What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-19 · 157 added, 266 removed, 140 unchanged (75% of the section changed)

1 unchanged sentence

The following discussion and analysis of our results of operations and financial position should be read together with our consolidated financial statements and accompanying notes, which are contained in “Item 8.

Financial Statements and Supplementary Data,” as well as “Item 6.

Selected Financial Data.”

The discussion of the comparison of our 2019 and 2018 results was previously presented in the Ma nagement’s Discussion & Analysis in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2020 , and has been omitted from this section pursuant to Instruction 1 to Item 303(a) of Regulation S-K.

Financial Statements and Supplementary Data.”

The discussion of the comparison of our 2020 and 2019 results was previously disclosed within the Management’s Discussion & Analysis in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed with the SEC on February 19, 2021 , and has been omitted from this section pursuant to Instruction 1 to Item 303(b) of Regulation S-K.

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 three strategic operating segments:

Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES).

The remaining operations, which represent our non-core businesses, are reported in the Other operating segment.

During the first quarter of 2021, we completed the realignment of our strategic business segments to reflect the combination of our ACS and PES businesses resulting in a new strategic business segment, Advanced Electronics Solutions (AES).

The combination of these two complementary businesses with capabilities in both high power and high frequency applications is expected to enhance our overall value proposition to customers in multiple high-growth markets.

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 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.

2 unchanged sentences

As a market-driven organization, we are focused on growth drivers, including advanced mobility and advanced connectivity.

More specifically, in addition to the impact 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, renewable energy and connected devices.

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 electrification of vehicles, including electric and hybrid electric vehicles (EV/HEV), and increasing use of advanced driver assistance systems (ADAS) in the automotive industry and the growth of 5G smartphones in the portable electronics industry.

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 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 attain a leading competitive position globally.

performance, reliability, 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.

1 unchanged sentence

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.

If we are able to successfully execute on our growth strategy, we see an opportunity to double our annual revenues over the next five years.

This robust outlook is supported by our participation in a number of fast-growing markets and by our strong competitive positions in these markets.

Advanced mobility markets, which are comprised of EV/HEV and ADAS, are expected to grow at the fastest rate.

Third-party analysis projects that the EV/HEV market will grow at compound annual growth rate of more than 25% over the next five years and ADAS at a rate of more than 15% over that time period.

Within the EV/HEV market, we believe our advanced battery cell pads, ceramic substrates and power interconnects provide multiple content opportunities to capitalize on this growth.

In each of these areas we have secured a number of design wins and have a strong pipeline, which provides confidence in our growth outlook.

In the ADAS market, we continue to build on our current position with new design wins, including those for next-generation automotive radar systems.

Other markets with a strong growth trajectory include aerospace and defense, clean energy and portable electronics.

These markets are projected to grow at high single digit rates and we expect that they will contribute to our growth strategy’s aim of doubling revenues over the next five years.

To support our revenue growth opportunity during the five-year strategic planning period, we have initiated a manufacturing expansion plan, which includes expanding capacity at existing Rogers’ manufacturing facilities, relocating existing manufacturing capabilities to enhance operational efficiency and adding new manufacturing facilities.

This expansion plan will require a significant increase in capital spending together with an associated increase in operating expenses, as compared to historic capital spending and operating expenses over the previous five years.

During the five-year strategic planning period, we also will have significant capital expenditures associated with implementing our enterprise resource planning system.

Proposed Merger with DuPont

On November 1, 2021, we entered into a definitive merger agreement to be acquired by DuPont de Nemours, Inc.

(DuPont) in an all-cash transaction at a price of $277.00 per share of the Company’s capital stock.

The merger agreement provides for the acquisition of Rogers Corporation by DuPont through the merger of Cardinalis Merger Sub, Inc., a wholly owned subsidiary of DuPont, with and into Rogers Corporation, with Rogers Corporation surviving the merger as a wholly owned subsidiary of DuPont.

Company shareholders approved the merger agreement at a special shareholder meeting held on January 25, 2022.

The merger is subject to receipt of regulatory approvals and satisfaction of other customary conditions.

The merger is expected to close by the end of the second quarter of 2022.

Executive Summary

The following key highlights and factors should be considered when reviewing our results of operations, financial position and liquidity:

• In 2020 as compared to 2019, our net sales decreased by 10.7% to $802.6 million, our gross margin increased 140 basis points to 36.4% from 35.0%, and operating income as a percentage of net sales decreased 390 basis points to 8.4% from 12.3%.

• We made $248.0 million of discretionary principal payments on our revolving credit facility during the second, third and fourth quarters of 2020, partially offset by $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic.

• We terminated the interest rate swap on September 30, 2020.

As a result, we settled the interest rate swap for $2.4 million on October 2, 2020, representing the fair value of the interest rate swap on the date of termination.

Both Rogers and the counterparties released each other from all obligation under the interest rate swap agreement, including

the obligation to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to the agreed upon notional principal amount of $75.0 million.

• We commenced manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our PES and ACS operating segments, and we recognized $12.3 million of restructuring charges in 2020 related to this project.

• We incurred incremental direct costs of $4.9 million in 2020, due to the COVID-19 pandemic.

These costs primarily consist of 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.

A substantial portion of the additional benefits under these programs expired in mid-June.

• We recognized an additional $27.4 million of amortization expense in 2020 due to the acceleration of amortization expense related to our Diversified Silicone Products, Inc.

(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.

• In 2021 as compared to 2020, our net sales increased by 16.2% to $932.9 million, our gross margin increased 100 basis points to 37.4% from 36.4%, and operating income as a percentage of net sales increased 420 basis points to 12.6% from 8.4%.

• 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.

These operations will be disrupted, but it is too early to determine the expected duration of the disruption.

The UTIS business represented less than 4% of our annual net sales in 2020.

Operations in South Korea will be disrupted into the first half of 2023.

We recognized net expense of $6.2 million in 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, lease impairments, compensation and benefits for certain of our UTIS employees and third-party property claims, partially offset by the recognition of certain anticipated insurance recoveries.

• On October 8, 2021, we acquired Silicone Engineering Ltd.

(Silicone Engineering), a leading European manufacturer of silicone material solutions based in Blackburn, England, for a combined purchase price of $172.3 million for the company, net of cash acquired, and its facility.

