NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - 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. Accordingly, these statements do not include all
of the information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In our opinion, the
accompanying statements of financial position and related interim statements of
income and cash flows include all normal recurring adjustments 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 our accounting policies,
refer to the audited consolidated financial statements and footnotes thereto
included in our Form 10-K for the fiscal year ended December 30,
2007.
Beginning
at year end 2008, our fiscal years will end on the last day of the month of
December. Beginning in fiscal 2009, all interim periods will end on
the last calendar day of that particular month. Historically, we used
a 52- or 53-week fiscal calendar ending on the Sunday closest to the last day in
December of each year.
Certain
prior period amounts have been reclassified to conform to the current period
classification.
Note
2 –Fair Value Measurements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (SFAS 157). SFAS 157 replaces multiple existing
definitions of fair value with a single definition, establishes a consistent
framework for measuring fair value and expands financial statement disclosures
regarding fair value measurements. SFAS 157 applies only to fair value
measurements that already are required or permitted by other accounting
standards and does not require any new fair value measurements and is effective
for fiscal years beginning after November 15, 2007. Although the
adoption of SFAS 157 on December 31, 2007 did not materially impact our
financial condition, results of operations, or cash flows, we are now required
to provide additional disclosures as part of our financial
statements.
SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value.
|
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
|
·
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
Assets
measured at fair value on a recurring basis during the period, categorized by
the level of inputs used in the valuation, include:
|
(Dollars
in thousands)
|
|
Carrying
amount as of
September
28, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Auction
rate securities
|
|
$ |
52,874 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
52,874 |
|
|
Foreign
currency option contracts
|
|
$ |
755 |
|
|
$ |
- |
|
|
$ |
755 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
Rate Securities
At
year-end 2007, we classified our auction rate securities as available-for-sale
and recorded them at fair value as determined in the active market at the
time. However, due to events in the credit markets, the auctions
failed during the first quarter of 2008 for the auction rate securities that we
held at the end of the first quarter. Accordingly, the securities
changed from a Level 1 valuation to a Level 3 valuation within SFAS 157’s
hierarchy since our adoption of this standard on the first day of fiscal
2008. The auctions continued to fail during the second and third
quarters of 2008 for the auction rate securities that were held.
The par
value of our auction rate securities remained unchanged as of the end of the
third quarter of 2008 at $54.4 million, which were comprised of
90% student loan auction rate securities and 10% municipality auction rate
securities. Due to the failure of auctions during the first
quarter, a fair value assessment of these securities was performed in accordance
with SFAS 157. The assessment was performed on each security based on
a discounted cash flow model, utilizing various assumptions that included
estimated interest rates, probabilities of successful auctions, the timing of
cash flows, and the quality and level of collateral of the
securities. This fair value analysis resulted in a decline in the
fair value of our auction rate securities of $1.7 million as of the second quarter. Due to
continued auction failures throughout the third quarter, the assessment was
updated, which resulted in a slight increase in the fair value of our auction
rate securities of $0.2 million during the third quarter ($1.5 million decline
year to date).
We have
concluded that the impairment is not other-than-temporary, per FASB Staff
Position 115-1 / 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments and Emerging Issues Task Force 03-1: The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, due primarily to
the fact that the investments we hold are high quality AAA/Aaa-rated securities
and 90% are collateralized with government-backed student
loans. Based on our expected operating cash flows and other sources
of cash, we do not anticipate that the current lack of liquidity of these
investments will affect our ability to execute our current business
plan. Therefore, we have the intent and ability to hold the
securities until the temporary impairment is recovered. Based on this
conclusion, we have recorded this charge as an unrealized loss in other
comprehensive income in the equity section of our condensed consolidated
statements of financial position. Additionally, due to our belief
that it may take over twelve months for the auction rate securities market to
recover, we have classified the auction rate securities as long-term assets,
with the exception of securities maturing within 12 months, which we classify as
short-term investments. The securities that we hold have maturities
ranging from 6 to 39 years, with the exception of one security which matures in
June 2009.
The
reconciliation of our assets measured at fair value on a recurring basis using
unobservable inputs (Level 3) is as follows:
|
(Dollars
in thousands)
|
|
Auction
Rate Securities
|
|
|
Balance
at December 30, 2007
|
|
$ |
- |
|
|
Transfers
to Level 3
|
|
|
54,400 |
|
|
Reported
in other comprehensive income
|
|
|
(1,526 |
) |
|
Balance
at September 28, 2008
|
|
$ |
52,874 |
|
|
|
|
|
|
|
These
securities typically earn interest at rates ranging from 3% to
7%. Upon the failure of these securities at auction, a penalty
interest rate is triggered. Since the securities we hold are high
quality securities, the penalty rates are market-based, and therefore the
aggregate interest rate that we earned has remained effectively unchanged during
most of the third quarter due to the effect of lower market interest rates
substantially offsetting the market-based penalty rates. Due to
changes in market conditions, we did experience an increase in penalty rates
during the last few weeks of the quarter.
Subsequent
to the close of the third quarter, we were notified that, during the fourth
quarter of 2008, two of the investments we hold in auction rate securities will
be redeemed at par value and a third investment will be partially redeemed at
par value. The par values of these investments that will be redeemed
total $4.4 million and have been classified as short-term assets.
Foreign
Currency Option Derivatives
As further
explained below in Note 3 “Hedging Transactions and Derivative Financial
Instruments”, we are exposed to certain risks relating to our ongoing business
operations, and the primary risk managed using derivative instruments is foreign
currency exchange rate risk. The fair value of these foreign currency
option derivatives is based upon valuation models applied to current market
information such as strike price, spot rate, maturity date and volatility, and
by reference to market values resulting from an over-the-counter market or
obtaining market data for similar instruments with similar
characteristics.
Note
3 – Hedging Transactions and Derivative Financial Instruments
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment to FASB Statement 133
(SFAS 161). SFAS 161, together with Statement of Financial
Accounting Standard 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), are referred to as SFAS
133R. SFAS 133R requires companies to recognize all of its
derivatives instruments as either assets or liabilities in the statement of
financial position at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship, and
further on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure being hedged, as
a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign
operation.
We are
exposed to certain risks relating to our ongoing business
operations. The primary risk managed by using derivative instruments
is foreign currency exchange rate risk. Option contracts on various
foreign currencies are entered into to manage the foreign currency exchange rate
risk on forecasted revenue denominated in foreign currencies.
We do not
use derivative financial instruments for trading or speculation
purposes.
In
accordance with SFAS 133R, we designate certain foreign currency option
contracts as cash flow hedges of forecasted revenues.
For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same line item associated with the
forecasted transaction and in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
the future cash flows of the hedged item, if any, are recognized in the
statement of income during the current period. The ineffective
portion of a derivative instrument’s change in fair value is immediately
recognized in income.
As of the
close of the third quarter, we have entered into eight hedge
programs. Five of the programs are foreign currency cash flow hedges
to protect against the reduction in value of forecasted cash flows resulting
from U.S. dollar denominated sales in 2008 and 2009 by our Belgian subsidiary,
which uses the Euro as its functional currency. Our Belgian subsidiary hedges
portions of its forecasted revenues denominated in U.S. dollars with option
contracts. If the dollar weakens against the Euro, the decrease in
the present value of future foreign currency cash flows is offset by gains in
the fair value of the options contracts. The remaining three
programs are to hedge exposure on the balance sheet of our Belgian
subsidiary.
|
Notional
Values of Derivative
Instruments
|
|
| |
|
|
Currency
(000s)
|
|
|
Euro
|
|
EUR
7,000
|
|
|
U.S.
Dollar
|
|
$
25,188 |
|
|
(Dollars
in thousands)
|
|
The
Effect of Derivative Instruments on the Financial
Statements
for the 9 month period ended
September
28, 2008
|
|
|
Fair
Values of Derivative
Instruments
for the period
ended
September 28, 2008
|
|
|
Foreign
Exchange Option Contracts
|
|
Location
of gain (loss)
|
|
Amount
of gain (loss)
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
designated as hedging instruments
|
|
Other
comprehensive income
|
|
$ |
(33 |
)
|
|
|
$ |
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
not designated as hedging instruments
|
|
Other
income, net
|
|
|
619 |
|
|
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
of Credit Risk
By using
derivative instruments, we are subject to credit and market risk. If
a counterparty fails to fulfill its performance obligations under a derivative
contract, our credit risk will equal the fair value of the derivative
instrument. Generally, when the fair value of a derivative contract is positive,
the counterparty owes the Company, thus creating a receivable risk for the
Company. We minimize counterparty credit (or repayment) risk by entering into
derivative transactions with major financial institutions of investment grade
credit rating.
|
Inventories
were as follows:
|
|
(Dollars
in thousands)
|
|
September
28,
2008
|
|
|
December
30,
2007
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
11,540 |
|
|
$ |
11,102 |
|
|
Work-in-process
|
|
|
7,715 |
|
|
|
6,172 |
|
|
Finished
goods
|
|
|
26,737 |
|
|
|
33,969 |
|
|
|
|
$ |
45,992 |
|
|
$ |
51,243 |
|
|
Note
5 - Comprehensive Income and Accumulated Other Comprehensive
Income
|
Comprehensive
income for the periods ended September 28, 2008 and September 30, 2007 were as
follows:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
(Dollars
in thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,945 |
|
|
$ |
8,950 |
|
|
$ |
22,661 |
|
|
$ |
14,131 |
|
|
Foreign
currency translation adjustments
|
|
|
(4,571 |
) |
|
|
2,740 |
|
|
|
2,235 |
|
|
|
1,937 |
|
|
Unrealized
gain (loss) on investments, net of tax of ($68) and $580,
for the three and nine month periods ended September 28,
2008
|
|
|
110 |
|
|
|
- |
|
|
|
(946 |
) |
|
|
- |
|
|
Unrealized
gain (loss) on derivative instruments
|
|
|
(33 |
) |
|
|
- |
|
|
|
(33 |
) |
|
|
- |
|
|
Comprehensive
income
|
|
$ |
3,451 |
|
|
$ |
11,690 |
|
|
$ |
23,917 |
|
|
$ |
16,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of accumulated other comprehensive income at September 28, 2008 and
December 30, 2007 were as follows:
|
(Dollars
in thousands)
|
|
September
28,
2008
|
|
|
December
30,
2007
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$ |
20,037 |
|
|
$ |
17,802 |
|
|
Funded
status of pension plans and other postretirement benefits
|
|
|
(4,700 |
) |
|
|
(4,700 |
) |
|
Unrealized
gain (loss) on investments, net of tax of $580
|
|
|
(946 |
) |
|
|
- |
|
|
Unrealized
gain (loss) on derivative instruments
|
|
|
(33 |
) |
|
|
- |
|
|
Accumulated
other comprehensive income
|
|
$ |
14,358 |
|
|
$ |
13,102 |
|
|
|
|
|
|
|
|
|
|
|
Note
6 - 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:
|
(In
thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28, 2008
|
|
|
September
30,
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
7,945 |
|
|
$ |
9,096 |
|
|
$ |
22,661 |
|
|
$ |
13,872 |
|
|
Income
(loss) from discontinued operations, net of taxes
|
|
|
- |
|
|
|
(146 |
) |
|
|
- |
|
|
|
259 |
|
|
Net
income
|
|
$ |
7,945 |
|
|
$ |
8,950 |
|
|
$ |
22,661 |
|
|
$ |
14,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share -
Weighted-average
shares
|
|
|
15,581 |
|
|
|
16,431 |
|
|
|
15,748 |
|
|
|
16,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
126 |
|
|
|
105 |
|
|
|
69 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted—average
shares and assumed conversions
|
|
|
15,707 |
|
|
|
16,536 |
|
|
|
15,817 |
|
|
|
16,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
|
$ |
1.44 |
|
|
$ |
0.84 |
|
|
Income
(loss) from discontinued operations, net
|
|
|
- |
|
|
|
(0.01 |
) |
|
|
- |
|
|
|
0.01 |
|
|
Net
income
|
|
$ |
0.51 |
|
|
$ |
0.54 |
|
|
$ |
1.44 |
|
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
|
$ |
1.43 |
|
|
$ |
0.83 |
|
|
Income
(loss) from discontinued operations, net
|
|
|
- |
|
|
|
(0.01 |
) |
|
|
- |
|
|
|
0.01 |
|
|
Net
income
|
|
$ |
0.51 |
|
|
$ |
0.54 |
|
|
$ |
1.43 |
|
|
$ |
0.84 |
|
|
Note
7 – Stock-Based Compensation
|
On January
2, 2006 (the first day of the 2006 fiscal year), we adopted SFAS No. 123
(Revised), Share-Based Payment
(SFAS 123R), using the modified prospective application as permitted
under SFAS 123R. SFAS 123R supersedes APB No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash
Flows. Under SFAS 123R, compensation cost recognized includes
compensation cost for all share-based payments, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R.
