ROGERS CORPORATION The following discussion and analysis of our results of operations and financial position should be read together with our consolidated financial statements and accompanying notes, which are contained in "Item 8. Financial Statements and Supplementary Data."
The discussion of the comparison of our 2020 and 2019 results was previously
disclosed within the Management's Discussion & Analysis in Part II, Item 7 of
the Company's Annual Report on Form 10-K filed with the
Company Background and Strategy
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 electrification of vehicles, including electric and hybrid electric vehicles (EV/HEV), and increasing use of advanced driver assistance systems (ADAS) in the automotive industry and the growth of 5G smartphones in the portable electronics industry. In addition to our focus on advanced mobility and advanced connectivity in the automotive, portable electronics and telecommunications industries, we sell into a variety of other markets including general industrial, aerospace and defense, mass transit, clean energy and connected devices.
Our sales and marketing approach is based on addressing these trends, while our strategy focuses on factors for success as a manufacturer of engineered materials and components: performance, reliability, service, cost, efficiency, innovation and technology. We have expanded our capabilities through organic investment and acquisitions and strive to ensure high quality solutions for our customers. We continue to review and re-align our manufacturing and engineering footprint in an effort to maintain a leading competitive position globally. We have established or expanded our capabilities in various locations in support of our customers' growth initiatives.
We seek to enhance our operational and financial performance by investing in research and development, manufacturing and materials efficiencies, and new product initiatives that respond to the needs of our customers. We strive to evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.
If we are able to successfully execute on our growth strategy, we see an opportunity to double our annual revenues over the next five years. This robust outlook is supported by our participation in a number of fast-growing markets and by our strong competitive positions in these markets. Advanced mobility markets, which are comprised of EV/HEV and ADAS, are expected to grow at the fastest rate. Third-party analysis projects that the EV/HEV market will grow at compound annual growth rate of more than 25% over the next five years and ADAS at a rate of more than 15% over that time period. Within the EV/HEV market, we believe our advanced battery cell pads, ceramic substrates and power interconnects provide multiple content opportunities to capitalize on this growth. In each of these areas we have secured a number of design wins and have a strong pipeline, which provides confidence in our growth outlook. In the ADAS market, we continue to build on our current position with new design wins, including those for next-generation automotive radar systems. Other markets with a strong growth trajectory include aerospace and defense, clean energy and portable electronics. These markets are projected to grow at high single digit rates and we expect that they will contribute to our growth strategy's aim of doubling revenues over the next five years.
To support our revenue growth opportunity during the five-year strategic planning period, we have initiated a manufacturing expansion plan, which includes expanding capacity at existing Rogers' manufacturing facilities, relocating existing manufacturing capabilities to enhance operational efficiency and adding new manufacturing facilities. This expansion plan will require a significant increase in capital spending together with an associated increase in operating expenses, as compared to historic capital spending and operating expenses over the previous five years. During the five-year strategic planning period, we also will have significant capital expenditures associated with implementing our enterprise resource planning system.
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Proposed Merger with DuPont
On
Executive Summary
The following key highlights and factors should be considered when reviewing our results of operations, financial position and liquidity:
•In 2021 as compared to 2020, our net sales increased by 16.2% to
•In early
•On
•Our 2021 net sales and gross margin were tempered by global supply chain disruptions, which we expect to continue into 2022.
