of up to an aggregate of $25 million in market value of such
stock. As of July 3, 2005, the Company had repurchased approximately 374,000
shares of stock for a total of $15.2 million as a result of this plan, including
approximately 133,900 shares of stock for a total of approximately $5.0 million
in the second quarter of 2005.
Note 6 - Segment Information
The following table sets forth the information about the Company's operating
segments in conformity with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", for the periods indicated:
Three-Months Ended Six-Months Ended
(Dollars in millions) July 3, 2005 July 4, 2004 July 3, 2005 July 4, 2004
------------ ------------ ------------ ------------
Printed Circuit Materials
Net Sales $ 37.0 $ 47.5 $ 76.7 $ 92.6
Operating Income 4.2 11.5 8.0 20.0
Polymer Materials & Components
Net Sales $ 23.7 $ 24.0 $ 47.2 $ 54.5
Operating Income (Loss) (0.5) 0.5 (1.7) 4.7
High Performance Foams
Net Sales $ 22.6 $ 21.8 $ 46.0 $ 43.9
Operating Income (Loss) (19.6) 1.3 (18.3) 1.9
Total
Net Sales $ 83.4 $ 93.3 $ 169.9 $ 191.0
Operating Income (Loss) (16.0) 13.3 (12.0) 26.6
High Performance Foams operating loss in 2005 includes substantially all of the
effect of the impairment charges.
-10-
Inter-segment sales have been eliminated from the sales data in the previous
table. Totals may not calculate due to rounding.
Note 7 - Joint Ventures
As of July 3, 2005, the Company had four joint ventures, each 50% owned, which
are accounted for by the equity method of accounting. Equity income of $1.4
million and $3.2 million for the first six months of 2005 and 2004 is included
in the consolidated statements of operations, respectively. Each of the joint
ventures is described below:
Joint Venture Location Business Segment
- ------------- -------- ----------------
Rogers Inoac Corporation Japan High Performance Foams
Rogers Inoac Suzhou Corporation China High Performance Foams
Polyimide Laminate Systems, LLC U.S. Printed Circuit Materials
Rogers Chang Chun Technology Co., Ltd. Taiwan Printed Circuit Materials
The summarized financial information for these joint ventures is included in the
following table for the six-month periods ended July 3, 2005 and July 4, 2004.
(Dollars in thousands) 2005 2004
---- ----
Net sales $ 45,870 $ 36,405
Gross profit 10,953 12,685
Net income 3,631 6,653
The effect of transactions between the Company and its unconsolidated joint
ventures were immaterial to the Company's financial statements in all periods
presented above.
Note 8 - Commitments and Contingencies
The Company is currently engaged in the following legal proceedings:
Environmental Remediation in Manchester, Connecticut
In the fourth quarter of 2002, the Company sold its Moldable Composites Division
("MCD") located in Manchester, Connecticut to Vyncolit North America, Inc.
(Vyncolit), a subsidiary of the Perstorp Group (Perstorp), Sweden. Subsequent to
the divestiture, certain environmental matters were discovered at the Manchester
location and Rogers determined that under the terms of the arrangement, the
Company would be responsible for estimated remediation costs of approximately
$500,000 and recorded this reserve in 2002. In the fourth quarter of 2004, the
Connecticut Department of Environmental Protection ("DEP") accepted the
Company's plan of remediation, which was subsequently accepted by the Town of
Manchester in the first quarter of 2005 subject to the Company performing a
study on the condition of a sewer line. In the second quarter of 2005, the study
was completed and found the sewer line to be in good condition. The findings
have been submitted to the town and await approval. Once approved by the town,
the plans will also have to be approved by Sumitomo Bakelite Co., Ltd., a
Japanese company that purchased Vyncolit from Perstorp in the second quarter of
2005. In accordance with SFAS No. 5, "Accounting for Contingencies," the Company
continues to maintain a reserve of approximately $0.5 million, which represents
the costs to cover the anticipated remediation, which is both probable and
estimable, based on facts and circumstances known to the Company at the present
time. The remediation is expected to be completed by the end of 2005 or soon
thereafter. The Company will be responsible for monitoring the site for at least
two years after completion of the remediation.
Superfund Sites
The Company is currently involved as a potentially responsible party ("PRP") in
four active cases involving waste disposal sites. In certain cases, these
proceedings are at a stage where it is still not possible to estimate the
ultimate cost of remediation, the timing and extent of remedial action that may
be required by governmental authorities, and the amount of liability, if any, of
the Company alone or in relation to that of any other PRPs.
-11-
However, the costs incurred since inception for these claims have been
immaterial and have been primarily covered by insurance policies, for both legal
and remediation costs. In one particular case, the Company has been assessed a
cost sharing percentage of 2.47% in relation to the range for estimated total
cleanup costs of $17 to $24 million. The Company has confirmed sufficient
insurance coverage to fully cover this liability and has recorded a liability
and related insurance receivable of approximately $0.5 million, which
approximates its share of the low end of the range.
In all its superfund cases, the Company has been deemed by the respective PRP
administrator to be a de minimis participant and only allocated an insignificant
percentage of the total PRP cost sharing responsibility. Based on facts
presently known to it, the Company believes that the potential for the final
results of these cases having a material adverse effect on its results of
operations, financial position or cash flows is remote. These cases have been
ongoing for many years and the Company believes that they will continue on for
the indefinite future. No time frame for completion can be estimated at the
present time.
PCB Contamination
The Company has been working with the DEP related to certain polychlorinated
biphenyl ("PCB") contamination in the soil beneath a section of cement flooring
at its Woodstock, Connecticut facility. The Company completed clean-up efforts
in 2000 and has monitored the site since the clean up was completed. In the
fourth quarter of 2004, additional PCB's were detected in one of the wells used
for monitoring the site. The Company has reported the results to the DEP and is
awaiting the government's response. The Company anticipates that it will be
required to install an additional well cluster at the site and expects the cost
of this new well to be approximately $40,000, which has been accrued. Since
inception, the Company has spent approximately $2.5 million in remediation and
monitoring costs related to the site. The future costs of monitoring the site
are expected to be de minimis and, although it is reasonably possible that the
Company will incur additional remediation costs associated with the newly found
PCB's, the Company cannot estimate the range of costs based on facts and
circumstances known to it at the present time. The Company believes that this
situation will continue for several more years, particularly considering the
newly identified PCB presence at the site. No time frame for completion can be
estimated at the present time.
Asbestos Litigation
Overview
- --------
Over the past several years, there has been a significant increase in certain
U.S. states in asbestos-related product liability claims brought against
numerous industrial companies where the third-party plaintiffs allege personal
injury from exposure to asbestos-containing products. The Company has been
named, along with hundreds of other industrial companies, as a defendant in some
of these claims. In virtually all of these claims filed against the Company, the
plaintiffs are seeking unspecified damages or, if an amount is specified, it
merely represents jurisdictional amounts or amounts to be proven at trial. Even
in those situations where specific damages are alleged, the claims frequently
seek the same amount of damages, irrespective of the disease or injury.
Plaintiffs' lawyers often sue dozens or even hundreds of defendants in
individual lawsuits on behalf of hundreds or even thousands of claimants. As a
result, even when specific damages are alleged with respect to a specific
disease or injury, those damages are not expressly identified as to the Company.
In fact, there are no cases in which the Company is the sole named defendant.
The Company did not mine, mill, manufacture or market asbestos; rather, the
Company made some limited products, which contained encapsulated asbestos. Such
products were provided to industrial users. The Company stopped the manufacture
of these products in 1987.
