ROGERS CORPORATION As used herein, the "Company," "Rogers," "we," "us," "our" and similar terms includeRogers 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 inthe United States (U.S. ) and abroad, particularly inChina ,South Korea ,Germany ,Hungary andBelgium , where we maintain significant manufacturing, sales or administrative operations; •the trade policy dynamics between theU.S. andChina reflected in trade agreement negotiations and the imposition of tariffs and other trade restrictions, including trade restrictions onHuawei 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 endedDecember 31, 2020 (the Annual Report) and our other reports filed with theSecurities 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. 26 -------------------------------------------------------------------------------- Company Background and StrategyRogers Corporation designs, develops, manufactures and sells high-performance and high-reliability engineered materials and components to meet our customers' demanding challenges. We operate two strategic operating segments: Advanced Electronics Solutions (AES) and Elastomeric Material Solutions (EMS). The remaining operations, which represent our non-core businesses, are reported in our Other operating segment. We have a history of innovation and have establishedInnovation Centers for our research and development (R&D) activities inChandler, Arizona ,Burlington, Massachusetts ,Eschenbach ,Germany andSuzhou, China . We are headquartered inChandler, 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, 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, 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 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. 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-while at the same time taking actions to preserve business continuity. Our non-manufacturing employees transitioned seamlessly to remote working arrangements and are effectively collaborating both internally and with our customers. In some cases, based on local conditions, non-manufacturing employees have returned to their worksites. 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 six months endedJune 30, 2021 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 second quarter of 2021 as compared to the second quarter of 2020, our net sales increased 22.9% to$234.9 million , our gross margin increased approximately 160 basis points to 38.2% from 36.6%, and operating income increased approximately 420 basis points to 15.2% from 11.0%. In the first half of 2021 as compared to the first half of 2020, our net sales increased approximately 19.0% to$464.2 million , our gross margin increased approximately 380 basis points to 38.6% from 34.8%, and operating income increased approximately 580 basis points to 15.7% from 9.9%. •We made$25.0 million of discretionary principal payments on our revolving credit facility during the first half of 2021. •We recognized$0.7 million of restructuring charges in the second quarter of 2021 and$2.3 million of restructuring charges in the first half of 2021, related to the manufacturing footprint optimization plans involving certainEurope andAsia manufacturing locations, primarily impacting our AES operating segment. 27 -------------------------------------------------------------------------------- •In earlyFebruary 2021 , there was a fire at our UTIS manufacturing facility in Ansan,South Korea . This facility manufactures eSorba® polyurethane foams used in portable electronics and display applications. Operations at this facility will be disrupted into at least the first quarter of 2022. We are currently evaluating alternative facility options. We recognized net expense of$1.5 million in the second quarter of 2021 and$2.8 million in the first half of 2021, related to the financial impacts from the fire, which consisted of write-offs of fixed assets and inventory destroyed and/or damaged in the fire, professional services, costs incurred due to obligations under our manufacturing facility lease agreement, 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$0.5 million and$3.3 million in the second quarter of 2021 and the second quarter of 2020, respectively, and incurred incremental transaction costs of$1.1 million and$4.0 million in the first half of 2021 and the first half of 2020, respectively, due to the COVID-19 pandemic. Results of Operations The following table sets forth, for the periods indicated, selected operations data expressed as a percentage of net sales: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross margin 38.2 % 36.6 % 38.6 % 34.8 % Selling, general and administrative expenses 19.1 % 21.8 % 18.7 % 21.0 % Research and development expenses 3.2 % 3.8 % 3.2 % 3.9 % Restructuring and impairment charges 0.3 % - % 0.5 % - % Other operating (income) expense, net 0.4 % - % 0.5 % - % Operating income 15.2 % 11.0 % 15.7 % 9.9 % Equity income in unconsolidated joint ventures 0.9 % 0.5 % 0.9 % 0.5 % Other income (expense), net 0.5 % 0.3 % 0.9 % - % Interest expense, net (0.2) % (0.9) % (0.2) % (0.8) % Income before income tax expense 16.4 % 10.9 % 17.3 % 9.6 % Income tax expense 4.2 % 3.3 % 4.4 % 2.5 % Net income 12.2 % 7.6 % 12.9 % 7.1 %Net Sales and Gross Margin Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net sales$ 234,906 $ 191,157 $ 464,171 $ 389,967 Gross margin$ 89,833 $
69,969
38.2 % 36.6 % 38.6 % 34.8 %
Net sales increased by 22.9% in the second quarter of 2021 compared to the
second quarter of 2020. Our AES and EMS operating segments had net sales
increases of 20.9% and 24.7%, respectively. The increase in net sales was
primarily due to higher net sales in the ADAS, EV/HEV, aerospace and defense and
clean energy markets in our AES operating segment and higher net sales in the
EV/HEV, general industrial, consumer and automotive markets in our EMS 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 favorably
impacted by foreign currency impacts of $8.1 million , or 4.3%, due to the
appreciation in value of the euro and Chinese renminbi relative to the U.S.
