What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-04-29 · 141 added, 96 removed, 175 unchanged (58% of the section changed)

71 unchanged sentences

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

transaction is expected to close late in the second quarter or early in the third quarter of 2022, subject to the satisfaction of other customary closing conditions, including receipt of certain regulatory approvals.

transaction is expected to close in the third quarter of 2022, subject to the satisfaction of other customary closing conditions, including receipt of certain regulatory approvals.

COVID-19 Update

3 unchanged sentences

In some cases, based on local conditions, non-manufacturing employees have returned to their worksites.

Recent surges in COVID-19 cases in Shanghai, China have resulted in lockdowns in the city, as well as various restrictions in the nearby city of Suzhou, China.

Surges in COVID-19 cases in Shanghai, China resulted in lockdowns in the city, as well as various restrictions in the nearby city of Suzhou, China.

These measures have not disrupted our manufacturing efforts, however, they are causing logistics challenges.

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 months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year.

Due to the above circumstances and as described generally in this Form 10-Q, our results of operations for the six months ended June 30, 2022 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 first quarter of 2022 as compared to the first quarter of 2021, our net sales increased 8.3% to $248.3 million, our gross margin decreased approximately 460 basis points to 34.4% from 39.0%, and operating income decreased approximately 820 basis points to 8.0% from 16.2%.

• With respect to other operating (income) expense, net, we recognized income of $0.5 million and expense of $1.2 million in the first quarter of 2022 and 2021, respectively, primarily related to the financial impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea.

• Our net sales and gross margin results were tempered in the first quarter of 2022 due to continued supply chain disruptions, which we expect to continue into the second quarter of 2022.

• In the first quarter of 2022, we incurred $11.5 million of expenses related to the merger with DuPont mainly associated with a discretionary RESIP contribution, professional services expenses and retention awards.

• In the second quarter of 2022 as compared to the second quarter of 2021, our net sales increased 7.3% to $252.0 million, our gross margin decreased approximately 390 basis points to 34.3% from 38.2%, and operating income decreased approximately 590 basis points to 9.3% from 15.2%.

In the first half of 2022 as compared to the first half of 2021, our net sales increased approximately 7.8% to $500.2 million, our gross margin decreased approximately 420 basis points to 34.4% from 38.6%, and operating income decreased approximately 700 basis points to 8.7% from 15.7%.

• With respect to other operating (income) expense, net, we recognized income of $1.7 million and expense of $0.9 million in the second quarter of 2022 and 2021, respectively, and income of $2.3 million and expense of $2.1 million in the first half of 2022 and 2021, respectively, primarily related to the financial impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea.

• Our net sales and gross margin results were tempered in the first half of 2022 due to continued raw material shortages and supply chain disruptions, which we expect to continue into the second half of 2022.

• We incurred $3.4 million and $14.9 million of expenses related to the merger with DuPont mainly associated with a discretionary RESIP contribution, professional services expenses and retention awards, in the second quarter of 2022 and first half of 2022, respectively.

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

March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Net Sales and Gross Margin

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Net sales $ 251,970 $ 234,906 $ 500,236 $ 464,171

1 unchanged sentence

Percentage of net sales 34.3 % 38.2 % 34.4 % 38.6 %

Net sales increased by 8.3% in the first quarter of 2022 compared to the first quarter of 2021.

Net sales increased by 7.3% in the second quarter of 2022 compared to the second quarter of 2021.

Our AES and EMS operating segments had net sales increases of 0.5% and 17.6%, respectively.

The increase in net sales was primarily due to higher net sales in the EV/HEV market in our AES operating segment and higher net sales in the general industrial, consumer and EV/HEV markets in our EMS operating segment.

The increase in net sales was primarily due to higher net sales in the EV/HEV market in our AES operating segment and higher net sales in the general industrial and EV/HEV markets in our EMS operating segment.

The increase was partially offset by lower net sales in the wireless infrastructure, ADAS and aerospace and defense markets in our AES operating segment and lower net sales in the portable electronics market in our EMS operating segment.

Additionally, our EMS operating segment net sales increased by $11.1 million, or 4.7%, reflecting the impact from our acquisition of Silicone Engineering.

Net sales were unfavorably impacted by foreign currency impacts of $4.1 million, or 1.8%, due to the depreciation in value of the euro relative to the U.S.