Substantially all of our $190.0 million in borrowings under our existing credit facility in October 2021 were used to fund the transaction, with the remaining amounts being used for general corporate purposes.

We incurred transaction costs of $3.9 million related to this acquisition.

• Our 2021 net sales and gross margin were tempered by global supply chain disruptions, which we expect to continue into 2022.

• We recognized $3.1 million and $12.3 million of restructuring charges in 2021 and 2020, respectively, related to the manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our AES operating segment.

• In 2021, we incurred $6.9 million of expenses related to the merger with DuPont mainly associated with professional services expense and retention awards.

• We incurred incremental direct costs of $1.9 million and $4.9 million in 2021 and 2020, respectively, due to the COVID-19 pandemic.

Results of Operations

19 unchanged sentences

Percentage of net sales 37.4 % 36.4 %

Net sales decreased by 10.7% in 2020 compared to 2019.

Our ACS, EMS and PES operating segments had net sales decreases of 15.1%, 9.2% and 4.3%, respectively.

The decrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment, as well as lower net sales in the automotive market in our ACS operating segment, lower net sales in the general industrial, mass transit, consumer and automotive markets in our EMS operating segment and lower net sales in the mass transit, industrial power and vehicle electrification markets in our PES operating segment.

The decrease in net sales was partially offset by higher net sales in the aerospace and defense market in our ACS operating segment, higher net sales in the EV/HEV and portable electronics markets in our EMS operating segment and higher net sales in the EV/HEV and renewable energy markets in our PES operating segment.

Net sales were not materially impacted by changes in foreign currencies.

The lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment reflected the waning of 4G infrastructure spending by telecommunications companies in anticipation of 5G, as well as the impacts of trade tensions, increased competition and design changes by telecommunications equipment original equipment manufacturers (OEMs), which reduced our materials content in 5G base stations.

The lower net sales in the automotive, mass transit and general industrial markets was largely due to the impacts of the COVID-19 pandemic.

The lower net sales in industrial power market in our PES operating segment was due to a slowdown in industrial automation demand due to the impacts of the COVID-19 pandemic combined with customer inventory rebalancing, which began in mid-2019 and continued through most of the first half of 2020.

The lower net sales in the vehicle electrification market in our PES operating segment was due to the COVID-19 impacts on the automotive sector in the first half of 2020, partially offset by a recovery in the second half of 2020.

In our PES and EMS operating segments, we anticipate higher net sales in the EV/HEV market in 2021 driven by continued strong demand.

In our ACS and EMS operating segments, we anticipate a strong recovery in the automotive market in 2021 following industry disruptions that occurred in the first half of 2020 due to the COVID-19 pandemic.

In particular, we anticipate higher net sales for ADAS applications in 2021 driven by increased adoption of safety features in newer vehicles.

In our EMS operating segment, we anticipate higher net sales in the portable electronics market in 2021 due to anticipated continuation of strong demand for 5G smartphones, tempered by the uncertain impacts from the fire at our UTIS manufacturing facility in early February 2021.

In our ACS operating segment, we anticipate higher net sales in the aerospace and defense market in 2021 driven by funding of technology programs such as advanced defense and radar systems.

Net sales increased by 16.2% in 2021 compared to 2020.

Our AES and EMS operating segments had net sales increases of 16.5% and 15.2%, respectively.

The increase in net sales was primarily due to higher net sales in the EV/HEV, clean energy, aerospace and defense and ADAS markets in our AES operating segment and higher net sales in the general industrial, EV/HEV, consumer and automotive markets in our EMS operating segment.

The increase was partially offset by lower net sales in the portable electronics and mass transit markets in our EMS operating segment.

Additionally, our EMS operating segment net sales increased by $8.3 million, or 1.0%, reflecting the impact from our acquisition of Silicone Engineering.

Net sales benefited from favorable foreign currency impacts of $22.3 million, or 2.8%, due to the appreciation in value of the euro and Chinese renminbi relative to the U.S.

Gross margin as a percentage of net sales increased 100 basis points to 37.4% in 2021 compared to 36.4% in 2020.

Gross margin in 2020 was favorably impacted by lower freight, duties and tariffs costs in our ACS operating segment, including the recognition of a $3.3 million recovery of previous duty taxes paid due to a change in Chinese tariff regulations, favorable product mix in our EMS operating segment, lower fixed overhead costs and yield improvements in our ACS, EMS and PES operating segments, as well as favorable productivity performance and favorable absorption of fixed overhead costs in our PES operating segment.

This was partially offset by lower volume in our ACS, EMS and PES operating segments, unfavorable absorption of fixed overhead costs in our ACS and EMS operating segments, an increase in inventory reserve provisions in our PES operating segment, as well as unfavorable product mix in our PES operating segment.

Gross margin in 2021 was favorably impacted by higher volume, favorable absorption of fixed overhead costs and lower inventory reserve provisions in our AES and EMS operating segments, as well as favorable productivity improvements in our AES operating segment and favorable product mix in our EMS operating segment.

This was partially offset by higher commodity and raw material costs, higher fixed overhead expenses, and higher freight, duty and tariff expenses in our AES and EMS operating segments, as well as unfavorable product mix in our AES operating segment and unfavorable productivity performance due to raw material shortages and unfavorable yield performance in our EMS operating segment.

The higher freight, duty and tariff expenses were primarily due to the recognition in the second quarter of 2020 of a $3.3 million benefit from Chinese duty tax recoveries.

UTIS net sales were significantly impacted by a fire at our manufacturing facility in Ansan, South Korea in February 2021.

The impacts to our EMS operating segment net sales and gross margin in the first half of 2021 were partially mitigated by our ability to sell our undamaged finished goods inventory.

In 2021, our net sales were tempered by global supply chain disruptions, primarily related to semiconductor chip and other key component and raw material shortages, as well as regional power outages in China, and their impacts on customer demand, partially offset by the favorable impacts of commercial actions taken earlier in 2021.

Further, supply constraints on raw material and labor availability moderated production levels, creating operational inefficiencies, which negatively impacted our gross margin.

The global supply chain disruptions experienced in the 2021 and their impacts to our net sales and gross margin are expected to continue into 2022.

