# ROGERS CORP (ROG) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ROGERS CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/84748/000008474823000019/rog-20221231.htm
Accession: 0000084748-23-000019
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ROG/
All MD&A years: /company/ROG/mda/
Previous year: /company/ROG/mda/fy2021/ (FY 2021)
Next year: /company/ROG/mda/fy2023/ (FY 2023)

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.”

The discussion of the comparison of our 2021 and 2020 results was previously disclosed within the Management’s Discussion & Analysis in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2022, and has been omitted from this section pursuant to Instruction 1 to Item 303(b) 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 two strategic operating segments: Advanced Electronics Solutions (AES) and Elastomeric Material Solutions (EMS). The remaining operations, which represent our non-core businesses, are reported in our Other operating segment. We have a history of innovation and have 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 and profitability strategy is based upon the following principles: (1) market-driven organization, (2) innovation leadership, (3) synergistic mergers and acquisitions, and (4) operational excellence. Our priorities in executing this strategy are focused on driving near-term improvements to profitability and improving the growth outlook for the Company over the next several years by further strengthening our focus on commercial activities, expanding capacity to meet customer demand and driving innovation.

As a market-driven organization, we are focused on capitalizing on growth opportunities in the increasing electrification of vehicles, including electric and hybrid electric vehicles (EV/HEV), and increasing use of advanced driver assistance systems (ADAS) in the automotive industry, the advancement of communication systems in aerospace and defense and the growth of 5G smartphones in the portable electronics industry. In addition to our focus on these markets, we sell into a variety of other markets including general industrial, clean energy, wireless infrastructure and mass transit.

Our sales and marketing approach is based on addressing these trends, while our strategy focuses on factors for success as a manufacturer of engineered materials and components: performance, reliability, technical service capabilities, cost, efficiency, innovation and technology. Through this strategy we expect to be able to drive further commercial wins, which provide the potential for higher growth in the future. We have also expanded our capabilities through organic investment and acquisitions and strive to ensure high quality solutions for our customers.

Our operational excellence efforts are focused on driving significant near-term improvement in our profitability. These efforts include focusing on adding strategic new hires and improving processes and tools to achieve better performance. We have also taken specific cost improvement actions in the fourth quarter of 2022 and first quarter of 2023 that will benefit subsequent quarters. These actions include optimizing our manufacturing footprint, divesting non-core product lines and reduction to manufacturing and corporate employees. We continue to review and re-align our manufacturing and engineering footprint in an effort to maintain a leading competitive position globally and to support our customers’ growth initiatives.

We seek to enhance our operational and financial performance by investing in research and development, manufacturing and materials efficiencies, and new product initiatives that respond to the needs of our customers. We strive to evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.

If we are able to successfully execute on our strategy, we see an opportunity to return to historical levels of profitability and accelerate revenue growth, relative to 2022, over the next several years, led by organic growth and complemented by targeted acquisitions. This outlook is supported by our participation in a number of fast-growing markets and by our strong competitive positions in these markets. The fastest growing market opportunity is expected to be EV/HEV where third-party analysis projects that the market will grow at compound annual growth rate of more than 25% over the next several years. Within the EV/HEV market, we believe our advanced battery cell pads, ceramic substrates and power interconnects provide multiple content opportunities to capitalize on this growth. In each of these areas we have secured a number of design wins and have a strong pipeline, which provides confidence in our growth outlook. Other markets with a strong growth trajectory include ADAS, aerospace and defense, clean energy and portable electronics. Each of these markets is expected to contribute to our growth strategy.