dollar.
Net sales increased by 19.0% in the first half of 2021 compared to the first
half of 2020. Our AES and EMS operating segments had net sales increases of
19.7% and 16.8%, respectively. The increase in net sales was primarily due to
higher net sales in the ADAS, EV/HEV, aerospace and defense and clean energy
markets in our AES operating segment and higher net sales in the EV/HEV, general
industrial, consumer and automotive markets in our EMS 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
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transit market in our EMS operating segment. Net sales were favorably impacted
by foreign currency impacts of $16.3 million , or 4.2%, due to the appreciation
in value of the euro and Chinese renminbi relative to the U.S. dollar.
Gross margin as a percentage of net sales increased approximately 160 basis
points to 38.2% in the second quarter of 2021 compared to 36.6% in the second
quarter of 2020. Gross margin in the second quarter of 2021 was favorably
impacted by higher volume and favorable absorption of fixed overhead costs in
our AES 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 higher commodity and raw material costs as well as
higher freight, duties and tariffs expenses in our AES and EMS operating
segments, unfavorable product mix in our AES operating segments and unfavorable
productivity performance due to raw material shortages in our EMS 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 380 basis
points to 38.6% in the first half of 2021 compared to 34.8% in the first half of
2020. Gross margin in the first half of 2021 was favorably impacted by higher
volume and favorable absorption of fixed overhead costs in our AES and EMS
operating segments, favorable product mix in our EMS operating segment,
favorable productivity improvements in our AES operating segment and a lower
inventory reserves provision in our EMS operating segment. This was partially
offset by higher commodity and raw material costs as well as higher freight,
duties and tariffs expenses in our AES and EMS operating segments, unfavorable
product mix in our AES operating segment and unfavorable productivity
performance due to raw material shortages in our EMS 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.
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 $0.4 million and $3.0 million
in the second quarter of 2021 and the second quarter of 2020, respectively, and
$1.1 million and $3.6 million in the first half of 2021 and the first half of
2020, respectively.
Selling, General and Administrative Expenses
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Selling, general and administrative
expenses $ 44,959 $ 41,694 $ 87,372 $ 82,024
Percentage of net sales 19.1 % 21.8 % 18.7 % 21.0 %
Selling, general and administrative (SG&A) expenses increased 7.8% in the second
quarter of 2021 from the second quarter of 2020, primarily due to a $5.2 million
increase in total compensation and benefits, a $0.9 million increase in software
expenses, a $0.5 million increase in recruiting/relocation/training expenses, a
$0.3 million increase in travel and entertainment expenses and a $0.1 million
increase in depreciation. This was partially offset by a $4.5 million decrease
in other intangible assets amortization and a $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 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 $5.0 million decrease in other intangible assets amortization and a $0.9
million decrease in travel and entertainment expenses.
The decrease in amortization expense for the three and six months ended June 30,
2021 was due to the acceleration of amortization expense related to our DSP
customer relationships and trademarks and trade names definite-lived other
intangible assets, which were both accelerated to be fully amortized by December
31, 2020 due to an adjustment to their remaining useful lives. We recognized
amortization expense for our DSP definite-lived other intangible assets of $0.1
million and $4.4 million in the second quarter of 2021 and the second quarter of
2020, respectively, and $0.1 million and $4.8 million in the first half of 2021
and the first half of 2020, respectively.
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The year-to-date decrease in travel and entertainment and
recruiting/relocation/training expenses was primarily driven by the impacts of
COVID-19.
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 second quarter of 2021 from the second
quarter of 2020 due to increases in depreciation and laboratory expenses,
partially offset by decreases in professional services and total compensation
benefits.
R&D expenses decreased 2.9% in 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.