Gross margin as a percentage of net sales decreased approximately 460 basis points to 34.4% in the first quarter of 2022 compared to 39.0% in the first quarter of 2021.

Gross margin in the first quarter of 2022 was unfavorably impacted by unfavorable yield performance, higher fixed overhead expenses and higher freight, duties and tariffs expenses in our AES and EMS operating segments, as well as unfavorable product mix in our AES operating segment and unfavorable productivity performance in our EMS operating segment.

This was partially offset by the favorable impacts of commercial actions taken, higher volume and favorable absorption of fixed overhead costs in our AES and EMS operating segments.

Net sales were unfavorably impacted by foreign currency impacts of $6.9 million, or 2.9%, due to the depreciation in value of the euro and British pound relative to the U.S.

Net sales increased by 7.8% in the first half of 2022 compared to the first half of 2021.

Our AES and EMS operating segments had net sales increases of 0.7% and 18.8%, 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 general industrial, EV/HEV and consumer markets in our EMS operating segment.

Additionally, our EMS operating segment net sales increased by $22.2 million, or 4.8%, reflecting the impact from our acquisition of Silicone Engineering.

Net sales were unfavorably impacted by foreign currency impacts of $10.9 million, or 2.4%, due to the depreciation in value of the euro and British pound relative to the U.S.

Gross margin as a percentage of net sales decreased approximately 390 basis points to 34.3% in the second quarter of 2022 compared to 38.2% in the second quarter of 2021.

Gross margin in the second quarter of 2022 was unfavorably impacted by higher fixed overhead expenses, unfavorable yield performance, higher freight, duties and tariffs expenses and unfavorable product mix in our AES and EMS operating segments, as well as unfavorable productivity performance in our EMS operating segment.

This was partially offset by the favorable impacts of commercial actions taken in our AES and EMS operating

segments, as well as higher volume and favorable absorption of fixed overhead costs in our EMS operating segment and a lower inventory reserves provision in our AES operating segment.

Gross margin as a percentage of net sales decreased approximately 420 basis points to 34.4% in the first half of 2022 compared to 38.6% in the first half of 2021.

Gross margin in the first half of 2022 was unfavorably impacted by higher fixed overhead expenses, unfavorable yield performance and higher freight, duties and tariffs expenses in our AES and EMS operating segments, as well as unfavorable productivity performance in our EMS operating segment and unfavorable product mix in our AES operating segment.

This was partially offset by the favorable impacts of commercial actions taken in our AES and EMS operating segments, as well as higher volume and favorable absorption of fixed overhead costs in our AES and EMS operating segments and a lower inventory reserves provision in our AES operating segment.

Supply constraints on raw material and labor availability moderated production levels for our EMS operating segment, creating operational inefficiencies, which negatively impacted our gross margin.

Further, the continuation of the global semiconductor chip shortage and its impact on our customers’ ability to continue to manufacture has negatively impacted our net sales, particularly in the ADAS market segment, for our AES operating segment.

The recent COVID-19 outbreaks, particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively impacted our net sales for both our AES and EMS operating segments in the first quarter of 2022.

Additionally, the impacts of the war in Ukraine, including sanctions and export controls, has impacted the production efforts of suppliers for certain raw materials, both to us and our customers, which could potentially have an impact on our net sales, as well as our gross margin, in the latter

half of 2022, for our AES and EMS operating segments.

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

Selling, General and Administrative Expenses

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Selling, general and administrative expenses $ 56,138 $ 44,959 $ 113,843 $ 87,372

Percentage of net sales 22.3 % 19.1 % 22.8 % 18.7 %

Selling, general and administrative (SG&A) expenses increased 36.1% in the first quarter of 2022 from the first quarter of 2021, primarily due a $9.1 million increase in total compensation and benefits, a $4.4 million increase in professional services, a $1.6 million increase in software expenses and a $1.2 million increase in other intangible asset amortization expense, partially offset by a $0.9 million decrease in depreciation expense.

The increase in total compensation and benefits was primarily due to a $6.5 discretionary RESIP contribution and a $2.2 million impact for retention awards issued in connection with the DuPont merger.

The increase in professional services expense is primarily due to $2.8 million of expenses incurred related to the merger with DuPont and $0.5 million of expenses incurred related to our acquisition of Silicone Engineering.