Claims
- ------
The Company has been named in asbestos litigation primarily in Illinois,
Pennsylvania, and Mississippi. As of July 3, 2005, there were approximately 199
pending claims compared to 232 pending claims at January 2, 2005 and 211 pending
claims at April 3, 2005. The number of open claims during a particular time can
fluctuate significantly from period to period depending on how successful the
Company has been in getting these cases dismissed or settled. In addition, most
of these lawsuits do not include specific dollar claims for damages, and many
include a number of plaintiffs and multiple defendants. Therefore, the Company
cannot provide any meaningful disclosure about the total amount of the damages
sought.
-12-
The rate at which plaintiffs filed asbestos-related suits against a number of
defendants, including the Company, increased in 2001, 2002 and the first half of
2003 because of increased activity on the part of plaintiffs to identify those
companies that sold asbestos containing products, but which did not directly
mine, mill or market asbestos. In addition, a significant increase in the volume
of asbestos-related bodily injury cases arose in Mississippi beginning in 2002
and extended through mid-year 2003. This increase in the volume of claims in
Mississippi was apparently due to the passage of tort reform legislation
(applicable to asbestos-related injuries), which became effective on September
1, 2003 and which resulted in a large number of claims being filed in
Mississippi by plaintiffs seeking to ensure their claims would be governed by
the law in effect prior to the passage of tort reform.
Defenses
- --------
In many cases, plaintiffs are unable to demonstrate that they have suffered any
compensable loss as a result of exposure to the Company's asbestos-containing
products. Management continues to believe that a majority of the claimants in
pending cases will not be able to demonstrate exposure or loss. This belief is
based in large part on two factors: the limited number of asbestos-related
products manufactured and sold by the Company and the fact that the asbestos was
encapsulated in such products. In addition, even at sites where a claimant can
verify his or her presence during the same period those products were used,
liability of the Company cannot be presumed because even if an individual
contracted an asbestos-related disease, not everyone who was employed at a site
was exposed to the Company's asbestos-containing products. Based on these and
other factors, the Company has and will continue to vigorously defend itself in
asbestos-related matters.
Dismissals and Settlements
- --------------------------
Cases involving the Company typically name 50-300 defendants, although some
cases have had as few as 6 and as many as 833 defendants. The Company has
obtained dismissals of many of these claims. In the first six months of 2005 and
full year 2004, the Company was able to have approximately 64 and 84 claims
dismissed, respectively, and settled 4 and 8 claims, respectively. The Company
has, however, settled a small number of cases for which all costs have been paid
by the Company's insurance carriers. The Company's insurance carriers paid an
aggregate of approximately $3.0 million for such settlements in the first three
months of 2005, while there were no payments made during the second quarter of
2005. Although these historical figures provide some insight into the Company's
experience with asbestos litigation, no guarantee can be made as to the
dismissal and settlement rate the Company will experience in the future.
Settlements are made without any admission of liability. Settlement amounts may
vary depending upon a number of factors, including the jurisdiction where the
action was brought, the nature and extent of the disease alleged and the
associated medical evidence, the age and occupation of the claimant, the
existence or absence of other possible causes of the claimant's alleged illness,
and the availability of legal defenses, as well as whether the action is brought
alone or as part of a group of claimants. To date, the Company has been
successful in obtaining dismissals for many of the claims and has settled only a
limited number. The majority of settled claims were settled for immaterial
amounts, and such costs have been paid by the Company's insurance carriers. In
addition, to date, the Company has not been required to pay any punitive damage
awards.
Potential Liability
- -------------------
In late 2004, the Company determined that it was reasonably prudent, based on
facts and circumstances known to it at that time, to perform a formal analysis
to project its potential future liability and related insurance coverage for
asbestos-related matters. This determination was made based on several factors,
including the growing number of asbestos related claims and recent settlement
history. As a result, National Economic Research Associates, Inc. ("NERA"), a
consulting firm with expertise in the field of evaluating mass tort litigation
asbestos bodily-injury claims, was engaged to assist the Company in projecting
the Company's future asbestos-related liabilities and defense costs with regard
to pending claims and future unasserted claims. Projecting future asbestos costs
is subject to numerous variables that are extremely difficult to predict,
including the number of claims that might be received, the type and severity of
the disease alleged by each claimant, the long latency period associated with
asbestos exposure, dismissal rates, costs of medical treatment,
-13-
the financial resources of other companies that are co-defendants in claims,
uncertainties surrounding the litigation process from jurisdiction to
jurisdiction and from case to case, and the impact of potential changes in
legislative or judicial standards, including potential tort reform. Furthermore,
any predictions with respect to these variables are subject to even greater
uncertainty as the projection period lengthens. In light of these inherent
uncertainties, the Company's limited claims history and consultations with NERA,
the Company believes that five years is the most reasonable period for
recognizing a reserve for future costs, and that costs that might be incurred
after that period are not reasonably estimable at this time. As a result, the
Company also believes that its ultimate net asbestos-related contingent
liability (i.e., its indemnity or other claim disposition costs plus related
legal fees) cannot be estimated with certainty.
Insurance Coverage
- ------------------
The Company's applicable insurance policies generally provide coverage for
asbestos liability costs, including coverage for both resolution and defense
costs. Following the initiation of asbestos litigation, an effort was made to
identify all of the Company's primary and excess insurance carriers that
provided applicable coverage beginning in the 1950s through the mid-1980s. There
appear to be three such primary carriers, all of which were put on notice of the
litigation. In late 2004, Marsh Risk Consulting ("Marsh"), a consulting firm
with expertise in the field of evaluating insurance coverage and the likelihood
of recovery for asbestos-related claims, was engaged to work with the Company to
project the insurance coverage of the Company for asbestos-related claims.
Marsh's conclusions were based primarily on a review of the Company's coverage
history, application of reasonable assumptions on the allocation of coverage
consistent with industry standards, an assessment of the creditworthiness of the
insurance carriers, analysis of applicable deductibles, retentions and policy
limits, and the experience of NERA and a review of NERA's report.
Cost Sharing Agreement
- ----------------------
To date, the Company's primary insurance carriers have provided for
substantially all of the legal and defense costs associated with its
asbestos-related claims. However, as claims continue to escalate, the Company
and its insurance carriers have determined that it would be appropriate to enter
into a cost sharing agreement to clearly define the cost sharing relationship
among the carriers and the Company. As of November 5, 2004, an interim cost
sharing agreement was established that provided that the known primary insurance
carriers would continue to pay all legal and defense costs associated with these
claims until a definitive cost sharing arrangement was consummated. The Company
expects a definitive cost sharing agreement to be finalized during the latter
part of 2005, at which time the final terms of the cost sharing relationship
would be agreed to by these respective parties.
Impact on Financial Statements
- ------------------------------
Given the inherent uncertainty in making future projections, the Company plans
to have the projections of current and future asbestos claims periodically
re-examined, and the Company will update them if needed based on the Company's
experience, changes in the underlying assumptions that formed the basis for
NERA's and Marsh's models, and other relevant factors, such as changes in the
tort system and the Company's success in resolving claims. Based on the
assumptions employed by and the report prepared by NERA and other variables, in
the fourth quarter of 2004 the Company recorded a reserve for its estimated
bodily injury liabilities for asbestos-related matters, including projected
indemnity and legal costs, for the five-year period through 2009 in the
undiscounted amount of $36.2 million. Likewise, based on the analysis prepared
by Marsh, the Company recorded a receivable for its estimated insurance recovery
of $36.0 million. This resulted in the Company recording a pre-tax charge to
earnings of $200,000 in 2004. As of July 3, 2005, these balances have not been
adjusted as facts and circumstances surrounding the assumptions used in the
original models have remained materially consistent since the initial analysis
was performed.