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Terminated Merger with DuPont

On November 1, 2021, we entered into a definitive merger agreement to be acquired by DuPont de Nemours, Inc. (DuPont) in an all-cash transaction at a price of $277.00 per share of the Company’s capital stock. The merger agreement provided for the acquisition of Rogers Corporation by DuPont through the merger of Cardinalis Merger Sub, Inc., a wholly owned subsidiary of DuPont, with and into Rogers Corporation, with Rogers Corporation surviving the merger as a wholly owned subsidiary of DuPont. Company shareholders approved the merger agreement at a special shareholder meeting held on January 25, 2022. The merger agreement provided both Rogers Corporation and DuPont with a right to terminate the merger agreement if the merger had not closed on or before November 1, 2022. Consummation of the merger was subject to various customary closing conditions, including regulatory approval by the State Administration for Market Regulation of China (SAMR). As of November 1, 2022, the parties had not received regulatory approval from SAMR. On November 1, 2022, the Company received from DuPont a notice of termination for the merger agreement. Pursuant to the terms of the merger agreement, the Company received a regulatory termination fee from DuPont in the amount of $162.5 million, before taxes, and incurred a transaction-related fee of $20.4 million.

Executive Summary

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

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

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

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

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

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

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

•On February 16, 2023, we announced a reduction in force plan of our global workforce that is expected to be completed in the first half of 2023. The plan is expected to significantly reduce our manufacturing costs and operating expenses, and are being done in conjunction with other previously announced cost reduction initiatives. We estimate that we will incur approximately $10 million to $13 million in pre-tax restructuring charges related to this plan, all of which are expected to be in the form of cash-based expenditures and substantially all of which are expected to be related to employee severance and other termination benefits.

•On February 17, 2023 we entered into an asset purchase agreement to sell our high-performance engineered cellular elastomer business for a net purchase price of $1.8 million. The business disposition is scheduled to be completed in early March.

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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:

[[GREPCENT_TABLE]]
[["","2022","","2021"],["Net sales","100.0","%","","100.0","%"],["Gross margin","33.1","%","","37.4","%"],["Selling, general and administrative expenses","22.5","%","","20.6","%"],["Research and development expenses","3.6","%","","3.2","%"],["Restructuring and impairment charges","6.9","%","","0.4","%"],["Other operating (income) expense, net","(14.8)","%","","0.6","%"],["Operating income","14.9","%","","12.6","%"],["Equity income in unconsolidated joint ventures","0.5","%","","0.7","%"],["Pension settlement charges","\u2014","%","","(0.1)","%"],["Other income (expense), net","0.1","%","","0.6","%"],["Interest expense, net","(1.0)","%","","(0.3)","%"],["Income before income tax expense","14.5","%","","13.5","%"],["Income tax expense","2.5","%","","1.9","%"],["Net income","12.0","%","","11.6","%"]]
[[/GREPCENT_TABLE]]

Net Sales and Gross Margin

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Net sales","$","971,171","","","$","932,886"],["Gross margin","$","321,015","","","$","349,139"],["Percentage of net sales","33.1","%","","37.4","%"]]
[[/GREPCENT_TABLE]]

Net sales increased by 4.1% in 2022 compared to 2021. Our AES and EMS operating segments had a net sales decrease of 0.8% and and a net sales increase of 11.1%, respectively. $32.0 million of the increase in net sales, or 3.4%, primarily reflects the impact of increased net sales from our Silicone Engineering subsidiary. The increase was further due to higher net sales in the EV/HEV and mass transit markets in our AES operating segment and higher net sales in the general industrial, mass transit and EV/HEV markets in our EMS operating segment, partially offset by lower net sales in the wireless infrastructure, aerospace and defense, ADAS and clean energy markets in our AES operating segment and lower net sales in portable electronics market in our EMS operating segment. Net sales was unfavorably impacted from foreign currency impacts of $36.9 million, or 4.0%, due to the depreciation in value of the euro, Chinese renminbi and British pound relative to the U.S. dollar.

Gross margin as a percentage of net sales decreased 430 basis points to 33.1% in 2022 compared to 37.4% in 2021. Gross margin in 2022 was impacted by unfavorable factory utilization, unfavorable yield performance, higher freight, duties and tariffs expenses and a higher inventory reserves provision in our AES and EMS operating segments, as well as lower volume in our AES operating segment and unfavorable changes in raw material costs in our EMS operating segment. This was partially offset by the favorable impacts of commercial actions taken in our AES and EMS operating segments, as well as favorable changes in raw material costs in our AES operating segment and higher volume in our EMS operating segment.

Supply constraints on raw material and labor availability moderated production levels, creating operational headwinds, which negatively impacted our gross margin. Further, the recent COVID-19 outbreaks, particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively impacted our net sales in 2022.

Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Selling, general and administrative expenses","$","218,828","","","$","193,153"],["Percentage of net sales","22.5","%","","20.6","%"]]
[[/GREPCENT_TABLE]]

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

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The increase in total compensation and benefits was primarily due to an $8.6 million impact for retention awards issued in connection with the terminated DuPont merger, and a $6.5 million discretionary RESIP contribution, partially offset by lower incentive compensation expense. The increase in professional services expense is primarily due to $6.4 million of expenses incurred related to the terminated merger with DuPont and $0.8 million of expense incurred related to our acquisition of Silicone Engineering.

Research and Development Expenses

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Research and development expenses","$","35,207","","","$","29,904"],["Percentage of net sales","3.6","%","","3.2","%"]]
[[/GREPCENT_TABLE]]

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

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

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Restructuring and impairment charges","$","66,562","","","$","3,570"],["Other operating (income) expense, net","$","(144,014)","","","$","5,330"]]
[[/GREPCENT_TABLE]]

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

We recognized $65.1 million and $0.5 million of impairment charges in 2022 and 2021, respectively. The impairment charges in 2022 were primarily related to certain AES operating segment equipment-in-process in the U.S. as well as certain EMS operating segment intangibles and fixed assets related to our high-performance engineered cellular elastomer business in the U.S.

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

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

Equity Income in Unconsolidated Joint Ventures

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Equity income in unconsolidated joint ventures","$","4,437","","","$","7,032"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022, 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 36.9% in 2022 from 2021 due to lower net sales for RIC and RIS and unfavorable productivity performance for RIC.

Pension Settlement Charges and Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Pension settlement charges","$","\u2014","","","$","(534)"],["Other income (expense), net","$","1,058","","","$","5,136"]]
[[/GREPCENT_TABLE]]

In 2021, we recorded $0.5 million of pre-tax settlement charges related to the termination of the Rogers Corporation Defined Benefit Pension Plan (following its merger with the Hourly Employees Pension Plan of Arlon LLC, Microwave Material and Silicone Technologies Divisions, Bear, Delaware (collectively, the Merged Plan)).

Other income (expense), net decreased to $1.1 million of income in 2022 compared to $5.1 million of income in 2021. The decrease was due to unfavorable impacts from our copper derivative contracts and unfavorable impacts from our foreign currency transactions, partially offset by favorable impacts from our foreign currency derivatives.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Interest expense, net","$","(9,547)","","","$","(2,536)"]]
[[/GREPCENT_TABLE]]

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

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Income Tax Expense

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Income tax expense","$","23,751","","","$","18,147"],["Effective tax rate","16.9","%","","14.4","%"]]
[[/GREPCENT_TABLE]]

Our effective income tax rate for 2022 was 16.9% compared to 14.4% for 2021. The increase from 2021 was primarily due to the decrease in the current year benefit from the reversal of unrecognized tax benefits.

Operating Segment Net Sales and Operating Income

Advanced Electronics Solutions

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Net sales","$","530,215","","","$","534,429"],["Operating income","$","77,163","","","$","50,198"]]
[[/GREPCENT_TABLE]]

Our AES operating segment net sales decreased by 0.8% in 2022 compared to 2021. The decrease in net sales was primarily driven by lower net sales in the wireless infrastructure, aerospace and defense, ADAS, and clean energy markets, partially offset by higher net sales in the EV/HEV and mass transit markets. Net sales were unfavorably impacted from foreign currency fluctuations of $25.3 million, or 4.7%, due to the depreciation in value of the euro and Chinese renminbi relative to the U.S. dollar.

Operating income increased by 53.7% in 2022 from 2021. The increase in operating income was primarily due to favorable year-over-year changes in shared service operating expense allocations driven by the merger termination fee less costs incurred related to the terminated DuPont merger, partially offset by $41.5 million in restructuring and impairment charges. Additionally, operating income also increased due to commercial actions taken and favorable changes in raw material costs, partially offset by unfavorable factory utilization, lower volume, unfavorable yield performance, higher freight, duties and tariffs expenses and a higher inventory reserves provision. As a percentage of net sales, operating income in 2022 was 14.6%, an approximately 520 basis point increase as compared to 9.4% in 2021.

