SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
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
ROGERS CORPORATION
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(Exact name of Registrant as specified in its charter)
Massachusetts 06-0513860
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(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
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(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
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The number of shares outstanding of the Registrant's classes of common stock as
of July 27, 2003:
Capital Stock, $1 Par Value - 16,131,687 shares
1
ROGERS CORPORATION AND CONSOLIDATED AFFILIATES
FORM 10-Q
June 29, 2003
INDEX
Page No.
--------
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Statements of Income 3
Condensed Statements of Financial Position 4-5
Condensed Statements of Cash Flows 6
Supplementary Notes 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16-17
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Reports on Form 8-K 19
Signatures 19
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 20-25
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ROGERS CORPORATION AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
Three Months Ended: Six Months Ended:
------------------- ----------------
(Unaudited) (Unaudited)
----------- ---------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $49,159 $57,330 $101,037 $111,888
Cost of Sales 34,433 39,634 69,823 77,949
Selling and Administrative Expenses 9,115 10,099 18,816 20,208
Research and Development Expenses 2,810 3,640 5,648 7,105
----- ------ ----- -------
Total Costs and Expenses 46,358 53,373 94,287 105,262
------ ------ ------ -------
Operating Income 2,801 3,957 6,750 6,626
Other Income less Other Charges 4,092 2,173 7,720 4,780
Interest Income (Expense), Net 56 (89) 131 (186)
----- ------- ------ -------
Income Before Income Taxes 6,949 6,041 14,601 11,220
Income Taxes 1,737 1,510 3,650 2,805
----- ----- ----- -----
Net Income $5,212 $4,531 $ 10,951 $ 8,415
====== ====== ======== =======
Net Income Per Share:
Basic $ 0.33 $ 0.29 $ 0.70 $ 0.54
====== ====== ====== ======
Diluted $ 0.32 $ 0.28 $ 0.68 $ 0.52
====== ====== ====== ======
The accompanying notes are an integral part of the condensed financial statements.
3
ROGERS CORPORATION AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENTS OF FINANCIAL POSITION
ASSETS
(Dollars in Thousands)
(Unaudited)
June 29, December 29,
-------- ------------
2003 2002
Current Assets: ---- ----
Cash and Cash Equivalents $32,640 $22,300
Short-term Investments -- 6,628
Accounts Receivable, Net 33,385 32,959
Accounts Receivable, Joint Ventures 1,184 1,414
Note Receivable, Current 2,100 --
Inventories:
Raw Materials 4,902 5,525
In-Process and Finished 12,982 12,544
------ ------
Total Inventories 17,884 18,069
Current Deferred Income Taxes 4,985 4,985
Other Current Assets 1,482 1,320
----- -----
Total Current Assets 93,660 87,675
Note Receivable, Long-Term 9,900 12,000
Property, Plant and Equipment, Net of
Accumulated Depreciation of
$98,633 and $90,285 103,292 99,883
Investment in Unconsolidated Joint Ventures 24,004 21,860
Pension Asset 8,951 8,951
Goodwill and Other Intangibles, Net 22,201 22,204
Other Assets 5,400 5,128
----- -----
Total Assets $ 267,408 $257,701
========= ========
The accompanying notes are an integral part of the condensed financial statements.
4
ROGERS CORPORATION AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENTS OF FINANCIAL POSITION - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
June 29, December 29,
------- -----------
2003 2002
Current Liabilities: ---- ----
Accounts Payable $ 8,436 $ 10,125
Accrued Employee Benefits and Compensation 8,838 10,414
Accrued Income Taxes Payable 11,533 8,249
Taxes, Other than Federal and Foreign Income 913 542
Other Accrued Liabilities 5,520 5,450
----- -----
Total Current Liabilities 35,240 34,780
Noncurrent Deferred Income Taxes 8,529 8,308
Noncurrent Pension Liability 17,119 22,658
Noncurrent Retiree Health Care and Life
Insurance Benefits 6,197 6,197
Other Long-Term Liabilities 2,073 2,720
Commitments and Contingencies -- --
Shareholders' Equity:
Capital Stock, $1 Par Value:
Authorized Shares 50,000,000; Issued
Shares 16,075,478 and 15,856,748 16,075 15,857
Additional Paid-In Capital 37,975 36,600
Retained Earnings 159,003 148,045
Accumulated Other Comprehensive Loss (2,369) (4,693)
Treasury Stock (346,836 and 360,487 shares, at cost) (12,434) (12,771)
-------- --------
Total Shareholders' Equity 198,250 183,038
------- -------
Total Liabilities and Shareholders' Equity $267,408 $ 257,701
======== =========
The accompanying notes are an integral part of the condensed financial statements.