We plan to mitigate any inflationary impacts through a combination of pricing actions and operating efficiencies.

We incurred incremental direct 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 approximately $4.5 million in 2020.

A substantial portion of the additional benefits under these programs expired in June 2020.

These costs impacted our gross margin by $1.7 million and $4.5 million in 2021 and 2020, respectively.

Selling, General and Administrative Expenses

2 unchanged sentences

Percentage of net sales 20.6 % 22.7 %

Selling, general and administrative (SG&A) expenses increased 8.1% in 2020 from 2019, primarily due to a $24.4 million increase in other intangible assets amortization, a $2.3 million increase in professional services and a $1.4 million increase in total compensation and benefits, partially offset by a $4.8 million decrease in travel and entertainment expenses, a $1.4 million decrease in depreciation, a $1.3 million decrease in advertising expenses, a $1.2 million decrease in recruiting/relocation/training expenses, a $1.1 million decrease in commissions expense and a $1.0 million decrease in environmental charges.

The increase in amortization expense in 2020 from 2019 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 an additional $27.4 million of amortization expense in 2020 due to this acceleration.

Selling, general and administrative (SG&A) expenses increased 6.0% in 2021 from 2020, primarily due to a $17.7 million increase in total compensation and benefits, an $11.1 million increase in professional services expense, a $5.3 million increase in software expenses, a $1.2 million increase in recruiting/relocation/training expenses, a $0.4 million increase in advertising costs and a $0.3 million increase in utility expenses.

This was partially offset by a $27.9 million decrease in other intangible assets amortization expense.

The decrease in amortization expense in 2021 from 2020 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 $0.3 million and $29.2 million in 2021 and 2020, respectively.

For additional information, refer to “Note 6 – Goodwill and Other Intangible Assets” to “Item 8.

Financial Statements and Supplementary Data.”

The decreases in travel and entertainment and recruiting/relocation/training expenses were primarily driven by the impacts of COVID-19.

The increase in total compensation and benefits is primarily due to higher incentive compensation expenses year-over-year, including a $1.4 million impact in 2021 for retention awards issued in connection with the DuPont merger.

The increase in professional services expense is primarily due to $5.5 million of expenses incurred related to the merger with DuPont and $3.0 million of expenses incurred related to our acquisition of Silicone Engineering.

Research and Development Expenses

2 unchanged sentences

Percentage of net sales 3.2 % 3.7 %

R&D expenses decreased 7.5% in 2020 from 2019, primarily due to decreases in laboratory expenses as well as travel and entertainment expenses, partially offset by increases in total compensation and benefits.

R&D expenses increased 2.0% in 2021 from 2020, primarily due to increases in laboratory expenses, depreciation and total compensation and benefits, partially offset by decreases in professional services.

Restructuring and Impairment Charges and Other Operating (Income) Expense, Net

2 unchanged sentences

Other operating (income) expense, net $ 5,330 $ (104)

We incurred restructuring charges associated with our manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations.

We recognized $12.3 million of restructuring charges related to this restructuring project in 2020.

We incurred restructuring charges associated with the consolidation of our Santa Fe Springs, California operations with the Company’s facilities in Carol Stream, Illinois and Bear, Delaware.

We recognized $0.9 million of restructuring charges related to our facility consolidation in 2019.

We recognized $0.6 million of impairment charges in 2020 primarily related to certain fixed assets in Belgium and Hungary.

We recognized $1.5 million of impairment charges in 2019 primarily related to certain fixed assets in connection with the Isola USA Corp.

(Isola) asset acquisition.

In connection with the transitional leaseback of a portion of the facility and certain machinery and equipment acquired from Isola, we recognized lease income and related depreciation on leased assets of $1.0 million and $1.9 million, respectively, in 2019.

Additionally, we recorded a gain of $0.7 million for the settlement of indemnity claims related to the Isola asset acquisition in 2019.

We recognized $3.1 million and $12.3 million of restructuring charges 2021 and 2020, respectively, related to the manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our AES operating segment.

We recognized $0.5 million and $0.6 million of impairment charges in 2021 and 2020, respectively, primarily related to certain AES operating segment fixed assets in Belgium.

With respect to other operating (income) expense, net, we recognized expense of $5.3 million, primarily related to the financial impacts from a fire at our UTIS manufacturing facility in Ansan, South Korea in the first quarter of 2021, which impacted our EMS operating segment.

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, lease impairments, compensation and benefits for certain of our UTIS employees and third-party property claims, 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 “Item 8.

Financial Statements and Supplementary Data.”

Equity Income in Unconsolidated Joint Ventures

3 unchanged sentences

Rogers INOAC Corporation (RIC) and Rogers INOAC Suzhou Corporation (RIS).

Equity income in those unconsolidated joint ventures decreased 8.3% in 2020 from 2019 due to lower net sales as a result of the COVID-19 pandemic and declines in operational performance, for both RIS and RIC.

Equity income in those unconsolidated joint ventures increased 44.2% in 2021 from

2020 due to higher net sales, driven by strong sales in the portable electronics and general industrial markets, and improved operational performance for RIC, primarily due to higher utilization of production capacity.

Pension Settlement Charges and Other Income (Expense), Net

2 unchanged sentences

Other income (expense), net $ 5,136 $ 3,513

In 2020 and 2019, we recorded $0.1 million and $53.2 million of pre-tax settlement charges in connection with the termination of the Rogers Corporation Defined Benefit Pension Plan (following its merger with the Hourly Employees Pension Plan of Arlon LLC, Microwave Material and Silicone Technologies Divisions, Bear, Delaware (collectively, the Merged Plan)).

In 2021 and 2020, we recorded $0.5 million and $0.1 million of pre-tax settlement charges in connection with further settlement efforts related to the termination of the Rogers Corporation Defined Benefit Pension Plan (following its merger with the Hourly Employees Pension Plan of Arlon LLC, Microwave Material and Silicone Technologies Divisions, Bear, Delaware (collectively, the Merged Plan)).

For additional information, refer to “Note 11 – Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan” to “Item 8.

Financial Statements and Supplementary Data.”

