VIA ELECTRONIC TRANSMISSION
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AND FEDERAL EXPRESS
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June 29, 2006
Ms. Nili Shah
Accounting Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 7116
100 F Street, N.E.
Washington, D.C. 20549
Re: Rogers Corporation
Form 10-K for the Fiscal Year Ended January 1, 2006
Filed March 31, 2006
File No. 1-4347
Dear Ms. Shah:
On behalf of Rogers Corporation (the "Company"), set forth below are the
responses of the Company to the letter dated June 19, 2006 (the "Comment
Letter"), containing the comments of the Staff of the Securities and Exchange
Commission to the Company's filing referenced above.
The Company's responses to each of the comments in the Comment Letter are
set forth below and are numbered to correspond to the comments set forth in the
Comment Letter, which for convenience we have incorporated into this response
letter.
Note 3 - Goodwill and Other Intangible Assets, page 50
- ------------------------------------------------------
Comment 1:
We note your response to comment 2 in our letter dated April 25, 2006. Please
provide us with the following additional information regarding your
determination that the fair values of your reporting units within your "other
polymer products" reportable segment are greater than the carrying values to
help us better understand how you arrived at your conclusion:
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 2
o In your calculation of adjusted segment operating income (loss) for
purposes of testing goodwill for impairment, your beginning segment
operating income (loss) does not agree to the amounts listed on the
prior page for each operating segment. Please reconcile.
o Please tell us the components of the corporate allocations you
eliminate from 2005 segment operating income (loss), including why you
believe these items should be eliminated. Help us understand why the
amounts you allocate to Elastomer and Polyolefin are not
representative of the changes that would be necessary on a stand-alone
basis.
o Please explain the significant assumptions you used in arriving at
future cash flows and terminal values for Polyester-Based Industrial
laminates, Polyolefin Foams, and Elastomer Components Products.
Specifically, please address the following:
o Terminal Value: Please tell us how you arrived at these amounts
for each reporting unit.
o Polyester: Please explain your forecast of operating profits that
increase significantly each period, considering this unit
reported close to breakeven for each of the past three years.
o Polyolefin: Please explain your forecast of sales increasing 13%
for fiscal year 2006 and 10% thereafter, considering this unit's
sale trends steadily decreased for fiscal years 2003-2005.
o Polyolefin: Please better explain your forecast that this unit
will generate increasing operating profits for the next five
years even though it generated operating losses for each of the
past three years.
o Elastomer: Please explain your forecast of sales increasing 20%
for fiscal year 2006 and 10% thereafter, considering historical
sales trends.
o Elastomer: Please better explain your forecast that this unit
will generate significantly increasing operating income for 2007
- 2010 even though it generated operating losses for each of the
past three years.
In addition, please provide us proposed disclosures, that you will include under
critical accounting policies in future filing, that provide a more comprehensive
analysis and discussion of the significant estimates and assumptions you used in
your evaluation of goodwill impairment.
Response 1:
In an effort to clearly respond to each of the Staff's comments above, we have
included your original request in italics, followed by our response to each of
your information requests:
o In your calculation of adjusted segment operating income (loss) for
purposes of testing goodwill for impairment, your beginning segment
operating income (loss) does not agree to the amounts listed on the prior
page for each operating segment. Please reconcile.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 3
In our previous response, the total operating income (loss) is the same on both
pages and the amounts allocated to each individual segment should be the same;
however, we inadvertently used different amounts for the individual segments.
The correct amounts are included in the table below:
2005 Operating
(in thousands) Income (Loss)
----------------
Elastomer Component Products $ [ * ]
Nonwoven Composite Materials [ * ]
Polyester-Based Industrial Laminates [ * ]
Polyolefin Foams [ * ]
----------------
Total $ [ * ]
================
o Please tell us the components of the corporate allocations you eliminate
from 2005 segment operating income (loss), including why you believe these
items should be eliminated. Help us understand why the amounts you allocate
to Elastomer and Polyolefin are not representative of the changes that
would be necessary on a stand-alone basis.