•We recognized
•In 2021, we incurred
•We incurred incremental direct costs of
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Results of Operations
The following table sets forth, for the periods indicated, selected operations data expressed as a percentage of net sales:
2021 2020
Net sales 100.0 % 100.0 %
Gross margin 37.4 % 36.4 %
Selling, general and administrative expenses 20.6 % 22.7 % Research and development expenses
3.2 % 3.7 %
Restructuring and impairment charges 0.4 % 1.6 %
Other operating (income) expense, net 0.6 % - %
Operating income 12.6 % 8.4 %
Equity income in unconsolidated joint ventures 0.7 % 0.6 % Pension settlement charges
(0.1) % - %
Other income (expense), net 0.6 % 0.4 %
Interest expense, net (0.3) % (0.9) %
Income before income tax expense 13.5 % 8.5 %
Income tax expense 1.9 % 2.3 %
Net income 11.6 % 6.2 %
Net Sales and Gross Margin
(Dollars in thousands) 2021 2020
Net sales $ 932,886 $ 802,583
Gross margin $ 349,139 $ 291,820
Percentage of net sales 37.4 % 36.4 %
Net sales increased by 16.2% in 2021 compared to 2020. Our AES and EMS operating
segments had net sales increases of 16.5% and 15.2%, respectively. The increase
in net sales was primarily due to higher net sales in the EV/HEV, clean energy,
aerospace and defense and ADAS markets in our AES operating segment and higher
net sales in the general industrial, EV/HEV, consumer and automotive markets in
our EMS operating segment. The increase was partially offset by lower net sales
in the portable electronics and mass transit markets in our EMS operating
segment. Additionally, our EMS operating segment net sales increased by
Gross margin as a percentage of net sales increased 100 basis points to 37.4% in
2021 compared to 36.4% in 2020. Gross margin in 2021 was favorably impacted by
higher volume, favorable absorption of fixed overhead costs and lower inventory
reserve provisions in our AES and EMS operating segments, as well as favorable
productivity improvements in our AES operating segment and favorable product mix
in our EMS operating segment. This was partially offset by higher commodity and
raw material costs, higher fixed overhead expenses, and higher freight, duty and
tariff expenses in our AES and EMS operating segments, as well as unfavorable
product mix in our AES operating segment and unfavorable productivity
performance due to raw material shortages and unfavorable yield performance in
our EMS operating segment. The higher freight, duty and tariff expenses were
primarily due to the recognition in the second quarter of 2020 of a
UTIS net sales were significantly impacted by a fire at our manufacturing
facility in Ansan,
In 2021, our net sales were tempered by global supply chain disruptions,
primarily related to semiconductor chip and other key component and raw material
shortages, as well as regional power outages in
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We incurred incremental direct costs associated with the temporary additional
benefits established under our dependent care, premium pay and sick pay programs
in response to the COVID-19 pandemic, as well as additional safety supplies.
These costs impacted our gross margin by
Selling, General and Administrative Expenses (Dollars in thousands) 2021 2020
Selling, general and administrative expenses
20.6 % 22.7 %
Selling, general and administrative (SG&A) expenses increased 6.0% in 2021 from
2020, primarily due to a
The decrease in amortization expense in 2021 from 2020 was due to the
acceleration of amortization expense related to our DSP customer relationships
and trademarks and trade names definite-lived other intangible assets, which
were both accelerated to be fully amortized by
The increase in total compensation and benefits is primarily due to higher
incentive compensation expenses year-over-year, including a
Research and Development Expenses (Dollars in thousands) 2021 2020
Research and development expenses
3.2 % 3.7 %
R&D expenses increased 2.0% in 2021 from 2020, primarily due to increases in laboratory expenses, depreciation and total compensation and benefits, partially offset by decreases in professional services.
Restructuring and Impairment Charges and Other Operating (Income) Expense, Net (Dollars in thousands)
2021 2020
Restructuring and impairment charges
We recognized
We recognized
With respect to other operating (income) expense, net, we recognized expense of
Equity Income inUnconsolidated Joint Ventures (Dollars in thousands) 2021 2020
Equity income in unconsolidated joint ventures
As of
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2020 due to higher net sales, driven by strong sales in the portable electronics and general industrial markets, and improved operational performance for RIC, primarily due to higher utilization of production capacity.
Pension Settlement Charges and Other Income (Expense), Net
(Dollars in thousands) 2021 2020
Pension settlement charges
In 2021 and 2020, we recorded
Other income (expense), net improved to a net income of
Interest Expense, Net (Dollars in thousands) 2021 2020 Interest expense, net$ (2,536) $ (7,135)
Interest expense, net, decreased by 64.5% in 2021 from 2020, primarily due to a
lower weighted-average outstanding balance for our borrowings under our
revolving credit facility as well as a
Income Tax Expense (Dollars in thousands) 2021 2020 Income tax expense$ 18,147 $ 18,544 Effective tax rate 14.4 % 27.1 %
Our effective income tax rate for 2021 was 14.4% compared to 27.1% for 2020. The
decrease from 2020 was primarily due to the beneficial impact of increased
reversals of unrecognized tax positions in
Operating Segment
Advanced Electronics Solutions (Dollars in thousands) 2021 2020 Net sales$ 534,429 $ 458,679 Operating income$ 50,198 $ 32,023
Our AES operating segment net sales increased by 16.5% in 2021 compared to 2020.
