Rogers Corp: Form 10-Q for the period ended Jun 30, 2023

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 Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such statements are generally accompanied by words such as “anticipate,” “assume,” “believe,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “seek,” “target” or similar expressions that convey uncertainty as to future events or outcomes. Forward-looking statements are based on assumptions and beliefs that we believe to be reasonable; however, assumed facts almost always vary from actual results, and the differences between assumed facts and actual results could be material depending upon the circumstances. Where we express an expectation or belief as to future results, that expectation or belief is expressed in good faith and based on assumptions believed to have a reasonable basis. We cannot assure you, however, that the stated expectation or belief will occur or be achieved or accomplished. Among the factors that could cause our results to differ materially from those indicated by forward-looking statements are risks and uncertainties inherent in our business including, without limitation:

• the duration and impacts of the novel coronavirus (COVID-19) global pandemic and efforts to contain its transmission and distribute vaccines, including the effect of these factors on our business, suppliers, supply chains, 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;
• failure to successfully execute on the Company’s long-term growth strategy as a standalone company;
• uncertain business, economic and political conditions in the United States (U.S.) and abroad, particularly in China, Germany, Belgium, England, South Korea and Hungary where we maintain significant manufacturing, sales or administrative operations;
• the trade policy dynamics between the U.S. and China reflected in trade agreement negotiations, the imposition of tariffs and other trade restrictions, as well as the potential for U.S.-China supply chain decoupling;
• fluctuations in foreign currency exchange rates;
• our ability to develop innovative products and the extent to which they are incorporated into end-user products and systems;
• the extent to which end-user products and systems incorporating our products achieve commercial success;
• the ability and willingness of our sole or limited source suppliers to deliver certain key raw materials, including commodities, to us in a timely and cost-effective manner;
• intense global competition affecting both our existing products and products currently under development;
• business interruptions due to catastrophes or other similar events, such as natural disasters, war, terrorism or public health crises;
• the impact of sanctions, export controls and other foreign asset or investment restriction;
• 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;
• disruptions in, or breaches of, our information technology systems; and
• our terminated merger with DuPont de Nemours, Inc. (DuPont), which may cause us to incur substantial costs that may adversely affect our financial results and operations and the market price of our capital stock, including as a result of litigation.

Our forward-looking statements are expressly qualified by these cautionary statements, which you should consider carefully, along with the risks discussed in this section and elsewhere in this report, including under the section entitled “Risk Factors” in Part II, Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 2022 (the Annual Report) and our other reports filed with the Securities and Exchange Commission, any of which could cause actual results to differ materially from historical results or anticipated results. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q along with our audited consolidated financial statements and the related notes thereto in our Annual Report.

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, the growth of 5G smartphones in the portable electronics industry and in 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 as a manufacturer of engineered materials and components is also built on our reputation for high performance and reliability solutions, trusted customer relationships, a broad product portfolio and custom design capabilities. 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 half 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 between 20% and 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 opportunity pipeline, which provides confidence in our growth outlook. Other markets with a strong growth trajectory include ADAS, aerospace and defense, portable electronics and renewable energy. Each of these markets is expected to contribute to our growth.

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 of 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.

COVID-19 Update

The global COVID-19 pandemic has affected and continues to affect Rogers’ business, operations and demand from customers. Surges in COVID-19 cases in China during 2022 resulted in lockdowns as well as various restrictions. These measures have not disrupted our manufacturing efforts, however, they have caused logistics challenges. Even since China ended its zero COVID policy in late 2022, although a significant percentage of our employees in Suzhou, China were diagnosed with COVID, our manufacturing has not been materially disrupted and to date we have received no reports of permanent disability or death among our employees. We expect that the COVID-19 pandemic will have a continuing but uncertain impact on our business and operations in the short- and medium-term.

Due to the above circumstances and as described generally in this Form 10-Q, our results of operations for the six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the full year.