The amounts recorded by the Company for the asbestos-related liability and the
related insurance receivable described above were based on currently known facts
and a number of assumptions. However, projecting future events, such as the
number of new claims to be filed each year, the average cost of disposing of
each such claims, coverage issues among insurers, and the continuing solvency of
various insurance companies, as well as the numerous uncertainties surrounding
asbestos litigation in the United States, could cause the actual liability and
insurance recoveries for the Company to be higher or lower than those projected
or recorded.
-14-
There can be no assurance that the Company's accrued asbestos liabilities will
approximate its actual asbestos-related settlement and defense costs, or that
its accrued insurance recoveries will be realized. The Company believes that it
is reasonably possible that it will incur additional charges for its asbestos
liabilities and defense costs in the future, which could exceed existing
reserves, but such excess amount cannot be estimated at this time. The Company
will continue to vigorously defend itself and believes it has substantial
unutilized insurance coverage to mitigate future costs related to this matter.
Other Environmental Matters
In 2004, the Company became aware of a potential environmental matter at its
facility in Korea involving possible soil contamination. The initial assessment
on the site has been completed and has confirmed that there is contamination.
The Company is in the process of assessing the extent of contamination. At
present, it is not possible to determine the likelihood or to reasonably
estimate the cost of any potential adverse outcome based on the facts and
circumstances currently known to the Company.
The Company is also aware of a potential environmental matter involving soil
contamination at one of its European facilities. The Company is currently
assessing this matter and believes that it is probable that a loss contingency
exists relating to this site and that a reasonably estimable range of loss is
between $200,000 and $400,000. The Company recorded a reserve in 2004 that
approximates the low end of the range. As of July 3, 2005, the Company believes
that this reserve continues to be appropriate based on facts and circumstances
presently known at this time.
In addition to the above issues, the nature and scope of the Company's business
brings it in regular contact with the general public and a variety of businesses
and government agencies. Such activities inherently subject the Company to the
possibility of litigation, including environmental and product liability matters
that are defended and handled in the ordinary course of business. The Company
has established accruals for matters for which management considers a loss to be
probable and reasonably estimable. It is the opinion of management that facts
known at the present time do not indicate that such litigation, after taking
into account insurance coverage and the aforementioned accruals, will have a
material adverse impact on the results of operations, financial position, or
cash flows of the Company.
Note 9 - Impairment Charge
In the second quarter of 2005, the Company recorded non-cash pre-tax charges of
$21.4 million related to the polyolefin foam business in the Company's High
Performance Foams business segment. This charge includes a $19.8 million
impairment charge on certain long-lived assets and $1.6 million in charges
related to the write down of inventory and receivables related to the polyolefin
foam business. The Company also recorded a non-cash pre-tax impairment charge of
$0.3 million on its facility in South Windham, Connecticut that formerly
contained the manufacturing operations of it elastomer components products,
which were relocated to Suzhou, China in 2004.
The Company acquired certain assets of the polyolefin foam business, including
intellectual property rights, inventory, machinery and equipment, and customer
lists from Cellect LLC, in the beginning of fiscal year 2002. The Company
migrated the manufacturing process to its Carol Stream, Illinois facility, which
was completed at the end of the third quarter of 2004. This migration included
the development of new process technology and the purchase of custom machinery,
which the Company believed at the time would allow it to gain efficiencies in
the manufacturing process and improvements in product quality. After completing
this transition, the Company focused on realizing these previously anticipated
efficiencies and improvements, but encountered a variety of business issues,
including changing customer requirements in the polyolefin marketplace, a
significant increase in raw material costs, and other quality and delivery
issues. In light of these circumstances, the Company commenced a study in the
first quarter of 2005 to update its market understanding and the long-term
viability of the polyolefin business. This study was completed in the second
quarter of 2005 and confirmed that the business environment surrounding the
polyolefin foam business had changed from the time of the Company's initial
purchase, which caused the Company to revisit its business plan for the
polyolefin foam business. The Company concluded during the second quarter that
under the new circumstances it would be very difficult and cost prohibitive to
produce the current polyolefin products on a profitable basis and decided to
scale back on the current business by shedding unprofitable customers and to
concentrate on developing new, more profitable products.
-15-
These developments resulted in the performance of an impairment analysis that
was conducted in accordance with Statement of Financial Accounting Standards No.
144, (SFAS 144) "Accounting for the Impairment or Disposal of Long-Lived Assets"
and No. 142, (SFAS 142) "Goodwill and Other Intangible Assets". This analysis
resulted in the impairment of certain long-lived assets, including machinery and
equipment ($14.1 million) and intangibles ($5.7 million), and the write down of
certain inventory ($1.2 million) and receivables ($0.4 million) related to the
polyolefin foam business. A deferred income tax benefit of $8.1 million was also
recorded, resulting in a net after-tax charge of $13.2 million.
Additionally during the second quarter of 2005, a non-cash pre-tax impairment
charge was recorded on the Company's facility in South Windham, Connecticut of
$0.3 million. The South Windham facility was formerly the location of the
manufacturing operations of the Company's elastomer components business prior to
it being moved to Suzhou, China in the fall of 2004. In the second quarter of
2005, the Company made the decision to actively market the building. As a
result, a fair value analysis was performed in accordance with SFAS 144,
resulting in the impairment charge. The book value of the building ($0.9
million) is classified as held-for-sale and was reclassified to "other current
assets" on the balance sheet.
Note 10 - Restructuring
On January 21, 2004, the Company announced that it would cease operations at its
South Windham, Connecticut facility by the end of 2004. The relocation of
manufacturing operations of the Company's molded polyurethane materials and
nitrile rubber floats to the Company's facility in Suzhou, China was completed
in the third quarter of 2004. Total charges associated with this transaction are
projected to be approximately $2.3 million related primarily to severance that
has been or will be paid to employees upon termination and completion of service
requirements. In addition, the Company recognized a $0.8 million curtailment
charge on its defined benefit pension plan in the fourth quarter of 2004 as a
result of the termination of employees as the amortizable prior service cost
related to terminated employees was accelerated into 2004 as a result of the
shutdown.
In accordance with Statement of Financial Accounting Standards No. 146, (SFAS
146) "Accounting for Costs Associated with Exit or Disposal Activities", and No.
112, (SFAS 112) "Employers' Accounting for Postemployment Benefits", the Company
recorded $2.3 million in restructuring charges in 2004 for the cessation of
operations in the South Windham, Connecticut facility, which is included in
selling and administrative expenses on the statement of operations. Actual costs
charged against the reserve to date are approximately $2.0 million, including
$0.9 million in the first six months of 2005. The Company expects to pay the
remaining amounts over the course of 2005 and the first half of 2006. No
additional costs were accrued in the first six months of 2005.
On October 5, 2004, the Company announced a restructuring plan resulting in a
headcount reduction at its Durel division. The terminations occurred early in
the fourth quarter of 2004 and, as such, the Company recognized approximately
$330,000 in charges associated with severance payments that have been or will be
made to employees as a result of this plan in accordance with SFAS 146. Actual
payments made to date are approximately $246,000, including approximately
$103,000 in the first six months of 2005, with the remainder to be paid over the
course of 2005. No additional costs were accrued in the first six months of
2005.
Note 11 - Related Parties
In the beginning of fiscal year 2002, the Company acquired certain assets of the
high performance polyolefin foam business of Cellect LLC, including intellectual
property rights, inventory, machinery and equipment, and customer lists, for
approximately $10 million in cash, plus a potential earn-out over five years
based upon performance. The acquisition was accounted for as a purchase pursuant
to Statement of Financial Accounting Standard No. 141, (SFAS 141) "Business
Combinations". As such, the purchase price was allocated to property, plant and
equipment and intangible assets based on their respective fair values at the
date of acquisition.