Selling, general and administrative (SG&A) expenses increased 24.9% in the second quarter of 2022 from the second quarter of 2021, primarily due to a $6.0 million increase in professional services, a $1.2 million increase in software expenses, $1.1 million increase in other intangible asset amortization expense, a $0.7 million increase in total compensation and benefits, a $0.8 million increase in travel and entertainment expenses, a $0.6 million increase in depreciation expense and a $0.4 million increase in advertising expense.

SG&A expenses increased 30.3% in the first half of 2022 from the first half of 2021, primarily due to a $10.4 million increase in professional services, a $9.8 million increase in total compensation and benefits, a $2.8 million increase in software expenses, $2.3 million increase in other intangible asset amortization expense, a $1.3 million increase in travel and entertainment expenses and a $0.5 million increase in advertising expense, partially offset by a $0.2 million decrease in depreciation expense.

The increase in total compensation and benefits was primarily due to a $2.2 million impact for retention awards issued in connection with the DuPont merger, on a quarter-to-date basis, and a $6.5 million discretionary RESIP contribution and a $4.4 million impact for retention awards issued in connection with the DuPont merger, on a year-to-date basis.

The increase in professional services expense is primarily due to $1.2 million of expenses incurred related to the merger with DuPont and $0.1 million of expenses incurred related to our acquisition of Silicone Engineering, on a quarter-to-date basis, and $4.0 million of expenses incurred related to the merger with DuPont and $0.6 million of expenses incurred related to our acquisition of Silicone Engineering, on a year-to-date basis.

Research and Development Expenses

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Research and development expenses $ 8,050 $ 7,492 $ 16,310 $ 14,664

Percentage of net sales 3.2 % 3.2 % 3.3 % 3.2 %

R&D expenses increased 15.2% in the first quarter of 2022 from the first quarter of 2021 due to increases in total compensation and benefits, professional services expenses and depreciation expense, partially offset by a decrease in laboratory expenses.

R&D expenses increased 7.4% in the second quarter of 2022 from the second quarter of 2021 due to increases in total compensation and benefits and travel and entertainment expenses, partially offset by decreases in professional services expense and laboratory expenses.

R&D expenses increased 11.2% in the first half of 2022 from the first half of 2021 due to increases in total compensation and benefits, travel and entertainment expenses and depreciation expense, partially offset by decreases in laboratory expenses and professional services expense.

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

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Restructuring and impairment charges $ 677 $ 747 $ 746 $ 2,253

1 unchanged sentence

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

We recognized an immaterial amount of restructuring charges and related expenses pertaining to these restructuring projects in the first quarter of 2022.

We recognized restructuring charges and related expenses pertaining to these restructuring projects of $0.5 million in both the second quarter of 2022 and the first half of 2022.

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 income of $0.5 million and expense of $1.2 million in the first quarter of 2022 and 2021, respectively, primarily related to the financial impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea.

The impact in the first quarter of 2022 primarily consisted of certain insurance recoveries, partially offset professional service costs, compensation and benefits for certain of our UTIS employees, costs incurred due to obligations under our manufacturing facility lease agreement and inventory charges.

The impact in the first quarter of 2021 primarily 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 recognized additional insurance recoveries of $2.9 million and $5.0 million for the three and six months ended June 30, 2022, respectively, as a result of an initial $2.5 million insurance payout related to our property damage claims and $2.5 million of additional in-process payouts communicated by the insurer.

This was partially offset by incurred expenses of $0.5 million and $0.9 million for various professional services, $0.6 million and $1.4 million for compensation and benefits for UTIS manufacturing employees subsequent to the fire, an immaterial amount and $0.3 million for related to obligations under our manufacturing facility lease agreement and an immaterial amount and $0.2 million of inventory charges for the three and six months ended June 30, 2022.

With respect to other operating (income) expense, net, we recognized income of $1.7 million and expense of $0.9 million in the second quarter of 2022 and 2021, respectively, and income of $2.3 million and expense of $2.1 million in the first half of 2022 and 2021, respectively, primarily related to the financial impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea.

The impact in the second quarter of 2022 and the first half of 2022 was primarily consisted of certain insurance recoveries, partially offset professional service costs, compensation and benefits for certain of our UTIS employees, costs incurred due to obligations under our manufacturing facility lease agreement and inventory charges.

The impact in the second quarter of 2021 and the first half of 2021 was primarily 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, and compensation and benefits for certain of our UTIS employees, partially offset by the recognition of certain anticipated insurance recoveries.

