UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20202021
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
Commission file number 1-4347
ROGERS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Massachusetts | 06-0513860 |
(State or Other Jurisdiction of | (I. R. S. Employer Identification No.) |
Incorporation or Organization) | |
2225 W. Chandler Blvd., Chandler, Arizona 85224-6155
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (480) 917-6000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, | par value $1.00 per share | ROG | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s capital stock as of OctoberJuly 26, 20202021 was 18,675,798.18,729,142.
ROGERS CORPORATION
FORM 10-Q
SeptemberJune 30, 20202021
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TABLE OF CONTENTS |
Part I – Financial Information |
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Part II – Other Information |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Refer to “Forward-Looking Statements” in Item 2, Management’s Discussion and Analysis of Results of Operations and Financial Position for additional information.
Part I – Financial Information
Item 1. Financial Statements
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net sales | Net sales | $ | 201,944 | | | $ | 221,842 | | | $ | 591,911 | | | $ | 704,492 | | Net sales | $ | 234,906 | | | $ | 191,157 | | | $ | 464,171 | | | $ | 389,967 | |
Cost of sales | Cost of sales | 126,426 | | | 142,975 | | | 380,794 | | | 454,403 | | Cost of sales | 145,073 | | | 121,188 | | | 284,839 | | | 254,368 | |
Gross margin | Gross margin | 75,518 | | | 78,867 | | | 211,117 | | | 250,089 | | Gross margin | 89,833 | | | 69,969 | | | 179,332 | | | 135,599 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 50,230 | | | 40,448 | | | 132,254 | | | 127,349 | | Selling, general and administrative expenses | 44,959 | | | 41,694 | | | 87,372 | | | 82,024 | |
Research and development expenses | Research and development expenses | 7,085 | | | 7,830 | | | 22,185 | | | 23,282 | | Research and development expenses | 7,492 | | | 7,295 | | | 14,664 | | | 15,100 | |
Restructuring and impairment charges | Restructuring and impairment charges | 9,413 | | | 580 | | | 9,413 | | | 2,485 | | Restructuring and impairment charges | 747 | | | 0 | | | 2,253 | | | 0 | |
Other operating (income) expense, net | Other operating (income) expense, net | (4) | | | 124 | | | (96) | | | 1,075 | | Other operating (income) expense, net | 890 | | | (112) | | | 2,105 | | | (92) | |
Operating income | Operating income | 8,794 | | | 29,885 | | | 47,361 | | | 95,898 | | Operating income | 35,745 | | | 21,092 | | | 72,938 | | | 38,567 | |
| Equity income in unconsolidated joint ventures | Equity income in unconsolidated joint ventures | 937 | | | 1,498 | | | 3,177 | | | 4,077 | | Equity income in unconsolidated joint ventures | 1,930 | | | 1,022 | | | 4,111 | | | 2,240 | |
Pension settlement charges | Pension settlement charges | 0 | | | 0 | | | (55) | | | 0 | | Pension settlement charges | 0 | | | (55) | | | 0 | | | (55) | |
Other income (expense), net | Other income (expense), net | 1,446 | | | (918) | | | 1,294 | | | (915) | | Other income (expense), net | 1,239 | | | 634 | | | 4,207 | | | (152) | |
Interest expense, net | Interest expense, net | (3,553) | | | (1,747) | | | (6,539) | | | (5,723) | | Interest expense, net | (404) | | | (1,779) | | | (1,011) | | | (2,986) | |
Income before income tax expense | Income before income tax expense | 7,624 | | | 28,718 | | | 45,238 | | | 93,337 | | Income before income tax expense | 38,510 | | | 20,914 | | | 80,245 | | | 37,614 | |
Income tax expense | Income tax expense | 618 | | | 5,331 | | | 10,453 | | | 17,258 | | Income tax expense | 9,855 | | | 6,394 | | | 20,372 | | | 9,835 | |
Net income | Net income | $ | 7,006 | | | $ | 23,387 | | | $ | 34,785 | | | $ | 76,079 | | Net income | $ | 28,655 | | | $ | 14,520 | | | $ | 59,873 | | | $ | 27,779 | |
| Basic earnings per share | Basic earnings per share | $ | 0.37 | | | $ | 1.26 | | | $ | 1.86 | | | $ | 4.10 | | Basic earnings per share | $ | 1.53 | | | $ | 0.78 | | | $ | 3.20 | | | $ | 1.49 | |
Diluted earnings per share | Diluted earnings per share | $ | 0.37 | | | $ | 1.25 | | | $ | 1.86 | | | $ | 4.07 | | Diluted earnings per share | $ | 1.52 | | | $ | 0.78 | | | $ | 3.18 | | | $ | 1.49 | |
| Shares used in computing: | Shares used in computing: | | | | | Shares used in computing: | | | | |
Basic earnings per share | Basic earnings per share | 18,688 | | | 18,581 | | | 18,678 | | | 18,569 | | Basic earnings per share | 18,729 | | | 18,676 | | | 18,721 | | | 18,673 | |
Diluted earnings per share | Diluted earnings per share | 18,713 | | | 18,724 | | | 18,695 | | | 18,715 | | Diluted earnings per share | 18,846 | | | 18,681 | | | 18,810 | | | 18,686 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net income | Net income | $ | 7,006 | | | $ | 23,387 | | | $ | 34,785 | | | $ | 76,079 | | Net income | $ | 28,655 | | | $ | 14,520 | | | $ | 59,873 | | | $ | 27,779 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | 11,269 | | | (10,187) | | | 10,004 | | | (12,262) | | Foreign currency translation adjustment | 2,758 | | | 5,629 | | | (10,501) | | | (1,265) | |
Pension and other postretirement benefits: | Pension and other postretirement benefits: | | Pension and other postretirement benefits: | |
Pension settlement benefits, net of tax (Note 4) | Pension settlement benefits, net of tax (Note 4) | 0 | | | 0 | | | (48) | | | 0 | | Pension settlement benefits, net of tax (Note 4) | 0 | | | (48) | | | 0 | | | (48) | |
Actuarial net gain incurred, net of tax (Note 4) | Actuarial net gain incurred, net of tax (Note 4) | 3 | | | 0 | | | 629 | | | 0 | | Actuarial net gain incurred, net of tax (Note 4) | 0 | | | 626 | | | 0 | | | 626 | |
Amortization of loss, net of tax (Note 4) | Amortization of loss, net of tax (Note 4) | 66 | | | 172 | | | 199 | | | 485 | | Amortization of loss, net of tax (Note 4) | 58 | | | 67 | | | 121 | | | 133 | |
Derivative instrument designated as cash flow hedge: | Derivative instrument designated as cash flow hedge: | | Derivative instrument designated as cash flow hedge: | |
Change in unrealized loss before reclassifications, net of tax (Note 4) | (638) | | | (158) | | | (1,504) | | | (1,362) | | |
Unrealized loss (gain) reclassified into earnings, net of tax (Note 4) | 2,810 | | | (32) | | | 2,476 | | | (188) | | |
Change in unrealized gain (loss) before reclassifications, net of tax (Note 4) | | Change in unrealized gain (loss) before reclassifications, net of tax (Note 4) | 0 | | | 383 | | | 0 | | | (866) | |
Unrealized gain reclassified into earnings, net of tax (Note 4) | | Unrealized gain reclassified into earnings, net of tax (Note 4) | 0 | | | (267) | | | 0 | | | (334) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | 13,510 | | | (10,205) | | | 11,756 | | | (13,327) | | Other comprehensive income (loss) | 2,816 | | | 6,390 | | | (10,380) | | | (1,754) | |
Comprehensive income | Comprehensive income | $ | 20,516 | | | $ | 13,182 | | | $ | 46,541 | | | $ | 62,752 | | Comprehensive income | $ | 31,471 | | | $ | 20,910 | | | $ | 49,493 | | | $ | 26,025 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(Dollars and shares in thousands, except par value)
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Assets | Assets | | | | Assets | | | |
Current assets | Current assets | | | | Current assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 186,123 | | | $ | 166,849 | | Cash and cash equivalents | $ | 203,945 | | | $ | 191,785 | |
Accounts receivable, less allowance for doubtful accounts of $1,366 and $1,691 | 138,611 | | | 122,285 | | |
Accounts receivable, less allowance for credit losses of $1,319 and $1,682 | | Accounts receivable, less allowance for credit losses of $1,319 and $1,682 | 157,471 | | | 134,421 | |
Contract assets | Contract assets | 22,061 | | | 22,455 | | Contract assets | 30,285 | | | 26,575 | |
Inventories | Inventories | 109,733 | | | 132,859 | | Inventories | 110,761 | | | 102,360 | |
Prepaid income taxes | Prepaid income taxes | 3,406 | | | 4,524 | | Prepaid income taxes | 2,904 | | | 2,960 | |
Asbestos-related insurance receivables, current portion | Asbestos-related insurance receivables, current portion | 4,292 | | | 4,292 | | Asbestos-related insurance receivables, current portion | 2,986 | | | 2,986 | |
Other current assets | Other current assets | 10,217 | | | 10,838 | | Other current assets | 16,773 | | | 13,088 | |
Total current assets | Total current assets | 474,443 | | | 464,102 | | Total current assets | 525,125 | | | 474,175 | |
Property, plant and equipment, net of accumulated depreciation of $370,164 and $341,119 | 266,104 | | | 260,246 | | |
Property, plant and equipment, net of accumulated depreciation of $363,927 and $365,844 | | Property, plant and equipment, net of accumulated depreciation of $363,927 and $365,844 | 282,543 | | | 272,378 | |
Investments in unconsolidated joint ventures | Investments in unconsolidated joint ventures | 12,755 | | | 16,461 | | Investments in unconsolidated joint ventures | 16,904 | | | 15,248 | |
Deferred income taxes | Deferred income taxes | 26,907 | | | 17,117 | | Deferred income taxes | 25,986 | | | 28,667 | |
Goodwill | Goodwill | 265,781 | | | 262,930 | | Goodwill | 267,192 | | | 270,172 | |
Other intangible assets, net of amortization | Other intangible assets, net of amortization | 132,818 | | | 158,947 | | Other intangible assets, net of amortization | 111,404 | | | 118,026 | |
Pension assets | Pension assets | 4,337 | | | 12,790 | | Pension assets | 5,694 | | | 5,278 | |
Asbestos-related insurance receivables, non-current portion | Asbestos-related insurance receivables, non-current portion | 74,024 | | | 74,024 | | Asbestos-related insurance receivables, non-current portion | 63,807 | | | 63,807 | |
Other long-term assets | Other long-term assets | 14,871 | | | 6,564 | | Other long-term assets | 14,821 | | | 16,254 | |
Total assets | Total assets | $ | 1,272,040 | | | $ | 1,273,181 | | Total assets | $ | 1,313,476 | | | $ | 1,264,005 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | Liabilities and Shareholders’ Equity | | | |
Current liabilities | Current liabilities | | | | Current liabilities | | | |
Accounts payable | Accounts payable | $ | 35,886 | | | $ | 33,019 | | Accounts payable | $ | 53,471 | | | $ | 35,987 | |
Accrued employee benefits and compensation | Accrued employee benefits and compensation | 35,991 | | | 29,678 | | Accrued employee benefits and compensation | 43,915 | | | 41,708 | |
Accrued income taxes payable | Accrued income taxes payable | 6,235 | | | 10,649 | | Accrued income taxes payable | 5,177 | | | 8,558 | |
Asbestos-related liabilities, current portion | Asbestos-related liabilities, current portion | 5,007 | | | 5,007 | | Asbestos-related liabilities, current portion | 3,615 | | | 3,615 | |
Other accrued liabilities | Other accrued liabilities | 23,237 | | | 21,872 | | Other accrued liabilities | 20,844 | | | 21,641 | |
Total current liabilities | Total current liabilities | 106,356 | | | 100,225 | | Total current liabilities | 127,022 | | | 111,509 | |
Borrowings under revolving credit facility | Borrowings under revolving credit facility | 60,000 | | | 123,000 | | Borrowings under revolving credit facility | 0 | | | 25,000 | |
Pension and other postretirement benefits liabilities | Pension and other postretirement benefits liabilities | 1,654 | | | 1,567 | | Pension and other postretirement benefits liabilities | 1,658 | | | 1,612 | |
Asbestos-related liabilities, non-current portion | Asbestos-related liabilities, non-current portion | 80,540 | | | 80,873 | | Asbestos-related liabilities, non-current portion | 69,469 | | | 69,620 | |
Non-current income tax | Non-current income tax | 15,509 | | | 10,423 | | Non-current income tax | 16,930 | | | 16,346 | |
Deferred income taxes | Deferred income taxes | 9,497 | | | 9,220 | | Deferred income taxes | 9,537 | | | 8,375 | |
Other long-term liabilities | Other long-term liabilities | 11,460 | | | 13,973 | | Other long-term liabilities | 12,198 | | | 10,788 | |
Commitments and contingencies (Note 10 and Note 12) | Commitments and contingencies (Note 10 and Note 12) | | Commitments and contingencies (Note 10 and Note 12) | 0 | | 0 |
Shareholders’ equity | Shareholders’ equity | | | | Shareholders’ equity | | | |
Capital stock - $1 par value; 50,000 authorized shares; 18,676 and 18,577 shares issued and outstanding | 18,676 | | | 18,577 | | |
Capital stock - $1 par value; 50,000 authorized shares; 18,722 and 18,677 shares issued and outstanding | | Capital stock - $1 par value; 50,000 authorized shares; 18,722 and 18,677 shares issued and outstanding | 18,722 | | | 18,677 | |
Additional paid-in capital | Additional paid-in capital | 145,010 | | | 138,526 | | Additional paid-in capital | 154,330 | | | 147,961 | |
Retained earnings | Retained earnings | 858,487 | | | 823,702 | | Retained earnings | 933,565 | | | 873,692 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (35,149) | | | (46,905) | | Accumulated other comprehensive loss | (29,955) | | | (19,575) | |
Total shareholders' equity | Total shareholders' equity | 987,024 | | | 933,900 | | Total shareholders' equity | 1,076,662 | | | 1,020,755 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | $ | 1,272,040 | | | $ | 1,273,181 | | Total liabilities and shareholders' equity | $ | 1,313,476 | | | $ | 1,264,005 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| | | Nine Months Ended | | Six Months Ended |
| | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 |
Operating Activities: | Operating Activities: | | | | Operating Activities: | | | |
Net income | Net income | $ | 34,785 | | | $ | 76,079 | | Net income | $ | 59,873 | | | $ | 27,779 | |
Adjustments to reconcile net income to cash provided by operating activities: | Adjustments to reconcile net income to cash provided by operating activities: | | Adjustments to reconcile net income to cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 48,562 | | | 37,176 | | Depreciation and amortization | 20,997 | | | 25,858 | |
Equity compensation expense | Equity compensation expense | 10,317 | | | 9,294 | | Equity compensation expense | 8,394 | | | 7,022 | |
Deferred income taxes | Deferred income taxes | (9,987) | | | (5,565) | | Deferred income taxes | 3,881 | | | (8,976) | |
Equity in undistributed income of unconsolidated joint ventures | Equity in undistributed income of unconsolidated joint ventures | (3,177) | | | (4,077) | | Equity in undistributed income of unconsolidated joint ventures | (4,111) | | | (2,240) | |
Dividends received from unconsolidated joint ventures | Dividends received from unconsolidated joint ventures | 7,075 | | | 5,375 | | Dividends received from unconsolidated joint ventures | 1,754 | | | 1,785 | |
Pension settlement benefits | Pension settlement benefits | (63) | | | 0 | | Pension settlement benefits | 0 | | | (63) | |
Pension and other postretirement benefits | Pension and other postretirement benefits | (149) | | | (503) | | Pension and other postretirement benefits | (190) | | | (100) | |
Asbestos-related charges | 0 | | | 67 | | |
Loss on sale or disposal of property, plant and equipment | 49 | | | 278 | | |
Impairment charges | 386 | | | 1,537 | | |
Provision (benefit) for doubtful accounts | (63) | | | 16 | | |
| (Gain) loss on sale or disposal of property, plant and equipment | | (Gain) loss on sale or disposal of property, plant and equipment | (682) | | | 53 | |
| UTIS fire fixed asset and inventory write-offs | | UTIS fire fixed asset and inventory write-offs | 1,211 | | | 0 | |
Provision (benefit) for credit losses | | Provision (benefit) for credit losses | (342) | | | 54 | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | (14,702) | | | 3,668 | | Accounts receivable | (24,609) | | | (6,623) | |
Proceeds from insurance/government subsidies related to operations | | Proceeds from insurance/government subsidies related to operations | 148 | | | 0 | |
Contract assets | Contract assets | 394 | | | (1,342) | | Contract assets | (3,710) | | | 3,174 | |
Inventories | Inventories | 25,008 | | | (7,788) | | Inventories | (10,527) | | | 7,910 | |
Pension and postretirement benefit contributions | Pension and postretirement benefit contributions | (248) | | | (16) | | Pension and postretirement benefit contributions | (151) | | | (244) | |
Other current assets | Other current assets | 1,876 | | | 641 | | Other current assets | (3,767) | | | 414 | |
Accounts payable and other accrued expenses | Accounts payable and other accrued expenses | 5,236 | | | (2,552) | | Accounts payable and other accrued expenses | 14,547 | | | (6,129) | |
Other, net | Other, net | 8,374 | | | 3,384 | | Other, net | 3,490 | | | 5,285 | |
Net cash provided by operating activities | Net cash provided by operating activities | 113,673 | | | 115,672 | | Net cash provided by operating activities | 66,206 | | | 54,959 | |
| Investing Activities: | Investing Activities: | | Investing Activities: | |
| Capital expenditures | Capital expenditures | (28,944) | | | (38,827) | | Capital expenditures | (21,415) | | | (18,150) | |
Proceeds from the sale of property, plant and equipment, net | Proceeds from the sale of property, plant and equipment, net | 0 | | | 9 | | Proceeds from the sale of property, plant and equipment, net | 714 | | | 0 | |
Return of capital from unconsolidated joint ventures | 0 | | | 2,625 | | |
| Net cash used in investing activities | Net cash used in investing activities | (28,944) | | | (36,193) | | Net cash used in investing activities | (20,701) | | | (18,150) | |
| Financing Activities: | Financing Activities: | | Financing Activities: | |
Proceeds from borrowings under revolving credit facility | Proceeds from borrowings under revolving credit facility | 150,000 | | | 0 | | Proceeds from borrowings under revolving credit facility | 0 | | | 150,000 | |
Repayment of debt principal and finance lease obligations | Repayment of debt principal and finance lease obligations | (213,299) | | | (98,294) | | Repayment of debt principal and finance lease obligations | (29,652) | | | (50,193) | |
Payments of taxes related to net share settlement of equity awards | Payments of taxes related to net share settlement of equity awards | (5,107) | | | (7,309) | | Payments of taxes related to net share settlement of equity awards | (2,684) | | | (5,029) | |
Proceeds from the exercise of stock options, net | 0 | | | 344 | | |
Proceeds from issuance of shares to employee stock purchase plan | Proceeds from issuance of shares to employee stock purchase plan | 1,373 | | | 1,249 | | Proceeds from issuance of shares to employee stock purchase plan | 704 | | | 664 | |
| Net cash provided by (used in) financing activities | (67,033) | | | (104,010) | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (31,632) | | | 95,442 | |
| Effect of exchange rate fluctuations on cash | Effect of exchange rate fluctuations on cash | 1,578 | | | (2,460) | | Effect of exchange rate fluctuations on cash | (1,713) | | | (358) | |
| Net increase (decrease) in cash and cash equivalents | 19,274 | | | (26,991) | | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | 12,160 | | | 131,893 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 166,849 | | | 167,738 | | Cash and cash equivalents at beginning of period | 191,785 | | | 166,849 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 186,123 | | | $ | 140,747 | | Cash and cash equivalents at end of period | $ | 203,945 | | | $ | 298,742 | |
| Supplemental Disclosures: | Supplemental Disclosures: | | Supplemental Disclosures: | |
Accrued capital additions | Accrued capital additions | $ | 1,493 | | | $ | 1,999 | | Accrued capital additions | $ | 7,403 | | | $ | 4,144 | |
Cash paid during the year for: | Cash paid during the year for: | | Cash paid during the year for: | |
Interest, net of amounts capitalized | Interest, net of amounts capitalized | $ | 4,301 | | | $ | 6,449 | | Interest, net of amounts capitalized | $ | 964 | | | $ | 3,311 | |
Income taxes | Income taxes | $ | 21,645 | | | $ | 16,018 | | Income taxes | $ | 18,036 | | | $ | 15,644 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars and shares in thousands)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Capital Stock | Capital Stock | | | | | | | | Capital Stock | | | | | | | |
Balance, beginning of period | Balance, beginning of period | $ | 18,668 | | | $ | 18,559 | | | $ | 18,577 | | | $ | 18,395 | | Balance, beginning of period | $ | 18,712 | | | $ | 18,662 | | | $ | 18,677 | | | $ | 18,577 | |
Shares issued for vested restricted stock units, net of shares withheld for taxes | Shares issued for vested restricted stock units, net of shares withheld for taxes | 1 | | | 2 | | | 86 | | | 139 | | Shares issued for vested restricted stock units, net of shares withheld for taxes | 0 | | | 6 | | | 28 | | | 85 | |
Stock options exercised | 0 | | | 1 | | | 0 | | | 11 | | |
Shares issued for employee stock purchase plan | Shares issued for employee stock purchase plan | 7 | | | 8 | | | 13 | | | 15 | | Shares issued for employee stock purchase plan | 0 | | | 0 | | | 7 | | | 6 | |
Shares issued to directors | Shares issued to directors | 0 | | | 2 | | | 0 | | | 12 | | Shares issued to directors | 10 | | | 0 | | | 10 | | | 0 | |
| Balance, end of period | Balance, end of period | 18,676 | | | 18,572 | | | 18,676 | | | 18,572 | | Balance, end of period | 18,722 | | | 18,668 | | | 18,722 | | | 18,668 | |
Additional Paid-In Capital | Additional Paid-In Capital | | | | | | | | Additional Paid-In Capital | | | | | | | |
Balance, beginning of period | Balance, beginning of period | 141,092 | | | 131,836 | | | 138,526 | | | 132,360 | | Balance, beginning of period | 150,004 | | | 137,235 | | | 147,961 | | | 138,526 | |
Shares issued for vested restricted stock units, net of shares withheld for taxes | Shares issued for vested restricted stock units, net of shares withheld for taxes | (79) | | | 113 | | | (5,193) | | | (7,448) | | Shares issued for vested restricted stock units, net of shares withheld for taxes | (52) | | | (38) | | | (2,712) | | | (5,114) | |
Stock options exercised | 0 | | | 16 | | | 0 | | | 333 | | |
Shares issued for employee stock purchase plan | Shares issued for employee stock purchase plan | 702 | | | 647 | | | 1,360 | | | 1,234 | | Shares issued for employee stock purchase plan | 0 | | | 0 | | | 697 | | | 658 | |
Shares issued to directors | Shares issued to directors | 0 | | | (2) | | | 0 | | | (12) | | Shares issued to directors | (10) | | | 0 | | | (10) | | | 0 | |
Equity compensation expense | Equity compensation expense | 3,295 | | | 3,151 | | | 10,317 | | | 9,294 | | Equity compensation expense | 4,388 | | | 3,895 | | | 8,394 | | | 7,022 | |
| Balance, end of period | Balance, end of period | 145,010 | | | 135,761 | | | 145,010 | | | 135,761 | | Balance, end of period | 154,330 | | | 141,092 | | | 154,330 | | | 141,092 | |
Retained Earnings | Retained Earnings | | | | | | | | Retained Earnings | | | | | | | |
Balance, beginning of period | Balance, beginning of period | 851,481 | | | 829,075 | | | 823,702 | | | 776,403 | | Balance, beginning of period | 904,910 | | | 836,961 | | | 873,692 | | | 823,702 | |
Net income | Net income | 7,006 | | | 23,387 | | | 34,785 | | | 76,079 | | Net income | 28,655 | | | 14,520 | | | 59,873 | | | 27,779 | |
Cumulative-effect adjustment for lease accounting | — | | | — | | | — | | | (20) | | |
Balance, end of period | Balance, end of period | 858,487 | | | 852,462 | | | 858,487 | | | 852,462 | | Balance, end of period | 933,565 | | | 851,481 | | | 933,565 | | | 851,481 | |
Accumulated Other Comprehensive Loss | Accumulated Other Comprehensive Loss | | | | | | | | Accumulated Other Comprehensive Loss | | | | | | | |
Balance, beginning of period | Balance, beginning of period | (48,659) | | | (81,956) | | | (46,905) | | | (78,834) | | Balance, beginning of period | (32,771) | | | (55,049) | | | (19,575) | | | (46,905) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | 13,510 | | | (10,205) | | | 11,756 | | | (13,327) | | Other comprehensive income (loss) | 2,816 | | | 6,390 | | | (10,380) | | | (1,754) | |
Balance, end of period | Balance, end of period | (35,149) | | | (92,161) | | | (35,149) | | | (92,161) | | Balance, end of period | (29,955) | | | (48,659) | | | (29,955) | | | (48,659) | |
Total Shareholders’ Equity | Total Shareholders’ Equity | $ | 987,024 | | | $ | 914,634 | | | $ | 987,024 | | | $ | 914,634 | | Total Shareholders’ Equity | $ | 1,076,662 | | | $ | 962,582 | | | $ | 1,076,662 | | | $ | 962,582 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
ROGERS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
As used herein, the terms “Company,” “Rogers,” “we,” “us,” “our” and similar terms mean Rogers Corporation and its consolidated subsidiaries, unless the context indicates otherwise.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for their fair presentation in accordance with GAAP. All significant intercompany balances and transactions have been eliminated.