|
Equity
Compensation Awards
|
Stock
Options
We
currently grant stock options under various equity compensation
plans. While we may grant options to employees that become
exercisable at different times or within different periods, we have generally
granted options to employees that vest and become exercisable in one-third
increments on the 2nd, 3rd and
4th
anniversaries of the grant dates. The maximum contractual term for
all options is generally ten years.
We use the
Black-Scholes option-pricing model to calculate the grant-date fair value of an
option. The fair value of options granted during the three and nine
month periods ended September 28, 2008 and September 30, 2007 were calculated
using the following weighted- average assumptions:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28, 2008
|
|
|
September
30,
2007
|
|
|
September
28, 2008
|
|
|
September
30,
2007
|
|
|
Options
granted
|
|
|
-- |
|
|
|
1,100 |
|
|
|
321,772 |
|
|
|
229,986 |
|
|
Weighted
average exercise price
|
|
|
-- |
|
|
$ |
41.85 |
|
|
$ |
31.89 |
|
|
$ |
51.38 |
|
|
Weighted-average
grant date fair value
|
|
|
-- |
|
|
|
20.12 |
|
|
|
15.00 |
|
|
|
24.44 |
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
-- |
|
|
|
38.10 |
% |
|
|
39.82 |
% |
|
|
36.50 |
% |
|
Expected
term (in years)
|
|
|
-- |
|
|
|
7.00 |
|
|
|
7.00 |
|
|
|
6.97 |
|
|
Risk-free
interest rate
|
|
|
-- |
|
|
|
4.41 |
% |
|
|
3.28 |
% |
|
|
4.75 |
% |
|
Expected
dividend yield
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Expected volatility – In
determining expected volatility, we have considered a number of factors,
including historical volatility and implied volatility.
Expected term – We use
historical employee exercise data to estimate the expected term assumption for
the Black-Scholes valuation.
Risk-free interest rate – We
use the yield on zero-coupon U.S. Treasury securities for a period commensurate
with the expected term assumption as its risk-free interest rate.
Expected dividend yield – We
do not issue dividends on our common stock; therefore, a dividend yield of 0%
was used in the Black-Scholes model.
We
recognize expense using the straight-line attribution method for both pre- and
post-adoption grants. The amount of stock-based compensation
recognized during a period is based on the value of the portion of the awards
that are ultimately expected to vest. SFAS 123R requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The term
“forfeitures” is distinct from “cancellations” or “expirations” and represents
only the unvested portion of the surrendered option. We currently
expect, based on an analysis of our historical forfeitures, a forfeiture rate of
approximately 3% and applied that rate to grants issued subsequent to adoption
of SFAS 123R. This assumption will be reviewed periodically and the
rate will be adjusted as necessary based on these
reviews. Ultimately, the actual expense recognized over the vesting
period will only be for those shares that vest.
A summary
of the activity under our stock option plans as of September 28, 2008 and
changes during the three month period then ended, is presented
below:
|
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life
in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Options
outstanding at June 29, 2008
|
|
|
2,244,644 |
|
|
$ |
39.66 |
|
|
|
|
|
|
|
|
Options
granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(42,032 |
) |
|
|
20.23 |
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(6,125 |
) |
|
|
44.15 |
|
|
|
|
|
|
|
|
Options
outstanding at September 28, 2008
|
|
|
2,196,487 |
|
|
|
40.02 |
|
|
|
6.2 |
|
|
$ |
8,023,727 |
|
|
Options
vested at September 28, 2008
|
|
|
1,613,050 |
|
|
|
39.66 |
|
|
|
5.3 |
|
|
|
6,031,741 |
|
|
Options
vested or expected to vest at September 28, 2008 *
|
|
|
2,178,337 |
|
|
|
40.01 |
|
|
|
6.2 |
|
|
|
7,962,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents
options outstanding (vested and unvested), less an estimated forfeiture rate on
those options that are expected to vest at some point in the
future.
|
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
Per
Share
|
|
|
Options
outstanding at December 30, 2007
|
|
|
1,989,646 |
|
|
$ |
40.39 |
|
|
Options
granted
|
|
|
321,772 |
|
|
|
31.89 |
|
|
Options
exercised
|
|
|
(90,190 |
) |
|
|
17.48 |
|
|
Options
cancelled
|
|
|
(24,741 |
) |
|
|
45.78 |
|
|
Options
outstanding at September 28, 2008
|
|
|
2,196,487 |
|
|
|
40.02 |
|
During the
three and nine month periods ended September 28, 2008, the total intrinsic value
of options exercised (i.e., the difference between the market price at time of
exercise and the price paid by the individual to exercise the options) was $0.5
million and $0.8 million, respectively, and the total amount of cash received
from the exercise of these options was $0.9 million and $1.6 million,
respectively.
Restricted
Stock
In 2006,
we began granting restricted stock to certain key executives. This
restricted stock program is a performance based plan that awards shares of
common stock of the Company at the end of a three-year measurement
period. Awards associated with this program cliff vest at the end of
the three year period and eligible participants can be awarded shares ranging
from 0% to 200% of the original award amount, based on defined performance
measures associated with earnings per share.
We will
recognize compensation expense on these awards ratably over the vesting
period. The fair value of the award will be determined based on the
market value of the underlying stock price at the grant date. The
amount of compensation expense recognized over the vesting period will be based
on our projections of the performance of earnings per share over the requisite
service period and, ultimately, how that performance compares to the defined
performance measure. If, at any point during the vesting period, we
conclude that the ultimate result of this measure will change from that
originally projected, we will adjust the compensation expense accordingly and
recognize the difference ratably over the remaining vesting period.
|
|
Restricted
Shares
Outstanding
|
|
Non-vested
shares outstanding at December 30, 2007
|
44,800
|
|
Awards
granted
|
34,150
|
|
Non-vested
shares outstanding at September 28, 2008
|
78,950
|
For the
three and nine months ended September 28, 2008 we recognized compensation
expense of $0.5 million and $0.6 million, respectively. For the three and nine
months ended September 30, 2007, we recognized $0.4 million and $0.5 million of
compensation expense, respectively, related to restricted stock.
Employee
Stock Purchase Plan
We have an
employee stock purchase plan (ESPP) that allows eligible employees to purchase,
through payroll deductions, shares of our common stock at 85% of the fair market
value. The ESPP has two six month offering periods per year, the
first beginning in January and ending in June and the second beginning in July
and ending in December. The ESPP contains a look-back feature that
allows the employee to acquire stock at a 15% discount from the underlying
market price at the beginning or end of the respective period, whichever is
lower. Under SFAS 123R, we recognize compensation expense on this
plan ratably over the offering period based on the fair value of the anticipated
number of shares that will be issued at the end of each respective
period. Compensation expense is adjusted at the end of each offering
period for the actual number of shares issued. Fair value is
determined based on two factors: (i) the 15% discount amount on the underlying
stock’s market value on the first day of the respective plan period, and (ii)
the fair value of the look-back feature determined by using the Black-Scholes
model. We recognized approximately $0.1 million of compensation
expense associated with the plan in the three month periods ended September 28,
2008 and September 30, 2007, respectively, and approximately $0.3 million of
compensation expense associated with the nine month periods ended September 28,
2008 and September 30, 2007, respectively.
Note
8 – 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:
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Retirement
Health and Life Insurance Benefits
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Change
in benefit obligation:
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1,158 |
|
|
$ |
1,557 |
|
|
$ |
3,474 |
|
|
$ |
3,864 |
|
|
$ |
165 |
|
|
$ |
116 |
|
|
$ |
449 |
|
|
$ |
530 |
|
|
Interest
cost
|
|
|
1,985 |
|
|
|
1,878 |
|
|
|
5,955 |
|
|
|
5,467 |
|
|
|
139 |
|
|
|
58 |
|
|
|
349 |
|
|
|
355 |
|
|
Expected
return on plan assets
|
|
|
(2,601 |
) |
|
|
(2,462 |
) |
|
|
(7,803 |
) |
|
|
(7,443 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Amortization
of prior service cost
|
|
|
128 |
|
|
|
147 |
|
|
|
385 |
|
|
|
388 |
|
|
|
(175 |
) |
|
|
(290 |
) |
|
|
(523 |
) |
|
|
(290 |
) |
|
Amortization
of net loss
|
|
|
60 |
|
|
|
21 |
|
|
|
180 |
|
|
|
180 |
|
|
|
117 |
|
|
|
38 |
|
|
|
201 |
|
|
|
88 |
|
|
Net
periodic benefit cost
|
|
$ |
730 |
|
|
$ |
1,141 |
|
|
$ |
2,191 |
|
|
$ |
2,456 |
|
|
$ |
246 |
|
|
$ |
(79 |
) |
|
$ |
476 |
|
|
$ |
683 |
|
Employer
Contributions
We made
$4.1 million in voluntary contributions to our qualified defined benefit pension
plans during the first nine months of 2008. There were no
contributions during the same period in 2007. We made approximately
$0.2 million in contributions (benefit payments) to our non-qualified defined
benefit plans during the first nine months of 2008 and 2007,
respectively.