Other income (expense), net improved to a net income of $3.5 million in 2020 compared to a net expense of $0.6 million in 2019 due to favorable impacts from our copper derivatives contracts and favorable impacts from our foreign currency transactions, including foreign currency derivatives, partially offset by higher costs associated with our defined benefit plans.

Other income (expense), net improved to a net income of $5.1 million in 2021 compared to a net income of $3.5 million in 2020 due to favorable impacts from our foreign currency transactions, copper derivative contracts and net periodic benefit credits from our defined benefit plans, partially offset by unfavorable impacts from our foreign currency derivative contracts.

Interest Expense, Net

1 unchanged sentence

Interest expense, net $ (2,536) $ (7,135)

Interest expense, net, increased by 3.9% in 2020 from 2019, primarily due to the $2.4 million acceleration of interest expense as a result of the termination of the interest rate swap on September 30, 2020, partially offset by lower interest expense on borrowings under our revolving credit facility, which was mainly attributable to a lower weighted-average interest rate year-over-year as well as a lower weighted-average outstanding balance for our borrowings under our revolving credit facility.

Interest expense, net, decreased by 64.5% in 2021 from 2020, primarily due to a lower weighted-average outstanding balance for our borrowings under our revolving credit facility as well as a $2.4 million acceleration of interest expense in 2020 as a result of the termination of the interest rate swap.

We expect interest expense, net to increase in 2022 due a higher weighted-average outstanding balance for our borrowings under our revolving credit facility.

Income Tax Expense

3 unchanged sentences

Our effective income tax rate for 2021 was 14.4% compared to 27.1% for 2020.

The increase from 2019 was primarily due to the increase in current year accruals of reserves for uncertain tax positions, the decrease in foreign tax credits available to offset foreign source income, the decrease in excess tax deductions on stock-based compensation and higher tax impact on unremitted foreign earnings and profits, partially offset by the beneficial impact of changes in valuation allowance related to R&D credits and pre-tax mix across jurisdictions with disparate tax rates.

The decrease from 2020 was primarily due to the beneficial impact of increased reversals of unrecognized tax positions in China.

Operating Segment Net Sales and Operating Income

Advanced Connectivity Solutions

Advanced Electronics Solutions

(Dollars in thousands) 2021 2020

1 unchanged sentence

Operating income $ 50,198 $ 32,023

ACS net sales decreased by 15.1% in 2020 compared to 2019.

The decrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets, as well as the lower net sales in the automotive market, partially offset by higher net sales in the aerospace and defense market.

Net sales were not materially impacted by changes in foreign currencies.

The lower net sales in the automotive market was largely due to the impacts of the COVID-19 pandemic.

We anticipate a strong recovery in the automotive market in 2021 following industry disruptions that occurred in the first half of 2020 due to the COVID-19 pandemic.

In particular, we anticipate higher net sales for ADAS applications in 2021 driven by increased adoption of safety features in newer vehicles.

Additionally, we anticipate higher net sales in the aerospace and defense market in 2021 driven by funding of technology programs such as advanced defense and radar systems.

Operating income decreased by 21.5% in 2020 from 2019.

The decrease in operating income was primarily due to lower volume and unfavorable absorption of fixed overhead costs, partially offset by lower freight, duties and tariffs costs, including the recognition of a $3.3 million recovery of previous duty taxes paid due to a change in Chinese tariff regulations, yield improvements and lower fixed overhead costs.

Additionally, our ACS operating segment incurred $4.6 million of restructuring and impairment charges in 2020.

As a percentage of net sales, operating income in 2020 was 14.2%, an approximately 120 basis point decrease as compared to 15.4% in 2019.

The incremental direct 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 the additional safety supplies, impacted ACS operating income by approximately $1.9 million in 2020.

Our AES operating segment net sales increased by 16.5% in 2021 compared to 2020.

The increase in net sales was primarily driven by higher net sales in the EV/HEV, clean energy, aerospace and defense and ADAS markets.

Net sales were benefited from favorable foreign currency fluctuations of $13.4 million, or 2.9%, due to the appreciation in value of the euro and Chinese renminbi relative to the U.S.

Operating income increased by 56.8% in 2021 from 2020.

The increase in operating income was primarily due to higher volume, favorable absorption of fixed overhead costs, favorable productivity improvements and a lower inventory reserves provision, in addition to a $8.9 million decrease in restructuring charges.

This was partially offset by higher commodity costs, unfavorable product mix, higher freight, duties and tariffs expenses and higher fixed overhead expenses.

The higher freight, duty and tariff expenses were primarily due to the recognition in the second quarter of 2020 of a $3.3 million benefit from Chinese duty tax recoveries.

As a percentage of net sales, operating income in 2021 was 9.4%, an approximately 240 basis point increase as compared to 7.0% in 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 $3.0 million and $11.9 million of restructuring charges and related expenses pertaining to these restructuring projects, in 2021 and 2020, respectively.

For additional information, refer to “Note 15 – Supplemental Financial Information” to “Item 8.

Financial Statements and Supplementary Data.”

In 2021, our AES operating segment net sales were tempered by global supply chain disruptions, primarily related to semiconductor chip and other key component and raw material shortages, as well as regional power outages in China, and their

impacts on customer demand, partially offset by the favorable impacts of commercial actions taken earlier in 2021.

Further, supply constraints on raw material and labor availability moderated production levels, creating operational inefficiencies, which negatively impacted our AES operating segment gross margin.

The global supply chain disruptions experienced in 2021 and their impacts to our AES operating segment net sales and gross margin are expected to continue into 2022.

Our AES operating segment incurred incremental direct 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 AES operating segment operating income by $1.1 million and $2.9 million in 2021 and 2020, respectively.

Elastomeric Material Solutions

2 unchanged sentences

Operating income $ 60,051 $ 30,817

EMS net sales decreased by 9.2% in 2020 compared to 2019.

The decrease in net sales was primarily driven by lower net sales in the general industrial, mass transit, consumer and automotive markets, partially offset by higher net sales in the EV/HEV and portable electronics markets.

Net sales were not materially impacted by changes in foreign currencies.

The lower net sales in the automotive, mass transit and general industrial markets was largely due to the impacts of the COVID-19 pandemic.

We anticipate higher net sales in the EV/HEV market in 2021 driven by continued strong demand.

