- Annual Report (10-K)
2011年5月20日 - 10:02PM
Edgar (US Regulatory)
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TABLE OF CONTENTS
PART IV
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 2011
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File Number: 001-15491
KEMET Corporation
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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57-0923789
(I.R.S. Employer
Identification No.)
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2835 Kemet Way, Simpsonville, South Carolina
(Address of principal executive offices)
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29681
(Zip Code)
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Registrant's
telephone number, including area code:
(864) 963-6300
Securities
registered pursuant to Section 12(b) of the Act:
None.
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 332.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a
smaller reporting company)
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Smaller reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
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No
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Aggregate market value of voting common stock held by non-affiliates of the registrant as of September 30, 2010, computed by reference to the
closing sale price of the registrant's common stock was approximately $264,127,461.
Number
of shares of each class of common stock outstanding as of May 18, 2011: common stock, $0.01 par value, 37,146,787.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of Shareholders to be held July 27, 2011 are incorporated by
reference in Part III of this report.
Table of Contents
Index
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Table of Contents
PART I
ITEM 1. BUSINESS
General
We are a leading global manufacturer of a wide variety of capacitors. Our product offerings include tantalum, multilayer ceramic, solid
and electrolytic aluminum and film and paper capacitors. Capacitors are fundamental components of most electronic circuits and are found in communication systems, data processing equipment, personal
computers, cellular phones, automotive electronic systems, defense and aerospace systems, consumer electronics, power management systems and many other electronic devices and systems. Capacitors are
typically used to filter out interference, smooth the output of power supplies, block the flow of direct current while allowing alternating current to pass and for many other purposes. We manufacture
a broad line of capacitors in many different sizes and configurations using a variety of raw materials. Our product line consists of over 250,000 distinct part configurations distinguished by various
attributes, such as dielectric (or insulating) material, configuration, encapsulation, capacitance level and tolerance, performance characteristics and packaging. Most of our customers have multiple
capacitance requirements, often within each of their products. Our broad product offering allows us to meet the majority of those needs independent of application and end use. In fiscal year 2011,
2010, and 2009 we shipped 35 billion capacitors, 31 billion capacitors, and 32 billion capacitors, respectively. We believe the medium-to-long term demand
for the various types of capacitors we offer will continue to grow on a regional and global basis due to a variety of factors, including increasing demand for and complexity of electronic products,
growing demand for technology in emerging markets and the ongoing development of new solutions for energy generation and conservation. As used in this report, the terms "we", "us", "our", "KEMET" and
the "Company" refer to KEMET Corporation and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise.
We
operate 22 production facilities in Europe, Mexico, China, the United States and Indonesia and employ nearly 11,000 employees worldwide. Our customer base includes most of the world's
major electronics original equipment manufacturers ("OEMs") (including Alcatel-Lucent USA Inc., Apple Inc., Bosch Group, Cisco Systems, Inc., Continental AG, Dell Inc.,
Hewlett-Packard Company, International Business Machines Corporation, Intel Corporation, Motorola, Inc., Nokia Corporation, and TRW Automotive Holdings Corporation), electronics manufacturing
services providers ("EMSs") (including Celestica Inc., Elcoteq SE, Flextronics International Ltd., Jabil Circuit, Inc. and Sanmina-SCI Corporation) and electronics
distributors (including TTI, Inc., Arrow Electronics, Inc. and Avnet, Inc.). For fiscal years 2011 and 2010, our consolidated net sales were $1,018.5 million and
$736.3 million, respectively.