In June 2004, the Company entered into a post-closing agreement with Cellect
that amended the terms of the original acquisition agreement, particularly as it
related to the earn-out provision. Under the post-closing agreement, the Company
agreed to accelerate the earn-out provision to the third quarter of 2004 and to
fix the amount of the earn-out at $3.0 million. The obligation was partially
satisfied in the second quarter of 2004 through a $200,000 cash payment to
Cellect and the exchange of a $1.8 million note receivable the Company had from
Cellect with the balance of $1.0 million due at the conclusion of the supply
agreement.
-16-
In the third quarter of 2004, the Company ceased production activities at
Cellect and it was manufacturing polyolefins exclusively at its Carol Stream
facility. In accordance with SFAS 141, the $3.0 million earn-out was recognized
as additional purchase price and capitalized as goodwill in the second quarter
of 2004.
In the second quarter of 2005, the Company reached an agreement with Cellect and
settled its outstanding obligations by entering into a note with Cellect for
$360,000, which is to be paid to Rogers in installments over the course of 2
years with the first installment due in August 2005. This note releases both
companies from any future obligations to each other. The previous receivable
outstanding of $1.5 million described above had previously been partially
reserved for and the write off of the remaining amount did not materially impact
the Company's results in the second quarter of 2005.
Note 12 - Acquisitions and Divestitures
KF Inc.
On January 31, 2004, the Company acquired KF Inc. ("KF"), a Korean manufacturer
of liquid level sensing devices for the automotive market, through a stock
purchase agreement for approximately $3.9 million. The acquisition allows the
Company to position itself for further growth and expansion in the float
business in Asia. Under the terms of the agreement, KF is an indirect wholly
owned subsidiary of Rogers and was included in the Company's consolidated
results beginning on January 31, 2004. The acquisition was accounted for as a
purchase pursuant to SFAS No. 141, "Business Combinations". As such, the
purchase price was allocated to the acquired assets as of the date of
acquisition. The following table summarizes the estimated fair values of the
acquired assets as of the date of acquisition, which includes amounts recorded
in the fourth quarter of 2004 to finalize the purchase accounting for the
acquisition:
(Dollars in thousands)
Purchase price $ 3,902
Less: Identified assets and liabilities:
Cash 495
Accounts receivable 255
Inventory 351
Property, plant and equipment 404
Intangible assets 800
Other assets 93
Accounts payable and other accruals (434)
Deferred tax liability (235)
Other liabilities (51)
-------
Goodwill $ 2,224
========
Due to the insignificant effect of KF on Rogers' consolidated statement of
financial position and operating results, no pro-forma information has been
presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Statements in this report that are not strictly historical may be deemed to be
"forward-looking" statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements should be considered as subject to the many uncertainties that exist
in the Company's operations and environment. These uncertainties, which include
economic conditions, market demand and pricing, competitive and cost factors,
rapid technological change, new product introductions, and the like, are
discussed in greater detail in Rogers' 2004 Form 10-K filed with the Securities
and Exchange Commission and are incorporated by reference herein. Such factors
could cause actual results to differ materially from those expressed in the
forward-looking statements. The Company undertakes no duty to update any
forward-looking statement to conform the statement to actual results or to a
change in its expectations.
-17-
Business Overview
Rogers Corporation is a global enterprise that provides its customers with
innovative solutions and industry leading products in three business segments:
Printed Circuit Materials, High Performance Foams and Polymer Materials and
Components. These segments generate revenues and cash flows through the
development, manufacturing, and distribution of specialty materials that are
focused on the portable communications devices, communications infrastructure,
computer and office equipment, ground transportation, defense and aerospace, and
consumer markets. In these markets, Rogers primarily serves as a supplier of
diverse products for varied applications to multiple customers that in turn
produce end-user products; as such, Rogers' business is highly dependent,
although indirectly, on market demand for these end-user products. The Company's
ability to forecast future sales growth is largely dependent on management's
ability to anticipate changing market conditions and how the Company's customers
will react to these changing conditions; it is also highly limited due to the
short lead times demanded by the Company's customers and the dynamics of serving
as a relatively small supplier in the overall supply chain for these end-user
products. In addition, the Company's sales represent a number of different
products across a wide range of price points and distribution channels that do
not always allow for meaningful quantitative analysis of changes in demand or
price per unit with respect to the effect on net sales.
The Company's current focus is on worldwide markets that have an increased
percentage of materials being used to support growing high technology
applications, such as cellular base stations and antennas, handheld wireless
devices, satellite television receivers, hard disk drives and automotive
electronics. The Company continues to focus on business opportunities in Asian
markets, as evidenced by the continued growth in production at the Company's
facilities in Suzhou, China and expanding Asian sales offices. The Company also
continues to focus on new products and emerging technologies and opportunities,
such as electroluminescent lamps in cell phone keypads. To better position
itself from a strategic standpoint in certain markets, the Company completed the
move in 2004 of its elastomer component and float manufacturing operations from
South Windham, Connecticut to Suzhou, China. The Company believes that this
relocation will enable it to better serve its customers and take advantage of
more opportunities in the Asian marketplace. During 2005, the Company has
continued to expand its manufacturing capacity at its Suzhou campus and plans to
manufacture other product lines in Suzhou by the end of 2005, including
electroluminescent lamps, busbars, and high frequency materials.
The Company continues to focus on its Six Sigma initiatives, as it plans to
increase employee participation in this effort in 2005 by training more Green
Belts and project champions. Six Sigma is a quantitative process improvement
methodology used by the Company to help streamline and improve its processes -
from manufacturing to transactional and from product to service. The Company
continuously has projects in progress as it is focused on gaining both
operational and transactional efficiencies as a result of its Six Sigma efforts.
To date, the Company's ongoing estimated cost savings and value creation is
greater than two-times its ongoing investment.
In the second quarter and first six months of 2005, sales were $83.4 million and
$169.9 respectively, a decline of 10.7% and 11.0% compared to the record second
quarter and first six month results of 2004. Operating profit also declined from
$13.3 million in the second quarter of 2004 to a loss of $16.0 million in the
second quarter of 2005, additionally, for the first six months of 2005,
operating profit declined $38.6 million to a loss of $12.0 million. Significant
factors that affected operating results in the second quarter of 2005 as
compared to the second quarter of 2004 include: (i) an operating loss for High
Performance Foams of $19.7, which includes $21.4 million non-cash pre-tax
charges taken on certain long-lived assets and the write down of inventory and
receivables within the segment's polyolefin foam operation and (ii) a decline of
$10.4 million in sales and a decline of $7.2 million in operating profit in the
Printed Circuit Materials segment, primarily due to a decrease in sales of
flexible circuit products, increased raw material costs, and additional costs
for incremental capacity investments that were not utilized due to the sales
downturn. For further discussion on segment results, see "Segment Analysis"
below.
The Company's sales volumes are impacted and can swing significantly based on
multiple factors, including, but not limited to: end user market trends,
suppliers and competitors, availability of raw materials, commercial success of
new products, and market development activities. The Company has experienced
recent upturns and downturns due to these varied factors and while the Company
projects sales volumes for resource planning and strategic considerations, the
Company anticipates these factors will continue to impact actual results and its
ability to accurately forecast and plan resources and initiatives accordingly.
-18-
The Company experienced significant sales growth in 2004 as compared to 2003,
particularly in the first half of 2004, but has incurred sequential sales
declines since the second quarter of 2004. The Company is optimistic about its
anticipated sales during the remainder of 2005 and expects sequential growth in
sales of certain product lines, such as electroluminescent lamps and flexible
circuit materials.