Defined
Benefit Pension Plan and Retiree Medical Plan Amendments
On July
16, 2007, we announced to our employees and retirees that the defined benefit
pension and retiree medical plans would be amended effective January 1,
2008. As of January 1, 2008, newly hired and rehired employees are no
longer eligible for the defined benefit pension plan. However, the
amendment to the defined benefit pension plan did not impact the benefits to
plan participants as of December 31, 2007. The amendment to the
retiree medical plan did not impact the benefits for employees who were age 50
or older as of December 31, 2007, as long as they met certain eligibility
requirements. However, employees who were less than age 50 as of
December 31, 2007 are no longer eligible for retiree medical
benefits. This plan amendment has resulted in a reduction to the
accumulated benefit obligation, which, beginning in the third quarter of 2007,
is being accounted for as a reduction to prior service cost based on a plan
amendment and amortized over the expected remaining service period of the
ongoing active plan participants until they become fully eligible. In
the first nine months of 2008, we recognized approximately $0.3 million as a
reduction to prior service cost as a result of the amendment.
Note
9 – Equity
Common
Stock Repurchase
From time
to time, our Board of Directors authorizes the repurchase, at management’s
discretion, of shares of our common stock. On February 15, 2008, the
Board of Directors approved a buyback program, which authorized us to repurchase
up to an aggregate of $30 million in market value of common stock over a
twelve-month period. This repurchase plan was scheduled to expire on
February 14, 2009. Under this buyback program, we repurchased
approximately 907,000 shares of common stock for $30.0 million in the first
quarter of 2008, which completed this buyback program. Under a prior
buyback program, we repurchased approximately 214,000 shares of common stock for
$8.7 million and 743,000 shares of common stock for $32.6 million in the three
and nine month periods ended September 30, 2007, respectively.
Note
10 – Segment Information
The
following table sets forth the information about our reportable segments in
conformity with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information” for the periods indicated:
| |
(Dollars
in thousands)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
| |
|
|
September
28,
2008
(1)
|
|
|
September
30,
2007
(1)
|
|
|
September
28,
2008
(1)
|
|
|
September
30,
2007
(1)
|
|
| |
High
Performance Foams
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
sales
|
|
$ |
33,890 |
|
|
$ |
29,466 |
|
|
$ |
92,966 |
|
|
$ |
80,483 |
|
| |
Operating
income
|
|
|
7,376 |
|
|
|
5,457 |
|
|
|
17,687 |
|
|
|
12,654 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Printed
Circuit Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
sales
|
|
$ |
31,820 |
|
|
$ |
37,057 |
|
|
$ |
94,300 |
|
|
$ |
109,540 |
|
| |
Operating
income
|
|
|
12 |
|
|
|
2,104 |
|
|
|
4,615 |
|
|
|
1,886 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Custom
Electrical Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
sales
|
|
$ |
23,232 |
|
|
$ |
32,884 |
|
|
$ |
75,862 |
|
|
$ |
100,683 |
|
| |
Operating
income (loss)
|
|
|
103 |
|
|
|
1,215 |
|
|
|
2,889 |
|
|
|
(6,055 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other
Polymer Products (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
sales
|
|
$ |
12,754 |
|
|
$ |
10,219 |
|
|
$ |
38,566 |
|
|
$ |
31,882 |
|
| |
Operating
income (loss)
|
|
|
(1,641 |
) |
|
|
(251 |
) |
|
|
(4,012 |
) |
|
|
(902 |
) |
| |
(1)
|
These
amounts represent the results of continuing operations. The
2007 amounts have been adjusted to exclude the results of the polyolefin
foams operating segment, which had been aggregated in the Other Polymer
Products reportable segment. See Note 14 “Discontinued
Operations” for further
information.
|
| |
(2)
|
In
the first quarter of 2008, we created a new operating segment called
NuFlex. This entity reports certain distribution activities for
our flexible circuit material products we historically produced, but now
have been outsourced to our joint venture, Rogers Chang Chun Technology
Co., Ltd. (RCCT), as well as certain residual manufacturing related to our
wholly-owned flexible circuit material business. This operating segment
did not meet the aggregation criteria in SFAS 131 and is therefore being
included in our Other Polymer Products reportable
segment.
|
|
|
Inter-segment
sales have been eliminated from the sales data in the previous
table.
|
Note
11 – Joint Ventures
As of
September 28, 2008, we had four joint ventures, each 50% owned, which are
accounted for under the equity method of accounting.
|
Joint
Venture
|
Location
|
Reportable
Segment
|
Fiscal
Year-End
|
|
|
|
|
|
|
Rogers
INOAC Corporation (RIC)
|
Japan
|
High
Performance Foams
|
October
31
|
|
Rogers
INOAC Suzhou Corporation (RIS)
|
China
|
High
Performance Foams
|
December
31
|
|
Rogers
Chang Chun Technology Co., Ltd. (RCCT)
|
Taiwan
|
Printed
Circuit Materials
|
December
31
|
|
Polyimide
Laminate Systems, LLC (PLS)
|
U.S.
|
Printed
Circuit Materials
|
December
31
|
Equity
income of $2.5 million and $5.1 million for the three and nine month periods
ended September 28, 2008 and $2.1 million and $4.9 million for the three and
nine month periods ended September 30, 2007, respectively, is included in the
condensed consolidated statements of income. In addition, commission
income from PLS of $0.5 million and $0.6 million for the three months ended
September 28, 2008 and September 30, 2007 and $1.8 million and $1.3 million for
the nine month periods ended September 28, 2008 and September 30, 2007,
respectively, is included in “Other income, net” on the condensed consolidated
statements of income.
The
summarized financial information for these joint ventures for the periods
indicated is as follows:
|
(Dollars
in thousands)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
Net
sales
|
|
$ |
32,792 |
|
|
$ |
31,356 |
|
|
$ |
88,226 |
|
|
$ |
79,652 |
|
|
Gross
profit
|
|
|
8,847 |
|
|
|
8,048 |
|
|
|
20,890 |
|
|
|
19,899 |
|
|
Net
income
|
|
|
5,072 |
|
|
|
4,220 |
|
|
|
10,291 |
|
|
|
9,704 |
|
The effect
of transactions between us and our unconsolidated joint ventures was accounted
for on a consolidated basis. Receivables from and payables to joint
ventures arise during the normal course of business from transactions between us
and the joint ventures, typically from the joint venture purchasing raw
materials from us to produce end products, which are sold to third parties, or
from us purchasing finished goods from our joint ventures, which are then sold
to third parties.
Note
12 – Commitments and Contingencies
We are
currently engaged in the following environmental and legal
proceedings:
Environmental
Remediation in Manchester, Connecticut
In the
fourth quarter of 2002, we sold our Moldable Composites Division located in
Manchester, Connecticut to Vyncolit North America, Inc., at the time a
subsidiary of the Perstorp Group, located in Sweden. Subsequent to
the divestiture, certain environmental matters were discovered at the Manchester
location and we determined that, under the terms of the arrangement, we would be
responsible for estimated remediation costs of approximately $0.5 million and
recorded this reserve in 2002 in accordance with SFAS No. 5, Accounting for Contingencies
(SFAS 5). The Connecticut Department of Environmental Protection (CT
DEP) accepted our Remedial Action Plan in February 2005. We completed
the remediation activities in December 2005 and started post-remediation
groundwater monitoring in 2006. The cost of the remediation
approximated the reserve originally recorded in 2002. We have
completed all of the required groundwater monitoring with favorable
results. As of the end of the third quarter, this site has been
remediated in accordance with the Connecticut Remediation Standard.
Superfund
Sites
We are
currently involved as a potentially responsible party (PRP) in three 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 our liability, if
any, 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, we have been assessed a cost sharing
percentage of approximately 2% in relation to the range for estimated total
cleanup costs of $17 million to $24 million. We believe we have
sufficient insurance coverage to fully cover this liability and have recorded a
liability and related insurance receivable of approximately $0.4 million as of
September 28, 2008, which approximates our share of the low end of the
range. During the third quarter of 2008, we settled a fourth
superfund case when we reached agreement with the CT DEP as a de minimus party
and agreed to pay approximately $0.1 million to settle our portion of the claim
and release us from further involvement with the site.
In all our
superfund cases, we believe we are a de minimis participant and have only been
allocated an insignificant percentage of the total PRP cost sharing
responsibility. Based on facts presently known to us, we believe that
the potential for the final results of these cases having a material adverse
effect on our results of operations, financial position or cash flows is
remote. These cases have been ongoing for many years and we believe
that they will continue on for the indefinite future. No time frame
for completion can be estimated at the present time.
PCB
Contamination
We have
been working with the CT DEP and the United States Environmental Protection
Agency (EPA) Region I in connection with certain polychlorinated biphenyl (PCB)
contamination in the soil beneath a section of cement flooring at our Woodstock,
Connecticut facility. We completed clean-up efforts in 2000 in
accordance with a previously agreed upon remediation plan. To address
the small amount of residual contamination at the site, we proposed a plan of
Monitored Natural Attenuation, which was subsequently rejected by the CT
DEP. The CT DEP has additionally rejected two revised plans that were
submitted. We are continuing to work with the CT DEP to resolve this
issue.
Since
inception, we have spent approximately $2.5 million in remediation and
monitoring costs related to the site. We cannot estimate the range of
future remediation costs based on facts and circumstances known to us at the
present time. We believe that this situation will continue for
several more years and no time frame for completion can be estimated at the
present time.
Asbestos
Litigation
A
significant number of asbestos-related product liability claims have been
brought against numerous United States industrial companies where the
third-party plaintiffs allege personal injury from exposure to
asbestos-containing products. We have been named, along with hundreds of other
companies, as a defendant in some of these claims. In virtually all of these
claims filed against us, the plaintiffs are seeking unspecified damages, or, if
an amount is specified, it merely represents jurisdictional
amounts. 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 us.
We did not
mine, mill, manufacture or market asbestos; rather, we made some limited
products, which contained encapsulated asbestos. Such products were
provided to industrial users. We stopped manufacturing these products
in 1987.
We have
been named in asbestos litigation primarily in Illinois, Pennsylvania and
Mississippi. As of September 28, 2008, there were approximately 188
pending claims compared to approximately 192 pending claims at June 29, 2008 and
approximately 175 pending claims at December 30, 2007. The number of
open claims during a particular time can fluctuate significantly from period to
period depending on how successful we have been in getting these cases dismissed
or settled. Some jurisdictions prohibit specifying alleged damages in
personal injury tort cases such as these, other than a minimum jurisdictional
amount which may be required for such reasons as allowing the case to be
litigated in a jury trial (which the plaintiffs believe will be more favorable
to them than if heard only before a judge) or allowing the case to be litigated
in federal court. This is in contrast to commercial litigation, in
which specific alleged damage claims are often permitted. The
prohibition on specifying alleged damage sometimes applies not only to the suit
when filed but also during the trial – in some jurisdictions the plaintiff is
not actually permitted to specify to the jury during the course of the trial the
amount of alleged damages the plaintiff is claiming. Further, in
those jurisdictions in which plaintiffs are permitted to claim specific alleged
damages, many plaintiffs nonetheless still choose not to do so. In those cases
in which plaintiffs are permitted to and do choose to assert specific dollar
amounts in their complaints, we believe the amounts claimed are typically not
meaningful as an indicator of a company’s potential liability. This is because
(1) the amounts claimed may bear no relation to the level of the
plaintiff’s injury and are often used as part of the plaintiff’s litigation
strategy, (2) the complaints typically assert claims against numerous
defendants, and often the alleged damages are not allocated against specific
defendants, but rather the broad claim is made against all of the defendants as
a group, making it impossible for a particular defendant to quantify the alleged
damages that are being specifically claimed against it and therefore its
potential liability, and (3) many cases are brought on behalf of plaintiffs
who have not suffered any medical injury, and ultimately are resolved without
any payment or payment of a small fraction of the damages initially
claimed. Of the approximately 188 claims pending as of September 28,
2008, 54 claims do not specify the amount of damages sought, 130 claims cite
jurisdictional amounts, and only four (4) claims (or approximately 2.1% of the
pending claims) specify the amount of damages sought not based on jurisdictional
requirements. Of these four (4) claims, one (1) claim alleges
compensatory and punitive damages of $20,000,000; one (1) claim alleges
compensatory and punitive damages of $1,000,000, and an unspecified amount of
exemplary damages, interest and costs; and two (2) claims allege compensatory
damages of $65,000,000 and punitive damages of $60,000,000. These four (4)
claims name between nine (9) and seventy-six (76) defendants. However, for the
reasons cited above, we do not believe that this data allows for an accurate
assessment of the relation that the amount of alleged damages claimed might bear
to the ultimate disposition of these cases.