Background of Company
KEMET's operations began in 1919 as a business of Union Carbide Corporation ("Union Carbide") to manufacture component parts for vacuum
tubes. In the 1950s, Bell Laboratories invented solid-state transistors along with tantalum capacitors and other passive components necessary for their operation. As vacuum tubes were gradually
replaced by transistors, we changed our manufacturing focus from vacuum tube parts to tantalum capacitors. We entered the market for tantalum capacitors in 1958 as one of approximately 25 United
States manufacturers. By 1966, we were the United States' market leader in tantalum capacitors. In 1969, we began production of ceramic capacitors as one of approximately 35 United States
manufacturers, and opened our first manufacturing facility in Mexico. In 2003, we expanded operations into Asia, opening our first facility in Suzhou, China. In fiscal year 2007, we acquired the
tantalum business unit of EPCOS AG ("EPCOS"). In fiscal year 2008, we acquired Evox Rifa Group Oyj ("Evox Rifa") and Arcotronics Italia S.p.A. ("Arcotronics") and, as a result, entered into
markets for film, electrolytic and paper capacitors. We are organized into three
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segments:
the Tantalum Business Group ("Tantalum"), the Ceramic Business Group ("Ceramic") and the Film and Electrolytic Business Group ("Film and Electrolytic").
KEMET
Corporation is a Delaware corporation that was formed in 1990 by certain members of the Company's management at the time, Citicorp Venture Capital, Ltd. and other investors
that acquired the outstanding common stock of KEMET Electronics Corporation from Union Carbide. In 1992, we publicly issued shares of our common stock. Today, our common stock trades on the NYSE under
the symbol "KEM".
Recent Developments
Net sales for the quarter ended March 31, 2011 were $261.5 million, which is a 22.8% increase over the same quarter last
fiscal year. Net income was $21.1 million, or $0.57 per basic share and $0.40 per diluted share for the fourth quarter of fiscal year 2011 compared to net income of $0.3 million or $0.01
per basic and diluted share for the same quarter last year.
On
November 3, 2010, our shareholders approved a reverse stock split of our common stock (the "Reverse Stock Split") at a ratio of 1-for-3. The Reverse
Stock Split became effective November 5, 2010 pursuant to a Certificate of Amendment to our Restated Certificate of Incorporation filed with the Secretary of State of Delaware. We had
27.1 million shares of common
stock issued and outstanding immediately following the completion of the Reverse Stock Split. We are authorized in the Restated Certificate of Incorporation to issue up to a total of
300.0 million shares of common stock at a $0.01 par value per share which was unchanged by the amendment. The Reverse Stock Split did not affect the registration of the common stock under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), or the listing of the common stock, under the symbol "KEM", although the post-split shares have a new CUSIP number. In the
Consolidated Balance Sheets, the line item "Stockholders' equity" has been retroactively adjusted to reflect the Reverse Stock Split for all periods presented by reducing the line item "Common stock"
and increasing the line item "Additional paid-in capital", with no change to Stockholders' equity in the aggregate. In the Statement of Shareholders' Equity, the columns "Common Stock" and
"Additional Paid-In Capital" have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented by reducing the column "Common stock" and increasing the column
"Additional paid-in capital", with no change to Stockholders' equity in the aggregate. All share and per share computations have been retroactively adjusted for all periods presented to
reflect the decrease in shares as a result of this transaction except as otherwise noted. Our board of directors intends to seek stockholder approval to reduce the number of authorized shares of
common stock from 300,000,000 to 175,000,000 at our next annual meeting of stockholders.
In
connection with a credit facility (as subsequently amended and restated, the "Platinum Credit Facility") we entered into in May 2009 with K Financing, LLC ("K Financing"), we
issued a warrant (which we sometimes refer to herein as the "Platinum Warrant") to K Financing, which was subsequently transferred to its affiliate K Equity, LLC ("K Equity"). K Financing and K
Equity are each affiliates of Platinum Equity Capital Partners II, L.P. The Platinum Warrant entitled K Equity to purchase up to 26,848,484 shares of our common stock, subject to certain
adjustments, which represented 49.9% of our common equity at the time of issuance on a post-exercise basis. On December 20, 2010, in connection with a secondary offering in which K
Equity was the selling security holder, K Equity sold a portion of the Platinum Warrant representing the right to purchase 10.9 million shares of our common stock to the underwriters of the
secondary offering, who exercised their full portion of the warrant in a cashless exercise, based on an exercise price of $1.05 per share and a closing price per share of $12.80, and received a net
settlement of 10.0 million shares of our common stock. These shares were sold as part of a secondary offering and KEMET did not receive any of the proceeds from the transaction. K Equity
retained the unsold portion of the warrant, representing the right to purchase 16.0 million shares of our common stock. In March 2011, the Company registered seven million shares subject to
issuance upon the partial exercise of the remaining Platinum Warrant.
