Skip to main content
As used herein, the "Company," "Rogers," "we," "us," "our" and similar terms
include Rogers Corporation and its subsidiaries, unless the context indicates
otherwise.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). Such statements are generally accompanied by words such as "anticipate,"
"assume," "believe," "could," "estimate," "expect," "foresee," "goal," "intend,"
"may," "might," "plan," "potential," "predict," "project," "should," "seek,"
"target" or similar expressions that convey uncertainty as to future events or
outcomes. Forward-looking statements are based on assumptions and beliefs that
we believe to be reasonable; however, assumed facts almost always vary from
actual results, and the differences between assumed facts and actual results
could be material depending upon the circumstances. Where we express an
expectation or belief as to future results, that expectation or belief is
expressed in good faith and based on assumptions believed to have a reasonable
basis. We cannot assure you, however, that the stated expectation or belief will
occur or be achieved or accomplished. Among the factors that could cause our
results to differ materially from those indicated by forward-looking statements
are risks and uncertainties inherent in our business including, without
limitation:
•the duration and impacts of the novel coronavirus (COVID-19) global pandemic
and efforts to contain its transmission and distribute vaccines, including the
effect of these factors on our business, suppliers, customers, end users and
economic conditions generally;
•failure to capitalize on, volatility within, or other adverse changes with
respect to the Company's growth drivers, including advanced mobility and
advanced connectivity, such as delays in adoption or implementation of new
technologies;
•uncertain business, economic and political conditions in the United States
(U.S.) and abroad, particularly in China, South Korea, Germany, Hungary and
Belgium, where we maintain significant manufacturing, sales or administrative
operations;
•the trade policy dynamics between the U.S. and China reflected in trade
agreement negotiations and the imposition of tariffs and other trade
restrictions, including trade restrictions on Huawei Technologies Co., Ltd.
(Huawei);
•fluctuations in foreign currency exchange rates;
•our ability to develop innovative products and the extent to which they are
incorporated into end-user products and systems;
•the extent to which end-user products and systems incorporating our products
achieve commercial success;
•the ability and willingness of our sole or limited source suppliers to deliver
certain key raw materials, including commodities, to us in a timely and
cost-effective manner;
•intense global competition affecting both our existing products and products
currently under development;
•business interruptions due to catastrophes or other similar events, such as
natural disasters, war, terrorism or public health crises;
•failure to realize, or delays in the realization of, anticipated benefits of
acquisitions and divestitures due to, among other things, the existence of
unknown liabilities or difficulty integrating acquired businesses;
•our ability to attract and retain management and skilled technical personnel;
•our ability to protect our proprietary technology from infringement by third
parties and/or allegations that our technology infringes third party rights;
•changes in effective tax rates or tax laws and regulations in the jurisdictions
in which we operate;
•failure to comply with financial and restrictive covenants in our credit
agreement or restrictions on our operational and financial flexibility due to
such covenants;
•the outcome of ongoing and future litigation, including our asbestos-related
product liability litigation;
•changes in environmental laws and regulations applicable to our business; and
•disruptions in, or breaches of, our information technology systems.
Our forward-looking statements are expressly qualified by these cautionary
statements, which you should consider carefully, along with the risks discussed
in this section and elsewhere in this report, including under the section
entitled "Risk Factors" in Part II, Item 1A and in our Annual Report on Form
10-K for the year ended December 31, 2020 (the Annual Report) and our other
reports filed with the Securities and Exchange Commission, any of which could
cause actual results to differ materially from historical results or anticipated
results. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
unless required by law.
The following discussion and analysis of our financial condition and results of
operations should be read together with our condensed consolidated financial
statements and the related notes that appear elsewhere in this Form 10-Q along
with our audited consolidated financial statements and the related notes thereto
in our Annual Report.
                                       26
--------------------------------------------------------------------------------