In 2022 and 2021, our AES operating segment recognized impairment charges of $40.5 million and $0.5 million, respectively, and recognized restructuring charges and related expenses of $1.1 million and $3.0 million, respectively. For additional information related to restructuring and impairment charges, refer to “Note 15 – Supplemental Financial Information” to “Item 8. Financial Statements and Supplementary Data.”

Supply constraints on raw material and labor availability moderated production levels, creating operational headwinds, which negatively impacted our gross margin. Further, the recent COVID-19 outbreaks, particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively impacted our net sales in 2022.

Elastomeric Material Solutions

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Net sales","$","420,006","","","$","378,017"],["Operating income","$","60,351","","","$","60,051"]]
[[/GREPCENT_TABLE]]

Our EMS operating segment net sales increased by 11.1% in 2022 compared to 2021. The increase in net sales was primarily driven by $32.0 million in net sales, or 8.5%, reflecting the impact of increased net sales from our Silicone Engineering subsidiary, as well as higher net sales in the general industrial and EV/HEV, partially offset by lower net sales in the portable electronics market. Net sales were unfavorably impacted by foreign currency fluctuations of $11.2 million, or 3.0%, due to the depreciation in value of the British pound, euro and Chinese renminbi relative to the U.S. dollar.

Operating income increased by 0.5% in 2022 from 2021. The increase in operating income was primarily due to favorable year-over-year changes in shared service operating expense allocations driven by the merger termination fee less costs incurred related to the terminated DuPont merger, and an $8.6 million favorable change in charges/benefits related to the UTIS fire, partially offset by $25.0 million in restructuring and impairment charges. Additionally, operating income also increased due the favorable impacts of commercial actions taken and higher volume, partially offset by unfavorable factory utilization, unfavorable changes in raw material costs, unfavorable yield performance, higher freight, duties and tariffs expenses and a higher inventory reserves provision. As a percentage of net sales, operating income in 2022 was 14.4%, an approximately 150 basis point decrease as compared to 15.9% in 2021.

In 2022 and 2021, our EMS operating segment recognized impairment charges of $24.6 million and no charges, respectively, and recognized restructuring charges and related expenses of $0.4 million and $0.1 million, respectively. For additional information related to restructuring and impairment charges, refer to “Note 15 – Supplemental Financial Information” to “Item 8. Financial Statements and Supplementary Data.”

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Supply constraints on raw material and labor availability moderated production levels, creating operational headwinds, which negatively impacted our gross margin. Further, the recent COVID-19 outbreaks, particularly in Asia, adversely impacted our customers’ ability to continue manufacturing operations, which in turn negatively impacted our net sales in 2022.

Other

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021"],["Net sales","$","20,950","","","$","20,440"],["Operating income","$","6,918","","","$","6,933"]]
[[/GREPCENT_TABLE]]

Net sales in our Other operating segment increased by 2.5% in 2022 from 2021. Our Other operating segment operating income decreased by 0.2% in 2022 from 2021. Net sales were unfavorably impacted by foreign currency fluctuations of $0.5 million, or 2.5%, due to the depreciation in value of the Chinese renminbi and euro relative to the U.S. dollar. The decrease in operating income was primarily driven by unfavorable product mix and lower volume, partially offset by favorable yield performance. As a percentage of net sales, operating income in 2022 was 33.0%, an approximately 90 basis point decrease as compared to 33.9% in 2021.

