ROGERS CORP (ROG) FY 2024 MD&A

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 2023 and 2022 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 27, 2024 and has been omitted from this section pursuant to Instruction 1 to Item 303(b) of Regulation S-K, except the Operating Segment Net Sales and Gross Margin section, which has been recast due to changes resulting from the adoption of ASU 2023-07: Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.

Company Overview and Strategy

We design, develop, manufacture and sell high-performance and high-reliability engineered materials and components to meet our customers’ challenges. We operate two strategic operating segments: AES and EMS. Our remaining operations, which represent non-core businesses, are reported in our Other operating segment. 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 our portfolio and commercial activities, optimizing our global capacity to meet customer demand and driving innovation.

As a market-driven organization, we are focused on capitalizing on growth opportunities in several different end markets. This includes the automotive industry, where there are market opportunities resulting from the increasing electrification of vehicles, and in the expanding use of ADAS. Other opportunities are driven by the advancement of communication systems in aerospace and defense, the growth of next-generation smartphones in the portable electronics industry, and the continued expansion of renewable energy. In addition to our focus on these markets, we sell into a variety of other markets, including general industrial, wireless infrastructure and mass transit.

Our growth strategy is based on addressing trends in these markets and applying our repeatable customer engagement process. Our sales engineers and technical service employees work closely with our customers to understand their complex challenges. They then leverage our innovation and technology capabilities and deep applications expertise to provide unique solutions to customers’ challenges. In addition to these capabilities, our strategy for success is also built on our reputation for high performance and reliability, trusted customer relationships and an expansive product portfolio. Through this strategy we expect to be able to drive further commercial wins, which provide the potential for higher growth in the future. This growth strategy is enabled by both organic and inorganic investments from which we strive to ensure high-quality solutions for our customers.

Our operational excellence efforts are focused on driving ongoing cost structure improvements to further enhance our profitability. These efforts include focusing on improving yields, throughput, procurement capabilities, and manufacturing processes. We have also taken specific cost improvement actions in recent quarters that have and will benefit our performance. These actions include optimizing our manufacturing footprint, divesting non-core product lines and reducing 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, over the next several years, to meaningfully increase revenues from current levels and further improve profitability. The increase in revenues is expected to come from a combination of organic growth and targeted acquisitions. This outlook is supported by our participation in a number of growth markets and by our 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 increase at a compound annual growth rate of between 10% and 15% over the next several years. Within the EV/HEV market, we believe our advanced battery cell pads and ceramic substrates provide multiple content opportunities to capitalize on this growth. Other markets with good growth trajectories include ADAS, aerospace and defense, portable electronics and renewable energy.

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Executive Summary

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

•In 2024 as compared to 2023, our net sales decreased by 8.6% to $830.1 million, our gross margin decreased 40 basis points to 33.4% from 33.8%, and operating income as a percentage of net sales decreased 640 basis points to 3.0% from 9.4%.

•We entered into and executed the JV Separation Agreement with INOAC, which resulted in gains of $7.7 million recorded in Other income (expense), net.

•We recognized restructuring charges of $16.2 million in 2024 primarily related to our manufacturing footprint consolidation plan and our reduction in global workforce plan.

•We recognized impairment charges of $7.9 million in 2024, primarily related to our new ERP system still in development.

•We made $30.0 million of discretionary principal payments on our revolving credit facility in 2024.

•We repurchased 0.2 million shares of our capital stock for $19.8 million in 2024.

Results of Operations

The following table sets forth, for the periods indicated, selected operations data expressed as a percentage of net sales:

Net Sales and Gross Margin

Net sales decreased by 8.6% in 2024 compared to 2023. Our AES and EMS operating segments had net sales decreases of 11.3% and 4.8%, respectively. The decrease in net sales was primarily due to lower net sales in the EV/HEV, industrial, ADAS and renewable energy markets, partially offset by higher net sales in the wireless infrastructure and aerospace and defense markets. We experienced lower EV/HEV net sales in our AES operating segment as customers continued to manage inventory levels and adjusted to softer end market demand and we experienced lower industrial net sales in our EMS operating segment primarily due to the non-recurrence of a one-time bulk purchase by a customer in 2023.