Company Background and Strategy
Rogers Corporation designs, develops, manufactures and sells high-performance
and high-reliability engineered materials and components to meet our customers'
demanding challenges. We operate two strategic operating segments: Advanced
Electronics Solutions (AES) and Elastomeric Material Solutions (EMS). The
remaining operations, which represent our non-core businesses, are reported in
our Other operating segment. We have a history of innovation and have
established Innovation Centers for our research and development (R&D) activities
in Chandler, Arizona, Burlington, Massachusetts, Eschenbach, Germany and Suzhou,
China. We are headquartered in Chandler, Arizona.
Our growth strategy is based upon the following principles: (1) market-driven
organization, (2) innovation leadership, (3) synergistic mergers and
acquisitions, and (4) operational excellence. As a market-driven organization,
we are focused on growth drivers, including advanced mobility and advanced
connectivity. More specifically, in addition to the impact of COVID-19 discussed
below, the key medium- to long-term trends currently affecting our business
include the increasing use of advanced driver assistance systems (ADAS) and
increasing electrification of vehicles, including electric and hybrid electric
vehicles (EV/HEV), in the automotive industry and the growth of 5G smartphones
in the portable electronics industry. In addition to our focus on advanced
mobility and advanced connectivity in the automotive, portable electronics and
telecommunications industries, we sell into a variety of other markets including
general industrial, aerospace and defense, mass transit, clean energy and
connected devices.
Our sales and marketing approach is based on addressing these trends, while our
strategy focuses on factors for success as a manufacturer of engineered
materials and components: performance, quality, service, cost, efficiency,
innovation and technology. We have expanded our capabilities through organic
investment and acquisitions and strive to ensure high quality solutions for our
customers. We continue to review and re-align our manufacturing and engineering
footprint in an effort to maintain a leading competitive position globally. We
have established or expanded our capabilities in various locations in support of
our customers' growth initiatives.
We seek to enhance our operational and financial performance by investing in
research and development, manufacturing and materials efficiencies, and new
product initiatives that respond to the needs of our customers. We strive to
evaluate operational and strategic alternatives to improve our business
structure and align our business with the changing needs of our customers and
major industry trends affecting our business.
COVID-19 Update
The global COVID-19 pandemic has affected and continues to affect Rogers'
business and operations, although to a lesser extent than the first half of
2020. In response to the outbreak, Rogers prioritized the safety and well-being
of its employees-including implementing social distancing initiatives in its
facilities, providing remote working arrangements for certain employees,
expanding personal protective equipment usage, enhancing plant hygiene
processes, and extending employee benefits, which increased our expenses-while
at the same time taking actions to preserve business continuity. Our
non-manufacturing employees transitioned seamlessly to remote working
arrangements and are effectively collaborating both internally and with our
customers. In some cases, based on local conditions, non-manufacturing employees
have returned to their worksites. We expect that the COVID-19 pandemic will have
a continuing but uncertain impact on our business and operations in the short-
and medium-term.
Due to the above circumstances and as described generally in this Form 10-Q, our
results of operations for the three and six months ended June 30, 2021 are not
necessarily indicative of the results to be expected for the full year.
Executive Summary
The following key highlights and factors should be considered when reviewing our
results of operations, financial position and liquidity:
•In the second quarter of 2021 as compared to the second quarter of 2020, our
net sales increased 22.9% to $234.9 million, our gross margin increased
approximately 160 basis points to 38.2% from 36.6%, and operating income
increased approximately 420 basis points to 15.2% from 11.0%. In the first half
of 2021 as compared to the first half of 2020, our net sales increased
approximately 19.0% to $464.2 million, our gross margin increased approximately
380 basis points to 38.6% from 34.8%, and operating income increased
approximately 580 basis points to 15.7% from 9.9%.
•We made $25.0 million of discretionary principal payments on our revolving
credit facility during the first half of 2021.
•We recognized $0.7 million of restructuring charges in the second quarter of
2021 and $2.3 million of restructuring charges in the first half of 2021,
related to the manufacturing footprint optimization plans involving certain
Europe and Asia manufacturing locations, primarily impacting our AES operating
segment.
                                       27
--------------------------------------------------------------------------------

•In early February 2021, there was a fire at our UTIS manufacturing facility in
Ansan, South Korea. This facility manufactures eSorba® polyurethane foams used
in portable electronics and display applications. Operations at this facility
will be disrupted into at least the first quarter of 2022. We are currently
evaluating alternative facility options. We recognized net expense of $1.5
million in the second quarter of 2021 and $2.8 million in the first half of
2021, related to the financial impacts from the fire, which consisted of
write-offs of fixed assets and inventory destroyed and/or damaged in the fire,
professional services, costs incurred due to obligations under our manufacturing
facility lease agreement, compensation and benefits for certain of our UTIS
employees, partially offset by the recognition of certain anticipated insurance
recoveries.
•We incurred incremental transaction costs of $0.5 million and $3.3 million in
the second quarter of 2021 and the second quarter of 2020, respectively, and
incurred incremental transaction costs of $1.1 million and $4.0 million in the
first half of 2021 and the first half of 2020, respectively, due to the COVID-19
pandemic.
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                                   Six Months Ended
                                              June 30, 2021             June 30, 2020             June 30, 2021             June 30, 2020
Net sales                                             100.0  %                  100.0  %                  100.0  %                  100.0  %
Gross margin                                           38.2  %                   36.6  %                   38.6  %                   34.8  %

Selling, general and administrative
expenses                                               19.1  %                   21.8  %                   18.7  %                   21.0  %
Research and development expenses                       3.2  %                    3.8  %                    3.2  %                    3.9  %
Restructuring and impairment charges                    0.3  %                      -  %                    0.5  %                      -  %
Other operating (income) expense, net                   0.4  %                      -  %                    0.5  %                      -  %
Operating income                                       15.2  %                   11.0  %                   15.7  %                    9.9  %

Equity income in unconsolidated joint
ventures                                                0.9  %                    0.5  %                    0.9  %                    0.5  %
Other income (expense), net                             0.5  %                    0.3  %                    0.9  %                      -  %
Interest expense, net                                  (0.2) %                   (0.9) %                   (0.2) %                   (0.8) %
Income before income tax expense                       16.4  %                   10.9  %                   17.3  %                    9.6  %