Executive Summary

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

• In the second quarter of 2023 as compared to the second quarter of 2022, our net sales decreased approximately 8.4% to $230.8 million, our gross margin increased approximately 20 basis points to 34.5% from 34.3%, and we had an operating income of 12.1% compared to operating income of 9.3%, an approximately 280 basis points increase.
• We made a $60.0 million discretionary principal payment on our revolving credit facility in the second quarter of 2023.
• We recognized restructuring charges of $3.9 million in the second quarter of 2023 related to the previously announced reduction in force plan of our global workforce and facility consolidation plans that were substantially completed as of June 30, 2023.
• On February 17, 2023, we entered into an asset purchase agreement to sell our high-performance engineered cellular elastomer business for a purchase price of $1.8 million. The first phase of the deal was completed in late March 2023, while the second phase is expected to be completed in the third quarter of 2023. The second phase of the deal pertains to the sale of the land and building to the buyer of the high-performance engineered cellular elastomer business.
• On July 14, 2023, we entered into an asset purchase agreement to sell the Price Road facility for $18.8 million, which is expected to close late in the third quarter of 2023.

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

(Dollars in thousands)

Net sales decreased by 8.4% in the second quarter of 2023 compared to the second quarter of 2022. Our AES and EMS operating segments had net sales decreases of 7.8% and 9.3%, respectively. The decrease in net sales was primarily due to lower net sales in the wireless infrastructure, aerospace and defense and portable electronics markets in our AES operating segment and lower net sales in the general industrial, portable electronics, EV/HEV and automotive markets in our EMS operating segment. The decrease was partially offset by higher net sales in the renewable energy and EV/HEV markets in our AES operating segment and higher net sales in the aerospace and defense market in our EMS operating segment. Net sales were unfavorably impacted by foreign currency impacts of $2.2 million, or 0.9%, due to the depreciation in value of the Chinese renminbi and the British pound relative to the U.S. dollar, partially offset by the appreciation in value of the euro relative to the U.S. dollar.

Net sales decreased by 5.1% in the first half of 2023 compared to the first half of 2022. Our AES and EMS operating segments had net sales decreases of 3.0% and 8.2%, respectively. The decrease in net sales was primarily due to lower net sales in the wireless infrastructure, aerospace and defense and portable electronics markets in our AES operating segment and lower net sales in the general industrial, portable electronics, EV/HEV and automotive markets in our EMS operating segment. The decrease was partially offset by higher net sales in the EV/HEV and renewable energy markets in our AES operating segment and higher net sales in the aerospace and defense market in our EMS operating segment. Net sales were unfavorably impacted by foreign currency impacts of $9.6 million, or 1.9%, due to the depreciation in value of the Chinese renminbi, euro and the British pound relative to the U.S. dollar.

Gross margin as a percentage of net sales increased approximately 20 basis points to 34.5% in the second quarter of 2023 compared to 34.3% in the second quarter of 2022. Gross margin in the second quarter of 2023 improved due to lower freight, duties and tariffs costs in our AES and EMS operating segments, as well as favorable factory utilization in our EMS operating segment. This was partially offset by the unfavorable impacts from lower volume and unfavorable mix, as well as unfavorable yield performance and higher inventory reserves provisions in our AES and EMS operating segments, and unfavorable factory utilization in our AES operating segment.

Gross margin as a percentage of net sales decreased approximately 80 basis points to 33.6% in the first half of 2023 compared to 34.4% in the first half of 2022. Gross margin in the first half of 2023 was unfavorably impacted by lower volume and unfavorable mix, as well as higher inventory reserves provisions and unfavorable factory utilization in our AES and EMS operating segments, and unfavorable yield performance in our EMS operating segment. This was partially offset by lower freight, duties and tariffs costs in our AES and EMS operating segments.

Selling, General and Administrative Expenses

(Dollars in thousands)

Selling, general and administrative (SG&A) expenses decreased 17.8% in the second quarter of 2023 from the second quarter of 2022, primarily due to a $5.6 million decrease in professional services, a $1.5 million decrease in total compensation and benefits, a $0.9 million decrease in other intangible asset amortization expense and $0.4 million decrease in fixed asset depreciation expense.

SG&A expenses decreased 6.7% in the first half of 2023 from the first half of 2022, primarily due to a $9.4 million decrease in total compensation and benefits, a $1.9 million decrease in other intangible asset amortization expense, partially offset by a $2.7 million increase in professional services, a $0.5 million increase in fixed asset depreciation expense and $0.3 million increase in travel expenses.