5
ROGERS CORPORATION AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended:
-----------------
(Unaudited)
-----------
June 29, June 30,
OPERATING ACTIVITIES: 2003 2002
- -------------------- ---- ----
Net Income $10,951 $8,415
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 7,027 7,175
Equity in Undistributed Income of Unconsolidated Joint Ventures, Net (3,815) (3,755)
Loss on Disposition of Assets 250 --
Changes in Operating Assets and Liabilities:
Accounts Receivable (3,688) (4,914)
Accounts Receivable, Joint Ventures 215 3,282
Inventories 659 1,293
Other Current Assets (95) (423)
Accounts Payable and Accrued Expenses (69) 4,987
Noncurrent Pension and Postretirement Benefits (5,538) (3,026)
Other, Net (749) (841)
----- -----
Net Cash Provided by Operating Activities 5,147 12,193
INVESTING ACTIVITIES:
- ---------------------
Capital Expenditures (8,266) (6,604)
Acquisition of Business -- (8,000)
Divestiture of Business 3,268 --
Short-term Investments 6,628 --
Investment in Unconsolidated Joint Ventures and Affiliates 1,633 2,962
------ -----
Net Cash Provided by (Used in) Investing Activities 3,263 (11,642)
FINANCING ACTIVITIES:
- ---------------------
Proceeds from Short - and Long-Term Borrowings 10 3,966
Repayments of Debt Principal -- (2,105)
Repayment of Life Insurance Debt -- (3,081)
Proceeds from Disposition of Treasury Stock 258 214
Proceeds from Sale of Capital Stock, Net 1,492 524
----- -----
Net Cash Provided by (Used in) Financing Activities 1,760 (482)
Effect of Exchange Rate Changes on Cash 170 (43)
----- -----
Net Increase in Cash and Cash Equivalents 10,340 26
Cash and Cash Equivalents at Beginning of Year 22,300 20,891
------ ------
Cash and Cash Equivalents at End of Quarter $ 32,640 $ 20,917
======== ========
The accompanying notes are an integral part of the condensed financial statements.
6
ROGERS CORPORATION AND CONSOLIDATED AFFILIATES
SUPPLEMENTARY NOTES
(Unaudited)
A. The accompanying unaudited consolidated financial statements have been
prepared in accordance with 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 generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated. For further information
regarding 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 December 29, 2002.
B. Rogers effective tax rate was 25% for the first six months of 2003 and
2002. The effective tax rate continues to be lower than the statutory rate
due to significant tax benefits including nontaxable foreign sales income
and foreign tax and research and development credits. Income taxes paid
were $498,000 and $374,000 in the first six months of 2003 and 2002,
respectively.
C. Comprehensive income, net of related tax, for the three and six-month
periods ended June 29, 2003 and June 30, 2002 are as follows:
Three Months Six Months
Ended: Ended:
------------------------------ --------------------------------
(Dollars In Thousands) June 29, June 30, June 29, June 30,
2003 2002 2003 2002
------------------------------ --------------------------------
Net income $ 5,212 $ 4,531 $ 10,951 $ 8,415
Foreign currency translation adjustments 1,477 (336) 2,324 2,303
------------------------------ --------------------------------
Comprehensive Income $ 6,689 $ 4,195 $ 13,275 $ 10,718
============================== ================================
Accumulated balances related to each component of Other Comprehensive
Loss were as follows:
June 29, December 29,
2003 2002
----------------------- -----------------------
Foreign currency translation adjustments $ 5,369 $ 3,045
Minimum pension liability (7,738) (7,738)
------- -------
Accumulated Other Comprehensive Loss $ (2,369) $ (4,693)
========= =========
7
D. The following table sets forth the computation of basic and diluted
earnings per share in conformity with Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" for the three and six
month periods ended:
Three Months Ended: Six Months Ended:
------------------------------- ------------------------------
(In Thousands, Except Per Share June 29, June 30, June 29, June 30,
Amounts) 2003 2002 2003 2002
------------------------------ ------------------------------
Numerator:
Net income $ 5,212 $ 4,531 $ 10,951 $ 8,415
Denominator:
Denominator for basic earnings per share -
weighted average shares
15,742 15,487 15,647 15,445
Effect of stock options 563 614 515 631
------------------------------ -------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 16,305 16,101 16,162 16,076
=============================== ===============================
Basic earnings per share $ 0.33 $ 0.29 $ 0.70 $ 0.54
=============================== ===============================
Diluted earnings per share $ 0.32 $ 0.28 $ 0.68 $ 0.52
=============================== ===============================
E. Under various plans, the Company may grant stock and stock options to
directors, officers, and other key employees. Stock-based compensation
awards are accounted for using the intrinsic value method prescribed in
APB 25, "Accounting for Stock Issued to Employees" and related
interpretations. Stock-based compensation costs for stock options are
generally not reflected in net income as each option granted under the
plans had an exercise price equal to market value of the underlying
common stock on the date of the grant. Stock-based compensation costs
for stock awards are reflected in net income over the awards' vesting
period.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized in the financial statements for the stock
option plans. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant date for
awards in the three and six months ended, consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per
share for the three and six month periods ended would have been reduced
to the pro forma amounts indicated below.
