-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J9Pi/qCnc022ls2RGM2rC13SwXlyNYQyj+wgesYhCnDOUKZeoV52OYJMxRwtTPtt ym2yQHOcr44cdTshCr6zeA== 0001157523-05-009714.txt : 20051104 0001157523-05-009714.hdr.sgml : 20051104 20051104134600 ACCESSION NUMBER: 0001157523-05-009714 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051002 FILED AS OF DATE: 20051104 DATE AS OF CHANGE: 20051104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROGERS CORP CENTRAL INDEX KEY: 0000084748 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 060513860 STATE OF INCORPORATION: MA FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04347 FILM NUMBER: 051179550 BUSINESS ADDRESS: STREET 1: P.O. BOX 188 STREET 2: ONE TECHNOLOGY DRIVE CITY: ROGERS STATE: CT ZIP: 06263-0188 BUSINESS PHONE: 8607749605 MAIL ADDRESS: STREET 1: ONE TECHNOLOGY DRIVE CITY: ROGERS STATE: CT ZIP: 06263 10-Q 1 a5012910.txt ROGERS CORPORATION 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-Q ------------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 2, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ____________________ Commission file number 1-4347 ------------------------------- ROGERS CORPORATION (Exact name of Registrant as specified in its charter) ------------------------------- 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 ------------------------------- 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 --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- The number of shares outstanding of the Registrant's common stock as of October 28, 2005 was 16,311,195. - -------------------------------------------------------------------------------- -1- ROGERS CORPORATION FORM 10-Q October 2, 2005 INDEX -----
Page No. -------- Part I - Financial Information - ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Statements of Income 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 18-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Item 4. Controls and Procedures 26 Part II - Other Information - --------------------------- Item 1. Legal Proceedings 27 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27 Item 6. Exhibits 28 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 INCOME (Dollars in thousands, except per share amounts)(Unaudited)
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 2005 2004 2005 2004 ---- ---- ---- ---- Net Sales $ 83,626 $ 86,740 $ 253,527 $ 277,733 Cost of Sales 59,307 62,430 181,602 188,372 Selling and Administrative Expenses 12,369 13,447 41,718 42,343 Research and Development Expenses 4,897 5,412 15,133 14,979 Impairment Charges - - 20,030 - ---------- ---------- ---------- ---------- Total Costs and Expenses 76,573 81,289 258,483 245,694 ---------- ---------- ---------- ---------- Operating Income (Loss) 7,053 5,451 (4,956) 32,039 Equity Income (Loss) in Unconsolidated Joint Ventures 601 2,265 2,003 5,451 Other Income less Other Charges 399 867 1,251 3,036 Interest Income, Net 194 31 556 131 ---------- ---------- ---------- ---------- Income (Loss) Before Income Taxes 8,247 8,614 (1,146) 40,657 Income Tax Expense (Benefit) 31 2,153 (5,674) 10,164 ---------- ---------- ---------- ---------- Net Income $ 8,216 $ 6,461 $ 4,528 $ 30,493 ========== ========== ========== ========== Net Income Per Share: Basic $ 0.51 $ 0.39 $ 0.28 $ 1.87 ========== ========== ========== ========== Diluted $ 0.49 $ 0.38 $ 0.27 $ 1.78 ========== ========== ========== ========== Weighted Average Shares Outstanding: Basic 16,267,116 16,460,393 16,314,263 16,342,241 ========== ========== ========== ========== Diluted 16,726,537 17,140,023 16,755,947 17,120,095 ========== ========== ========== ========== 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)
October 2, January 2, 2005 2005 ---- ---- Assets Current Assets: Cash and Cash Equivalents $ 31,907 $ 37,967 Short-term Investments - 2,000 Accounts Receivable, Net 59,711 57,264 Account Receivable from Joint Ventures 5,905 5,176 Note Receivable, Current 2,100 2,100 Inventories 41,845 49,051 Current Deferred Income Taxes 9,064 9,064 Asbestos-Related Insurance Receivables 7,154 7,154 Other Current Assets 3,936 3,158 ----------- ----------- Total Current Assets 161,622 172,934 Notes Receivable 4,200 4,200 Property, Plant and Equipment, Net of Accumulated Depreciation of $123,576 and $111,215 131,764 140,384 Investments in Unconsolidated Joint Ventures 18,154 18,671 Pension Asset 5,831 5,831 Goodwill 21,460 21,928 Other Intangible Assets 1,260 7,144 Asbestos-Related Insurance Receivables - Noncurrent 28,803 28,803 Other Assets 5,441 5,300 ----------- ----------- Total Assets $ 378,535 $ 405,195 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable $ 17,945 $ 21,117 Accrued Employee Benefits and Compensation 16,451 18,427 Accrued Income Taxes Payable 4,331 8,177 Asbestos-Related Liabilities 7,154 7,154 Other Accrued Liabilities 5,264 2,512 ----------- ----------- Total Current Liabilities 51,145 57,387 Deferred Income Taxes 6,979 14,111 Pension Liability 12,775 14,757 Retiree Health Care and Life Insurance Benefits 6,483 6,483 Asbestos-Related Liabilities 29,045 29,045 Other Long-Term Liabilities 1,367 2,045 Shareholders' Equity: Capital Stock, $1 Par Value: Authorized Shares 50,000,000; Issued and Outstanding Shares 16,277,802 and 16,437,790 16,278 16,437 Additional Paid-In Capital 32,220 41,769 Retained Earnings 218,946 214,418 Accumulated Other Comprehensive Income 3,297 8,743 ----------- ----------- Total Shareholders' Equity 270,741 281,367 ----------- ---------- Total Liabilities and Shareholders' Equity $ 378,535 $ 405,195 =========== =========== The accompanying notes are an integral part of the condensed financial statements.