The decrease in total compensation and benefits was primarily due to a $0.7 million decrease in the impact for retention awards issued in connection with the terminated DuPont merger, on a quarter-to-date basis, and the $6.5 million discretionary RESIP contribution in 2022 and a $1.6 million decrease in the impact for retention awards issued in connection with the terminated DuPont merger on a year-to-date basis. The decrease in professional services expense on a quarter-to-date basis was partially due to a $1.1 million decrease in expenses incurred related to the terminated merger with DuPont and $0.1 million decrease in expenses incurred related to our acquisition of Silicone Engineering. The increase in professional services expense on a year-to-date basis was primarily due to $7.6 million of expenses related to non-routine shareholder advisory costs and $1.0 million of expenses in connection with the sale of our high-performance engineered cellular elastomer business, partially offset by a $3.9 million decrease in expenses incurred related to the terminated merger with DuPont and $0.1 million decrease in expenses incurred related to our acquisition of Silicone Engineering.

Research and Development Expenses

(Dollars in thousands)

R&D expenses increased 0.6% in the second quarter of 2023 from the second quarter of 2022 due to an increase in trial costs for alternative raw materials, almost entirely offset by a decrease in total compensation and benefits expense and a decrease in professional services.

R&D expenses increased 8.4% in the first half of 2023 from the first half of 2022 due to an increase in trial costs for alternative raw materials, partially offset by a decrease in professional services.

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

(Dollars in thousands)

We incurred restructuring charges and related expenses associated with the announced reduction in force plan of our global workforce along with certain facility consolidation efforts, which were substantially completed as of June 30, 2023. The plans are expected to significantly reduce our manufacturing costs and operating expenses. We recognized restructuring charges and related expenses pertaining to these restructuring projects of $3.9 million in the second quarter of 2023 and $14.4 million in the first half of 2023. For additional information, refer to “Note 15 – Supplemental Financial Information” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

With respect to other operating (income) expense, net, we recognized income of $6.4 million and income of $1.7 million in the second quarter of 2023 and 2022, respectively, and income of $6.7 million and income of $2.3 million in the first half of 2023 and 2022, respectively. The impact in the second quarter of 2023 and 2022 and the first half of 2023 and 2022, primarily consisted of insurance recoveries, partially offset by professional service costs, compensation and benefits for certain of our UTIS employees, costs incurred under our manufacturing facility lease agreement and inventory charges. For additional information, refer to “Note 15 – Supplemental Financial Information” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Equity Income in Unconsolidated Joint Ventures

(Dollars in thousands)

As of June 30, 2023, 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 53.2% in the second quarter of 2023 from the second quarter of 2022, and decreased 70.1% in the first half of 2023 from the first half of 2022. On quarter-to-date and year-to-date bases, the decrease was due to lower net sales and unfavorable productivity performance for RIC and RIS. The lower net sales for both RIC and RIS was primarily drive by the portable electronics market in Asia.

Other Income (Expense), Net

(Dollars in thousands)

Other income (expense), net decreased to expense of less than $0.8 million in the second quarter of 2023 from income of $0.3 million in the second quarter of 2022. On a quarter-to-date basis, the decrease was due to the unfavorable impacts from our foreign currency transactions, partially offset by favorable impacts from our foreign currency derivatives and the favorable impacts from our copper derivative contracts.

Other income (expense), net decreased to expense of $0.8 million in the first half of 2023 from income of $0.6 million in the first half of 2022. On a year-to-date basis, the decrease was due to unfavorable impacts from our foreign currency transactions, partially offset by favorable impacts from our foreign currency derivatives and the favorable impacts from our copper derivative contracts.

Interest Expense, Net

(Dollars in thousands)

Interest expense, net, increased by $1.3 million in the second quarter of 2023 from the second quarter of 2022, and increased by $3.7 million in the first half of 2023 from the first half of 2022. The increase on quarter-to-date and year-to-date bases was primarily due to a higher weighted-average interest rate.

Income Taxes

(Dollars in thousands)

Our effective income tax rate was 28.9% and 25.4% for the three months ended June 30, 2023 and 2022, respectively. The increase from the second quarter of 2022 was primarily due to the increase in the valuation allowance attributable to loss jurisdictions in which no benefit is anticipated to be realized. Our effective income tax rate was 33.2% and 22.2% for the six months ended June 30, 2023 and 2022, respectively. The increase from the first half of 2022 was primarily due to the increase in the valuation allowance attributable to loss jurisdictions in which no benefit is anticipated to be realized and the decrease in the excess tax benefits associated with stock compensation windfalls.