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

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Equity income in unconsolidated joint ventures $ 1,800 $ 1,930 $ 3,075 $ 4,111

As of March 31, 2022, we had two unconsolidated joint ventures, each 50% owned:

As of June 30, 2022, 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 decreased 41.5% in the first quarter of 2022 from the first quarter of 2021.

On a quarter-to-date basis, the decrease was due to lower net sales and unfavorable productivity and operational performance for RIC, as well as unfavorable productivity and operational performance for RIS, partially offset by higher net sales for RIS.

Equity income in those unconsolidated joint ventures decreased 6.7% in the second quarter of 2022 from the second quarter of 2021, and decreased 25.2% in the first half of 2022 from the first half of 2021.

On a quarter-to-date basis, the decrease was due to unfavorable productivity performance for RIC, partially offset by higher net sales for RIC and RIS.

On a year-to-date basis, the decrease was due to lower net sales for RIC and unfavorable productivity performance for RIC and RIS, partially offset by higher net sales for RIS.

Other Income (Expense), Net

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Other income (expense), net $ 319 $ 1,239 $ 586 $ 4,207

Other income (expense), net decreased to expense of $0.3 million in the first quarter of 2022 from income of $3.0 million in the first quarter of 2021.

On a quarter-to-date basis, the decrease was due to unfavorable impacts from our copper derivative contracts and foreign currency transactions.

Other income (expense), net decreased to income of $0.3 million in the second quarter of 2022 from income of $1.2 million in the second quarter of 2021.

On a quarter-to-date basis, the decrease was due to unfavorable impacts from our copper derivative contracts, partially offset by favorable impacts from foreign currency transactions and favorable impacts from our foreign currency derivatives.

Other income (expense), net decreased to income of $0.6 million in the first half of 2022 from income of $4.2 million in the first half of 2021.

On a year-to-date basis, the decrease was due to unfavorable impacts from our copper derivative contracts, partially offset by favorable impacts from foreign currency transactions and favorable impacts from our foreign currency derivatives.

Interest Expense, Net

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Interest expense, net $ (1,548) $ (404) $ (2,617) $ (1,011)

Interest expense, net, increased by 76.1% in the first quarter of 2022 from the first quarter of 2021.

The increase on a quarter-to-date basis was primarily due to a higher weighted-average outstanding balance for our borrowings under our revolving credit facility.

We expect interest expense, net to increase on quarter-to-date and year-to-date bases in the second quarter of 2022 from the second quarter of 2021, primarily due to recent borrowings under our revolving credit facility to complete an acquisition.

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Interest expense, net, increased by 283.2% in the second quarter of 2022 from the second quarter of 2021, and increased by 158.9% in the first half of 2022 from the first half of 2021.

The increase on quarter-to-date and year-to-date bases was primarily due to a higher weighted-average outstanding balance for our borrowings under our revolving credit facility.

We expect interest expense, net to increase on quarter-to-date and year-to-date bases in the third quarter of 2022 from the third quarter of 2021, primarily due to recent borrowings under our revolving credit facility to complete an acquisition.

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Income tax expense $ 6,084 $ 9,855 $ 9,848 $ 20,372

Effective tax rate 25.4 % 25.6 % 22.2 % 25.4 %

Our effective income tax rate was 18.5% and 25.2% for the three months ended March 31, 2022 and 2021, respectively.

The decrease from the first quarter of 2021 was primarily due to the beneficial impact of a decrease in current quarter accruals for uncertain tax positions, as well as an increase in the windfall tax benefits associated with stock compensation.

Our effective income tax rate was 25.4% and 25.6% for the three months ended June 30, 2022 and 2021, respectively.

The decrease from the second quarter of 2021 was primarily due to the beneficial impact of a decrease in current quarter accruals of reserves for uncertain tax positions.

Our effective income tax rate was 22.2% and 25.4% for the six months ended June 30, 2022 and 2021, respectively.

The decrease from the first half of 2021 was primarily due to the decrease in the current quarter accruals of reserves of unrecognized tax benefits, as well as the increase in the excess tax benefits associated with stock compensation windfalls.

Operating Segment Net Sales and Operating Income

Advanced Electronics Solutions

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Net sales $ 141,165 $ 140,426 $ 274,318 $ 272,318

Operating income $ 8,775 $ 18,288 $ 10,079 $ 33,137

AES net sales increased by 1.0% in the first quarter of 2022 compared to the first quarter of 2021.