Liquidity, Capital Resources and Financial Position

We believe that our existing sources of liquidity and cash flows that are expected to be generated from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, R&D efforts and our debt service commitments, for at least the next 12 months. 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:

[[GREPCENT_TABLE]]
[["","As of December 31,"],["(Dollars in thousands)","2022","","2021"],["United States","$","119,931","","","$","76,621"],["Europe","69,877","","","56,034"],["Asia","46,042","","","99,641"],["Total cash and cash equivalents","$","235,850","","","$","232,296"]]
[[/GREPCENT_TABLE]]

Approximately $115.9 million of our cash and cash equivalents were held by non-U.S. subsidiaries as of December 31, 2022. We did not make any changes in 2022 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 $517.3 million and $420.1 million as of December 31, 2022 and 2021, respectively.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","As of December 31,"],["Key Financial Position Accounts:","2022","","2021"],["Cash and cash equivalents","$","235,850","","","$","232,296"],["Accounts receivable, net","177,413","","","163,092"],["Inventories","182,402","","","133,384"],["Borrowings under revolving credit facility","215,000","","","190,000"]]
[[/GREPCENT_TABLE]]

Significant changes in our statement of financial position accounts from December 31, 2021 to December 31, 2022 were as follows:

•Accounts receivable, net increased 8.8% to $177.4 million as of December 31, 2022, from $163.1 million as of December 31, 2021. The increase was primarily due to a $13.3 million increase in our income taxes receivable, as well as an increase in days sales outstanding, partially offset by the receipt or settlement of $6.3 million in recognized UTIS fire insurance receivables and lower net sales at the end of 2022 compared to the end of 2021.

•Inventories increased 36.7% to $182.4 million as of December 31, 2022, from $133.4 million as of December 31, 2021, primarily driven by raw material cost increases as well as the ramp up of raw material purchases and production efforts to meet anticipated demand.

•Borrowings under revolving credit facility increased to $215.0 million as of December 31, 2022, from $190.0 million as of December 31, 2021. The increase reflects $100.0 million in borrowings under our revolving credit facility throughout 2022. This was partially offset by a $75.0 million of discretionary principal payment at the end of 2022. For additional

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information regarding this facility, as well as the Fourth Amended Credit Agreement, refer to “Note 9 – Debt” to “Item 8. Financial Statements and Supplementary Data.”

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","Year Ended December 31,"],["Key Cash Flow Measures:","2022","","2021"],["Net cash provided by operating activities","$","129,461","","","$","124,363"],["Net cash used in investing activities","(113,117)","","","(238,615)"],["Net cash (used in) provided by financing activities","(10,104)","","","159,057"]]
[[/GREPCENT_TABLE]]

In 2022, cash and cash equivalents increased $3.6 million, primarily due to $100.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $116.8 million in capital expenditures, a $75.0 million of principal payment made on our outstanding borrowings under our revolving credit facility, $25.0 million in share repurchases, as well as $10.8 million in tax payments related to net share settlement of equity awards.

In 2021, cash and cash equivalents increased $40.5 million, primarily due to $190.0 million in borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $71.1 million in capital expenditures, a $25.0 million of principal payment made on our outstanding borrowings under our revolving credit facility, as well as $2.9 million in tax payments related to net share settlement of equity awards.

In 2023, we expect capital spending to be in the range of approximately $65.0 million to $75.0 million, of which we are contractually committed to $16.7 million as of December 31, 2022. We plan to fund our capital spending in 2023 with cash from operations and cash on-hand, as well as our existing revolving credit facility, if necessary.

Excluding $3.9 million of inventory purchase commitments, there are no contractual obligations requiring material cash requirements in 2022 and beyond, excluding those already noted, including those related to our outstanding borrowings under our revolving credit facility, our operating and finance lease obligations and our pension benefit and other postretirement benefit obligations, which are discussed in Note 9 – Debt, Note 10 – Leases and Note 11 – Pension Benefits, Other Postretirement Benefits and Employee Savings and Investment Plan, to Item 8. Financial Statements and Supplementary Data, respectively.

We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have a current or future material effect on our results of operations or financial position.

Restriction on Payment of Dividends

The Fourth Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our total net leverage ratio does not exceed 2.75 to 1.00. If our total net leverage ratio exceeds 2.75 to 1.00, we may nonetheless make up to $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, 2022. For additional information regarding the Fourth Amended Credit Agreement, refer to “Note 9 – Debt” to “Item 8. Financial Statements and Supplementary Data.”

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:

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 a claim projection analysis and an insurance usage analysis prepared annually by third parties. The claim projection analysis contains numerous assumptions, including number of claims that might be received, the type and severity of the disease alleged by each claimant,

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

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