8
Three Months Ended: Six Months Ended:
--------------------------------- --------------------------------
(In Thousands, Except Per Share June 29, June 30, June 29, June 30,
Amounts) 2003 2002 2003 2002
---------------------------------- -------------------------------
Net income, as reported $5,212 $4,531 $10,951 $8,415
Less: Total stock-based
compensation expense
determined under Black-
Scholes option pricing model,
net of related tax effect
1,281 1,156
636 567
Pro Forma net income 4,576 3,964 9,670 7,259
Basic earnings per share:
As Reported $ 0.33 $ 0.29 $ 0.70 $ 0.54
Pro Forma 0.29 0.26 0.62 0.47
Diluted earnings per share:
As Reported $ 0.32 $ 0.28 $ 0.68 $ 0.52
Pro Forma 0.28 0.25 0.60 0.45
The effects on pro forma net income and earnings per share of expensing
the estimated fair value of stock options are not necessarily
representative of the effects on reported net income for future years,
due to such things as the vesting period of the stock options, and the
potential for issuance of additional stock options in future years.
F. The table below conveys information about the Company's operating
segments in conformity with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information":
High Printed Polymer
(Dollars in Millions) Performance Circuit Materials & Total
Foams Materials Components
--------------------------------------------------------------------------------------------------------------------------
Three months ended June 29, 2003
Net Sales $17.1 $22.0 $10.1 $49.2
Operating Income (Loss) 2.5 0.9 (0.6) 2.8
Three months ended June 30, 2002
Net Sales $17.8 $20.0 $19.5 $57.3
Operating Income 2.7 0.3 1.0 4.0
Six months ended June 29, 2003
Net Sales $34.3 $46.2 $20.5 $101.0
Operating Income (Loss) 4.6 3.5 (1.3) 6.8
Six months ended June 30, 2002
Net Sales $33.5 $39.5 $38.9 $111.9
Operating Income 4.3 0.6 1.7 6.6
Inter-segment sales, which are generally priced with reference to costs
or prevailing market prices, have been eliminated from the sales data
in the previous table.
9
G. The Company has four joint ventures, each 50% owned, which are
accounted for by the equity method. Equity income of $3,950,000 and
$3,870,000 for the first six months ended in 2003 and 2002,
respectively, is included in other income less other charges on the
condensed statements of income. Each of the joint ventures is described
below:
Joint Venture Location Business Segment
Durel Corporation U.S. Polymer Materials and Components
Rogers Inoac Corporation Japan High Performance Foams
Polyimide Laminate U.S. Printed Circuit Materials
Systems, LLC
Rogers Chang Chun Taiwan Printed Circuit Materials
Technology Co., Ltd.
The summarized financial information for these joint ventures is
included in the following table for the first six months ended of each
year shown. Note that there is a difference between the Company's
investment in unconsolidated joint ventures and its one-half interest
in the underlying shareholders' equity of the joint ventures due
primarily to three factors. First, the Company's major initial
contribution to two joint ventures was technology that was valued
differently by the joint ventures than it was on the Company's books.
Secondly, one of the joint ventures had a negative retained earnings
balance for a period of time. Lastly, the translation of foreign
currency at current rates differs from that at historical rates.
Correspondingly, there is a difference between the Company's recorded
income from unconsolidated joint ventures and a 50% share of the income
of those joint ventures.
2003 2002
---------------------- ------------------------
Net Sales $61,070,000 $59,946,000
Gross Profit 22,157,000 21,366,000
Net Income 7,461,000 7,625,000
Sales made to unconsolidated joint ventures by the Company were
immaterial in all periods presented above.