ROGERS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)(Unaudited)
Nine Months Ended October 2, October 3, 2005 2004 ------ ------ Operating Activities - -------------------- Net Income $ 4,528 $ 30,493 Adjustments to Reconcile Net Income to Cash Provided by (Used in) Operating Activities: Depreciation and Amortization 14,658 13,226 Deferred Income Taxes (8,280) (954) Equity in Undistributed Income of Unconsolidated Joint Ventures, Net (2,003) (5,451) Pension and Postretirement Benefits 1,859 (307) Other, Net (2,802) (1,032) Impairment Charges 20,030 -- Changes in Operating Assets and Liabilities, Net of Effects of Acquisition of Businesses: Accounts Receivable (4,399) (7,959) Inventories 6,062 (14,791) Accounts Payable and Accrued Expenses (7,352) (485) Other Current Assets (281) (810) ---------- -------- Net Cash Provided by Operating Activities 22,020 11,930 Investing Activities - -------------------- Capital Expenditures (25,297) (19,951) Dividends from (investments in) Unconsolidated Joint Ventures and Affiliates 2,813 (1,794) Short-Term Investments 2,000 1,005 Acquisition of Business, Net -- (3,205) ---------- -------- Net Cash Used in Investing Activities (20,484) (23,945) Financing Activities - -------------------- Purchase of Capital Stock from Shareholders (12,274) -- Proceeds from Sale of Capital Stock, Net 4,064 6,717 Proceeds from Issuance of Shares to Employee Stock Ownership Plan 897 719 ---------- -------- Net Cash Provided by (Used in) Financing Activities (7,313) 7,436 Effect of Exchange Rate Changes on Cash (283) 124 ---------- -------- Net Decrease in Cash and Cash Equivalents (6,060) (4,455) Cash and Cash Equivalents at Beginning of Year 37,967 31,476 ---------- -------- Cash and Cash Equivalents at End of Quarter $ 31,907 $ 27,021 ========== ======== 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 0% and 25%, respectively, for the three month periods ended October 2, 2005 and October 3, 2004 and (495%) and 25% for the first nine months of 2005 and 2004, respectively. Income taxes paid were $46,500 and $500,000 in the three months ended October 2, 2005 and October 3, 2004, and $87,500 and $4.2 million for the first nine months of 2005 and 2004, respectively. 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) the net positive adjustment associated with a favorable IRS determination on previous Durel Corporation federal income tax filings (5.7 percentage point decrease), (iii) adjustment of the Company's tax accruals to reflect the filing of the 2004 federal income tax return on September 15, 2005 (6.9 percentage point decrease), and (iv) favorable tax rates on certain foreign business activity, foreign tax credits and research and development credits, which reduced the effective tax rate by 10, 5 and 3 percentage points, respectively. The effective tax rate was negatively impacted by an adjustment to deferred taxes associated with the remediation of the previously reported material weakness associated with our accounting for deferred income taxes (5.9 percentage point increase). -6- Inventories Inventories were as follows:
October 2, January 2, (Dollars in thousands) 2005 2005 ---- ---- Raw materials $ 12,222 $ 16,121 Work in process and finished goods 29,623 32,930 --------- --------- $ 41,845 $ 49,051 ========= =========
Comprehensive Income Comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, (Dollars in thousands) 2005 2004 2005 2004 ---- ---- ---- ---- Net income $ 8,216 $ 6,461 $ 4,528 $ 30,493 Foreign currency translation adjustments (1,149) 560 (5,446) 231 ------- ------- ------- -------- Comprehensive income (loss) $ 7,067 $ 7,021 $ (919) $ 30,724 ======= ======= ======= ========
Accumulated balances related to each component of Accumulated Other Comprehensive Income as of October 2, 2005 and January 2, 2005 were as follows:
(Dollars in thousands) 2005 2004 ---- ---- Foreign currency translation adjustments $ 7,188 $ 12,634 Minimum pension liability (3,891) (3,891) --------- --------- Accumulated Other Comprehensive Income $ 3,297 $ 8,743 ========= =========
Recent Accounting Standards Stock-Based Compensation On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS 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 is currently evaluating the provisions of SFAS 123R to determine its impact on the Company's 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 -7- 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. Note 2 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share in conformity with SFAS No. 128, "Earnings per Share", for the periods indicated:
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, (Dollars in thousands, except per share amounts) 2005 2004 2005 2004 ---- ---- ---- ---- Numerator: Net income (loss) $ 8,216 $ 6,461 $ 4,528 $ 30,493 Denominator: Denominator for basic earnings per share - Weighted-average shares 16,267 16,460 16,314 16,342 Effect of dilutive stock options 459 680 442 778 ----------- ----------- ----------- ------------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 16,726 17,140 16,756 17,120 =========== =========== =========== ============ Basic earnings (loss) per share $ 0.51 $ 0.39 $ 0.28 $ 1.87 =========== =========== =========== ============ Diluted earnings (loss) per share $ 0.49 $ 0.38 $ 0.27 $ 1.78 =========== =========== =========== ============