Income tax expense                                      4.2  %                    3.3  %                    4.4  %                    2.5  %

Net income                                             12.2  %                    7.6  %                   12.9  %                    7.1  %


Net Sales and Gross Margin
                                                      Three Months Ended                             Six Months Ended
(Dollars in thousands)                       June 30, 2021          June 30, 2020          June 30, 2021          June 30, 2020
Net sales                                   $     234,906          $     191,157          $     464,171          $     389,967
Gross margin                                $      89,833          $     

69,969 $ 179,332 $ 135,599
Percentage of net sales

                              38.2  %                36.6  %                38.6  %                34.8  %


Net sales increased by 22.9% in the second quarter of 2021 compared to the
second quarter of 2020. Our AES and EMS operating segments had net sales
increases of 20.9% and 24.7%, respectively. The increase in net sales was
primarily due to higher net sales in the ADAS, EV/HEV, aerospace and defense and
clean energy markets in our AES operating segment and higher net sales in the
EV/HEV, general industrial, consumer and automotive markets in our EMS operating
segment. The increase was partially offset by lower net sales in the wireless
infrastructure market in our AES operating segment and lower net sales in the
mass transit market in our EMS operating segment. Net sales were favorably
impacted by foreign currency impacts of $8.1 million, or 4.3%, due to the
appreciation in value of the euro and Chinese renminbi relative to the U.S.
dollar.
Net sales increased by 19.0% in the first half of 2021 compared to the first
half of 2020. Our AES and EMS operating segments had net sales increases of
19.7% and 16.8%, respectively. The increase in net sales was primarily due to
higher net sales in the ADAS, EV/HEV, aerospace and defense and clean energy
markets in our AES operating segment and higher net sales in the EV/HEV, general
industrial, consumer and automotive markets in our EMS operating segment. The
increase was partially offset by lower net sales in the wireless infrastructure
market in our AES operating segment and lower net sales in the mass
                                       28
--------------------------------------------------------------------------------

transit market in our EMS operating segment. Net sales were favorably impacted
by foreign currency impacts of $16.3 million, or 4.2%, due to the appreciation
in value of the euro and Chinese renminbi relative to the U.S. dollar.
Gross margin as a percentage of net sales increased approximately 160 basis
points to 38.2% in the second quarter of 2021 compared to 36.6% in the second
quarter of 2020. Gross margin in the second quarter of 2021 was favorably
impacted by higher volume and favorable absorption of fixed overhead costs in
our AES and EMS operating segments, favorable product mix in our EMS operating
segment, favorable productivity improvements in our AES operating segment, as
well as a lower inventory reserves provision in our EMS operating segment. This
was partially offset by higher commodity and raw material costs as well as
higher freight, duties and tariffs expenses in our AES and EMS operating
segments, unfavorable product mix in our AES operating segments and unfavorable
productivity performance due to raw material shortages in our EMS operating
segment. The higher freight, duties and tariffs expenses were primarily due to
the recognition in the second quarter of 2020 of $3.3 million of Chinese duty
tax recoveries.
Gross margin as a percentage of net sales increased approximately 380 basis
points to 38.6% in the first half of 2021 compared to 34.8% in the first half of
2020. Gross margin in the first half of 2021 was favorably impacted by higher
volume and favorable absorption of fixed overhead costs in our AES and EMS
operating segments, favorable product mix in our EMS operating segment,
favorable productivity improvements in our AES operating segment and a lower
inventory reserves provision in our EMS operating segment. This was partially
offset by higher commodity and raw material costs as well as higher freight,
duties and tariffs expenses in our AES and EMS operating segments, unfavorable
product mix in our AES operating segment and unfavorable productivity
performance due to raw material shortages in our EMS operating segment. The
higher freight, duties and tariffs expenses were primarily due to the
recognition in the second quarter of 2020 of $3.3 million of Chinese duty tax
recoveries.
Our UTIS net sales were only slightly impacted by the fire at our UTIS
manufacturing facility in Ansan, South Korea as a result of selling our
undamaged finished goods inventory during the remainder of the first quarter of
2021. In the second quarter of 2021, we experienced a greater impact to our net
sales due to the continued disruption to our UTIS operations. In the third
quarter of 2021, we expect a similar impact to our net sales as the second
quarter of 2021.
In the first quarter of 2021, our net sales were largely unaffected by global
supply chain disruptions, but we began seeing some greater impacts as we exited
the quarter. In the second quarter of 2021, the impact of supply constraints and
raw material cost increases, primarily due to the weather interruptions along
the U.S. Gulf Coast as well as commodity price increases, somewhat tempered our
net sales growth and gross margin results. In the third quarter of 2021, we
expect these issues to continue, but to a lesser extent.
We incurred incremental transaction costs associated with the temporary
additional benefits established under our dependent care, premium pay and sick
pay programs in response to the COVID-19 pandemic, as well as additional safety
supplies. These costs impacted our gross margin by $0.4 million and $3.0 million
in the second quarter of 2021 and the second quarter of 2020, respectively, and
$1.1 million and $3.6 million in the first half of 2021 and the first half of
2020, respectively.
Selling, General and Administrative Expenses
                                               Three Months Ended                             Six Months Ended
(Dollars in thousands)                June 30, 2021          June 30, 2020          June 30, 2021          June 30, 2020
Selling, general and administrative
expenses                             $      44,959          $      41,694          $      87,372          $      82,024
Percentage of net sales                       19.1  %                21.8  %                18.7  %                21.0  %