H. The following table sets forth the significant components of other
income less other charges for the first three and six months ended of
2003 and 2002.
Three Months Six Months
Ended: Ended:
------------------------------ -------------------------------
(Dollars In Thousands) June 29, June 30, June 29, June 30,
2003 2002 2003 2002
------------------------------ ------------------------------
Joint venture equity income $ 2,385 $ 2,810 $ 5,713 $ 5,394
Royalties 1,512 197 2,442 584
Other income/(expense) 195 (834) (435) (1,198)
---------- ----------- ------------- -----------
Total other income $ 4,092 $ 2,173 $ 7,720 $ 4,780
10
I. The Company is subject to federal, state, and local laws and
regulations concerning the environment and is currently engaged in
proceedings related to such matters.
The Company is currently involved as a potentially responsible party
("PRP") in three active cases involving waste disposal sites. These
proceedings are at a stage where it is still not possible to estimate
the cost of remediation, the timing and extent of remedial action that
may be required by governmental authorities, and the amount of
liability, if any, of the Company alone or in relation to that of any
other PRPs. Where it has been possible to make a reasonable estimate of
the Company's liability, a provision has been established. Insurance
proceeds have only been taken into account when they have been
confirmed by or received from the insurance company. Actual costs to be
incurred in future periods may vary from these estimates. Based on
facts presently known to it, the Company does not believe that the
outcome of these proceedings will have a material adverse effect on its
financial position.
In addition to the above proceedings, the Company worked with the
Connecticut Department of Environmental Protection ("CT DEP") related
to certain polychlorinated biphenyl ("PCB") contamination in the soil
beneath a section of cement flooring at its Woodstock, Connecticut
facility. The Company completed clean-up efforts in 2000, monitored the
site in 2001 and 2002, and will continue to monitor the site for the
next three years. On the basis of estimates prepared by environmental
engineers and consultants, the Company had recorded a provision of
$2,600,000 in prior years. Prior to 2003, $2,300,000 was charged
against this provision. In the first six months of 2003, expenses of
$125,000 have been charged against the provision. The remaining reserve
is primarily for testing, monitoring, sampling and minor residual
treatment activity. Management believes, based on facts currently
available, that the balance of this provision is adequate to complete
the project.
In this same matter the United States Environmental Protection Agency
("EPA") alleged that the Company improperly disposed of PCBs. An
administrative law judge found the Company liable for this alleged
disposal and assessed a penalty of approximately $300,000. The Company
reflected this fine in expense in 1998 but disputed the EPA allegations
and appealed the administrative law judge's findings and penalty
assessment. The original findings were upheld internally by the EPA's
Environmental Appeals Board, and the Company placed that decision on
appeal with the District of Columbia Federal Court of Appeals in 2000.
In early January of 2002, the Company was informed that the Court of
Appeals reversed the decision. As a result of this favorable decision,
the $300,000 reserve for the fine was taken into income in 2001.
However, subsequent to the favorable decision by the Court of Appeals,
the EPA continued to pursue this issue and settlement discussions with
the EPA were more protracted and difficult than originally anticipated.
As such, the Company recorded $325,000 for legal and other costs
associated with this matter in 2002. On January 16, 2003, a settlement
agreement was signed with the EPA. The costs associated with the
settlement will not exceed the provision recorded, which included a
cash settlement payment to the government of $45,000 plus a commitment
to undertake some energy-related environmental improvements at its
facilities, as well as assistance to a local Woodstock, Connecticut
Fire Department for emergency preparedness. Management believes, based
on facts currently available, that the provision recorded is adequate
to cover the requirements of the settlement.
On February 7, 2001, the Company entered into a definitive agreement to
purchase the Advanced Dielectric Division ("ADD") of Tonoga, Inc.
(commonly known as Taconic), which operates facilities in Petersburgh,
11
New York and Mullingar, Ireland. On May 11, 2001, the Company announced
that active discussions with Taconic to acquire the ADD business had
been suspended and it was not anticipated that the acquisition would
occur. Accordingly, $1,500,000 in costs associated with this potential
acquisition were written off during the second quarter of 2001. On
October 23, 2001, the Company terminated the acquisition agreement. On
October 24, 2001, Taconic filed a breach of contract lawsuit against
the Company in the United States District Court for the District of
Connecticut seeking damages in the amount of $25,000,000 or more, as
well as specific performance and attorneys' fees. In September 2002, a
confidential settlement agreement concerning all matters raised in this
litigation was negotiated and entered into. The settlement had no
material impact on the 2002 results.