The increase in net sales over the first quarter of 2021 was primarily driven by higher net sales in the EV/HEV market, partially offset by lower net sales in the wireless infrastructure, ADAS and aerospace and defense markets.

AES net sales increased by 0.5% in the second quarter of 2022 compared to the second quarter of 2021.

The increase in net sales over the second quarter of 2021 was primarily driven by higher net sales in the EV/HEV market, partially offset by lower net sales in the wireless infrastructure, ADAS and aerospace and defense markets.

Net sales were unfavorably impacted by foreign currency fluctuations of $4.8 million, or 3.4%, due to the depreciation in value of the euro relative to the U.S.

Operating income decreased by 91.2% in the first quarter of 2022 from the first quarter of 2021.

The decrease in operating income was primarily due to unfavorable year-over-year changes in shared service operating expense allocations driven to costs incurred related to the DuPont merger.

The decrease in operating income was also due to unfavorable yield performance, higher fixed overhead expenses, higher freight, duties and tariffs expenses and unfavorable product mix, partially offset by the favorable impacts of commercial actions taken, higher volume and favorable absorption of fixed overhead costs.

As a percentage of net sales, operating income in the first quarter of 2022 was 1.0%, an approximately 1,030 basis point decrease as compared to the 11.3% reported in the first quarter of 2021.

AES net sales increased by 0.7% in the first half of 2022 compared to the first half of 2021.

The increase in net sales over the first half of 2020 was primarily driven by higher net sales in the EV/HEV market, partially offset by lower net sales in the wireless infrastructure, ADAS and aerospace and defense markets.

Net sales were unfavorably impacted by foreign currency fluctuations of $8.3 million, or 3.1%, due to the depreciation in value of the euro relative to the U.S.

Operating income decreased by 52.0% in the second quarter of 2022 from the second quarter of 2021.

The decrease in operating income was primarily due to unfavorable year-over-year changes in shared service operating expense allocations driven by costs incurred related to the DuPont merger.

The decrease in operating income was also due to higher fixed overhead expenses, unfavorable yield performance, higher freight, duties and tariffs expenses and unfavorable product mix.

This was partially offset by the favorable impacts of commercial actions taken, favorable product mix and a lower inventory reserves provision.

As a percentage of net sales, operating income in the second quarter of 2022 was 6.2%, an approximately 680 basis point decrease as compared to the 13.0% reported in the second quarter of 2021.

Operating income decreased by 69.6% in the first half of 2022 from the first half of 2021.

The decrease in operating income was primarily due to unfavorable year-over-year changes in shared service operating expense allocations driven by costs incurred related to the DuPont merger.

The decrease in operating income was also due to higher fixed overhead expenses, unfavorable yield performance, higher freight, duties and tariffs expenses and unfavorable product mix.

This was partially offset by the favorable impacts of commercial actions taken, higher volume, favorable absorption of fixed overhead costs and a lower inventory reserves provision.

As a percentage of net sales, operating income in the first half of 2022 was 3.7%, an approximately 850 basis point decrease as compared to the 12.2% reported in the first half of 2021.

The continuation of the global semiconductor chip shortage and its impact on our customers’ ability to continue to manufacture has negatively impacted our net sales, particularly in the ADAS market segment.

Further, the recent COVID-19 outbreaks, particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively

impacted our net sales in the first quarter of 2022.

Further, the recent COVID-19 outbreaks,

particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively impacted our net sales in the first half of 2022.

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Elastomeric Material Solutions

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Net sales $ 105,090 $ 89,331 $ 215,330 $ 181,180

Operating income $ 12,601 $ 15,637 $ 29,598 $ 35,714

EMS net sales increased by 20.0% in the first quarter of 2022 compared to the first quarter of 2021.

The increase in net sales over the first quarter of 2021 was primarily driven by $11.1 million in net sales, or 12.1%, reflecting the impact from our acquisition of Silicone Engineering, as well as higher net sales in the general industrial, EV/HEV and consumer markets, partially offset by lower net sales in the portable electronics market.

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

Operating income decreased by 15.3% in the first quarter of 2022 from the first quarter of 2021.

The decrease in operating income was primarily due to unfavorable year-over-year changes in shared service operating expense allocations due to costs incurred related to the DuPont merger.