Selling, general and administrative (SG&A) expenses increased 7.8% in the second
quarter of 2021 from the second quarter of 2020, primarily due to a $5.2 million
increase in total compensation and benefits, a $0.9 million increase in software
expenses, a $0.5 million increase in recruiting/relocation/training expenses, a
$0.3 million increase in travel and entertainment expenses and a $0.1 million
increase in depreciation. This was partially offset by a $4.5 million decrease
in other intangible assets amortization and a $0.1 million decrease in
environmental charges.
SG&A expenses increased 6.5% in the first half of 2021 from the first half of
2020, primarily due to an $7.7 million increase in total compensation and
benefits, a $1.7 million increase in software expenses and a $0.6 million
increase in recruiting/relocation/training expenses. This was partially offset
by a $5.0 million decrease in other intangible assets amortization and a $0.9
million decrease in travel and entertainment expenses.
The decrease in amortization expense for the three and six months ended June 30,
2021 was due to the acceleration of amortization expense related to our DSP
customer relationships and trademarks and trade names definite-lived other
intangible assets, which were both accelerated to be fully amortized by December
31, 2020 due to an adjustment to their remaining useful lives. We recognized
amortization expense for our DSP definite-lived other intangible assets of $0.1
million and $4.4 million in the second quarter of 2021 and the second quarter of
2020, respectively, and $0.1 million and $4.8 million in the first half of 2021
and the first half of 2020, respectively.
                                       29
--------------------------------------------------------------------------------

The year-to-date decrease in travel and entertainment and
recruiting/relocation/training expenses was primarily driven by the impacts of
COVID-19.
Research and Development Expenses
                                              Three Months Ended                            Six Months Ended
(Dollars in thousands)               June 30, 2021          June 30, 2020         June 30, 2021          June 30, 2020
Research and development expenses   $       7,492          $      7,295          $      14,664          $      15,100
Percentage of net sales                       3.2  %                3.8  %                 3.2  %                 3.9  %


R&D expenses increased 2.7% in the second quarter of 2021 from the second
quarter of 2020 due to increases in depreciation and laboratory expenses,
partially offset by decreases in professional services and total compensation
benefits.
R&D expenses decreased 2.9% in the first half of 2021 from the first half of
2020 due to decreases in professional services, total compensation benefits and
travel and entertainment expenses, partially offset by increases in depreciation
and laboratory expenses. The year-to-date decrease in travel and entertainment
expenses was primarily driven by the impacts of COVID-19.
Restructuring and Impairment Charges and Other Operating (Income) Expense, Net
                                               Three Months Ended                               Six Months Ended
(Dollars in thousands)                June 30, 2021          June 30, 2020           June 30, 2021            June 30, 2020
Restructuring and impairment charges $        747          $            -          $      2,253             $            -
Other operating (income) expense,
net                                  $        890          $         (112)         $      2,105             $          (92)


We incurred restructuring charges and related expenses associated with our
manufacturing footprint optimization plans involving certain Europe and Asia
manufacturing locations. We recognized $0.7 million and $2.3 million of
restructuring charges and related expenses pertaining to these restructuring
projects in the second quarter of 2021 and the first half of 2021, respectively.
For additional information, refer to "Note 15 - Supplemental Financial
Information" to the condensed consolidated financial statements in Part I, Item
1 of this Form 10-Q.
With respect to other operating (income) expense, net, we recognized expense of
$0.9 million and $2.1 million in the second quarter of 2021 and the first half
of 2021, respectively, primarily related to the financial impacts from the fire
at our UTIS manufacturing facility in Ansan, South Korea in the first quarter of
2021. This impact consisted of write-offs of fixed assets and inventory
destroyed and/or damaged in the fire, professional services, costs incurred due
to obligations under our manufacturing facility lease agreement, compensation
and benefits for certain of our UTIS employees, partially offset by the
recognition of certain anticipated insurance recoveries. There may be other
potential costs that cannot be reasonably foreseen or estimated at this time and
we continue to evaluate information as it becomes available. For additional
information, refer to "Note 15 - Supplemental Financial Information" to the
condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Equity Income in Unconsolidated Joint Ventures
                                                 Three Months Ended                               Six Months Ended
(Dollars in thousands)                 June 30, 2021            June 30, 2020           June 30, 2021           June 30, 2020
Equity income in unconsolidated
joint ventures                       $      1,930             $        