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Issuance of 10.5% Senior Notes
On May 5, 2010, we completed a private placement of $230.0 million in aggregate principal amount of our 10.5% Senior
Notes due 2018 (the "10.5% Senior Notes"). The
private placement of the 10.5% Senior Notes resulted in proceeds to us of $222.2 million. We used a portion of the proceeds of the private placement to repay all of the outstanding indebtedness
under our credit facility with K Financing, our EUR 60 million credit facility and EUR 35 million credit facility with UniCredit and our term loan with a subsidiary of Vishay
Intertechnology, Inc. ("Vishay"). We used a portion of the remaining proceeds to fund a previously announced tender offer to purchase $40.5 million in aggregate principal amount of our
2.25% Convertible Senior Notes (the "Convertible Notes") and to pay costs incurred in connection with the private placement, the tender offer and the foregoing repayments. We incurred
$6.6 million in costs related to the execution of the offering.
On
October 26, 2010, we filed a Form S-4 to offer, in exchange for our outstanding 10.5% Senior Notes due 2018 ("Old Notes"), up to $230.0 million in
aggregate principal amount of 10.5% Senior Notes due 2018 and the guarantees thereof which have been registered under the Securities Act of 1933, as amended. The Form S-4 was
declared effective on December 14, 2010 and on January 13, 2011 we completed the exchange for all of the Old Notes.
Revolving Line of Credit
On September 30, 2010, KEMET Electronics Corporation ("KEC") and KEMET Electronics Marketing (S) Pte Ltd. ("KEMET
Singapore") (each a "Borrower" and, collectively, the "Borrowers") entered into a Loan and Security Agreement (the "Loan and Security Agreement"), with Bank of America, N.A, as the administrative
agent and the initial lender. The Loan and Security Agreement provides a $50 million revolving line of credit, which is bifurcated into a U.S. facility (for which KEC is the Borrower) and a
Singapore facility (for which KEMET Singapore is the Borrower). The size of the U.S. facility and the Singapore facility can fluctuate as long as the Singapore facility does not exceed
$30 million and the total facility does not exceed $50 million. A portion of the U.S. facility and the Singapore facility can be used to issue letters of credit. The Loan and Security
Agreement expires on September 30, 2014.
Listing
As announced on June 21, 2010, our common stock was approved for listing on the NYSE Amex. Trading commenced on the NYSE Amex on
June 22, 2010 under the ticker symbol "KEM" (NYSE Amex: KEM).
On
November 11, 2010, we provided written notice to the NYSE Amex that we intended to transfer our listing to the New York Stock Exchange ("NYSE"). We voluntarily ceased trading
on the NYSE Amex, with the last day of trading on the NYSE Amex on November 12, 2010. Our common stock commenced trading on November 15, 2010 on the NYSE under the ticker symbol "KEM"
(NYSE: KEM).
Outlook
Looking out to the first quarter of fiscal year 2012, we anticipate an increase in net sales in a range of 5% to 7% when compared to
the fourth quarter of fiscal year 2011. This increase is primarily due to Film and Electrolytic's machinery division while we anticipate a slight increase in our component sales. Consolidated gross
margin is expected to be comparable to the fourth quarter of fiscal year 2011.