The components of the corporate allocations we eliminated from 2005 segment
operating income (loss) are as follows:
Elastomer Nonwoven Polyester-Based
Component Composite Industrial Polyolefin
(in thousands) Products Materials Laminates Foams
-----------------------------------------------------
Research & Development
Costs $ [ * ] $ [ * ] $ [ * ] $ [ * ]
Sales & Marketing Costs [ * ] [ * ] [ * ] [ * ]
Distribution Costs [ * ] [ * ] [ * ] [ * ]
Administrative Support
Costs [ * ] [ * ] [ * ] [ * ]
-----------------------------------------------------
$ [ * ] $ [ * ] $ [ * ] $ [ * ]
=====================================================
These charges represent amounts that are allocated to our business units based
on the overhead structure of Rogers, which is designed to support a growing,
global enterprise and based on planned resource allocations. These charges are
determined during the annual planning process, which occurs in the previous
fiscal year (i.e. in 2004 for the 2005 fiscal year), and are not adjusted during
the year regardless of actual performance and resource utilization. The units
included above represent entities that Rogers considers nonstrategic, as we do
not believe as of the time of this analysis that these entities will
significantly impact the Company's growth plans in the future. Therefore, the
allocations absorbed by these entities, although proportionate to their size in
comparison to our other business units, place an unfair burden on each
respective entity as each unit is asked to absorb its proportionate share of
certain costs that are designed to stimulate the continued growth of the
Company. For example, allocated sales and marketing costs represent the planned
costs necessary to continue to develop and grow the consolidated business
through increased market penetration and new product introductions, among other
things. Research and development costs are determined based on the Company's
plans to develop and grow the business, including costs associated with
developing new products and finding alternative uses for existing products. Both
sales and marketing and research and development efforts are targeted mainly at
the Company's strategic businesses that have the most growth potential and to a
lesser extent at the businesses being discussed in this letter. The costs
included in the administrative support category include many of the costs
associated with being a global, public company, including board of directors
fees, corporate governance costs, and executive leadership team expenses. Many
of these costs would not be necessary if these entities operated on a
stand-alone basis. Therefore, we believe that the costs we allocate to these
businesses are not representative of the actual costs that would be required to
operate these businesses on a stand-alone basis.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 4
Specifically in the case of Polyolefins, the above charges were determined prior
to the restructuring of the business in the second quarter of 2005. The
allocation was determined during the 2005 planning period (late 2004), when the
Company had a more optimistic outlook of the business, resulting in the
Company's plan to allocate more resources to the business consistent with its
anticipated operational targets. However, at the time the goodwill impairment
analysis was performed at the end of 2005, the structure and focus of the
business had drastically changed as evidenced by the second quarter 2005
restructuring effort. Unprofitable customers were no longer being serviced and
the scope of the business had narrowed significantly to only focus on a small
number of key accounts. Also, many of the products acquired during the initial
acquisition were no longer being manufactured and the unit was concentrating
only on a small number of more strategic product lines. For these remaining
product lines, the start up effort associated with the acquisition had been
completed and the Company was focused on gaining additional productivity
improvements and efficiencies. Therefore, we believe that the additional costs
to independently run the business would be limited to the compensation of a
general manager specific to the polyolefin business, a limited amount of
research and development (as there were limited plans in place to further expand
the product line offerings and these existing product lines would generate the
majority of the future cash flows associated with the business) and an
insignificant amount of selling and marketing costs, as the products were a
known commodity and the limited customer base was already in place. We believe
that these costs are appropriately reflected in our impairment analysis.