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 15 - Supplemental Financial
Information" to the condensed consolidated financial statements in Part I, Item
1 of this Form 10-Q.
With respect to other operating (income) expense, net, we recognized expense of
$0.9 million and $2.1 million in the second quarter of 2021 and the first half
of 2021, respectively, primarily related to the financial 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 UTIS employees, partially offset by the
recognition of certain anticipated insurance recoveries. There may be other
potential costs that cannot be reasonably foreseen or estimated at this time and
we continue to evaluate information as it becomes available. For additional
information, refer to "Note 15 - Supplemental Financial Information" to the
condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Equity Income in Unconsolidated Joint Ventures
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Equity income in unconsolidated
joint ventures $ 1,930 $
1,022
As ofJune 30, 2021 , we had two unconsolidated joint ventures, each 50% owned:Rogers INOAC Corporation (RIC) andRogers INOAC Suzhou Corporation (RIS). Equity income in those unconsolidated joint ventures increased 88.8% in the second quarter of 2021 from the second quarter of 2020, and increased 83.5% in the first half of 2021 from the first half of 2020. On a quarter-to-date basis and a year-to-date basis, the increase was due to higher net sales, driven by strong sales in the portable electronics and general industrial markets, and improved operational performance for both RIS and RIC, primarily due to higher utilization of production capacity. 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), net increased to income of$1.2 million in the second quarter of 2021 from income of$0.6 million in the second quarter of 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. 30 -------------------------------------------------------------------------------- Other income (expense), net increased to income of$4.2 million in the first half of 2021 from expense of$0.2 million in the first half of 2020. On a year-to-date basis, the increase was due to favorable impacts from our copper derivative contracts and foreign currency transactions, partially offset by unfavorable impacts from our foreign currency derivative contracts. Interest Expense, Net Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Interest expense, net$ (404) $ (1,779) $ (1,011) $ (2,986) Interest expense, net, decreased by 77.3% in the second quarter of 2021 from the second quarter of 2020, and decreased by 66.1% in the first half of 2021 from the first half of 2020. The decrease on quarter-to-date and year-to-date bases was primarily due to a lower weighted-average outstanding balance for our borrowings under our revolving credit facility. We expect interest expense, net to decrease on quarter-to-date and year-to-date bases in the third quarter of 2021 from the third quarter of 2020 primarily due to a lower weighted-average outstanding balance for our borrowings under our revolving credit facility. Income Taxes Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Income tax expense$ 9,855 $ 6,394 $ 20,372 $ 9,835 Effective tax rate 25.6 % 30.6 % 25.4 % 26.1 % Our effective income tax rate was 25.6% and 30.6% for the three months endedJune 30, 2021 and 2020, respectively. The decrease from the second quarter of 2020 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. Our effective income tax rate was 25.4% and 26.1% for the six months endedJune 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 of unrecognized tax benefits and the pretax mix across jurisdictions with disparate tax rates, partially offset by the first half of 2020 beneficial impact of changes in valuation allowance related to R&D credits. Operating SegmentNet Sales and Operating Income Advanced Electronics Solutions Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net sales$ 140,426 $ 116,160 $ 272,318 $ 227,434 Operating income$ 18,288 $ 17,070 $ 33,137 $ 21,848 AES net sales increased by 20.9% in the second quarter of 2021 compared to the second quarter of 2020. The increase in net sales over the second quarter 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 wireless infrastructure market. Net sales were favorably impacted by foreign currency fluctuations of$5.4 million , or 4.7%, due to the appreciation in value of the euro and Chinese renminbi relative to theU.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 wireless infrastructure market. Net sales were favorably impacted by foreign currency fluctuations of$10.7 million , or 4.7%, due to the appreciation in value of the euro and Chinese renminbi relative to theU.S. dollar. Operating income increased by 7.1% in the second quarter of 2021 from the second quarter of 2020. The increase in operating income was primarily due to higher volume, favorable absorption of fixed overhead costs and favorable productivity improvements. This was partially offset by 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 second quarter of 2020 of$3.3 million of Chinese duty tax recoveries. As a percentage of net sales, operating income in the second quarter of 2021 was 13.0%, an approximately 170 basis point decrease as compared to the 14.7% reported in the second quarter of 2020. Operating income increased by 51.7% in the first half of 2021 from the first half of 2020. The increase in operating income was primarily due to higher volume, favorable absorption of fixed overhead costs and favorable productivity