The decrease in operating income was also due to unfavorable yield performance, higher fixed overhead expenses, higher freight, duties and tariffs expenses and unfavorable productivity performance, partially offset by the favorable impacts of commercial actions taken, higher volume and favorable absorption of fixed overhead costs.

As a percentage of net sales, operating income in the first quarter of 2022 was 15.4%, an approximately 650 basis point decrease as compared to the 21.9% reported in the first quarter of 2021.

EMS net sales increased by 17.6% in the second quarter of 2022 compared to the second quarter of 2021.

The increase in net sales over the second quarter of 2021 was primarily driven by $11.1 million in net sales, or 12.4%, reflecting the impact from our acquisition of Silicone Engineering, as well as higher net sales in the general industrial, EV/HEV and consumer markets, partially offset by lower net sales in the portable electronics market.

Net sales were unfavorably impacted by foreign currency fluctuations of $2.0 million, or 2.2%, due to the depreciation in value of the euro and British pound relative to the U.S.

EMS net sales increased by 18.8% in the first half of 2022 compared to the first half of 2021.

The increase in net sales over the first half of 2020 was primarily driven by $22.2 million in net sales, or 12.3%, reflecting the impact from our acquisition of Silicone Engineering, as well as 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 unfavorably impacted by foreign currency fluctuations of $2.5 million, or 1.4%, due to the depreciation in value of the euro and British pound relative to the U.S.

Operating income decreased by 19.4% in the second quarter of 2022 from the second quarter of 2021.

The decrease in operating income was primarily due to unfavorable year-over-year changes in shared service operating expense allocations due by costs incurred related to the DuPont merger.

The decrease in operating income was also due to higher fixed overhead expenses, unfavorable yield performance, higher freight, duties and tariffs expenses, unfavorable productivity performance and unfavorable product mix.

This was partially offset by the favorable impacts of commercial actions taken, higher volume and favorable absorption of fixed overhead costs, in addition to a $3.2 million favorable change in charges/benefits related to the UTIS fire.

As a percentage of net sales, operating income in the second quarter of 2022 was 12.0%, an approximately 550 basis point decrease as compared to the 17.5% reported in the second quarter of 2021.

Operating income decreased by 17.1% in the first half of 2022 from the first half of 2021.

The decrease in operating income was primarily due to unfavorable year-over-year changes in shared service operating expense allocations due by costs incurred related to the DuPont merger.

The decrease in operating income was also due to higher fixed overhead expenses, unfavorable yield performance, higher freight, duties and tariffs expenses and unfavorable productivity performance.

This was partially offset by the favorable impacts of commercial actions taken, higher volume and favorable absorption of fixed overhead costs, in addition to a $5.0 million favorable change in charges/benefits related to the UTIS fire.

As a percentage of net sales, operating income in the first half of 2022 was 13.7%, an approximately 600 basis point decrease as compared to the 19.7% reported in the first half of 2021.

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

Further, the recent COVID-19 outbreaks, particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively impacted our net sales in the first quarter of 2022.

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

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Three Months Ended Six Months Ended

(Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Net sales $ 5,715 $ 5,149 $ 10,588 $ 10,673

Operating income $ 2,020 $ 1,820 $ 3,610 $ 4,087

Net sales in this segment decreased by 11.8% in the first quarter of 2022 from the first quarter of 2021.

The decrease in net sales over the first quarter of 2021 was primarily driven by lower net sales in the automotive market.

Operating income decreased 29.9% in the first quarter of 2022 compared to the first quarter of 2021.

The decrease in operating income was primarily driven by unfavorable product mix and lower volume.

As a percentage of net sales, operating income in the first quarter of 2022 was 32.6%, a 840 basis point decrease as compared to the 41.0% reported in the first quarter of 2021.

Net sales in this segment increased by 11.0% in the second quarter of 2022 from the second quarter of 2021.

The increase in net sales over the second quarter of 2021 was primarily driven by higher net sales in the automotive market.

Net sales in this segment decreased by 0.8% in the first half of 2022 from the first half of 2021.

The decrease in net sales over the first half of 2021 was primarily driven by lower net sales in the automotive market.

Operating income increased 11.0% in the second quarter of 2022 compared to the second quarter of 2021.

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

Operating income decreased 11.7% in the first half of 2022 compared to the first half of 2021.

The decrease in operating income was primarily driven by unfavorable product mix.

As a percentage of net sales, operating income was 35.3% in the second quarter of 2022 and the second quarter of 2021.