In the case of Elastomer Components, this business was relocated to China in
2004 with the intention of becoming more price competitive based on a China cost
structure as compared to a higher US cost structure. Due to this restructuring,
the Company believed that it could sustain and recapture a number of the
programs it had lost while operating in the US and position itself to further
grow the business in Asia. However, the actual relocation associated with this
move proved to be more difficult than anticipated and the business did not reach
the goals anticipated in its operating plan (actual sales results were
approximately 40% less than 2005 plan levels). As the allocation of corporate
charges is partly based on planned sales, the business was unproportionately
burdened as a result this shortfall. Also, since elastomer components is a
mature business with established product lines, there is limited need to invest
in research and development and ongoing business development. Any additional
investment in the business would be a result of the need for local management
oversight and investments in sales and marketing to further penetrate the Asian
marketplace. As such, we believe that, if operated on an independent basis, the
additional costs that would be required to operate the business on a stand-alone
basis would be limited to the compensation of a general manager specific to the
Elastomer Components business, a limited amount of research and development (as
there were limited plans in place to further expand the product line offerings
and these existing product lines would generate the majority of the future cash
flows associated with the business) and selling and marketing costs which would
be required to recapture lost business and expand further into the Asian
marketplace. We believe that these costs are appropriately reflected in our
impairment analysis.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 5
o Please explain the significant assumptions you used in arriving at future
cash flows and terminal values for Polyester-Based Industrial laminates,
Polyolefin Foams, and Elastomer Components Products. Specifically, please
address the following:
o Terminal Value: Please tell us how you arrived at these amounts for
each reporting unit.
o Polyester: Please explain your forecast of operating profits that
increase significantly each period, considering this unit reported
close to breakeven for each of the past three years.
o Polyolefin: Please explain your forecast of sales increasing 13% for
fiscal year 2006 and 10% thereafter, considering this unit's sale
trends steadily decreased for fiscal years 2003-2005.
o Polyolefin: Please better explain your forecast that this unit will
generate increasing operating profits for the next five years even
though it generated operating losses for each of the past three years.
o Elastomer: Please explain your forecast of sales increasing 20% for
fiscal year 2006 and 10% thereafter, considering historical sales
trends.
o Elastomer: Please better explain your forecast that this unit will
generate significantly increasing operating income for 2007 - 2010
even though it generated operating losses for each of the past three
years.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 6
Terminal Value:
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For each of the reporting units included in this analysis, we calculated the
terminal value by utilizing the perpetuity growth model, which accounts for the
value of free cash flows that continue into perpetuity in the future, growing at
an assumed constant rate. The amount is derived using the following calculation:
((Adjusted cash flows in the final year forecasted * (1 + Terminal year growth
rate))/(Discount rate - Terminal year growth rate)
The terminal values for each reporting unit were determined based on our best
estimates of the perpetual growth associated with each of these individual
businesses. The factors that were considered in determining these values are
discussed in detail in the following section of our response to this comment.
Polyester-Based Industrial Laminates (PBIL):
- --------------------------------------------
The historical results associated with the PBIL business contains fully
allocated corporate charges (as discussed in the above section of this
response). To provide further clarification to the Staff regarding the trends in
this business, we have included the below table, which includes historical and
forecasted profit amounts excluding allocated corporate charges. We believe that
this view of the business will allow the Staff to better understand the current
trend of the business and better align historical results with future forecasts
for purposes of the FAS 142 analysis.
(in thousands) Actual Forecast
----------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010
----------------------------------------------------------------
Division Profit $[ * ] $[ * ] $[ * ] $[ * ] $[ * ] $[ * ] $[ * ] $[ * ]
We believed that the future projected profit growth estimates included in our
FAS 142 analysis were reasonable as these estimates are directly impacted by the
growth in the overall sales of PBIL. The anticipated sales growth was being
driven by the Company's increased focus on the non-cable business, as the cable
product business' margins continued to soften, partially as a result of the
increasing cost of raw materials, and the cable-based business becoming more
commodity based, resulting in more competition. Therefore, the Company shifted
its long-term strategic focus to specialty applications in the non-cable
business where it believed better operating results could be achieved. PBIL was
forecasting continued success and growth with the application of its products in
non-cable products, such as greenhouse, heater, sensor and antenna applications,
many of which had either relatively new products and/or planned product launches
in the near future, such as seat occupant sensors in the automotive industry.