1,022 $ 4,111 $ 2,240


As of June 30, 2021, we had two unconsolidated joint ventures, each 50% owned:
Rogers INOAC Corporation (RIC) and Rogers INOAC Suzhou Corporation (RIS). Equity
income in those unconsolidated joint ventures increased 88.8% in the second
quarter of 2021 from the second quarter of 2020, and increased 83.5% in the
first half of 2021 from the first half of 2020. On a quarter-to-date basis and a
year-to-date basis, the increase was due to higher net sales, driven by strong
sales in the portable electronics and general industrial markets, and improved
operational performance for both RIS and RIC, primarily due to higher
utilization of production capacity.
Other Income (Expense), Net
                                                 Three Months Ended                                Six Months Ended
(Dollars in thousands)                 June 30, 2021             June 30, 2020           June 30, 2021           June 30, 2020

Other income (expense), net         $      1,239               $          634          $        4,207          $         (152)


Other income (expense), net increased to income of $1.2 million in the second
quarter of 2021 from income of $0.6 million in the second quarter of 2020. On a
quarter-to-date basis, the increase was due to favorable impacts from our copper
derivative contracts and foreign currency transactions, partially offset by
unfavorable impacts from our foreign currency derivative contracts.
                                       30
--------------------------------------------------------------------------------

Other income (expense), net increased to income of $4.2 million in the first
half of 2021 from expense of $0.2 million in the first half of 2020. On a
year-to-date basis, the increase was due to favorable impacts from our copper
derivative contracts and foreign currency transactions, partially offset by
unfavorable impacts from our foreign currency derivative contracts.
Interest Expense, Net
                                   Three Months Ended                       Six Months Ended
(Dollars in thousands)      June 30, 2021      June 30, 2020       June 30, 2021       June 30, 2020
Interest expense, net      $    (404)         $       (1,779)     $       (1,011)     $       (2,986)


Interest expense, net, decreased by 77.3% in the second quarter of 2021 from the
second quarter of 2020, and decreased by 66.1% in the first half of 2021 from
the first half of 2020. The decrease on quarter-to-date and year-to-date bases
was primarily due to a lower weighted-average outstanding balance for our
borrowings under our revolving credit facility. We expect interest expense, net
to decrease on quarter-to-date and year-to-date bases in the third quarter of
2021 from the third quarter of 2020 primarily due to a lower weighted-average
outstanding balance for our borrowings under our revolving credit facility.
Income Taxes
                                   Three Months Ended                      Six Months Ended
(Dollars in thousands)      June 30, 2021       June 30, 2020      June 30, 2021       June 30, 2020
Income tax expense         $       9,855       $      6,394       $      20,372       $      9,835
Effective tax rate                  25.6  %            30.6  %             25.4  %            26.1  %


Our effective income tax rate was 25.6% and 30.6% for the three months ended
June 30, 2021 and 2020, respectively. The decrease from the second quarter of
2020 was primarily due to the decrease in the current quarter accruals for
reserves of unrecognized tax benefits and the pretax mix across jurisdictions
with disparate tax rates, partially offset by the second quarter of 2020
beneficial impact of changes in valuation allowance related to R&D credits. Our
effective income tax rate was 25.4% and 26.1% for the six months ended June 30,
2021 and 2020, respectively. The decrease from the first half of 2020 was
primarily due to the decrease in the current quarter accruals of reserves of
unrecognized tax benefits and the pretax mix across jurisdictions with disparate
tax rates, partially offset by the first half of 2020 beneficial impact of
changes in valuation allowance related to R&D credits.
Operating Segment Net Sales and Operating Income
Advanced Electronics Solutions
                                                       Three Months Ended                               Six Months Ended
(Dollars in thousands)                        June 30, 2021           June 30, 2020           June 30, 2021           June 30, 2020
Net sales                                   $      140,426          $      116,160          $      272,318          $      227,434
Operating income                            $       18,288          $       17,070          $       33,137          $       21,848


AES net sales increased by 20.9% in the second quarter of 2021 compared to the
second quarter of 2020. The increase in net sales over the second quarter of
2020 was primarily driven by higher net sales in the ADAS, EV/HEV, aerospace and
defense and clean energy markets, partially offset by lower net sales in the
wireless infrastructure market. Net sales were favorably impacted by foreign
currency fluctuations of $5.4 million, or 4.7%, due to the appreciation in value
of the euro and Chinese renminbi relative to the U.S. dollar.
AES net sales increased by 19.7% in the first half of 2021 compared to the first
half of 2020. The increase in net sales over the first half of 2020 was
primarily driven by higher net sales in the ADAS, EV/HEV, aerospace and defense
and clean energy markets, partially offset by lower net sales in the wireless
infrastructure market. Net sales were favorably impacted by foreign currency
fluctuations of $10.7 million, or 4.7%, due to the appreciation in value of the
euro and Chinese renminbi relative to the U.S. dollar.
Operating income increased by 7.1% in the second quarter of 2021 from the second
quarter of 2020. The increase in operating income was primarily due to higher
volume, favorable absorption of fixed overhead costs and favorable productivity
improvements. This was partially offset by higher commodity costs, unfavorable
product mix and higher freight, duties and tariffs expenses. The higher freight,
duties and tariffs expenses were primarily due to the recognition in the second
quarter of 2020 of $3.3 million of Chinese duty tax recoveries. As a percentage
of net sales, operating income in the second quarter of 2021 was 13.0%, an
approximately 170 basis point decrease as compared to the 14.7% reported in the
second quarter of 2020.
Operating income increased by 51.7% in the first half of 2021 from the first
half of 2020. The increase in operating income was primarily due to higher
volume, favorable absorption of fixed overhead costs and favorable productivity
improvements. This was partially offset by higher commodity costs, unfavorable
product mix and higher freight, duties and tariffs expenses. The
                                       31
--------------------------------------------------------------------------------