With regard to operating performance, a number of the Company's various
strategic initiatives have been completed, such as the movement of elastomer
component and float manufacturing to China. The Company is now focused on the
continued introduction of other product line production in China, such as
electroluminescent lamps and busbars. The Company expects to continue to
experience cost savings resulting from the elimination of duplicate operational
costs that existed in 2004 during the transitional phases and from improvements
in production efficiencies. Also, in the second quarter of 2005, the Company
shifted its strategic focus related to its polyolefin foam business as it became
apparent to the Company that the business would not become profitable under
current market conditions, particularly due to increasing raw material prices
and the existing product pricing structure. Therefore, the Company shed many of
its unprofitable customers and will focus on developing new applications using
the polyolefin foam technology. This business decision resulted in an impairment
of certain assets related to the polyolefin business, which resulted in a $21.4
million non-cash pre-tax charge to operations in the second quarter of 2005. The
Company expects that these events, along with other cost-saving initiatives,
such as Six Sigma and the continued implementation of an enterprise-wide
information system, will have a positive effect on the future operating results
of the Company. Although the Company expects improved operating results in the
second half of 2005, actual results will be highly dependent on the dynamic
nature of the Company's markets, products, and supply chain, the constant
emerging operational challenges in meeting its customers' evolving needs, and
the expected trends in sales and product mix described above.
Results of Operations
The following table sets forth, for the periods indicated, selected Company
operations data expressed as a percentage of net sales.
Three Months Ended Six Months Ended
------------------ ----------------
July 3, July 4, July 3, July 4,
2005 2004 2005 2004
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Manufacturing Margin 29.2% 33.9% 28.0% 34.1%
Selling and Administrative Expenses 18.1% 14.4% 17.3% 15.1%
Research and Development Expenses 6.2% 5.3% 6.0% 5.0%
Impairment Charge 24.0% -- 11.8% --
Operating Profit (Loss) (19.1)% 14.3% (7.1)% 13.9%
Equity Income in Unconsolidated Joint Ventures (0.4)% 2.0% 0.8% 1.7%
Other Income -- 0.5% 0.5% 1.1%
Net Income (Loss) (10.6)% 12.6% (2.2)% 12.6%
Net Sales
Net sales for the second quarter of 2005 were $83.4 million as compared to $93.3
million in the second quarter of 2004, a decrease of $9.9 million, or 11%. For
the first six months of 2005, net sales decreased $21.0 million to $169.9
million, versus $191.0 million for the first six months of 2004. This decrease
was driven by a decline in sales of 17% in the Printed Circuit Materials segment
for the first six months of the year, partially offset by an increase in sales
of almost 5% in the High Performance Foams segment. See "Segment Analysis" below
for further discussion on segment performance.
-19-
Manufacturing Margins
Manufacturing margins as a percentage of sales decreased from 33.9% in the
second quarter of 2004 to 29.2% in the second quarter of 2005. Year-to-date,
manufacturing margins decreased from 34.1% in 2004 to 28.0% in 2005. The
decrease in margins is primarily attributable to declines in the Polymer
Materials and Components and Printed Circuit Materials segments. In Polymer
Materials and Components, margins at Durel declined as inverter sales decreased
significantly quarter-over-quarter and new production on electroluminescent
keypad applications commenced. Also, elastomer component and float products
experienced negative gross margins in the second quarter and first half of 2005
as the Company continues to experience challenges in transitioning production of
these products in China. Margins in the Printed Circuit Materials segment were
negatively affected by a decline in sales in flexible products.
Selling and Administrative Expenses
Selling and administrative expenses were up 12.8%, or $1.7 million, for the
second quarter of 2005 and up 1.6%, or $0.5 million, for the first six months of
2005 as compared to the prior year. As a percentage of sales, selling and
administrative expenses increased from 14.4% in the second quarter of 2004 to
18.1% in the second quarter of 2005 and from 15.1% to 17.3% in the first half of
2005 and compared to the first half of 2004. On a year-to-date basis, the
increase in spending as a percentage of net sales was based almost entirely on
the decline in sales from the first half of 2004 to the first half of 2005 and
overall spending levels remained relatively consistent. Quarterly spending
increased in 2005 over 2004 primarily due to the increased level of spending in
consultative matters, including asbestos litigation and financial statement
impact analysis and Sarbanes-Oxley regulation and implementation.
Research and Development Expenses
Research and development expenses increased 6.1% from $4.9 million in the second
quarter of 2004 to $5.2 million in the second quarter of 2005. For the first six
months of 2005, research and development expenses were $10.2 million, a slight
increase over the first six months of 2004. As a percentage of sales, research
and development expenses were 6.2% in the second quarter of 2005 as compared to
5.3% in the comparable prior period. The percentage increase as compared to the
prior year is partially a result of the decrease in sales in the second quarter
of 2005 and timing of development projects. The Company's plan is to reinvest
approximately 6% of sales in research and development activities each year and
its second quarter 2005 spending rate is consistent with this target.
Impairment Charge
In the second quarter of 2005, the Company recorded non-cash pre-tax charges of
$21.4 million related to the polyolefin foam business in the Company's High
Performance Foams business segment. This charge includes a $19.8 million
impairment charge on certain long-lived assets and $1.6 million in charges
related to the write down of inventory and receivables related to the polyolefin
foam business. The Company also recorded a non-cash pre-tax impairment charge of
$0.3 million on its facility in South Windham, Connecticut that formerly
contained the manufacturing operations of it elastomer components products,
which were relocated to Suzhou, China in 2004.
The Company acquired certain assets of the polyolefin foam business, including
intellectual property rights, inventory, machinery and equipment, and customer
lists from Cellect LLC, in the beginning of fiscal year 2002. The Company
migrated the manufacturing process to its Carol Stream, Illinois facility, which
was completed at the end of the third quarter of 2004. This migration included
the development of new process technology and the purchase of custom machinery,
which the Company believed at the time would allow them to gain efficiencies in
the manufacturing process and improvements in product quality. After completing
this transition, the Company focused on realizing these previously anticipated
efficiencies and improvements, but encountered a variety of business issues,
including changing customer requirements in the polyolefin market place, a
significant increase in raw material costs, and other quality and delivery
issues. In light of these circumstances, the Company commenced a study in the
first quarter of 2005 to update its market understanding and the long-term
viability of the polyolefin business. This study was completed in the second
quarter of 2005 and confirmed that the business environment surrounding the
polyolefin foam business had changed from the time of the Company's initial
purchase, which caused the Company to revisit its business plan for the
polyolefin foam business. The Company concluded during the second quarter that
under these new circumstances it would be very difficult and cost prohibitive to
produce the current polyolefin product on a profitable basis and decided to
scale back on the current business by shedding unprofitable customers and to
concentrate on developing new, more profitable products.
-20-
These developments resulted in the performance of an impairment analysis that
was conducted in accordance with Statement of Financial Accounting Standards No.
144, (SFAS 144) "Accounting for the Impairment or Disposal of Long-Lived Assets"
and No. 142, (SFAS 142) "Goodwill and Other Intangible Assets". This analysis
resulted in the impairment of certain long-lived assets, including machinery and
equipment ($14.1 million) and intangibles ($5.7 million), and the write down of
certain inventory ($1.2 million) and receivables ($0.4 million) related to the
polyolefin foam business. A deferred income tax benefit of $8.1 million was also
recorded.
Additionally during the second quarter of 2005, a non-cash pre-tax impairment
charge was recorded on the Company's facility in South Windham, Connecticut of
$0.3 million. The South Windham facility was formerly the location of the
manufacturing operations of the Company's elastomer components business prior to
it being moved to Suzhou, China in the fall of 2004. In the second quarter of
2005, the Company made the decision to actively market the building. As a
result, a fair value analysis was performed in accordance with SFAS 144,
resulting in the impairment charge. The carrying value of the building ($0.9
million) is classified as held-for-sale and was reclassified to "other current
assets" on the balance sheet.