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 as of the date of the grant. Stock-based compensation costs for stock awards are reflected in net income over the awards' vesting periods. The Company has adopted the disclosure-only provisions of SFAS 123. (See "Note 1 - - Accounting Policies" for a discussion of the changes to this approach that the Company will be required to adopt in the first quarter of 2006 under SFAS 123R). 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 Nine Months Ended October 3, October 3, October 3, October 3, (Dollars thousands, except per share amounts) 2005 2004 2005 2004 ---- ---- ---- ---- Net income, as reported $ 8,216 $ 6,461 $ 4,528 $ 30,493 Less: Total stock-based compensation expense determined under Black-Scholes option pricing model, net of related tax effect 841 1,231 5,794 8,728 --------- -------- -------- ---------- Pro-forma net income (loss) $ 7,375 $ 5,230 $ (1,266) $ 21,765 ========= ======== ======== ========== Basic earnings (loss) per share: As reported $ 0.51 $ 0.39 $ 0.28 $ 1.87 Pro-forma 0.45 0.32 (0.08) 1.33 Diluted earnings (loss) per share: As reported $ 0.49 $ 0.38 $ 0.27 $ 1.78 Pro-forma 0.44 0.31 (0.08) 1.27
-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 339,000 shares that were granted in the first nine 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 Nine Months Ended October 2, October 3, October 2, October 3, (Dollars in thousands) 2005 2004 2005 2004 ---- ---- ---- ---- Service cost $ 1,042 $ 984 $ 3,127 $ 2,951 Interest cost 1,625 1,537 4,876 4,611 Expected return on plan assets (2,011) (1,768) (6,034) (5,303) Amortization of prior service cost 115 125 346 376 Amortization of net loss 165 140 494 421 -------- ------ ------- ------- Net periodic benefit cost $ 936 $1,018 $ 2,809 $ 3,056 ======== ====== ======= ======= Other Benefits -------------- Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 2005 2004 2005 2004 ---- ---- ---- ---- (Dollars in thousands) Service cost $ 160 $ 149 $ 506 $ 446 Interest cost 111 136 422 408 Expected return on plan assets -- -- -- -- Amortization of prior service cost -- -- -- -- Amortization of net loss (43) 32 122 97 -------- ------ ------- ------- Net periodic benefit cost $ 228 $ 317 $ 1,050 $ 951 ======== ====== ======= =======
-9- Employer Contributions The Company made a $2 million contribution to one of its qualified defined benefit pension plans in the second quarter of 2005 (contributions approximated $3.3 million during fiscal 2004). 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 $128,500 in the first nine months of 2005. The reduction in expense for the first, second and third quarter of 2005 is $35,000, $34,000 and $59,500, 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. On October 28, 2004, the Board of Directors authorized the repurchase of up to an aggregate of $25 million in market value of such common stock. As of October 2, 2005, the Company had repurchased approximately 382,000 shares of common stock for a total of $15.5 million as a result of this plan, including approximately 8,000 shares of common stock for a total of approximately $0.3 million in the third quarter of 2005. The current plan was scheduled to expire on October 28, 2005. However, on October 27, 2005, the Board of Directors cancelled the unused portion of the existing plan and approved a new buyback program, under which the Company is authorized to repurchase up to an aggregate of $25 million in market value of common stock over the next 12 months. 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 Nine Months Ended (Dollars in millions) October 2, 2005 October 3, 2004 October 2, 2005 October 3, 2004 --------------- --------------- --------------- --------------- Printed Circuit Materials Net Sales $ 35.9 $ 45.3 $ 112.5 $ 137.8 Operating Income 4.4 7.0 12.4 27.0 Polymer Materials & Components Net Sales $ 23.1 $ 20.7 $ 70.4 $ 75.3 Operating Income (Loss) (2.0) (1.7) (3.7) 2.9 High Performance Foams Net Sales $ 24.6 $ 20.7 $ 70.6 $ 64.6 Operating Income (Loss) 4.7 0.2 (13.6) 2.1 Total Net Sales $ 83.6 $ 86.7 $ 253.5 $ 277.7 Operating Income (Loss) 7.1 5.5 (4.9) 32.0
-10- High Performance Foams operating loss in 2005 includes substantially all of the effect of the impairment charge, associated with the restructuring of the polyolefin business in the second quarter. 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 October 2, 2005, the Company had four joint ventures, each 50% owned, which are accounted for by the equity method of accounting. Equity income of $2.0 million and $5.5 million for the first nine 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 nine-month periods ended October 2, 2005 and October 3, 2004.
(Dollars in thousands) 2005 2004 ---- ---- Net sales $ 68,206 $ 60,318 Gross profit 16,571 21,419 Net income 5,561 12,057