There recently has been a significant increase in certain U.S. states
in asbestos-related product liability claims against numerous
industrial companies. The Company has been named, along with hundreds
of other industrial companies, as a defendant in some of these cases.
The Company strongly believes it has valid defenses to these claims and
intends to defend itself vigorously. In addition, the Company believes
that it has sufficient insurance to cover all costs associated with
these claims. Based upon past claims experience and available insurance
coverage, management believes these matters will not have a material
adverse effect on the financial position, results of operations, or
cash flows of the Company.
In addition to the above issues, the nature and scope of the Company's
business bring it in regular contact with the general public and a
variety of businesses and government agencies. Such activities
inherently subject the Company to the possibility of litigation,
including environmental and product liability matters that are defended
and handled in the ordinary course of business. The Company has
established accruals for matters for which management considers a loss
to be probable and reasonably estimable. It is the opinion of
management that facts known at the present time do not indicate that
such litigation, after taking into account insurance coverage and the
aforementioned accruals, will have a material adverse effect on the
financial position of the Company.
J. In 2002, the Company incurred restructuring charges of $2,150,000. These
charges were associated solely with the severance benefits for 62 employees
of which 48 had been terminated prior to the 2002 year-end. The remaining
employees were notified prior to year-end. The separation date of these
residual employees occurred on varied dates in the first half of 2003.
These workforce reductions were initiated in order to appropriately align
resources with the Company's business requirements, given varied ongoing
operational initiatives, including non-strategic business unit
consolidations, plant rationalizations, outsourcing low value production
and/or moving it to lower production cost environments, and support
function reorganizations to streamline administrative activities. As of
June 29, 2003, the balance in the accrual for these charges was $1,000,000.
Management believes, based on current estimates, the residual provision
will be adequate to cover the future costs of these restructuring
activities. The following table summarizes activities related to the
provision for the first six months ended.
Balance in Provision at December 29, 2002 $1,600,000
Less Payments made for Severance Benefits (600,000)
Adjustments/Additional Provisions --
Balance in Provision at June 29, 2003 $ 1,000,000
===========
12
K. As of December 31, 2001 (fiscal year 2002), the Company acquired certain
assets of the high performance foam business of Cellect LLC ("Cellect") for
approximately $10,000,000 in cash, plus a potential earn-out in five years
based upon performance. While there is no contractual limitation on the
earn-out, the actual earn-out will be determined and affected by the sales
and profitability growth through 2006 as compared to the base year of 2001.
The assets acquired included intellectual property rights and machinery and
equipment for portions of the Cellect plastomeric and elastomeric high
performance polyolefin foam business. The acquisition was accounted for as
a purchase pursuant to SFAS No.141, "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.
On November 18, 2002, the Company completed the divestiture of its
Moldable Composites Division ("MCD"), located in Manchester, Connecticut.
MCD, which was included in the Company's Polymer Materials and Components
segment, was sold to Vyncolit North America Inc., a subsidiary of the
Perstorp group, Sweden. Under the terms of the agreement, the Company
will receive a total of approximately $21,000,000 for the business assets
(excluding the intellectual property) and a five-year royalty stream from
the intellectual property license. Half of the $21,000,000 was paid in
cash upon consummation of the transaction. A Note, which bears interest
at the rate of LIBOR plus 1%, was provided for the remainder of the sales
price, which will be paid over a five-year period. There was no material
gain or loss on the transaction.
L. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research
Bulletin ("ARB") No. 51," ("FIN 46"). FIN 46 clarifies the application of
ARB No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support
from other parties. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003,
and to existing variable interest entities in the interim period beginning
after June 15, 2003. The Company is in the final stages of reviewing the
new accounting standard and its own operations and joint ventures to
determine the impact, if any, and the appropriate reporting. In accordance
with the standard, any required reporting and disclosure changes will be
addressed in the third quarter of 2003.
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 which 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, legal proceedings, and the like, are discussed in greater detail
in Rogers' 2002 Form 10-K filed with the Securities and Exchange Commission and
incorporated by reference. Such factors could cause actual results to differ
materially from those in the forward-looking statements.