The rate
at which plaintiffs filed asbestos-related suits against us increased in 2001,
2002, 2003 and 2004 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. A significant increase in
the volume of asbestos-related bodily injury cases arose in Mississippi in
2002. 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 higher than average 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. The number of
asbestos-related suits filed against us declined in 2005 and in 2006, but
increased slightly in 2007. As of the end of the third quarter, the
number of suits filed in 2008 is less than the number filed in 2007 at that
time.
In many
cases, plaintiffs are unable to demonstrate that they have suffered any
compensable loss as a result of exposure to our asbestos-containing
products. We continue 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 us and the fact that the
asbestos was encapsulated in such products. In addition, even at
sites where the presence of an alleged injured party can be verified during the
same period those products were used, our liability 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 asbestos-containing products that we
manufactured. Based on these and other factors, we have and will
continue to vigorously defend ourselves in asbestos-related
matters.
|
·
|
Dismissals
and Settlements
|
Cases
involving us typically name 50-300 defendants, although some cases have had as
few as one and as many as 833 defendants. We have obtained dismissals
of many of these claims. In the nine month period ended September 28,
2008, we were able to have approximately 43 claims dismissed and settled 4
claims. For the full year 2007, approximately 59 claims were
dismissed and 12 were settled. The majority of costs have been paid
by our insurance carriers, including the costs associated with the small number
of cases that have been settled. Such settlements totaled
approximately $1.5 million in the first three quarters of 2008, compared to
approximately $2 million for the full year 2007. Although these
figures provide some insight into our experience with asbestos litigation, no
guarantee can be made as to the dismissal and settlement rate that we 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 alleged illness of the
alleged injured party 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, we have been successful in obtaining dismissals for many of the claims and
have 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 our insurance carriers. In addition, to date, we have not
been required to pay any punitive damage awards.
In late
2004, we determined that it was reasonably prudent, based on facts and
circumstances known to us at that time, to have a formal analysis performed to
determine our 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 at the
time and the related 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 us in projecting our 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, our limited
claims history and consultations with NERA, we believe 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, we also believe that our ultimate net
asbestos-related contingent liability (i.e., our indemnity or other claim
disposition costs plus related legal fees) cannot be estimated with
certainty.
Our
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 our 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 us to project our insurance coverage for
asbestos-related claims. Marsh’s conclusions were based primarily on a review of
our 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, the experience of NERA and a review of NERA’s
reports.
To date,
our primary insurance carriers have provided for substantially all of the
settlement and defense costs associated with our asbestos-related
claims. However, as claims continued, we determined, along with our
primary insurance carriers, that it would be appropriate to enter into a cost
sharing agreement to clearly define the cost sharing relationship among such
carriers and ourselves. A definitive cost sharing agreement was
finalized on September 28, 2006. Under the definitive agreement, the
primary insurance carriers will continue to pay essentially all resolution and
defense costs associated with these claims until the coverage is
exhausted.
|
·
|
Impact
on Financial Statements
|
Given the inherent uncertainty in making
future projections, we have had the projections of current and future asbestos
claims periodically re-examined, and we will have them updated if needed based
on our 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, the number of claims brought against us and our success in
resolving claims. Based on the assumptions employed by and the report
prepared by NERA and other variables, NERA and Marsh updated their respective
analyses for year-end 2007 and the estimated liability and estimated insurance
recovery, for the five-year period through 2012, is $23.6 and $23.5 million,
respectively. These amounts are currently reflected in our financial
statements at September 28, 2008 as no material changes occurred during the
quarter that would cause us to believe that an additional update to the analysis
was required.
The
amounts recorded for the asbestos-related liability and the related insurance
receivables described above were based on facts known at the time 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, the continuing solvency of various
insurance companies, the ability of insurance companies to reimburse amounts
owed to us on a timely basis, as well as the numerous uncertainties surrounding
asbestos litigation in the United States (including, but not limited to,
uncertainties surrounding the litigation process from jurisdiction to
jurisdiction as well as potential legislative changes), could cause the actual
liability and insurance recoveries for us to be higher or lower than those
projected or recorded.
There can
be no assurance that our accrued asbestos liabilities will approximate our
actual asbestos-related settlement and defense costs, or that our accrued
insurance recoveries will be realized. We believe that it is
reasonably possible that we will incur additional charges for our asbestos
liabilities and defense costs in the future, which could exceed existing
reserves, but such excess amount cannot be estimated at this time. We
will continue to vigorously defend ourselves and believe we have substantial
unutilized insurance coverage to mitigate future costs related to this
matter.
Other
Environmental and Legal Matters
In 2005,
we began to market our manufacturing facility in Windham, Connecticut to find
potential interested buyers. This facility was formerly the location
of the manufacturing operations of our elastomer component and float businesses
prior to the relocation of these businesses to Suzhou, China in the fall of
2004. As part of our due diligence in preparing the site for sale, we
determined that there were several environmental issues at the site and,
although under no legal obligation to voluntarily remediate the site, we
believed that remediation procedures would have to be performed in order to
successfully sell the property. Therefore, we obtained an independent
third-party assessment on the site, which determined that the potential
remediation cost range would be approximately $0.4 million to $1.0
million. In accordance with SFAS 5, we determined that the potential
remediation would most likely approximate the mid-point of this range and
recorded a $0.7 million charge in the fourth quarter of 2005. During
the third quarter of 2008, the remediation for this site was
completed. Due to the remediation not being as extensive as
originally estimated, we reduced the accrual by approximately $0.3 million and
paid approximately $0.2 million in costs associated with the remediation
work. We believe the remaining $0.2 million accrual is appropriate to
cover the future payments related to the remediation efforts that we completed
in the third quarter of 2008.
On May 16,
2007, CalAmp Corp. (CalAmp) filed a lawsuit against us for unspecified
damages. In the lawsuit, which was filed in the United States
District Court, Central District of California, CalAmp alleges performance
issues with certain printed circuit board laminate materials we had provided for
use in certain of its products. Although the lawsuit initially
did not quantify the amount of damages CalAmp was seeking against
us, CalAmp had disclosed in various SEC filings that, in December 2007, it
had settled claims asserted by its largest customer, EchoStar
Technologies Corp. (EchoStar), related to performance problems with EchoStar’s
customers’ direct broadcast satellite television equipment allegedly caused
by our laminate materials. During the second quarter of 2008, CalAmp
responded to discovery requests in the litigation and stated that its current
estimated total damages are $82.9 million. According to CalAmp, this
amount is comprised of the following: $18.7 million related to CalAmp’s
settlement with EchoStar, $44.4 million of alleged goodwill impairment for lost
EchoStar business, $19.5 million for alleged lost margin from EchoStar’s
business annualized (May 2007 to April 2008) and $0.3 million for other
miscellaneous costs and fees. CalAmp’s suit against us is proceeding,
although a trial date has not yet been set. We intend to vigorously
defend ourselves against these allegations. Based on facts and
circumstances known to us at the present time, we cannot determine the
probability of success in such defenses or estimate the range of any potential
loss that may occur as a result of these proceedings.
In
addition to the above issues, the nature and scope of our business bring us in
regular contact with the general public and a variety of businesses and
government agencies. Such activities inherently subject us to the
possibility of litigation, including environmental and product liability matters
that are defended and handled in the ordinary course of business. We
have 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 our results of operations, financial position,
or cash flows.
Note
13 – Restructuring Charges
Beginning
in the second quarter of 2007, we underwent significant restructuring activities
which resulted in net charges of $12.9 million for the second quarter of
2007. Such activities, and the related charges, were substantially
completed by the end of 2007. The residual financial impact of these
activities in the third quarter and first nine months of 2008 consisted of a
reduction in inventory reserves of approximately $0.3 million and $1.6 million,
respectively, due to the sale of inventory that had previously been specifically
reserved in the second quarter of 2007. To date this restructuring
program has resulted in total net charges of $11.9 million.
The
following table summarizes the restructuring and impairment charges recorded in
income from continuing operations for the three and nine month periods ended
September 30, 2007:
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30, 2007
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
Inventory
charges (1)
|
|
|
|
|
|
|
|
Printed
Circuit Materials
|
|
$ |
- |
|
|
$ |
2,500 |
|
|
Custom
Electrical Components
|
|
|
- |
|
|
|
4,750 |
|
|
|
|
|
- |
|
|
|
7,250 |
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
recoveries (1)
|
|
|
|
|
|
|
|
|
|
Printed
Circuit Materials
|
|
|
(509 |
) |
|
|
(509 |
) |
|
Custom
Electrical Components
|
|
|
(710 |
) |
|
|
(710 |
) |
|
|
|
|
(1,219 |
) |
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment charges (1)
|
|
|
|
|
|
|
|
|
|
Printed
Circuit Materials
|
|
|
210 |
|
|
|
420 |
|
|
Custom
Electrical Components
|
|
|
729 |
|
|
|
2,299 |
|
|
|
|
|
939 |
|
|
|
2,719 |
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
license charges (2)
|
|
|
|
|
|
|
|
|
|
Custom
Electrical Components
|
|
|
603 |
|
|
|
1,435 |
|
|
|
|
|
603 |
|
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment (3)
|
|
|
|
|
|
|
|
|
|
Other
Polymer Materials
|
|
|
- |
|
|
|
525 |
|
|
|
|
|
- |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
|
Severance
(3)
|
|
|
202 |
|
|
|
2,758 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
charges
|
|
$ |
525 |
|
|
$ |
13,468 |
|
|
(1)
|
These
amounts are included in cost of sales on our condensed consolidated
statements of income.
|
|
(2)
|
These
amounts are included in selling and administrative expenses on our
condensed consolidated statements of income.
|
|
(3)
|
These
amounts are included in restructuring and impairment charges on our
condensed consolidated statements of
income.
|
Durel
In the
second quarter of 2007, we recorded a non-cash pre-tax charge of $7.1 million,
related to our Durel operating segment, which is aggregated into our Custom
Electrical Components reportable segment. This charge included a $6.3
million restructuring charge, which was included in cost of sales on our
condensed consolidated statements of income, related to the write down of
inventory and accelerated depreciation on machinery and equipment related to the
Durel business and an $0.8 million charge, which was included in selling and
administrative expenses on our condensed consolidated statements of income,
related to the accelerated expense recognition of a prepaid license associated
with a certain flexible electroluminescent (EL) lamp product for which the
future sales forecast was lowered in the second quarter of
2007. These charges resulted from a significant change in the outlook
for existing and future EL lamp programs during the second quarter of 2007 based
on an announcement of certain program terminations from our most significant
customer of EL lamps in the portable communications market. As a
result of this new outlook, all production of EL lamps for the portable
communications market was located at Durel’s manufacturing facility in China by
the end of the second quarter of 2007 and we had shifted substantially all EL
production, including automotive lamp production, to Durel’s China facility by
the end of the year. The significant change in the outlook of EL
programs and the planned shift in EL production to China was an indicator of
impairment that triggered an impairment analysis on the long-lived assets of the
Durel business under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). However, the
impairment analysis, which was completed as part of the 2007 second quarter
closing process, concluded that no impairment charge associated with the Durel
long-lived assets was necessary. As such, in accordance with SFAS
144, we determined that it was appropriate to reduce the estimated useful lives
of EL lamp related equipment in the Durel US manufacturing
facility. In addition, the reduced forecast of EL lamp sales,
specifically related to flexible EL lamps for the portable communications
market, caused us to accelerate the expense recognition of a prepaid license
associated with flexible EL lamps based on the current forecasted
revenues.