Equity Income (Loss) in Unconsolidated Joint Ventures
Equity income in unconsolidated joint ventures decreased from $1.9 million in
the second quarter of 2004 to a loss of $0.3 million in the second quarter of
2005, and decreased to $1.4 million in the first six months of 2005 as compared
to $3.2 million in the comparable period in 2004. These decreases were primarily
due to a significant sales decline at Rogers Chang Chun Technologies (RCCT) as a
result of the softening in the flexible circuit market and start-up costs,
including increased qualifications trials, at the Company's new Chinese joint
venture, Rogers Inoac Suzhou (RIS).
Income Taxes
The Company's effective tax rate was (45)% and 25%, respectively, for the three
month period ended July 3, 2005 and July 4, 2004 and (61%) and 25% for the first
six months of 2005 and 2004, respectively. The Company's annual effective tax
rate, excluding the effects of the impairment charge, at the end of the second
quarter of 2005 was 20%, as compared to 25% at the end of the second quarter of
2004, and 24% at the end of the first quarter of 2005. In 2005, the effective
tax rate benefited from (i) one-time non-cash pre-tax charges of $21.4 million
taken on certain assets of the Company's polyolefin business (33.5 percentage
point decrease), (ii) from favorable tax rates on certain foreign business
activity, foreign tax credits and research and development credits, which
reduced the effective tax rate by 7, 4 and 2 percentage points, respectively,
and (iii) a 4 percentage point decrease due to lower forecasted income levels in
2005. As a result of the benefit related to the impairment charges for which tax
deductions will be realized over an extended time period, the Company's deferred
tax liabilities decreased by approximately $8.1 million as of July 3, 2005.
Segment Analysis
(Dollars in millions) Second Quarter First Six Months
------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------
Printed Circuit Materials:
Net Sales $ 37.0 $ 47.5 $ 76.7 $ 92.6
Operating Profit 4.2 11.5 8.0 20.0
Polymer Materials and Components:
Net Sales 23.7 24.0 47.2 54.5
Operating Profit (Loss) (0.5) 0.5 (1.7) 4.7
High Performance Foams:
Net Sales 22.6 21.8 46.0 43.9
Operating Profit (Loss) (19.7) 1.3 (18.3) 1.9
-21-
Printed Circuit Materials:
Net sales of Printed Circuit Materials in the second quarter and first six
months of 2005 were $37.0 million and $76.7 million, respectively, a decrease of
22% and 17% from same period in 2004. Segment operating profit declined from
$11.5 million in the second quarter of 2004 to $4.2 million in the second
quarter of 2005 and from $20.0 million in the first half of 2004 to $8.0 million
in the first half of 2005. These decreases in operating profit are attributable
primarily to a 50% quarter over quarter and 37% year-to-date decline in flexible
product sales. These sales declines were attributable primarily to a number of
cellular telephone programs coming to end of life, and the delay of some new
programs. The Company is focused on growth in sales of its flexible products in
2005 and 2006 through recent design wins and further diversification of the
customer base. The Company recently introduced a new family of flexible circuit
materials that addresses the growing need for denser circuits and thinner
constructions. However, the Company anticipates that significant sales for these
new flexible circuit materials will not occur until later in 2005 and into 2006.
Polymer Materials and Components:
The Polymer Materials and Components segment had sales of $23.7 million and
$47.2 million for the second quarter and first six months of 2005. This is a
decrease of 1.3% and 13.4% when compared to the same periods in 2004. Operating
results for the segment declined by $1.0 million and $6.4 million from the
second quarter and first six months of 2004 to an operating loss of $0.5 million
and $1.7 million in 2005, respectively. The year-to-date decreases are primarily
due to lower sales levels in elastomer components and floats (decline of 29%).
Sequentially, sales have increased 15% as compared to the first quarter of 2005.
The Company has made steady progress in its production capabilities in China and
has recently experienced expansion of the float business, as most of the
start-up issues associated with the move to China have been resolved. The
Company is also expanding production of busbars into China and shipped the first
product from that operation in the second quarter of 2005. Sales of busbars
increased approximately 5% in the second quarter and for the first six months of
2005 as compared to the comparable prior year periods. Also, sales at Durel
increased approximately 7% in the second quarter of 2005 as compared to the
prior year but decreased 15% on a year-to-date basis. The first quarter of 2004
was a very strong quarter at Durel for sales of both inverters and monochrome
backlighting display lamps. In the second quarter of 2004, many of the
monochrome display programs began to reach end of life and were eventually
replaced by the new electroluminescent (EL) keypad technology, which contributed
to improved sales in the second quarter of 2005. Orders for keypad EL lamps have
surpassed Company expectations and are expected to be strong for the remainder
of 2005; however, sales of the more profitable inverter products have declined
in 2005, which has more then offset the profit contribution of the increased
lamp sales. Sequentially when compared to the first quarter of 2005, the
segment's sales have remained relatively consistent, but operating results have
improved from a $1.2 million loss in the first quarter of 2005 to a $0.5 million
loss in the second quarter of 2005. This improvement is due largely to the
operational improvements in the Company's elastomer component and float business
that was transitioned to China in 2004.
High Performance Foams:
High Performance Foams net sales increased almost 4% to $22.6 million and 5% to
$46.0 million for the second quarter and first six months of 2005, respectively.
This segment had an operating loss of $19.7 million and $18.3 million for the
quarter and year-to-date, respectively, versus operating profit of $1.3 million
and $1.9 million during the same periods of 2004. The operating loss in 2005 is
primarily due to a $21.4 million non-cash charge in the second quarter related
to the impairment of certain long-lived assets and the write-down of inventory
and receivables within the polyolefin foam operation. Sequentially, High
Performance Foams net sales were only slightly below the record sales levels
experienced in the first quarter of 2005. The increases from 2004 to 2005
resulted primarily from strong sales of polyurethane foams in industrial and
consumer applications, as sales increased 10% in the second quarter of 2005 and
11% in the first six months of 2005 as compared to the same prior year periods.
These increases were mitigated by a 28% decline in quarterly sales and a 30%
decline in year-to-date sales of polyolefin foam products as the Company
encountered many operational issues with the product line and has adjusted its
strategic outlook on this product line as discussed in the "Impairment Charge"
section above.
-22-
Liquidity, Capital Resources and Financial Position
Rogers' management believes that the Company's ability to generate cash from
operations to reinvest in the business is one of its fundamental strengths, as
demonstrated by the Company's financial position continuing to remain strong in
the second quarter of 2005. The Company remains debt free and is able to finance
its operating needs through internally generated funds. Management believes that
over the next twelve months internally generated funds plus borrowing
availability under lines of credit will be sufficient to meet the capital
expenditure requirements and ongoing needs of the business. However, the Company
continually reviews and evaluates the adequacy of its borrowing facilities and
relationships.
At July 3, 2005, cash, cash equivalents and short-term investments totaled $34.0
million as compared to $40.0 million at January 2, 2005. During 2005 the Company
repurchased approximately $12.0 million of its common stock as part of its share
repurchase program and spent approximately $12.1 million on capital
requirements. Working capital decreased slightly from $115.5 million at January
2, 2005 to $109.8 million at July 3, 2005.