13
RESULTS OF OPERATIONS AND SEGMENT ANALYSIS
- ------------------------------------------
Net sales of $49.2 million and $101.0 million in the second quarter and first
half of 2003 were down 14% and 10%, respectively compared to $57.3 million and
$111.9 million in the same periods of 2002. These decreases are primarily
attributable to the MCD divestiture in November of 2002. The Company's 50%
owned, unconsolidated joint ventures had total revenues in the second quarter
and first half of 2003 of $27.0 million and $61.0 million, respectively. Adding
50% of these joint venture sales to the Company's net sales, which the Company
defines as Combined Sales, were $62.7 million for the second quarter of 2003
compared to $73.1 million reported in the second quarter of 2002 (see the
non-GAAP measure reconciliation below for combined sales). Combined Sales
decreased compared to the second quarter of 2002 because of the divestiture of
MCD, along with a decline in sales at Durel Corporation, the largest of Rogers'
joint ventures. However, on a year-to-date basis, revenues across most of the
Company's product lines and joint ventures improved from the prior year with
strong sales into key market niches.
(Dollars in Thousands) Second Quarter First Six Months
----------------------------------------------------
2003 2002 2003 2002
------------------------- ---------------------------
Net Sales, as reported in this report and in $49.2 $57.3 $101.0 $111.9
accordance with generally acceptable
accounting principles
50% of Rogers' Joint Venture Sales 13.5 15.8 30.5 29.6
---- ---- ---- ----
Combined Sales $62.7 $73.1 $131.5 $141.8
===== ===== ====== ======
Sales of Printed Circuit Materials for the second quarter and first half totaled
$22.0 million and $46.2 million, respectively, an increase of 10% and 17%
respectively compared to similar periods in 2002. Revenue growth was driven by
strong sales of high frequency laminates into the satellite television and
cellular base station infrastructure markets as well as flexible laminates for
disk drive applications and increased penetration into cellular telephone
handsets.
High Performance Foam sales were $17.1 million and $34.3 million for this year's
second quarter and first half, down about 4% and up about 3% respectively from
comparable periods in 2002. High performance urethane materials used in cell
phones were strong as the Company continues to gain design wins in more models;
however, weakness on the consumer side of the business, as well as in aerospace
and chip packaging, caused a slight decline in total revenues.
Sales of Polymer Materials and Components totaled $10.1 million and $20.5
million, respectively for the second quarter and first half of 2003, a decrease
of 48% and 47% respectively as compared to the prior year comparable periods.
Sales of power distribution components grew over last year driven in part by a
European application in DSL, a system that moves network data over phone lines
at high speeds. This increase, however, was more than offset by a significant
decline in the office equipment roller business and by the impact of the MCD
divestiture.
Second quarter 2003 net income was $5.2 million and diluted earnings per share
were $.32, as compared to $4.5 million in net income and $.28 in diluted
earnings per share earned in last year's second quarter. The increase was due
14
mostly to revenue growth in Rogers' higher margin businesses, increased
royalties, and strong focus on cost management.
Manufacturing profit as a percentage of sales was 30% and 31% in the second
quarter and first half of 2003, respectively, as compared to 31% and 30% in
comparable periods of 2002. The impact of higher revenues in Rogers' higher
margin businesses coupled with productivity improvements continues to drive
stronger manufacturing margins; however, the gains have been reduced by the
start up costs associated with plant openings in China, Belgium, and Carol
Stream, Illinois, particularly in the second quarter of 2003. These start up
costs will most likely continue at varying levels through the balance of the
year.
Selling and administrative expenses for the second quarter and first half of
2003 were down in total dollars as compared to similar periods in 2002, but
fairly consistent as a percentage of sales. The decrease in total expenses was a
result of continued cost management and reduction in overhead commensurate with
the MCD divestiture.
Research and development expenses for the second quarter and first half were
also lower than the comparable periods in 2002. This decrease is due to timing
of developmental projects and the divestiture of MCD; however, as a percentage
of sales, they are comparable with the prior year and generally in line with the
Company's annual investment target.
Other income was up substantially for the second quarter and the first half, as
compared to 2002. The increase is due primarily to increased royalties,
principally associated with the intellectual property license entered into in
connection with the divestiture of MCD. Rogers' four joint ventures in total had
a favorable first six months; however, the total revenues attributable to
Rogers' joint ventures decreased by 14% compared to last year's second quarter.
Durel's revenues were lower in the second quarter due to the continuing shift to
color displays for cellular telephones, which cannot utilize electroluminescence
for backlighting. However, Durel anticipates that its sales should remain
relatively level over the next twelve months. Polyimide Laminate Systems sales
were essentially unchanged compared to last year's second quarter. Rogers Inoac
Corporation realized double digit growth over the previous year's second quarter
as it continues to win new designs for its urethane foam materials used as seals
and shock absorbing components in mobile phones. Rogers Chang Chun Technologies
continued to make progress in the second quarter with two new major design wins.