Additionally, we anticipate a strong recovery in the automotive market in 2021 following industry disruptions that occurred in the first half of 2020 due to the COVID-19 pandemic.

Lastly, we anticipate higher net sales in the portable electronics market in 2021 due to anticipated continuation of strong demand for 5G smartphones, tempered by the uncertain impacts from the fire at our UTIS manufacturing facility in early February 2021.

Operating income decreased by 46.0% in 2020 from 2019.

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, we recognized an additional $27.4 million of amortization expense in 2020.

The decrease in operating income was also due to lower volume and unfavorable absorption of fixed overhead costs, offset by favorable product mix and lower fixed overhead costs.

As a percentage of net sales, operating income in 2020 was 9.4%, an approximately 640 basis point decrease as compared to 15.8% in 2019.

The incremental direct 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 the additional safety supplies, impacted EMS operating income by approximately $1.9 million in 2020.

We recognized an additional $27.4 million of amortization expense in 2020 due to this acceleration.

The increase in amortization expense in 2020 is offset by a decrease in forecasted amortization expense in future years.

Our EMS operating segment net sales increased by 15.2% in 2021 compared to 2020.

The increase in net sales was primarily driven by higher net sales in the general industrial, EV/HEV, consumer and automotive markets, partially offset by lower net sales in the portable electronics and mass transit markets.

Additionally, EMS net sales increased by $8.3 million in net sales, or 2.5%, reflecting the impact from our acquisition of Silicone Engineering.

Net sales benefited from favorable foreign currency fluctuations of $8.4 million, or 2.5%, due to the appreciation in value of the Chinese renminbi and euro relative to the U.S.

Operating income increased by 94.9% in 2021 from 2020.

The increase was primarily due to a $27.6 million decrease in other intangible assets amortization expense.

The increase in operating income was also due to higher volume, favorable absorption of fixed overhead costs, favorable product mix and a lower inventory reserves provision.

This was partially offset by unfavorable yield performance, higher freight, duties and tariffs expenses, higher fixed overhead expenses, as well as higher raw material costs and unfavorable productivity performance due to raw material shortages.

As a percentage of net sales, operating income in 2021 was 15.9%, an approximately 650 basis point increase as compared to 9.4% in 2020.

The decrease in other intangible assets amortization expense in 2021 from 2020 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 $0.3 million and $29.2 million in 2021 and 2020, respectively.

For additional information, refer to “Note 6 – Goodwill and Other Intangible Assets” to “Item 8.

Financial Statements and Supplementary Data.”

Power Electronics Solutions

(Dollars in thousands) 2020 2019

Net sales $ 189,980 $ 198,535

Operating income (loss) $ (6,179) $ (1,437)

PES net sales decreased by 4.3% in 2020 compared to 2019.

The decrease in net sales was primarily driven by lower net sales in the mass transit, industrial power and vehicle electrification markets, partially offset by higher net sales in the EV/HEV and renewable energy markets.

Net sales were favorably impacted by foreign currency fluctuations of $1.0 million, or 0.5%, due to the appreciation in value of the euro relative to the U.S.

We anticipate higher net sales in 2021 in the EV/HEV market driven by continued strong demand.

Operating loss increased by 330.0% in 2020 from 2019.

The increase in operating loss was primarily due to $7.9 million of restructuring and impairment charges incurred in 2020, in addition to unfavorable product mix and lower volume, partially offset by favorable productivity performance, yield improvements, lower fixed overhead costs and favorable absorption of fixed overhead costs.

As a percentage of net sales, operating loss in 2020 was 3.3%, an approximately 260 basis point increase as compared to 0.7% in 2019.

The incremental direct 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 the additional safety supplies, impacted PES operating loss by approximately $1.0 million in 2020.

Additionally, we recognized expense of $6.2 million related to the financial impacts from a fire at our UTIS manufacturing facility in Ansan, South Korea in 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 “Item 8.

Financial Statements and Supplementary Data.”

UTIS net sales were significantly impacted by a fire at our manufacturing facility in Ansan, South Korea in February 2021.

The impacts to our EMS operating segment net sales and gross margin in the first half of 2021 were partially mitigated by our ability to sell our undamaged finished goods inventory.

In 2021, our EMS operating segment net sales were tempered by global supply chain disruptions, primarily related to semiconductor chip and other key component and raw material shortages, as well as regional power outages in China, and their impacts on customer demand, partially offset by the favorable impacts of commercial actions taken earlier in 2021.

Further, supply constraints on raw material and labor availability moderated production levels, creating operational inefficiencies, which negatively impacted our gross margin.

The global supply chain disruptions experienced in the 2021 and their impacts to our net sales and gross margin are expected to continue into 2022.

Our EMS operating segment incurred incremental direct 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 EMS operating segment operating income by $0.8 million and $1.9 million in 2021 and 2020, respectively.

(Dollars in thousands) 2021 2020

1 unchanged sentence

Operating income $ 6,933 $ 4,494

Net sales in this segment decreased by 27.0% in 2020 from 2019.

The decrease in net sales was primarily driven by a non-recurring last time buy in the Durel business in the first quarter of 2019, as well as lower demand in the automotive market partially resulting from the COVID-19 pandemic.

Net sales were not materially impacted by changes in foreign currencies.

Operating income decreased by 27.3% in 2020 from 2019.

The decrease in operating income was primarily due to lower volume and unfavorable absorption of fixed overhead costs, partially offset by lower fixed overhead costs.

As a percentage of net sales, operating income in 2020 was 28.6%, an approximately 10 basis point decrease as compared to 28.7% in 2019.

Product and Market Development

Our research and development team is dedicated to growing our business by developing cost effective solutions that improve the performance of customers’ products and by identifying business and technology acquisition or development opportunities to expand our market presence.

Net sales in our Other operating segment increased by 30.0% in 2021 from 2020.

The increase in net sales was primarily due to higher demand in the automotive market.

Net sales were favorably impacted by foreign currency fluctuations of $0.6 million, or 3.7%, due to the appreciation in value of the Chinese renminbi relative to the U.S.

Our Other operating segment operating income increased by 54.3% in 2021 from 2020.