Gross margin in 2024 declined due to lower volume and unfavorable mix, partially offset by reduction in manufacturing spend, scrap and yield improvements and lower inventory reserves provisions. Gross margin as a percentage of net sales decreased 40 basis points to 33.4% in 2024 compared to 33.8% in 2023.

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Selling, General and Administrative Expenses

SG&A expenses decreased 4.4% in 2024 from 2023, primarily due to a $9.5 million decrease in professional services expense, partially offset by the non-recurrence of the $0.7 million gain on the sale of our high-performance engineered cellular elastomer business in 2023.

The decrease in professional services expense was primarily attributable to the non-recurrence of the $7.6 million of non-routine shareholder advisory costs and the $1.1 million of expenses in connection with the sale of our high-performance engineered cellular elastomer business, both of which were incurred in 2023.

Research and Development Expenses

R&D expenses decreased 3.1% in 2024 from 2023, primarily due to a $1.0 million decrease in compensation and benefits and a $0.8 million decrease in professional services expense, partially offset by a $0.7 million increase in trial costs for alternative raw materials.

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

We recognized $16.2 million and $16.9 million of restructuring charges in 2024 and 2023, respectively. The restructuring charges in 2024 were related to manufacturing footprint consolidation efforts, which impacted our Evergem, Belgium facility, along with the reduction in global workforce plan announced in November 2024 and the R&D facility exit plan announced in June 2024. The restructuring charges in 2023 were related to the reduction in global workforce and facility consolidation plans announced in February 2023. We recognized $7.9 million of impairment charges in 2024, which were primarily related to our new ERP system still in development.

With respect to other operating (income) expense, net, we recognized expense of $0.1 million and income of $33.1 million in 2024 and 2023, respectively. The income recognized in 2023 was primarily related to insurance recoveries from the fire at our UTIS manufacturing facility in Ansan, South Korea.

For additional information, refer to “Note 14 – Supplemental Financial Information” to “Item 8. Financial Statements and Supplementary Data.”

Equity Income in Unconsolidated Joint Ventures

Up until November 5, 2024, we had two unconsolidated JVs, each 50% owned: RIC and RIS. Equity income in those unconsolidated JVs decreased 22.2% in 2024 from 2023 due to lower net sales for RIC and RIS, which was primarily driven by the portable electronics market in Asia, a change in the business model for RIS to subcontracting manufacturing in the second half of 2023, as well as the discontinuation of the JV relationships in November 2024. For additional information, refer to “Note 16 – Mergers and Acquisitions” to “Item 8. Financial Statements and Supplementary Data.”

Other Income (Expense), Net

Other income (expense), net increased to $8.8 million of income in 2024 compared to $0.7 million of expense in 2023. The increase was due to the recognition of $7.7 million of gains in connection to the execution of the JV Separation Agreement with INOAC, as well as a favorable year-over-year change in impacts from our foreign currency transactions, partially offset by an unfavorable year-over-year change in impacts from our foreign currency derivatives.

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Interest Expense, Net

Interest expense, net, decreased by $9.3 million in 2024 from 2023, due to a lower weighted-average outstanding balance for our borrowings under our revolving credit facility.

Income Tax Expense

Our effective income tax rate for 2024 was 23.9% compared to 25.8% for 2023. The decrease from 2023 was primarily due to the (i) release of valuation allowance against certain NOLs, (ii) JV Separation which did not have a corresponding tax gain and (iii) favorable releases of uncertain tax positions, offset by (iv) increased non-deductible equity compensation.

Operating Segment Net Sales and Gross Margin

Advanced Electronics Solutions

Our AES operating segment net sales decreased by 11.3% in 2024 compared to 2023. The decrease in net sales was primarily driven by lower net sales in the EV/HEV, industrial power systems, ADAS and renewable energy markets, partially offset by higher net sales in the wireless infrastructure and aerospace and defense markets. We experienced lower EV/HEV net sales as customers continued to manage inventory levels and adjusted to softer end market demand.