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), located in 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 second quarter of 2005. The plan of remediation is awaiting approval 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 -11- reserve of approximately $500,000, 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 Company will be responsible for monitoring the site for at least two years after completion of the remediation, and the costs of monitoring will be treated as period expenses as incurred. 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. 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 reported the results to the DEP and was requested by the DEP to install additional well clusters at the site that subsequently tested positive for low levels of contamination. The Company will install additional well clusters by the end of 2005 and continue to monitor the site. Results of this monitoring may result in alternative remediation actions. 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 such remediation 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. -12- 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 October 2, 2005, there were approximately 212 pending claims compared to 232 pending claims at January 2, 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. 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 nine months of 2005 and full year 2004, the Company was able to have approximately 74 and 84 claims dismissed, respectively, and settled 7 and 8 claims, respectively. The Company has, however, settled a small number of cases for which the majority of costs have been paid by the Company's insurance carriers. Payments related to such settlements totaled approximately $1.4 million in the third quarter of 2005, and approximately $4.4 million in the first nine months 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 the majority of 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. -13- 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, 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 primary insurance carriers have determined that it would be appropriate to enter into a cost sharing agreement to clearly define the cost sharing relationship among such 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 around the end 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 -14- of $36.0 million. This resulted in the Company recording a pre-tax charge to earnings of $200,000 in 2004. As of October 2, 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 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. 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 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 believes that such contamination is historical and occurred prior to its occupation of the facility. Based on this information, the Company believes it is under no current obligation to remediate the site, but will continue to monitor the issue. 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 October 2, 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 its 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 -15- 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 polyolefin products. 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. The Company has made substantially all severance payments due to the employees affected by the restructuring and anticipates paying certain residual amounts in the fourth quarter of 2005 and the first quarter of 2006. On October 5, 2004, the Company announced a restructuring plan that resulted 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 approximate the original accrual amount with certain residual payments to be made over the course 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 -16- 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. In the third quarter of 2004, the Company ceased production activities at Cellect and began 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. The first two installments were received in accordance with the note terms in the third quarter of 2005. This agreement releases both companies from any future obligations to each other. The previous receivable outstanding of $1.5 million had previously been partially reserved for and subsequently, 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 a 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. -17- 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, litigations 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. 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 and components 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 is currently working to qualify production of its electroluminescent lamps and busbar products at its manufacturing facility in Suzhou to serve its Asian customers and, in late 2004, completed the move of its elastomer component and float manufacturing operations from South Windham, Connecticut to Suzhou. The Company believes that these strategic decisions will enable it to better serve its customers and take advantage of more opportunities in the Asian marketplace. The Company continues to focus and invest in its Six Sigma initiatives, as it has increased its efforts in 2005 and plans to continue to invest in future projects through increased employee participation in its Six Sigma efforts 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. From a financial perspective, sales in the third quarter and first nine months of 2005 were $83.6 million and $253.5 respectively, a decline of 3.6% and 8.7% respectively, compared to the third quarter and first nine months of 2004. Operating profit increased from $5.5 million in the third quarter of 2004 to $7.1 million in the third quarter of 2005 and declined $37.0 million to a loss -18- of $5.0 million in the first nine months of 2005 as compared to the same period last year. Significant factors that affected operating results in the third quarter and the first nine months of 2005 as compared to comparable prior year periods include an increase in sales for the High Performance Foams segment of $3.9 million and $5.9 million respectively, driven by the strong performance of the polyurethane foams products. Additionally, there were increases in operating profit for the third quarter and first nine months of $4.5 million and $5.7 million respectively (excluding the second quarter impairment charge of $21.4 million). These increases were offset by a decline in sales for the three and nine months of $9.4 million and $25.3 million respectively, and a decline in operating profit of $2.6 million and $14.6 million 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. 