higher freight, duties and tariffs expenses were primarily due to the
recognition in the second quarter of 2020 of $3.3 million of Chinese duty tax
recoveries. As a percentage of net sales, operating income in the first half of
2021 was 12.2%, an approximately 260 basis point increase as compared to the
9.6% reported in the first half of 2020.
Additionally, we incurred restructuring charges and related expenses associated
with our manufacturing footprint optimization plans involving certain Europe and
Asia manufacturing locations. We recognized $0.7 million and $2.3 million of
restructuring charges and related expenses pertaining to these restructuring
projects in the second quarter of 2021 and the first half of 2021, respectively.
For additional information, refer to "Note 15 - Supplemental Financial
Information" to the condensed consolidated financial statements in Part I, Item
1 of this Form 10-Q.
In the first quarter of 2021, our net sales were largely unaffected by global
supply chain disruptions, but we began seeing some greater impacts as we exited
the quarter. In the second quarter of 2021, the impact of higher commodity costs
tempered our gross margin results. In the third quarter of 2021, we expect these
issues to persist, but to a lesser extent due to commercial actions we have
begun to take to address these higher costs.
Our AES operating segment incurred incremental transaction costs associated with
the temporary additional benefits established under our dependent care, premium
pay and sick pay programs in response to the COVID-19 pandemic, as well as
additional safety supplies. These costs impacted our operating income by $0.3
million and $1.9 million in the second quarter of 2021 and the second quarter of
2020, respectively, and $0.7 million and $2.3 million in the first half of 2021
and the first half of 2020, respectively.
Elastomeric Material Solutions
                                                       Three Months Ended                               Six Months Ended
(Dollars in thousands)                        June 30, 2021           June 30, 2020           June 30, 2021           June 30, 2020
Net sales                                   $       89,331          $       71,626          $      181,180          $      155,152
Operating income                            $       15,637          $        2,995          $       35,714          $       14,512


EMS net sales increased by 24.7% in the second quarter of 2021 compared to the
second quarter of 2020. The increase in net sales over the second quarter of
2020 was primarily driven by higher net sales in the EV/HEV, general industrial,
consumer and automotive markets, partially offset by lower net sales in the mass
transit market. Net sales were favorably impacted by foreign currency
fluctuations of $2.5 million, or 3.5%, due to the appreciation in value of the
Chinese renminbi and euro relative to the U.S. dollar.
EMS net sales increased by 16.8% in the first half of 2021 compared to the first
half of 2020. The increase in net sales over the first half of 2020 was
primarily driven by higher net sales in the EV/HEV, general industrial, consumer
and automotive markets, partially offset by lower net sales in the mass transit
market. Net sales were favorably impacted by foreign currency fluctuations of
$5.2 million, or 3.4%, due to the appreciation in value of the Chinese renminbi
and euro relative to the U.S. dollar.
Operating income increased by 422.1% in the second quarter of 2021 from the
second quarter of 2020. As a result of the acceleration of amortization expense
related to the DSP customer relationships and trademarks and trade names
definite-lived other intangible assets in 2020, we recognized lower amortization
expense in the second quarter of 2021 compared to the second quarter of 2020.
The increase in operating income was also due to higher volume, favorable
product mix, a lower inventory reserves provision and favorable absorption of
fixed overhead costs. This was partially offset by higher freight, duties and
tariffs expenses, higher raw material costs and unfavorable productivity
performance due to raw material shortages. As a percentage of net sales,
operating income in the second quarter of 2021 was 17.5%, an approximately 1,330
basis point increase as compared to the 4.2% reported in the second quarter of
2020.
Operating income increased by 146.1% in the first half of 2021 from the first
half of 2020. As a result of the acceleration of amortization expense related to
the DSP customer relationships and trademarks and trade names definite-lived
other intangible assets in 2020, we recognized lower amortization expense in the
first half of 2021 compared to the first half of 2020. The increase in operating
income was also due to higher volume, favorable product mix, a lower inventory
reserves provision and favorable absorption of fixed overhead costs. This was
partially offset by higher freight, duties and tariffs expenses, higher raw
material costs and unfavorable productivity performance due to raw material
shortages. As a percentage of net sales, operating income in the first half of
2021 was 19.7%, an approximately 1,030 basis point increase as compared to the
9.4% reported in the second quarter of 2020.
                                       32
--------------------------------------------------------------------------------