Significant changes in the Company's balance sheet accounts are as follows:
o Accounts receivable declined approximately $5.1 million from $57.3
million at January 2, 2005 to $52.2 million at July 3, 2005 primarily
due to the collection of annual royalty payments of approximately $3.2
million in the first quarter of 2005 and strong collections of trade
receivables in the first half of 2005.
o Inventories decreased by $6.4 million from $49.0 million at January 2,
2005 to $42.6 million at July 3, 2005. The decrease is due primarily to
(i) the write down of inventory associated with the polyolefin foam
business ($1.2 million), (ii) the planned reduction of flexible product
inventories ($3.4 million), and (iii) the decline in inventory held at
the South Windham, Connecticut facility ($1.2 million) as the planned
inventory build in 2004 for the anticipated move to China is no longer
necessary and the China plant is now meeting all current customer
requirements.
o Property, plant and equipment and intangibles decreased a total of $21.4
million from January 2, 2005, which is a direct result of the impairment
and write down of the assets associated with the polyolefin business,
and the reclassification of the Company's South Windham facility to
current assets as it is held-for-sale.
o Accrued employee benefits and compensation decreased $3.7 million from
$18.1 million at January 2, 2005 to $14.7 million at July 3, 2005 due
mainly to annual incentive compensation payouts of approximately $7.0
million in the first quarter of 2005 that related to 2004 operating
performance and accrued salaries of $1.0 million, which was offset
partially by additional accruals for employee benefits for the 2005
fiscal year (approximately $4.7 million).
o Noncurrent deferred income tax liabilities decreased $8.9 million from
$14.1 million at January 2, 2005 to $5.2 million at July 3, 2005,
primarily due to the tax benefit of the polyolefin impairment charge.
Cash flows from operations were approximately $11.2 million in the first half of
2005, as compared to $10.1 million in the first half of 2004. The first six
months of 2005 includes a non-cash impairment charge of $21.4 million, which is
mitigated by a deferred tax benefit of $8.1 million and a decrease in accounts
payable and accrued expenses of $10.8 million, primarily as a result of 2004
annual incentive compensation payouts. Both inventories and accounts receivable
decreased in the first half of 2005 as the Company's sales levels and related
production requirements were less than in the first half of 2004.
Contingencies
During the second quarter of 2005, the Company did not become aware of any new
material developments related to environmental matters or other contingencies.
The Company did not have any material recurring costs or capital expenditures
related to environmental matters in the second quarter of 2005 or year-to-date.
Refer to Note 8 of the unaudited condensed consolidated financial statements for
further discussion on ongoing environmental and contingency matters.
Contractual Obligations
There have been no significant changes except in the ordinary course of business
in the Company's contractual obligations during the second quarter of 2005.
-23-
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are
in the opinion of management likely to have, a current or future material effect
on the Company's financial condition or results of operations.
Related Parties
In the beginning of fiscal year 2002, the Company acquired certain assets of the
high performance polyolefin foam business of Cellect LLC, including intellectual
property rights, inventory, machinery and equipment, and customer lists, for
approximately $10 million in cash, plus a potential earn-out over five years
based upon performance. The acquisition was accounted for as a purchase pursuant
to SFAS No. 141, "Business Combinations". As such, the purchase price was
allocated to property, plant and equipment and intangible assets based on their
respective fair values at the date of acquisition.
In June 2004, the Company entered into a post-closing agreement with Cellect
that amended the terms of the original acquisition agreement, particularly as it
related to the earn-out provision. Under the post-closing agreement, the Company
agreed to accelerate the earn-out provision to the third quarter of 2004 and to
fix the amount of the earn-out at $3.0 million. The obligation was partially
satisfied in the second quarter of 2004 through a $200,000 cash payment to
Cellect and the exchange of a $1.8 million note receivable the Company had from
Cellect with the balance of $1.0 million due at the conclusion of the supply
agreement. In the third quarter of 2004, the Company ceased production
activities at Cellect and it was manufacturing polyolefins exclusively at its
Carol Stream facility. In accordance with SFAS No. 141, the $3.0 million
earn-out was recognized as additional purchase price and capitalized as goodwill
in the second quarter of 2004.
In the second quarter of 2005, the Company reached an agreement with Cellect and
settled its outstanding obligations by entering into a note with Cellect for
$360,000, which is to be paid to Rogers in installments over the course of 2
years with the first installment due in August 2005. This note releases both
companies from any future obligations to each other. The previous receivable
outstanding of $1.5 million described above had previously been partially
reserved for and, consequently, the write off of the remaining receivables did
not materially impact the Company's results in the second quarter of 2005.
New Accounting Policies
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based
Payment" (SFAS 123R), which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123R supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. However, SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. In April 2005, the Securities and
Exchange Commission extended the compliance dates for SFAS 123R, and therefore,
Rogers will adopt SFAS 123R in the first quarter of 2006. The Company will
continue to evaluate the provisions of SFAS 123R to determine its impact on its
financial condition, results of operations and liquidity upon adoption.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in
Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and spoilage. Among other provisions, the new rule requires that these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of fiscal 2006. The Company is
currently evaluating the effect that the adoption of SFAS 151 will have on its
consolidated results of operations and financial condition but does not expect
SFAS 151 to have a material impact.
-24-
Critical Accounting Policies
There have been no significant changes in the Company's critical accounting
policies during the second quarter of 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in Rogers' exposure to market risk during
the second quarter of 2005. For discussion of the Company's exposure to market
risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, contained in Rogers' Form 10-K for fiscal year 2004, which incorporates by
reference Exhibit 13 to the 10-K, where information is set forth under the
caption "Market Risk".
Item 4. Controls and Procedures
a. As of the end of the period covered by this report, management of Rogers
conducted an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Acting Chief Financial
Officer, of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on this evaluation, and due to the material weakness in the Company's
internal control over financial reporting in the Company's accounting for
deferred income taxes as discussed below and as reported in the Company's
Annual Report on Form 10-K for the year-ended January 2, 2005, the Chief
Executive Officer and Acting Chief Financial Officer concluded that, as of
July 3, 2005, the Company's disclosure controls and procedures were not
effective.
b. The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control system was designed to provide reasonable assurance to the
Company's management and the board of directors regarding the preparation
and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
As of January 2, 2005, management's assessment of the effectiveness of its
internal control over financial reporting identified a material weakness in
the Company's internal control over financial reporting for deferred income
taxes. Specifically, management determined that a change was necessary in
the method used to reconcile and account for deferred income taxes to be
consistent with the application of the provisions of Statement of Financial
Accounting Standards No. 109. This material weakness is discussed in
greater detail in the Company's Annual Report on Form 10-K for the
year-ended January 2, 2005.
During the first half of 2005, the Company began the process of
implementing controls and procedures to address the material weakness
identified as of January 2, 2005 and believes that, once fully implemented,
these controls and procedures will correct the material weakness discussed
above. Specifically, the Company has engaged outside consultants to assist
in performing reconciliations and other procedures for all material
deferred tax amounts in connection with the development and implementation
of its controls over its accounting for deferred income taxes. The Company
believes this exercise will be completed in the third quarter of 2005.
Except as discussed above, there were no changes in the Company's internal
control over financial reporting during its most recently completed fiscal
quarter that have materially affected or are reasonably likely to
materially affect its internal control over financial reporting, as defined
in Rule 13a-15(f) under the Exchange Act.