Our AES operating segment net sales decreased by 3.9% in 2023 compared to 2022. The decrease in net sales was primarily driven by lower net sales in the power interconnects EV/HEV, aerospace and defense, wireless infrastructure and portable electronics markets, partially offset by higher net sales in the power substrates EV/HEV, renewable energy and ADAS markets. Net sales were favorably impacted by foreign currency fluctuations of $0.7 million, or 0.1%, due to the appreciation in value of the euro relative to the U.S. dollar, partially offset by the depreciation in value of Chinese renminbi relative to the U.S. dollar.

Our AES operating segment gross margin in 2024 declined due to lower volume and unfavorable mix, which was partially offset by lower manufacturing spend. As a percentage of net sales, gross margin in 2024 was 29.3% as compared to 30.9% in 2023.

Our AES operating segment gross margin in 2023 declined due to lower volumes and unfavorable mix, unfavorable yield performance and higher inventory reserves provisions, which was partially offset by lower freight, duties and tariffs costs, lower raw material costs and favorable factory optimization efforts. As a percentage of net sales, gross margin in 2023 was 30.9% as compared to 32.3% in 2022.

Elastomeric Material Solutions

Our EMS operating segment net sales decreased by 4.8% in 2024 compared to 2023. The decrease in net sales was primarily driven by lower net sales in the industrial market, partially offset by higher net sales in the EV/HEV market. We experienced lower industrial net sales primarily due to the non-recurrence of a one-time bulk purchase by a customer in 2023.

Our EMS operating segment net sales decreased by 9.8% in 2023 compared to 2022. The decrease in net sales was primarily driven by lower net sales in the general industrial, consumer, portable electronics and EV/HEV markets, partially offset by higher net sales in the aerospace and defense market. Net sales were unfavorably impacted by foreign currency fluctuations of $3.6 million, or 0.9%, due to the depreciation in value of Chinese renminbi relative to the U.S. dollar, partially offset by the appreciation in value of the euro relative to the U.S. dollar.

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Our EMS operating segment gross margin in 2024 improved due to scrap and yield improvements and lower inventory reserves provisions, which was partially offset by lower volume and unfavorable mix. As a percentage of net sales, gross margin in 2024 was 38.4% as compared to 37.5% in 2023.

Our EMS operating segment gross margin in 2023 improved due to lower freight, duties and tariffs costs, lower raw material costs and favorable factory optimization efforts, which was partially offset by lower volumes, unfavorable yield performance and higher inventory reserves provisions. As a percentage of net sales, gross margin in 2023 was 37.5% as compared to 33.7% in 2022.

Other

Net sales in our Other operating segment decreased by 13.7% in 2024 from 2023. Our Other operating segment gross margin in 2024 declined due to unfavorable impacts from lower volume and unfavorable factory utilization. As a percentage of net sales, gross margin in 2024 was 35.3%, an approximately 280 basis point decrease as compared to 38.1% in 2023.

Net sales in our Other operating segment decreased by 6.2% in 2023 from 2022. Net sales were unfavorably impacted by foreign currency fluctuations of $0.4 million, or 2.0%, due to the depreciation in value of Chinese renminbi relative to the U.S. dollar. Our Other operating segment gross margin improved in 2023 due to lower freight, duties and tariffs costs, partially offset by lower volume and unfavorable factory utilization. As a percentage of net sales, gross margin in 2023 was 38.1%, an approximately 50 basis point increase as compared to 37.6% in 2022.

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:

Approximately $75.1 million of our cash and cash equivalents were held by non-U.S. subsidiaries as of December 31, 2024. We did not make any changes in 2024 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 is held, we continue to assert that historical foreign earnings are indefinitely reinvested.

Net working capital was $370.4 million and $410.5 million as of December 31, 2024 and 2023, respectively.