The decrease in amortization expense for the three and six months ended June 30,
2021 was due to the acceleration of amortization expense related to our DSP
customer relationships and trademarks and trade names definite-lived other
intangible assets, which were both accelerated to be fully amortized by December
31, 2020 due to an adjustment to their remaining useful lives. We recognized
amortization expense for our DSP definite-lived other intangible assets of $0.1
million and $4.4 million in the second quarter of 2021 and the second quarter of
2020, respectively, and $0.1 million and $4.8 million in the first half of 2021
and the first half of 2020, respectively.
Additionally, we recognized expense of $1.5 million and $2.8 million primarily
related to the financial impacts from the fire at our UTIS manufacturing
facility in Ansan, South Korea in 2021 for the second quarter of 2021 and the
first half of 2021, respectively. This impact consisted of write-offs of fixed
assets and inventory destroyed and/or damaged in the fire, professional
services, costs incurred due to obligations under our manufacturing facility
lease agreement, compensation and benefits for certain of our UTIS employees,
partially offset by the recognition of certain anticipated insurance recoveries.
There may be other potential costs that cannot be reasonably foreseen or
estimated at this time and we continue to evaluate information as it becomes
available. For additional information, refer to "Note 15 - Supplemental
Financial Information" to the condensed consolidated financial statements in
Part I, Item 1 of this Form 10-Q.
Our UTIS net sales were only slightly impacted by the fire at our UTIS
manufacturing facility in Ansan, South Korea as a result of selling our
undamaged finished goods inventory during the remainder of the first quarter of
2021. In the second quarter of 2021, we experienced a greater impact to our net
sales due to the continued disruption to our UTIS operations. In the third
quarter of 2021, we expect a similar impact to our net sales as the second
quarter of 2021.
In the first quarter of 2021, our net sales were largely unaffected by global
supply chain disruptions, but we began seeing some greater impacts as we exited
the quarter. In the second quarter of 2021, the impact of supply constraints and
raw material cost increases, primarily due to the weather interruptions along
the U.S. Gulf Coast, somewhat tempered our net sales growth and gross margin
results. In the third quarter of 2021, we expect these issues to persist, but to
a lesser extent as the supply chain constraints begin to subside, in addition to
commercial actions we have begun to take to address the higher raw material
costs.
Our EMS operating segment incurred incremental transaction costs associated with
the temporary additional benefits established under our dependent care, premium
pay and sick pay programs in response to the COVID-19 pandemic, as well as
additional safety supplies. These costs impacted our operating income by $0.2
million and $1.3 million in the second quarter of 2021 and the second quarter of
2020, respectively, and $0.4 million and $1.5 million in the first half of 2021
and the first half of 2020, respectively.
Other
                                                        Three Months Ended                               Six Months Ended
(Dollars in thousands)                        June 30, 2021            June 30, 2020           June 30, 2021           June 30, 2020
Net sales                                   $      5,149             $        3,371          $       10,673          $        7,381
Operating income                            $      1,820             $        1,027          $        4,087          $        2,207


Net sales in this segment increased by 52.7% in the second quarter of 2021 from
the second quarter of 2020. The increase in net sales over the second quarter of
2020 was primarily driven by higher demand in the automotive market. Net sales
were favorably impacted by foreign currency fluctuations of $0.2 million, or
6.0%, due to the appreciation in value of the Chinese renminbi relative to the
U.S. dollar.
Net sales in this segment increased by 44.6% in the first half of 2021 from the
first half of 2020. The increase in net sales over the first half of 2020 was
primarily driven by higher demand in the automotive market. Net sales were
favorably impacted by foreign currency fluctuations of $0.4 million, or 5.1%,
due to the appreciation in value of the Chinese renminbi relative to the U.S.
dollar.
Operating income increased 77.2% in the second quarter of 2021 compared to the
second quarter of 2020. The increase in operating income was primarily driven by
higher volume and favorable absorption of fixed overhead costs, partially offset
by unfavorable product mix and higher freight expenses.
Operating income increased 85.2% in the first half of 2021 compared to the first
half of 2020. The increase in operating income was primarily driven by higher
volume and favorable absorption of fixed overhead costs, partially offset by
unfavorable product mix and higher freight expenses.
As a percentage of net sales, operating income in the second quarter of 2021 was
35.3%, a 480 basis point increase as compared to the 30.5% reported in the
second quarter of 2020. As a percentage of net sales, operating income in the
first half of 2021 was 38.3%, a 840 basis point increase as compared to the
29.9% reported in the first half of 2020.
                                       33
--------------------------------------------------------------------------------