The increase in net sales was primarily driven by higher net sales in the
EV/HEV, clean energy, aerospace and defense and ADAS markets. Net sales were
benefited from favorable foreign currency fluctuations of
Operating income increased by 56.8% in 2021 from 2020. The increase in operating
income was primarily due to higher volume, favorable absorption of fixed
overhead costs, favorable productivity improvements and a lower inventory
reserves provision, in addition to a
Additionally, we incurred restructuring charges and related expenses associated
with our manufacturing footprint optimization plans involving certain
In 2021, our AES operating segment net sales were tempered by global supply
chain disruptions, primarily related to semiconductor chip and other key
component and raw material shortages, as well as regional power outages in
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impacts on customer demand, partially offset by the favorable impacts of commercial actions taken earlier in 2021. Further, supply constraints on raw material and labor availability moderated production levels, creating operational inefficiencies, which negatively impacted our AES operating segment gross margin. The global supply chain disruptions experienced in 2021 and their impacts to our AES operating segment net sales and gross margin are expected to continue into 2022.
Our AES operating segment incurred incremental direct costs associated with the
temporary additional benefits established under our dependent care, premium pay
and sick pay programs in response to the COVID-19 pandemic, as well as
additional safety supplies. These costs impacted our AES operating segment
operating income by
Elastomeric Material Solutions (Dollars in thousands) 2021 2020 Net sales$ 378,017 $ 328,177 Operating income$ 60,051 $ 30,817
Our EMS operating segment net sales increased by 15.2% in 2021 compared to 2020.
The increase in net sales was primarily driven by higher net sales in the
general industrial, EV/HEV, consumer and automotive markets, partially offset by
lower net sales in the portable electronics and mass transit markets.
Additionally, EMS net sales increased by
Operating income increased by 94.9% in 2021 from 2020. The increase was
primarily due to a
The decrease in other intangible assets amortization expense in 2021 from 2020
was due to the acceleration of amortization expense related to our DSP customer
relationships and trademarks and trade names definite-lived other intangible
assets, which were both accelerated to be fully amortized by
Additionally, we recognized expense of
UTIS net sales were significantly impacted by a fire at our manufacturing
facility in Ansan,
In 2021, our EMS operating segment net sales were tempered by global supply
chain disruptions, primarily related to semiconductor chip and other key
component and raw material shortages, as well as regional power outages in
Our EMS operating segment incurred incremental direct costs associated with the
temporary additional benefits established under our dependent care, premium pay
and sick pay programs in response to the COVID-19 pandemic, as well as
additional safety supplies. These costs impacted our EMS operating segment
operating income by
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Other (Dollars in thousands) 2021 2020 Net sales$ 20,440 $ 15,727 Operating income$ 6,933 $ 4,494
Net sales in our Other operating segment increased by 30.0% in 2021 from 2020.
The increase in net sales was primarily due to higher demand in the automotive
market. Net sales were favorably impacted by foreign currency fluctuations of
Our Other operating segment operating income increased by 54.3% in 2021 from 2020. The increase in operating income was primarily driven by higher volume and favorable absorption of fixed overhead costs, partially offset by higher fixed overhead expenses and higher freight expenses. As a percentage of net sales, operating income in 2021 was 33.9%, an approximately 530 basis point increase as compared to 28.6% in 2020.