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 through the second quarter of 2005. Sales in the third quarter of 2005 were essentially flat as compared to the previous quarters, although fluctuations occurred within its various businesses. The Company continues to strategically position itself to take advantage of market opportunities, particularly in China, and is optimistic that these investments will drive future business growth. 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. 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. The Company began to realize a positive financial impact from this transition in the third 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 last quarter 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. -19- 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 Nine Months Ended ------------------ ----------------- October 2, October 3, October 2, October 3, 2005 2004 2005 2004 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Manufacturing Margin 29.1% 28.0% 28.4% 32.2% Selling and Administrative Expenses 14.8% 15.6% 16.5% 15.2% Research and Development Expenses 5.9% 6.2% 6.0% 5.4% Impairment Charge - - 7.9% - Operating Profit (Loss) 8.4% 6.2% (2.0)% 11.5% Equity Income in Unconsolidated Joint Ventures 0.7% 2.7% 0.8% 2.0% Other Income 0.5% 1.0% 0.5% 1.1% Net Income 9.8% 7.5% 1.8% 11.0%
Net Sales Net sales for the third quarter of 2005 were $83.6 million as compared to $86.7 million in the third quarter of 2004, a decline of almost 4%. For the first nine months of 2005, net sales decreased $24.2 million to $253.5 million from $277.7 million for the first nine months of 2004. This year-to-date decrease was driven by declines in sales of over 18% in the Printed Circuit Materials segment and over 6% in the Polymer Materials and Components segment, partially offset by an increase in sales of over 9% in the High Performance Foams segment. See "Segment Analysis" below for further discussion and explanation of these fluctuations in segment performance. Manufacturing Margins Manufacturing margins as a percentage of sales increased from 28% in the third quarter of 2004 to slightly over 29% in the third quarter of 2005. For the first nine months, manufacturing margins as a percentage of sales decreased from 32.2% in 2004 to 28.4% in 2005. The decrease in margins year-to-date, is primarily attributable to declines in the Polymer Materials and Components and Printed Circuit Materials segments. In Polymer Materials and Components, although Durel sales were relatively flat year-over-year and increased quarter-over-quarter, margins declined due to product mix and manufacturing yield issues as the concentration of the sales increase was driven by programs featuring lower margin electroluminescent lamp products. Also contributing to the decrease were lower margins on elastomer component and float products sales as the Company continues to experience challenges in establishing production of these products in China. Margins in the Printed Circuit Materials segment were negatively affected by a decline in sales of flexible circuit materials. These declines were partially mitigated by a 35% quarter-over-quarter improvement in margins in the High Performance Foams segment that was driven primarily by the leverage obtained as a result of the restructuring of the polyolefin business. Selling and Administrative Expenses Selling and administrative expenses decreased 8%, or $1.1 million, in the third quarter of 2005 and decreased 1.3%, or $0.6 million, in the first nine months of 2005 as compared to the comparable periods in the prior year. As a percentage of sales, selling and administrative expenses decreased from 15.6% in the third quarter of 2004 to 14.8% in the third quarter of 2005 and increased from 15.2% to 16.5% in the first nine months of 2005. 