The increase in operating income was primarily driven by higher volume and favorable absorption of fixed overhead costs, partially offset by higher fixed overhead expenses and higher freight expenses.

As a percentage of net sales, operating income in 2021 was 33.9%, an approximately 530 basis point increase as compared to 28.6% in 2020.

Liquidity, Capital Resources and Financial Position

We believe that our existing sources of liquidity and cash flows that are expected to be generated 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 believe that our existing sources of liquidity and cash flows that are expected to be generated from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, R&D efforts and our debt service commitments, for at least the next 12 months.

Our merger agreement with DuPont does not restrict these currently planned capital expenditures.

We regularly review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships, seeking to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives.

20 unchanged sentences

• Accounts receivable, net increased 21.3% to $163.1 million as of December 31, 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 2020 compared to at the end of 2019, as well as an increase in our income taxes receivable.

• Inventories decreased 23.0% to $102.4 million as of December 31, 2020, from $132.9 million as of December 31, 2019, primarily driven by a decline in inventory levels to align with our lower net sales volumes, as well as an increase in inventory reserve provision within the ACS and EMS operating segments and a reduction of capitalized variances associated with the timing of volumes produced versus sold relative to the end of 2019.

• Borrowings under revolving credit facility decreased 79.7% to $25.0 million as of December 31, 2020, from $123.0 million as of December 31, 2019.

This was as a result of $248.0 million of discretionary principal payments on our revolving credit facility during the second, third and fourth quarters of 2020, partially offset by $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic.

For additional information regarding this facility, as well as the Third Amended Credit Agreement and the Fourth Amended Credit Agreement, refer to “ Note 9 – Debt” to “Item 8.

The increase was primarily due to higher net sales at the end of 2021 compared to the end of 2020, as well as $5.7 million related to our acquisition of Silicone Engineering and the recognition of $5.4 million in UTIS fire insurance receivables for anticipated recoveries related to property damage claims.

• Inventories increased 30.3% to $133.4 million as of December 31, 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, as well as a decrease in inventory reserves and the $2.5 million related to our acquisition of Silicone Engineering.

• Borrowings under revolving credit facility increased $190.0 million as of December 31, 2021, from $25.0 million as of December 31, 2020.

The increase reflects $190.0 million in borrowings under our revolving credit facility in October 2021, substantially all of which was used to fund our acquisition of Silicone Engineering Ltd., with the remaining amount used

for general corporate purposes.

This was partially offset by $25.0 million of discretionary principal payments on our revolving credit facility during the first part of 2021.

For additional information regarding this facility, as well as the Fourth Amended Credit Agreement, refer to “Note 9 – Debt” to “Item 8.

Financial Statements and Supplementary Data.”

(Dollars in thousands )

Year Ended December 31,

(Dollars in thousands) Year Ended December 31,

Key Cash Flow Measures:

2 unchanged sentences

Net cash (used in) provided by financing activities 159,057 (104,189)

In 2020, cash and cash equivalents increased $24.9 million, primarily due to the $150.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $248.0 million of principal payments made on our outstanding borrowings on our revolving credit facility, $40.4 million in capital expenditures, as well as $5.4 million in tax payments related to net share settlement of equity awards.

In 2019, cash and cash equivalents decreased $0.9 million, primarily due to $105.5 million of principal payments made on our outstanding borrowings on our revolving credit facility, $51.6 million in capital expenditures, as well as $7.6 million in tax payments related to net share settlement of equity awards, almost entirely offset by cash flows generated by operations.

In 2021, we 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 does not incorporate any capital spending that may occur as a result of the fire that extensively damaged our UTIS manufacturing facility located in Ansan, South Korea, in early February 2021.

In 2021, cash and cash equivalents increased $40.5 million, primarily due to $190.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $71.1 million in capital expenditures, $25.0 million of principal payments made on our outstanding borrowings on our revolving credit facility, as well as $2.9 million in tax payments related to net share settlement of equity awards.

In 2020, cash and cash equivalents increased $24.9 million, primarily due to $150.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $248.0 million of principal payments made on our outstanding borrowings on our revolving credit facility, $40.4 million in capital expenditures, as well as $5.4 million in tax payments related to net share settlement of equity awards.

In 2022, we expect capital spending to be in the range of approximately $155.0 million to $165.0 million, of which we are contractually committed to $39.9 million as of December 31, 2021.

We plan to fund our capital spending in 2022 with cash from operations and cash on-hand, as well as our existing revolving credit facility, if necessary.

There are no contractual obligations requiring material cash requirements in 2022 and beyond, excluding those already noted, including those related our outstanding borrowings under our revolving credit facility, our operating and finance lease obligations and our pension benefit and other postretirement benefit obligations, which are discussed in Note 9 – Debt , Note 10 – Leases and Note 11 – Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan, to Item 8.

Financial Statements and Supplementary Data, respectively.

We do 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.

Restriction on Payment of Dividends

4 unchanged sentences

Financial Statements and Supplementary Data.”

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2020.

Payments Due by Period

Total Less than

1 Year 1 - 3 Years 3 - 5 Years More than

Operating lease obligations $ 4,741 $ 2,342 $ 2,394 $ 5 $ —

Finance lease obligations 5,077 4,713 364 — —

Interest payments on finance lease obligations 91 74 17 — —

Inventory purchase obligations 60 60 — — —

Capital commitments (1)

5,330 5,330 — — —

Borrowings under revolving credit facility (2)

25,000 — — 25,000 —

Interest payments on borrowings under revolving credit facility (3)

1,500 445 927 128 —

Other postretirement benefits 1,503 148 244 272 839

Total contractual obligations $ 43,302 $ 13,112 $ 3,946 $ 25,405 $ 839

(1) This amount represents non-cancelable vendor purchase commitments.

(2) All outstanding borrowings under our revolving credit facility are due on March 31, 2024.

(3) Estimated future interest payments are based on a leverage ratio based spread that ranges from 1.625% to 2.000%, plus projected forward 1-month LIBOR rates.

Actual future interest payments could differ from those set forth here due to the expected phase-out of LIBOR by the end of 2021.

Other postretirement benefits, which amount to $1.5 million, are expected to be paid from operating cash flows.