-25-
Part II - Other Information
Item 1. Legal Proceedings
See Note 8, "Commitments and Contingencies", to the condensed consolidated
financial statements in Part I, Item 1 of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchase of Equity Securities
(d) Maximum Number
(c) Total Number of (or Approximate Dollar
Shares (or Units) Value) of Shares (or
(a) Total Number of Purchase as Part of Units) that May Yet Be
Shares (or Units) (b) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per share (or Unit) Plans or Programs Plans or Programs
- ------ ------------------ ---------------------- -------------------- -------------------
May 30, 2005 through July 3, 2005 - - - $ 9,834,136
May 2, 2005 through May 29, 2005 80,000 $ 35.88 80,000 $ 9,834,136
April 4, 2005 through May 1, 2005 53,900 $ 39.32 53,900 $ 12,705,606
Total: 133,900 133,900
On October 28, 2004, the Company's Board of Directors authorized the purchase,
at management's discretion, of up to an aggregate of $25 million in market value
of shares of the Company's capital stock in open market transactions. The
buyback program will be completed or cancelled within twelve months of the
authorization date. As of July 3, 2005, the Company repurchased 373,900 shares
of stock for a total of $15.2 million as a result of this plan, including
133,900 shares of stock for a total of approximately $5.0 million in the second
quarter of 2005.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Rogers' Annual Meeting of Shareholders was held on April 28, 2005, during
the second fiscal quarter of 2005.
(b) All of the matters voted upon were approved and the specific votes,
updated from the votes originally disclosed in the Company's 10-Q for
the first quarter of 2005, are as follows:
1. To elect the members of the Board of Directors:
Number of Shares
----------------
Name For Withheld
---- --- --------
Leonard M. Baker 15,054,293 274,804
Walter E. Boomer 10,680,115 4,648,982
Edward L. Diefenthal 15,126,843 202,254
Gregory B. Howey 14,994,788 334,309
Leonard R. Jaskol 15,054,490 274,607
Eileen S. Kraus 14,538,818 790,279
William E. Mitchell 14,497,241 831,856
Robert G. Paul 14,547,484 781,613
Robert D. Wachob 15,056,321 272,776
2. To approve the Rogers Corporation 2005 Equity Compensation Plan:
For Against Abstentions Non-Vote
--- ------- ----------- --------
10,068,907 2,914,013 41,851 2,304,326
3. To ratify the appointment of Ernst & Young LLP as the Company's
registered public accounting firm for the fiscal year ending January 1,
2006:
For Against Abstentions
--- ------- -----------
15,082,689 241,209 5,199
-26-
Item 6. Exhibits
List of Exhibits:
3a Restated Articles of Organization, filed with the Secretary of
State of the Commonwealth of Massachusetts on April 6, 1966,
were filed as Exhibit 3a to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 1989 (the 1988
Form 10-K).
3b Articles of Amendment to the Articles of Organization, filed
with the Secretary of State of the Commonwealth of Massachusetts
on August 10, 1966, were filed as Exhibit 3b to the 1988 Form
10-K.
3c Articles of Merger of Parent and Subsidiary Corporations, filed
with the Secretary of State of the Commonwealth of Massachusetts
on December 29, 1975, were filed as Exhibit 3c to the 1988 Form
10-K.
3d Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on March 29, 1979, were filed as
Exhibit 3d to the 1988 Form 10-K.
3e Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on March 29, 1979, were filed as
Exhibit 3e to the 1988 Form 10-K.
3f Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on April 2, 1982, were filed as
Exhibit 3f to the 1988 Form 10-K.
3g Articles of Merger of Parent and Subsidiary Corporations, filed
with the Secretary of State of the Commonwealth of Massachusetts
on December 31, 1984, were filed as Exhibit 3g to the 1988 Form
10-K.
3h Articles of Amendment, filed with the Secretary of State of the
Commonwealth of Massachusetts on April 6, 1988, were filed as
Exhibit 3h to the 1988 Form 10-K.
3i Bylaws of Rogers Corporation, as amended and restated effective
August 26, 2004, were filed as Exhibit 3.1 to the Company's
Current Report of Form 8-K, filed with the Securities and
Exchange Commission on September 1, 2004, were filed as Exhibit
3i to the 2004 Form 10-K.
3j Articles of Amendment, as filed with the Secretary of State of
the Commonwealth of Massachusetts on May 24, 1994, were filed as
Exhibit 3j to the 1995 Form 10-K.
3k Articles of Amendment, as filed with the Secretary of State of
the Commonwealth of Massachusetts on May 8, 1998 were filed as
Exhibit 3k to the 1998 Form 10-K.
3l Articles of Merger of Parent and Subsidiary Corporation, filed
with the Secretary of State of the Commonwealth of Massachusetts
on December 28, 2003, were filed as Exhibit 3l to the 2004 Form
10-K.
4a 1997 Shareholder Rights Plan was filed on Form 8-A dated March
24, 1997. The June 19, 1997 and July 7, 1997 amendments were
filed on Form 8-A/A dated July 21, 1997. The April 10, 2000
amendment was filed on Form 8-K on May 16, 2000.
4b Certain Long-Term Debt Instruments, each representing
indebtedness in an amount equal to less than 10 percent of the
Registrant's total consolidated assets, have not been filed as
exhibits to this Annual Report on Form 10-K. The Registrant
hereby undertakes to file these instruments with the Commission
upon request.
10af Rogers Corporation 2005 Equity Compensation Plan (the "2005
Plan") (incorporated herein by reference to Exhibit 10.1 to
Rogers' Registration Statement No. 333-124489 on Form S-8 dated
April 28, 2005, and filed on April 29, 2005) *.
10ag Form of Incentive Stock Option Agreement under the 2005 Plan
(incorporated herein by reference to Exhibit 10.2 to Rogers'
Registration Statement No. 333-124489 on Form S-8 dated April
28, 2005, and filed on April 29, 2005) *.
10ah Form of Non-Qualified Stock Option Agreement (For Officers and
Employees, with vesting) under the 2005 Plan (incorporated
herein by reference to Exhibit 10.3 to Rogers' Registration
Statement No. 333-124489 on Form S-8 dated April 28, 2005, and
filed on April 29, 2005) *.
10ai Form of Non-Qualified Stock Option Agreement (For Officers and
Employees, without vesting) under the 2005 Plan (incorporated
herein by reference to Exhibit 10.4 to Rogers' Registration
Statement No. 333-124489 on Form S-8 dated April 28, 2005, and
filed on April 29, 2005) *.
-27-
10aj Form of Non-Qualified Stock Option Agreement (For Non-Employee
Directors) under the 2005 Plan (incorporated herein by reference
to Exhibit 10.5 to Rogers' Registration Statement No. 333-124489
on Form S-8 dated April 28, 2005, and filed on April 29, 2005)
*.
10ak Form of Stock Appreciation Right Agreement under the 2005 Plan
(incorporated herein by reference to Exhibit 10.6 to Rogers'
Registration Statement No. 333-124489 on Form S-8 dated April
28, 2005, and filed on April 29, 2005) *.
10al Form of Restricted Stock Agreement under the 2005 Plan
(incorporated herein by reference to Exhibit 10.7 to Rogers'
Registration Statement No. 333-124489 on Form S-8 dated April
28, 2005, and filed on April 29, 2005) *.
10am Amendment, effective April 28, 2005, to 1998 Stock Incentive
Plan (incorporated by reference to Exhibit 10.8 to Rogers'
Current Report on Form 8-K, filed May 2, 2005) *.
10r Summary of Director and Executive Officer Compensation
(incorporated by reference to Exhibit 10r to Rogers' Annual
Report on Form 10-K, filed on March 18, 2005) *.
10r-1 Amendment No.1 to Summary of Director and Executive Officer
Compensation (incorporated by reference to Exhibit 10r-1 to
Rogers' Quarterly Report on Form 10-Q, filed on May 9, 2005) *.
10r-2 Amendment No. 2 to Summary of Director and Executive
Officer Compensation, filed herewith *.
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Acting Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Acting Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Management Contract.
Part II, Items 3 and 5 are not applicable and have been omitted.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROGERS CORPORATION
(Registrant)
/s/ Paul B. Middleton
---------------------
Paul B. Middleton
Acting Chief Financial Officer
and Corporate Controller
Dated: August 10, 2005
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