improvements. This was partially offset by higher commodity costs, unfavorable product mix and higher freight, duties and tariffs expenses. The 31 -------------------------------------------------------------------------------- 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. As a percentage of net sales, operating income in the first half of 2021 was 12.2%, an approximately 260 basis point increase as compared to the 9.6% reported in the first half of 2020. Additionally, we incurred restructuring charges and related expenses associated with our manufacturing footprint optimization plans involving certainEurope andAsia 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 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 commercial actions we have begun to take to address these higher costs. Our AES operating segment 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 operating income by$0.3 million and$1.9 million in the second quarter of 2021 and the second quarter of 2020, respectively, and$0.7 million and$2.3 million in the first half of 2021 and the first half of 2020, respectively. Elastomeric Material Solutions Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net sales$ 89,331 $ 71,626 $ 181,180 $ 155,152 Operating income$ 15,637 $ 2,995 $ 35,714 $ 14,512 EMS net sales increased by 24.7% in the second quarter of 2021 compared to the second quarter of 2020. The increase in net sales over the second quarter of 2020 was primarily driven 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 favorably impacted by foreign currency fluctuations of$2.5 million , or 3.5%, due to the appreciation in value of the Chinese renminbi and euro relative to theU.S. dollar. EMS net 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 automotive markets, partially offset by lower net sales in the mass transit market. Net sales were favorably impacted by foreign currency fluctuations of$5.2 million , or 3.4%, due to the appreciation in value of the Chinese renminbi and euro relative to theU.S. dollar. Operating income increased by 422.1% in the second quarter of 2021 from the second quarter 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 lower amortization expense in the second quarter of 2021 compared to the second quarter of 2020. The increase in operating income was also due to higher volume, favorable product mix, a lower inventory reserves provision and favorable absorption of fixed overhead costs. This was partially offset by higher freight, duties and tariffs expenses, higher raw material costs and unfavorable productivity performance due to raw material shortages. As a percentage of net sales, operating income in the second quarter of 2021 was 17.5%, an approximately 1,330 basis point increase as compared to the 4.2% reported in the second quarter of 2020. Operating income increased by 146.1% in the first half of 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 lower amortization expense in the first half of 2021 compared to the first half of 2020. The increase in operating income was also due to higher volume, favorable product mix, a lower inventory reserves provision and favorable absorption of fixed overhead costs. This was partially offset by higher freight, duties and tariffs 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. 32 -------------------------------------------------------------------------------- The decrease in amortization expense for the three and six months endedJune 30, 2021 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 byDecember 31, 2020 due to an adjustment to their remaining useful lives. We recognized amortization expense for our DSP definite-lived other intangible assets of$0.1 million and$4.4 million in the second quarter of 2021 and the second quarter of 2020, respectively, and$0.1 million and$4.8 million in the first half of 2021 and the first half of 2020, respectively. Additionally, we recognized expense of$1.5 million and$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 2021 and the first half of 2021, respectively. This impact consisted of write-offs of fixed assets and inventory destroyed and/or damaged in the fire, professional services, costs incurred due to obligations under our manufacturing facility lease agreement, compensation and benefits for certain of our UTIS employees, partially offset by the recognition of certain anticipated insurance recoveries. There may be other potential costs that cannot be reasonably foreseen or estimated at this time and we continue to evaluate information as it becomes available. For additional information, refer to "Note 15 - Supplemental Financial Information" to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. 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 theU.S. Gulf Coast , somewhat tempered our net sales growth and gross margin results. In the third quarter of 2021, we expect these issues to persist, but to a lesser extent as the supply chain constraints begin to subside, in addition to commercial actions we have begun to take to address the higher raw material costs. Our EMS operating segment 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 operating income by$0.2 million and$1.3 million in the second quarter of 2021 and the second quarter of 2020, respectively, and$0.4 million and$1.5 million in the first half of 2021 and the first half of 2020, respectively. Other Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net sales$ 5,149 $ 3,371 $ 10,673 $ 7,381 Operating income$ 1,820 $ 1,027 $ 4,087 $ 2,207 Net sales in this segment increased by 52.7% in the second quarter