Liquidity, Capital Resources and Financial Position
We believe that our existing sources of liquidity and cash flows that we expect
to generate from our operations, together with our available credit facilities,
will be sufficient to fund our operations, currently planned capital
expenditures, research and development efforts and our debt service commitments,
for at least the next 12 months. We regularly review and evaluate the adequacy
of our cash flows, borrowing facilities and banking relationships in an effort
to ensure that we have the appropriate access to cash to fund both our near-term
operating needs and our long-term strategic initiatives.
The following table illustrates the location of our cash and cash equivalents by
our three major geographic areas:
(Dollars in thousands)               June 30, 2021       December 31, 2020
United States                       $       39,390      $           21,657
Europe                                      44,446                  55,449
Asia                                       120,109                 114,679

Total cash and cash equivalents $ 203,945 $ 191,785


Approximately $164.6 million of our cash and cash equivalents were held by
non-U.S. subsidiaries as of June 30, 2021. We did not make any changes in the
six months ended June 30, 2021 to our position on the permanent reinvestment of
our earnings from foreign operations. With the exception of certain of our
Chinese subsidiaries, where a substantial portion of our Asia cash and cash
equivalents are held, we continue to assert that historical foreign earnings are
indefinitely reinvested.
(Dollars in thousands)                        June 30, 2021       December 31, 2020
Key Financial Position Accounts:
Cash and cash equivalents                    $      203,945      $          191,785
Accounts receivable, net                     $      157,471      $          134,421
Inventories                                  $      110,761      $          102,360
Borrowings under revolving credit facility   $            -      $          

25,000


Changes in key financial position accounts and other significant changes in our
statements of financial position from December 31, 2020 to June 30, 2021 were as
follows:
•Accounts receivable, net increased 17.1% to $157.5 million as of June 30, 2021
from $134.4 million as of December 31, 2020. The increase from year-end was
primarily due to higher net sales at the end of the second quarter of 2021
compared to at the end of 2020.
•Inventories increased 8.2% to $110.8 million as of June 30, 2021, from $102.4
million as of December 31, 2020, primarily driven by raw material cost increases
as well as the ramp up of raw material purchases and production efforts to meet
anticipated demand.
•Borrowings under revolving credit facility were nil as of June 30, 2021
compared to $25.0 million as of December 31, 2020. This was as a result of $25.0
million of discretionary principal payments on our revolving credit facility
during the first half of 2021. For additional information regarding this
facility and the Fourth Amended Credit Agreement, refer to "Note 9 - Debt" to
the condensed consolidated financial statements in Part I, Item 1 of this Form
10-Q.
                                                                Six Months Ended
(Dollars in thousands)                                 June 30, 2021       June 30, 2020
Key Cash Flow Measures:
Net cash provided by operating activities             $       66,206      $ 

54,959

Net cash used in investing activities                 $      (20,701)     $ 

(18,150)

Net cash (used) provided by financing activities $ (31,632) $

95,442


As of June 30, 2021, cash and cash equivalents were $203.9 million as compared
to $191.8 million as of December 31, 2020, an increase of $12.2 million, or
6.3%. This increase was primarily due to cash flows generated by operations,
partially offset by $25.0 million of discretionary principal payments on our
revolving credit facility during the first half of 2021, $21.4 million in
capital expenditures and $2.7 million in tax payments related to net share
settlement of equity awards.
In 2021, we continue to expect capital spending to be in the range of
approximately $70.0 million to $80.0 million, which we plan to fund with cash
from operations. This range includes the capital expenditures necessary to
restore the UTIS operations, a significant portion of which we expect to be
reimbursed by insurance proceeds.
                                       34
--------------------------------------------------------------------------------

Restrictions on Payment of Dividends
The Fourth Amended Credit Agreement generally permits us to pay cash dividends
to our shareholders, provided that (i) no default or event of default has
occurred and is continuing or would result from the dividend payment and (ii)
our total net leverage ratio does not exceed 2.75 to 1.00. If our total net
leverage ratio exceeds 2.75 to 1.00, we may nonetheless make up to $20.0 million
in restricted payments, including cash dividends, during each fiscal year,
provided that no default or event of default has occurred and is continuing or
would result from the payments. Our total net leverage ratio did not exceed 2.75
to 1.00 as of June 30, 2021.
Contingencies
During the second quarter of 2021, we did not become aware of any material
developments related to environmental matters disclosed in our Annual Report,
our asbestos litigation or other material contingencies previously disclosed or
incur any material costs or capital expenditures related to such 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
of these contingencies.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements that
have or are, in the opinion of management, reasonably likely to have a current
or future material effect on our results of operations or financial position.
Critical Accounting Policies
There were no material changes in our critical accounting policies during the
second quarter of 2021.
Recent Accounting Pronouncements
Refer to "Note 16 - Recent Accounting Standards" to the condensed consolidated
financial statements in Part I, Item 1 of this Form 10-Q for discussion of
recent accounting pronouncements including expected dates of adoption.
                                       35

————————————————– ——————————

© Edgar online, source Previews

Source link

Leave a Reply