Flexible
Circuit Materials
In the
second quarter of 2007, we recorded a non-cash pre-tax charge of $2.7 million,
related to our flexible circuit materials operating segment, which was
aggregated into our Printed Circuit Materials reportable
segment. This charge, which was included in cost of sales on our
condensed consolidated statements of income, related to the write down of
inventory and accelerated depreciation on machinery and equipment related to the
flexible circuit material business. Flexible circuit materials, which
are used in a variety of consumer electronic products, had been transformed into
a commodity product with increased global competition and price pressure driven
by excess capacity. This had caused the operating results of the
flexible circuit materials business to significantly decline in recent periods,
which we determined was an indicator of impairment that triggered an impairment
analysis on the long-lived assets of the flexible circuit materials business
under SFAS 144. However, the impairment analysis, which was completed
as part of the 2007 second quarter closing process, concluded that no impairment
charge associated with the flexible circuit materials long-lived assets was
necessary. As such, in accordance with SFAS 144, we determined that
it was appropriate to reduce the estimated useful lives of flexible circuit
materials related equipment.
Severance
In the
second quarter of 2007, we took a number of actions to reduce costs, including a
company-wide headcount reduction. In accordance with SFAS No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities, and SFAS No. 112, Employers’ Accounting for
Postemployment Benefits, we recorded $2.6 million of severance charges in
the second quarter of 2007, which was included in restructuring and impairment
charges on our condensed consolidated statements of income. As of
September 28, 2008, the program is effectively complete with no additional
payments expected or accrued.
Note
14 – Discontinued Operations
On July
27, 2007, we completed the closure of the operations of the polyolefin foams
operating segment, which had been aggregated in our Other Polymer Products
reportable segment. For the three and nine months ended September 28,
2008, there was no activity associated with the discontinued
operations. For the nine month period ended September 30, 2007 $1.9
million of net sales have been reflected as discontinued
operations. For the three and nine months ended September 30, 2007,
$0.1 million of operating loss and $0.3 million of operating income, both net of
tax, has been reflected as discontinued operations in the accompanying
consolidated statements of income.
Note
15 – Income Taxes
Our
effective tax rate was 17.3% and 18.5%, respectively, for the three month
periods ended September 28, 2008, and September 30, 2007, and 25.6% and 5.1%,
respectively, for the nine month periods ended September 28, 2008, and September
30, 2007, as compared with the statutory rate of 35.0%. In both the
three and nine month periods ended September 28, 2008, our tax rate benefited
from favorable tax rates on certain foreign business activity, and certain other
discrete items. In the three and nine month periods ended
September 30, 2007, our tax rate benefited from favorable tax rates on certain
foreign business activity, research and development tax credits, and tax
benefits associated with the restructuring, impairment, and other one-time
charges, and certain other discrete items.
Our
accounting policy is to account for interest expense and penalties related to
income tax issues as income tax expense. As of September 28, 2008, we
have approximately $0.5 million of accrued interest related to uncertain tax
positions included in the $9.1 million of unrecognized tax
benefits.
We are
subject to numerous tax filings including U.S. Federal, various state and
foreign jurisdictions. Currently, the following tax years remain open
to audit, by jurisdiction: U.S. Federal 2005 – 2007, various states 2004 – 2007,
and foreign 2004 – 2007.
Note
16 - Recent Accounting Pronouncements
Hierarchy
of Generally Accepted Accounting Principles
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162). SFAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles in the United States. This
Statement is effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. We
are in the process of evaluating the impact, if any, of the provisions of SFAS
162 on our consolidated financial position, operations and cash
flows.
Disclosures
about Derivative Instruments
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS 161), as an amendment to SFAS
133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 161 requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and
accounting designation. The fair value of derivative instruments and their gains
and losses will need to be presented in tabular format in order to present a
more complete picture of the effects of using derivative instruments. SFAS 161
is effective for financial statements issued for fiscal years beginning after
November 15, 2008. We adopted the provisions of SFAS 161 on September 28, 2008
and have disclosed information related to derivative instruments in accordance
with SFAS 161 in this form 10-Q. (See Note 3 “Hedging Transactions and
Derivative Financial Statements”.)
Accounting
for Business Combinations and Noncontrolling Interests
In
December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS
141(R)), and SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). SFAS 141(R) will change how business acquisitions are
accounted for and will impact financial statements both on the acquisition date
and in subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity.
SFAS 141(R) and SFAS 160 are required to be adopted concurrently and
are effective for fiscal years, beginning on or after December 15,
2008.
Accounting
for Financial Assets and Financial Liabilities
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 was effective in
the first quarter of 2008, and the adoption has not had a material impact on our
financial position or results of operations.
Accounting
for Fair Value Measurements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (SFAS 157). SFAS 157 replaces multiple existing definitions
of fair value with a single definition, establishes a consistent framework for
measuring fair value and expands financial statement disclosures regarding fair
value measurements. SFAS 157 applies only to fair value measurements
that already are required or permitted by other accounting standards and does
not require any new fair value measurements and is effective for fiscal years
beginning after November 15, 2007. We adopted the provisions of SFAS
157 on December 31, 2007. See Note 2 “Fair Value
Measurements”.
Note
17 - Subsequent Event
On October
31, 2008, we entered into an agreement to sell 100% of the shares of our
Induflex subsidiary (ILD) located in Ghent, Belgium to a subsidiary of BV
Capital Partners. Under the terms of the agreement, we received
approximately 10.7 million euros (US$13.6 million at the closing spot rate),
which represents the purchase price of approximately 8.9 million euros plus
other amounts due under the agreement. Additionally, we have an
opportunity to receive additional earnouts over the next three years based on
the future performance of the divested business.
As used
herein, the “Company”, “Rogers”, “we”, “us”, “our” and similar terms include
Rogers Corporation and its subsidiaries, unless the context indicates
otherwise.
Business
Overview
We are a
global enterprise that provides our customers with innovative solutions and
industry leading products in a variety of markets, including portable
communications, communications infrastructure, consumer products, consumer
electronics, semiconductors, mass transit, automotive, ground transportation,
aerospace, defense and alternative energy. We generate revenues and
cash flows through the development, manufacture, and distribution of specialty
material-based products that are sold to multiple customers, primarily original
equipment manufacturers (OEM’s) and contract manufacturers that, in turn,
produce component products that are sold to end-customers for use in various
applications. As such, our business is highly dependent, although
indirectly, on market demand for these end-user products. Our ability
to forecast future sales and earnings results is largely dependent on
management’s ability to anticipate changing market conditions and how our
customers will react to these changing conditions. It is also highly
limited due to the short lead times demanded by our customers and the dynamics
of serving as a relatively small supplier in the overall supply chain for these
end-user products. In addition, our 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 forecasting.
Our
current focus is on worldwide markets that have an increasing percentage of
materials being used to support growing high technology applications, such as
cellular base stations and antennas, handheld wireless devices, satellite
television receivers and automotive electronics. We continue to focus
on business opportunities around the globe and particularly in the Asian
marketplace, as evidenced by the continued investment in and expansion of our
manufacturing facilities in Suzhou, China, which functions as our manufacturing
base to serve our customers in Asia. Our goal is to become the
supplier of choice for our customers in all of the various markets in which we
participate. To achieve this goal, we strive to make the best
products in these respective markets and to deliver the highest level of service
to our customers.
Third
quarter 2008 sales were $101.7 million, compared to $109.7 million for the third
quarter of 2007, and sales for the first nine months of 2008 were $301.7
million, a 6.5% decline from the first nine months of 2007. These
declines were primarily driven by the decrease in sales in both the Printed
Circuit Materials reportable segment (14.1% decline quarter-over-quarter; 13.9%
decline year-to-date) and the Custom Electrical Components reportable segment
(29.4% decline quarter-over-quarter; 24.7% decline year-to-date). These declines
were partially offset by an increase in sales in the High Performance Foams
reportable segment (15.0% increase quarter-over-quarter; 15.5% increase
year-to-date). Operating income declined from $8.5 million in the
third quarter of 2007 to $5.9 million in the third quarter of
2008. However, on a year-to-date basis, operating income increased
from $7.6 million in 2007 to $21.2 million in 2008, primarily as a result of
$13.5 million in net restructuring charges that are included in the 2007
results. Earnings-per-diluted-share (EPS) increased on a year-to-date
basis, from $0.83 in for the first nine months of 2007 to $1.43 for the same
period in 2008.
Although
sales volumes declined in 2008 as compared to 2007, we have been able to improve
our manufacturing margins, primarily as a result of the restructuring efforts
initiated in the second quarter of 2007, which have allowed us to improve our
operating efficiency and achieve a more favorable product mix. Our
operating expenses increased in the third quarter of 2008, which negatively
impacted our operating profit performance in comparison to the comparable prior
year period. This increase is primarily attributable to expenses
associated with tax projects that have been initiated to improve our global tax
position, as well as additional incentive compensation expense due to the
overall improvement in year-over-year results. In these volatile
economic times, we have made concerted efforts to control discretionary spending
and improve our balance sheet position through close monitoring of our working
capital position, which has resulted in a significant reduction in inventory and
allowed us to continue to generate significant amounts of cash. We
have been able to partially offset the sales declines in our restructured
operating segments, Durel and Flexible Circuit Materials, through organic growth
in other operating segments, particularly our PORON® Polyurethane Foams and
Power Distribution Systems operating segments.
Results
of Operations
The
following table sets forth, for the periods indicated, selected operations data
expressed as a percentage of net sales.