of 2021 from the second quarter of 2020. The increase in net sales over the second quarter of 2020 was primarily driven by higher demand in the automotive market. Net sales were favorably impacted by foreign currency fluctuations of$0.2 million , or 6.0%, due to the appreciation in value of the Chinese renminbi relative to theU.S. dollar. Net sales in this segment increased by 44.6% in the first half of 2021 from the first half of 2020. The increase in net sales over the first half of 2020 was primarily driven by higher demand in the automotive market. Net sales were favorably impacted by foreign currency fluctuations of$0.4 million , or 5.1%, due to the appreciation in value of the Chinese renminbi relative to theU.S. dollar. Operating income increased 77.2% in the second quarter of 2021 compared to the second quarter of 2020. The increase in operating income was primarily driven by higher volume and favorable absorption of fixed overhead costs, partially offset by unfavorable product mix and higher freight expenses. Operating income increased 85.2% in the first half of 2021 compared to the first half of 2020. The increase in operating income was primarily driven by higher volume and favorable absorption of fixed overhead costs, partially offset by unfavorable product mix and higher freight expenses. As a percentage of net sales, operating income in the second quarter of 2021 was 35.3%, a 480 basis point increase as compared to the 30.5% reported in the second quarter of 2020. As a percentage of net sales, operating income in the first half of 2021 was 38.3%, a 840 basis point increase as compared to the 29.9% reported in the first half of 2020. 33 -------------------------------------------------------------------------------- Liquidity, Capital Resources and Financial Position We believe that our existing sources of liquidity and cash flows that we expect to generate from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, research and development efforts and our debt service commitments, for at least the next 12 months. We regularly review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships in an effort to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives. The following table illustrates the location of our cash and cash equivalents by our three major geographic areas: (Dollars in thousands) June 30, 2021 December 31, 2020 United States$ 39,390 $ 21,657 Europe 44,446 55,449 Asia 120,109 114,679
Total cash and cash equivalents
Approximately$164.6 million of our cash and cash equivalents were held by non-U.S. subsidiaries as ofJune 30, 2021 . We did not make any changes in the six months endedJune 30, 2021 to our position on the permanent reinvestment of our earnings from foreign operations. With the exception of certain of our Chinese subsidiaries, where a substantial portion of ourAsia cash and cash equivalents are held, we continue to assert that historical foreign earnings are indefinitely reinvested. (Dollars in thousands) June 30, 2021 December 31, 2020 Key Financial Position Accounts: Cash and cash equivalents$ 203,945 $ 191,785 Accounts receivable, net$ 157,471 $ 134,421 Inventories$ 110,761 $ 102,360 Borrowings under revolving credit facility $ - $
25,000
Changes in key financial position accounts and other significant changes in our statements of financial position fromDecember 31, 2020 toJune 30, 2021 were as follows: •Accounts receivable, net increased 17.1% to$157.5 million as ofJune 30, 2021 from$134.4 million as ofDecember 31, 2020 . The increase from year-end was primarily due to higher net sales at the end of the second quarter of 2021 compared to at the end of 2020. •Inventories increased 8.2% to$110.8 million as ofJune 30, 2021 , from$102.4 million as ofDecember 31, 2020 , primarily driven by raw material cost increases as well as the ramp up of raw material purchases and production efforts to meet anticipated demand. •Borrowings under revolving credit facility were nil as ofJune 30, 2021 compared to$25.0 million as ofDecember 31, 2020 . This was as a result of$25.0 million of discretionary principal payments on our revolving credit facility during the first half of 2021. For additional information regarding this facility and the Fourth Amended Credit Agreement, refer to "Note 9 - Debt" to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. Six Months Ended (Dollars in thousands) June 30, 2021 June 30, 2020Key Cash Flow Measures : Net cash provided by operating activities$ 66,206 $
54,959
Net cash used in investing activities$ (20,701) $
(18,150)
Net cash (used in) provided by financing activities
95,442
As ofJune 30, 2021 , cash and cash equivalents were$203.9 million as compared to$191.8 million as ofDecember 31, 2020 , an increase of$12.2 million , or 6.3%. This increase was primarily due to cash flows generated by operations, partially offset by$25.0 million of discretionary principal payments on our revolving credit facility during the first half of 2021,$21.4 million in capital expenditures and$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. 34 -------------------------------------------------------------------------------- Restrictions 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$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 ofJune 30, 2021 . Contingencies During the second quarter of 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 ofJune 30, 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 second quarter of 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. 35
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