The effective tax rate used in the second quarter and first half of 2003 and
2002 was 25%. The tax rate has continued to benefit from foreign tax credits,
research and development credits, nontaxable foreign sales income, and most
recently a reduction in the statutory tax rate in Belgium.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and short-term investments increased during the first half of 2003 by
approximately $3.7. The strong cash flow from operations was partially offset by
$5.5 million of voluntary pension contributions made by the Company.
Trade receivables were up from the 2002 year-end balance due to the increased
revenues in the first half of 2003, as compared to the fourth quarter of 2002.
Inventories and current liabilities were relatively comparable with the 2002
year-end levels.
15
Net cash provided by operating activities in the first half of 2003 totaled $5.1
million. This compares with $12.2 million provided by operations for the
comparable 2002 period. Cash provided by operations was lower in the current
year due primarily to higher levels of voluntary pension contributions in 2003
and the repayment in 2002 of working capital advances from the Company's joint
ventures.
In 2003, investments in capital expenditures totaled $8.2 million in the first
half and are expected to approach $25.0 million for the year; primarily
associated with the plant expansion in Carol Stream and in China. In 2002,
capital expenditures in the first half were $6.6 million and finished at $22.3
million for the year.
Management believes that cash on hand, and internally generated funds will be
sufficient to meet the near term, regular needs of the business. In addition,
the Company has an unsecured multi-currency revolving credit agreement with two
domestic banks and can borrow up to $50.0 million, or the equivalent in certain
other foreign currencies. There were no borrowings at June 29, 2003 under this
agreement.
In addition to the revolving credit agreement above, Rogers N.V., a Belgian
subsidiary of the Company, has an unsecured revolving credit agreement with a
European bank. Under this arrangement Rogers N.V. can borrow up to 6.2 million
Euro. There were no borrowings at June 29, 2003 under this agreement.
RESTRUCTURINGS
- --------------
In 2002, the Company incurred restructuring charges of $2,150,000. These charges
were associated solely with the severance benefits for 62 employees of which 48
had been terminated prior to the 2002 year-end. The remaining employees were
notified prior to year-end. The separation date of these residual employees
occurred on varied dates in the first half of 2003. These workforce reductions
were initiated in order to appropriately align resources with the Company's
business requirements, given varied ongoing operational initiatives, including
non-strategic business unit consolidations, plant rationalizations, outsourcing
low value production and/or moving it to lower production cost environments, and
support function reorganizations to streamline administrative activities. As of
June 29, 2003, the balance in the accrual for these charges was $1,000,000.
Management believes, based on current estimates, the residual provision will be
adequate to cover the future costs of these restructuring activities. The
following table summarizes activities related to the provision for the first six
months ended.
Balance in Provision at December 29, 2002 $1,600,000
Less Payments made for Severance Benefits (600,000)
Adjustments/Additional Provisions --
----------
Balance in Provision at June 29, 2003 $1,000,000
==========
CONTINGENCIES
- -------------
During the first half of 2003, there were no material developments relative to
environmental matters or other contingencies (Refer to Note H for ongoing
environmental and contingency matters). The Company has not had any material
recurring costs and capital expenditures relating to environmental matters,
except as specifically described in the preceding statements.
16
ITEM. 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and foreign
exchange rates. The Company does not use derivative instruments for trading or
speculative purposes. The Company monitors foreign exchange and interest rate
risks and manages such risks on specific transactions. The risk management
process primarily uses analytical techniques and sensitivity analysis.
The Company has various borrowing facilities where the interest rates, although
not fixed, are relatively low. Currently, an increase in the associated interest
rates would not significantly impact interest expense on these facilities as the
Company has paid them off in full, thus the Company has no debt.
The fair value of the Company's investment portfolio or the related interest
income would not be significantly impacted by either a 100.0 basis point
increase or decrease in interest rates due mainly to the size and short-term
nature of the Company's investment portfolio and the relative insignificance of
interest income to consolidated pretax income.