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Manufacturing
margins
|
|
|
31.5 |
|
|
|
28.4 |
|
|
|
31.8 |
|
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
20.2 |
|
|
|
15.4 |
|
|
|
19.1 |
|
|
|
16.7 |
|
|
Research
and development expenses
|
|
|
5.6 |
|
|
|
5.1 |
|
|
|
5.6 |
|
|
|
5.4 |
|
|
Restructuring
and impairment charges
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
|
|
1.0 |
|
|
Operating
income
|
|
|
5.7 |
|
|
|
7.8 |
|
|
|
7.1 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
income in unconsolidated joint ventures
|
|
|
2.5 |
|
|
|
1.9 |
|
|
|
1.7 |
|
|
|
1.5 |
|
|
Other
income, net
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
Interest
income, net
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
Income
before income taxes
|
|
|
9.4 |
|
|
|
10.2 |
|
|
|
10.2 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(1.6 |
) |
|
|
1.9 |
|
|
|
(2.6 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
7.8 |
% |
|
|
8.2 |
% |
|
|
7.6 |
% |
|
|
4.4 |
% |
Net
Sales
Net sales
for the three month period ended September 28, 2008 were $101.7 million as
compared to $109.6 million for the three month period ended September 30, 2007,
and $301.7 million versus $322.6 million for the respective nine month periods,
a decrease of 6.5%. The decrease was primarily the result of sales
declines in our Custom Electrical Components and Printed Circuit Materials
reportable segments, partially offset by a sales increase in our High
Performance Foams and Other Polymer Products reportable
segment. See “Segment Sales and Operations” below for further
discussion on segment performance.
Manufacturing
Margins
Manufacturing
margins as a percentage of sales increased from 28.4% in the third quarter of
2007 to 31.5% in the third quarter of 2008 and from 25.4% to 31.8% for the nine
month periods, respectively. The results for 2007 included
restructuring charges of approximately $8.2 million in the first nine months of
2007 and income of $0.8 million in the third quarter of 2007 related primarily
to the sale of inventory that was previously reserved as part of our
restructuring initiatives. These charges impacted our margins by 0.7%
and 2.5%, respectively, in the third quarter and first nine months of
2007. Our three strategic business segments, Printed Circuit
Materials, High Performance Foams and Custom Electrical Components, all
experienced improved margins in the third quarter and first nine months of 2008
as compared to the comparable periods of 2007. See “Segment Sales and
Operations” discussion below for additional information.
Selling
and Administrative Expenses
Selling
and administrative expenses increased from $16.9 million in the third quarter of
2007 to $20.5 million in the third quarter of 2008 and from $53.7 million in the
first nine months of 2007 to $57.7 million in the first nine months of
2008. As a percentage of sales, selling and administrative expenses
were 20.2% and 19.1%, respectively, for the third quarter and first nine months
of 2008 as compared to 15.4% and 16.7%, respectively, for the comparable periods
in 2007. The increase in 2008 can be primarily attributable to
expenditures related to global tax minimization projects, additional incentive
compensation costs, and increased litigation costs.
Research
and Development Expenses
Research
and development (R&D) expense remained relatively flat in the third quarter
of 2008 as compared to the third quarter of 2007 and decreased slightly from
$17.3 million in the first nine months of 2007 to $17.0 million in the first
nine months of 2008. As a percentage of sales, research and
development expenses were 5.6% in the third quarter of 2008 as compared to 5.1%
in the third quarter of 2007. On a year-to-date basis, R&D
expenses as a percentage of sales increased slightly from 5.4% in 2007 to 5.6%
in 2008. We continue to target a reinvestment percentage of
approximately 6% of sales into R&D activities each year. We are
focused on continually investing in R&D, both in our efforts to improve the
technology and products in our current portfolio, as well as researching new
business development opportunities to further expand and grow the
business. We believe that technology is one of the cornerstones of
our past success and our future success is dependent on our continued focus on
research and development initiatives.
Equity
Income in Unconsolidated Joint Ventures
Equity
income in unconsolidated joint ventures increased $0.4 million from $2.1 million
to $2.5 million in the third quarter of 2008 versus the third quarter of
2007. On a year-to-date basis, equity income increased 6% from $4.9
million to $5.1 million. This increase is due primarily to the strong
performance of our foam joint ventures in China, Rogers Inoac Suzhou Corporation
(RIS), and in Japan, Rogers Inoac Corporation (RIC), as these entities continue
to penetrate the Asian marketplace. In the second half of 2007, we
added additional capacity in our RIS joint venture, which is now beginning to
contribute to the improved operating results at that joint
venture. These positive results were partially offset by lower
profitability at our flexible circuit material joint venture in Taiwan, Rogers
Chang Chun Technology Co., Ltd. (RCCT), as markets for these products continue
to become increasingly competitive and price sensitive as the products become
more commoditized.
Other
Income, Net
Other
income increased approximately $0.5 million in the third quarter of 2008 versus
the third quarter of 2007 from $0.1 million to $0.6 million. On a
year-to-date basis, other income increased $1.3 million, from $0.8 million in
2007 to $2.1 million in 2008. The year-over-year increase is
primarily attributable to increased commission income from our Polyimide
Laminate Systems, LLC (PLS) joint venture, ($0.6 million increase year-to-date)
as we have been able to successfully grow market share in 2008, while
quarter-over-quarter increases are attributable to favorable foreign currency
fluctuations.
Interest
Income, Net
Interest
income increased from $0.4 million and $1.3 million, respectively, for the three
and nine month periods ended September 30, 2007 to $0.6 million and $2.1
million, respectively, for the three and nine month periods ended September 28,
2008. The increase is primarily attributed to higher levels of
invested cash in the first nine months of 2008 versus the same period in
2007.
Income
Taxes
Our
effective tax rate was 17.3% and 18.5%, respectively, for the three month
periods ended September 28, 2008, and September 30, 2007, and 25.6% and 5.1%,
respectively, for the nine month periods ended September 28, 2008, and September
30, 2007, as compared with the statutory rate of 35.0%. In both the
three and nine month periods ended September 28, 2008, our tax rate to benefited
from favorable tax rates on certain foreign business activity, and certain other
discrete items. In the three and nine month periods ended
September 30, 2007, our tax rate benefited from favorable tax rates on certain
foreign business activity, research and development tax credits, and tax
benefits associated with the restructuring, impairment, and other one-time
charges, as well as certain other discrete items.
Restructuring
Charges
In the
second quarter of 2007, we initiated significant restructuring activities at our
Durel and Flexible Circuits Materials operating segments that resulted in net
pre-tax charges of $13.5 million year-to-date in 2007 and $0.5 million in the
third quarter of 2007. The majority of our restructuring related activities, and
the resulting subsequent charges, were substantially completed by the end of
2007. The residual financial impact of these activities on the third
quarter and first nine months of 2008 consisted of a reduction in inventory
reserves of approximately $0.3 million and $1.6 million, respectively, due to
the sale of inventory that had previously been specifically reserved in the
second quarter of 2007. To date this restructuring program has
resulted in total net charges of $11.9 million.
In the
second quarter of 2007, we recorded a non-cash pre-tax charge of $7.1 million,
related to our Durel operating segment, which is aggregated into our Custom
Electrical Components reportable segment. This charge included a $6.3
million restructuring charge, which was included in cost of sales on our
condensed consolidated statements of income, related to the write down of
inventory and accelerated depreciation on machinery and equipment related to the
Durel business and an $0.8 million charge, which was included in selling and
administrative expenses on our condensed consolidated statements of income,
related to the accelerated expense recognition of a prepaid license associated
with a certain flexible electroluminescent (EL) lamp product for which the
future sales forecast was lowered in the second quarter of
2007. These charges resulted from a significant change in the outlook
for existing and future EL lamp programs during the second quarter of 2007 based
on an announcement of certain program terminations from our most significant
customer of EL lamps in the portable communications market. As a
result of this new outlook, all production of EL lamps for the portable
communications market was located at Durel’s manufacturing facility in China by
the end of the second quarter of 2007 and we had shifted substantially all EL
production, including automotive lamp production, to Durel’s China facility by
the end of the year. The significant change in the outlook of EL
programs and the planned shift in EL production to China was an indicator of
impairment that triggered an impairment analysis on the long-lived assets of the
Durel business under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). However, the
impairment analysis, which was completed as part of the 2007 second quarter
closing process, concluded that no impairment charge associated with the Durel
long-lived assets was necessary. As such, in accordance with SFAS
144, we determined that it was appropriate to reduce the estimated useful lives
of EL lamp related equipment in the Durel US manufacturing
facility. In addition, the reduced forecast of EL lamp sales,
specifically related to flexible EL lamps for the portable communications
market, caused us to accelerate the expense recognition of a prepaid license
associated with flexible EL lamps based on the current forecasted
revenues.
|
·
|
Flexible Circuit
Materials
|
In the
second quarter of 2007, we recorded a non-cash pre-tax charge of $2.7 million,
related to our flexible circuit materials operating segment, which was
aggregated into our Printed Circuit Materials reportable
segment. This charge, which was included in cost of sales on our
condensed consolidated statements of income, related to the write down of
inventory and accelerated depreciation on machinery and equipment related to the
flexible circuit material business. Flexible circuit materials, which
are used in a variety of consumer electronic products, had been transformed into
a commodity product with increased global competition and price pressure driven
by excess capacity. This had caused the operating results of the
flexible circuit materials business to significantly decline in recent periods,
which we determined was an indicator of impairment that triggered an impairment
analysis on the long-lived assets of the flexible circuit materials business
under SFAS 144. However, the impairment analysis, which was completed
as part of the 2007 second quarter closing process, concluded that no impairment
charge associated with the flexible circuit materials long-lived assets was
necessary. As such, in accordance with SFAS 144, we determined that
it was appropriate to reduce the estimated useful lives of flexible circuit
materials related equipment.
Discontinued
Operations
On July
27, 2007, we completed the closure of the operations of the polyolefin foams
operating segment, which had been aggregated in our Other Polymer Products
reportable segment. For the nine months ended September 28, 2008,
there was no activity associated with the discontinued
operations. For the nine month period ended September 30, 2007 $1.9
million of net sales have been reflected as discontinued
operations. There were no net sales associated with the discontinued
operations for the third quarter of 2007. For the three and nine
months ended September 30, 2007, $0.1 million of operating loss and $0.3 million
of operating income, both net of tax, has been reflected as discontinued
operations in the accompanying consolidated statements of income.
Segment
Sales and Operations
High
Performance Foams
|
(Dollars
in millions)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
Net
sales
|
|
$ |
33.9 |
|
|
$ |
29.5 |
|
|
$ |
93.0 |
|
|
$ |
80.5 |
|
|
Operating
income
|
|
|
7.4 |
|
|
|
5.5 |
|
|
|
17.7 |
|
|
|
12.7 |
|
Our High
Performance Foams (HPF) reportable segment is comprised of our Poron® and Bisco®
foam products. Net sales in this segment increased by 15.0% and
15.5%, respectively, in the third quarter and first nine months of 2008 compared
to the respective periods in 2007. Operating results improved by
35.2% and 39.8%, respectively, in the third quarter and first nine months of
2008 as compared to the comparable periods in 2007. These increases
were driven by general strength across most major market segments, particularly
in sales into the consumer electronics market for handheld
devices. This segment is continuing to develop new products, which
are gaining a wider acceptance in diverse applications around the globe as these
products typically assist customers in meeting escalating product specification
requirements. For example, Poron® SoftSeal, a new premier
polyurethane foam product, continues to gain momentum by being adopted as the
design-in choice at many original-equipment manufacturers, primarily for
handheld communication device programs. Silicone foam products sales
were also strong in 2008 as compared to 2007 due primarily to increased demand
across most market segments.
