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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-22 · 96 added, 141 removed, 156 unchanged (60% of the section changed)

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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 have a history of innovation and have established Innovation Centers for our research and development (R&D) activities in Chandler, Arizona;

Burlington, Massachusetts;

Eschenbach, Germany;

and Suzhou, China.

We are headquartered in Chandler, Arizona.

Our growth strategy is based upon the following principles:

Our growth and profitability strategy is based upon the following principles:

(1) market-driven organization, (2) innovation leadership, (3) synergistic mergers and acquisitions, and (4) operational excellence.

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

More specifically, in addition to the impact of COVID-19 discussed below, the key medium- to long-term trends currently affecting our business include the increasing 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.

In addition to our focus on advanced mobility and advanced connectivity in the automotive, portable electronics and telecommunications industries, we sell into a variety of other markets including general industrial, aerospace and defense, mass transit, clean energy and connected devices.

Our priorities in executing this strategy are focused on driving near-term improvements to profitability and improving the growth outlook for the Company over the next several years by further strengthening our focus on commercial activities, expanding capacity to meet customer demand and driving innovation.

As a market-driven organization, we are focused on capitalizing on growth opportunities in 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, the advancement of communication systems in aerospace and defense and the growth of 5G smartphones in the portable electronics industry.

In addition to our focus on these markets, we sell into a variety of other markets including general industrial, clean energy, wireless infrastructure and mass transit.

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, 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.

performance, reliability, technical service capabilities, cost, efficiency, innovation and technology.

Through this strategy we expect to be able to drive further commercial wins, which provide the potential for higher growth in the future.

We have also expanded our capabilities through organic investment and acquisitions and strive to ensure high quality solutions for our customers.

Our operational excellence efforts are focused on driving significant near-term improvement in our profitability.

These efforts include focusing on adding strategic new hires and improving processes and tools to achieve better performance.

We have also taken specific cost improvement actions in the fourth quarter of 2022 and first quarter of 2023 that will benefit subsequent quarters.

These actions include optimizing our manufacturing footprint, divesting non-core product lines and reduction to manufacturing and corporate employees.

We continue to review and re-align our manufacturing and engineering footprint in an effort to maintain a leading competitive position globally and to support our customers’ growth initiatives.

We seek to enhance our operational and financial performance by investing in research and development, manufacturing and materials efficiencies, and new product initiatives that respond to the needs of our customers.

We strive to evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.

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.

If we are able to successfully execute on our strategy, we see an opportunity to return to historical levels of profitability and accelerate revenue growth, relative to 2022, over the next several years, led by organic growth and complemented by targeted acquisitions.

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

The fastest growing market opportunity is expected to be EV/HEV where third-party analysis projects that the market will grow at compound annual growth rate of more than 25% over the next several years.

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

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

Each of these markets is expected to contribute to our growth strategy.

Terminated 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.

The merger agreement provided 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.

The merger agreement provided both Rogers Corporation and DuPont with a right to terminate the merger agreement if the merger had not closed on or before November 1, 2022.

Consummation of the merger was subject to various customary closing conditions, including regulatory approval by the State Administration for Market Regulation of China (SAMR).

As of November 1, 2022, the parties had not received regulatory approval from SAMR.

On November 1, 2022, the Company received from DuPont a notice of termination for the merger agreement.

Pursuant to the terms of the merger agreement, the Company received a regulatory termination fee from DuPont in the amount of $162.5 million, before taxes, and incurred a transaction-related fee of $20.4 million.

Executive Summary

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

• 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.

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.

• In 2022 as compared to 2021, our net sales increased by 4.1% to $971.2 million, our gross margin decreased 430 basis points to 33.1% from 37.4%, and operating income as a percentage of net sales increased 230 basis points to 14.9% from 12.6%.