Other long-term liabilities, such as deferred taxes, unrecognized tax benefits and asbestos-related product liability reserves, have been excluded from the table due to the uncertainty of the timing of payments combined with the absence of historical trends to be used as a predictor for such payments.

Effects of Inflation

We do not believe that inflation had a material impact on our business, net sales, or operating results during the periods presented.

Off-Balance Sheet Arrangements

We do 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.

Under the terms of the merger agreement with DuPont, we are restricted from paying any dividends or other distributions to our shareholders, or making any material modifications to our dividend policy, without the prior approval of DuPont.

Critical Accounting Estimates

5 unchanged sentences

A summary of our critical accounting estimates is presented below:

Goodwill and Other Intangible Assets

We have made acquisitions over the years that included the recognition of intangible assets.

Intangible assets are classified into three categories:

(1) goodwill;

(2) other intangible assets with definite lives subject to amortization;

and (3) other intangible assets with indefinite lives not subject to amortization.

Other intangible assets can include items such as trademarks and trade names, licensed technology, customer relationships and covenants not to compete, among other things.

Each definite-lived other intangible asset is amortized over its respective economic useful life using the economic attribution method.

Goodwill is tested for impairment annually and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired.

If it is more likely than not that our goodwill is impaired, then we compare the estimated fair value of each of our reporting units to its respective carrying value.

If a reporting unit’s carrying value is greater than its fair value, then an impairment is recognized for the excess and charged to operations.

We currently have four reporting units with goodwill:

ACS, EMS, curamik ® and Elastomer Components Division (ECD).

Consistent with historical practice, the annual impairment test on these reporting units was performed as of November 30, 2020.

The application of the annual goodwill impairment test requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit.

Determining the fair value is subjective and requires the use of significant estimates and assumptions, including financial projections for net sales, gross margin and operating margin, discount rates, terminal growth rates and future market conditions, among others.

We estimated the fair value of our reporting units using an income approach based on the present value of future cash flows through a five-year discounted cash flow analysis.

The discounted cash flow analysis utilized the discount rates for each of the reporting units ranging from 10.5% for EMS to 13.1% for ECD, and terminal growth rates ranging from 3.4% for curamik ® to 4.2% for ACS.

We believe this approach yields the most appropriate evidence of fair value as our reporting units are not easily compared to other corporations involved in similar businesses.

We further believe that the assumptions and rates used in our annual goodwill impairment test are reasonable, but inherently uncertain.

There were no impairment charges resulting from our goodwill impairment analysis for the year ended December 31, 2020.

Our ACS, EMS, curamik ® and ECD reporting units had allocated goodwill of $51.7 million, $143.0 million, $73.2 million and $2.2 million respectively, as of December 31, 2020.

Indefinite-lived other intangible assets are tested for impairment annually and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired.

If it is more likely than not that an indefinite-lived other intangible asset is impaired, then we compare the estimated fair value of that indefinite-lived other intangible asset to its respective carrying value.

If an indefinite-lived other intangible asset’s carrying value is greater than its fair value, then an impairment charge is recognized for the excess and charged to operations.

Consistent with historical practice, the annual impairment test on these reporting units was performed as of November 30, 2020.

The application of the annual indefinite-lived other intangible asset impairment test requires significant judgment, including the determination of fair value of each indefinite-lived other intangible asset.

Fair value is primarily based on income approaches using discounted cash flow models, which have significant assumptions.

Such assumptions are subject to variability from year to year and are directly impacted by global market conditions.

There were no impairment charges resulting from our indefinite-lived other intangible assets impairment analysis for the year ended December 31, 2020.

Our curamik ® reporting unit had an indefinite-lived other intangible asset of $4.8 million as of December 31, 2020.

Definite-lived other intangible assets are tested for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable.

The recoverability test involves comparing the estimated sum of the undiscounted cash flows for each definite-lived other intangible asset to its respective carrying value.

If a definite-lived other intangible asset’s carrying value is greater than the sum of its undiscounted cash flows, then the definite-lived other intangible asset’s carrying value is compared to its estimated fair value and an impairment charge is recognized for the excess and charged to operations.

The application of the recoverability test requires significant judgment, including the identification of the asset group and determination of undiscounted cash flows and fair value of the underlying definite-lived other intangible asset.

Determination of undiscounted cash flows requires the use of significant estimates and assumptions, including certain financial projections.

Fair value is primarily based on income approaches using discounted cash flow models, which have significant assumptions.

Such assumptions are subject to variability from year to year and are directly impacted by global market conditions.

There were immaterial impairment charges resulting from our definite-lived other intangible assets impairment analysis for the year ended December 31, 2020.

Our ACS, EMS and curamik ® reporting units had definite-lived other intangible assets of $3.7 million, $101.2 million and $8.2 million, respectively, as of December 31, 2020.

The useful life determination for each indefinite-lived other intangible asset is evaluated each reporting period to determine whether events and circumstances support an indefinite useful life.

The useful life determination for each definite-lived other intangible asset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.

Product Liabilities

2 unchanged sentences

For asbestos-related claims, we recognize projected asbestos liabilities and related insurance receivables, with any difference between the liability and related insurance receivable recognized as an expense in the consolidated statements of operations.

Our estimates of asbestos-related contingent liabilities and related insurance receivables are based on an independent actuarial analysis and an independent insurance usage analysis prepared annually by third parties.

The actuarial analysis contains

numerous assumptions, including 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, average indemnity costs, average defense costs, 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.

Our estimates of asbestos-related contingent liabilities and related insurance receivables are based on a claim projection analysis and an insurance usage analysis prepared annually by third parties.

The claim projection analysis contains numerous assumptions, including 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, average indemnity costs, average defense costs, 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 assumptions are subject to even greater uncertainty as the projection period lengthens.

8 unchanged sentences

As of December 31, 2021, the estimated liabilities and estimated insurance recoveries for all current and future indemnity and defense costs projected through 2064 were $68.3 million and $62.6 million, respectively.

Revenue Recognition

Recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services.

We recognize revenue when all of the following criteria are met:

(1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied.

The majority of our shipping terms permit us to recognize revenue at point of shipment.

Some shipping terms require the goods to be cleared through customs or be received by the customer before title passes.

In those instances, revenue is not recognized until either the customer has received the goods or they have passed through customs, depending on the circumstances.