Printed
Circuit Materials
|
(Dollars
in millions)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
Net
sales
|
|
$ |
31.8 |
|
|
$ |
37.1 |
|
|
$ |
94.3 |
|
|
$ |
109.5 |
|
|
Operating
income (loss)
|
|
|
- |
|
|
|
2.1 |
|
|
|
4.6 |
|
|
|
1.9 |
|
Our
Printed Circuit Materials (PCM) reportable segment is comprised of our high
frequency circuit material products. Net sales in this segment
decreased by 14.1% and 13.9%, respectively, in the third quarter and first nine
months of 2008 as compared to the comparable prior year
periods. Operating results declined from income of $2.1 million in
the third quarter of 2007 break-even in the third quarter of 2008; while
operating results improved on a year-to-date basis from $1.9 million in the
first nine months of 2007 to $4.6 million in the first nine months of
2008. The 2007 results included net restructuring charges of $3.2
million (including $0.3 million in the third quarter of 2007) related to the
flexible circuit materials operating segment, which included charges related to
inventory write-downs, accelerated depreciation on certain equipment used to
manufacture Flexible Circuit Materials in the U.S., and severance
costs. For further discussion of these charges, see “Restructuring
and Impairment Charges” section in Item 2 - Management’s Discussion and Analysis
of Financial Condition and Results of Operations in this Form
10-Q.
As part of
the continued efforts to transform the Flexible Circuit Materials operating
segment, in the first quarter of 2008 we established a new business model
related to this operating segment in which much of our production related to
this segment was outsourced to our joint venture, Rogers Chang Chun Technology
Co., Ltd. (RCCT). We now act as a distributor for production out of
RCCT and only retain some residual manufacturing related to this
segment. These results are reported in a new operating segment,
NuFlex, which is reported in our Other Polymer Products reportable
segment.
As a
result of these management initiatives, the decline in sales experienced in 2008
as compared to 2007 is primarily attributable to the restructuring of the
Flexible Circuit Materials operating segment, which has enabled us to have a
much more favorable sales mix in this segment, as evidenced by the generation of
more profits per sales dollar year-to-date in 2008 as compared to
2007. In the third quarter of 2008, the segment operating results
were break-even as compared to an operating profit of $2.1 million in the third
quarter of 2007. This decrease was driven by the inclusion of costs
associated with incentive compensation programs in 2008 which did not occur in
2007; increased legal costs related to a product liability lawsuit (see Footnote
11 for further discussion); and increased raw material prices as well as a less
favorable product mix than in the third quarter of 2007.
Overall in
2008, we have experienced strength in the high reliability markets for our high
frequency advanced circuit materials for radar and guidance system devices, and
we anticipate it will benefit in the future from the on-going global roll-out of
3G (Third Generation) wireless systems. These positive results were
partially offset by weaker demand in low noise block-down converters for the
satellite television market, which is attributable to the downturn in the new
housing market and lower direct consumer purchases.
Custom
Electrical Components
|
(Dollars
in millions)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
Net
sales
|
|
$ |
23.2 |
|
|
$ |
32.9 |
|
|
$ |
75.9 |
|
|
$ |
100.7 |
|
|
Operating
income (loss)
|
|
|
0.1 |
|
|
|
1.2 |
|
|
|
2.9 |
|
|
|
(6.1 |
) |
Our Custom
Electrical Components reportable segment is comprised of electroluminescent (EL)
lamps, inverters, and power distribution systems products. Net sales
in this segment decreased by 29.4% and 24.7%, respectively, in the third quarter
and first nine months of 2008 as compared to the comparable prior year
periods. Operating results improved on a year-to-date basis, while
declining slightly in the third quarter. In the second quarter of
2007, we initiated restructuring efforts in our Durel operating segment,
resulting in net charges of $9.3 million year-to-date in 2007 and $0.6 million
in the third quarter of 2007, which were comprised of the write-down of
inventory, accelerated depreciation primarily related to idle equipment in the
U.S., accelerated expense recognition of a prepaid license associated with
certain EL lamp product sales, and severance costs. For further
discussion of these charges, see the “Restructuring and Impairment Charges”
section in Item 2 - Management’s Discussion and Analysis
of Financial Condition and Results of Operations in this Form 10-Q. The
continued decline in sales in this segment is primarily driven by the forecasted
decline in demand for EL backlighting in the portable communications market,
which we expect will continue in the future. In order to maximize the
residual lamp business, we shifted the majority of our EL lamp production to
China in 2007, leaving only a small amount of manufacturing in the
U.S. We believe the demand for EL lamps will continue to decline in
the portable communications market and we are currently exploring other
potential opportunities for this technology in other markets, such as
advertising, as well as in the automotive and consumer electronics markets,
among others. The decline in lamp sales, as well as the
aforementioned restructuring efforts, resulted in a more favorable product mix
in this segment, as the segment was able to achieve break even status for the
quarter and generate profits on a year-to-date basis in 2008, even at lower
sales volumes. These improvements were driven not only by the
restructuring activities at our Durel operating segment, but also by increased
sales volumes in the power distribution systems operating segment, due primarily
to strong demand for these products in mass transit applications, particularly
in Asia. We expect to continue to benefit from the continued mass
transit infrastructure expansion in China and other countries around the world,
particularly in emerging markets, due to the anticipated future investment in
infrastructure initiatives in these countries.
Other
Polymer Products
|
(Dollars
in millions)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
Net
sales
|
|
$ |
12.8 |
|
|
$ |
10.2 |
|
|
$ |
38.6 |
|
|
$ |
31.9 |
|
|
Operating
income (loss)
|
|
|
(1.6 |
) |
|
|
(0.3 |
) |
|
|
(4.0 |
) |
|
|
(0.9 |
) |
Our Other
Polymer Products reportable segment consists of elastomer rollers, floats,
non-woven materials, polyester-based industrial laminates, thermal management
products and flexible circuit material products. Net sales in this
segment increased by 24.8% and 21.0%, respectively, in the three and nine month
periods ended September 28, 2008 as compared to the three and nine month
comparable prior year periods, while operating losses increased from $0.3
million in the third quarter of 2007 to $1.6 million in the third quarter of
2008 and from $0.9 million in the first nine months of 2007 to $4.0 million in
the first nine months of 2008. As discussed in the PCM section above,
this segment now includes our NuFlex operating segment, which contributed to
both the sales volume and operating loss increases in the third quarter and
first nine months of 2008 as compared to the comparable periods in
2007. 2008 also included product development costs related to our new
Thermal Management Systems operating segment, which began operations in the
first quarter of 2008, but has not recognized significant sales to
date.
Liquidity,
Capital Resources and Financial Position
We believe
our ability to generate cash from operations to reinvest in the business is one
of our fundamental strengths, as demonstrated by the continued strength in our
financial position at the end of the third quarter of 2008. We have
remained debt free since 2002 and continue to finance our operating needs
through internally generated funds. We believe that over the next
twelve months, internally generated funds plus available lines of credit will be
sufficient to meet the capital expenditures and ongoing financial needs of the
business. However, we continually review and evaluate the adequacy of
our lending facilities and relationships.
|
|
|
|
|
|
(Dollars in
thousands)
|
|
September
28,
2008
|
|
|
December
30,
2007
|
|
|
Key
Balance Sheet Accounts:
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$ |
48,706 |
|
|
$ |
89,628 |
|
|
Accounts
receivable
|
|
|
67,818 |
|
|
|
76,965 |
|
|
Inventory
|
|
|
45,992 |
|
|
|
51,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
Key
Cash Flow Measures:
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities from continuing
operations
|
|
$ |
48,306 |
|
|
$ |
30,465 |
|
|
Cash
provided by (used in) investing activities from continuing
operations
|
|
|
(15,518 |
) |
|
|
16,594 |
|
|
Cash
used in financing activities
|
|
|
(25,628 |
) |
|
|
(25,941 |
) |
At
September 28, 2008, cash, cash equivalents and short-term investments totaled
$48.7 million as compared to $89.6 million at December 30, 2007. The
decline is primarily due to the change in classification of our investments in
auction rate securities. At year-end 2007, we held approximately
$53.3 million of such securities that were classified as short-term
investments. As September 28, 2008, approximately $48.6 million (par
value of $50.0 million) of these investments are now reported in long term
assets (see Note 2 “Fair Value Measurements” for further
discussion). Cash increased $8.1 million from year-end 2007 due to
strong cash generation from operations. This increase was partially
offset by the repurchase of $30.0 million (907,000 shares) of common stock in
the first quarter of 2008.
Significant
changes in our balance sheet accounts from December 30, 2007 to September 28,
2008 are as follows:
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Accounts
receivable decreased by $9.1 million from $77.0 million at December 30,
2007 to $67.8 million at September 28, 2008, primarily due to lower sales
volumes in the third quarter of 2008 as compared to the fourth quarter of
2007, as well as strong cash collections particularly in
Asia.
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Inventory
decreased by $5.3 million, or 10%, from December 30, 2007 to September 28,
2008, primarily due to our continued focus on reducing inventory levels to
improve cash flows and strengthen our working capital
position.
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Accounts
payable decreased by $3.2 million from $22.1 million at December 30, 2007
to $18.9 million at September 28, 2008, primarily due to lower inventory
purchases during the first nine months of 2008, which is consistent with
our lower sales volumes, as well as the timing of
payments.
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Accrued
employee benefits and compensation increased $5.9 million from $15.0 at
December 30, 2007 to $20.8 at September 28, 2008 which is largely due to
the increase in incentive compensation in 2008, versus 2007 due to the
stronger performance of the business in
2008.
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We have a
Multicurrency Revolving Credit Agreement with RBS Citizens, National Association
(Bank), a successor in interest to Citizens Bank of Connecticut (Credit
Agreement). The Credit Agreement provides for two credit
facilities. One facility (Credit Facility A) is available for loans
or letters of credit up to $75 million, and the second facility (Credit Facility
B) is available for loans of up to $25 million. Credit Facility A is
a five-year facility and Credit Facility B is a 364-day
facility. Both are multi-currency facilities under which we may
borrow in US dollars, Japanese Yen, Euros or any other currency freely
convertible into US dollars and traded on a recognized interbank
market. Under the terms of the Credit Agreement, we have the right to
incur additional indebtedness outside of the Credit Agreement through additional
borrowings in an aggregate amount of up to $25 million.
We had
originally entered the Credit Agreement together with certain of our
wholly-owned subsidiaries, Rogers Technologies (Barbados) SRL, Rogers (China)
Investment Co., Ltd., Rogers N.V., and Rogers Technologies (Suzhou) Co. Ltd on
November 13, 2006. On June 17, 2008, we amended the Credit Agreement
to remove our wholly-owned subsidiaries as borrowers and, as such, we are now
the sole borrower. In connection with this amendment and on June 17,
2008, we granted the Bank a security interest in 6,500 common shares of Rogers
Technologies (Barbados) SRL and 97,500 common shares of Rogers B.V.B.A.