Interim results are not necessarily indicative of results for a full year. For further information regarding our accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. Refer to the discussion below for our restructuring activities significant accounting policy.
We assessed certain accounting matters that generally require considerationThrough the fourth quarter of forecasted financial information in context2020, we operated 3 strategic operating segments: Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES), with the information reasonably available to us andremaining operations, which represented our non-core businesses, being reported in a fourth operating segment, the unknown future impactsOther operating segment. In the first quarter of COVID-19 as of September 30, 2020 and through2021, we completed the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, equity compensation, the carrying valuerealignment of our goodwill, other intangible assets as well as other long-lived assets,strategic business segments to reflect the combination of our ACS and PES businesses resulting in a new strategic business segment, Advanced Electronics Solutions (AES). The combination of these two complementary businesses with capabilities in both high power and high frequency applications is expected to enhance our overall value proposition to customers in multiple high-growth markets. As a result of our organizational and reporting structure changes, we re-evaluated the chief operating decision maker’s review and assessment of the Company’s operating performance for purposes of performance monitoring and resource allocation. We determined, based on the financial assets, valuation allowancesdata utilized by the chief operating decision maker to assess segment performance and allocate resources among the Company’s strategic business segments, that we now have 3 operating segments under this new organizational and reporting structure: AES, EMS and Other. Reported results for tax assetsthe AES operating segment prior to 2021 represent the aggregation of the results for our former ACS and revenue recognition.
Restructuring Activities
We record charges associated with restructuring activities, such as employee termination benefits, which represent a one-time benefit, when management approves and commits to a plan of termination, or over the future service period, if any. Other costs associated with restructuring activities may include contract termination costs, including costs related to leased facilities to be abandoned or subleased, and facility and employee relocation costs.PES operating segments.
Note 2 – Fair Value Measurements
The accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As a result of our pension termination and settlement efforts in late 2019 and the first half of 2020, we have a pension surplus investment balance, which is now accounted for as an available-for-sale investment as of June 2020. For additional information regarding this balance, refer to “Note 11 – Pension Benefits and Other Postretirement Benefits.” Available-for-sale investments measured at fair value on a recurring basis, categorized by the level of inputs used in the valuation, were as follows:
| | | Available-for-Sale Investment at Fair Value as of September 30, 2020 | | Available-for-Sale Investment at Fair Value as of June 30, 2021 |
(Dollars in thousands) | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Pension surplus investment(1) | Pension surplus investment(1) | $ | 6,911 | | | $ | 2,416 | | | $ | 0 | | | $ | 9,327 | | Pension surplus investment(1) | $ | 5,334 | | | $ | 2,391 | | | $ | 0 | | | $ | 7,725 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale Investment at Fair Value as of December 31, 2020 |
(Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Pension surplus investment(1) | $ | 6,706 | | | $ | 2,400 | | | $ | 0 | | | $ | 9,106 | |
(1) This balance was invested in funds comprised of short-term cash and fixed income securities, and was recorded in the “Other long-term assets” line item in the condensed consolidated statements of financial position. As of SeptemberJune 30, 2020,2021, the fair value of this investmentthese investments approximated its carrying value.
From time to time we enter into various instruments that require fair value measurement, including foreign currency contracts and copper derivative contracts and interest rate swaps.contracts. Derivative instruments measured at fair value on a recurring basis, categorized by the level of inputs used in the valuation, were as follows:
| | | Derivative Instruments at Fair Value as of September 30, 2020 | | Derivative Instruments at Fair Value as of June 30, 2021 |
(Dollars in thousands) | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total(1) | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total(1) |
Foreign currency contracts | Foreign currency contracts | $ | 0 | | | $ | (106) | | | $ | 0 | | | $ | (106) | | Foreign currency contracts | $ | 0 | | | $ | (72) | | | $ | 0 | | | $ | (72) | |
Copper derivative contracts | Copper derivative contracts | $ | 0 | | | $ | 2,640 | | | $ | 0 | | | $ | 2,640 | | Copper derivative contracts | $ | 0 | | | $ | 4,840 | | | $ | 0 | | | $ | 4,840 | |
Interest rate swap contract | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | |
|
| | | Derivative Instruments at Fair Value as of December 31, 2019 | | Derivative Instruments at Fair Value as of December 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total(1) | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total(1) |
Foreign currency contracts | Foreign currency contracts | $ | 0 | | | $ | (6) | | | $ | 0 | | | $ | (6) | | Foreign currency contracts | $ | 0 | | | $ | (130) | | | $ | 0 | | | $ | (130) | |
Copper derivative contracts | Copper derivative contracts | $ | 0 | | | $ | 1,147 | | | $ | 0 | | | $ | 1,147 | | Copper derivative contracts | $ | 0 | | | $ | 4,785 | | | $ | 0 | | | $ | 4,785 | |
Interest rate swap contract | $ | 0 | | | $ | (1,254) | | | $ | 0 | | | $ | (1,254) | | |
|
(1) All balances were recorded in the “Other current assets” or “Other accrued liabilities” line items in the condensed consolidated statements of financial position, except the 2019 interest rate swap balance, which was recorded in the “Other long-term liabilities” line item.position.
For additional information on derivative contracts, refer to “Note 3 – Hedging Transactions and Derivative Financial Instruments.”
Note 3 – Hedging Transactions and Derivative Financial Instruments
We are exposed to certain risks related to our ongoing business operations. The primary risks being managed through our use of derivative instruments are foreign currency exchange rate risk and commodity pricing risk (primarily related to copper) and interest rate risk.. We do not use derivative instruments for trading or speculative purposes. The valuation of derivative contracts used to manage each of these risks is described below:
•Foreign Currency – The fair value of any foreign currency option derivative is based upon valuation models applied to current market information such as strike price, spot rate, maturity date and volatility, and by reference to market values resulting from an over-the-counter market or obtaining market data for similar instruments with similar characteristics.
•Commodity – The fair value of copper derivatives is computed using a combination of intrinsic and time value valuation models, which are collectively a function of five primary variables: price of the underlying instrument, time to expiration, strike price, interest rate and volatility. The intrinsic valuation model reflects the difference between the strike price of the underlying copper derivative instrument and the current prevailing copper prices in an over-the-counter market at period end. The time value valuation model incorporates changes in the price of the underlying copper derivative instrument, the time value of money, the underlying copper derivative instrument’s strike price and the remaining time to the underlying copper derivative instrument’s expiration date from the period end date.
•Interest Rates – The fair value of interest rate swap instruments is derived by comparing the present value of the interest rate forward curve against the present value of the swap rate, relative to the notional amount of the swap. The net value represents the estimated amount we would receive or pay to terminate the agreements. Settlement amounts for an “in the money” swap would be adjusted down to compensate the counterparties for cost of funds, and the adjustment is directly related to the counterparties’ credit ratings.
The guidance for the accounting and disclosure of derivatives and hedging transactions requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the condensed consolidated statements of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies for hedge accounting treatment as defined under the applicable accounting guidance. For derivative instruments that are designated and qualify for hedge accounting treatment as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss). This gain or loss is reclassified into earnings in the same line item of the condensed consolidated statements of operations associated with the forecasted transaction and in the same period or
periods during which the hedged transaction affects earnings. As of September 30, 2019, only our interest rate swap qualified for hedge accounting treatment as a cash flow hedge, and the hedge was highly effective.
Foreign Currency
During the three months ended SeptemberJune 30, 2020,2021, we entered into U.S. dollar, euro, and Korean won forward contracts. We entered into these foreign currency forward contracts to mitigate certain global transactional exposures. These contracts do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense) income,, net” in our condensed consolidated statements of operations in the period in which the adjustment occurred.
As of SeptemberJune 30, 2020,2021, the notional values of the remaining foreign currency forward contracts were as follows:
| | | | | |
Notional Values of Foreign Currency Derivatives |
USD/CNH | $ | 30,138,50519,919,008 | |
KRW/USD | ₩ | 10,170,000,000 | |
EUR/USD | € | 9,430,781 | |
KRW/USD | ₩ | 11,684,000,00010,049,732 | |
| |
Commodity
As of SeptemberJune 30, 2020,2021, we had 2110 outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions (PES) and Advanced Connectivity Solutions (ACS)AES operating segments.segment. These contracts are held with financial institutions and are intended to offset rising copper prices and do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense) income,, net” in our condensed consolidated statements of operations in the period in which the adjustment occurred.
As of SeptemberJune 30, 2020,2021, the volume of our copper contracts outstanding was as follows:
| | | | | |
Volume of Copper Derivatives |
October 2020 - December 2020 | 201 metric tons per month |
January 2021 - March 2021 | 256 metric tons per month |
April 2021 - June 2021 | 256 metric tons per month |
July 2021 - September 2021 | 222 metric tons per month |
October 2021 - December 2021 | 222 metric tons per month |
January 2022 - March 2022 | 213 metric tons per month |
April 2022 - June 2022 | 168 metric tons per month |
Interest Rates
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on $75.0 million of our $450.0 million revolving credit facility. This transaction was designated as a cash flow hedge and qualified for hedge accounting treatment. We terminated the interest rate swap on September 30, 2020. As a result, we settled the interest rate swap for $2.4 million on October 2, 2020, representing the fair value of the interest rate swap on the date of termination. Both Rogers and the counterparties released each other from all obligation under the interest rate swap agreement, including the obligation to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to the agreed upon notional principal amount of $75.0 million. As a result of the termination of the interest rate swap, there is an offsetting decrease in the forecasted interest expense, net over the remaining term of the now-terminated interest rate swap, which was set to expire in February 2022. For additional information regarding our revolving credit facility, refer to “Note 9 – Debt.”
Effects on Financial Statements
The impacts from our derivative instruments on the statement of operations and statements of comprehensive income (loss) were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | Financial Statement Line Item | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | Financial Statement Line Item | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Foreign Currency Contracts | Foreign Currency Contracts | | | | | | | | | | Foreign Currency Contracts | | | | | | | | | |
Contracts not designated as hedging instruments | Contracts not designated as hedging instruments | Other (expense) income, net | | $ | (823) | | | $ | 181 | | | $ | (1,378) | | | $ | (406) | | Contracts not designated as hedging instruments | Other income (expense), net | | $ | (400) | | | $ | (27) | | | $ | (1,222) | | | $ | (555) | |
Copper Derivative Contracts | Copper Derivative Contracts | | | Copper Derivative Contracts | | |
Contracts not designated as hedging instruments | Contracts not designated as hedging instruments | Other (expense) income, net | | $ | 1,238 | | | $ | (543) | | | $ | 1,067 | | | $ | (1,008) | | Contracts not designated as hedging instruments | Other income (expense), net | | $ | 1,313 | | | $ | 964 | | | $ | 3,860 | | | $ | (171) | |
Interest Rate Swap | Interest Rate Swap | | Interest Rate Swap | |
Contract designated as hedging instrument | Contract designated as hedging instrument | Other comprehensive income (loss) | | $ | 2,771 | | | $ | (240) | | | $ | 1,254 | | | $ | (1,985) | | Contract designated as hedging instrument | Other comprehensive income (loss) | | $ | 0 | | | $ | 173 | | | $ | 0 | | | $ | (1,517) | |
Note 4 – Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component were as follows:
| (Dollars and accompanying footnotes in thousands) | (Dollars and accompanying footnotes in thousands) | Foreign Currency Translation Adjustments | | Pension and Other Postretirement Benefits(1) | | Derivative Instrument Designated as Cash Flow Hedge(2) | | Total | (Dollars and accompanying footnotes in thousands) | Foreign Currency Translation Adjustments | | Pension and Other Postretirement Benefits(1) | | Derivative Instrument Designated as Cash Flow Hedge(2) | | Total |
Balance as of December 31, 2020 | | Balance as of December 31, 2020 | $ | (10,571) | | | $ | (9,004) | | | $ | 0 | | | $ | (19,575) | |
Other comprehensive income (loss) before reclassifications | | Other comprehensive income (loss) before reclassifications | (10,501) | | | 0 | | | 0 | | | (10,501) | |
Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | 0 | | | 121 | | | 0 | | | 121 | |
Net current-period other comprehensive income (loss) | | Net current-period other comprehensive income (loss) | (10,501) | | | 121 | | | 0 | | | (10,380) | |
Balance as of June 30, 2021 | | Balance as of June 30, 2021 | $ | (21,072) | | | $ | (8,883) | | | $ | 0 | | | $ | (29,955) | |
| Balance as of December 31, 2019 | Balance as of December 31, 2019 | $ | (35,478) | | | $ | (10,455) | | | $ | (972) | | | $ | (46,905) | | Balance as of December 31, 2019 | $ | (35,478) | | | $ | (10,455) | | | $ | (972) | | | $ | (46,905) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | 10,004 | | | 629 | | | (1,504) | | | 9,129 | | Other comprehensive income (loss) before reclassifications | (1,265) | | | 626 | | | (866) | | | (1,505) | |
Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | 0 | | | 151 | | | 2,476 | | | 2,627 | | Amounts reclassified from accumulated other comprehensive loss | 0 | | | 85 | | | (334) | | | (249) | |
Net current-period other comprehensive income (loss) | Net current-period other comprehensive income (loss) | 10,004 | | | 780 | | | 972 | | | 11,756 | | Net current-period other comprehensive income (loss) | (1,265) | | | 711 | | | (1,200) | | | (1,754) | |
Balance as of September 30, 2020 | $ | (25,474) | | | $ | (9,675) | | | $ | 0 | | | $ | (35,149) | | |
| Balance as of December 31, 2018 | $ | (30,488) | | | $ | (48,700) | | | $ | 354 | | | $ | (78,834) | | |
Other comprehensive loss before reclassifications | (12,262) | | | 0 | | | (1,362) | | | (13,624) | | |
Amounts reclassified from accumulated other comprehensive loss | 0 | | | 485 | | | (188) | | | 297 | | |
Net current-period other comprehensive income (loss) | (12,262) | | | 485 | | | (1,550) | | | (13,327) | | |
Balance as of September 30, 2019 | $ | (42,750) | | | $ | (48,215) | | | $ | (1,196) | | | $ | (92,161) | | |
Balance as of June 30, 2020 | | Balance as of June 30, 2020 | $ | (36,743) | | | $ | (9,744) | | | $ | (2,172) | | | $ | (48,659) | |
(1) Net of taxes of $2,154 $1,923 and $2,368$1,951 as of SeptemberJune 30, 2021 and December 31, 2020, respectively. Net of taxes of $2,172 and $2,368 as of June 30, 2020 and December 31, 2019, respectively. Net of taxes of $9,851 and $9,984 as of September 30, 2019 and December 31, 2018, respectively.
(2) Net of taxes of $0 and $282$0 as of Septemberboth June 30, 2021 and December 31, 2020. Net of taxes of $598 and $282 as of June 30, 2020 and December 31, 2019, respectively. Net of taxes of $329 and $(106) as of September 30, 2019 and December 31, 2018, respectively.
Note 5 – Inventories
Inventories, which are valued at the lower of cost or net realizable value, consisted of the following:
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2020 | | December 31, 2019 |
Raw materials | $ | 52,105 | | | $ | 61,338 | |
Work-in-process | 26,452 | | | 30,043 | |
Finished goods | 31,176 | | | 41,478 | |
Total inventories | $ | 109,733 | | | $ | 132,859 | |
| | | | | | | | | | | |
(Dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Raw materials | $ | 53,904 | | | $ | 44,976 | |
Work-in-process | 27,950 | | | 25,291 | |
Finished goods | 28,907 | | | 32,093 | |
Total inventories | $ | 110,761 | | | $ | 102,360 | |
Note 6 – Goodwill and Other Intangible Assets
Goodwill
The changes in the net carrying amount of goodwill by operating segment were as follows:
| (Dollars in thousands) | (Dollars in thousands) | Advanced Connectivity Solutions | | Elastomeric Material Solutions | | Power Electronics Solutions | | Other | | Total | (Dollars in thousands) | Advanced Electronics Solutions | | Elastomeric Material Solutions | | Other | | Total |
December 31, 2019 | $ | 51,694 | | | $ | 142,030 | | | $ | 66,982 | | | $ | 2,224 | | | $ | 262,930 | | |
December 31, 2020 | | December 31, 2020 | $ | 124,927 | | | $ | 143,021 | | | $ | 2,224 | | | $ | 270,172 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | 0 | | | (176) | | | 3,027 | | | 0 | | | $ | 2,851 | | Foreign currency translation adjustment | (2,400) | | | (580) | | | 0 | | | $ | (2,980) | |
September 30, 2020 | $ | 51,694 | | | $ | 141,854 | | | $ | 70,009 | | | $ | 2,224 | | | $ | 265,781 | | |
June 30, 2021 | | June 30, 2021 | $ | 122,527 | | | $ | 142,441 | | | $ | 2,224 | | | $ | 267,192 | |
Other Intangible Assets
The gross and net carrying amounts, as well as the accumulated amortization of other intangible assets were as follows:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (Dollars in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | Customer relationships | $ | 149,891 | | | $ | 58,935 | | | $ | 90,956 | | | $ | 149,317 | | | $ | 39,018 | | | $ | 110,299 | | Customer relationships | $ | 150,219 | | | $ | 74,661 | | | $ | 75,558 | | | $ | 150,863 | | | $ | 72,014 | | | $ | 78,849 | |
Technology | Technology | 82,102 | | | 50,776 | | | 31,326 | | | 80,938 | | | 45,190 | | | 35,748 | | Technology | 80,478 | | | 53,235 | | | 27,243 | | | 83,469 | | | 53,540 | | | 29,929 | |
Trademarks and trade names | Trademarks and trade names | 11,986 | | | 6,676 | | | 5,310 | | | 11,994 | | | 4,361 | | | 7,633 | | Trademarks and trade names | 12,013 | | | 8,509 | | | 3,504 | | | 12,039 | | | 8,149 | | | 3,890 | |
Covenants not to compete | Covenants not to compete | 1,340 | | | 746 | | | 594 | | | 1,340 | | | 505 | | | 835 | | Covenants not to compete | 1,340 | | | 928 | | | 412 | | | 1,340 | | | 827 | | | 513 | |
Total definite-lived other intangible assets | Total definite-lived other intangible assets | 245,319 | | | 117,133 | | | 128,186 | | | 243,589 | | | 89,074 | | | 154,515 | | Total definite-lived other intangible assets | 244,050 | | | 137,333 | | | 106,717 | | | 247,711 | | | 134,530 | | | 113,181 | |
Indefinite-lived other intangible asset | Indefinite-lived other intangible asset | 4,632 | | | — | | | 4,632 | | | 4,432 | | | — | | | 4,432 | | Indefinite-lived other intangible asset | 4,687 | | | — | | | 4,687 | | | 4,845 | | | — | | | 4,845 | |
Total other intangible assets | Total other intangible assets | $ | 249,951 | | | $ | 117,133 | | | $ | 132,818 | | | $ | 248,021 | | | $ | 89,074 | | | $ | 158,947 | | Total other intangible assets | $ | 248,737 | | | $ | 137,333 | | | $ | 111,404 | | | $ | 252,556 | | | $ | 134,530 | | | $ | 118,026 | |
In the table above, gross carrying amounts and accumulated amortization may differ from prior periods due to foreign exchange rate fluctuations.