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Restructuring
In fiscal year 2010, the Company initiated the first phase of a plan to restructure Film and Electrolytic and to reduce overhead within
the Company as a whole. The restructuring plan includes implementing programs to make the Company more competitive by removing excess capacity, moving production to lower cost locations and
eliminating unnecessary costs throughout the Company. Restructuring charges in the fiscal year ended March 31, 2011 relate to this new plan and are primarily comprised of manufacturing
relocation costs of $6.0 million for relocation of equipment from various plants to Mexico and China as well as relocation of the European distribution center. In addition, the Company incurred
$1.2 million in personnel reduction costs related to the following: headcount reductions in Italy, $0.8 million; the closure of our Nantong, China plant expected to be completed in the
second quarter of fiscal year 2012, $0.6 million; and $1.5 million related to the Company's initiative to reduce overhead within the Company as a whole and headcount reductions in
Mexico. These personnel reduction charges were offset by a $1.7 million reversal of prior expenses primarily associated with the Cassia Integrazione Guadagni Straordinaria ("CIGS") plan as it
was determined that only 107 employees are expected to participate in the program through October 2012. The agreements with the labor unions allowed the Company to place up to 260 workers, on a
rotation basis, on the CIGS plan to save labor costs. CIGS is a temporary plan to save labor costs whereby a company may temporarily "lay off" employees while the government continues to pay their
wages for a maximum of 36 months for the program. The employees who are in CIGS are not working, but are still employed by the Company. Only employees that are not classified as management or
executive level personnel can participate in the CIGS program. Upon termination of the plan, the affected employees return to work.
Our Industry
Capacitors are electronic components consisting of conducting materials separated by a dielectric, or insulating material, which allows
a capacitor to act as a filtering or an energy storage/delivery device. We manufacture a full line of capacitors, including tantalum, multilayer ceramic, film, paper, and aluminum (both wet
electrolytic and solid polymer). We manufacture these types of capacitors in many different sizes and configurations. These configurations include surface-mount capacitors, which are attached directly
to the circuit board without lead wires, leaded capacitors, which are attached to the circuit board using lead wires, and chassis-mount and other pin-through-hole board-mount
capacitors, which utilize attachment methods such as screw terminal and snap-in.
The
choice of capacitor dielectric is driven by the engineering specifications and the application of the component product into which the capacitor is incorporated. Product design
engineers in the electronics industry typically select capacitors on the basis of capacitance levels, voltage requirements, size and cost. Tantalum and ceramic capacitors are commonly used in
conjunction with integrated circuits, and the same circuit may, and frequently does, contain both ceramic and tantalum capacitors. Generally, ceramic capacitors are more cost-effective at
lower capacitance values, tantalum capacitors are more cost-effective at higher capacitance values, and solid aluminum capacitors can be more effective in applications requiring
intermediate capacitance and very low equivalent series resistance. Although film, paper and electrolytic capacitors can also be used to support integrated circuits, a significant area of usage is the
field of power electronics to provide energy for applications such as motor start, power factor correction, pulse power, electromagnetic interference filtering and safety.
Capacitors
account for the largest market within the passive component product grouping. According to a December 2010 report by Paumanok Publications, Inc. ("Paumanok"), a
marketing research firm concentrating on the passive components industry, the global capacitor market in fiscal year 2010 was $15.1 billion in revenues and 1.3 trillion units. Although this
represents a significant downturn in revenue and unit sales volume as compared to the high water mark set in fiscal year 2008 of $18 billion and 1.4 trillion units, according to the Paumanok
report, the global capacitor market was
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expected
to improve substantially to achieve revenue of $18.5 billion and 1.5 trillion pieces in fiscal year ended March 31, 2011. This represents a revenue increase of 23% over fiscal
year 2010.
Because
capacitors are a fundamental component of electronic circuits, demand for capacitors tends to reflect the general demand for electronic products, as well as integrated circuits,
which, though cyclical, continues to grow. We believe that growth in the electronics market and the resulting growth in
demand for capacitors will be driven primarily by a number of recent trends which include:
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the development of new products and applications, such as global positioning devices, alternative and renewable energy
systems, hybrid transportation systems, electronic controls for engines and industrial machinery, smart phones and mobile personal computers;
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the increase in the electronic content of existing products, such as home appliances, medical equipment and automobiles;
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consumer desire for mobility and connectivity; and
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the enhanced functionality, complexity and convergence of electronic devices that use
state-of-the-art microprocessors.