• With respect to other operating (income) expense, net, we recognized income of $144.0 million and expense of $5.3 million in 2022 and 2021, respectively, primarily related to the financial impacts from the regulatory termination fee net of a transaction-related fee, as well as the impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea.

• We recognized $1.5 million and $3.1 million of restructuring charges in 2022 and 2021, 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.

• We recognized $65.1 million of impairment charges in 2022, primarily related to certain AES operating segment equipment-in-process and certain EMS operating segment intangibles and fixed assets in the U.S.

• We incurred $21.7 million of expenses related to the terminated merger with DuPont, mainly associated with retention awards, a discretionary RESIP contribution and professional services expenses in 2022.

• We borrowed $100.0 million on the revolver to fund our operations, and made a $75.0 million repayment at the end of 2022.

• On February 16, 2023, we announced a reduction in force plan of our global workforce that is expected to be completed in the first half of 2023.

The plan is expected to significantly reduce our manufacturing costs and operating expenses, and are being done in conjunction with other previously announced cost reduction initiatives.

We estimate that we will incur approximately $10 million to $13 million in pre-tax restructuring charges related to this plan, all of which are expected to be in the form of cash-based expenditures and substantially all of which are expected to be related to employee severance and other termination benefits.

• On February 17, 2023 we entered into an asset purchase agreement to sell our high-performance engineered cellular elastomer business for a net purchase price of $1.8 million.

The business disposition is scheduled to be completed in early March.

Results of Operations

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Net sales increased by 4.1% in 2022 compared to 2021.

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 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 $1.7 million and $4.5 million in 2021 and 2020, respectively.

Our AES and EMS operating segments had a net sales decrease of 0.8% and and a net sales increase of 11.1%, respectively.

$32.0 million of the increase in net sales, or 3.4%, primarily reflects the impact of increased net sales from our Silicone Engineering subsidiary.

The increase was further due to higher net sales in the EV/HEV and mass transit markets in our AES operating segment and higher net sales in the general industrial, mass transit and EV/HEV markets in our EMS operating segment, partially offset by lower net sales in the wireless infrastructure, aerospace and defense, ADAS and clean energy markets in our AES operating segment and lower net sales in portable electronics market in our EMS operating segment.

Net sales was unfavorably impacted from foreign currency impacts of $36.9 million, or 4.0%, due to the depreciation in value of the euro, Chinese renminbi and British pound relative to the U.S.

Gross margin as a percentage of net sales decreased 430 basis points to 33.1% in 2022 compared to 37.4% in 2021.

Gross margin in 2022 was impacted by unfavorable factory utilization, unfavorable yield performance, higher freight, duties and tariffs expenses and a higher inventory reserves provision in our AES and EMS operating segments, as well as lower volume in our AES operating segment and unfavorable changes in raw material costs 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 favorable changes in raw material costs in our AES operating segment and higher volume in our EMS operating segment.

Supply constraints on raw material and labor availability moderated production levels, creating operational headwinds, 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 2022.

Selling, General and Administrative Expenses

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Percentage of net sales 22.5 % 20.6 %

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 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.

Selling, general and administrative (SG&A) expenses increased 13.3% in 2022 from 2021, primarily due to an $11.2 million increase in professional services expenses, a $5.0 million increase in total compensation and benefits, a $2.5 million increase in software expenses, a $2.4 million increase in travel expenses and a $2.1 million increase in other intangible asset amortization expense.

The increase in total compensation and benefits was primarily due to an $8.6 million impact for retention awards issued in connection with the terminated DuPont merger, and a $6.5 million discretionary RESIP contribution, partially offset by lower incentive compensation expense.

The increase in professional services expense is primarily due to $6.4 million of expenses incurred related to the terminated merger with DuPont and $0.8 million of expense incurred related to our acquisition of Silicone Engineering.

Research and Development Expenses

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Percentage of net sales 3.6 % 3.2 %

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.

R&D expenses increased 17.7% in 2022 from 2021, primarily due to a $2.3 million increase in total compensation and benefits, a $2.0 million increase in laboratory expenses and a $0.4 million increase in travel expenses.

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

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Other operating (income) expense, net $ (144,014) $ 5,330

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.

We recognized $1.5 million and $3.1 million of restructuring charges 2022 and 2021, respectively, primarily related to the manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations.

We recognized $65.1 million and $0.5 million of impairment charges in 2022 and 2021, respectively.

The impairment charges in 2022 were primarily related to certain AES operating segment equipment-in-process in the U.S.

as well as certain EMS operating segment intangibles and fixed assets related to our high-performance engineered cellular elastomer business in the U.S.

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

Financial Statements and Supplementary Data.”

With respect to other operating (income) expense, net, we recognized income of $144.0 million and expense of $5.3 million in 2022 and 2021, respectively, primarily related to the financial impacts from the regulatory termination fee net of a transaction-related fee, as well as the impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea.

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 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.

Equity income in those unconsolidated joint ventures decreased 36.9% in 2022 from 2021 due to lower net sales for RIC and RIS and unfavorable productivity performance for RIC.

Pension Settlement Charges and Other Income (Expense), Net

2 unchanged sentences

Other income (expense), net $ 1,058 $ 5,136

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 $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.

In 2021, we recorded $0.5 million of pre-tax settlement charges 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)).

Other income (expense), net decreased to $1.1 million of income in 2022 compared to $5.1 million of income in 2021.

The decrease was due to unfavorable impacts from our copper derivative contracts and unfavorable impacts from our foreign currency transactions, partially offset by favorable impacts from our foreign currency derivatives.

Interest Expense, Net

1 unchanged sentence

Interest expense, net $ (9,547) $ (2,536)

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.

Interest expense, net, increased by $7.0 million in 2022 from 2021, primarily due to a higher weighted-average outstanding balance for our borrowings under our revolving credit facility.

Income Tax Expense

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Our effective income tax rate for 2022 was 16.9% compared to 14.4% for 2021.

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

The increase from 2021 was primarily due to the decrease in the current year benefit from the reversal of unrecognized tax benefits.

Operating Segment Net Sales and Operating Income

3 unchanged sentences

Operating income $ 77,163 $ 50,198

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.

Our AES operating segment net sales decreased by 0.8% in 2022 compared to 2021.

The decrease in net sales was primarily driven by lower net sales in the wireless infrastructure, aerospace and defense, ADAS, and clean energy markets, partially offset by higher net sales in the EV/HEV and mass transit markets.

Net sales were unfavorably impacted from foreign currency fluctuations of $25.3 million, or 4.7%, due to the depreciation in value of the euro and Chinese renminbi relative to the U.S.

Operating income increased by 53.7% in 2022 from 2021.

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.

The increase in operating income was primarily due to favorable year-over-year changes in shared service operating expense allocations driven by the merger termination fee less costs incurred related to the terminated DuPont merger, partially offset by $41.5 million in restructuring and impairment charges.

Additionally, operating income also increased due to commercial actions taken and favorable changes in raw material costs, partially offset by unfavorable factory utilization, lower volume, unfavorable yield performance, higher freight, duties and tariffs expenses and a higher inventory reserves provision.

As a percentage of net sales, operating income in 2022 was 14.6%, an approximately 520 basis point increase as compared to 9.4% in 2021.

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.

In 2022 and 2021, our AES operating segment recognized impairment charges of $40.5 million and $0.5 million, respectively, and recognized restructuring charges and related expenses of $1.1 million and $3.0 million, respectively.

For additional information related to restructuring and impairment charges, 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.

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

Elastomeric Material Solutions

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Our EMS operating segment net sales increased by 11.1% in 2022 compared to 2021.

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.

The increase in net sales was primarily driven by $32.0 million in net sales, or 8.5%, reflecting the impact of increased net sales from our Silicone Engineering subsidiary, as well as higher net sales in the general industrial and EV/HEV, partially offset by lower net sales in the portable electronics market.