The Company's largest foreign currency exposure is against the Euro, primarily
because of its investments in its ongoing operations in Belgium. In addition to
the Euro exposure, commensurate with the Company's growth and expansion in Asia,
particularly China, the Company is experiencing an escalation of foreign
currency exposure against the currencies in countries such as China, Japan,
Taiwan, Korea, and Singapore. Exposure to variability in currency exchange rates
is mitigated, when possible, through the use of natural hedges, whereby
purchases and sales in the same foreign currency and with similar maturity dates
offset one another. The Company can initiate hedging activities by entering into
foreign exchange forward contracts with third parties when the use of natural
hedges is not possible or desirable.
ITEM 4. CONTROLS AND PROCEDURES
a. Our Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act"), as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective
in alerting our management on a timely basis to material information
required to be disclosed in our reports filed under the Exchange Act.
b. There have been no significant changes in our internal controls or in
other factors that could significantly affect such controls since the
Evaluation Date.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved as a potentially responsible party ("PRP") in
three active cases involving waste disposal sites. These proceedings are at a
stage where it is still not possible to estimate the cost of remediation, the
timing and extent of remedial action that may be required by governmental
authorities, and the amount of liability, if any, of the Company alone or in
relation to that of any other PRPs. Where it has been possible to make a
reasonable estimate of the Company's liability, a provision has been
established. Insurance proceeds have only been taken into account when they have
been confirmed by or received from the insurance company. Actual costs to be
incurred in future periods may vary from these estimates. Based on facts
presently known to it, the Company does not believe that the outcome of these
proceedings will have a material adverse effect on its financial position.
In addition to the above proceedings, the Company worked with the Connecticut
Department of Environmental Protection ("CT DEP") related to certain
polychlorinated biphenyl ("PCB") contamination in the soil beneath a section of
cement flooring at its Woodstock, Connecticut facility. The Company completed
clean-up efforts in 2000, monitored the site in 2001 and 2002, and will continue
to monitor the site for the next three years. On the basis of estimates prepared
by environmental engineers and consultants, the Company had recorded a provision
of $2,600,000 in prior years. Prior to 2003, $2,300,000 was charged against this
provision. In the first six months of 2003, expenses of $125,000 have been
charged against the provision. The remaining reserve is primarily for testing,
monitoring, sampling and minor residual treatment activity. Management believes,
based on facts currently available, that the balance of this provision is
adequate to complete the project.
There recently has been a significant increase in certain U.S. states in
asbestos-related product liability claims against numerous industrial companies.
The Company has been named, along with hundreds of other industrial companies,
as a defendant in some of these cases. The Company strongly believes it has
valid defenses to these claims and intends to defend itself vigorously. In
addition, the Company believes that it has sufficient insurance to cover all
costs associated with these claims. Based upon past claims experience and
available insurance coverage, management believes these matters will not have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
In addition to the above issues, the nature and scope of the Company's business
bring it in regular contact with the general public and a variety of businesses
and government agencies. Such activities inherently subject the Company to the
possibility of litigation, including environmental and product liability matters
that are defended and handled in the ordinary course of business. The Company
has established accruals for matters for which management considers a loss to be
probable and reasonably estimable. It is the opinion of management that facts
known at the present time do not indicate that such litigation, after taking
into account insurance coverage and the aforementioned accruals, will have a
material adverse effect on the financial position of the Company.
18
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed for the three months ended June 29, 2003
A form 8-K was filed on July 16, 2003 with respect to the
Company's Second Quarter Earnings Release
SIGNATURES
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/ James M. Rutledge
---------------------
James M. Rutledge
Vice President, Finance and
Chief Financial Officer
Dated: August 13, 2003
19
- --------------------------------------------------------------------------------
ROGERS CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Walter E. Boomer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rogers
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
20
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Walter E. Boomer
--------------------
Walter E. Boomer
Chairman of the Board of Directors and Chief Executive Officer
August 13, 2003
21
- --------------------------------------------------------------------------------
CERTIFICATION
I, James M. Rutledge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rogers
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
22
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ James M. Rutledge
---------------------
James M. Rutledge
Vice President, Finance and Chief Financial Officer
August 13, 2003
23
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Rogers Corporation (the "Company") on
Form 10-Q for the period ending June 29, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Walter E. Boomer,
Chairman of the Board of Directors and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Walter E. Boomer
-------------------
Walter E. Boomer
Chairman of the Board of Directors and Chief Executive Officer
August 13, 2003
24
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Rogers Corporation (the "Company") on
Form 10-Q for the period ending June 29, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, James M. Rutledge,
Vice President, Finance and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ James M. Rutledge
- ---------------------
James M. Rutledge
Vice President, Finance and Chief Financial Officer
August 13, 2003
25