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 nine months of 2004 to the first nine months of 2005, as overall spending levels remained relatively consistent. Quarterly spending decreased in 2005 over 2004 primarily due to cost control in light of the decreased sales levels, as well as the decrease in the costs associated with the Company's medical benefits, as the Company migrated to a self-insured plan in 2005. -20- Research and Development Expenses Research and development expenses decreased 9.3% from $5.4 million in the third quarter of 2004 to $4.9 million in the third quarter of 2005. For the first nine months of 2005, research and development expenses were $15.1 million, a slight increase over the first nine months of 2004. As a percentage of sales, research and development expenses were 5.9% in the third quarter of 2005 as compared to 6.2% in the comparable prior period and 6.0% for the first nine-months of 2005 as compared to 5.4% for the comparable prior year period. The percentage period-over-period changes are almost exclusively a result of the sales fluctuations, as spending has remained relatively consistent across these periods. Also, in the third quarter of 2004 the Company was investing in the elastomer components production move to China, which also increased research and development costs in the period. The Company's strategic plan is to reinvest approximately 6% of sales in research and development activities each year and its third 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 its 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. These developments resulted in the performance of an impairment analysis that was conducted in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). 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 is classified in "other current assets" on the balance sheet. -21- Equity Income (Loss) in Unconsolidated Joint Ventures Equity income in unconsolidated joint ventures decreased from $2.3 million in the third quarter of 2004 to $0.6 million in the third quarter of 2005 and decreased to $2.0 million in the first nine months of 2005 from $5.5 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). The Company is optimistic that these start-up issues will come to resolution in the fourth quarter of 2005 and the first quarter of 2006 and that the operating results of RIS will improve in 2006 accordingly. Income Taxes The Company's effective tax rate was 0% and 25%, respectively, for the three month periods ended October 2, 2005 and October 3, 2004 and (495%) and 25% for the first nine months of 2005 and 2004, respectively. 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) the net positive adjustment associated with a favorable IRS determination on previous Durel Corporation federal income tax filings (5.7 percentage point decrease), (iii) adjustment of the Company's tax accruals to reflect the filing of the 2004 federal income tax return on September 15, 2005 (6.9 percentage point decrease), and (iv) favorable tax rates on certain foreign business activity, foreign tax credits and research and development credits, which reduced the effective tax rate by 10, 5 and 3 percentage points, respectively. The effective tax rate was negatively impacted by an adjustment to deferred taxes associated with the remediation of the previously reported material weakness associated with our accounting for deferred income taxes (5.9 percentage point increase).
Segment Analysis (Dollars in millions) Third Quarter First Nine Months ------------------------------------------------------ 2005 2004 2005 2004 ------------------------------------------------------ Printed Circuit Materials: Net Sales $ 35.9 $ 45.3 $ 112.5 $ 137.8 Operating Profit 4.4 7.0 12.4 27.0 Polymer Materials and Components: Net Sales 23.2 20.7 70.4 75.3 Operating Profit (Loss) (2.0) (1.7) (3.7) 2.9 High Performance Foams: Net Sales 24.6 20.7 70.6 64.6 Operating Profit (Loss) 4.7 0.2 (13.6) 2.1
Printed Circuit Materials: Net sales of Printed Circuit Materials in the third quarter and first nine months of 2005 were $35.9 million and $112.5 million, respectively, a decrease of 20.8% and 18.4% from same period in 2004. Segment operating profit declined from $7.0 million in the third quarter of 2004 to $4.4 million in the third quarter of 2005 and from $27.0 million in the first nine months of 2004 to $12.4 million in the first nine months of 2005. These decreases are attributable primarily to the sales decline in the Company's flexible circuit materials business (declines of over 46% quarter over quarter and almost 41% for the comparable nine month periods). These sales declines were attributable primarily to a number of cellular telephone programs coming to end of life in the fourth quarter of 2004 with no replacement programs in place at that time, as well as the delay of some future programs. However, certain new programs have recently started that contributed to a 15% sequential sales growth from the second quarter of 2005. The Company expects additional new programs to begin in the fourth quarter of 2005 and into 2006, which are anticipated to continue to drive the growth in this segment. Sales in the Company's high frequency materials -22- business declined in 2005 almost 4% quarter-over-quarter and 7% for the comparable nine month periods. This business was also impacted by rising material prices which drove additional declines in profitability. Polymer Materials and Components: The Polymer Materials and Components segment had sales of $23.2 million and $70.4 million for the third quarter and first nine months of 2005, respectively. This is an increase of 12% and a decrease of 6.5%, respectively, when compared to the same periods in 2004. Operating results for the segment declined by $0.3 million and $6.6 million from the third quarter and first nine months of 2004 to an operating loss of $2.0 million and $3.7 million in 2005, respectively. The quarter-over-quarter sales increase is driven by a 42% growth in Durel sales due to the escalating sales of electroluminescent (EL) lamps. Sales have remained relatively flat for the comparable nine-month periods in 2005 and 2004, but have increased