Operating Segment Net Sales and Operating Income

Advanced Electronics Solutions

(Dollars in thousands)

AES net sales decreased by 7.8% in the second quarter of 2023 compared to the second quarter of 2022. The decrease in net sales over the second quarter of 2022 was primarily driven by lower net sales in the wireless infrastructure, aerospace and defense and portable electronics markets, partially offset by higher net sales in the renewable energy and EV/HEV markets. Net sales were unfavorably impacted by foreign currency fluctuations of $0.6 million, or 0.4%, due to the depreciation in value of the Chinese renminbi relative to the U.S. dollar, partially offset by the appreciation in value of the euro relative to the U.S. dollar.

AES net sales decreased by 3.0% in the first half of 2023 compared to the first half of 2022. The decrease in net sales over the first half of 2022 was primarily driven by lower net sales in the wireless infrastructure, aerospace and defense and portable electronics markets, partially offset by higher net sales in the EV/HEV and renewable energy markets. Net sales were unfavorably impacted by foreign currency fluctuations of $4.9 million, or 1.8%, due to the depreciation in value of Chinese renminbi and the euro relative to the U.S. dollar.

We recognized operating income of $5.8 million in the second quarter of 2023 compared to operating income of $8.8 million in the second quarter of 2022. The decrease in operating income was primarily due to unfavorable year-over-year changes in restructuring charges, partially offset by a year-over-year decrease in costs related to the terminated DuPont merger. The decrease in operating income was also due to lower volume and unfavorable mix, as well as unfavorable yield performance, higher inventory reserves provisions and unfavorable factory utilization. This was partially offset by lower freight, duties and tariffs costs. As a percentage of net sales, the operating income in the second quarter of 2023 was 4.5% compared to 6.2% of operating income reported in the second quarter of 2022.

We recognized operating income of $0.3 million in the first half of 2023 compared to operating income of $10.1 million in the first half of 2022. The decrease in operating income was primarily due to unfavorable year-over-year changes in restructuring charges and shared service operating expense allocations driven by non-routine shareholder advisory costs, partially offset by a year-over-year decrease in costs related to the terminated DuPont merger. The decrease in operating income was also due to lower volume and unfavorable mix, as well as higher inventory reserves provisions and unfavorable factory utilization. This was partially offset by lower freight, duties and tariffs costs. As a percentage of net sales, operating income in the first half of 2023 was 0.1% compared to 3.7% of operating income reported in the first half of 2022.

Elastomeric Material Solutions

(Dollars in thousands)

EMS net sales decreased by 9.3% in the second quarter of 2023 compared to the second quarter of 2022. The decrease in net sales over the second quarter of 2022 was primarily driven by lower net sales in the general industrial, portable electronics, EV/HEV and automotive markets, partially offset by higher net sales in the aerospace and defense market. Net sales were unfavorably impacted by foreign currency fluctuations of $1.5 million, or 1.4%, due to the depreciation in value of the Chinese renminbi and the British pound relative to the U.S. dollar.

EMS net sales decreased by 8.2% in the first half of 2023 compared to the first half of 2022. The decrease in net sales over the first half of 2022 was primarily driven by lower net sales in the general industrial, portable electronics, EV/HEV and automotive markets, partially offset by higher net sales in the aerospace and defense market. Net sales were unfavorably impacted by foreign currency fluctuations of $4.4 million, or 2.0%, due to the depreciation in value of Chinese renminbi, the euro and the British pound relative to the U.S. dollar.

We recognized operating income of $20.2 million in the second quarter of 2023 compared to operating income of $12.6 million in the second quarter of 2022. The increase in operating income was primarily due to a year-over-year decrease in costs related to the terminated DuPont merger, partially offset by unfavorable year-over-year changes in restructuring charges. The increase in operating income was also due to lower freight, duties and tariffs costs and favorable factory utilization, in addition to a $4.2 million favorable change in charges/benefits related to the UTIS fire. This was partially offset by lower volume, as well as unfavorable yield performance and higher inventory reserves provisions. As a percentage of net sales, operating income in the second quarter of 2023 was 21.2% compared to 12.0% reported in the second quarter of 2022.