The business had available capacity to expand without the addition of
significant fixed costs or an increase in the number of employees. Therefore, a
sales volume increase would positively impact the operating profit margin.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 7
Polyolefin Foams:
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The Company first acquired the polyolefin business in 2002, which underwent
significant transition issues in the first few years of the business. Sales
declined over this period as certain product lines originally acquired were
discontinued, such as the Bun product line, and the Company focused on certain
products it considered more strategic to its overall foam business. Although
overall sales continued to decline, the portion of the T-Cell product line that
the Company ultimately chose to focus on grew over this three-year period. In
2005, the Company further restructured the business to focus on the primary
products that survived since the acquisition and to shed its unprofitable
customers and remaining unprofitable product lines (F-Cell and most T-Cell
applications).
Late in 2005, the Company renegotiated a contract with its sole customer that
carried through the end of 2006. This contract included a price increase of
approximately 30% that accounts for a large portion of the sales increase
anticipated in 2006. The Company also believed that the future market for this
residual business would include growth at its current customer as its foam was
an important material in a key industrial printing application for this
customer, as well as new business generation, such as an Interlam product used
in automotive applications, which would enable the business to continue to grow
at the anticipated 10% rate included in our impairment evaluation.
From a profitability standpoint, the poor performance of the business unit from
2002 to 2005 was associated with the issues discussed above that ultimately led
to the restructuring of the business in 2005. We believed that the future
landscape of this business would be very different than the prior 3 years, as
the restructuring of the business allowed for a completely different internal
cost structure, which would significantly reduce the costs necessary to operate
and grow the business, and the new contract with our sole customer would result
in a significant price increase (as discussed above). Also, significant
operational improvements had been realized since acquisition, enabling us to
reduce the internal costs necessary to produce these products. Finally, all the
start up costs incurred during 2002 to 2005 were behind us and we had shed our
unprofitable customers as a result of the 2005 restructuring. We began to
realize the impact of these changes in the beginning of 2006 as our operational
results were trending positively as compared to 2005 and we anticipated
additional operating improvements over the remainder of the year.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 8
Elastomer Components:
- ---------------------
Historical sales trends in our elastomer components business have fluctuated
significantly due to the relocation of the operation from Connecticut to China
in 2004 and 2005. Sales in 2004 were approximately $18.8 million, up from $16.7
million in 2003, as customers built inventory in anticipation of the announced
move of the business to China and anticipated delays in bringing production
on-line once the move was complete. The impact of the relocation and the
accelerated order stream was compounded by continued program losses in the
elastomer roller business due to long lead times in getting designed in to new
product applications and the loss of business as a result of the Company's cost
structure in the US. These factors resulted in a sales decline in 2005 to $13.7
million from $18.8 million in 2004. We faced many start-up issues with the
production lines that were built in China, due in part to the complexity of the
operation as well as the fact that this was the first manufacturing operation we
had attempted to place in China. The forecasts for 2006 and beyond are based on
several anticipated factors that drove the increases the Staff has inquired
about in its letter. First, we anticipated an increase in orders as our
production was brought up to acceptable levels and our customers worked off
their inventory levels that had been built in 2004. Secondly, we believed that
we would be participating in a large program with one of our key partners in
China that would generate approximately $1 million in revenue annually once in
place. Thirdly, the Company was focused on gaining continued traction in the
Asian marketplace and believed that we could be more competitive since our
manufacturing operations were now located in China and the cost structure was
more favorable than when operations were located in the US. Some of these
factors began to impact results in the beginning of 2006 as sales for the first
quarter of 2006 were $4.5 million.