sequentially over 15% since the second quarter of 2005. Demand for EL lamps has continued to grow steadily and the Company is currently adding production capacity in China to meet this demand. The Company has not yet experienced the desired level of profit contribution from this product, which is often the case when new technology is put into production. Therefore, the Company is focused on improving yields and gaining efficiencies in its manufacturing process to drive profit improvement. Mitigating the positive sales results at Durel was a decline in sales in the elastomer components and floats business of approximately 30% both quarter-over-quarter and year-to-date in 2005 as compared to 2004. This business is continuing to improve since the initial start up of manufacturing in China late in 2004 as the Company is currently in the process of qualifying additional capacity expansion to service new potential customers in Asia. Currently, the Company is at capacity in its float production and unable to take on this new business. Sales of the Company's busbar products have remained relatively consistent in 2005 as compared to 2004. The Company is currently adding capacity in China to manufacture busbars and anticipates that this expansion will have a positive impact on the business as it will allow access to customers in the Asian marketplace. High Performance Foams: High Performance Foams net sales increased 18.8% to $24.6 million and 9.2% to $70.6 million for the third quarter and first nine months of 2005, respectively. This segment had an operating profit of $4.7 million and an operating loss of $13.6 million for the quarter and year-to-date, respectively, versus operating profit of $0.2 million and $2.1 million respectively, during the same periods of 2004. The year to date 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 increased 8.6% from the second quarter of 2005 to $24.6 million. The increase in sales from 2004 to 2005 resulted primarily from strong sales of polyurethane foams in industrial and consumer applications, particularly into cellular phones and footwear, as sales increased 35.8% in the third quarter of 2005 and 18.9% in the first nine months of 2005 as compared to the same prior year periods. Sequentially, polyurethane foam sales increased almost 15% from the second quarter of 2005 as this business experienced record sales levels in the third quarter of 2005. The segment's overall sales increase was partially offset by the planned sales decline in polyolefin foams as a result of the restructuring of the business in the second quarter of 2005. This restructuring favorably impacted the segment's operating results in the quarter and should continue to benefit its results going forward. 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 third 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 October 2, 2005, cash, cash equivalents and short-term investments totaled $31.9 million as compared to $40.0 million at January 2, 2005. During 2005 the Company repurchased approximately $12.3 million of its common stock as part of its share repurchase program and spent approximately $25.3 million on capital requirements. Working capital decreased slightly from $115.5 million at January 2, 2005 to $110.5 million at October 2, 2005. -23- Significant changes in the Company's balance sheet accounts are as follows: o Accounts receivable increased approximately $2.4 million from $57.3 million at January 2, 2005 to $59.7 million at October 2, 2005 primarily due to the changing geographic nature of the Company's accounts receivable. As more business is transacted and billed out of Asia, the accounts receivable collection period should increase as Asian customers traditionally take longer to pay than customers in the United States. o Inventories decreased by $7.2 million from $49.0 million at January 2, 2005 to $41.8 million at October 2, 2005. The decrease is due primarily to (i) the write down of inventory in the second quarter associated with the polyolefin foam business ($1.2 million), (ii) the planned reduction of flexible circuit materials inventories ($4.7 million) as the inventory that was produced in 2004 is sold off, and (iii) the decline in inventory previously held at the South Windham, Connecticut facility ($1.4 million) as the planned inventory build in 2004 of elastomer component and float products for the move to China is no longer necessary and the China plant is now meeting all current customer requirements. o Noncurrent deferred income tax liabilities decreased $7.1 million from $14.1 million at January 2, 2005 to $7.0 million at October 2, 2005, primarily due to decreases of $8.1 million as a result of the benefit recorded in the second quarter of 2005 due to the polyolefin impairment charge, for which tax deductions will be realized over an extended time period, and $1.9 million as a result of the filing of the Company's 2004 federal income tax return. These reductions were partially offset by an increase of approximately $1.7 million recorded in the third quarter as a result of an adjustment associated with the ongoing material weakness remediation. Cash flows from operations were approximately $22.0 million in the first nine months of 2005, as compared to $11.9 million in the first nine months of 2004. The first nine 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 $7.4 million, primarily as a result of annual incentive