As a percentage of net sales, operating income in the first half of 2022 was 34.1%, a 420 basis point decrease as compared to the 38.3% reported in the first half of 2021.

Liquidity, Capital Resources and Financial Position

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The following table illustrates the location of our cash and cash equivalents by our three major geographic areas:

(Dollars in thousands) March 31, 2022 December 31, 2021

(Dollars in thousands) June 30, 2022 December 31, 2021

United States $ 97,268 $ 76,621

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Approximately $128.1 million of our cash and cash equivalents were held by non-U.S.

subsidiaries as of March 31, 2022.

We did not make any changes in the three months ended March 31, 2022 to our position on the permanent reinvestment of our earnings from foreign operations.

subsidiaries as of June 30, 2022.

We did not make any changes in the six months ended June 30, 2022 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 )

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Key Financial Position Accounts:

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Borrowings under revolving credit facility $ 260,000 $ 190,000

Changes in key financial position accounts and other significant changes in our statements of financial position from December 31, 2021 to March 31, 2022 were as follows:

• Accounts receivable, net increased 6.3% to $173.4 million as of March 31, 2022 from $163.1 million as of December 31, 2021.

The increase from year-end was primarily due to higher net sales at the end of the first quarter of 2022 compared to at the end of 2021, partially offset by the receipt of $0.8 million in previously recognized UTIS fire insurance receivables for property damage claims.

• Inventories increased 14.1% to $152.2 million as of March 31, 2022, from $133.4 million as of December 31, 2021, primarily driven by raw material cost increases as well as the ramp up of raw material purchases and production efforts to meet anticipated demand.

Three Months Ended

(Dollars in thousands) March 31, 2022 March 31, 2021

Changes in key financial position accounts and other significant changes in our statements of financial position from December 31, 2021 to June 30, 2022 were as follows:

• Accounts receivable, net increased 8.3% to $176.6 million as of June 30, 2022 from $163.1 million as of December 31, 2021.

The increase from year-end was primarily due to an increase in days sales outstanding, higher net sales at the end of the second quarter of 2022 compared to at the end of 2021, the recognition of $5.0 million in UTIS fire insurance receivables for property damage claims, partially offset by the receipt or settlement of $7.2 million in recognized UTIS fire insurance receivables for property damage claims and a $3.4 million decrease in our income taxes receivable.

• Inventories increased 28.3% to $171.1 million as of June 30, 2022, from $133.4 million as of December 31, 2021, 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 $260.0 million as of June 30, 2022 from $190.0 million as of December 31, 2021.

This was as a result of $70.0 million of borrowings under our revolving credit facility during the first half of 2022.

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, 2022 June 30, 2021

Key Cash Flow Measures:

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Net cash used in investing activities $ (52,243) $ (20,701)

Net cash used in financing activities $ (9,694) $ (23,181)

As of March 31, 2022, cash and cash equivalents were $182.1 million as compared to $232.3 million as of December 31, 2021, a decrease of $50.2 million, or 21.6%.

This decrease was primarily due to cash flows generated by operations, partially offset by $28.2 million in capital expenditures and $10.5 million in tax payments related to net share settlement of equity awards.

Net cash provided by (used in) financing activities $ 60,184 $ (31,632)

As of June 30, 2022, cash and cash equivalents were $225.3 million as compared to $232.3 million as of December 31, 2021, a decrease of $7.0 million, or 3.0%.

This decrease was primarily due to $53.2 million in capital expenditures and $10.6 million in tax payments related to net share settlement of equity awards as well as cash flows used in operations, partially offset by $70.0 million in borrowings under our revolving credit facility.

In 2022, we expect capital spending to be in the range of approximately $155.0 million to $165.0 million.

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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 the 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 March 31, 2022.

Our total net leverage ratio did not exceed 2.75 to 1.00 as of June 30, 2022.

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.

Contingencies

During the first quarter of 2022, 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.

During the second quarter of 2022, 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.

Critical Accounting Policies

There were no material changes in our critical accounting policies during the first quarter of 2022.

There were no material changes in our critical accounting policies during the second quarter of 2022.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our exposure to market risk during the first quarter of 2022.

There have been no material changes in our exposure to market risk during the second quarter of 2022.

For discussion of our exposure to market risk, refer to “Item 7A.

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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-Q

Item 2. Management’s Discussion and Analysis