From a profit perspective, as mentioned in the last paragraph, the cost
structure in the US was a key driver of the poor operating results of the
business unit from 2003 - 2005, which was a significant reason why the business
was ultimately relocated to China. Starting in 2006, all significant start-up
investment would be complete and we believed that we could better leverage the
low cost structure in China to generate more market penetration, which would
positively impact both our sales and profit levels. Due to the size of the
business, a few relatively small programs would have a significant impact on the
operational results of the business unit as there would not be a need for
additional capacity investment as the capacity was already in place and
supported by the current structure in China, so any incremental business would
have a significant positive impact on the business. Some of the benefits we
believed would be realized as a result of the efforts put forth in 2004 and 2005
related to the relocation were starting to be realized in the early part of
2006, as operating profit, exclusive of corporate allocations, approximated
break-even levels in the first quarter, as compared to significant operating
losses, exclusive of corporate allocations, in 2005 of $1.6 million.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 9
o In addition, please provide us proposed disclosures that you will include
under critical accounting policies in future filings that provide a more
comprehensive analysis and discussion of the significant estimates and
assumptions you used in your evaluation of goodwill impairment.
We will continue to review and update our disclosures as appropriate in our
filings to make them as meaningful as possible to the readers of our financial
statements; however, for purposes of this response, a potential disclosure that
we would propose to include in future filings is as follows:
"SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), classifies
intangible assets into three categories: (1) intangible assets with definite
lives subject to amortization; (2) intangible assets with indefinite lives not
subject to amortization; and (3) goodwill. The Company reviews goodwill and
intangible assets with indefinite lives for impairment annually or more
frequently if events or changes in circumstances, such as declines in sales,
earnings or cash flows, or material adverse changes in the business climate,
indicate that the carrying value of an asset might be impaired. The Company
reviews intangible assets with definite lives for impairment whenever conditions
exist that indicate the carrying value may not be recoverable, such as an
economic downturn in a market or a change in the assessment of future
operations. The results of these impairment tests may result in impairment
losses that could have a material adverse impact on our results of operations.
Goodwill is considered to be impaired when the net book value of a reporting
unit exceeds its estimated fair value. Fair values are primarily established
using a discounted cash flow methodology using assumptions consistent with
market participants. Determining the fair value of an operating segment or an
indefinite-lived purchased intangible asset is judgmental in nature and requires
the use of significant estimates and assumptions, including revenue growth rates
and operating margins, discount rates, and future market conditions, among
others. The determination of discounted cash flows and the assumptions used in
this analysis are based on the businesses' strategic plans and long-term
outlooks for the business and are based on the business operating as a
stand-alone entity. The revenue growth rates included in the plans, which
typically range from 5% to 10% annually, are management's best estimates based
on current and forecasted market conditions, and the profit margin assumptions
are projected by each reporting unit based on the current costs structure and
anticipated net cost reductions, if any. Other assumptions, such as the discount
rate and terminal year growth rate, are determined independently for each
business unit based on the respective units current and projected operating
results. If different assumptions were used in these plans, the related
discounted cash flows used in measuring impairment could be different,
potentially resulting in an impairment charge. The Company believes that the
assumptions and rates used in its annual impairment test under SFAS 142 are
reasonable, but inherently uncertain.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 10
The 2005 impairment test was performed in the fourth quarter of 2005 and did not
result in an impairment charge. The excess of fair value over carrying value for
each of the Company's respective operating segments as of the fourth quarter of
2005, the annual testing date, ranged from approximately $2.7 million to $21.8
million. In order to evaluate the sensitivity of the analysis performed, the
Company applied a hypothetical 10% decrease to the fair values of each reporting
unit, which resulted in excess fair value over carrying value ranging from
approximately $1.4 million to $17.9 million for each respective operating
segment."
Note 8 - Income Taxes, page 57
- ------------------------------
Comment 2:
We note your response to comment 3 in our letter dated April 25, 2006. Please
help us understand, the facts and circumstances that resulted in the initial tax
estimates you recorded, when you filed your 2004 Form 10-K, and the changes that
occurred and resulted in material revisions to those estimates, when you filed
your 2004 tax return. In this regard, it is not clear to us why you would need
to extrapolate 2003 results to estimate a benefit for 2004 since actual 2004
results were available when you filed your 2004 Form 10-K. In addition, please
explain why you did not include disclosures in the critical accounting policies
section of MD&A for these changes in estimates that materially impacted net
income.
Response 2:
Although the actual book financial results were available at the end of 2004
when the estimate of the extraterritorial income exclusion (ETI) benefit was
made, the final calculation required to complete the Company's consolidated
federal income tax return involves figures that are derived from such tax return
before the ETI exclusion is finalized. The ETI exclusion is one of the last
calculations that a company performs in its tax return preparation process. As
such, this calculation was not completed by the Company until the third quarter
of 2005.
Specifically, the ETI rules exclude from a company's taxable income the profit
on certain export sales. This requires the company to identify the specific
qualifying export sales that meet the very strict requirements of the rules, and
calculate the profit on such sales. In determining the profit, the amount of the
company's cost of goods sold derived for tax purposes is required to be
completed prior to calculating the complex ETI calculation. This means that book
to tax adjustments for inventory under Internal Revenue Code Section 263A,
various inventory reserve adjustments, vacation accrual adjustments, and others,
which are not completed until the tax return process is finalized, need to be
complete in order to finalize the calculation.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 11
Fiscal 2005 included twelve months of activity for Durel, which was acquired in
2003, and Durel constitutes a large portion of the Company's qualifying export
sales. Since the Company's ETI calculation could not be finalized until all
actual tax return adjustments were completed in the third quarter of 2005 (in
conjunction with the preparation and filing of the 2004 consolidated tax return
on September 15), we were required to estimate the amount of benefit related to
the Company's exports of Durel in order to file our 2004 Form 10-K. At that
time, we determined that the extrapolation of actual 2003 data for Durel
resulted in the best estimate to determine the expected benefit. This estimate
[based on Durel's historical Foreign Sales and Lease Income (FSALI) method]
proved to be conservative, as greater taxable profitability was realized once
the tax return calculations were finalized, resulting in a greater ETI benefit
and a corresponding adjustment to our consolidated results in 2005 for the
change in estimate.
In our disclosures in the critical accounting policies section of MD&A in our
2005 Form 10-K, we state in the "Income Taxes" section that "Significant
judgment is required in determining the Company's worldwide income tax position
as well as its effective tax rate. Although the Company believes its tax
estimates are reasonable, the final determination of certain transactions and
tax audits could be materially different than that which is reflected in
historical income tax provisions and accruals." We believe this statement alerts
the reader to the potential risk associated with these estimates. We further
note this adjustment in the "Income Taxes" section in our Results of Operations
discussion in MD&A where we explain the factors impacting our effective tax
rate. We note that Staff's comment that this particular item could have been
discussed more transparently and will, in future filings, attempt to further
clarify any such items.
Please telephone me at 860-779-5508, or our attorney, Andrew J. Merken, Esq. of
Burns & Levinson LLP, Boston, MA at 617-345-3740, with any questions or comments
you may have.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
Ms. Nili Shah
Accounting Branch Chief
June 29, 2006
Page 12
Very truly yours,
/s/ Paul B. Middleton
--------------------------------------------------
Paul B. Middleton
Corporate Controller and Chief Accounting Officer
cc: Robert D. Wachob, President and Chief Executive Officer
Dennis M. Loughran, Vice President, Finance and Chief Financial Officer
Robert M. Soffer, Vice President, Treasurer and Secretary
Debra J. Granger, Director, Corporate Compliance and Control
Ronald J. Pelletier, Manager, Financial Reporting
Tracey Houser, Staff Accountant, Securities and Exchange Commission
Anne McConnell, Securities and Exchange Commission
Sean Lynch, Ernst & Young
Andrew J. Merken, Esq., Burns & Levinson LLP
[ * ] CONFIDENTIAL TREATMENT REQUESTED