Amortization expense was $15.4$3.1 million and $4.4$7.6 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and was $26.7$6.3 million and $13.3$11.2 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The estimated future amortization expense is $15.4$6.2 million for the remainder of 20202021 and $12.3 million, $11.8$11.9 million, $11.3 million, $10.0 million and $9.9$8.5 million for 2021, 2022, 2023, 2024 and 2024,2025, respectively. The increase in amortization expense for the three and nine months ended September 30, 2020, and decrease in forecasted amortization expense in future years, were due to the acceleration of amortization expense related to our Diversified Silicone Products, Inc. (DSP) customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020. As part of our ongoing assessment of the useful lives of our definite-lived other intangible assets, we reviewed the deterioration of our DSP business and identified significant customer attrition, a sustained substantial decrease in net sales, as well as the planned phase-out of the DSP trademark and trade name by December 2020. Based on these events and circumstances, we concluded an adjustment to the remaining useful lives of our DSP customer relationships and trademarks and trade names definite-lived other intangible assets was warranted.
The weighted average amortization period as of SeptemberJune 30, 2020,2021, by definite-lived other intangible asset class, was as follows:
| | | | | | | | |
Definite-Lived Other Intangible Asset Class | | Weighted Average Remaining Amortization Period |
Customer relationships | | 5.57.5 years |
Technology | | 4.03.8 years |
Trademarks and trade names | | 3.84.9 years |
Covenants not to compete | | 1.31.0 years |
Total definite-lived other intangible assets | | 5.06.4 years |
Note 7 – Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.
The following table sets forth the computation of basic and diluted earnings per share:
| (Dollars and shares in thousands, except per share amounts) | (Dollars and shares in thousands, except per share amounts) | Three Months Ended | | Nine Months Ended | (Dollars and shares in thousands, except per share amounts) | Three Months Ended | | Six Months Ended |
September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Numerator: | Numerator: | | | | | | | | Numerator: | | | | | | | |
Net income | Net income | $ | 7,006 | | | $ | 23,387 | | | $ | 34,785 | | | $ | 76,079 | | Net income | $ | 28,655 | | | $ | 14,520 | | | $ | 59,873 | | | $ | 27,779 | |
Denominator: | Denominator: | | Denominator: | |
Weighted-average shares outstanding - basic | Weighted-average shares outstanding - basic | 18,688 | | | 18,581 | | | 18,678 | | | 18,569 | | Weighted-average shares outstanding - basic | 18,729 | | | 18,676 | | | 18,721 | | | 18,673 | |
Effect of dilutive shares | Effect of dilutive shares | 25 | | | 143 | | | 17 | | | 146 | | Effect of dilutive shares | 117 | | | 5 | | | 89 | | | 13 | |
Weighted-average shares outstanding - diluted | Weighted-average shares outstanding - diluted | 18,713 | | | 18,724 | | | 18,695 | | | 18,715 | | Weighted-average shares outstanding - diluted | 18,846 | | | 18,681 | | | 18,810 | | | 18,686 | |
Basic earnings per share | Basic earnings per share | $ | 0.37 | | | $ | 1.26 | | | $ | 1.86 | | | $ | 4.10 | | Basic earnings per share | $ | 1.53 | | | $ | 0.78 | | | $ | 3.20 | | | $ | 1.49 | |
Diluted earnings per share | Diluted earnings per share | $ | 0.37 | | | $ | 1.25 | | | $ | 1.86 | | | $ | 4.07 | | Diluted earnings per share | $ | 1.52 | | | $ | 0.78 | | | $ | 3.18 | | | $ | 1.49 | |
Dilutive shares are calculated using the treasury stock method and primarily include unvested restricted stock units. Anti-dilutive shares are excluded from the calculation of diluted shares and diluted earnings per share. For the three months ended SeptemberJune 30, 2021 and 2020, and 2019, 32,5011,769 shares and 3,17355,961 shares were excluded, respectively.
Note 8 – Capital Stock and Equity Compensation
Equity Compensation
Performance-Based Restricted Stock Units
As of SeptemberJune 30, 2020,2021, we had performance-based restricted stock units from 2021, 2020 2019, and 20182019 outstanding. These awards generally cliff vest at the end of a three-year measurement period. However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed during the measurement period.period, except as noted below in Chief Executive Officer’s 2021 Equity Award Grants. Participants are eligible to be awarded shares ranging from 0% to 200% of the original award amount, based on certain defined performance measures.
The outstanding awards have one measurement criterion: the three-year total shareholder return (TSR) on our capital stock as compared to that of a specified group of peer companies. The TSR measurement criterion of the awards is considered a market condition. As such, the fair value of this measurement criterion was determined on the grant date using a Monte Carlo simulation valuation model. We recognize compensation expense on all of these awards on a straight-line basis over the vesting period with no changes for final projected payout of the awards. We account for forfeitures as they occur.
The following table sets forth the assumptions used in the Monte Carlo calculation for each material award granted in 20202021 and 2019:2020:
| | | February 12, 2020 | | June 3, 2019 | | February 7, 2019 | | February 10, 2021 | | February 12, 2020 |
Expected volatility | Expected volatility | 41.0% | | 39.7% | | 36.7% | Expected volatility | 51.0% | | 41.0% |
Expected term (in years) | Expected term (in years) | 2.9 | | 2.6 | | 2.9 | Expected term (in years) | 2.9 | | 2.9 |
Risk-free interest rate | Risk-free interest rate | 1.41% | | 1.78% | | 2.43% | Risk-free interest rate | 0.18% | | 1.41% |
Expected volatility – In determining expected volatility, we have considered a number of factors, including historical volatility.
Expected term – We use the vesting period of the award to determine the expected term assumption for the Monte Carlo simulation valuation model.
Risk-free interest rate – We use an implied “spot rate” yield on U.S. Treasury Constant Maturity rates as of the grant date for our assumption of the risk-free interest rate.
Expected dividend yield – We do not currently pay dividends on our capital stock; therefore, a dividend yield of 0% was used in the Monte Carlo simulation valuation model.
A summary of activity of the outstanding performance-based restricted stock units for the ninesix months ended SeptemberJune 30, 20202021 is presented below:
| | | | | |
| Performance-Based Restricted Stock Units |
Awards outstanding as of December 31, 20192020 | 106,943111,059 | |
Awards granted | 87,24439,955 | |
Stock issued | (75,486)0 | |
Awards forfeitedcancelled | (5,866)(34,020) | |
Awards outstanding as of SeptemberJune 30, 20202021 | 112,835116,994 | |
We recognized $1.6$1.1 million and $1.5$1.3 million of compensation expense for performance-based restricted stock units for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. We recognized $4.3$3.2 million and $3.5$2.7 million of compensation expense for performance-based restricted stock units for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
Time-Based Restricted Stock Units
As of SeptemberJune 30, 2020,2021, we had time-based restricted stock unit awards from 2021, 2020, 2019 2018 and 20172018 outstanding. The outstanding awards all ratably vest on the first, second and third anniversaries of the original grant date. However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed subsequent to the last grant anniversary date.date, except as noted below in Chief Executive Officer’s 2021 Equity Award Grants. Each time-based restricted stock unit represents a right to receive 1 share of Rogers’ capital stock at the end of the vesting period. The fair value of the award is determined by the market value of the underlying stock price at the grant date. We recognize compensation expense on all of these awards on a straight-line basis over the vesting period. We account for forfeitures as they occur.
A summary of activity of the outstanding time-based restricted stock units for the ninesix months ended SeptemberJune 30, 20202021 is presented below:
| | | | | |
| Time-Based Restricted Stock Units |
Awards outstanding as of December 31, 20192020 | 101,685102,142 | |
Awards granted | 58,28846,998 | |
Stock issued | (48,901)(44,037) | |
Awards forfeitedcancelled | (4,962)(5,450) | |
Awards outstanding as of SeptemberJune 30, 20202021 | 106,11099,653 | |
We recognized $1.5$1.9 million and $1.5 million of compensation expense for time-based restricted stock units for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. We recognized $4.6$3.7 million and $4.4$3.1 million of compensation expense for time-basedperformance-based restricted stock units for the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively.
Chief Executive Officer’s 2021 Equity Award Grants
The terms of the performance-based and 2019, respectively.time-based restricted stock unit awards granted to our Chief Executive Officer (CEO), Bruce Hoechner, in February 2021 were modified from the standard language provisions from prior year awards to allow for accelerated vesting of the full awards provided certain criteria are met. Accounting Standards Codification (ASC) Topic 718: Compensation—Stock Compensation requires companies that allow for accelerated vesting of employees’ unvested equity upon retirement to recognize the expense from the date of grant to the date the employee becomes eligible to retire – regardless of whether or not the employee actually retires when he or she is eligible to retire. As a result, the $4.0 million of expense related to the awards granted on February 10, 2021 to our CEO, which provide for immediate vesting upon retirement, will be expensed from the date of the grant, February 10, 2021, through his retirement eligibility date, November 9, 2021.
Deferred Stock Units
We grant deferred stock units to non-management directors. These awards are fully vested on the date of grant and the related shares are generally issued on the 13-month anniversary of the grant date unless the individual elects to defer the receipt of those shares. Each deferred stock unit results in the issuance of 1 share of Rogers’ capital stock. The grant of deferred stock units is typically done annually during the second quarter of each year. The fair value of the award is determined by the market value of the underlying stock price at the grant date.
A summary of activity of the outstanding deferred stock units for the ninesix months ended SeptemberJune 30, 20202021 is presented below:
| | | | | |
| Deferred Stock Units |
Awards outstanding as of December 31, 20192020 | 7,15012,450 | |
Awards granted | 9,4006,450 | |
Stock issued | (5,100)(9,400) | |
Awards outstanding as of SeptemberJune 30, 20202021 | 11,4509,500 | |
We recognized 0$1.2 million of compensation expense related to deferred stock units for the three and six months ended SeptemberJune 30, 20202021, and 2019, respectively. We recognized $1.0 million and $1.1 million of compensation expense for the ninethree and six months ended SeptemberJune 30, 2020 and 2019, respectively.2020.
Note 9 – Debt
In February 2017, we entered into a secured five-year credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the Third Amended Credit Agreement), which increased the principal amount of our revolving credit facility to up to $450.0 million borrowing capacity, with sublimits for multicurrency borrowings, letters of credit and swing-line notes, and provided an additional $175.0 million accordion feature. Borrowings may be used to finance working capital needs, for letters of credit and for general corporate purposes in the ordinary course of business, including the financing of permitted acquisitions (as defined in the Third Amended Credit Agreement).
All obligations under the Third Amended Credit Agreement are guaranteed by each of our existing and future material domestic subsidiaries, as defined in the Third Amended Credit Agreement (the Guarantors). The obligations are also secured by a Third Amended and Restated Pledge and Security Agreement, dated as of February 17, 2017, entered into by us and the Guarantors which grants to the administrative agent, for the benefit of the lenders, a security interest, subject to certain exceptions, in substantially all of the non-real estate assets of the Guarantors. These assets include, but are not limited to, receivables, equipment, intellectual property, inventory, and stock in certain subsidiaries. All revolving loans are due on the maturity date, February 17, 2022.
Borrowings under the Third Amended Credit Agreement can be made as alternate base rate loans or euro-currency loans. Alternate base rate loans bear interest at a base reference rate plus a spread of 37.5 to 75.0 basis points, depending on our leverage ratio. The base reference rate is the greatest of (a) the prime rate in effect on such day, (b) the Federal Reserve Bank of New York (NYFRB) rate in effect on such day plus ½ of 1% and (c) the adjusted LIBOR for a one month interest period in dollars on such day (or if such day is not a business day, the immediately preceding business day) plus 1%. Euro-currency loans bear interest based on adjusted LIBOR plus a spread of 137.5 to 175.0 basis points, depending on our leverage ratio. Based on our leverage ratio as of September 30, 2020, the spread was 137.5 basis points.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Third Amended Credit Agreement, we are required to pay a quarterly fee of 20 to 30 basis points (based upon our leverage ratio) of the unused amount of the lenders’ commitments under the Third Amended Credit Agreement.
The Third Amended Credit Agreement contains customary representations, warranties, covenants, mandatory prepayments and events of default under which our payment obligations may be accelerated. If an event of default occurs, the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees. The financial covenants include requirements to maintain (1) a leverage ratio of no more than 3.25 to 1.00, subject to an election to increase the maximum leverage ratio to 3.50 to 1.00 for 3 fiscal quarters in connection with a permitted acquisition, and (2) an interest coverage ratio of no less than 3.00 to 1.00.
The Third Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our leverage ratio does not exceed 2.75 to 1.00. If our 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 leverage ratio did not exceed 2.75 to 1.00 as of September 30, 2020.
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on $75.0 million of our $450.0 million revolving credit facility. This transaction was designated as a cash flow hedge and qualified for hedge accounting treatment. We terminated the interest rate swap on September 30, 2020. As a result, we settled the interest rate swap for $2.4 million on October 2, 2020, representing the fair value of the interest rate swap on the date of termination. Both Rogers and the counterparties released each other from all obligation under the interest rate swap agreement, including the obligation to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to the agreed upon notional principal amount of $75.0 million.
We borrowed $150.0 million under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic, during the three months ended March 31, 2020. We did 0t borrow anything further under our revolving credit facility for the three and nine months ended September 30, 2020. We are not required to make any quarterly principal payments under the Third Amended Credit Agreement. However, for the three and nine months ended September 30, 2020, we made $163.0 million and $213.0 million of discretionary principal payments on our revolving credit facility, respectively. We had $60.0 million in outstanding borrowings under our revolving credit facility as of September 30, 2020.
We incurred interest expense on our outstanding debt, net of the impacts of our interest rate swap, of $3.4 million and $1.8 million for the three months ended September 30, 2020 and 2019, respectively, and $6.3 million and $6.1 million for the nine months ended September 30, 2020, and 2019, respectively. We incurred immaterial unused commitment fees for each of the three- and nine-month periods ended September 30, 2020 and 2019.
We had $0.7 million and $1.2 million of outstanding line of credit issuance costs as of September 30, 2020 and December 31, 2019, respectively, which will be amortized over the life of the Third Amended Credit Agreement. We recognized an immaterial amount of amortization expense for each of the three- and nine-month periods ended September 30, 2020 and 2019, related to these deferred costs.
On October 16, 2020, we entered into the Fourth Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A, as administrative agent, and the lenders party thereto (the Fourth Amended Credit Agreement). The Fourth Amended Credit Agreement amends and restates the Third Amended Credit Agreement, and provides for a revolving credit facility with up to a $450.0 million borrowing capacity, with sublimits for multicurrency borrowings, letters of credit and swing-line notes, in addition to a $175.0 million accordion feature. Borrowings may be used to finance working capital needs, for letters of credit and for general corporate purposes in the ordinary course of business, including the financing of permitted acquisitions (as defined in the Fourth Amended Credit Agreement). The Fourth Amended Credit Agreement extends the maturity, the date on which all amounts borrowed or outstanding under the Fourth Amended Credit Agreement are due, from February 17, 2022 to March 31, 2024.
All obligations under the Fourth Amended Credit Agreement are guaranteed by each of our existing and future material domestic subsidiaries, as defined in the Fourth Amended Credit Agreement (the Guarantors). The obligations are also secured by a Fourth Amended and Restated Pledge and Security Agreement, dated as of October 16, 2020, entered into by us and the Guarantors which grants to the administrative agent, for the benefit of the lenders, a security interest, subject to certain
exceptions, in substantially all of our and the Guarantors’ non-real estate assets. These assets include, but are not limited to, receivables, equipment, intellectual property, inventory, and stock in certain subsidiaries.
Borrowings under the Fourth Amended Credit Agreement can be made as alternate base rate loans or euro-currency loans. Alternate base rate loans bear interest at a base reference rate plus a spread of 62.5 to 100.0 basis points, depending on our leverage ratio. The base reference rate is the greatest of (a) the prime rate in effect on such day, (b) the NYFRBFederal Reserve Bank of New York rate in effect on such day plus ½ of 1%, and (c) the adjusted LIBOR for a one month interest period in dollars on such day (or if such day is not a business day, the immediately preceding business day) plus 1%. Euro-currency loans bear interest based on adjusted LIBOR plus a spread of 162.5 to 200.0 basis points, depending on our leverage ratio. Based on our leverage ratio on June 30, 2021, the spread was 162.5 basis points.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Fourth Amended Credit Agreement, we are required to pay a quarterly fee of 25 to 35 basis points (based upon our leverage ratio) of the unused amount of the lenders’ commitments under the Fourth Amended Credit Agreement.
The Fourth Amended Credit Agreement contains customary representations and warranties, covenants, mandatory prepayments and events of default under which our payment obligations may be accelerated. If an event of default occurs, the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees. The financial covenants include requirements to maintain (1) a total net leverage ratio of no more than 3.25 to 1.00, subject to a one-time election to increase the maximum total net leverage ratio to 3.50 to 1.00 for one fiscal year in connection with a permitted acquisition, and (2) an interest coverage ratio of no less than 3.00 to 1.00. We are permitted to net up to $50.0 million of unrestricted domestic cash and cash equivalents against indebtedness in the calculation of the total net leverage ratio.
The Fourth Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our total net leverage ratio does not exceed 2.75 to 1.00. If our total net leverage ratio exceeds 2.75 to 1.00, we may nonetheless make up to $20.0 million in restricted payments, including cash dividends, during 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 June 30, 2021.
We did 0t borrow anything under the Fourth Amended Credit Agreement for the three and six months ended June 30, 2021. During the three months ended March 31, 2020, we borrowed $150.0 million under the Third Amended Credit Agreement (prior to its restatement) as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic. We did not borrow anything further for the three months ended June 30, 2020. We are not required to make any quarterly principal payments under the Fourth Amended Credit Agreement. However, we made $4.0 million and $25.0 million of discretionary principal payments on our revolving credit facility for the three and six months ended June 30, 2021, respectively, and we made $50.0 million of discretionary principal payments for both of the three and six month periods ended June 30, 2020.
We had 0 outstanding borrowings under our revolving credit facility as of June 30, 2021, and $25.0 million as of December 31, 2020. We had $2.0 million and $2.3 million of outstanding line of credit issuance costs as of June 30, 2021 and December 31, 2020, respectively, which will be amortized over the life of the Fourth Amended Credit Agreement.
Note 10 - Leases
We havehad a finance lease obligation related to our manufacturing facility in Eschenbach, Germany. Under the terms of the lease agreement, we havehad an option to purchase the property upon the expiration of the lease inon June 30, 2021 at a price which iswas the greater of (i) the then-current market value or (ii) the residual book value of the land including the buildings and installations thereon. We exercised this purchase option with a net cash payment of $5.0 million on June 30, 2021, extinguishing the remaining finance lease obligation and finance lease right-of-use asset related to this facility. Our finance lease obligation related to this facility was $4.4$4.2 million just prior to the exercise of the purchase option and $4.5 million as of September 30, 2020 and December 31, 2019, respectively.2020. The finance lease right-of-use asset balance for this facility was $6.3$6.1 million just prior to the exercise of the purchase option and $6.3$6.5 million as of September 30, 2020 and December 31, 2019,2020, respectively. Accumulated amortization related to this finance lease right-of-use asset was $4.2$4.5 million just prior to the exercise of the purchase option and $3.8 million as of SeptemberJune 30, 2020 and December 31, 2019, respectively.2021. The aggregate of all other finance lease obligations, finance lease right-of-use assets and related accumulated amortization, were immaterial as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
Amortization expense related to our finance lease right-of-use assets, which is primarily included in the “Cost of sales” line item of the condensed consolidated statements of operations, was immaterial for each of the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019.2020. Interest expense related to our finance lease obligations, which is included in the “Interest expense, net” line item of the condensed consolidated statements of operations, was immaterial for each of the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019.2020. Payments made on the principal portion of our finance lease obligations were
immaterial for each of the three- and nine-monthsix-month periods ended SeptemberJune 30, 2021 and 2020, and 2019.excluding the $5.0 million net cash payment to exercise the Eschenbach, Germany manufacturing facility purchase option.
We have operating leases primarily related to building space and vehicles. Renewal options are included in the lease term to the extent we are reasonably certain to exercise the option. The exercise of lease renewal options is at our sole discretion. We
account for lease components separately from non-lease components. The incremental borrowing rate represents our ability to borrow on a collateralized basis over a similar lease term.