Shipping and handling costs are treated as fulfillment costs.

Sales tax or value added tax (VAT) are excluded from the measurement of the transaction price.

We manufacture some products to customer specifications which are customized to such a degree that it is unlikely that another entity would purchase these products or that we could modify these products for another customer.

These products are deemed to have no alternative use to the Company whereby we have an enforceable right to payment evidenced by contractual termination clauses.

In accordance with ASC 606, for those circumstances we recognize revenue on an over-time basis.

Revenue recognition does not occur until the product meets the definition of “no alternative use” and therefore, items that have not yet reached that point in the production process are not included in the population of items with over-time revenue recognition.

As appropriate, we record estimated reductions to revenue for customer returns, allowances, and warranty claims.

Provisions for such reductions are made at the time of sale and are typically derived from historical trends and other relevant information.

Pension and Other Postretirement Benefits

We sponsor one material defined benefit pension plan that covers certain union employees and we sponsor multiple fully insured or self-funded medical plans and fully insured life insurance plans for retirees.

The costs and obligations associated with these plans are dependent upon various actuarial assumptions used in calculating such amounts.

These assumptions include discount rates, long-term rates of return on plan assets, mortality rates and other factors.

The assumptions used were determined as follows:

(i) the discount rate used is based on the PruCurve bond index, with comparisons against other similar indices;

and (ii) the long-term rate of return on plan assets is determined based on historical portfolio results, market conditions and our expectations of future returns.

We determine these assumptions based on consultation with outside actuaries and investment advisors.

Any changes in these assumptions could have a significant impact on future recognized pension costs, assets and liabilities.

The rates used to determine our costs and obligations under our pension and postretirement plans are disclosed in “Note 11 – Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan” to “Item 8.

Financial Statements and Supplementary Data.” Each assumption has different sensitivity characteristics.

For the year ended December 31, 2020, a 25 basis point decrease in the discount rate would have increased our pension expense for Rogers Corporation Employees’ Pension Plan (the Union Plan) by a de minimis amount.

A 25 basis point decrease in the discount rate would have increased the other postretirement benefits expense by a de minimis amount.

A 25 basis point decrease in the expected return on assets would have increased the total 2020 pension expense for the Union Plan by a de minimis amount.

As the other postretirement benefit plans are unfunded, they would not be impacted by this assumption change.

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value with costs determined primarily on a first-in first-out basis.

We also maintain a reserve for excess, obsolete and slow-moving inventory that is primarily developed by utilizing both specific product identification and historical product demand as the basis for our analysis.

Products and materials that are specifically identified as obsolete are fully reserved.

In general, most products that have been held in inventory greater than one year are fully reserved unless there are mitigating circumstances, including forecasted sales or current orders for the product.

The remainder of the allowance is based on our estimates and fluctuates with market conditions, design cycles and other economic factors.

Risks associated with this allowance include unforeseen changes in business cycles that could affect the marketability of certain products and an unexpected decline in current production.

We closely monitor the marketplace and related inventory levels and have historically maintained reasonably accurate allowance levels.

Our obsolescence reserve has ranged from 9% to 18% of gross inventory over the last three fiscal years.

Equity Compensation

Determining the amount of equity compensation expense to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of performance-based restricted stock units.

Performance-Based Restricted Stock Units

As of December 31, 2020, we had performance-based restricted stock units from 2020, 2019 and 2018 outstanding.

These awards generally cliff vest at the end of a three-year measurement period.

However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed during the measurement period.

Participants are eligible to be awarded shares ranging from 0% to 200% of the original award amount, based on certain defined performance measures.

The 2020, 2019 and 2018 awards have one measurement criteria:

the three-year total shareholder return (TSR) on the performance of our capital stock as compared to that of a specified group of peer companies.

The TSR measurement criteria of the awards is considered a market condition.

As such, the fair value of this measurement criteria was determined on the grant date using a Monte Carlo simulation valuation model.

We recognize compensation expense on all of these awards on a straight-line basis over the vesting period with no changes for final projected payout of the awards.

We account for forfeitures as they occur.

Below were the assumptions used in the Monte Carlo calculation for each material award granted in 2020, 2019 and 2018:

February 12, 2020 June 3, 2019 February 7, 2019 September 17, 2018 February 8, 2018

Expected volatility 41.0% 39.7% 36.7% 36.6% 34.8%

Expected term (in years) 2.9 2.6 2.9 3.0 3.0

Risk-free interest rate 1.41% 1.78% 2.43% 2.85% 2.28%

Expected volatility – In determining expected volatility, we have considered a number of factors, including historical volatility.

Expected term – We use the measurement period of the award to determine the expected term assumption for the Monte Carlo simulation valuation model.

Risk-free interest rate – We use an implied “spot rate” yield on U.S.

Treasury Constant Maturity rates as of the grant date for our assumption of the risk-free interest rate.

Expected dividend yield – We do not currently pay dividends on our capital stock;

therefore, a dividend yield of 0% was used in the Monte Carlo simulation valuation model.

Business Combination Purchase Price Allocation

The application of the acquisition method requires the allocation of the purchase price amongst the acquisition date fair values of identifiable assets acquired and liabilities assumed in a business combination.

Fair values are determined using the income approach, market approach and/or cost approach depending on the nature of the asset or liability being valued and the reliability of available information.

The income approach estimates fair value by discounting associated lifetime expected future cash flows to their present value and relies on significant assumptions regarding future revenues, expenses, working capital levels and discount rates.

The market approach estimates fair value by analyzing recent actual market transactions for similar assets or liabilities.

The cost approach estimates fair value based on the expected cost to replace or reproduce the asset or liability and relies on assumptions regarding the occurrence and extent of any physical, functional and/or economic obsolescence.

Customer relationships were valued using the multi-period excess earnings method (MPEEM) of the income approach.

Significant assumptions used in the valuation include projected revenues and gross margins, customer attrition rate and an appropriate discount rate.

No residual value was assigned to the acquired customer relationships.

The customer relationships are amortized on an economic useful life basis commensurate with future anticipated cash flows.

The total weighted average amortization period for the Silicone Engineering customer relationship definite-lived intangible asset is 9.5 years.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis