Rogers Corporation
10-K on 02/19/2021   Download
SEC Document
SEC Filing
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-K
_______________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
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)
_______________________________
Massachusetts06-0513860
(State or other jurisdiction of incorporation or organization)(I. R. S. Employer Identification No.)
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:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock,par value $1.00 per shareROGNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes     No
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.
Large accelerated filer
ý
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes     No
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2,301,662,539. Rogers has no non-voting common equity. The number of shares outstanding of common stock as of February 12, 2021 was 18,699,801.



Documents Incorporated by Reference:
Portions of Rogers’ Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders, currently scheduled for May 5, 2021, are incorporated by reference into Part III of this Form 10-K.
2


ROGERS CORPORATION
FORM 10-K

December 31, 2020

TABLE OF CONTENTS
Part I
Item 1. Business
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Part II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.Selected Financial Data
Item 7.Management’s Discussion and Analysis of Results of Operations and Financial Position
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.Exhibits, Financial Statement Schedules
Item 16.Form 10-K Summary
Signatures

3


Part I

Item 1. Business
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 Annual Report on Form 10-K 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 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 under the headings “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Position” and elsewhere in this report, 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.
4


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 three strategic operating segments: Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES). The remaining operations, which represent our non-core businesses, are reported in the 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 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, renewable 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 in 2020—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, 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 rest of the fiscal year and 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 in 2020. 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 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 fourth 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 in the second half of 2020, such as portable electronics, EV/HEV, aerospace and defense and automotive relative to the first half of 2020. 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.
5


Operating Segments
Advanced Connectivity Solutions
Our ACS operating segment designs, develops, manufactures and sells circuit materials and solutions enabling high-performance and high-reliability connectivity for applications in wireless infrastructure (e.g., power amplifiers, antennas and small cells), automotive (e.g., ADAS, telematics and thermal solutions), aerospace and defense (e.g. antenna systems, communication systems and phased array radar systems), connected devices (e.g., mobile internet devices and thermal solutions) and wired infrastructure (e.g., computing and IP infrastructure) markets. We believe these products have characteristics that offer performance and other functional advantages in many market applications that serve to differentiate our products from other commonly available materials. ACS products are sold principally to independent and captive printed circuit board fabricators that convert our laminates to custom printed circuits. Trade names for our ACS products include: RO4000® Series, RO3000® Series, RT/duroid®, CLTE Series®, TMM®, AD Series®, DiClad® Series, CuClad® Series, Kappa®, COOLSPAN®, TC Series®, 92ML™, IsoClad® Series, MAGTREX™, XTremeSpeed RO1200™ Laminates, IM Series™, 2929 Bondply, 3001 Bondply Film and SpeedWave™ Prepreg. As of December 31, 2020, our ACS operating segment had manufacturing and administrative facilities in Chandler, Arizona; Rogers, Connecticut; Bear, Delaware; Evergem, Belgium; and Suzhou, China.
Elastomeric Material Solutions
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, 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, 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 and aerospace and defense markets. We believe these materials have characteristics that offer functional advantages in many market applications which serve to differentiate Rogers’ products from other commonly available materials. EMS products are sold globally to converters, fabricators, distributors and original equipment manufacturers (OEMs). Trade names for our EMS products include: PORON®, BISCO®, DeWAL®, ARLON®, eSorba®, Griswold®, XRD®, R/bak® and HeatSORB™.
As of December 31, 2020, our EMS operating segment had administrative and manufacturing facilities in Moosup, Connecticut; Rogers, Connecticut; Woodstock, Connecticut; Bear, Delaware; Carol Stream, Illinois; Narragansett, Rhode Island; Ansan, South Korea; and Suzhou, China. We also own 50% of two unconsolidated joint ventures: (1) Rogers Inoac Corporation (RIC), a joint venture established in Japan to design, develop, manufacture and sell PORON® products predominantly for the Japanese market and (2) Rogers INOAC Suzhou Corporation (RIS), a joint venture established in China to design, develop, manufacture and sell PORON® products primarily for RIC customers in various Asian countries. INOAC Corporation owns the remaining 50% of both RIC and RIS. RIC has manufacturing facilities at the INOAC facilities in Nagoya and Mie, Japan, and RIS has manufacturing facilities at Rogers’ facilities in Suzhou, China.
Power Electronics Solutions
Our PES operating segment designs, develops, manufactures and sells ceramic substrate materials, busbars and cooling solutions for a variety of applications in EV/HEV, general industrial, mass transit, renewable energy, 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. As of December 31, 2020, our PES operating segment had manufacturing and administrative facilities in Evergem, Belgium; Eschenbach, Germany; Budapest, Hungary; and Suzhou, China.
Other
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.
Sales and Competition
We sell our materials and components primarily through direct sales channels positioned near major concentrations of our customers in North America, Europe and Asia. We sold to approximately 3,600 customers worldwide in 2020, primarily OEMs and component suppliers. No individual customer represented more than 10% of our total net sales for 2020; however, there are concentrations of OEM customers in our ACS (Chinese telecommunications equipment manufacturers) and PES (semiconductor and automotive manufacturers) operating segments. Although the loss of any one of our larger customers would
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require a period of adjustment, during which the results of operations could be materially adversely impacted, we believe that such events could be successfully mitigated over a period of time due to the diversity of our customer base.
We employ a technical sales and marketing approach pursuant to which we work collaboratively to provide design engineering, testing, product development and other technical support services to OEMs that incorporate our engineered materials and components in their products. Component suppliers convert, modify or otherwise incorporate our engineered materials and components into their components for these OEMs in accordance with their specifications. Accordingly, we provide similar technical support services to component suppliers.
We compete primarily with manufacturers of high-end materials, some of which are large, multi-national companies, principally on the basis of innovation, historical customer relationships, product quality, reliability, performance and price, technical and engineering service and support, breadth of product line, and manufacturing capabilities. We also compete with manufacturers of commodity materials, including smaller regional producers with lower overhead costs and profit requirements located in Asia that attempt to upsell their products based principally upon price, particularly for products that have matured in their life cycle. We believe that we have a competitive advantage because of our reputation for innovation, the performance, quality and reliability of our materials and components, and our commitment to technical support and customer service.
Research and Development
We have a history of innovation, and innovation leadership is a key component of our overall business strategy. The markets we serve are typically characterized by rapid technological changes and advances. Accordingly, the success of our strategy is in part dependent on our ability to develop market-leading products, which is primarily driven by efforts in R&D. We are focused on identifying technologies and innovations related to both our current product portfolio as well as initiatives targeted at further diversifying and growing our business. As part of this technology commitment, we have a Rogers Innovation Center co-located at Northeastern University in Burlington, Massachusetts, as well as Rogers Innovation Centers at our facilities in Chandler, Arizona, Eschenbach, Germany and Suzhou, China. Our Innovation Centers focus on early stages of technical and commercial development of new high-tech materials solutions in an effort to align with market direction and needs.
Patents and Other Intellectual Property
We have many domestic and foreign patents, licenses and additional patent applications pending related to technology in each of our operating segments. These patents and licenses vary in duration and provide some protection from competition. We also own a number of registered and unregistered trademarks and have acquired and developed certain confidential and proprietary technologies, including trade secrets that we believe to be of some importance to our business.
While we believe our patents and other intellectual property provide a competitive advantage to our operating segments, we believe that a significant part of our competitive position and future success will be determined by factors such as the innovative skills, systems and process knowledge, and technological expertise of our personnel; the range of new products we develop; and our customer service and support.
Manufacturing and Raw Materials
The key raw materials used in our business are as follows: for our ACS operating segment, copper, polymer, polytetraflouroethylene and fiberglass materials; for our EMS operating segment, polyol, isocyanates, polytetraflouroethylene, ultra-high molecular weight polyethylene materials, silicone and natural rubber materials; and for our PES operating segment, copper, ceramic and brazing paste materials, including silver.
Some of the raw materials used in our business are available through sole or limited-source suppliers. While we have undertaken strategies to mitigate the risks associated with sole or limited source suppliers, these strategies may not be effective in all cases, and price increases or disruptions in our supply of raw materials could have a material adverse impact on our business. For additional information, refer to “Item 1A. Risk Factors.”
Seasonality
Except for some minor seasonality for consumer products, which often aligns with year-end holidays and product launch cycles, the operations of our segments have not been seasonal.
Human Capital Management
The Company’s continuing success derives from our talented and dedicated employees globally, who are responsible for the innovation, operations and ethics foundational to our business and its future. In 2020, our employees navigated the challenges from COVID-19, and, with an overarching commitment to health and safety, maintained a steady flow of materials for our customers, including for critical infrastructure and health applications.
As of December 31, 2020, we employed approximately 3,350 people, of whom approximately 1,250 were employed in the U.S., 1,150 in Europe and 950 in China. Approximately 375 of our domestic employees are covered by collective bargaining
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agreements or by specific labor agreements and approximately 750 of our European employees are covered by work council arrangements.
Our approach to human capital management is based on our culture of respect, which is built on the ethical foundation of our Code of Business Ethics and our commitment to making choices that are based on what is ethically sound and not just what is easy or expedient. Additionally, we connect our day-to-day work with our organizational objectives through our Cultural Behaviors: Live Safely, Trust, Just Decide, Speak Openly, Simply Improve, Innovate and Deliver Results. Management’s principal objectives, with oversight from our Board of Directors, are Health and Safety, Employee Experience and Diversity and Inclusion.
Health and Safety
The health and safety of our employees is a paramount objective. We strive to minimize lost workdays and recordable incidents. To promote awareness and accountability, safety performance data is shared throughout the company and executive compensation includes safety performance factors.
Employment Experience
We take a comprehensive approach to the employment experience, striving to use a fair and inclusive recruiting process to select talented individuals. Once we hire, we endeavor to provide our employees a safe and ethical work environment that includes fair compensation, opportunities for career development and employee engagement. We are proud to invest in our employees’ futures through a variety of technical and other training opportunities internally, as well as education reimbursement programs globally.
Diversity and Inclusion
We continue to advance efforts to improve diversity and inclusion within the Company, focusing on attracting and maintaining diverse talent within the organization and promoting awareness and acceptance globally. We believe that our diversity and inclusion will make the Company a more desirable workplace and will lead to improved business performance.
Backlog
Our sales are generally pursuant to short-term purchase orders. These purchase orders are made without deposits and may be rescheduled, canceled or modified on relatively short notice, without substantial penalty. Therefore, even though we may have a large backlog from time to time, we believe the purchase orders or backlog are not necessarily a reliable indicator of future sales.
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Information About Our Executive Officers
Our executive officers as of February 18, 2021 were as follows:
NameAgePresent PositionYear Appointed to Present PositionOther Relevant Positions Held
Bruce D. Hoechner61President and Chief Executive Officer, Director, Principal Executive Officer2011
Michael M. Ludwig59Senior Vice President, Chief Financial Officer and Treasurer, Principal Financial Officer2018Senior Vice President and Chief Financial Officer, FormFactor, Inc., from May 2011 to March 2018.
Jonathan J. Rowntree49Senior Vice President and
General Manager,
Advanced Connectivity
Solutions
2019Senior Vice President and Global Head of Industrial Electronics, Henkel Electronic Materials, from January 2017 to May 2019; Senior Vice President and General Manager, Henkel Electronic Materials, from July 2015 to December 2016.
R. Colin Gouveia57Senior Vice President and
General Manager,
Elastomeric Material
Solutions
2019Vice President and General Manager, Eastman Chemical Co., from December 2014 to June 2019.
Peter B. Williams58Senior Vice President, Global Operations and Supply Chain2019Vice President of Global Operations, MKS Instruments, 2011 to July 2019.
Robert C. Daigle57Senior Vice President and Chief Technology Officer2009
Jay B. Knoll57Senior Vice President, Corporate Development, General Counsel and Secretary
2017Vice President and General Counsel, Rogers Corporation, from November 2014 to February 2017.
Benjamin M. Buckley48Vice President and Chief Human Resources Officer
2019Associate General Counsel and Director of Global Compliance and Integrity, Rogers Corporation, from October 2014 to January 2019.

Available Information
We make available on our website (http://www.rogerscorp.com), or through a link posted on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports filed by our executive officers and directors pursuant to Section 16 of the Exchange Act, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). In addition, the SEC maintains an internet site that contains these reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).
We also make available on our website the charters for our Audit Committee, Compensation and Organization Committee, and Nominating and Governance Committee, in addition to our Corporate Governance Guidelines, Bylaws, Code of Business Ethics, and Compensation Recovery Policy. Our website is not incorporated into or a part of this Form 10-K.
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Item 1A. Risk Factors
Our business, results of operations and financial position are subject to various risks, including those discussed below, which may affect the value of our capital stock. The following risk factors, which we believe represent the most significant factors that may make an investment in our capital stock risky, may cause our actual results to differ materially from those projected in any forward-looking statement. You should carefully consider these factors, as well as the other information contained in this Annual Report on Form 10-K, including the information set forth in “Item 1. Business - Forward-Looking Statements” and “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Position,” when evaluating an investment in our capital stock.
Risks Relating to the COVID-19 Pandemic
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 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 and to distribute vaccines as they are approved. 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.
Risks Relating to Our Business, Strategy and Operations
Failure to capitalize on, volatility within, or other adverse changes with respect to the Company’s growth drivers, including advanced mobility and advanced connectivity, may adversely affect our business.
We derived approximately 25% and 24% of our net sales for the year ended December 31, 2020 from sales relating to the key market growth drivers of advanced mobility and advanced connectivity, respectively. These growth drivers are served by our direct and indirect customers in a variety of markets, including automotive (i.e., ADAS) and EV/HEV, wireless infrastructure and portable electronics. These growth drivers, as well as specific market and industry trends within them, may be volatile, cyclical and sensitive to a variety of factors, including general economic conditions, technology disruptions, consumer preferences and political priorities. Adverse or cyclical changes to and within these growth drivers, such as delays in adoption or implementation of new technologies, has resulted in, and may continue to result in, reduced demand for certain of our products, production overcapacity, increased inventory levels and related risks of obsolescence, as well as price erosion, ultimately leading to a decline in our operating results. Acceleration within these growth drivers and corresponding rapid increases in demand for certain products may also require us to make significant capital investments or acquisitions in order to increase production levels and to maintain customer relationships and market positions. However, we may not be able to increase our production levels with sufficient speed or efficiency to capitalize on such increases in demand.
We have extensive international operations, and events and circumstances that have general international consequence or specific impact in the countries in which we operate may materially adversely affect our business.
For the year ended December 31, 2020, approximately 72% of our net sales resulted from sales in foreign markets, with approximately 47% and 23% of such net sales occurring in Asia and Europe, respectively. We expect our net sales in foreign markets to continue to represent a substantial majority of our consolidated net sales. We maintain significant manufacturing and administrative operations in China, Belgium, Germany, South Korea and Hungary, and approximately 60% of our employees were located outside the U.S. as of December 31, 2020. Risks related to our extensive international operations include the following:
foreign currency fluctuations, particularly in the value of the euro, the Chinese renminbi, the South Korean won, the Japanese yen and the Hungarian forint against the U.S. dollar;
economic and political instability due to regional or country-specific events or changes in relations between the U.S. and the countries in which we operate;
accounts receivable practices across countries, including longer payment cycles;
export control or customs matters, including tariffs and trade restrictions;
changes in multilateral and bilateral trade relations
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complications in complying, and failure to comply, with a variety of laws and regulations applicable to our foreign operations, including due to unexpected changes in the laws or regulations of the countries in which we operate;
failure to comply with the Foreign Corrupt Practices Act or other applicable anti-corruption laws;
greater difficulty protecting our intellectual property;
compliance with foreign employment regulations, as well as work stoppages and labor and union disputes.
The foregoing risks may be particularly acute in emerging markets such as China and India, where our operations are subject to greater uncertainty due to increased volatility associated with the developing nature of the economic, legal and governmental systems of these countries, changes in bilateral and multilateral arrangements with the U.S. and other governments, and challenges that some multinational customers that are headquartered in emerging markets may have complying fully with U.S. and other developed market extraterritorial regulations. In addition, our business has been, and may continue to be, adversely affected by the lack of development, or disruptions, of transportation or other critical infrastructure, including wireless infrastructure, in emerging markets. If we are unable to successfully manage the risks associated with expanding our global business, or to adequately manage operational fluctuations, it may materially adversely affect our business, results of operations and financial position.
Deteriorating trade relations between the U.S. and China, other trade conflicts and barriers, economic sanctions, and Chinese policies to decrease dependence on foreign suppliers could limit or prevent certain existing or potential customers from doing business with us and materially adversely affect our business.
The increased trade conflicts between the U.S. and its major trading partners, evidenced by trade restrictions such as tariffs, taxes, export controls, economic sanctions, and enhanced policies designed to protect national security, could adversely impact our business. In particular, we have experienced and expect that we may in the future experience impacts on our business due to the increase in trade conflicts between the U.S. and China. The May 2019 U.S. Department of Commerce addition of Huawei to its “entity list,” and subsequently implemented Foreign Direct Products Rules, limits the ability of U.S. and foreign companies to export products and license technologies to Huawei. Although we have been able to continue supplying Huawei’s fabricators while in compliance with all restrictions, the ongoing impact of the Huawei export controls on 5G demand and the demand for our products is currently uncertain. Such export controls, as well as retaliatory controls and tariffs that China has imposed and which remain in place to a certain extent under the Phase 1 agreement reached between the U.S. and China on January 15, 2020, could continue to restrict our ability to do business with Huawei and other Chinese customers. Further U.S. government actions to protect domestic economic and security interests could lead to further restrictions. China continues to be a fast-developing market, and an area of potential growth for us. Sales to customers located in China and the Asia Pacific region have typically accounted for nearly half of our total sales and a substantial majority of our overall sales to customers located outside the U.S. In addition, certain of the end products created in China that incorporate our products are ultimately sold outside of the Asia Pacific region. We expect that revenue from these sales generally, and sales to China and the Asia Pacific region specifically, will continue to be a material component of our total revenue. Therefore, any financial crisis, trade war or dispute or other major event causing business disruption in international jurisdictions generally, and China and the Asia Pacific region in particular, could negatively affect our business, results of operations and financial position.
China’s stated policy of reducing its dependence on foreign manufacturers and technology companies has resulted and may continue to result in reduced demand for our products in China. These trends could have a material adverse impact on our business, results of operations and financial position. In addition, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business, or provide incentives to government-backed local customers to buy from local suppliers rather than companies like ours, all of which could adversely impact our business, results of operations and financial position.
Our business is dependent upon our development of innovative products and our customers’ incorporation of those products into end user products and systems that achieve commercial success.
As a manufacturer and supplier of engineered materials and components, our business depends upon our ability to innovate and sell our materials and components for inclusion in other products that are developed, manufactured and sold by our customers. We strive to differentiate our products and secure long-term demand through our engagement with our customers to design in our materials and components as part of their product development processes. The value of any design-in largely depends upon the decision of our customers to manufacture their products or systems in sufficient production quantities, the commercial success of the end product and the extent to which the design of our customers’ products or systems could accommodate substitution of competitor products. A consistent failure to introduce new products in a timely manner, achieve design-ins or achieve market acceptance on commercially reasonable terms could materially adversely affect our business, results of operations and financial position. The introduction of new products presents particularly significant business challenges in our business because product development commitments and expenditures must be made well in advance of product sales.
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Our dependence on sole or limited source suppliers for certain of our raw materials could materially adversely affect our ability to manufacture products and materially increase our costs.
We rely on sole and limited source suppliers for certain of the raw materials that are critical to the manufacturing of our products. This reliance subjects us to risks related to our potential inability to obtain an adequate supply of required raw materials, particularly given our use of lean manufacturing and just-in-time inventory techniques, and our reduced control over pricing and timing of delivery of raw materials. Our operating results could be materially adversely affected if we were unable to obtain adequate supplies of these materials in a timely manner or if their cost increased significantly.
While we believe we could obtain and qualify alternative sources for most sole and limited source supplier materials if necessary, the transition time could be long, particularly if the change requires us to redesign our systems. Ultimately, we may be unable to redesign our systems, which could further increase delays or prevent us from manufacturing our products at all. Even if a system redesign is feasible, increased costs associated with such a redesign would decrease our profit margins, perhaps materially, if we could not effectively pass such costs along to our customers. Further, it would likely result in production and delivery delays, which could lead to lost sales and damage to our relationships with current and potential customers.
We face intense global competition, which could reduce demand for our products or create additional pricing pressure on our products.
We operate in a highly competitive global environment and compete with domestic and international companies principally on the basis of the following:
innovation;
historical customer relationships;
product quality, reliability, performance and price;
technical and engineering service and support;
breadth of product line; and
manufacturing capabilities.
Our competitors include commodity materials suppliers, which offer product substitutions based mostly on price, and suppliers of alternate solutions, which offer product substitutions or eliminations based mostly on disruptive technology. Certain of these competitors have greater financial and other resources than we have and, in some cases, these competitors are well established in specific product niches. We expect that our competitors will continue to improve the design and performance of their products, which could result in the development of products that offer price or performance features superior to our products. Furthermore, our customers may engage in internal manufacturing of products that may result in reduced demand for our products. If we are unable to maintain our competitive advantage for any reason, demand for our products may be materially reduced, which may adversely affect our business, results of operations and financial position.
We have engaged in transactions in the past and may in the future acquire or dispose of businesses, or engage in other transactions, which expose us to a variety of risks that could materially adversely affect our business operating results and financial position.
From time to time, we have explored and pursued transaction opportunities that we believe complement our core businesses, and we expect to do so again in the future. We have also divested and may again consider divesting businesses or assets that we do not regard as part of our core businesses. These transaction opportunities may come in the form of acquisitions, joint ventures, investments, divestitures or other structures. There are risks associated with such transactions, including, without limitation, general business risk, technology risk, market acceptance risk, litigation risk, environmental risk, regulatory approval risk and risks associated with the failure to complete announced transactions. In the case of acquisitions, we may not be able to discover, during the due diligence process or otherwise, all known and unknown risks associated with the business we are acquiring, including the existence of liabilities. We may spend a significant portion of available cash, incur substantial debt or issue equity securities, which would dilute current shareholders’ equity ownership, to pay for the acquisitions. In addition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficult than anticipated, we may experience disruptions that could harm our business and result in our failure to realize the anticipated benefits of the acquisitions. In the case of divestitures, we may agree to indemnify acquiring parties for known or unknown liabilities arising from the businesses we are divesting. We have incurred, and may in the future incur, significant costs in the pursuit and evaluation of transactions that we do not consummate for a variety of reasons.
As a result, these transactions may not ultimately create value for us or our shareholders and may harm our reputation and materially adversely affect our business, results of operations and financial position.
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The failure to attract and retain specialized technical and management personnel could impair our expected growth and future success.
We depend upon the continued services and performance of key executives, senior management and skilled technical personnel, particularly our sales engineers and other professionals with significant experience in the key industries we serve. Competition for these personnel from other companies, academic institutions and government entities is intense, and our expected growth and future success will depend, in large part, upon our ability to attract and retain these individuals.
If we suffer loss or disruption to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our business could be seriously harmed.
Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss or disruption due to fire, flood, earthquake, hurricane, public health crisis, war, terrorism or other natural or man-made disasters or events. If any of these facilities, supply chains or systems were to experience a catastrophic loss or disruption, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. For instance, the COVID-19 pandemic and related quarantines and work and travel restrictions have disrupted, and may continue to disrupt, production of and demand for certain of our products. Additionally, there was a fire at our UTIS manufacturing facility in Ansan, South Korea in early February 2021, which resulted in extensive damage to the manufacturing site. The extent to which these events will affect our results of operations and financial position remains uncertain. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses or disruptions.
A significant disruption in, or breach in security of, our information technology systems or violations of data protection laws could materially adversely affect our business and reputation.
In the ordinary course of business, we collect and store confidential information, including proprietary business information belonging to us, our customers, suppliers, business partners and other third parties and personally identifiable information of our employees. We rely on information technology systems to protect this information and to keep financial records, process orders, manage inventory, coordinate shipments to customers, and operate other critical functions. Our information technology systems are susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, telecommunication failures, systems upgrades (including the planned implementation of a new enterprise resource planning system) and user errors. If we experience a disruption in our information technology systems, it could result in the loss of sales and customers and significant incremental costs, which could materially adversely affect our business.
We are also subject to security breaches caused by computer viruses, illegal break-ins or hacking, sabotage, or acts of vandalism by disgruntled employees or third parties. The risk of a security breach or disruption, particularly through cyberattack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased, in part because of evolving technologies, the ubiquitous use of the Internet and telecommunications technologies (including mobile devices) to conduct business transactions. Our information technology network and systems have been and, we believe, continue to be under constant attack. Accordingly, despite our security measures or those of our third-party service providers, we have experienced and may in the future experience security breaches, including breaches that we may not be able to detect. Security breaches of our information technology systems, including through mobile devices, could result in the misappropriation or unauthorized disclosure of confidential information belonging to us or to our customers, suppliers, business partners, employees or other third parties, which could result in our suffering significant financial and reputational damage. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our security processes and procedures and our compliance with applicable laws and regulations, including evolving government cyber security requirements for government contractors.
In addition, the processing and storage of certain information is increasingly subject to privacy and data security regulations, and many such regulations are country-specific. The interpretation and application of data protection laws in the U.S., Europe, and elsewhere, including the EU General Data Protection Regulation and the California Consumer Privacy Act, are uncertain, evolving and may be inconsistent among jurisdictions. Compliance with these various laws may be onerous and require us to incur substantial costs or to change our business practices in a manner that adversely affects our business, while failure to comply with such laws may subject us to substantial penalties.
Employee benefit cost increases could reduce our profitability.
Our profitability is affected by employee benefit costs, particularly medical and other employee benefits. In recent years, employee medical costs have increased due to factors such as the increase in health care costs in the U.S. These factors will continue to put pressure on our business and financial performance, as employee benefit costs continue to escalate. We may not succeed in limiting future cost increases. Continued employee benefit cost increases could have an adverse effect on our results of operations, cash flows and financial position.
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We also sponsor one material defined benefit pension plan that covers certain union employees. Our costs of providing this plan are dependent upon a number of factors and assumptions that drive the plan’s funding status and projected annual expenses, such as discount rates, the actual and projected rates of return on the plans’ assets, governmental regulation, global equity prices, portfolio composition, mortality rates and required or voluntary contributions to the plan. Changes in these factors and assumptions could have a negative impact on our defined benefit pension plan, which could result in unfavorable changes in the net assets and funded status of the plan and increases in annual net periodic benefit costs. Unfavorable changes in the plan’s net assets and funded status could result in increased funding requirements. All of these potential changes could negatively impact our results of operations, cash flows and financial position.
Legal, Compliance and Regulatory Risks
Our business may be materially adversely affected if we cannot protect our proprietary technology or if we infringe the proprietary rights of others.
Our proprietary technology supports our ability to compete effectively with other companies, and we seek to protect our intellectual property rights by obtaining domestic and foreign patents, trademarks and copyrights, and maintaining trade secrets for our manufacturing processes. It is possible, however, that our efforts to obtain such protection in the U.S. and abroad will be unsuccessful or that the protection afforded will not be sufficiently broad to protect our technology.
Even if domestic and foreign laws do grant initial protection to our technology, our competitors or other third parties may subsequently obtain and unlawfully copy, use or disclose our technologies, products, and processes. We believe that the risk of piracy of our technology is particularly acute in the foreign countries in which we operate. In circumstances in which we conclude that our proprietary technology has been infringed, we have pursued, and may again pursue, litigation to enforce our rights. The defense and prosecution of intellectual property infringement suits are both costly and time consuming, even if the outcome is favorable to us. If we are not successful in protecting our proprietary technology or if the protection afforded to us is not sufficiently broad, our competitors may be able to manufacture and offer products substantially similar to our own, thereby reducing demand for our products and adversely affecting our results of operations and financial position. We may also be adversely affected by, and subject to increased competition as a result of, the normal expiration of our issued patents.
Our competitors or other third parties may also assert infringement or invalidity claims against us in the future. In addition to the significant costs associated with such suits, as noted above, an adverse outcome could subject us to significant liabilities to third parties and require us to license rights from third parties or cease selling our products. Any of these events may have a material adverse effect on our business, results of operations and financial position.
As a multinational corporation doing business in the U.S. and various foreign jurisdictions, changes in tax laws or exposures to additional tax liability could negatively impact our operating results.
As a result of the variability and uncertainty in global taxation, we are subject to a wide variety of tax-related risks, any of which could provoke changes in our global structure, international operations or intercompany agreements, which could materially reduce our net income in future periods or result in restructuring costs, increased effective tax rates and other expenses. Given the global nature of our business, a number of factors may increase our effective tax rates or otherwise subject us to additional tax liability, including:
decisions to redeploy foreign earnings outside of their country of origin for which we have not previously provided for income taxes;
increased scrutiny of our transactions by taxing authorities;
changes in the geographic mix of our profits among jurisdictions with differing statutory income tax rates;
ability to utilize, or changes in the valuation of, deferred tax assets; and
changes in tax laws, regulations and interpretations thereof or issuance of new interpretations of laws or regulations applicable to us.
For instance, many foreign jurisdictions are actively considering changes to existing tax laws as a result of the base erosion and profit shifting project undertaken by the Organization for Economic Co-operation and Development (OECD). If these changes are enacted, our tax obligations could increase in countries where we do business or sell our products.
The terms of our credit agreement subject us to risks, including potential acceleration of our outstanding indebtedness if we fail to satisfy financial ratios and comply with numerous covenants.
Our credit agreement contains, and any future debt agreements into which we enter may contain, certain financial ratios and certain restrictive covenants that, among other things, limit our ability to incur indebtedness or liens, acquire other businesses, dispose of assets, or make investments. Our ability to make scheduled payments on these borrowings and to satisfy financial ratios may be adversely affected by changes in economic or business conditions beyond our control, while the restrictive covenants to which we are subject may limit our ability to take advantage of potential business opportunities as they arise. Failure to satisfy these financial ratios or to comply with the covenants in our credit agreement would constitute a default. An uncured default with respect to one or more of our covenants could result in outstanding borrowings thereunder being declared
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immediately due and payable, which may also trigger an obligation to repay other outstanding indebtedness. Any such acceleration of our indebtedness would have a material adverse effect on our cash flows, financial position and results of operations.
Our credit agreement currently permits us to borrow euro-currency loans that bear interest based on the London interbank offered rate (LIBOR), plus a specified spread. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. However, LIBOR borrowings may become unavailable before that date. When LIBOR becomes unavailable, our credit agreement provides for a new reference rate for borrowings thereunder, dependent upon certain facts and circumstances. There is a risk that this new reference rate may be higher than our projected future LIBOR interest rates, thereby causing the cost of our borrowings to increase.
We may be adversely affected by litigation stemming from product liability and other claims.
Our products may contain defects that we do not detect before sale, which may lead to warranty or damage claims against us or product recalls. We are involved in various unresolved legal matters that arise in the ordinary course of our operations or otherwise, including asbestos-related product liability claims related to our operations before the 1990s. For additional information, refer to “Item 3. Legal Proceedings” and “Note 12 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.” We maintain insurance coverage with respect to certain claims, but the policy coverage limits may not be adequate or cover a particular loss. Costs associated with, among other things, the defense of, or settlements or judgments relating to, claims against us that are not covered by insurance or that result in recoveries in excess of insurance coverage may adversely affect our business, results of operations and financial position. Irrespective of insurance coverage, claims against us could divert the attention of our senior management and/or result in reputational damage, thereby adversely affecting our business.
Our projections on the potential exposure and expected insurance coverage relating to our asbestos-related product liability claims are based on a number of assumptions, including 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 U.S. To the extent such assumptions are inaccurate, the net liabilities that we have recorded in our financial statements may fail to approximate the losses we could suffer in connection with such claims.
We are subject to many environmental laws and regulations as well as potential environmental liabilities that could adversely affect our business.
We are subject to a variety of federal, state, local and foreign laws, rules and regulations related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals, gases and other substances used in manufacturing our products. Some of these laws in the U.S. include the Federal Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, Toxic Substances Control Act, and similar state statutes and regulations. In the European Union (EU), we are subject to the EU regulations (and their related national implementing legislation) including the Registration, Evaluation, Authorization and Restriction of Chemicals, the Regulation on the Classification, Labelling and Packaging of Substances and Mixtures and the Industrial Emissions Directive. Compliance with these laws and regulations could require us to incur substantial expenses, including in connection with the acquisition of new equipment. Any failure to comply with present or future environmental laws, rules and regulations could result in criminal and civil liabilities, fines, suspension of production or cessation of certain operations, any of which could have a material adverse effect on our business, results of operations and financial position.
In addition, some environmental laws impose liability, sometimes without fault, for investigating and/or cleaning up contamination on, or emanating from, properties currently or formerly owned, leased or operated by us, as well as for damages to property or natural resources and for personal injury arising out of such contamination. Such liability may be joint and several, meaning that we could be held responsible for more than our share of the liability involved, or even the entire liability. For additional information regarding our material legal proceedings, refer to “Note 12 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.”
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
We operate various general offices and manufacturing facilities throughout the U.S., Europe and Asia. The following table provides certain information about the material general offices and manufacturing facilities used by our operating segments:
LocationFloor Space (Square Feet)Type of FacilityLeased / OwnedOperating Segment
United States
Chandler, Arizona147,000ManufacturingOwnedACS
Chandler, Arizona105,100ManufacturingOwnedACS
Chandler, Arizona100,000ManufacturingOwnedACS
Chandler, Arizona75,000Administrative OfficesOwnedAll
Rogers, Connecticut388,100Manufacturing / Administrative OfficesOwnedAll
Moosup, Connecticut185,500ManufacturingOwnedEMS
Woodstock, Connecticut150,600ManufacturingOwnedEMS
Carol Stream, Illinois216,600ManufacturingOwnedEMS
Bear, Delaware125,000Manufacturing / Administrative OfficesOwnedACS & EMS
Burlington, Massachusetts6,000R&D Lab / Administrative OfficesLeased through 2/2024All
Narragansett, Rhode Island84,600ManufacturingOwnedEMS
Europe
Eschenbach, Germany149,000Manufacturing / Administrative OfficesLeased through 6/2021PES
Eschenbach, Germany51,000Warehouse / Administrative OfficesLeased through 12/2024PES
Eschenbach, Germany24,100Warehouse / Administrative OfficesLeased through 12/2021PES
Evergem, Belgium122,000Manufacturing / Administrative OfficesOwnedACS & PES
Evergem, Belgium55,700Warehouse / Administrative OfficesLeased through 5/2021ACS & PES
Ghent, Belgium45,000WarehouseLeased through 3/2022ACS & EMS
Budapest, Hungary64,000ManufacturingLeased through 2/2023PES
Asia
Suzhou, China821,000Manufacturing / Administrative OfficesOwnedAll
Ansan, South Korea(1)
40,000ManufacturingLeased through 10/2021EMS
(1) Our Ansan, South Korea facility, which we utilize to manufacture our eSorba® polyurethane foams, suffered extensive damage due to a fire in early February 2021.
Item 3. Legal Proceedings
Asbestos Products Litigation
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 were a defendant in 561 asbestos-related product liability cases as of December 31, 2020, compared to 592 cases as of December 31, 2019, with the change reflecting new cases, dismissals, settlements and other dispositions. 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. In virtually all of the cases against us, the plaintiffs are seeking unspecified damages above a jurisdictional minimum against multiple defendants who may have manufactured, sold or used asbestos-containing products to which the plaintiffs were allegedly exposed and from which they purportedly suffered injury. Most of these cases are being litigated in Maryland, Illinois, Missouri and New York; however, we are also defending cases in other states. We intend to vigorously defend these cases, primarily on the basis of the plaintiffs’ inability to establish compensable loss as a result of exposure to our products. As of December 31, 2020, the estimated liability and estimated insurance recovery for all current and future indemnity and defense costs projected through 2064 was $73.2 million and $66.8 million, respectively.
The indemnity and defense costs of our asbestos-related product liability litigation to date have been substantially covered by insurance. As of December 31, 2020, our consolidated statements of financial position include $6.4 million of estimated asbestos-related expenses that exceed asbestos-related insurance coverage for all current and future indemnity and defense costs projected through 2064. For additional information regarding our asbestos-related product liability litigation, refer to “Note 12 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.”
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Other Matters
We are currently involved in a variety of other legal proceedings that we view as ordinary, routine litigation incidental to our business, including commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters. Although the outcome of no legal matter can be predicted with certainty, we do not believe that the outcome of any of these legal proceedings, either individually or in the aggregate, will have a material adverse effect on our business, results of operations, cash flows or financial position. In addition, we are involved in certain environmental matters, which we do not view as material legal proceedings, either pending or known to be contemplated. For additional information regarding certain of these matters, refer to “Note 12 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.”
Item 4. Mine Safety Disclosures
Not applicable.
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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Capital Stock Market Prices and Dividend Policy
Our capital stock is traded on the New York Stock Exchange under the symbol “ROG”. As of the end of business on February 12, 2021, we had 327 shareholders of record.
We currently retain all of our earnings for use in the operation and expansion of our business, to repurchase or redeem capital stock, and in the repayment of our debt. We have never declared or paid any cash dividends on our capital stock and may not pay any cash dividends in the foreseeable future. Whether or not dividends will be paid in the future will depend on, among other things, our results of operations, financial condition, level of indebtedness, cash requirements, covenants in our financings, contractual restrictions and other factors that our board of directors and our shareholders may deem relevant.
Performance Graph
The following graph compares the cumulative total return on Rogers’ capital stock over the past five fiscal years with the cumulative total return on the Standard & Poor’s Industrials Index (S&P Industrials) and the S&P Small Cap 600 Electronic Equipment, Instruments & Components Index. The graph tracks the performance of a $100 investment in the Company’s common stock and in each of the indexes (with the reinvestment of all dividends) on the date specified.
rog-20201231_g1.jpg
Issuer Purchases of Equity Securities
In 2015, we initiated a share repurchase program (the Program) of up to $100.0 million of the Company’s capital stock. We initiated the Program to mitigate the dilutive effects of stock option exercises and vesting of restricted stock units granted by the Company, in addition to enhancing shareholder value. The Program has no expiration date and may be suspended or discontinued at any time without notice. There were no share repurchases in 2020. As of December 31, 2020, $49.0 million remained available to purchase under the Program. For additional information regarding share repurchases, refer to “Note 18 – Share Repurchases” to “Item 8. Financial Statements and Supplementary Data.”
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Item 6. Selected Financial Data
(Dollars in thousands, except per share amounts)20202019201820172016
Financial Results
Net sales$802,583 $898,260 $879,091 $821,043 $656,314 
Income before income tax expense$68,534 $55,126 $110,589 $132,925 $82,280 
Net income$49,990 $47,319 $87,651 $80,459 $48,283 
Per Share Data
Basic earnings per share$2.68 $2.55 $4.77 $4.43 $2.68 
Diluted earnings per share$2.67 $2.53 $4.70 $4.34 $2.65 
Book value$54.65 $50.27 $46.12 $41.99 $35.28 
Financial Position
Current assets$474,175 $464,102 $485,786 $454,523 $458,401 
Current liabilities$111,509 $100,225 $107,180 $113,808 $101,185 
Ratio of current assets to current liabilities4.3 to 14.6 to 14.5 to 14.0 to 14.5 to 1
Cash and cash equivalents$191,785 $166,849 $167,738 $181,159 $227,767 
Net working capital$362,666 $363,877 $378,606 $340,715 $357,216 
Property, plant and equipment, net$272,378 $260,246 $242,759 $179,611 $176,916 
Total assets$1,264,005 $1,273,181 $1,279,344 $1,125,134 $1,056,500 
Borrowings under revolving credit facility$25,000 $123,000 $228,482 $130,982 $235,877 
Shareholders’ equity$1,020,755 $933,900 $848,324 $766,573 $635,786 
Borrowings under revolving credit facility as a percentage of shareholders’ equity2.4 %13.2 %26.9 %17.1 %37.1 %
Other Data
Depreciation and amortization$71,425 $49,162 $50,073 $44,099 $37,847 
Research and development expenses$29,320 $31,685 $33,075 $29,547 $28,582 
Capital expenditures$40,385 $51,597 $90,549 $27,215 $18,136 
Number of employees (approximate)3,350 3,600 3,700 3,400 3,100 
Net sales per employee$240 $250 $238 $241 $212 
Number of shares outstanding as of December 3118,677 18,577 18,395 18,255 18,021 
The financial data included within the preceding table should be read in conjunction with our Management’s Discussion and Analysis of Results of Operations and Financial Position as well as the Financial Statements and Supplementary Data included in Items 7 and 8, respectively, of this Form 10-K, and with our previously filed Forms 10-K.
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Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Position
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,” as well as “Item 6. Selected Financial Data.”
The discussion of the comparison of our 2019 and 2018 results was previously presented in the Management’s Discussion & Analysis in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2020, and has been omitted from this section pursuant to Instruction 1 to Item 303(a) of Regulation S-K.
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 three strategic operating segments: Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES). The remaining operations, which represent our non-core businesses, are reported in the Other operating segment.
During the first quarter of 2021, we completed the realignment of our 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.
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 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, renewable 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 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 attain 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.
Executive Summary
The following key highlights and factors should be considered when reviewing our results of operations, financial position and liquidity:
In 2020 as compared to 2019, our net sales decreased by 10.7% to $802.6 million, our gross margin increased 140 basis points to 36.4% from 35.0%, and operating income as a percentage of net sales decreased 390 basis points to 8.4% from 12.3%.
We made $248.0 million of discretionary principal payments on our revolving credit facility during the second, third and fourth quarters 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.
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
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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 commenced manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our PES and ACS operating segments, and we recognized $12.3 million of restructuring charges in 2020 related to this project.
We incurred incremental direct costs of $4.9 million in 2020, due to the 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 recognized an additional $27.4 million of amortization expense in 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.
In early February 2021, there was a fire at our UTIS manufacturing facility in Ansan, South Korea. This facility manufactures eSorba® polyurethane foams used in portable electronics and display applications. These operations will be disrupted, but it is too early to determine the expected duration of the disruption. The UTIS business represented less than 4% of our annual net sales in 2020.
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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.
20202019
Net sales100.0 %100.0 %
Gross margin36.4 %35.0 %
Selling, general and administrative expenses22.7 %18.8 %
Research and development expenses3.7 %3.5 %
Restructuring and impairment charges1.6 %0.3 %
Other operating (income) expense, net %0.1 %
Operating income8.4 %12.3 %
Equity income in unconsolidated joint ventures0.6 %0.6 %
Pension settlement charges %(5.9)%
Other income (expense), net0.4 %(0.1)%
Interest expense, net(0.9)%(0.8)%
Income before income tax expense8.5 %6.1 %
Income tax expense2.3 %0.8 %
Net income6.2 %5.3 %
Net Sales and Gross Margin
(Dollars in thousands)20202019
Net sales$802,583 $898,260 
Gross margin$291,820 $314,292 
Percentage of net sales36.4 %35.0 %
Net sales decreased by 10.7% in 2020 compared to 2019. Our ACS, EMS and PES operating segments had net sales decreases of 15.1%, 9.2% and 4.3%, respectively. The decrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment, as well as lower net sales in the automotive market in our ACS operating segment, lower net sales in the general industrial, mass transit, consumer and automotive markets in our EMS operating segment and lower net sales in the mass transit, industrial power and vehicle electrification 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 EV/HEV and portable electronics markets in our EMS operating segment and higher net sales in the EV/HEV and renewable energy markets in our PES operating segment. Net sales were not materially impacted by changes in foreign currencies.
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 trade tensions, 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, mass transit and general industrial markets was largely due to the impacts of the COVID-19 pandemic.
The lower net sales in industrial power market in our PES operating segment was due to a slowdown in industrial automation demand due to the impacts of the COVID-19 pandemic combined with customer inventory rebalancing, which began in mid-2019 and continued through most of the first half of 2020. The lower net sales in the 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 a recovery in the second half of 2020.
In our PES and EMS operating segments, we anticipate higher net sales in the EV/HEV market in 2021 driven by continued strong demand. In our ACS and EMS operating segments, we anticipate a strong recovery in the automotive market in 2021 following industry disruptions that occurred in the first half of 2020 due to the COVID-19 pandemic. In particular, we anticipate higher net sales for ADAS applications in 2021 driven by increased adoption of safety features in newer vehicles. In our EMS operating segment, we anticipate higher net sales in the portable electronics market in 2021 due to anticipated continuation of strong demand for 5G smartphones, tempered by the uncertain impacts from the fire at our UTIS manufacturing facility in early February 2021. In our ACS operating segment, we anticipate higher net sales in the aerospace and defense market in 2021 driven by funding of technology programs such as advanced defense and radar systems.
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Gross margin as a percentage of net sales increased 140 basis points to 36.4% in 2020 compared to 35.0% in 2019. Gross margin in 2020 was favorably impacted by lower freight, duties and tariffs costs in our ACS operating segment, including the recognition of a $3.3 million recovery of previous duty taxes paid due to a change in Chinese tariff regulations, 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 favorable productivity performance and favorable absorption of fixed overhead costs in our PES operating segment. This was partially offset by lower volume in our ACS, EMS and PES operating segments, unfavorable absorption of fixed overhead costs in our ACS and EMS operating segments, an increase in inventory reserve provisions in our PES operating segment, as well as unfavorable product mix in our PES operating segment.
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 approximately $4.5 million in 2020. A substantial portion of the additional benefits under these programs expired in June 2020.
Selling, General and Administrative Expenses
(Dollars in thousands)20202019
Selling, general and administrative expenses$182,283 $168,682 
Percentage of net sales22.7 %18.8 %
Selling, general and administrative (SG&A) expenses increased 8.1% in 2020 from 2019, primarily due to a $24.4 million increase in other intangible assets amortization, a $2.3 million increase in professional services and a $1.4 million increase in total compensation and benefits, partially offset by a $4.8 million decrease in travel and entertainment expenses, a $1.4 million decrease in depreciation, a $1.3 million decrease in advertising expenses, a $1.2 million decrease in recruiting/relocation/training expenses, a $1.1 million decrease in commissions expense and a $1.0 million decrease in environmental charges.
The increase in amortization expense in 2020 from 2019 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 $27.4 million of amortization expense in 2020 due to this acceleration. For additional information, refer to “Note 6 – Goodwill and Other Intangible Assets” to “Item 8. Financial Statements and Supplementary Data.”
The decreases in travel and entertainment and recruiting/relocation/training expenses were primarily driven by the impacts of COVID-19.
Research and Development Expenses
(Dollars in thousands)20202019
Research and development expenses$29,320 $31,685 
Percentage of net sales3.7 %3.5 %
R&D expenses decreased 7.5% in 2020 from 2019, primarily due to decreases in laboratory expenses as well as travel and entertainment expenses, partially offset by increases in total compensation and benefits.
Restructuring and Impairment Charges and Other Operating (Income) Expense, Net
(Dollars in thousands)20202019
Restructuring and impairment charges$12,987 $2,485 
Other operating (income) expense, net$(104)$959 
We incurred restructuring charges associated with our manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations. We recognized $12.3 million of restructuring charges related to this restructuring project in 2020.
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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 $0.9 million of restructuring charges related to our facility consolidation in 2019.
We recognized $0.6 million of impairment charges in 2020 primarily related to certain fixed assets in Belgium and Hungary. We recognized $1.5 million of impairment charges in 2019 primarily related to certain fixed assets in connection with the Isola USA Corp. (Isola) asset acquisition.
In connection with the transitional leaseback of a portion of the facility and certain machinery and equipment acquired from Isola, we recognized lease income and related depreciation on leased assets of $1.0 million and $1.9 million, respectively, in 2019. Additionally, we recorded a gain of $0.7 million for the settlement of indemnity claims related to the Isola asset acquisition in 2019.
Equity Income in Unconsolidated Joint Ventures
(Dollars in thousands)20202019
Equity income in unconsolidated joint ventures$4,877 $5,319 
As of December 31, 2020, we had two unconsolidated joint ventures, each 50% owned: Rogers INOAC Corporation (RIC) and Rogers INOAC Suzhou Corporation (RIS). Equity income in those unconsolidated joint ventures decreased 8.3% in 2020 from 2019 due to lower net sales as a result of the COVID-19 pandemic and declines in operational performance, for both RIS and RIC.
Pension Settlement Charges and Other Income (Expense), Net
(Dollars in thousands)20202019
Pension settlement charges$(55)$(53,213)
Other income (expense), net$3,513 $(592)
In 2020 and 2019, we recorded $0.1 million and $53.2 million of pre-tax settlement charges in connection with the termination of the Rogers Corporation Defined Benefit Pension Plan (following its merger with the Hourly Employees Pension Plan of Arlon LLC, Microwave Material and Silicone Technologies Divisions, Bear, Delaware (collectively, the Merged Plan)). For additional information, refer to “Note 11 – Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan” to “Item 8. Financial Statements and Supplementary Data.”
Other income (expense), net improved to a net income of $3.5 million in 2020 compared to a net expense of $0.6 million in 2019 due to favorable impacts from our copper derivatives contracts and favorable impacts from our foreign currency transactions, including foreign currency derivatives, partially offset by higher costs associated with our defined benefit plans.
Interest Expense, Net
(Dollars in thousands)20202019
Interest expense, net$(7,135)$(6,869)
Interest expense, net, increased by 3.9% in 2020 from 2019, primarily due to the $2.4 million acceleration of interest expense as a result of the termination of the interest rate swap on September 30, 2020, 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 as well as a lower weighted-average outstanding balance for our borrowings under our revolving credit facility.
Income Tax Expense
(Dollars in thousands)20202019
Income tax expense$18,544 $7,807 
Effective tax rate27.1 %14.2 %
Our effective income tax rate for 2020 was 27.1% compared to 14.2% for 2019. The increase from 2019 was primarily due to the increase in current year accruals of reserves for uncertain tax positions, the decrease in foreign tax credits available to offset foreign source income, the decrease in excess tax deductions on stock-based compensation and higher tax impact on unremitted foreign earnings and profits, partially offset by the beneficial impact of changes in valuation allowance related to R&D credits and pre-tax mix across jurisdictions with disparate tax rates.
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Operating Segment Net Sales and Operating Income
Advanced Connectivity Solutions
(Dollars in thousands)20202019
Net sales$268,699 $316,592 
Operating income$38,202 $48,654 
ACS net sales decreased by 15.1% in 2020 compared to 2019. The decrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets, as well as the lower net sales in the automotive market, partially offset by higher net sales in the aerospace and defense market. Net sales were not materially impacted by changes in foreign currencies.
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 trade tensions, 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 the COVID-19 pandemic.
We anticipate a strong recovery in the automotive market in 2021 following industry disruptions that occurred in the first half of 2020 due to the COVID-19 pandemic. In particular, we anticipate higher net sales for ADAS applications in 2021 driven by increased adoption of safety features in newer vehicles. Additionally, we anticipate higher net sales in the aerospace and defense market in 2021 driven by funding of technology programs such as advanced defense and radar systems.
Operating income decreased by 21.5% in 2020 from 2019. The decrease in operating income was primarily due to lower volume and unfavorable absorption of fixed overhead costs, partially offset by lower freight, duties and tariffs costs, including the recognition of a $3.3 million recovery of previous duty taxes paid due to a change in Chinese tariff regulations, yield improvements and lower fixed overhead costs. Additionally, our ACS operating segment incurred $4.6 million of restructuring and impairment charges in 2020. As a percentage of net sales, operating income in 2020 was 14.2%, an approximately 120 basis point decrease as compared to 15.4% in 2019.
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 ACS operating income by approximately $1.9 million in 2020.
Elastomeric Material Solutions
(Dollars in thousands)20202019
Net sales$328,177 $361,603 
Operating income$30,817 $57,080 
EMS net sales decreased by 9.2% in 2020 compared to 2019. The decrease in net sales was primarily driven by lower net sales in the general industrial, mass transit, consumer and automotive markets, partially offset by higher net sales in the EV/HEV and portable electronics markets. Net sales were not materially impacted by changes in foreign currencies.
The lower net sales in the automotive, mass transit and general industrial markets was largely due to the impacts of the COVID-19 pandemic.
We anticipate higher net sales in the EV/HEV market in 2021 driven by continued strong demand. Additionally, we anticipate a strong recovery in the automotive market in 2021 following industry disruptions that occurred in the first half of 2020 due to the COVID-19 pandemic. Lastly, we anticipate higher net sales in the portable electronics market in 2021 due to anticipated continuation of strong demand for 5G smartphones, tempered by the uncertain impacts from the fire at our UTIS manufacturing facility in early February 2021.
Operating income decreased by 46.0% in 2020 from 2019. 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, we recognized an additional $27.4 million of amortization expense in 2020. The decrease in operating income was also due to lower volume and unfavorable absorption of fixed overhead costs, offset by favorable product mix and lower fixed overhead costs. As a percentage of net sales, operating income in 2020 was 9.4%, an approximately 640 basis point decrease as compared to 15.8% in 2019.
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 $1.9 million in 2020.
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The increase in amortization expense in 2020 from 2019 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 $27.4 million of amortization expense in 2020 due to this acceleration. The increase in amortization expense in 2020 is offset by a decrease in forecasted amortization expense in future years. For additional information, refer to “Note 6 – Goodwill and Other Intangible Assets” to “Item 8. Financial Statements and Supplementary Data.”
Power Electronics Solutions
(Dollars in thousands)20202019
Net sales$189,980 $198,535 
Operating income (loss)$(6,179)$(1,437)
PES net sales decreased by 4.3% in 2020 compared to 2019. The decrease in net sales was primarily driven by lower net sales in the mass transit, industrial power and vehicle electrification markets, partially offset by higher net sales in the EV/HEV and renewable energy markets. Net sales were favorably impacted by foreign currency fluctuations of $1.0 million, or 0.5%, due to the appreciation in value of the euro relative to the U.S. dollar.
The lower net sales in industrial power market in our PES operating segment was due to a slowdown in industrial automation demand due to the impacts of the COVID-19 pandemic combined with customer inventory rebalancing, which began in mid-2019 and continued through most of the first half of 2020. The lower net sales in the 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 a recovery in the second half of 2020. We anticipate higher net sales in 2021 in the EV/HEV market driven by continued strong demand.
Operating loss increased by 330.0% in 2020 from 2019. The increase in operating loss was primarily due to $7.9 million of restructuring and impairment charges incurred in 2020, in addition to unfavorable product mix and lower volume, partially offset by favorable productivity performance, yield improvements, lower fixed overhead costs and favorable absorption of fixed overhead costs. As a percentage of net sales, operating loss in 2020 was 3.3%, an approximately 260 basis point increase as compared to 0.7% in 2019.
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 PES operating loss by approximately $1.0 million in 2020.
Other
(Dollars in thousands)20202019
Net sales$15,727 $21,530 
Operating income$4,494 $6,184 
Net sales in this segment decreased by 27.0% in 2020 from 2019. The decrease in net sales was primarily driven by a non-recurring last time buy in the Durel business in the first quarter of 2019, as well as lower demand in the automotive market partially resulting from the COVID-19 pandemic. Net sales were not materially impacted by changes in foreign currencies.
Operating income decreased by 27.3% in 2020 from 2019. The decrease in operating income was primarily due to lower volume and unfavorable absorption of fixed overhead costs, partially offset by lower fixed overhead costs. As a percentage of net sales, operating income in 2020 was 28.6%, an approximately 10 basis point decrease as compared to 28.7% in 2019.
Product and Market Development
Our research and development team is dedicated to growing our business by developing cost effective solutions that improve the performance of customers’ products and by identifying business and technology acquisition or development opportunities to expand our market presence.
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, 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, 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:
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As of December 31,
(Dollars in thousands)20202019
United States$21,657 $39,354 
Europe55,449 31,166 
Asia114,679 96,329 
Total cash and cash equivalents$191,785 $166,849 
Approximately $170.1 million of our cash and cash equivalents were held by non-U.S. subsidiaries as of December 31, 2020. We did not make any changes in 2020 to our position on the permanent reinvestment of our historical 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.
Net working capital was $362.7 million and $363.9 million as of December 31, 2020 and 2019, respectively.
(Dollars in thousands)
As of December 31,
Key Financial Position Accounts:20202019
Cash and cash equivalents$191,785 $166,849 
Accounts receivable, net134,421 122,285 
Inventories102,360 132,859 
Borrowings under revolving credit facility25,000 123,000 
Significant changes in our statement of financial position accounts from December 31, 2019 to December 31, 2020 were as follows:
Accounts receivable, net increased 9.9% to $134.4 million as of December 31, 2020, from $122.3 million as of December 31, 2019. The increase from year-end was primarily due to higher net sales at the end of 2020 compared to at the end of 2019, as well as an increase in our income taxes receivable.
Inventories decreased 23.0% to $102.4 million as of December 31, 2020, from $132.9 million as of December 31, 2019, primarily driven by a decline in inventory levels to align with our lower net sales volumes, as well as an increase in inventory reserve provision within the ACS and EMS operating segments and a reduction of capitalized variances associated with the timing of volumes produced versus sold relative to the end of 2019.
Borrowings under revolving credit facility decreased 79.7% to $25.0 million as of December 31, 2020, from $123.0 million as of December 31, 2019. This was as a result of $248.0 million of discretionary principal payments on our revolving credit facility during the second, third and fourth quarters 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. For additional information regarding this facility, as well as the Third Amended Credit Agreement and the Fourth Amended Credit Agreement, refer to “Note 9 – Debt” to “Item 8. Financial Statements and Supplementary Data.”
(Dollars in thousands)
Year Ended December 31,
Key Cash Flow Measures:20202019
Net cash provided by operating activities$165,056 $161,323 
Net cash used in investing activities(40,385)(48,963)
Net cash (used in) provided by financing activities(104,189)(111,843)
In 2020, cash and cash equivalents increased $24.9 million, primarily due to the $150.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $248.0 million of principal payments made on our outstanding borrowings on our revolving credit facility, $40.4 million in capital expenditures, as well as $5.4 million in tax payments related to net share settlement of equity awards.
In 2019, cash and cash equivalents decreased $0.9 million, primarily due to $105.5 million of principal payments made on our outstanding borrowings on our revolving credit facility, $51.6 million in capital expenditures, as well as $7.6 million in tax payments related to net share settlement of equity awards, almost entirely offset by cash flows generated by operations.
In 2021, we 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 does not incorporate any capital spending that may occur as a result of the fire that extensively damaged our UTIS manufacturing facility located in Ansan, South Korea, in early February 2021.
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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 $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 December 31, 2020. For additional information regarding the Fourth Amended Credit Agreement, refer to “Note 9 – Debt” to “Item 8. Financial Statements and Supplementary Data.”
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020.
Payments Due by Period
TotalLess than
1 Year
1 - 3 Years3 - 5 YearsMore than
5 Years
Operating lease obligations$4,741 $2,342 $2,394 $$— 
Finance lease obligations5,077 4,713 364 — — 
Interest payments on finance lease obligations91 74 17 — — 
Inventory purchase obligations60 60 — — — 
Capital commitments(1)
5,330 5,330 — — — 
Borrowings under revolving credit facility(2)
25,000 — — 25,000 — 
Interest payments on borrowings under revolving credit facility(3)
1,500 445 927 128 — 
Other postretirement benefits1,503 148 244 272 839 
Total contractual obligations$43,302 $13,112 $3,946 $25,405 $839 
(1)This amount represents non-cancelable vendor purchase commitments.
(2)All outstanding borrowings under our revolving credit facility are due on March 31, 2024.
(3)Estimated future interest payments are based on a leverage ratio based spread that ranges from 1.625% to 2.000%, plus projected forward 1-month LIBOR rates. Actual future interest payments could differ from those set forth here due to the expected phase-out of LIBOR by the end of 2021.
Other postretirement benefits, which amount to $1.5 million, are expected to be paid from operating cash flows. Other long-term liabilities, such as deferred taxes, unrecognized tax benefits and asbestos-related product liability reserves, have been excluded from the table due to the uncertainty of the timing of payments combined with the absence of historical trends to be used as a predictor for such payments.
Effects of Inflation
We do not believe that inflation had a material impact on our business, net sales, or operating results during the periods presented.
Off-Balance Sheet Arrangements
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.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances and believe that appropriate reserves have been established using on reasonable methodologies and appropriate assumptions based on facts and circumstances that are known; however, actual results may differ from these estimates under different assumptions or conditions. Certain accounting policies may require a choice between acceptable accounting methods or may require substantial judgment or estimation in their application. A summary of our critical accounting estimates is presented below:
Goodwill and Other Intangible Assets
We have made acquisitions over the years that included the recognition of intangible assets. Intangible assets are classified into three categories: (1) goodwill; (2) other intangible assets with definite lives subject to amortization; and (3) other intangible assets with indefinite lives not subject to amortization. Other intangible assets can include items such as trademarks and trade names, licensed technology, customer relationships and covenants not to compete, among other things. Each definite-lived other intangible asset is amortized over its respective economic useful life using the economic attribution method.
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Goodwill is tested for impairment annually and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired. If it is more likely than not that our goodwill is impaired, then we compare the estimated fair value of each of our reporting units to its respective carrying value. If a reporting unit’s carrying value is greater than its fair value, then an impairment is recognized for the excess and charged to operations. We currently have four reporting units with goodwill: ACS, EMS, curamik® and Elastomer Components Division (ECD). Consistent with historical practice, the annual impairment test on these reporting units was performed as of November 30, 2020.
The application of the annual goodwill impairment test requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit. Determining the fair value is subjective and requires the use of significant estimates and assumptions, including financial projections for net sales, gross margin and operating margin, discount rates, terminal growth rates and future market conditions, among others. We estimated the fair value of our reporting units using an income approach based on the present value of future cash flows through a five-year discounted cash flow analysis. The discounted cash flow analysis utilized the discount rates for each of the reporting units ranging from 10.5% for EMS to 13.1% for ECD, and terminal growth rates ranging from 3.4% for curamik® to 4.2% for ACS. We believe this approach yields the most appropriate evidence of fair value as our reporting units are not easily compared to other corporations involved in similar businesses. We further believe that the assumptions and rates used in our annual goodwill impairment test are reasonable, but inherently uncertain. There were no impairment charges resulting from our goodwill impairment analysis for the year ended December 31, 2020. Our ACS, EMS, curamik® and ECD reporting units had allocated goodwill of $51.7 million, $143.0 million, $73.2 million and $2.2 million respectively, as of December 31, 2020.
Indefinite-lived other intangible assets are tested for impairment annually and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired. If it is more likely than not that an indefinite-lived other intangible asset is impaired, then we compare the estimated fair value of that indefinite-lived other intangible asset to its respective carrying value. If an indefinite-lived other intangible asset’s carrying value is greater than its fair value, then an impairment charge is recognized for the excess and charged to operations. Consistent with historical practice, the annual impairment test on these reporting units was performed as of November 30, 2020. The application of the annual indefinite-lived other intangible asset impairment test requires significant judgment, including the determination of fair value of each indefinite-lived other intangible asset. Fair value is primarily based on income approaches using discounted cash flow models, which have significant assumptions. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. There were no impairment charges resulting from our indefinite-lived other intangible assets impairment analysis for the year ended December 31, 2020. Our curamik® reporting unit had an indefinite-lived other intangible asset of $4.8 million as of December 31, 2020.
Definite-lived other intangible assets are tested for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. The recoverability test involves comparing the estimated sum of the undiscounted cash flows for each definite-lived other intangible asset to its respective carrying value. If a definite-lived other intangible asset’s carrying value is greater than the sum of its undiscounted cash flows, then the definite-lived other intangible asset’s carrying value is compared to its estimated fair value and an impairment charge is recognized for the excess and charged to operations. The application of the recoverability test requires significant judgment, including the identification of the asset group and determination of undiscounted cash flows and fair value of the underlying definite-lived other intangible asset. Determination of undiscounted cash flows requires the use of significant estimates and assumptions, including certain financial projections. Fair value is primarily based on income approaches using discounted cash flow models, which have significant assumptions. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. There were immaterial impairment charges resulting from our definite-lived other intangible assets impairment analysis for the year ended December 31, 2020. Our ACS, EMS and curamik® reporting units had definite-lived other intangible assets of $3.7 million, $101.2 million and $8.2 million, respectively, as of December 31, 2020.
The useful life determination for each indefinite-lived other intangible asset is evaluated each reporting period to determine whether events and circumstances support an indefinite useful life. The useful life determination for each definite-lived other intangible asset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.
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. Our estimates of asbestos-related contingent liabilities and related insurance receivables are based on an independent actuarial analysis and an independent insurance usage analysis prepared annually by third parties. The actuarial analysis contains
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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 December 31, 2020, the estimated liabilities and estimated insurance recoveries for all current and future indemnity and defense costs projected through 2064 were $73.2 million and $66.8 million, respectively.
Revenue Recognition
Recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of our shipping terms permit us to recognize revenue at point of shipment. Some shipping terms require the goods to be cleared through customs or be received by the customer before title passes. In those instances, revenue is not recognized until either the customer has received the goods or they have passed through customs, depending on the circumstances. Shipping and handling costs are treated as fulfillment costs. Sales tax or value added tax (VAT) are excluded from the measurement of the transaction price.
We manufacture some products to customer specifications which are customized to such a degree that it is unlikely that another entity would purchase these products or that we could modify these products for another customer. These products are deemed to have no alternative use to the Company whereby we have an enforceable right to payment evidenced by contractual termination clauses. In accordance with ASC 606, for those circumstances we recognize revenue on an over-time basis. Revenue recognition does not occur until the product meets the definition of “no alternative use” and therefore, items that have not yet reached that point in the production process are not included in the population of items with over-time revenue recognition.
As appropriate, we record estimated reductions to revenue for customer returns, allowances, and warranty claims. Provisions for such reductions are made at the time of sale and are typically derived from historical trends and other relevant information.
Pension and Other Postretirement Benefits
We sponsor one material defined benefit pension plan that covers certain union employees and we sponsor multiple fully insured or self-funded medical plans and fully insured life insurance plans for retirees. The costs and obligations associated with these plans are dependent upon various actuarial assumptions used in calculating such amounts. These assumptions include discount rates, long-term rates of return on plan assets, mortality rates and other factors. The assumptions used were determined as follows: (i) the discount rate used is based on the PruCurve bond index, with comparisons against other similar indices; and (ii) the long-term rate of return on plan assets is determined based on historical portfolio results, market conditions and our expectations of future returns. We determine these assumptions based on consultation with outside actuaries and investment advisors. Any changes in these assumptions could have a significant impact on future recognized pension costs, assets and liabilities.
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The rates used to determine our costs and obligations under our pension and postretirement plans are disclosed in “Note 11 – Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan” to “Item 8. Financial Statements and Supplementary Data.” Each assumption has different sensitivity characteristics. For the year ended December 31, 2020, a 25 basis point decrease in the discount rate would have increased our pension expense for Rogers Corporation Employees’ Pension Plan (the Union Plan) by a de minimis amount. A 25 basis point decrease in the discount rate would have increased the other postretirement benefits expense by a de minimis amount. A 25 basis point decrease in the expected return on assets would have increased the total 2020 pension expense for the Union Plan by a de minimis amount. As the other postretirement benefit plans are unfunded, they would not be impacted by this assumption change.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value with costs determined primarily on a first-in first-out basis. We also maintain a reserve for excess, obsolete and slow-moving inventory that is primarily developed by utilizing both specific product identification and historical product demand as the basis for our analysis. Products and materials that are specifically identified as obsolete are fully reserved. In general, most products that have been held in inventory greater than one year are fully reserved unless there are mitigating circumstances, including forecasted sales or current orders for the product. The remainder of the allowance is based on our estimates and fluctuates with market conditions, design cycles and other economic factors. Risks associated with this allowance include unforeseen changes in business cycles that could affect the marketability of certain products and an unexpected decline in current production. We closely monitor the marketplace and related inventory levels and have historically maintained reasonably accurate allowance levels. Our obsolescence reserve has ranged from 9% to 18% of gross inventory over the last three fiscal years.
Equity Compensation
Determining the amount of equity compensation expense to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of performance-based restricted stock units.
Performance-Based Restricted Stock Units
As of December 31, 2020, we had performance-based restricted stock units from 2020, 2019 and 2018 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. Participants are eligible to be awarded shares ranging from 0% to 200% of the original award amount, based on certain defined performance measures.
The 2020, 2019 and 2018 awards have one measurement criteria: the three-year total shareholder return (TSR) on the performance of our capital stock as compared to that of a specified group of peer companies. The TSR measurement criteria of the awards is considered a market condition. As such, the fair value of this measurement criteria 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.
Below were the assumptions used in the Monte Carlo calculation for each material award granted in 2020, 2019 and 2018:
February 12, 2020June 3, 2019February 7, 2019September 17, 2018February 8, 2018
Expected volatility41.0%39.7%36.7%36.6%34.8%
Expected term (in years)2.92.62.93.03.0
Risk-free interest rate1.41%1.78%2.43%2.85%2.28%
Expected volatility – In determining expected volatility, we have considered a number of factors, including historical volatility.
Expected term – We use the measurement 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.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Foreign Currency Risk
Our financial results are affected by changes in foreign exchange rates and economic conditions in foreign countries in which we operate. Our primary overseas markets are in Europe and Asia, thus exposing us to exchange rate risk from fluctuations in the euro, the Chinese renminbi and certain other currencies used in Asia. We seek to mitigate exposure to variability in currency exchange rates, when possible, through the use of natural hedges, whereby purchases and sales in the same foreign currency and with similar maturity dates offset one another. We further seek to mitigate this exposure through hedging activities by entering into foreign exchange forward contracts with third parties when the use of natural hedges is not possible or desirable. We currently do not use derivative instruments for trading or speculative purposes. We monitor foreign exchange risks and at times manage such risks on specific transactions. Our risk management process primarily uses analytical techniques and sensitivity analysis. In 2020, a 10% strengthening of the U.S. dollar relative to other currencies would have resulted in a decrease to net sales and net income of approximately $32 million and $7 million, respectively, while a 10% weakening of the U.S. dollar relative to other currencies would have resulted in an increase to net sales and net income of approximately $39 million and $7 million, respectively.
Interest Rate Risk
As of December 31, 2020, we had $25.0 million in borrowings outstanding under our revolving credit facility. The interest charged on these borrowings fluctuates with movements in the benchmark LIBOR. As of December 31, 2020, the effective all-in rate of interest on our revolving credit facility was 1.77%, and a 100 basis point increase in LIBOR would have increased the amount of interest expense by approximately $1.0 million for the year ended December 31, 2020.
Commodity Risk
We are subject to fluctuations in the cost of raw materials used to manufacture our materials and products. In particular, we are exposed to market fluctuations in commodity pricing as we utilize certain materials, such as copper and ceramic, which are key materials in certain of our products. In order to minimize the risk of market driven price changes in these commodities, we utilize hedging strategies to insulate us against price fluctuations of copper, the most frequently used commodity in our manufacturing processes. We currently do not use hedging strategies to minimize the risk of price fluctuations on other commodity-based raw materials; however, we regularly review such strategies to hedge market risk on an ongoing basis.
For additional discussion, refer to “Note 2 – Fair Value Measurements” and “Note 3 – Hedging Transactions and Derivative Financial Instruments” to “Item 8. Financial Statements and Supplementary Data.”
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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Rogers Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Rogers Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 appearing under Item 8 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - curamik® Reporting Unit
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $270.2 million as of December 31, 2020, and the goodwill associated with the curamik® reporting unit was $73.2 million. Goodwill is tested for impairment annually as of November 30 and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired. If a reporting unit’s carrying value is greater than its fair value, then an impairment is recognized for the excess and charged to operations. Management estimated the fair value of the curamik® reporting unit using an income approach based on the present value of future cash flows through a five year discounted cash flow analysis. Determining the fair value is subjective and requires the use of significant estimates and assumptions, including financial projections for net sales, gross margin and operating margin, discount rate, terminal growth rate and future market conditions, among others.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the curamik® reporting unit is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the reporting unit; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s significant assumptions related to financial projections for net sales and gross margin.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others (i) testing management’s process for determining the fair value measurement of the curamik® reporting unit; (ii) evaluating the appropriateness of the discounted cash flow analysis; (iii) testing the completeness and accuracy of underlying data used in the analysis; and (iv) evaluating the reasonableness of significant assumptions used by management related to the financial projections for net sales and gross margin. Evaluating management’s assumptions related to the financial projections for net sales and gross margin involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
Asbestos-Related Liabilities and Insurance Receivables
As described in Notes 1 and 12 to the consolidated financial statements, the Company’s consolidated asbestos-related liabilities and asbestos-related insurance receivables balances were $73.2 million and $66.8 million, respectively, as of December 31, 2020. Management reviews the asbestos-related projections annually in the fourth quarter of each year unless facts and circumstances materially change during the year, at which time management would analyze these projections. Management recognizes 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, management records asbestos-related insurance receivables that are deemed probable. Estimates of asbestos-related contingent liabilities and related insurance receivables are based on an independent actuarial analysis and an independent insurance usage analysis, respectively, prepared annually by third parties. The actuarial analysis contains numerous assumptions, including the number of claims that might be received, the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, average indemnity costs, average defense costs, costs of medical treatment, the financial resources of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards, including potential tort reform. The 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 principal considerations for our determination that performing procedures relating to asbestos-related liabilities and insurance receivables is a critical audit matter are (i) the significant judgment by management when determining the asbestos-
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related liabilities and insurance receivables; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the number of claims that might be received, type and severity of the disease alleged by each claimant, average indemnity costs, average defense costs, and dismissal rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the analyses of the asbestos-related liabilities and insurance receivables. These procedures also included, among others (i) testing management’s process for determining the asbestos-related liabilities and insurance receivables estimates; (ii) evaluating the appropriateness of the actuarial and insurance usage analyses; (iii) testing the completeness and accuracy of underlying data used in the analyses; and (iv) evaluating the reasonableness of significant assumptions used by management related to the number of claims that may be received, type and severity of the disease alleged by each claimant, average indemnity costs, average defense costs, and dismissal rates. Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s analyses and significant assumptions related to the number of claims that may be received, the type and severity of the disease alleged by each claimant, average indemnity costs, average defense costs, and dismissal rates.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 18, 2021
We have served as the Company’s auditor since 2015.

35


ROGERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the fiscal years in the three-year period ended December 31, 2020
(Dollars and shares in thousands, except per share amounts)202020192018
Net sales$802,583 $898,260 $879,091 
Cost of sales510,763 583,968 568,308 
Gross margin291,820 314,292 310,783 
Selling, general and administrative expenses182,283 168,682 164,046 
Research and development expenses29,320 31,685 33,075 
Restructuring and impairment charges12,987 2,485 4,038 
Other operating (income) expense, net(104)959 (3,087)
Operating income67,334 110,481 112,711 
Equity income in unconsolidated joint ventures4,877 5,319 5,501 
Pension settlement charges(55)(53,213) 
Other income (expense), net3,513 (592)(994)
Interest expense, net(7,135)(6,869)(6,629)
Income before income tax expense68,534 55,126 110,589 
Income tax expense18,544 7,807 22,938 
Net income$49,990 $47,319 $87,651 
Basic earnings per share$2.68 $2.55 $4.77 
Diluted earnings per share$2.67 $2.53 $4.70 
Shares used in computing:
Basic earnings per share18,681 18,573 18,374 
Diluted earnings per share18,706 18,713 18,659 


The accompanying notes are an integral part of the consolidated financial statements.

36


ROGERS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For each of the fiscal years in the three-year period ended December 31, 2020
(Dollars in thousands)202020192018
Net income$49,990 $47,319 $87,651 
Foreign currency translation adjustment24,907 (4,990)(12,505)
Pension and other postretirement benefits:
Pension settlement (benefits) charges, net of tax (Note 4)(48)43,934  
Actuarial net gain (loss) incurred, net of tax (Note 4)1,255 (6,079)(1,678)
Amortization of loss, net of tax (Note 4)244 390 176 
Derivative instrument designated as cash flow hedge:
Change in unrealized (loss) gain before reclassifications, net of tax (Note 4)(1,504)(1,171)519 
Unrealized loss (gain) reclassified into earnings, net of tax (Note 4)2,476 (155)(191)
Other comprehensive income (loss)27,330 31,929 (13,679)
Comprehensive income$77,320 $79,248 $73,972 


The accompanying notes are an integral part of the consolidated financial statements.

37


ROGERS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31,
(Dollars and share amounts in thousands, except par value of capital stock)20202019
Assets
Current assets
Cash and cash equivalents$191,785 $166,849 
Accounts receivable, less allowance for credit losses of $1,682 and $1,691
134,421 122,285 
Contract assets26,575 22,455 
Inventories102,360 132,859 
Prepaid income taxes2,960 4,524 
Asbestos-related insurance receivables, current portion2,986 4,292 
Other current assets13,088 10,838 
Total current assets474,175 464,102 
Property, plant and equipment, net of accumulated depreciation of $365,844 and $341,119
272,378 260,246 
Investments in unconsolidated joint ventures15,248 16,461 
Deferred income taxes28,667 17,117 
Goodwill270,172 262,930 
Other intangible assets, net of amortization118,026 158,947 
Pension assets5,278 12,790 
Asbestos-related insurance receivables, non-current portion63,807 74,024 
Other long-term assets16,254 6,564 
Total assets$1,264,005 $1,273,181 
Liabilities and Shareholders’ Equity 
Current liabilities
Accounts payable$35,987 $33,019 
Accrued employee benefits and compensation41,708 29,678 
Accrued income taxes payable8,558 10,649 
Asbestos-related liabilities, current portion3,615 5,007 
Other accrued liabilities21,641 21,872 
Total current liabilities111,509 100,225 
Borrowings under revolving credit facility25,000 123,000 
Pension and other postretirement benefits liabilities1,612 1,567 
Asbestos-related liabilities, non-current portion69,620 80,873 
Non-current income tax16,346 10,423 
Deferred income taxes8,375 9,220 
Other long-term liabilities10,788 13,973 
Commitments and contingencies (Note 10 and Note 12)
Shareholders’ equity
Capital stock - $1 par value; 50,000 authorized shares; 18,677 and 18,577 shares issued and outstanding, respectively
18,677 18,577 
Additional paid-in capital147,961 138,526 
Retained earnings873,692 823,702 
Accumulated other comprehensive loss(19,575)(46,905)
Total shareholders' equity1,020,755 933,900 
Total liabilities and shareholders' equity$1,264,005 $1,273,181 


The accompanying notes are an integral part of the consolidated financial statements.

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ROGERS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For each of the fiscal years in the three-year period ended December 31, 2020