Our expenses and payments for operating leases were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Operating leases expense | Operating leases expense | $ | 846 | | | $ | 843 | | | $ | 2,268 | | | $ | 2,336 | | Operating leases expense | $ | 779 | | | $ | 694 | | | $ | 1,460 | | | $ | 1,422 | |
Short-term leases expense | Short-term leases expense | $ | 154 | | | $ | 68 | | | $ | 384 | | | $ | 150 | | Short-term leases expense | $ | 56 | | | $ | 107 | | | $ | 130 | | | $ | 230 | |
Payments on operating lease obligations | Payments on operating lease obligations | $ | 719 | | | $ | 719 | | | $ | 2,187 | | | $ | 2,243 | | Payments on operating lease obligations | $ | 665 | | | $ | 722 | | | $ | 1,335 | | | $ | 1,468 | |
Our assets and liabilities balances related to finance and operating leases reflected in the condensed consolidated statements of financial position were as follows:
| (Dollars in thousands) | (Dollars in thousands) | Location in Statements of Financial Position | | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | Location in Statements of Financial Position | | June 30, 2021 | | December 31, 2020 |
Finance lease right-of-use assets | Finance lease right-of-use assets | Property, plant and equipment, net | | $ | 6,307 | | | $ | 6,280 | | Finance lease right-of-use assets | Property, plant and equipment, net | | $ | 418 | | | $ | 7,017 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | Other long-term assets | | $ | 4,039 | | | $ | 4,656 | | Operating lease right-of-use assets | Other long-term assets | | $ | 4,565 | | | $ | 4,216 | |
| Finance lease obligations, current portion | Finance lease obligations, current portion | Other accrued liabilities | | $ | 4,433 | | | $ | 400 | | Finance lease obligations, current portion | Other accrued liabilities | | $ | 219 | | | $ | 4,755 | |
Finance lease obligations, non-current portion | Finance lease obligations, non-current portion | Other long-term liabilities | | $ | 0 | | | $ | 4,140 | | Finance lease obligations, non-current portion | Other long-term liabilities | | $ | 161 | | | $ | 322 | |
Total finance lease obligations | Total finance lease obligations | | $ | 4,433 | | | $ | 4,540 | | Total finance lease obligations | | $ | 380 | | | $ | 5,077 | |
| Operating lease obligations, current portion | Operating lease obligations, current portion | Other accrued liabilities | | $ | 2,135 | | | $ | 2,343 | | Operating lease obligations, current portion | Other accrued liabilities | | $ | 2,164 | | | $ | 2,275 | |
Operating lease obligations, non-current portion | Operating lease obligations, non-current portion | Other long-term liabilities | | $ | 2,023 | | | $ | 2,334 | | Operating lease obligations, non-current portion | Other long-term liabilities | | $ | 2,431 | | | $ | 2,219 | |
Total operating lease obligations | Total operating lease obligations | | $ | 4,158 | | | $ | 4,677 | | Total operating lease obligations | | $ | 4,595 | | | $ | 4,494 | |
Net Future Minimum Lease Payments
The following table includes future minimum lease payments under finance and operating leases together with the present value of the net future minimum lease payments as of SeptemberJune 30, 2020:2021:
| | | Finance | | Operating | | Finance | | Operating |
(Dollars in thousands) | (Dollars in thousands) | Leases Signed | | Less: Leases Not Yet Commenced | | Total Leases | | Leases Signed | | Less: Leases Not Yet Commenced | | Total Leases | (Dollars in thousands) | Leases Signed | | Less: Leases Not Yet Commenced | | Leases in Effect | | Leases Signed | | Less: Leases Not Yet Commenced | | Leases in Effect |
2020 | $ | 139 | | | $ | 0 | | | $ | 139 | | | $ | 674 | | | $ | (2) | | | $ | 672 | | |
2021 | 2021 | 4,584 | | | (193) | | | 4,391 | | | 2,002 | | | (12) | | | 1,990 | | 2021 | 15 | | | 0 | | | 15 | | | 1,232 | | | (10) | | | 1,222 | |
2022 | 2022 | 193 | | | (193) | | | 0 | | | 1,096 | | | (17) | | | 1,079 | | 2022 | 412 | | | (218) | | | 194 | | | 2,057 | | | (33) | | | 2,024 | |
2023 | 2023 | 186 | | | (186) | | | 0 | | | 454 | | | (15) | | | 439 | | 2023 | 478 | | | (291) | | | 187 | | | 1,238 | | | (33) | | | 1,205 | |
2024 | 2024 | 0 | | | 0 | | | 0 | | | 211 | | | (5) | | | 206 | | 2024 | 291 | | | (291) | | | 0 | | | 323 | | | (24) | | | 299 | |
2025 | | 2025 | 291 | | | (291) | | | 0 | | | 43 | | | (5) | | | 38 | |
Thereafter | Thereafter | 0 | | | 0 | | | 0 | | | 5 | | | 0 | | | 5 | | Thereafter | 362 | | | (362) | | | 0 | | | 7 | | | (4) | | | 3 | |
Total lease payments | Total lease payments | 5,102 | | | (572) | | | 4,530 | | | 4,442 | | | (51) | | | 4,391 | | Total lease payments | 1,849 | | | (1,453) | | | 396 | | | 4,900 | | | (109) | | | 4,791 | |
Less: Interest | Less: Interest | (124) | | | 27 | | | (97) | | | (236) | | | 3 | | | (233) | | Less: Interest | (75) | | | 59 | | | (16) | | | (199) | | | 3 | | | (196) | |
Present Value of Net Future Minimum Lease Payments | Present Value of Net Future Minimum Lease Payments | $ | 4,978 | | | $ | (545) | | | $ | 4,433 | | | $ | 4,206 | | | $ | (48) | | | $ | 4,158 | | Present Value of Net Future Minimum Lease Payments | 1,774 | | | (1,394) | | | 380 | | | 4,701 | | | (106) | | | 4,595 | |
The following table includes information regarding the lease term and discount rates utilized in the calculation of the present value of net future minimum lease payments:
| | | Finance Leases | | Operating Leases | | Finance Leases | | Operating Leases |
Weighted Average Remaining Lease Term | Weighted Average Remaining Lease Term | 0.8 years | | 2.3 years | Weighted Average Remaining Lease Term | 2.3 years | | 2.4 years |
Weighted Average Discount Rate | Weighted Average Discount Rate | 3.00% | | 4.84% | Weighted Average Discount Rate | 3.70% | | 3.58% |
Note 11 – Pension Benefits and Other Postretirement Benefits
Pension and Other Postretirement Benefit Plans
As of December 31, 2019,June 30, 2021, we had 21 qualified noncontributory defined benefit pension plans. In June 2020, we completed the remaining settlement efforts for 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)), which had been terminated and substantially settled in late 2019. As of September 30, 2020, onlyplan, the Rogers Corporation Employees’ Pension Plan (the Union Plan), which was frozen and ceased accruing benefits remained. There are no plans to terminate the Union Plan.in 2013.
Additionally, we sponsor other postretirement benefit plans, including multiple fully insured or self-funded medical plans and life insurance plans for certain retirees. The measurement date for all plans is December 31st for each respective plan year.
Pension Plan Termination & SettlementSurplus Funds
During the second quarter ofOn October 17, 2019, following receipt of a determination letter from the Internal Revenue Service (IRS), we amended the Merged Plan to (a) terminate the Merged Plan (subject to discretionary approval by our Chief Executive Officer) and (b) add a lump sum distribution option in connection withOfficer approved 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, if approved.Plan)). We subsequently provided participants of the Merged Plan an option to elect either a lump sum distribution or an annuity.
On October 17, 2019, our Chief Executive Officer approved the termination of the Merged Plan. A group annuity contract was purchased with an insurance company for all participants who did not elect a lump sum distribution, for $123.3 million, with an initial cash settlement date of October 24, 2019, and a true-up cash settlement date of June 1, 2020.distribution. The insurance company became responsible for administering and paying pension benefit payments effective January 1, 2020.
Lump sum distributionsUpon completion of $38.9 million were paid out prior to December 31, 2019. The Merged Plan paid an additional $1.3 million of monthlythe pension benefit payments subsequent to the annuity purchase date during the transition period ending December 31, 2019.
In addition, we recorded a total non-cash pre-taxtermination and settlement charge in connection with the termination ofprocesses for the Merged Plan, of $53.2we had a $9.7 million during the fourth quarter of 2019, as well as an immaterial non-cash pre-tax settlement benefit during the second quarter of 2020. This net settlement amount recognized included the immediate recognition into expense of the related unrecognized losses within “Accumulated other comprehensive loss” on the consolidated statements of financial position as of the plan termination date. The pension settlement charge during the fourth quarter of 2019 was recognized in the “Pension settlement charges” line item in the consolidated statements of operations, and the pension settlement benefit during the second quarter of 2020 was recognized in the “Pension settlement charges” line item in the condensed consolidated statements of operations.
As of September 30, 2020, the remaining pension surplus investment balance was approximately $9.3 million. We plan on using a portion of the funds to pay plan expenses, and moving the remainder funds from the pension trust to a defined contribution plan trust, where they will be used to fund certain employer contributions and pay plan expenses. Onbalance. In July 27, 2020, we transferred $7.4 million of the pension surplus investment balance to a suspense account held within a trust for the Rogers Employee Savings and Investment Plan (RESIP), a 401(k) plan for domestic employees. The investment balance not transferred to the trust suspense account will be used to pay any final plan expenses, after which the remainder of these funds will be moved to the RESIP trust suspense account. The funds in the RESIP trust suspense account have been, and will continue to be, used to fund certain employer contributions. As of June 30, 2021, the combined remaining pension surplus investment balance was approximately $7.7 million.
Components of Net Periodic Benefit (Credit) Cost
The components of net periodic benefit (credit) cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | | September 30, | | September 30, |
(Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 17 | | | $ | 12 | | | $ | 51 | | | $ | 48 | |
Interest cost | 223 | | | 1,790 | | | 685 | | | 5,359 | | | 10 | | | 14 | | | 30 | | | 44 | |
Expected return of plan assets | (394) | | | (2,187) | | | (1,180) | | | (6,571) | | | 0 | | | 0 | | | 0 | | | 0 | |
Amortization of prior service credit | 0 | | | 0 | | | 0 | | | 0 | | | (28) | | | (252) | | | (84) | | | (758) | |
Amortization of net loss | 99 | | | 476 | | | 327 | | | 1,386 | | | 0 | | | 0 | | | 0 | | | 0 | |
Settlement benefit | 0 | | | 0 | | | (63) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Net periodic benefit (credit) cost | $ | (72) | | | $ | 79 | | | $ | (231) | | | $ | 174 | | | $ | (1) | | | $ | (226) | | | $ | (3) | | | $ | (666) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| June 30, | | June 30, | | June 30, | | June 30, |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 15 | | | $ | 17 | | | $ | 30 | | | $ | 34 | |
Interest cost | 184 | | | 231 | | | 368 | | | 462 | | | 6 | | | 10 | | | 12 | | | 20 | |
Expected return of plan assets | (390) | | | (393) | | | (780) | | | (786) | | | 0 | | | 0 | | | 0 | | | 0 | |
Amortization of prior service credit | 0 | | | 0 | | | 0 | | | 0 | | | (24) | | | (28) | | | (48) | | | (56) | |
Amortization of net loss | 98 | | | 114 | | | 196 | | | 228 | | | 0 | | | 0 | | | 0 | | | 0 | |
Settlement benefit | 0 | | | (63) | | | 0 | | | (63) | | | 0 | | | 0 | | | 0 | | | 0 | |
Net periodic benefit (credit) cost | $ | (108) | | | $ | (111) | | | $ | (216) | | | $ | (159) | | | $ | (3) | | | $ | (1) | | | $ | (6) | | | $ | (2) | |
Employer Contributions
There were 0 required or voluntary contributions made to ourthe Union Plan or the Merged Plan for each of the three and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019.2020. Additionally, there were 0 required or voluntary contributions made to our Union Plan for the three and nine-month periods ended September 30, 2020 and 2019, and we are 0t required to make additional contributions to this planthe Union Plan for the remainder of 2020.2021.
As there is no funding requirement for the other postretirement benefit plans, we funded these benefit payments as incurred, which were immaterial for each of the three and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019,2020, using cash from operations.
Note 12 – Commitments and Contingencies
We are currently engaged in the following material environmental and legal proceedings:
Voluntary Corrective Action Program
Our location in Rogers, Connecticut is part of the Connecticut Voluntary Corrective Action Program (VCAP). As part of this program, we partnered with the Connecticut Department of Energy and Environmental Protection (CT DEEP) to determine the corrective actions to be taken at the site related to contamination issues. We evaluated this matter and completed internal due diligence work related to the site in the fourth quarter of 2015. Remediation activities on the site are ongoing and are recorded as reductions to the accrual as they are incurred. We incurred $1.7$1.8 million of aggregate remediation costs through SeptemberJune 30, 2020,2021, and the accrual for future remediation efforts is $1.0$0.9 million.
Asbestos
Overview
We, like many other industrial companies, have been named as a defendant in a number of lawsuits filed in courts across the country by persons alleging personal injury from exposure to products containing asbestos. We have never mined, milled, manufactured or marketed asbestos; rather, we made and provided to industrial users a limited number of products that contained encapsulated asbestos, but we stopped manufacturing these products in the late 1980s. Most of the claims filed against us involve numerous defendants, sometimes as many as several hundred.
The following table summarizes the change in number of asbestos claims outstanding for the ninesix months ended SeptemberJune 30, 2020:2021:
| | | | | |
| Asbestos Claims |
Claims outstanding as of January 1, 20202021 | 592561 | |
New claims filed | 8864 | |
Pending claims concluded(1) | (122)(77) | |
Claims outstanding as of SeptemberJune 30, 20202021 | 558548 | |
(1) For the ninesix months ended SeptemberJune 30, 2020, 1032021, 71 claims were dismissed and 196 claims were settled. Settlements totaled approximately $5.4$0.5 million for the ninesix months ended SeptemberJune 30, 2020.2021.
Impact on Financial Statements
We recognize a liability for asbestos-related contingencies that are probable of occurrence and reasonably estimable. In connection with the recognition of liabilities for asbestos-related matters, we record asbestos-related insurance receivables that are deemed probable.
The liability projection period covers all current and future indemnity and defense costs through 2064, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. This conclusion was based on our history and experience with the claims data, the diminished volatility and consistency of observable claims data, the period of time that has elapsed since we stopped manufacturing products that contained encapsulated asbestos and an expected downward trend in claims due to the average age of our claimants, which is approaching the average life expectancy.
To date, the indemnity and defense costs of our asbestos-related product liability litigation have been substantially covered by insurance. Although we have exhausted coverage under some of our insurance policies, we believe that we have applicable primary, excess and/or umbrella coverage for claims arising with respect to most of the years during which we manufactured and marketed asbestos-containing products. In addition, we have entered into a cost sharing agreement with most of our primary, excess and umbrella insurance carriers to facilitate the ongoing administration and payment of claims covered by the carriers. The cost sharing agreement may be terminated by any party, but will continue until a party elects to terminate it. As of the filing date for this report, the agreement has not been terminated, and no carrier had informed us it intended to terminate the agreement. We expect to continue to exhaust individual primary, excess and umbrella coverages over time, and there is no
assurance that such exhaustion will not accelerate due to additional claims, damages and settlements or that coverage will be available as expected. We are responsible for uninsured indemnity and defense costs, and we incurred an immaterial amount of expenses for each of the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019,2020, respectively, related to such costs.
The amounts recorded for the asbestos-related liability and the related insurance receivables are based on facts known at the time and a number of assumptions. However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of such claims, the length of time it takes to dispose of such claims, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual liability and insurance recoveries for us to be higher or lower than those projected or recorded.
Changes recorded in the estimated liability and estimated insurance recovery based on projections of asbestos litigation and corresponding insurance coverage, result in the recognition of expense or income.
Our projected asbestos-related liabilities and insurance receivables were as follows:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Asbestos-related liabilities | Asbestos-related liabilities | $ | 85,547 | | | $ | 85,880 | | Asbestos-related liabilities | $ | 73,084 | | | $ | 73,235 | |
Asbestos-related insurance receivables | Asbestos-related insurance receivables | $ | 78,316 | | | $ | 78,316 | | Asbestos-related insurance receivables | $ | 66,793 | | | $ | 66,793 | |
General
In addition to the above issues, the nature and scope of our business brings us in regular contact with the general public and a variety of businesses and government agencies. Such activities inherently subject us to the possibility of litigation, including environmental and product liability matters that are defended and handled in the ordinary course of business. We have established accruals for matters for which management considers a loss to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation will have a material adverse impact on our results of operations, financial position or cash flows.
Note 13 – Income Taxes
Our effective income tax rate was 8.1%25.6% and 18.6%30.6% for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The decrease from the thirdsecond quarter of 20192020 was primarily due to the decrease in the current quarter accruals for reserves of unrecognized tax benefits and the pretax mix across jurisdictions with disparate tax rates, partially offset by the second quarter of 2020 beneficial impact of changes in valuation allowance related to research and development (R&D) credits, partially offset bycredits. Our effective income tax rate was 25.4% and 26.1% for the increasesix months ended June 30, 2021 and 2020, respectively. The decrease from the first half of 2020 was primarily due to the decrease in the current quarter accruals of reserves for uncertainof unrecognized tax positions, higher tax impact on unremitted foreign earningsbenefits and profits, and changes inthe pretax mix across jurisdictions with disparate tax rates. Our effective income tax rate was 23.1% and 18.5% for the nine months ended September 30, 2020 and 2019, respectively. The increase from the first nine months of 2019 was primarily due to the increase in current quarter accruals of reserves for uncertain tax positions, the decrease in excess tax deductions on stock-based compensation and higher tax impact on unremitted foreign earnings and profits,rates, partially offset by the first half of 2020 beneficial impact of changes in valuation allowance related to R&D credits and pretax mix across jurisdictions with disparate tax rates.credits.
The total amount of unrecognized tax benefits as of SeptemberJune 30, 20202021 was $14.9$15.5 million, of which $14.5$14.9 million would affect our effective tax rate if recognized. Additionally, the balance of unrecognized tax benefits as of June 30, 2021 also included $0.6 million of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.
We recognize interest and penalties related to unrecognized tax benefits through income tax expense. As of SeptemberJune 30, 2020,2021, we had $1.1$1.5 million accrued for the payment of interest.
We are subject to taxation in the U.S. and various state and foreign jurisdictions. Our tax years from 2016 through 2020 are subject to examination by the tax authorities. With few exceptions, we are no longer subject to U.S. federal, state, local and foreign examinations by tax authorities for the years prior to 2015.before 2016.
Note 14 – Operating Segment Information
Our reporting structure is comprised of the following strategic operating segments: ACS, Elastomeric Material Solutions (EMS)AES and PES.EMS. The remaining operations, which represent our non-core businesses, are reported in the Other operating segment. We believe this structure aligns our external reporting presentation with how we currently manage and view our business internally.
Our ACSAES operating segment designs, develops, manufactures and sells circuit materials, ceramic substrate materials, busbars and cooling solutions enabling high-performance and high-reliability connectivity for applications in electric and hybrid electric vehicles (EV/HEV), wireless infrastructure (e.g.(i.e., power amplifiers, antennas and small cells), automotive (e.g.(i.e., ADAS,advanced driver assistance systems (ADAS), telematics and thermal solutions), aerospace and defense (e.g.(i.e., antenna systems, communication systems and phased array radar systems), mass transit, clean energy (i.e., variable frequency drives, renewable energy), connected devices (e.g.(i.e., mobile internet devices and thermal solutions) and wired infrastructure (e.g.(i.e., computing and IP infrastructure) markets.
Our EMS operating segment designs, develops, manufactures and sells engineered material solutions for a wide variety of applications and markets. These include polyurethane and silicone materials used in cushioning, gasketing and sealing, and vibration management applications for general industrial, portable electronics, automotive, electric and hybrid electric vehicles (EV/HEV),EV/HEV, mass transit, aerospace and defense, footwear and impact mitigation and printing markets; customized silicones used in flex heater and semiconductor thermal applications for general industrial, portable electronics, automotive, EV/HEV,
mass transit, aerospace and defense and medical markets; polytetrafluoroethylene and ultra-high molecular weight polyethylene materials used in wire and cable protection, electrical insulation, conduction and shielding, hose and belt protection, vibration management, cushioning, gasketing and sealing, and venting applications for general industrial, automotive, EV/HEV and aerospace and defense markets.
Our PES operating segment designs, develops, manufactures and sells ceramic substrate materials, busbars and cooling solutions for a variety of applications in EV/HEV, mass transit, clean energy (i.e. variable frequency drives, renewable energy), general industrial, aerospace and defense and wired infrastructure markets. We sell our ceramic substrate materials and cooling solutions under the curamik® trade name and our busbars under the ROLINX® trade name.
Our Other operating segment consists of elastomer components for applications in general industrial market, as well as elastomer floats for level sensing in fuel tanks, motors, and storage tanks applications in the general industrial and automotive markets. We sell our elastomer components under our ENDUR® trade name and our floats under our NITROPHYL® trade name.
The following table presents a disaggregation of revenue from contracts with customers and other pertinent financial information, for the periods indicated; inter-segment sales have been eliminated from the net sales data:
| (Dollars in thousands) | (Dollars in thousands) | | Advanced Connectivity Solutions | | Elastomeric Material Solutions | | Power Electronics Solutions | | Other | | Total | (Dollars in thousands) | | Advanced Electronics Solutions | | Elastomeric Material Solutions | | Other | | Total |
Three Months Ended September 30, 2020 | | | | | | | | | | | |
Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2021 | | | | | | | | |
Net sales - recognized over time | Net sales - recognized over time | | $ | 219 | | | $ | 2,612 | | | $ | 47,827 | | | $ | 3,568 | | | $ | 54,226 | | Net sales - recognized over time | | $ | 57,248 | | | $ | 3,758 | | | $ | 4,761 | | | $ | 65,767 | |
Net sales - recognized at a point in time | Net sales - recognized at a point in time | | 63,495 | | | 83,832 | | | 100 | | | 291 | | | 147,718 | | Net sales - recognized at a point in time | | 83,178 | | | 85,573 | | | 388 | | | 169,139 | |
Total net sales | Total net sales | | $ | 63,714 | | | $ | 86,444 | | | $ | 47,927 | | | $ | 3,859 | | | $ | 201,944 | | Total net sales | | $ | 140,426 | | | $ | 89,331 | | | $ | 5,149 | | | $ | 234,906 | |
Operating income (loss) | | $ | 4,981 | | | $ | 7,372 | | | $ | (4,691) | | | $ | 1,132 | | | $ | 8,794 | | |
Operating income | | Operating income | | $ | 18,288 | | | $ | 15,637 | | | $ | 1,820 | | | $ | 35,745 | |
| Three Months Ended September 30, 2019 | | |
Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2020 | |
Net sales - recognized over time | Net sales - recognized over time | | $ | 0 | | | $ | 3,429 | | | $ | 42,906 | | | $ | 4,504 | | | $ | 50,839 | | Net sales - recognized over time | | $ | 45,060 | | | $ | 2,667 | | | $ | 3,077 | | | $ | 50,804 | |
Net sales - recognized at a point in time | Net sales - recognized at a point in time | | 78,983 | | | 91,511 | | | 225 | | | 284 | | | 171,003 | | Net sales - recognized at a point in time | | 71,100 | | | 68,959 | | | 294 | | | 140,353 | |
Total net sales | Total net sales | | $ | 78,983 | | | $ | 94,940 | | | $ | 43,131 | | | $ | 4,788 | | | $ | 221,842 | | Total net sales | | $ | 116,160 | | | $ | 71,626 | | | $ | 3,371 | | | $ | 191,157 | |
Operating income (loss) | | $ | 13,778 | | | $ | 17,995 | | | $ | (3,358) | | | $ | 1,470 | | | $ | 29,885 | | |
Operating income | | Operating income | | $ | 17,070 | | | $ | 2,995 | | | $ | 1,027 | | | $ | 21,092 | |
| Nine Months Ended September 30, 2020 | | |
Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 | |
Net sales - recognized over time | Net sales - recognized over time | | $ | 219 | | | $ | 8,106 | | | $ | 139,288 | | | $ | 10,295 | | | $ | 157,908 | | Net sales - recognized over time | | $ | 112,062 | | | $ | 6,445 | | | $ | 9,973 | | | $ | 128,480 | |
Net sales - recognized at a point in time | Net sales - recognized at a point in time | | 198,988 | | | 233,490 | | | 580 | | | 945 | | | 434,003 | | Net sales - recognized at a point in time | | 160,256 | | | 174,735 | | | 700 | | | 335,691 | |
Total net sales | Total net sales | | $ | 199,207 | | | $ | 241,596 | | | $ | 139,868 | | | $ | 11,240 | | | $ | 591,911 | | Total net sales | | $ | 272,318 | | | $ | 181,180 | | | $ | 10,673 | | | $ | 464,171 | |
Operating income (loss) | | $ | 26,067 | | | $ | 21,884 | | | $ | (3,929) | | | $ | 3,339 | | | $ | 47,361 | | |
Operating income | | Operating income | | $ | 33,137 | | | $ | 35,714 | | | $ | 4,087 | | | $ | 72,938 | |
| Nine Months Ended September 30, 2019 | | |
Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | |
Net sales - recognized over time | Net sales - recognized over time | | $ | 0 | | | $ | 9,400 | | | $ | 153,827 | | | $ | 13,421 | | | $ | 176,648 | | Net sales - recognized over time | | $ | 91,461 | | | $ | 5,494 | | | $ | 6,727 | | | $ | 103,682 | |
Net sales - recognized at a point in time | Net sales - recognized at a point in time | | 251,982 | | | 272,196 | | | 780 | | | 2,886 | | | 527,844 | | Net sales - recognized at a point in time | | 135,973 | | | 149,658 | | | 654 | | | 286,285 | |
Total net sales | Total net sales | | $ | 251,982 | | | $ | 281,596 | | | $ | 154,607 | | | $ | 16,307 | | | $ | 704,492 | | Total net sales | | $ | 227,434 | | | $ | 155,152 | | | $ | 7,381 | | | $ | 389,967 | |
Operating income (loss) | | $ | 45,301 | | | $ | 46,752 | | | $ | (976) | | | $ | 4,821 | | | $ | 95,898 | | |
Operating income | | Operating income | | $ | 21,848 | | | $ | 14,512 | | | $ | 2,207 | | | $ | 38,567 | |
Net sales by operating segment and by geographic area were as follows:
| (Dollars in thousands) | (Dollars in thousands) | | Net Sales(1) | (Dollars in thousands) | | Net Sales(1) |
Region/Country | Region/Country | | Advanced Connectivity Solutions | | Elastomeric Material Solutions | | Power Electronics Solutions | | Other | | Total | Region/Country | | Advanced Electronics Solutions | | Elastomeric Material Solutions | | Other | | Total |
Three Months Ended September 30, 2020 | | | | | | | | | | | |
Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2021 | | | | | | | | |
United States | United States | | $ | 18,058 | | | $ | 29,733 | | | $ | 5,901 | | | $ | 980 | | | $ | 54,672 | | United States | | $ | 21,824 | | | $ | 40,666 | | | $ | 1,353 | | | $ | 63,843 | |
Other Americas | Other Americas | | 497 | | | 2,517 | | | 36 | | | 144 | | | 3,194 | | Other Americas | | 790 | | | 2,815 | | | 171 | | | 3,776 | |
Total Americas | Total Americas | | 18,555 | | | 32,250 | | | 5,937 | | | 1,124 | | | 57,866 | | Total Americas | | 22,614 | | | 43,481 | | | 1,524 | | | 67,619 | |
China | China | | 26,641 | | | 34,016 | | | 11,229 | | | 754 | | | 72,640 | | China | | 49,841 | | | 27,427 | | | 1,026 | | | 78,294 | |
Other APAC | Other APAC | | 11,588 | | | 11,150 | | | 4,633 | | | 530 | | | 27,901 | | Other APAC | | 25,432 | | | 5,410 | | | 648 | | | 31,490 | |
Total APAC | Total APAC | | 38,229 | | | 45,166 | | | 15,862 | | | 1,284 | | | 100,541 | | Total APAC | | 75,273 | | | 32,837 | | | 1,674 | | | 109,784 | |
Germany | Germany | | 1,973 | | | 5,450 | | | 12,074 | | | 99 | | | 19,596 | | Germany | | 21,651 | | | 5,889 | | | 217 | | | 27,757 | |
Other EMEA | Other EMEA | | 4,957 | | | 3,578 | | | 14,054 | | | 1,352 | | | 23,941 | | Other EMEA | | 20,888 | | | 7,124 | | | 1,734 | | | 29,746 | |
Total EMEA | Total EMEA | | 6,930 | | | 9,028 | | | 26,128 | | | 1,451 | | | 43,537 | | Total EMEA | | 42,539 | | | 13,013 | | | 1,951 | | | 57,503 | |
Total net sales | Total net sales | | $ | 63,714 | | | $ | 86,444 | | | $ | 47,927 | | | $ | 3,859 | | | $ | 201,944 | | Total net sales | | $ | 140,426 | | | $ | 89,331 | | | $ | 5,149 | | | $ | 234,906 | |
Three Months Ended September 30, 2019 | | | | | | | | | | | |
Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2020 | | | | | | | | |
United States | United States | | $ | 17,671 | | | $ | 41,232 | | | $ | 8,115 | | | $ | 1,237 | | | $ | 68,255 | | United States | | $ | 22,885 | | | $ | 30,073 | | | $ | 707 | | | $ | 53,665 | |
Other Americas | Other Americas | | 807 | | | 2,452 | | | 11 | | | 271 | | | 3,541 | | Other Americas | | 758 | | | 1,668 | | | 48 | | | 2,474 | |
Total Americas | Total Americas | | 18,478 | | | 43,684 | | | 8,126 | | | 1,508 | | | 71,796 | | Total Americas | | 23,643 | | | 31,741 | | | 755 | | | 56,139 | |
China | China | | 37,398 | | | 26,461 | | | 7,642 | | | 908 | | | 72,409 | | China | | 44,700 | | | 20,159 | | | 1,024 | | | 65,883 | |
Other APAC | Other APAC | | 13,813 | | | 14,385 | | | 6,269 | | | 675 | | | 35,142 | | Other APAC | | 13,439 | | | 9,835 | | | 453 | | | 23,727 | |
Total APAC | Total APAC | | 51,211 | | | 40,846 | | | 13,911 | | | 1,583 | | | 107,551 | | Total APAC | | 58,139 | | | 29,994 | | | 1,477 | | | 89,610 | |
Germany | Germany | | 4,251 | | | 3,868 | | | 10,528 | | | 171 | | | 18,818 | | Germany | | 18,407 | | | 4,799 | | | 44 | | | 23,250 | |
Other EMEA | Other EMEA | | 5,043 | | | 6,542 | | | 10,566 | | | 1,526 | | | 23,677 | | Other EMEA | | 15,971 | | | 5,092 | | | 1,095 | | | 22,158 | |
Total EMEA | Total EMEA | | 9,294 | | | 10,410 | | | 21,094 | | | 1,697 | | | 42,495 | | Total EMEA | | 34,378 | | | 9,891 | | | 1,139 | | | 45,408 | |
Total net sales | Total net sales | | $ | 78,983 | | | $ | 94,940 | | | $ | 43,131 | | | $ | 4,788 | | | $ | 221,842 | | Total net sales | | $ | 116,160 | | | $ | 71,626 | | | $ | 3,371 | | | $ | 191,157 | |
(1)Net sales are allocated to countries based on the location of the customer. The table above lists individual countries with 10% or more of net sales for the periods indicated.
| (Dollars in thousands) | (Dollars in thousands) | | Net Sales(1) | (Dollars in thousands) | | Net Sales(1) |
Region/Country | Region/Country | | Advanced Connectivity Solutions | | Elastomeric Material Solutions | | Power Electronics Solutions | | Other | | Total | Region/Country | | Advanced Electronics Solutions | | Elastomeric Material Solutions | | Other | | Total |
Nine Months Ended September 30, 2020 | | | | | | | | | | | |
Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 | | | | | | | | |
United States | United States | | $ | 49,907 | | | $ | 98,373 | | | $ | 19,562 | | | $ | 2,666 | | | $ | 170,508 | | United States | | $ | 45,621 | | | $ | 78,398 | | | $ | 2,025 | | | $ | 126,044 | |
Other Americas | Other Americas | | 2,122 | | | 6,634 | | | 222 | | | 503 | | | 9,481 | | Other Americas | | 1,384 | | | 5,309 | | | 387 | | | 7,080 | |
Total Americas | Total Americas | | 52,029 | | | 105,007 | | | 19,784 | | | 3,169 | | | 179,989 | | Total Americas | | 47,005 | | | 83,707 | | | 2,412 | | | 133,124 | |
China | China | | 86,846 | | | 72,550 | | | 28,657 | | | 2,003 | | | 190,056 | | China | | 108,264 | | | 55,258 | | | 2,419 | | | 165,941 | |
Other APAC | Other APAC | | 35,482 | | | 33,938 | | | 13,857 | | | 1,531 | | | 84,808 | | Other APAC | | 48,804 | | | 14,698 | | | 1,368 | | | 64,870 | |
Total APAC | Total APAC | | 122,328 | | | 106,488 | | | 42,514 | | | 3,534 | | | 274,864 | | Total APAC | | 157,068 | | | 69,956 | | | 3,787 | | | 230,811 | |
Germany | Germany | | 8,354 | | | 13,883 | | | 40,829 | | | 292 | | | 63,358 | | Germany | | 26,814 | | | 16,165 | | | 351 | | | 43,330 | |
Other EMEA | Other EMEA | | 16,496 | | | 16,218 | | | 36,741 | | | 4,245 | | | 73,700 | | Other EMEA | | 41,431 | | | 11,352 | | | 4,123 | | | 56,906 | |
Total EMEA | Total EMEA | | 24,850 | | | 30,101 | | | 77,570 | | | 4,537 | | | 137,058 | | Total EMEA | | 68,245 | | | 27,517 | | | 4,474 | | | 100,236 | |
Total net sales | Total net sales | | $ | 199,207 | | | $ | 241,596 | | | $ | 139,868 | | | $ | 11,240 | | | $ | 591,911 | | Total net sales | | $ | 272,318 | | | $ | 181,180 | | | $ | 10,673 | | | $ | 464,171 | |
Nine Months Ended September 30, 2019 | | | | | | | | | | | |
Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | | | | | | | |
United States | United States | | $ | 47,014 | | | $ | 126,067 | | | $ | 23,800 | | | $ | 3,606 | | | $ | 200,487 | | United States | | $ | 45,510 | | | $ | 68,640 | | | $ | 1,686 | | | $ | 115,836 | |
Other Americas | Other Americas | | 2,598 | | | 6,725 | | | 260 | | | 668 | | | 10,251 | | Other Americas | | 1,811 | | | 4,117 | | | 359 | | | 6,287 | |
Total Americas | Total Americas | | 49,612 | | | 132,792 | | | 24,060 | | | 4,274 | | | 210,738 | | Total Americas | | 47,321 | | | 72,757 | | | 2,045 | | | 122,123 | |
China | China | | 129,220 | | | 72,726 | | | 29,989 | | | 4,374 | | | 236,309 | | China | | 77,633 | | | 38,534 | | | 1,249 | | | 117,416 | |
Other APAC | Other APAC | | 44,980 | | | 44,407 | | | 18,232 | | | 2,244 | | | 109,863 | | Other APAC | | 33,118 | | | 22,788 | | | 1,001 | | | 56,907 | |
Total APAC | Total APAC | | 174,200 | | | 117,133 | | | 48,221 | | | 6,618 | | | 346,172 | | Total APAC | | 110,751 | | | 61,322 | | | 2,250 | | | 174,323 | |
Germany | Germany | | 12,674 | | | 10,775 | | | 46,780 | | | 447 | | | 70,676 | | Germany | | 35,136 | | | 8,433 | | | 193 | | | 43,762 | |
Other EMEA | Other EMEA | | 15,496 | | | 20,896 | | | 35,546 | | | 4,968 | | | 76,906 | | Other EMEA | | 34,226 | | | 12,640 | | | 2,893 | | | 49,759 | |
Total EMEA | Total EMEA | | 28,170 | | | 31,671 | | | 82,326 | | | 5,415 | | | 147,582 | | Total EMEA | | 69,362 | | | 21,073 | | | 3,086 | | | 93,521 | |
Total net sales | Total net sales | | $ | 251,982 | | | $ | 281,596 | | | $ | 154,607 | | | $ | 16,307 | | | $ | 704,492 | | Total net sales | | $ | 227,434 | | | $ | 155,152 | | | $ | 7,381 | | | $ | 389,967 | |
(1)Net sales are allocated to countries based on the location of the customer. The table above lists individual countries with 10% or more of net sales for the periods indicated.
Revenue from Contracts with Customers
We have contract assets primarily related to unbilled revenue for revenue recognized related to products that are deemed to have no alternative use whereby we have the right to payment. Revenue is recognized in advance of billing to the customer in these circumstances as billing is typically performed at the time of shipment to the customer. The unbilled revenue is included in contract assets on the condensed consolidated statements of financial position.
Contract assets by operating segment were as follows:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Advanced Connectivity Solutions | $ | 186 | | | $ | 0 | | |
Advanced Electronics Solutions | | Advanced Electronics Solutions | $ | 25,947 | | | $ | 24,199 | |
Elastomeric Material Solutions | Elastomeric Material Solutions | 1,090 | | | 1,077 | | Elastomeric Material Solutions | 1,828 | | | 887 | |
Power Electronics Solutions | 19,132 | | | 19,471 | | |
Other | Other | 1,653 | | | 1,907 | | Other | 2,510 | | | 1,489 | |
Total contract assets | Total contract assets | $ | 22,061 | | | $ | 22,455 | | Total contract assets | $ | 30,285 | | | $ | 26,575 | |
We did not have any contract liabilities as of SeptemberJune 30, 20202021 or December 31, 2019.2020. No impairment losses were recognized for either of the three or nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019,2020, respectively, on any receivables or contract assets arising from our contracts with customers.
Note 15 – Supplemental Financial Information
Restructuring and Impairment Charges
The components of “Restructuring and impairment charges” line item in the condensed consolidated statements of operations, which contains restructuring charges and related expenses, as well as impairment charges, were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Restructuring charges | Restructuring charges | $ | 9,027 | | | $ | (1) | | | $ | 9,027 | | | $ | 948 | | Restructuring charges | | | | | | | |
Impairment charges | 386 | | | 581 | | | 386 | | | 1,537 | | |
Manufacturing footprint optimization | | Manufacturing footprint optimization | 747 | | | 0 | | | 2,253 | | | 0 | |
| Total restructuring charges | | Total restructuring charges | 747 | | | 0 | | | 2,253 | | | 0 | |
| Total restructuring and impairment charges | Total restructuring and impairment charges | $ | 9,413 | | | $ | 580 | | | $ | 9,413 | | | $ | 2,485 | | Total restructuring and impairment charges | $ | 747 | | | $ | 0 | | | $ | 2,253 | | | $ | 0 | |
Our PES, ACS and EMSAES operating segmentssegment incurred $6.3 million, $2.9$0.7 million and $0.2$2.3 million of restructuring and impairment charges respectively, for the three and ninesix months ended SeptemberJune 30, 2020.2021, respectively, and our EMS operating segment incurred an immaterial amount of restructuring and impairment charges for the three and six months ended June 30, 2021.Restructuring Charges & Related Expenses - Manufacturing Footprint Optimization
During the third quarter of 2020, we commenced manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our PES and ACSAES operating segments,segment, in order to achieve greater cost competitiveness as well as align capacity with end market demand. We expect theThe majority of the restructuring activities to behave been completed byas of the end of the first half of 2021. We incurred restructuring charges and related expenses of $0.7 million and $2.3 million for the three and six months ended June 30, 2021, respectively, of which $0.4 million of contra-expense and $0.1 million of expense is related to severance and related benefits for the three and six months ended June 30, 2021, respectively. Severance and related benefits activity related to the manufacturing footprint optimization plan is presented in the table below for the ninesix months ended SeptemberJune 30, 2020:2021:
| | | | | |
(Dollars in thousands) | Manufacturing Footprint Optimization Restructuring Severance |
Balance as of December 31, 20192020 | $ | 011,003 | |
Provisions | 8,754113 | |
Payments | (5)(6,902) | |
Foreign currency translation adjustment | (78)(312) | |
Balance as of SeptemberJune 30, 20202021 | $ | 8,6713,902 | |
In 2018, we made the decision to consolidate our Santa Fe Springs, California operations into our facilities in Carol Stream, Illinois and Bear, Delaware, which was completed as of December 31, 2019. We recorded immaterial expense and $0.9 million of expense for the three and nine months ended September 30, 2019, respectively, related to this facility consolidation.
Impairment Charges
We recognized $0.4 million of impairment charges, primarily related to fixed assets in Belgium, for the three and nine months ended September 30, 2020. We recognized $0.6 million and $1.5 million in impairment charges on certain assets in connection with the Isola USA Corp. (Isola) asset acquisition for the three and nine months ended September 30, 2019, respectively.
Other Operating (Income) Expense, Net
The components of “Other operating (income) expense, net” line item in the condensed consolidated statements of operations, were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Lease income | $ | 0 | | | $ | (57) | | | $ | 0 | | | $ | (932) | | |
Depreciation on leased assets | 0 | | | 179 | | | 0 | | | 1,729 | | |
Loss on sale or disposal of property, plant and equipment | (4) | | | 2 | | | 49 | | | 278 | | |
| UTIS fire | | UTIS fire | | | | | | | |
Fixed assets write-offs | | Fixed assets write-offs | 0 | | | 0 | | | 891 | | | 0 | |
Inventory charges | | Inventory charges | 40 | | | 0 | | | 320 | | | 0 | |
Professional services | | Professional services | 1,072 | | | 0 | | | 1,594 | | | 0 | |
Lease obligations | | Lease obligations | 54 | | | 0 | | | 540 | | | 0 | |
Compensation & benefits | | Compensation & benefits | 600 | | | 0 | | | 844 | | | 0 | |
Other | | Other | 76 | | | 0 | | | 76 | | | 0 | |
Insurance recoveries | | Insurance recoveries | (359) | | | 0 | | | (1,478) | | | 0 | |
Total UTIS fire | | Total UTIS fire | 1,483 | | | 0 | | | 2,787 | | | 0 | |
(Gain) loss on sale or disposal of property, plant and equipment | | (Gain) loss on sale or disposal of property, plant and equipment | (593) | | | 33 | | | (682) | | | 53 | |
Economic incentive grants | Economic incentive grants | 0 | | | 0 | | | (145) | | | 0 | | Economic incentive grants | 0 | | | (145) | | | 0 | | | (145) | |
Total other operating (income) expense, net | Total other operating (income) expense, net | $ | (4) | | | $ | 124 | | | $ | (96) | | | $ | 1,075 | | Total other operating (income) expense, net | $ | 890 | | | $ | (112) | | | $ | 2,105 | | | $ | (92) | |
In early February 2021, there was a fire at our UTIS manufacturing facility in Ansan, South Korea, which manufactures eSorba® polyurethane foams used in portable electronics and display applications. The site was safely evacuated and there were no reported injuries; however, there was extensive damage to the manufacturing site and some damage to nearby property. The cause of the fire is still under investigation. Operations at this facility will be disrupted into at least the first quarter of 2022. We are currently evaluating alternative facility options.We recognized fixed asset write-offs and inventory charges of $0.9 million and $0.3 million, respectively, related to property destroyed in the fire for the six months ended June 30, 2021. Additionally, we recognized a $0.5 million contingent liability pertaining to our obligations for the fire damage to the building in connection with the underlying lease agreement. We have incurred $1.1 million and $1.6 million of fees for various professional services for the three and six months ended June 30, 2021, respectively, in connection with the assessment of the fire and the efforts to rebuild and resume operations. Further, we incurred $0.6 million and $0.8 million of compensation and benefits for UTIS manufacturing employees, subsequent to the fire, for the three and six months ended June 30, 2021, respectively. In connection with the transitional leasebackUTIS fire, we have recognized anticipated insurance recoveries of a portion of the facility and certain machinery and equipment acquired from Isola in August 2018, we recognized lease income of $0.1$0.4 million and $0.9$1.5 million related to our ongoing insurance claim for property damage and compensation and benefits of hourly employees, less the applicable $0.3 million deductible, for the three and ninesix months ended SeptemberJune 30, 2019, respectively,2021, respectively.
Based on the facts and related depreciation on leased assetscircumstances known to us as of $0.2 million and $1.7 million, respectively, forour filing, while we are aware of other potential liabilities, we are unable presently to estimate the three and nine months ended September 30, 2019.
probability or amount of any further contingent liabilities associated with damages to nearby property or other potential costs due to the fire at our UTIS manufacturing facility. As such, no further reserves have been established at this time. We will continue to re-assess as additional information becomes available.Interest Expense, Net
The components of “Interest expense, net” line item in the condensed consolidated statements of operations, were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Interest on revolving credit facility | Interest on revolving credit facility | $ | 612 | | | $ | 1,873 | | | $ | 3,079 | | | $ | 6,303 | | Interest on revolving credit facility | $ | 5 | | | $ | 1,388 | | | $ | 106 | | | $ | 2,467 | |
Interest rate swap settlements | Interest rate swap settlements | 2,769 | | | (40) | | | 3,191 | | | (241) | | Interest rate swap settlements | 0 | | | 336 | | | 0 | | | 422 | |
Line of credit fees | Line of credit fees | 112 | | | 125 | | | 430 | | | 378 | | Line of credit fees | 291 | | | 152 | | | 564 | | | 318 | |
Debt issuance amortization costs | Debt issuance amortization costs | 138 | | | 138 | | | 414 | | | 414 | | Debt issuance amortization costs | 179 | | | 138 | | | 358 | | | 276 | |
Interest on finance leases | Interest on finance leases | 35 | | | 29 | | | 100 | | | 92 | | Interest on finance leases | 47 | | | 32 | | | 259 | | | 65 | |
Interest income | Interest income | (135) | | | (398) | | | (724) | | | (1,262) | | Interest income | (150) | | | (269) | | | (345) | | | (589) | |
Other | Other | 22 | | | 20 | | | 49 | | | 39 | | Other | 32 | | | 2 | | | 69 | | | 27 | |
Total interest expense, net | Total interest expense, net | $ | 3,553 | | | $ | 1,747 | | | $ | 6,539 | | | $ | 5,723 | | Total interest expense, net | $ | 404 | | | $ | 1,779 | | | $ | 1,011 | | | $ | 2,986 | |
Note 16 – Recent Accounting Standards
Recently IssuedAdopted Standards Reflected in Our 2021 Financial Statements
In MarchAugust 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04,2020-06, Reference Rate Reform (Topic 848)Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): FacilitationAccounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies only to contracts, hedging relationships, and other transactions that reference LIBORstandard requires using either the modified retrospective or another reference rate that is expected to be discontinued after reference rate reform. This ASU provides optional expedients and exceptions to accounting under GAAP for contract modifications that replace a reference rate affected by reference rate reform. The amendments in this update were effective as of March 12, 2020 and we may elect to apply the amendments to contract modifications or hedging relationships entered into through December 31, 2022. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Recently Adopted Standards Reflected in Our 2020 Financial Statements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss model with a new expected loss impairment model that applies to certain financial assets measured at amortized cost, including trade and other receivables and contract assets.retrospective approach. We adopted this updatestandard in January 2020 using the modified-retrospective approach,2021, and it did not have a material impacteffect on our condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. Under ASU 2019-12, the new guidance removes certain exceptions to the general principles in Topic 740. The new guidance also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for our annual reporting periods beginning after December 15, 2020. The transition method (retrospective, modified retrospective, or prospective approach) related to this standard depends on the applicable guidance, and all amendments for which there is no transition guidance specified, are to be applied on a prospective basis. We adopted this standard in January 2021, and it did not have a material effect on our condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Position
As used herein, the “Company,” “Rogers,” “we,” “us,” “our” and similar terms include Rogers Corporation and its subsidiaries, unless the context indicates otherwise.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such statements are generally accompanied by words such as “anticipate,” “assume,” “believe,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “seek,” “target” or similar expressions that convey uncertainty as to future events or outcomes. Forward-looking statements are based on assumptions and beliefs that we believe to be reasonable; however, assumed facts almost always vary from actual results, and the differences between assumed facts and actual results could be material depending upon the circumstances. Where we express an expectation or belief as to future results, that expectation or belief is expressed in good faith and based on assumptions believed to have a reasonable basis. We cannot assure you, however, that the stated expectation or belief will occur or be achieved or accomplished. Among the factors that could cause our results to differ materially from those indicated by forward-looking statements are risks and uncertainties inherent in our business including, without limitation:
•the duration and impacts of the novel coronavirus (COVID-19) global pandemic and efforts to contain its transmission and distribute vaccines, including the effect of these factors on our business, suppliers, customers, end users and economic conditions generally;
•failure to capitalize on, volatility within, or other adverse changes with respect to the Company’s growth drivers, including advanced mobility and advanced connectivity, such as delays in adoption or implementation of new technologies;
•uncertain business, economic and political conditions in the United States (U.S.) and abroad, particularly in China, South Korea, Germany, Hungary and Belgium, where we maintain significant manufacturing, sales or administrative operations;
•the trade policy dynamics between the U.S. and China reflected in trade agreement negotiations and the imposition of tariffs and other trade restrictions, including trade restrictions on Huawei Technologies Co., Ltd. (Huawei);
•fluctuations in foreign currency exchange rates;
•our ability to develop innovative products and the extent to which they are incorporated into end-user products and systems;
•the extent to which end-user products and systems incorporating our products achieve commercial success;
•the ability and willingness of our sole or limited source suppliers to deliver certain key raw materials, including commodities, to us in a timely and cost-effective manner;
•intense global competition affecting both our existing products and products currently under development;
•business interruptions due to catastrophes or other similar events, such as natural disasters, war, terrorism or public health crises;
•failure to realize, or delays in the realization of, anticipated benefits of acquisitions and divestitures due to, among other things, the existence of unknown liabilities or difficulty integrating acquired businesses;
•our ability to attract and retain management and skilled technical personnel;
•our ability to protect our proprietary technology from infringement by third parties and/or allegations that our technology infringes third party rights;
•changes in effective tax rates or tax laws and regulations in the jurisdictions in which we operate;
•failure to comply with financial and restrictive covenants in our credit agreement or restrictions on our operational and financial flexibility due to such covenants;
•the outcome of ongoing and future litigation, including our asbestos-related product liability litigation;
•changes in environmental laws and regulations applicable to our business; and
•disruptions in, or breaches of, our information technology systems.
Our forward-looking statements are expressly qualified by these cautionary statements, which you should consider carefully, along with the risks discussed in this section and elsewhere in this report, including under the section entitled “Risk Factors” in Part II, Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 20192020 (the Annual Report) and our other reports filed with the Securities and Exchange Commission, any of which could cause actual results to differ materially from historical results or anticipated results. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q along with our audited consolidated financial statements and the related notes thereto in our Annual Report.
Company Background and Strategy
Rogers Corporation designs, develops, manufactures and sells high-performance and high-reliability engineered materials and components to meet our customers’ demanding challenges. We operate threetwo strategic operating segments: Advanced ConnectivityElectronics Solutions (ACS),(AES) and Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES). The remaining operations, which represent our non-core businesses, are reported in our Other operating segment. We have a history of innovation and have established Innovation Centers for our research and development (R&D) activities in Chandler, Arizona, Burlington, Massachusetts, Eschenbach, Germany and Suzhou, China. We are headquartered in Chandler, Arizona.
Our growth strategy is based upon the following principles: (1) market-driven organization, (2) innovation leadership, (3) synergistic mergers and acquisitions, and (4) operational excellence. As a market-driven organization, we are focused on growth drivers, including advanced mobility and advanced connectivity. More specifically, in addition to the impact of COVID-19 discussed below, the key medium- to long-term trends currently affecting our business include the increasing use of advanced driver assistance systems (ADAS) and increasing electrification of vehicles, including electric and hybrid electric vehicles (EV/HEV), in the automotive industry and the growth of 5G smartphones in the portable electronics industry. In addition to our focus on advanced mobility and advanced connectivity in the automotive, portable electronics and telecommunications industries, we sell into a variety of other markets including general industrial, connected devices, aerospace and defense, mass transit, clean energy and renewable energy.connected devices.
Our sales and marketing approach is based on addressing these trends, while our strategy focuses on factors for success as a manufacturer of engineered materials and components: performance, quality, service, cost, efficiency, innovation and technology. We have expanded our capabilities through organic investment and acquisitions and strive to ensure high quality solutions for our customers. We continue to review and re-align our manufacturing and engineering footprint in an effort to attainmaintain a leading competitive position globally. We have established or expanded our capabilities in various locations in support of our customers’ growth initiatives.
We seek to enhance our operational and financial performance by investing in research and development, manufacturing and materials efficiencies, and new product initiatives that respond to the needs of our customers. We strive to evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.
COVID-19 Update
The global COVID-19 pandemic has affected and continues to affect Rogers’ business and operations, although to a lesser extent than the first half of 2020. In response to the outbreak, Rogers prioritized the safety and well-being of its employees—including implementing social distancing initiatives in its facilities, providing remote working arrangements for certain employees, expanding personal protective equipment usage, enhancing plant hygiene processes, and extending employee benefits, which increased our expenses in the quarter—expenses—while at the same time taking actions to preserve business continuity. Our non-manufacturing employees transitioned seamlessly to remote working arrangements and are maintaining effective collaboration,effectively collaborating both internally and with our customers. In some cases, based on local conditions, non-manufacturing employees have returned to their worksites.
Our China business and operations were the first to be impacted by the virus, with the government temporarily suspending our operations, as well as the operations of most Chinese business, including our Chinese customers and suppliers, at the beginning of February. We resumed production in mid-February and reached full production capacity by early-March.
Our U.S. and European businesses were first impacted later in the first quarter, and the impact continued through the first, second and third quarters, and continues through the date of this filing. In both the U.S. and Europe, we generally maintained operations at close to normal levels, with the additional employee safety precautions implemented at our facilities. We do not believe these additional precautions in the aggregate, had a material impact on our financial performance during the first nine months. In the U.S., exemptions from state-level “shelter in place” directives with respect to numerous sectors, including the Communications, Healthcare and Public Health, Defense Industrial Base, Critical Manufacturing and Information Technology sectors, have largely enabled us to continue our operations while those directives were in place, and as states have continued to reopen during the second and third quarters, and through the date of this filing.
Our operations were not affected by any material shortages, as our inventory and supply chain met our manufacturing requirements. Global demand continued to be impacted in the third quarter by the COVID-19 pandemic, although to a lesser extent than prior quarters. General industrial and mass transit market demand continued to be the most impacted. Demand improved in some markets, such as portable electronics, EV/HEV, aerospace and defense and automotive relative to the second quarter.
We expect that the COVID-19 pandemic will have a continuing but uncertain impact on our business and operations in the short- and medium-term.
Due to the above circumstances and as described generally in this Form 10-Q, our results of operations for the three and ninesix months ended SeptemberJune 30, 20202021 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 thirdsecond quarter of 20202021 as compared to the thirdsecond quarter of 2019,2020, our net sales decreased 9.0%increased 22.9% to $201.9$234.9 million, our gross margin increased approximately 180160 basis points to 37.4%38.2% from 35.6%36.6%, and operating income decreasedincreased approximately 910420 basis points to 4.4%15.2% from 13.5%11.0%. In the first nine monthshalf of 20202021 as compared to the first nine monthshalf of 2019,2020, our net sales decreased 16.0%increased approximately 19.0% to $591.9$464.2 million, our gross margin increased approximately 20380 basis points to 35.7%38.6% from 35.5%34.8%, and operating income decreasedincreased approximately 560580 basis points to 8.0%15.7% from 13.6%9.9%.
•We made $213.0$25.0 million of discretionary principal payments on our revolving credit facility during the second and third quartersfirst half of 2020, partially offset by $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic.2021.
•We terminatedrecognized $0.7 million of restructuring charges in the interest rate swap on September 30, 2020. As a result, we settledsecond quarter of 2021 and $2.3 million of restructuring charges in the interest rate swap for $2.4 million on October 2, 2020, representing the fair valuefirst half of the interest rate swap on the date of termination. Both Rogers and the counterparties released each other from all obligation under the interest rate swap agreement, including the obligation to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference2021, related to the agreed upon notional principal amount of $75.0 million.
•We commenced manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our PESAES operating segment.
•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 ACS operating segments, and wedisplay applications. Operations at this facility will be disrupted into at least the first quarter of 2022. We are currently evaluating alternative facility options. We recognized $9.0net expense of $1.5 million of restructuring charges in the thirdsecond quarter of 20202021 and $2.8 million in the first half of 2021, related to this project.the financial impacts from the fire, which consisted of write-offs of fixed assets and inventory destroyed and/or damaged in the fire, professional services, costs incurred due to obligations under our manufacturing facility lease agreement, compensation and benefits for certain of our UTIS employees, partially offset by the recognition of certain anticipated insurance recoveries.
•We incurred incremental transaction costs of $0.3$0.5 million and $3.3 million in the thirdsecond quarter of 2021 and the second quarter of 2020, respectively, and $4.3incurred incremental transaction costs of $1.1 million and $4.0 million in the first nine monthshalf of 2021 and the first half of 2020, respectively, due to COVID-19 pandemic. These costs primarily consist of temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as additional safety supplies. A substantial portion of the additional benefits under these programs expired in mid-June. We expect significantly lower costs during the remainder of 2020, associated with the remaining additional benefits, as well as safety supplies, when compared to the first and second quarters of 2020.pandemic.
•We recognized an additional $11.7 million of amortization expense in the third quarter of 2020 and $15.6 million in the first nine months of 2020, and will recognize an additional $11.7 million of amortization expense in the fourth quarter of 2020, due to the acceleration of amortization expense related to our Diversified Silicone Products, Inc. (DSP) customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020.
Results of Operations
The following table sets forth, for the periods indicated, selected operations data expressed as a percentage of net sales:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net sales | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross margin | Gross margin | 37.4 | % | | 35.6 | % | | 35.7 | % | | 35.5 | % | Gross margin | 38.2 | % | | 36.6 | % | | 38.6 | % | | 34.8 | % |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 24.9 | % | | 18.2 | % | | 22.3 | % | | 18.1 | % | Selling, general and administrative expenses | 19.1 | % | | 21.8 | % | | 18.7 | % | | 21.0 | % |
Research and development expenses | Research and development expenses | 3.5 | % | | 3.5 | % | | 3.7 | % | | 3.3 | % | Research and development expenses | 3.2 | % | | 3.8 | % | | 3.2 | % | | 3.9 | % |
Restructuring and impairment charges | Restructuring and impairment charges | 4.7 | % | | 0.3 | % | | 1.6 | % | | 0.4 | % | Restructuring and impairment charges | 0.3 | % | | — | % | | 0.5 | % | | — | % |
Other operating (income) expense, net | Other operating (income) expense, net | (0.1) | % | | 0.1 | % | | 0.1 | % | | 0.1 | % | Other operating (income) expense, net | 0.4 | % | | — | % | | 0.5 | % | | — | % |
Operating income | Operating income | 4.4 | % | | 13.5 | % | | 8.0 | % | | 13.6 | % | Operating income | 15.2 | % | | 11.0 | % | | 15.7 | % | | 9.9 | % |
| Equity income in unconsolidated joint ventures | Equity income in unconsolidated joint ventures | 0.5 | % | | 0.7 | % | | 0.5 | % | | 0.6 | % | Equity income in unconsolidated joint ventures | 0.9 | % | | 0.5 | % | | 0.9 | % | | 0.5 | % |
Other income (expense), net | Other income (expense), net | 0.7 | % | | (0.5) | % | | 0.2 | % | | (0.2) | % | Other income (expense), net | 0.5 | % | | 0.3 | % | | 0.9 | % | | — | % |
Interest expense, net | Interest expense, net | (1.8) | % | | (0.8) | % | | (1.1) | % | | (0.8) | % | Interest expense, net | (0.2) | % | | (0.9) | % | | (0.2) | % | | (0.8) | % |
Income before income tax expense | Income before income tax expense | 3.8 | % | | 12.9 | % | | 7.6 | % | | 13.2 | % | Income before income tax expense | 16.4 | % | | 10.9 | % | | 17.3 | % | | 9.6 | % |
| Income tax expense | Income tax expense | 0.3 | % | | 2.4 | % | | 1.7 | % | | 2.4 | % | Income tax expense | 4.2 | % | | 3.3 | % | | 4.4 | % | | 2.5 | % |
| Net income | Net income | 3.5 | % | | 10.5 | % | | 5.9 | % | | 10.8 | % | Net income | 12.2 | % | | 7.6 | % | | 12.9 | % | | 7.1 | % |
| Net Sales and Gross Margin | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net sales | Net sales | $ | 201,944 | | | $ | 221,842 | | | $ | 591,911 | | | $ | 704,492 | | Net sales | $ | 234,906 | | | $ | 191,157 | | | $ | 464,171 | | | $ | 389,967 | |
Gross margin | Gross margin | $ | 75,518 | | | $ | 78,867 | | | $ | 211,117 | | | $ | 250,089 | | Gross margin | $ | 89,833 | | | $ | 69,969 | | | $ | 179,332 | | | $ | 135,599 | |
Percentage of net sales | Percentage of net sales | 37.4 | % | | 35.6 | % | | 35.7 | % | | 35.5 | % | Percentage of net sales | 38.2 | % | | 36.6 | % | | 38.6 | % | | 34.8 | % |
Net sales decreasedincreased by 9.0%22.9% in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 2019.2020. Our ACSAES and EMS operating segments had net sales decreasesincreases of 19.3%20.9% and 8.9%24.7%, respectively, while our PES operating segment had a net salesrespectively. The increase of 11.1%. The decrease in net sales was primarily drivendue to higher net sales in the ADAS, EV/HEV, aerospace and defense and clean energy markets in our AES operating segment and higher net sales in the EV/HEV, general industrial, consumer and automotive markets in our EMS operating segment. The increase was partially offset by significantly lower net sales in the 4G and 5G wireless infrastructure and automotive marketsmarket in our ACS operating segment, lower net sales in the general industrial, mass transit, automotive and consumer markets in our EMSAES operating segment and lower net sales in the mass transit and variable frequency drives markets in our PES operating segment. The decrease in net sales was partially offset by higher net sales in the aerospace and defense market in our ACS operating segment, higher net sales in the portable electronics and EV/HEV markets in our EMS operating segment and higher net sales in our EV/HEV and renewable energy markets in our PES operating segment. Net sales were favorably impacted by foreign currency impacts of $0.9$8.1 million, or 0.4%4.3%, due to the appreciation in value of the euro and Chinese renminbi relative to the U.S. dollar.
Net sales decreasedincreased by 16.0%19.0% in the first nine monthshalf of 20202021 compared to the first nine monthshalf of 2019.2020. Our ACS,AES and EMS and PES operating segments had net sales decreasesincreases of 20.9%, 14.2%19.7% and 9.5%16.8%, respectively. The decreaseincrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure and automotive markets in our ACS operating segment, lower net sales in the general industrial, mass transit, consumer, portable electronics and automotive markets in our EMS operating segment and lower net sales in the mass transit, variable frequency drives and vehicle electrification markets in our PES operating segment. The decrease in net sales was partially offset bydue to higher net sales in the ADAS, EV/HEV, aerospace and defense marketand clean energy markets in our ACS operating segment, higher net sales in the EV/HEV market in our EMSAES operating segment and higher net sales in the EV/HEV, general industrial, consumer and renewable energyautomotive markets in our PESEMS operating segment. The increase was partially offset by lower net sales in the wireless infrastructure market in our AES operating segment and lower net sales in the mass
transit market in our EMS operating segment. Net sales were unfavorablyfavorably impacted by foreign currency impacts of $5.0$16.3 million, or 0.7%4.2%, due to the depreciationappreciation in value of the Chinese renminbi, euro and Korean wonChinese renminbi relative to the U.S. dollar.
The lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment reflected the waning of 4G infrastructure spending by telecommunications companies in anticipation of 5G, as well as the impacts of the trade restrictions on Huawei, increased competition and design changes by telecommunications equipment original equipment manufacturers
(OEMs), which reduced our materials content in 5G base stations. The lower net sales in the automotive market was largely due to the impacts of COVID-19 pandemic.
The lower net sales in variable frequency drives market in our PES operating segment was due to a slowdown in industrial automation demand through the first nine months of 2020 combined with customer inventory rebalancing, which began in mid-2019, and continued through most of the first half of 2020. The lower year-to-date net sales in vehicle electrification market in our PES operating segment was due to the COVID-19 impacts on the automotive sector in the first half of 2020, partially offset by the initial recovery in the third quarter of 2020.
In our ACS operating segment, we anticipate lower net sales in the 4G and 5G wireless infrastructure markets year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate higher net sales in the aerospace and defense market year-over-year on a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate lower net sales in the 4G and 5G wireless infrastructure and aerospace and defense markets, while we anticipate higher net sales in the automotive market. The effects of trade tensions, increased competition, lower 5G base station content and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure. As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward. Our expectations of net sales in the aerospace and defense market are primarily due to the alignment of the advanced weaponry requirements with the technical capabilities of our products, partially offset by unfavorable impacts of defense program timing. Our expectations of net sales in the automotive market are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020.
In our EMS operating segment, we anticipate higher net sales in the EV/HEV and portable electronics markets year-over-year in the fourth quarter of 2020, on a quarter-to-date basis, and we anticipate higher net sales in the EV/HEV market, year-over-year, on a year-to-date basis, while we anticipate lower net sales in the general industrial market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate lower net sales in the EV/HEV and portable electronics market in the fourth quarter of 2020. Our expectations of net sales in the EV/HEV market are primarily due to continued strong demand partially offset by unfavorable variations of ordering patterns. Our expectations of net sales in the portable electronics market are primarily due to an extension of the normal seasonality from the third quarter into the fourth quarter as a result of the COVID-19 pandemic. Our expectations of net sales in the general industrial market are primarily due to impact of the COVID-19 pandemic.
In our PES operating segment, we anticipate higher net sales in the EV/HEV market year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate lower net sales in the variable frequency drives market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate higher net sales in the EV/HEV market in the fourth quarter of 2020, while we anticipate lower net sales in the variable frequency drives market. Our expectations of net sales in the EV/HEV market in the fourth quarter of 2020 are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020. Our expectations of the net sales in the variable frequency drives market are primarily due to the anticipated continued effects of the COVID-19 pandemic.
Gross margin as a percentage of net sales increased approximately 180160 basis points to 37.4%38.2% in the thirdsecond quarter of 20202021 compared to 35.6%36.6% in the thirdsecond quarter of 2019.2020. Gross margin in the thirdsecond quarter of 20202021 was favorably impacted by lower freight, duties and tariffs costs in our ACS operating segment, favorable product mix in our EMS operating segment, lower fixed overhead costs and yield improvements in our ACS, EMS and PES operating segments, as well as higher volume favorable productivity performance and favorable absorption of fixed overhead costs in our PESAES and EMS operating segments, favorable product mix in our EMS operating segment, favorable productivity improvements in our AES operating segment, as well as a lower inventory reserves provision in our EMS operating segment. This was partially offset by lower volumehigher commodity and unfavorable absorption of fixed overheadraw material costs as well as higher freight, duties and tariffs expenses in our ACSAES and EMS operating segments, unfavorable product mix in our ACS and PESAES operating segments and an increase in inventory reserve provisionunfavorable productivity performance due to raw material shortages in our ACSEMS operating segment. The higher freight, duties and tariffs expenses were primarily due to the recognition in the second quarter of 2020 of $3.3 million of Chinese duty tax recoveries.
Gross margin as a percentage of net sales increased approximately 20380 basis points to 35.7%38.6% in the first nine monthshalf of 20202021 compared to 35.5%34.8% in the first nine monthshalf of 2019.2020. Gross margin in the first nine monthshalf of 20202021 was favorably impacted by lower freight, dutieshigher volume and tariffs costs, lowerfavorable absorption of fixed overhead costs and yield improvements in our ACS,AES and EMS and PES operating segments, including the recognition of a $3.3 million expected recovery of previous duty taxes paid due to a change in Chinese tariff regulations in our ACS operating segment, favorable product mix in our EMS operating segment, as well as favorable productivity performanceimprovements in our PESAES operating segment and a lower inventory reserves provision in our EMS operating segment. This was partially offset by lower volumehigher commodity and unfavorable absorption of fixed overheadraw material costs as well as higher freight, duties and tariffs expenses in our ACS, EMS and PES operating segments, an increase in inventory reserve provisions in our ACSAES and EMS operating segments, as well as unfavorable product mix in our ACSAES operating segment and PESunfavorable productivity performance due to raw material shortages in our EMS operating segments.segment. The higher freight, duties and tariffs expenses were primarily due to the recognition in the second quarter of 2020 of $3.3 million of Chinese duty tax recoveries.
Our UTIS net sales were only slightly impacted by the fire at our UTIS manufacturing facility in Ansan, South Korea as a result of selling our undamaged finished goods inventory during the remainder of the first quarter of 2021. In the second quarter of 2021, we experienced a greater impact to our net sales due to the continued disruption to our UTIS operations. In the third quarter of 2021, we expect a similar impact to our net sales as the second quarter of 2021.
In the first quarter of 2021, our net sales were largely unaffected by global supply chain disruptions, but we began seeing some greater impacts as we exited the quarter. In the second quarter of 2021, the impact of supply constraints and raw material cost increases, primarily due to the weather interruptions along the U.S. Gulf Coast as well as commodity price increases, somewhat tempered our net sales growth and gross margin results. In the third quarter of 2021, we expect these issues to continue, but to a lesser extent.
We incurred incremental transaction costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as additional safety supplies. These costs impacted our gross margin by approximately $0.3$0.4 million and $3.9$3.0 million on a quarter-to-date basisin the second quarter of 2021 and year-to-date basis, respectively. A substantial portion of the additional benefits under these programs expired in mid-June. We expect
significantly lower gross margin impacts during the remaindersecond quarter of 2020, associated with the remaining additional benefits, as well as safety supplies, when compared torespectively, and $1.1 million and $3.6 million in the first half of 2021 and second quartersthe first half of 2020.2020, respectively.
| Selling, General and Administrative Expenses | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Selling, general and administrative expenses | Selling, general and administrative expenses | $ | 50,230 | | | $ | 40,448 | | | $ | 132,254 | | | $ | 127,349 | | Selling, general and administrative expenses | $ | 44,959 | | | $ | 41,694 | | | $ | 87,372 | | | $ | 82,024 | |
Percentage of net sales | Percentage of net sales | 24.9 | % | | 18.2 | % | | 22.3 | % | | 18.1 | % | Percentage of net sales | 19.1 | % | | 21.8 | % | | 18.7 | % | | 21.0 | % |
Selling, general and administrative (SG&A) expenses increased 24.2%7.8% in the thirdsecond quarter of 2021 from the second quarter of 2020, from the third quarter of 2019, primarily due to an $11.0 million increase in other intangible assets amortization, a $0.6 million increase in professional services a $0.4$5.2 million increase in total compensation and benefits, anda $0.9 million increase in software expenses, a $0.5 million increase in recruiting/relocation/training expenses, a $0.3 million increase in software costs,travel and entertainment expenses and a $0.1 million increase in depreciation. This was partially offset by a $1.1$4.5 million decrease in travel and entertainment expenses, a $0.3 million decrease in advertising expenses, a $0.3 million decrease in depreciation, a $0.2 million decrease in commissions expense and a $0.2 million decrease in recruiting/relocation/training expenses.
SG&A expenses increased 3.9% in the first nine months of 2020 from the first nine months of 2019, primarily due to a $13.5 million increase in other intangible assets amortization and a $1.9$0.1 million decrease in environmental charges.
SG&A expenses increased 6.5% in the first half of 2021 from the first half of 2020, primarily due to an $7.7 million increase in professional services,total compensation and benefits, a $1.7 million increase in software expenses and a $0.6 million increase in recruiting/relocation/training expenses. This was partially offset by a $3.2$5.0 million decrease in other intangible assets amortization and a $0.9 million decrease in travel and entertainment expenses, a $2.0 million decrease in total compensation and benefits, a $1.2 million decrease in advertising expenses, a $1.1 million decrease in depreciation, a $0.9 million decrease in commissions expense, a $0.8 million decrease in recruiting/relocation/training expenses, a $0.5 million decrease in environmental charges and a $0.3 million decrease in software costs.expenses.
The increasedecrease in amortization expense for the three and ninesix months ended SeptemberJune 30, 20202021 was due to the acceleration of amortization expense related to our DSP customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020 due to an adjustment to their remaining useful lives. We recognized an additional $11.7 million of amortization expense for our DSP definite-lived other intangible assets of $0.1 million and $4.4 million in the thirdsecond quarter of 2021 and the second quarter of 2020, respectively, and $15.6$0.1 million and $4.8 million in the first nine monthshalf of 2021 and the first half of 2020, respectively.
The year-to-date decrease in travel and will recognize an additional $11.7 millionentertainment and recruiting/relocation/training expenses was primarily driven by the impacts of amortization expenseCOVID-19.
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Research and Development Expenses |
| Three Months Ended | | Six Months Ended |
(Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Research and development expenses | $ | 7,492 | | | $ | 7,295 | | | $ | 14,664 | | | $ | 15,100 | |
Percentage of net sales | 3.2 | % | | 3.8 | % | | 3.2 | % | | 3.9 | % |
R&D expenses increased 2.7% in the fourthsecond quarter of 2020. The2021 from the second quarter of 2020 due to increases in amortization expense in 2020 aredepreciation and laboratory expenses, partially offset by decreases in forecasted amortization expenseprofessional services and total compensation benefits.
R&D expenses decreased 2.9% in future years.the first half of 2021 from the first half of 2020 due to decreases in professional services, total compensation benefits and travel and entertainment expenses, partially offset by increases in depreciation and laboratory expenses. The year-to-date decrease in travel and entertainment expenses was primarily driven by the impacts of COVID-19.
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Restructuring and Impairment Charges and Other Operating (Income) Expense, Net |
| Three Months Ended | | Six Months Ended |
(Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Restructuring and impairment charges | $ | 747 | | | $ | — | | | $ | 2,253 | | | $ | — | |
Other operating (income) expense, net | $ | 890 | | | $ | (112) | | | $ | 2,105 | | | $ | (92) | |
We incurred restructuring charges and related expenses associated with our manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations. We recognized $0.7 million and $2.3 million of restructuring charges and related expenses pertaining to these restructuring projects in the second quarter of 2021 and the first half of 2021, respectively. For additional information, refer to “Note 615 – Goodwill and Other Intangible Assets”Supplemental Financial Information” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
The decrease in travel and entertainment and recruiting/relocation/training expenses, on both a quarter-to-date and year-to-date basis, was primarily driven by the impacts of COVID-19.
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Research and Development Expenses |
| Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Research and development expenses | $ | 7,085 | | | $ | 7,830 | | | $ | 22,185 | | | $ | 23,282 | |
Percentage of net sales | 3.5 | % | | 3.5 | % | | 3.7 | % | | 3.3 | % |
R&D expenses decreased 9.5% in the third quarter of 2020 from the third quarter of 2019 due to decreases in laboratory expenses as well as travel and entertainment expenses, partially offset by increases in total compensation and benefits. R&D expenses decreased 4.7% in the first nine months of 2020 from the first nine months of 2019 due to decreases in laboratory expenses as well as travel and entertainment expenses, partially offset by increases in total compensation and benefits.
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Restructuring and Impairment Charges and Other Operating (Income) Expense, Net |
| Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Restructuring and impairment charges | $ | 9,413 | | | $ | 580 | | | $ | 9,413 | | | $ | 2,485 | |
Other operating (income) expense, net | $ | (4) | | | $ | 124 | | | $ | (96) | | | $ | 1,075 | |
We incurred restructuring charges associated with our manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations. We recognized $9.0 million of restructuring charges related to these restructuring projects for the three and nine months ended September 30, 2020.
We incurred restructuring charges associated with the consolidation of our Santa Fe Springs, California operations with the Company’s facilities in Carol Stream, Illinois and Bear, Delaware. We recognized no restructuring charges in the third quarter of 2019. We recognized $0.9 million of restructuring charges related to our facility consolidation in the first nine months of 2019.
We recognized $0.4 million of impairment charges primarily related to certain fixed assets in Belgium, for the three and nine months ended September 30, 2020. We recognized $0.6 million and $1.5 million in impairment charges on certain assets in connection with the Isola USA Corp. (Isola) asset acquisition for the three and nine months ended September 30, 2019, respectively.
We expect to incur between $2.5 million and $4.5 million of restructuring and impairment charges in the fourth quarter of 2020.
With respect to other operating (income) expense, net, we recognized incomeexpense of $0.1$0.9 million from economic incentive grantsand $2.1 million in the second quarter of 2021 and the first half of 2021, respectively, primarily related to the physical relocationfinancial impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea in the first quarter of 2021. This impact consisted of write-offs of fixed assets and inventory destroyed and/or damaged in the fire, professional services, costs incurred due to obligations under our manufacturing facility lease agreement, compensation and benefits for certain of our global headquarters from Rogers, ConnecticutUTIS 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 Chandler, Arizona, forevaluate information as it becomes available. For additional information, refer to “Note 15 – Supplemental Financial Information” to the nine months ended September 30, 2020. In connection with the transitional leasebackcondensed consolidated financial statements in Part I, Item 1 of a portion of the facility and certain machinery and equipment acquired from Isola in August 2018, we recognized lease income of $0.1 million and $0.9 million for the three and nine months ended September 30, 2019, respectively, and related depreciation on leased assets of $0.2 million and $1.7 million, respectively, for the three and nine months ended September 30, 2019.this Form 10-Q.
| Equity Income in Unconsolidated Joint Ventures | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Equity income in unconsolidated joint ventures | Equity income in unconsolidated joint ventures | $ | 937 | | | $ | 1,498 | | | $ | 3,177 | | | $ | 4,077 | | Equity income in unconsolidated joint ventures | $ | 1,930 | | | $ | 1,022 | | | $ | 4,111 | | | $ | 2,240 | |
As of SeptemberJune 30, 2020,2021, we had two unconsolidated joint ventures, each 50% owned: Rogers INOAC Corporation (RIC) and Rogers INOAC Suzhou Corporation (RIS). Equity income in those unconsolidated joint ventures decreased 37.4%increased 88.8% in the thirdsecond quarter of 2021 from the second quarter of 2020, from the third quarter of 2019, and decreased 22.1%increased 83.5% in the first nine monthshalf of 20202021 from the first nine monthshalf of 2019.2020. On a quarter-to-date basis and a year-to-date basis, the decreaseincrease was due to lowerhigher net sales, due todriven by strong sales in the COVID-19 pandemic, as well as declines inportable electronics and general industrial markets, and improved operational performance for both RIS and RIC. On a year-to-date basis, the decrease wasRIC, primarily due to lower net sales due to the COVID-19 pandemic and declines in operational performance for both RIS and RIC.higher utilization of production capacity.
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Pension Settlement Charges and Other (Expense) Income, Net |
| Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Pension settlement charges | $ | — | | | $ | — | | | $ | (55) | | | $ | — | |
Other income (expense), net | $ | 1,446 | | | $ | (918) | | | $ | 1,294 | | | $ | (915) | |
In the second quarter of 2020, we recorded an immaterial pre-tax settlement charge in connection with the remaining settlement efforts for 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 and Other Postretirement Benefits.” | | | | | | | | | | | | | | | | | | | | | | | |
Other Income (Expense), Net |
| Three Months Ended | | Six Months Ended |
(Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| | | | | | | |
Other income (expense), net | $ | 1,239 | | | $ | 634 | | | $ | 4,207 | | | $ | (152) | |
Other income (expense) income,, net increased to income of $1.4$1.2 million in the thirdsecond quarter of 20202021 from expenseincome of $0.9$0.6 million in the thirdsecond quarter of 2019.2020. On a quarter-to-date basis, the increase was due to favorable impacts from our copper derivative contracts and foreign currency transactions, partially offset by unfavorable impacts from our foreign currency derivative contracts and by lower net periodic benefit credits associated with our defined benefit plans.contracts.
Other income (expense) income,, net increased to income of $1.3$4.2 million in the first nine monthshalf of 20202021 from expense of $0.9$0.2 million in the first nine monthshalf of 2019.2020. On a year-to-date basis, the increase was due to favorable impacts from our copper derivative contracts and foreign currency transactions, partially offset by unfavorable impacts from our foreign currency derivative contracts and by lower net periodic benefit credits associated with our defined benefit plans.contracts.
| Interest Expense, Net | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Interest expense, net | Interest expense, net | $ | (3,553) | | | $ | (1,747) | | | $ | (6,539) | | | $ | (5,723) | | Interest expense, net | $ | (404) | | | $ | (1,779) | | | $ | (1,011) | | | $ | (2,986) | |
Interest expense, net, increaseddecreased by 103.4%77.3% in the thirdsecond quarter of 2021 from the second quarter of 2020, from the third quarter of 2019, and increaseddecreased by 14.3%66.1% in the first nine monthshalf of 20202021 from the first nine monthshalf of 2019.2020. The increase,decrease on both a quarter-to-date and year-to-date basis,bases was primarily due to the $2.4 million acceleration of interest expense as a result of the unwinding of the interest rate swap on September 30, 2020. The increase on both a quarter-to-date and year-to-date basis, was partially offset by lower interest expense on borrowings under our revolving credit facility, which was mainly attributable to a lower weighted-average interest rate year-over-year. We expect interest expense, net to decrease on a quarter-to-date basis in the fourth quarter of 2020 from the fourth quarter of 2019 due to an anticipated lower weighted-average interest rate on and an anticipated lower weighted-average outstanding balance for our borrowings under our revolving credit facility. We expect interest expense, net to increasedecrease on aquarter-to-date and year-to-date basisbases in the fourththird quarter of 2021 from the third quarter of 2020 from the fourth quarter of 2019primarily due to the $2.4 million acceleration of interest expense as a result of the unwinding of the interest rate swap, partially offset by an anticipated lower weighted-average interest rate on and an anticipated lower weighted-average outstanding balance for our borrowings under our revolving credit facility.
| Income Taxes | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Income tax expense | Income tax expense | $ | 618 | | | $ | 5,331 | | | $ | 10,453 | | | $ | 17,258 | | Income tax expense | $ | 9,855 | | | $ | 6,394 | | | $ | 20,372 | | | $ | 9,835 | |
Effective tax rate | Effective tax rate | 8.1 | % | | 18.6 | % | | 23.1 | % | | 18.5 | % | Effective tax rate | 25.6 | % | | 30.6 | % | | 25.4 | % | | 26.1 | % |
Our effective income tax rate was 8.1%25.6% and 18.6%30.6% for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The decrease from the thirdsecond quarter of 20192020 was primarily due to the decrease in the current quarter accruals for reserves of unrecognized tax benefits and the pretax mix across jurisdictions with disparate tax rates, partially offset by the second quarter of 2020 beneficial impact of changes in valuation allowance related to R&D credits, partially offset bycredits. Our effective income tax rate was 25.4% and 26.1% for the increasesix months ended June 30, 2021 and 2020, respectively. The decrease from the first half of 2020 was primarily due to the decrease in the current quarter accruals of reserves for uncertainof unrecognized tax positions, higher tax impact on unremitted foreign earningsbenefits and profits, and changes inthe pretax mix across jurisdictions with disparate tax rates. Our effective income tax rate was 23.1% and 18.5% for the nine months ended September 30, 2020 and 2019, respectively. The increase from the first nine months of 2019 was primarily due to the increase in current quarter accruals of reserves for uncertain tax positions, the decrease in excess tax deductions on stock-based compensation and higher tax impact on unremitted foreign earnings and profits,rates, partially offset by the first half of 2020 beneficial impact of changes in valuation allowance related to R&D credits and pretax mix across jurisdictions with disparate tax rates.credits.
Operating Segment Net Sales and Operating Income
Advanced ConnectivityElectronics Solutions
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net sales | Net sales | $ | 63,714 | | | $ | 78,983 | | | $ | 199,207 | | | $ | 251,982 | | Net sales | $ | 140,426 | | | $ | 116,160 | | | $ | 272,318 | | | $ | 227,434 | |
Operating income | Operating income | $ | 4,981 | | | $ | 13,778 | | | $ | 26,067 | | | $ | 45,301 | | Operating income | $ | 18,288 | | | $ | 17,070 | | | $ | 33,137 | | | $ | 21,848 | |
ACSAES net sales decreasedincreased by 19.3%20.9% in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 2019.2020. The decreaseincrease in net sales over the thirdsecond quarter of 20192020 was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets, as well as the automotive market, partially offset by higher net sales in the ADAS, EV/HEV, aerospace and defense market. Net sales were not materially impactedand clean energy markets, partially offset by changes in foreign currencies.
ACS net sales decreased by 20.9% in the first nine months of 2020 compared to the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets, as well as the automotive market, partially offset by higher net sales in the aerospace and defense market. Net sales were unfavorablyfavorably impacted by $1.7foreign currency fluctuations of $5.4 million, or 0.7%4.7%, due to the depreciationappreciation in value of the euro and Chinese renminbi relative to the U.S. dollar.
AES net sales increased by 19.7% in the first half of 2021 compared to the first half of 2020. The increase in net sales over the first half of 2020 was primarily driven by higher net sales in the ADAS, EV/HEV, aerospace and defense and clean energy markets, partially offset by lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment reflected the waningmarket. Net sales were favorably impacted by foreign currency fluctuations of 4G infrastructure spending by telecommunications companies in anticipation of 5G, as well as the impacts of the trade restrictions on Huawei, increased competition and design changes by telecommunications equipment original equipment manufacturers (OEMs)$10.7 million, or 4.7%, which reduced our materials content in 5G base stations. The lower net sales in the automotive market was largely due to the impactsappreciation in value of COVID-19 pandemic.
In our ACS operating segment, we anticipate lower net sales in the 4Geuro and 5G wireless infrastructure markets year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate higher net sales in the aerospace and defense market year-over-year on a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate
lower net sales in the 4G and 5G wireless infrastructure and aerospace and defense markets, while we anticipate higher net sales in the automotive market. The effects of trade tensions, increased competition, lower 5G base station content and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure. As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward. Our expectations of net sales in the aerospace and defense market are primarily dueChinese renminbi relative to the alignment of the advanced weaponry requirements with the technical capabilities of our products, partially offsetU.S. dollar.
Operating income increased by unfavorable impacts of defense program timing. Our expectations of net sales in the automotive market are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic7.1% in the second quarter of 2021 from the second quarter of 2020.
Operating The increase in operating income decreasedwas primarily due to higher volume, favorable absorption of fixed overhead costs and favorable productivity improvements. This was partially offset by 63.8%higher commodity costs, unfavorable product mix and higher freight, duties and tariffs expenses. The higher freight, duties and tariffs expenses were primarily due to the recognition in the thirdsecond quarter of 2020 from the third quarter of 2019.$3.3 million of Chinese duty tax recoveries. As a percentage of net sales, operating income in the thirdsecond quarter of 20202021 was 7.8%13.0%, an approximately 960170 basis point decrease as compared to the 17.4%14.7% reported in the thirdsecond quarter of 2019.2020.
Operating income increased by 51.7% in the first half of 2021 from the first half of 2020. The decreaseincrease in operating income was primarily due to lowerhigher volume, and unfavorablefavorable absorption of fixed overhead costs and favorable productivity improvements. This was partially offset by higher commodity costs, unfavorable product mix and an increase in inventory reserve provision, partially offset by lowerhigher freight, duties and tariffs costs, lower fixed overhead costsexpenses. The
higher freight, duties and yield improvements. Additionally, our ACS operating segment incurred $2.9tariffs expenses were primarily due to the recognition in the second quarter of 2020 of $3.3 million of restructuring and impairment charges in the third quarter of 2020.
Operating income decreased by 42.5% in the first nine months of 2020 from the first nine months of 2019.Chinese duty tax recoveries. As a percentage of net sales, operating income in the first nine monthshalf of 20202021 was 13.1%12.2%, an approximately 490260 basis point decreaseincrease as compared to the 18.0%9.6% reported in the first nine monthshalf of 2019. The decrease2020.
Additionally, we incurred restructuring charges and related expenses associated with our manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations. We recognized $0.7 million and $2.3 million of restructuring charges and related expenses pertaining to these restructuring projects in operating income was primarilythe second quarter of 2021 and the first half of 2021, respectively. For additional information, refer to “Note 15 – Supplemental Financial Information” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
In the first quarter of 2021, our net sales were largely unaffected by global supply chain disruptions, but we began seeing some greater impacts as we exited the quarter. In the second quarter of 2021, the impact of higher commodity costs tempered our gross margin results. In the third quarter of 2021, we expect these issues to persist, but to a lesser extent due to lower volume, unfavorable absorption of fixed overhead costs and unfavorable product mix, partially offset by lower freight, duties and tariffs costs, including the recognition of a $3.3 million expected recovery of previous duty taxes paid duecommercial actions we have begun to a change in Chinese tariff regulations, yield improvements and lower fixed overheadtake to address these higher costs. Additionally, our ACS
Our AES operating segment incurred $2.9 million of restructuring and impairment charges in the first nine months of 2020.
The incremental directtransaction costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as the additional safety supplies,supplies. These costs impacted ACSour operating income by approximately $0.2$0.3 million and $1.7$1.9 million on a quarter-to-date basisin the second quarter of 2021 and year-to-date basis,the second quarter of 2020, respectively, and $0.7 million and $2.3 million in the first half of 2021 and the first half of 2020, respectively.
Elastomeric Material Solutions
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net sales | Net sales | $ | 86,444 | | | $ | 94,940 | | | $ | 241,596 | | | $ | 281,596 | | Net sales | $ | 89,331 | | | $ | 71,626 | | | $ | 181,180 | | | $ | 155,152 | |
Operating income | Operating income | $ | 7,372 | | | $ | 17,995 | | | $ | 21,884 | | | $ | 46,752 | | Operating income | $ | 15,637 | | | $ | 2,995 | | | $ | 35,714 | | | $ | 14,512 | |
EMS net sales decreasedincreased by 8.9%24.7% in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 2019.2020. The decreaseincrease in net sales over the thirdsecond quarter of 20192020 was primarily driven by lower net sales in the general industrial, mass transit, automotive and consumer markets, partially offset by higher net sales in the portable electronics and EV/HEV markets. Net sales were not materially impacted by changes in foreign currencies.
EMS net sales decreased by 14.2% in the first nine months of 2020 compared to the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by lower net sales in the general industrial, mass transit, consumer, portable electronics and automotive markets, partially offset by higher net sales in the EV/HEV, general industrial, consumer and automotive markets, partially offset by lower net sales in the mass transit market. Net sales were unfavorablyfavorably impacted by $1.9foreign currency fluctuations of $2.5 million, or 0.7%3.5%, due to the depreciationappreciation in value of the Chinese renminbi Korean won and euro relative to the U.S. dollar.
In our EMS operating segment, we anticipatenet sales increased by 16.8% in the first half of 2021 compared to the first half of 2020. The increase in net sales over the first half of 2020 was primarily driven by higher net sales in the EV/HEV, general industrial, consumer and portable electronicsautomotive markets, year-over-year in the fourth quarter of 2020, on a quarter-to-date basis, and we anticipate higher net sales in the EV/HEV market, year-over-year, on a year-to-date basis, while we anticipatepartially offset by lower net sales in the general industrial market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate lower netmass transit market. Net sales in the EV/HEV and portable electronics market in the fourth quarterwere favorably impacted by foreign currency fluctuations of 2020. Our expectations of net sales in the EV/HEV market are primarily$5.2 million, or 3.4%, due to continued strong demand partially offset by unfavorable variations of ordering patterns. Our expectations of net salesthe appreciation in the portable electronics market are primarily due to an extensionvalue of the normal seasonality fromChinese renminbi and euro relative to the third quarter into the fourth quarter as a result of the COVID-19 pandemic. Our expectations of net sales in the general industrial market are primarily due to impact of the COVID-19 pandemic.U.S. dollar.
Operating income decreasedincreased by 59.0%422.1% in the thirdsecond quarter of 20202021 from the thirdsecond quarter of 2019. As a percentage of net sales, third quarter of 2020 operating income was 8.5%, an approximately 1,050 basis point decrease as compared to the 19.0% reported in the third quarter of 2019.2020. As a result of the acceleration of amortization expense related to the DSP customer relationships and trademarks and trade names definite-lived other intangible assets in 2020, we recognized an additional $11.7 million oflower amortization expense in the thirdsecond quarter of 2021 compared to the second quarter of 2020. The decreaseincrease in operating income was also due to higher volume, favorable product mix, a lower volumeinventory reserves provision and unfavorablefavorable absorption of fixed overhead costs. This was partially offset by favorable product mix, lower fixed overheadhigher freight, duties and tariffs expenses, higher raw material costs and yield improvements.
Operating income decreased by 53.2% in the first nine months of 2020 from the first nine months of 2019.unfavorable productivity performance due to raw material shortages. As a percentage of net sales, operating income in the first nine monthssecond quarter of 20202021 was 9.1%17.5%, an approximately 7501,330 basis point decreaseincrease as compared to the 16.6%4.2% reported in the second quarter of 2020.
Operating income increased by 146.1% in the first nine monthshalf of 2019.2021 from the first half of 2020. As a result of the acceleration of amortization expense related to the DSP customer relationships and trademarks and trade names definite-lived other intangible assets in 2020, we recognized an additional $15.6 million oflower amortization expense in the first nine monthshalf of 2021 compared to the first half of 2020. The decreaseincrease in operating income was also due to higher volume, favorable product mix, a lower volume, unfavorableinventory reserves provision and favorable absorption of fixed overhead costs and an increase in inventory reserve provision,costs. This was partially offset by favorable product mix, lower fixed overhead costs and lowerhigher freight, duties and tariffs costs.expenses, higher raw material costs and unfavorable productivity performance due to raw material shortages. As a percentage of net sales, operating income in the first half of 2021 was 19.7%, an approximately 1,030 basis point increase as compared to the 9.4% reported in the second quarter of 2020.
The incremental direct costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as the additional safety supplies, impacted EMS operating income by approximately $0.1 million and $1.6 million on a quarter-to-date basis and year-to-date basis, respectively.
The increasedecrease in amortization expense for the three and ninesix months ended SeptemberJune 30, 20202021 was due to the acceleration of amortization expense related to our DSP customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020 due to an adjustment to their remaining useful lives. We recognized an additional $11.7 million of amortization expense for our DSP definite-lived other intangible assets of $0.1 million and $4.4 million in the thirdsecond quarter of 2021 and the second quarter of 2020, respectively, and $15.6$0.1 million and $4.8 million in the first nine monthshalf of 2021 and the first half of 2020, respectively.
Additionally, we recognized expense of $1.5 million and will recognize an additional $11.7$2.8 million primarily related to the financial impacts from the fire at our UTIS manufacturing facility in Ansan, South Korea in 2021 for the second quarter of amortization expense2021 and the first half of 2021, respectively. This impact consisted of write-offs of fixed assets and inventory destroyed and/or damaged in the fourth quarterfire, professional services, costs incurred due to obligations under our manufacturing facility lease agreement, compensation and benefits for certain of 2020. The increases in amortization expense in 2020 areour UTIS employees, partially offset by decreases in forecasted amortization expense in future years.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 615 – Goodwill and Other Intangible Assets”Supplemental Financial Information” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Power Electronics Solutions
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | $ | 47,927 | | | $ | 43,131 | | | $ | 139,868 | | | $ | 154,607 | |
Operating loss | $ | (4,691) | | | $ | (3,358) | | | $ | (3,929) | | | $ | (976) | |
PESOur UTIS net sales increasedwere only slightly impacted by 11.1%the fire at our UTIS manufacturing facility in Ansan, South Korea as a result of selling our undamaged finished goods inventory during the remainder of the first quarter of 2021. In the second quarter of 2021, we experienced a greater impact to our net sales due to the continued disruption to our UTIS operations. In the third quarter of 2020 from2021, we expect a similar impact to our net sales as the second quarter of 2021.
In the first quarter of 2021, our net sales were largely unaffected by global supply chain disruptions, but we began seeing some greater impacts as we exited the quarter. In the second quarter of 2021, the impact of supply constraints and raw material cost increases, primarily due to the weather interruptions along the U.S. Gulf Coast, somewhat tempered our net sales growth and gross margin results. In the third quarter of 2019. The increase in net sales over the third quarter of 2019 was primarily driven by higher net sales in the EV/HEV and renewable energy markets, partially offset by lower net sales in the mass transit and variable frequency drives markets. Net sales were favorably impacted by foreign currency fluctuations of $0.9 million, or 2.0%, due2021, we expect these issues to the depreciation in value of the euro relative to the U.S. dollar.
PES net sales decreased by 9.5% in the first nine months of 2020 from the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by lower net sales in the mass transit, variable frequency drives and vehicle electrification markets, partially offset by higher net sales in the EV/HEV and renewable energy markets. Net sales were unfavorably impacted by foreign currency fluctuations of $1.2 million, or 0.8%, due to the depreciation in value of the euro and Chinese renminbi relative to the U.S. dollar.
The lower net sales in variable frequency drives market in our PES operating segment was duepersist, but to a slowdown in industrial automation demand throughlesser extent as the first nine months of 2020 combined with customer inventory rebalancing, which began in mid-2019, and continued through most of the first half of 2020. The lower year-to-date net sales in vehicle electrification market in our PES operating segment was duesupply chain constraints begin to the COVID-19 impacts on the automotive sector in the first half of 2020, partially offset by the initial recovery in the third quarter of 2020.
In our PES operating segment, we anticipate higher net sales in the EV/HEV market year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate lower net sales in the variable frequency drives market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate higher net sales in the EV/HEV market in the fourth quarter of 2020, while we anticipate lower net sales in the variable frequency drives market. Our expectations of net sales in the EV/HEV market in the fourth quarter of 2020 are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020. Our expectations of the net sales in the variable frequency drives market are primarily due to the anticipated continued effects of the COVID-19 pandemic.
Operating loss increased by 39.7% in the third quarter of 2020 from the third quarter of 2019. As a percentage of net sales, the third quarter of 2020 operating loss was 9.8% as compared to the 7.8% for operating loss reported in the third quarter of 2019. The increase in operating loss was primarily due to $6.3 million of restructuring and impairment charges incurred in the third quarter of 2020,subside, in addition to unfavorable product mix, partially offset bycommercial actions we have begun to take to address the higher volume, lower fixed overhead costs, favorable productivity performance, yield improvements and favorable absorption of fixed overheadraw material costs.
Operating loss increased by 302.6% in the first nine months of 2020 from the first nine months of 2019. As a percentage of net sales, the first nine months of 2020Our EMS operating loss was 2.8% as compared to the 0.6% for operating loss reported in the first nine months of 2019. The increase in operating loss was primarily due to $6.3 million of restructuring and impairment charges
segment incurred in the first nine months of 2020, in addition to lower volume, unfavorable product mix and unfavorable absorption of fixed overhead costs, partially offset by favorable productivity performance, yield improvements, lower fixed overhead costs and lower freight costs.
The incremental transaction costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as the additional safety supplies, did not materially impact PESsupplies. These costs impacted our operating loss on a quarter-to-date basisincome by $0.2 million and impacted PES operating loss by approximately $0.8$1.3 million on a year-to-date basis.in the second quarter of 2021 and the second quarter of 2020, respectively, and $0.4 million and $1.5 million in the first half of 2021 and the first half of 2020, respectively.
Other
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Net sales | Net sales | $ | 3,859 | | | $ | 4,788 | | | $ | 11,240 | | | $ | 16,307 | | Net sales | $ | 5,149 | | | $ | 3,371 | | | $ | 10,673 | | | $ | 7,381 | |
Operating income | Operating income | $ | 1,132 | | | $ | 1,470 | | | $ | 3,339 | | | $ | 4,821 | | Operating income | $ | 1,820 | | | $ | 1,027 | | | $ | 4,087 | | | $ | 2,207 | |
Net sales in this segment decreasedincreased by 19.4%52.7% in the thirdsecond quarter of 20202021 from the thirdsecond quarter of 2019.2020. The decreaseincrease in net sales over the thirdsecond quarter of 20192020 was primarily driven by lowerhigher demand in the automotive market partially resulting from the COVID-19 pandemic.market. Net sales were not materiallyfavorably impacted by changesforeign currency fluctuations of $0.2 million, or 6.0%, due to the appreciation in foreign currencies.value of the Chinese renminbi relative to the U.S. dollar.
Net sales in this segment decreasedincreased by 31.1%44.6% in the first nine monthshalf of 20202021 from the first nine monthshalf of 2019.2020. The decreaseincrease in net sales over the first nine monthshalf of 20192020 was primarily driven by a non-recurring last time buy in the Durel business in the first quarter of 2019, as well as lowerhigher demand in the automotive market partially resulting from the COVID-19 pandemic.market. Net sales were unfavorablyfavorably impacted by foreign currency fluctuations of $0.1$0.4 million, or 0.7%5.1%, due to the depreciationappreciation in value of the Chinese renminbi relative to the U.S. dollar.
Operating income decreased 23.0%increased 77.2% in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 2019.2020. The decreaseincrease in operating income was primarily driven by lowerhigher volume and unfavorablefavorable absorption of fixed overhead costs, partially offset by lower fixed overhead costs. As a percentage of net sales, third quarter of 2020 operating income was 29.3%, a 140 basis point decrease as compared to the 30.7% reported in the third quarter of 2019.unfavorable product mix and higher freight expenses.
Operating income decreased 30.7%increased 85.2% in the first nine monthshalf of 20202021 compared to the first nine monthshalf of 2019.2020. The decreaseincrease in operating income was primarily driven by lowerhigher volume and unfavorablefavorable absorption of fixed overhead costs, partially offset by lower fixed overhead costs. unfavorable product mix and higher freight expenses.
As a percentage of net sales, the first nine months of 2020 operating income in the second quarter of 2021 was 29.7%35.3%, a 10480 basis point increase as compared to the 29.6%30.5% reported in the second quarter of 2020. As a percentage of net sales, operating income in the first half of 2021 was 38.3%, a 840 basis point increase as compared to the 29.9% reported in the first nine monthshalf of 2019.2020.
Liquidity, Capital Resources and Financial Position
We believe that our existing sources of liquidity and cash flows that we expect to generate from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, research and development efforts and our debt service commitments, for at least the next 12 months. We regularly review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships in an effort to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives.
The following table illustrates the location of our cash and cash equivalents by our three major geographic areas:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | June 30, 2021 | | December 31, 2020 |
United States | United States | $ | 43,143 | | | $ | 39,354 | | United States | $ | 39,390 | | | $ | 21,657 | |
Europe | Europe | 46,560 | | | 31,166 | | Europe | 44,446 | | | 55,449 | |
Asia | Asia | 96,420 | | | 96,329 | | Asia | 120,109 | | | 114,679 | |
Total cash and cash equivalents | Total cash and cash equivalents | $ | 186,123 | | | $ | 166,849 | | Total cash and cash equivalents | $ | 203,945 | | | $ | 191,785 | |
Approximately $143.0$164.6 million of our cash and cash equivalents were held by non-U.S. subsidiaries as of SeptemberJune 30, 2020.2021. We did not make any changes in the ninesix months ended SeptemberJune 30, 20202021 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) | (Dollars in thousands) | September 30, 2020 | | December 31, 2019 | (Dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Key Financial Position Accounts: | Key Financial Position Accounts: | | | | Key Financial Position Accounts: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 186,123 | | | $ | 166,849 | | Cash and cash equivalents | $ | 203,945 | | | $ | 191,785 | |
Accounts receivable, net | Accounts receivable, net | $ | 138,611 | | | $ | 122,285 | | Accounts receivable, net | $ | 157,471 | | | $ | 134,421 | |
Inventories | Inventories | $ | 109,733 | | | $ | 132,859 | | Inventories | $ | 110,761 | | | $ | 102,360 | |
Borrowings under revolving credit facility | Borrowings under revolving credit facility | $ | 60,000 | | | $ | 123,000 | | Borrowings under revolving credit facility | $ | — | | | $ | 25,000 | |
Changes in key financial position accounts and other significant changes in our statements of financial position from December 31, 20192020 to SeptemberJune 30, 20202021 were as follows:
•Accounts receivable, net increased 13.4%17.1% to $138.6$157.5 million as of SeptemberJune 30, 2020,2021 from $122.3$134.4 million as of December 31, 2019.2020. The increase from year-end was primarily due to higher net sales at the end of the thirdsecond quarter of 20202021 compared to at the end of 2019, as well as an increase to our days sales outstanding and an increase in our income taxes receivable.2020.
•Inventories decreased 17.4%increased 8.2% to $109.7$110.8 million as of SeptemberJune 30, 2020,2021, from $132.9$102.4 million as of December 31, 2019,2020, primarily driven by a decline in inventory levels to align with our lower net sales volumes,raw material cost increases as well as an increase in inventory reserve provision within the EMS operating segmentramp up of raw material purchases and a reduction of capitalized variances associated with the timing of volumes produced versus sold relativeproduction efforts to the end of 2019.meet anticipated demand.
•Borrowings under revolving credit facility decreased 51.2% to $60.0 millionwere nil as of SeptemberJune 30, 2020, from $123.02021 compared to $25.0 million as of December 31, 2019.2020. This was as a result of $213.0$25.0 million of discretionary principal payments on our revolving credit facility during the second and third quartersfirst half of 2020, partially offset by $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic.2021. For additional information regarding this facility and the Third Amended Credit Agreement 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.
| | | Nine Months Ended | | Six Months Ended |
(Dollars in thousands) | (Dollars in thousands) | September 30, 2020 | | September 30, 2019 | (Dollars in thousands) | June 30, 2021 | | June 30, 2020 |
Key Cash Flow Measures: | Key Cash Flow Measures: | | | | Key Cash Flow Measures: | | | |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 113,673 | | | $ | 115,672 | | Net cash provided by operating activities | $ | 66,206 | | | $ | 54,959 | |
Net cash used in investing activities | Net cash used in investing activities | $ | (28,944) | | | $ | (36,193) | | Net cash used in investing activities | $ | (20,701) | | | $ | (18,150) | |
Net cash provided by (used in) financing activities | $ | (67,033) | | | $ | (104,010) | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | $ | (31,632) | | | $ | 95,442 | |
As of SeptemberJune 30, 2020,2021, cash and cash equivalents were $186.1$203.9 million as compared to $166.8$191.8 million as of December 31, 2019,2020, an increase of $19.3$12.2 million, or 11.6%6.3%. This increase was primarily due to the $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020, supplemented by cash flows generated by operations. This increase wasoperations, partially offset by $213.0$25.0 million of discretionary principal payments on our revolving credit facility during the second and third quartersfirst half of 2020, $28.92021, $21.4 million in capital expenditures and $5.1$2.7 million in tax payments related to net share settlement of equity awards.
In 2021, we continue to expect capital spending to be in the range of approximately $70.0 million to $80.0 million, which we plan to fund with cash from operations. This range includes the capital expenditures necessary to restore the UTIS operations, a significant portion of which we expect to be reimbursed by insurance proceeds.
Restrictions on Payment of Dividends
The Third Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our leverage ratio does not exceed 2.75 to 1.00. If our 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 leverage ratio did not exceed 2.75 to 1.00 as of September 30, 2020.
The Fourth Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our total net leverage ratio does not exceed 2.75 to 1.00. If our total net leverage ratio exceeds 2.75 to 1.00, we may nonetheless make up to $20.0 million in restricted payments, including cash dividends, during each fiscal year, provided that no default or event of default has occurred and is continuing or would result from the payments. Our total net leverage ratio did not exceed 2.75 to 1.00 as of October 16, 2020.June 30, 2021.
Contingencies
During the thirdsecond quarter of 2020,2021, we did not become aware of any material developments related to environmental matters disclosed in our Annual Report, our asbestos litigation or other material contingencies previously disclosed or incur any material costs or capital expenditures related to such matters. Refer to “Note 12 – Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for further discussion of these contingencies.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2020,2021, we did not have any off-balance sheet arrangements that have or are, in the opinion of management, reasonably likely to have a current or future material effect on our results of operations or financial position.
Critical Accounting Policies
There were no material changes in our critical accounting policies during the thirdsecond quarter of 2020.2021.
Recent Accounting Pronouncements
Refer to “Note 16 – Recent Accounting Standards” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements including expected dates of adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our exposure to market risk during the thirdsecond quarter of 2020.2021. For discussion of our exposure to market risk, refer to “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of SeptemberJune 30, 2020.2021. The Company’s disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2020.2021.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.
Part II - Other Information
Item 1. Legal Proceedings
Refer to the discussion of certain environmental, asbestos and other litigation matters in “Note 12 – Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Item 1A. Risk Factors
The COVID-19 pandemic and global responsive measures have impacted our business and results of operations and could materially adversely affect our business, results of operations and financial position in future periods.
The COVID-19 pandemic has now spread globally and resulted in governmental authorities implementing numerous responsive measures, such as travel bans and other restrictions, including quarantines, shelter-in-place and stay-home orders, transportation disruptions, closures and shutdowns. We maintain significant manufacturing and administrative operations in the U.S., China, Belgium, Germany, South Korea and Hungary, and each of these countries has been significantly affected by the outbreak and taken measures to try to contain it. We have also modified our business practices in an effort to ensure business continuity while promoting continued employee health and well-being. Collectively, these measures have impacted and are likely to continue to impact our workforce and operations. In addition, the outbreak and associated responsive measures have resulted in significant disruption of the global economy, leading to steep declines and increased volatility in the financial markets, and it is possible that a potentially severe global recession will follow.
There is considerable uncertainty regarding the effect of COVID-19 as well as current and future responsive measures on our business, including on our workforce and operations. We may experience sustained demand reductions for our products in certain end markets, be unable to satisfy customer demand and face increased operating costs, asset impairments and cash flow reductions, all of which could have a material adverse effect on our business, results of operations and financial position.
Item 6. Exhibits
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List of Exhibits: |
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3.1 | |
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3.2 | |
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10.1 | |
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31.1 | |
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31.2 | |
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32 | |
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99.1 | |
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101 | The following materials from Rogers Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended SeptemberJune 30, 20202021 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, (iii) Condensed Consolidated Statements of Financial Position as of SeptemberJune 30, 20202021 and December 31, 2019,2020, (iv) Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, (v) Condensed Consolidated Statements of Shareholders’ Equity for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, (vi) Notes to Condensed Consolidated Financial Statements and (vii) Cover Page. |
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104 | The cover page from Rogers Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended SeptemberJune 30, 2020,2021, formatted in iXBRL and contained in Exhibit 101. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ROGERS CORPORATION (Registrant) |
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/s/ Michael M. LudwigRamakumar Mayampurath | | |
Michael M. LudwigRamakumar Mayampurath | | |
Senior Vice President, Chief Financial Officer and Treasurer Principal Financial Officer | | |
Principal Financial Officer | | |
Dated: October 30, 2020July 29, 2021 | | |