Key Financial Position Accounts

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Significant changes in our statement of financial position accounts from December 31, 2023 to December 31, 2024 were as follows:

•Cash and cash equivalents were $159.8 million as compared to $131.7 million as of December 31, 2023, an increase of $28.1 million, or 21.3%. This increase was primarily due to $127.1 million of net cash flow provided by operations, partially offset by $56.1 million in capital expenditures, $30.0 million in discretionary principal payments on our revolving credit facility, $19.8 million in share repurchases and $1.4 million in tax payments related to net share settlement of equity awards.

•Accounts receivable, net decreased 16.4% to $135.3 million as of December 31, 2024, from $161.9 million as of December 31, 2023. The decrease from year-end was primarily due to lower net sales at the end of 2024 compared to at the end of 2023 and lower days sales outstanding, as well as a $4.1 million receipt of previously recognized UTIS fire insurance receivables for our business interruption claims.

•Inventories, net decreased 7.3% to $142.3 million as of December 31, 2024, from $153.5 million as of December 31, 2023, primarily driven by lower raw materials and work-in-process levels, combined with higher inventory reserves provisions, partially offset by higher finished goods levels.

•Borrowings under revolving credit facility were nil as of December 31, 2024, compared to $30.0 million as of December 31, 2023. The decrease was due to $30.0 million in discretionary principal payments on our revolving credit facility made in early 2024. For additional information regarding this facility, as well as the Fifth Amended Credit Agreement, refer to “Note 9 – Debt” to “Item 8. Financial Statements and Supplementary Data.”

In 2025, we expect capital spending to be in the range of approximately $40.0 million to $50.0 million, of which we are contractually committed to $2.9 million as of December 31, 2024. We plan to fund our capital spending in 2025 with cash from operations and cash on-hand, as well as our existing revolving credit facility, if necessary.

Excluding $3.0 million of inventory purchase commitments, there are no contractual obligations requiring material cash requirements in 2025 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 6 – Leases” and “Note 8 – Postretirement Benefits,” 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 Fifth 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, 2024. For additional information regarding the Fifth 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. GAAP, 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 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:

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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 recoverables 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 recoverables, with any difference between the liability and related insurance recoverable recognized as an expense in the consolidated statements of operations. Our estimates of asbestos-related contingent liabilities and related insurance recoverables are based on a claim projection analysis and an insurance usage analysis prepared annually by third parties. The claim projection analysis contains numerous assumptions, including number of claims that might be received, the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, average indemnity costs, average defense costs, costs of medical treatment, the financial resources of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards, including potential tort reform. Furthermore, any predictions with respect to these assumptions are subject to even greater uncertainty as the projection period lengthens. The insurance usage analysis considers, among other things, applicable deductibles, retentions and policy limits, the solvency and historical payment experience of various insurance carriers, the likelihood of recovery as estimated by external legal counsel and existing insurance settlements.

The liability projection period covers all current and future indemnity and defense costs through 2064, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. This conclusion was based on our history and experience with the claims data, the diminished volatility and consistency of observable claims data, the period of time that has elapsed since we stopped manufacturing products that contained encapsulated asbestos and an expected downward trend in claims due to the average age of our claimants, which is approaching the average life expectancy.

Our accrued asbestos liabilities may not approximate our actual asbestos-related indemnity and defense costs, and our accrued insurance recoveries may not be realized. We believe it is reasonably possible that we may incur additional charges for our asbestos liabilities and defense costs in the future that could exceed existing reserves and insurance recoveries. We plan to continue to vigorously defend ourselves and believe we have substantial unutilized insurance coverage to mitigate future costs related to this matter.

We review our asbestos-related projections annually in the fourth quarter of each year unless facts and circumstances materially change during the year, at which time we would analyze these projections. We believe the assumptions made on the potential exposure and expected insurance coverage are reasonable at the present time, but are subject to uncertainty based on the actual future outcome of our asbestos litigation.

As of December 31, 2024, the estimated liabilities and estimated insurance recoveries for all current and future indemnity and defense costs projected through 2064 were $57.5 million and $52.3 million, respectively.

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