We recognized operating income of $23.4 million in the first half of 2023 compared to operating income of $29.6 million in the first half of 2022. The decrease in operating income was primarily due to unfavorable year-over-year changes in restructuring charges and shared service operating expense allocations driven by non-routine shareholder advisory costs, partially offset by a year-over-year decrease in costs related to the terminated DuPont merger. The decrease in operating income was also due to lower volume, as well as higher inventory reserves provisions, unfavorable factory utilization and unfavorable yield performance. This was partially offset by lower freight, duties and tariffs costs, in addition to a $3.9 million favorable change in charges/benefits related to the UTIS fire. As a percentage of net sales, operating income in the first half of 2023 was 11.9% compared to 13.7% reported in the first half of 2022.

Other

(Dollars in thousands)

Net sales in this segment decreased by 7.3% in the second quarter of 2023 from the second quarter of 2022. Operating income decreased 9.3% in the second quarter of 2023 compared to the second quarter of 2022. The decrease in operating income was primarily driven by lower volume, partially offset by lower freight, duties and tariffs costs. As a percentage of net sales, operating income in the second quarter of 2023 was 34.6% compared to 35.3% in the second quarter of 2022.

Net sales in this segment increased by 4.3% in the first half of 2023 from the first half of 2022. Operating income increased 7.3% in the first half of 2023 compared to the first half of 2022. The increase in operating income was primarily driven by lower freight, duties and tariffs costs. As a percentage of net sales, operating income in the first half of 2023 was 35.1% compared to 34.1% in the first half of 2022.

Liquidity, Capital Resources and Financial Position

We believe that our existing sources of liquidity and cash flows that we expect to generate from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, research and development efforts and our debt service commitments, for at least the next 12 months. We regularly review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships in an effort to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives.

The following table illustrates the location of our cash and cash equivalents by our three major geographic areas:

(Dollars in thousands)

Approximately $101.4 million of our cash and cash equivalents were held by non-U.S. subsidiaries as of June 30, 2023. We did not make any changes in the six months ended June 30, 2023 to our position on the permanent reinvestment of our earnings from foreign operations. With the exception of certain of our Chinese subsidiaries, where a substantial portion of our Asia cash and cash equivalents are held, we continue to assert that historical foreign earnings are indefinitely reinvested.

(Dollars in thousands)

31

Changes in key financial position accounts and other significant changes in our statements of financial position from December 31, 2022 to June 30, 2023 were as follows:

• Cash and cash equivalents were $141.5 million as compared to $235.9 million as of December 31, 2022, a decrease of $94.4 million, or 40.0%. This decrease was primarily due to $85.0 million in discretionary principal payments on our revolving credit facility, $27.9 million in capital expenditures and $2.5 million in tax payments related to net share settlement of equity awards, partially offset by cash flows provided by operations.
• Accounts receivable, net increased 5.2% to $186.7 million as of June 30, 2023 from $177.4 million as of December 31, 2022. The increase from year-end was primarily due to higher net sales at the end of the second quarter of 2023 compared to at the end of 2022 and the recognition of $3.9 million in UTIS fire insurance receivables for property damage claims, partially offset by a $4.7 million decrease in our income taxes receivable.
• Inventories decreased 7.0% to $169.7 million as of June 30, 2023, from $182.4 million as of December 31, 2022, primarily driven by a reduction in finished goods stock as well as higher inventory reserves provisions.
• Borrowings under revolving credit facility were $130.0 million as of June 30, 2023 compared to $215.0 million as of December 31, 2022. This decrease was due to $85.0 million in discretionary principal payments on our revolving credit facility made in the first half of 2023. For additional information regarding this facility and the Fifth Amended Credit Agreement, refer to “Note 9 – Debt” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

(Dollars in thousands)

In 2023, we expect capital spending to be in the range of approximately $65.0 million to $75.0 million. 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.

Restrictions 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 June 30, 2023.

Contingencies

During the second quarter of 2023, we did not become aware of any material developments related to environmental matters disclosed in our Annual Report, our asbestos litigation or other material contingencies previously disclosed or incur any material costs or capital expenditures related to such matters. Refer to “Note 12 – Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for further discussion of these contingencies.

Critical Accounting Policies

There were no material changes in our critical accounting policies during the second quarter of 2023.

There have been no material changes in our exposure to market risk during the second quarter of 2023. For discussion of our exposure to market risk, refer to “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2023. The Company’s disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.