(formerly Rogers N.V.), which, in each case, represents approximately 65% of the
issued and outstanding shares in each company. Such pledged stock is
the only security for Credit Facilities A and B. As previously noted,
we changed the legal status of our Belgian subsidiary from Rogers N.V. to Rogers
B.V.B.A. on August 20, 2008.
In
addition, certain of our subsidiaries that are not borrowers under the Credit
Agreement, including Rogers KF, Inc., Rogers Specialty Materials Corporation,
Rogers Japan Inc., Rogers Southeast Asia, Inc., Rogers Taiwan, Inc., Rogers
Korea, Inc., Rogers Technologies Singapore, Inc., and Rogers Circuit Materials
Incorporated, made guaranties to the Bank to guarantee the borrower’s
obligations under the Credit Agreement.
Additionally,
we were obligated under an irrevocable standby letter of credit, which
guarantees our self- insured workers compensation plan in the amount of $1.1
million at September 28, 2008. There were no amounts outstanding on
this letter of credit as of September 28, 2008.
As of
September 28, 2008, we held auction rate securities with a par value of $54.4
million, which were comprised of 90% student loan auction rate securities and
10% municipality auction rate securities. These securities have an
auction reset feature which began to fail in February 2008 due to a disruption
in the credit markets and each auction since then has failed, thus limiting
liquidity. A fair value analysis was performed on these securities
that resulted in a decline in the fair value of $1.5 million as of the third
quarter. The fair value analysis was based on a discounted cash flow
model for each security, utilizing various assumptions including estimated
interest rates, probabilities of successful auctions, the timing of cash flows,
and the quality and level of collateral of the securities. We have
concluded that the impairment is not other-than-temporary, per FASB Staff
Position 115-1 / 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments and Emerging Issues Task Force 03-1: The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, due primarily to
the fact that the investments we hold are high quality AAA/Aaa-rated securities
and 90% are collateralized with government-backed student loans. Based on
our expected operating cash flows and other sources of cash, we do not
anticipate that the current lack of liquidity on these investments will affect
our ability to execute our current business plan. Therefore, we have
the intent and ability to hold the securities until the temporary impairment is
recovered. Based on this conclusion, we have recorded this charge as
an unrealized loss in other comprehensive income in the equity section of our
condensed consolidated statements of financial
position. Additionally, due to our belief that it may take over
twelve months for the auction rate securities market to recover, we have
reclassified the auction rate securities balance from short-term investments to
long-term assets, with the exception of one security with a maturity date within
the next 12 months that has been classified as a short-term
investment.
These securities
typically earn interest at rates ranging from 3% to 7%. Upon the
failure of these securities at auction, a penalty interest rate is
triggered. However, as the securities that we hold are high quality
securities, the penalty rates are market-based, therefore the aggregate interest
rate that we earned in the first nine months has remained effectively unchanged
during most of the third quarter due to the effect of lower market interest
rates substantially offsetting the market-based penalty rates. Due to
changes in market conditions, we did experience an increase in penalty rates
during the last few weeks of the quarter.
Subsequent
to the close of the third quarter, we were notified that, during the fourth
quarter of 2008, two of the investments we hold in auction rate securities will
be redeemed at par value, and a third investment will be partially redeemed at
par value. The par values of the investments that will be redeemed
total $4.4 million and have been classified as short-term assets.
Contingencies
During the
third quarter of 2008, we did not become aware of any new material developments
related to environmental matters or other contingencies. We have not
had any material recurring costs and capital expenditures related to
environmental matters. Refer to Note 12 “Commitments and
Contingencies”, to the condensed consolidated financial statements in Part I,
Item 1 of this Form 10-Q, for further discussion on ongoing environmental and
contingency matters.
Contractual
Obligations
There have
been no significant changes outside the ordinary course of business in our
contractual obligations during the third quarter of 2008.
Off-Balance
Sheet Arrangements
We did 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 our financial
condition or results of operations.
Recent
Accounting Pronouncements
Hierarchy
of Generally Accepted Accounting Principles
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162). SFAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles in the United States. This
Statement is effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. We
are in the process of evaluating the impact, if any, of the provisions of SFAS
162 on our consolidated financial position, operations and cash
flows.
Disclosures
about Derivative Instruments
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS 161), as an amendment to SFAS
133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 161 requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and
accounting designation. The fair value of derivative instruments and their gains
and losses will need to be presented in tabular format in order to present a
more complete picture of the effects of using derivative instruments. SFAS 161
is effective for financial statements issued for fiscal years beginning after
November 15, 2008. We adopted the provisions of SFAS 161 on September
28, 2008 and have disclosed information related to derivative instruments in
accordance with SFAS 161 in this form 10-Q. (See Note 3 “Hedging
Transactions and Derivative Financial Statements”.)
Accounting
for Business Combinations and Noncontrolling Interests
In
December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS
141(R)), and SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). SFAS 141(R) will change how business acquisitions are
accounted for and will impact financial statements both on the acquisition date
and in subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity.
SFAS 141(R) and SFAS 160 are required to be adopted concurrently and
are effective for fiscal years, beginning on or after December 15,
2008.
Accounting
for Financial Assets and Financial Liabilities
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 was effective in
the first quarter of 2008, and the adoption has not had a material impact on our
financial position or results of operations.
Accounting
for Fair Value Measurements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (SFAS 157). SFAS 157 replaces multiple existing definitions
of fair value with a single definition, establishes a consistent framework for
measuring fair value and expands financial statement disclosures regarding fair
value measurements. SFAS 157 applies only to fair value measurements
that already are required or permitted by other accounting standards and does
not require any new fair value measurements and is effective for fiscal years
beginning after November 15, 2007. We adopted the provisions of SFAS
157 on December 31, 2007, see Note 2 “Fair Value Measurements”.
Critical
Accounting Policies
There have
been no significant changes in our critical accounting policies during the third
quarter of 2008.
Forward-Looking
Statements
This
information should be read in conjunction with the unaudited financial
statements and related notes included in Item 1 of this Quarterly Report on Form
10-Q and the audited consolidated financial statements and related notes and
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contained in our Form 10-K for the year-ended December 30,
2007.
Certain
statements in this Quarterly Report on Form 10-Q may constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on management’s
expectations, estimates, projections and assumptions. Words such as
“expects,” “anticipates,” “intends,” “believes,” “estimates,” and variations of
such words and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results or
performance to be materially different from any future results or performance
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, changing business, economic, and political conditions
both in the United States and in foreign countries; increasing competition;
changes in product mix; the development of new products and manufacturing
processes and the inherent risks associated with such efforts; the outcome of
current and future litigation; the accuracy of our analysis of our potential
asbestos-related exposure and insurance coverage; changes in the availability
and cost of raw materials; fluctuations in foreign currency exchange rates; and
any difficulties in integrating acquired businesses into our
operations. Such factors also apply to our joint
ventures. We make no commitment to update any forward-looking
statement or to disclose any facts, events, or circumstances after the date
hereof that may affect the accuracy of any forward-looking statements, unless
required by law. Additional information about certain factors that could cause
actual results to differ from such forward-looking statements include, but are
not limited to, those items described in Item 1A, Risk Factors, to the
Company’s Form 10-K for the year-ended December 30, 2007.
There has
been no significant change in our exposure to market risk during the third
quarter of 2008. For discussion of our exposure to market risk, refer
to Item 7A, Quantitative and
Qualitative Disclosures about Market Risk, contained in our 2007 Annual
Report on Form 10-K.
The
Company, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the design and operation of our
disclosure controls and procedures, as defined under Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of September 28, 2008. Our disclosure controls and
procedures are designed (i) to ensure that information required to be disclosed
by it in the reports that it files or submits under the Exchange Act are
recorded, processed and summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure. Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures were effective as of September 28, 2008 in alerting management on
a timely basis to information required to be included in our submissions and
filings under the Exchange Act.
During the
third quarter of 2008, the Company completed the implementation of a new
Enterprise Resource Planning (“ERP”) system at the Woodstock, Connecticut
location of its High Performance Foams business. The implementation is part of a
Company-wide initiative to replace remaining stand-alone legacy computer systems
with a more efficient fully integrated global system. As a matter of course in
such implementations, certain internal controls surrounding the inputting,
processing and accessing of information ultimately used in financial reporting
were changed. Previously, the ERP system implemented in Woodstock was previously
successfully implemented by the Company in a number of the Company’s other
facilities both in the U.S. and abroad. The phased-in approach the Company is
taking reduces the risks associated with making these changes, and in addition,
the Company is taking the necessary steps to monitor and maintain appropriate
internal controls during these implementations. These steps include performing
additional verifications and testing to ensure data integrity.
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.
See a
discussion of environmental, asbestos and other litigation matters in Note 12,
“Commitments and Contingencies”, to the condensed consolidated financial
statements in Part I, Item 1 of this Form 10-Q.
Financial
and Credit Market Volatility
Volatility
in the financial markets could have a significant effect on our business as it
could impact the returns generated on our investment portfolio, our ability to
further diversify our business through strategic acquisitions or other
alliances, and our ability to obtain and hold insurance, among other
things. As our investments are impacted by market
conditions, such as factors that affect interest rates and the underlying
liquidity of the related investment bank through which we hold investments, any
volatility in our or their ability to liquidate our investments could negatively
effect our financial position. Undertaking acquisitions and
divestitures is an important component of our long-term growth
strategy. The volatility of the credit markets can significantly
affect us from an acquisition stand-point, through access to our line of credit
and other forms of financing, and from a divestiture stand-point, through the
availability of funds to the potential acquiring party.
Other than
the new risk factor above, there have been no material changes in our risk
factors from those disclosed in our 2007 Annual Report on Form
10-K.
List of
Exhibits:
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3a
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Restated
Articles of Organization of Rogers Corporation were filed as Exhibit 3a to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 filed on February 27, 2007*.
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3b
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Amended
and Restated Bylaws of Rogers Corporation, effective October 2, 2008 filed
as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on
October 9, 2008*.
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4a
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Shareholder
Rights Agreement, dated as of February 22, 2007, between Rogers
Corporation and Registrar and Transfer Company, as Rights Agent, filed as
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on
February 23, 2007*.
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4b
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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 report on Form
10-Q. The Registrant hereby undertakes to file these
instruments with the Commission upon request.
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10aj-4
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Fourth
Amendment to the 2005 Equity Compensation Plan, effective as of October 2,
2008, filed herewith.
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23.1
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Consent
of National Economic Research Associates, Inc., filed
herewith.
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23.2
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Consent
of Marsh U.S.A., Inc., filed herewith.
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31(a)
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Certification
of President and Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
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31(b)
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Certification
of Vice President, Finance and Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
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32
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Certification
of President and Chief Executive Officer and Vice President, Finance and
Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
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*
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In
accordance with Rule 12b-23 and Rule 12b-32 under the Securities Exchange
Act of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents are
hereby incorporated by reference.
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**
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Management
Contract.
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Part II,
Items 2, 3, 4 and 5 are not applicable and have been omitted.
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.
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ROGERS
CORPORATION |
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(Registrant) |
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/s/ Dennis
M. Loughran
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/s/
Paul B. Middleton
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Dennis
M. Loughran
Vice
President, Finance and Chief Financial Officer
Principal
Financial Officer
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Paul
B. Middleton
Treasurer
and Principal Accounting Officer
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Dated: November
5, 2008
35