Liquidity, Capital Resources and Financial Position
We believe that our existing sources of liquidity and cash flows that are expected to be generated from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, R&D efforts and our debt service commitments, for at least the next 12 months. Our merger agreement with DuPont does not restrict these currently planned capital expenditures. We regularly review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships, seeking to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives. The following table illustrates the location of our cash and cash equivalents by our three major geographic areas:
As of December 31,
(Dollars in thousands) 2021 2020
United States $ 76,621 $ 21,657
Europe 56,034 55,449
Asia 99,641 114,679
Total cash and cash equivalents
Approximately
Net working capital was
(Dollars in thousands) As of December 31, Key Financial Position Accounts: 2021 2020 Cash and cash equivalents$ 232,296 $ 191,785 Accounts receivable, net 163,092 134,421 Inventories 133,384 102,360
Borrowings under revolving credit facility 190,000 25,000
Significant changes in our statement of financial position accounts from
•Accounts receivable, net increased 21.3% to
•Inventories increased 30.3% to
•Borrowings under revolving credit facility increased
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for general corporate purposes. This was partially offset by
(Dollars in thousands) Year Ended December 31, Key Cash Flow Measures: 2021 2020 Net cash provided by operating activities$ 124,363 $ 165,056 Net cash used in investing activities (238,615) (40,385) Net cash (used in) provided by financing activities 159,057 (104,189)
In 2021, cash and cash equivalents increased
In 2020, cash and cash equivalents increased
In 2022, we expect capital spending to be in the range of approximately
There are no contractual obligations requiring material cash requirements in 2022 and beyond, excluding those already noted, including those related our outstanding borrowings under our revolving credit facility, our operating and finance lease obligations and our pension benefit and other postretirement benefit obligations, which are discussed in Note 9 - Debt, Note 10 - Leases and Note 11 - Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan, to Item 8. Financial Statements and Supplementary Data, respectively.
We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have a current or future material effect on our results of operations or financial position.
Restriction on Payment of Dividends
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
Under the terms of the merger agreement with DuPont, we are restricted from paying any dividends or other distributions to our shareholders, or making any material modifications to our dividend policy, without the prior approval of DuPont.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with
Product Liabilities
We endeavor to maintain insurance coverage with reasonable deductible levels to protect us from potential exposures to product liability claims. Any liability associated with such claims is based on management's best estimate of the potential claim value, while insurance receivables associated with related claims are not recorded until verified by the insurance carrier.
For asbestos-related claims, we recognize projected asbestos liabilities and related insurance receivables, with any difference between the liability and related insurance receivable recognized as an expense in the consolidated statements of operations.
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Our estimates of asbestos-related contingent liabilities and related insurance receivables are based on a claim projection analysis and an insurance usage analysis prepared annually by third parties. The claim projection analysis contains numerous assumptions, including number of claims that might be received, the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, average indemnity costs, average defense costs, costs of medical treatment, the financial resources of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards, including potential tort reform. Furthermore, any predictions with respect to these assumptions are subject to even greater uncertainty as the projection period lengthens. The insurance usage analysis considers, among other things, applicable deductibles, retentions and policy limits, the solvency and historical payment experience of various insurance carriers, the likelihood of recovery as estimated by external legal counsel and existing insurance settlements.
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.
Our accrued asbestos liabilities may not approximate our actual asbestos-related indemnity and defense costs, and our accrued insurance recoveries may not be realized. We believe it is reasonably possible that we may incur additional charges for our asbestos liabilities and defense costs in the future that could exceed existing reserves and insurance recoveries. We plan to continue to vigorously defend ourselves and believe we have substantial unutilized insurance coverage to mitigate future costs related to this matter.
We review our asbestos-related projections annually in the fourth quarter of each year unless facts and circumstances materially change during the year, at which time we would analyze these projections. We believe the assumptions made on the potential exposure and expected insurance coverage are reasonable at the present time, but are subject to uncertainty based on the actual future outcome of our asbestos litigation.
As of
Business Combination Purchase Price Allocation
The application of the acquisition method requires the allocation of the purchase price amongst the acquisition date fair values of identifiable assets acquired and liabilities assumed in a business combination. Fair values are determined using the income approach, market approach and/or cost approach depending on the nature of the asset or liability being valued and the reliability of available information. The income approach estimates fair value by discounting associated lifetime expected future cash flows to their present value and relies on significant assumptions regarding future revenues, expenses, working capital levels and discount rates. The market approach estimates fair value by analyzing recent actual market transactions for similar assets or liabilities. The cost approach estimates fair value based on the expected cost to replace or reproduce the asset or liability and relies on assumptions regarding the occurrence and extent of any physical, functional and/or economic obsolescence.
Customer relationships were valued using the multi-period excess earnings method (MPEEM) of the income approach. Significant assumptions used in the valuation include projected revenues and gross margins, customer attrition rate and an appropriate discount rate. No residual value was assigned to the acquired customer relationships. The customer relationships are amortized on an economic useful life basis commensurate with future anticipated cash flows. The total weighted average amortization period for the Silicone Engineering customer relationship definite-lived intangible asset is 9.5 years.
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