Net sales were unfavorably impacted by foreign currency fluctuations of $11.2 million, or 3.0%, due to the depreciation in value of the British pound, euro and Chinese renminbi relative to the U.S.

Operating income increased by 0.5% in 2022 from 2021.

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.”

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.

The increase in operating income was primarily due to favorable year-over-year changes in shared service operating expense allocations driven by the merger termination fee less costs incurred related to the terminated DuPont merger, and an $8.6 million favorable change in charges/benefits related to the UTIS fire, partially offset by $25.0 million in restructuring and impairment charges.

Additionally, operating income also increased due the favorable impacts of commercial actions taken and higher volume, partially offset by unfavorable factory utilization, unfavorable changes in raw material costs, unfavorable yield performance, higher freight, duties and tariffs expenses and a higher inventory reserves provision.

As a percentage of net sales, operating income in 2022 was 14.4%, an approximately 150 basis point decrease as compared to 15.9% in 2021.

In 2022 and 2021, our EMS operating segment recognized impairment charges of $24.6 million and no charges, respectively, and recognized restructuring charges and related expenses of $0.4 million and $0.1 million, respectively.

For additional information related to restructuring and impairment charges, 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.

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

(Dollars in thousands) 2022 2021

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Net sales in our Other operating segment increased by 2.5% in 2022 from 2021.

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.

Our Other operating segment operating income decreased by 0.2% in 2022 from 2021.

Net sales were unfavorably impacted by foreign currency fluctuations of $0.5 million, or 2.5%, due to the depreciation in value of the Chinese renminbi and euro relative to the U.S.

The decrease in operating income was primarily driven by unfavorable product mix and lower volume, partially offset by favorable yield performance.

As a percentage of net sales, operating income in 2022 was 33.0%, an approximately 90 basis point decrease as compared to 33.9% in 2021.

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, 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.

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• Accounts receivable, net increased 8.8% to $177.4 million as of December 31, 2022, from $163.1 million as of December 31, 2021.

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.

The increase was primarily due to a $13.3 million increase in our income taxes receivable, as well as an increase in days sales outstanding, partially offset by the receipt or settlement of $6.3 million in recognized UTIS fire insurance receivables and lower net sales at the end of 2022 compared to the end of 2021.

• Inventories increased 36.7% to $182.4 million as of December 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.

• Borrowings under revolving credit facility increased to $215.0 million as of December 31, 2022, from $190.0 million as of December 31, 2021.

The increase reflects $100.0 million in borrowings under our revolving credit facility throughout 2022.

This was partially offset by a $75.0 million of discretionary principal payment at the end of 2022.

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.”

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Net cash (used in) provided by financing activities (10,104) 159,057

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, cash and cash equivalents increased $3.6 million, primarily due to $100.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $116.8 million in capital expenditures, a $75.0 million of principal payment made on our outstanding borrowings under our revolving credit facility, $25.0 million in share repurchases, as well as $10.8 million in tax payments related to net share settlement of equity awards.

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, a $25.0 million of principal payment made on our outstanding borrowings under our revolving credit facility, as well as $2.9 million in tax payments related to net share settlement of equity awards.

In 2023, we expect capital spending to be in the range of approximately $65.0 million to $75.0 million, of which we are contractually committed to $16.7 million as of December 31, 2022.

We plan to fund our capital spending in 2023 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.

Excluding $3.9 million of inventory purchase commitments, there are no contractual obligations requiring material cash requirements in 2022 and beyond, excluding those already noted, including those related to 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.

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Financial Statements and Supplementary Data.”

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

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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.

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.

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As of December 31, 2022, the estimated liabilities and estimated insurance recoveries for all current and future indemnity and defense costs projected through 2064 were $65.0 million and $59.8 million, respectively.

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