compensation payouts earned in 2004. Inventories decreased in the first nine months of 2005 as the Company's sales levels and related production requirements were less than in the first nine months of 2004 and the Company made a concerted effort to sell inventory that had been produced in 2004. Contingencies During the third 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 third 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 third quarter of 2005. -24- 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 began 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. The first two installments were received in accordance with the note terms in the third quarter of 2005. This agreement releases both companies from any future obligations to each other. The previous receivable outstanding of $1.5 million 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 SFAS 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 the 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 -25- 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. Critical Accounting Policies There have been no significant changes in the Company's critical accounting policies during the third 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 third 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 October 2, 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 nine months 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 substantially completed this exercise in the third quarter of 2005 and expects to have the issue fully remediated in the fourth 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. -26- 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 (b) Average Price Purchase as Part of Units) that May Yet Shares (or Units) Paid per Share Publicly Announced Be Purchased Under Period Purchased (or Unit) Plans or Programs the Plans or Programs - ------ ------------------------------------------------------------------------------------------ May 31, 2005 through July 2, 2005 - - - $ 9,834,136 July 3, 2005 through August 28, 2005 - - - $ 9,834,136 August 29, 2005 through October 2, 2005 8,000 $ 36.18 8,000 $ 9,544,702 ----- ----- Total 8,000 8,000
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 was to be completed or cancelled within twelve months of the authorization date. As of October 2, 2005, the Company repurchased 381,900 shares of common stock for a total of $15.5 million as a result of this plan, including 8,000 shares of common stock for a total of approximately $0.3 million in the third quarter of 2005. On October 27, 2005, the Board of Directors cancelled the unused portion of the stock buyback program that was put in place in October 2004 and approved a new buyback program, under which the Company is authorized to repurchase up to an aggregate of $25 million in market value of common stock over the next 12 months. Item 5. Other Information In June 2005, Charles M. Brennan, III was appointed a Director of the Company and at that time was also designated for a position on the Audit Committee, subject to determination by the Board of Directors of his independence. In August 2005, the Board of Directors determined Mr. Brennan to be independent and, in conjunction therewith, appointed him as a member of the Company's Audit Committee. At the same time, the Board of Directors also determined that Mr. Brennan is an "Audit Committee Financial Expert" in accordance with the standards established by the Securities and Exchange Commission. -27 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 Quarterly Report on Form 10-Q. The Registrant hereby undertakes to file these instruments with the Commission upon request. 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 4 are not applicable and have been omitted. -28- 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: November 4, 2005 -29- EX-31.1 2 a5012914ex311.txt EXHIBIT 31.1 ROGERS CORPORATION Exhibit 31.1 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert W. Wachob, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rogers Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 4, 2005 /s/ Robert D. Wachob - -------------------- Robert D. Wachob President and Chief Executive Officer EX-31.2 3 a5012914ex312.txt EXHIBIT 31.2 ROGERS CORPORATION Exhibit 31.2 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Paul B. Middleton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rogers Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 4, 2005 /s/ Paul B. Middleton - --------------------- Paul B. Middleton Acting Chief Financial Officer and Corporate Controller EX-32 4 a5012914ex32.txt EXHIBIT 32 Exhibit 32 SECTION 1350 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (Subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Rogers Corporation, a Massachusetts corporation (the "Corporation"), does hereby certify that: The Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2005 (the "Form 10-Q") of the Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Robert D. Wachob -------------------- Robert D. Wachob President and Chief Executive Officer November 4, 2005 /s/ Paul B. Middleton --------------------- Paul B. Middleton Acting Chief Financial Officer and Corporate Controller November 4, 2005 A signed original of this written statement required by Section 906 has been provided to Rogers Corporation and will be retained by Rogers Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----