Markets and Customers
Our products are sold to a variety of OEMs in a broad range of industries including the computer, communications, automotive,
military, consumer, industrial and aerospace industries. We also sell products to EMS providers, which also serve OEMs in these industries. Electronics distributors are an important channel of
distribution in the electronics industry and represent the largest channel through which we sell our capacitors. TTI, Inc., an electronics distributor, accounted for over 10% of our net sales
in fiscal years 2011, 2010 and 2009. If our relationship with TTI, Inc. were to terminate, we would need to determine alternative means of delivering our products to the
end-customers served by TTI, Inc. Our top 50 customers accounted for 76.8% of our net sales during fiscal year 2011.
The
following table presents an overview of the diverse industries that incorporate our capacitors into their products and the general nature of those products.
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Industry
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Products
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Automotive
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Audio systems, tire pressure monitoring systems, power train electronics, instrumentation, airbag systems, anti-lock braking and stability systems, electric drive vehicles, electronic engine controls, air
conditioning controls, and security systems
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Business Equipment
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Copiers, point-of-sale terminals, and fax machines
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Communications
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Cellular phones, telephones, switching equipment, relays, base stations, and wireless infrastructure
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Computer-related
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Personal computers, workstations, mainframes, computer peripheral equipment, power supplies, disk drives, printers, and local area networks
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Industrial
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Electronic controls, measurement equipment, instrumentation, solar and wind energy generation, and medical electronics
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Consumer
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DVD players, MP3 players, game consoles, LCD televisions, global positioning systems and digital still cameras
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Military/Aerospace
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Avionics, radar, guidance systems, and satellite communications
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Alternative Energy
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Wind generation systems, solar generation systems, geothermal generation systems, tidal generation systems and electric drive vehicles
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We
produce a small percentage of capacitors under military specification standards sold for both military and commercial uses. We do not sell any capacitors directly to the United States
government. Certain of our customers purchase capacitors for products in the military and aerospace industries.
It
is impracticable to report revenues from external customers for each of the above noted products primarily due to approximately 50% of our external sales are to electronics
distributors.
KEMET in the United States
Our corporate headquarters is located in Simpsonville, South Carolina, which is part of the greater Greenville metropolitan area.
Individual functions continue to evolve to support global activities in Asia, Europe, and the Americas, either from Greenville, South Carolina or through locations in appropriate parts of the world.
Commodity
manufacturing in the United States has been substantially relocated to our lower-cost manufacturing facilities in Mexico and China. Production that remains in the
United States will focus primarily on early-stage manufacturing of new products and other specialty products for which customers are predominantly located in North America. In June 2011, we expect to
begin the production of power film capacitors in the United States to support alternative energy products and emerging green technologies, such as hybrid electric drive vehicles. In fiscal year 2013,
we expect to begin production of electrolytic capacitors to further support alternative energy products and emerging green technologies.
To
accelerate the pace of innovations, the KEMET Innovation Center was created in July 2003. The primary objectives of the KEMET Innovation Center are to ensure the flow of new products
and robust manufacturing processes that are expected to keep us at the forefront of our customers' product designs, while enabling these products to be transferred rapidly to the most appropriate
KEMET manufacturing location in the world for low-cost, high-volume production. The main campus of the KEMET Innovation Center is located in Simpsonville, South Carolina which
is part of the greater Greenville metropolitan area.
KEMET in Mexico
We believe our Mexican operations are among the most cost efficient in the world, and they will continue to be our primary production
facilities supporting North American and European customers for Tantalum and Ceramic. One of the strengths of KEMET Mexico is that it is a Mexican operation, including Mexican management and workers.
These facilities are responsible for maintaining KEMET's traditional excellence in quality, service, and delivery, while driving costs down. The facilities in Victoria and Matamoros will remain
focused primarily on tantalum capacitors, while the facilities in Monterrey will continue to focus on ceramic capacitors. Following the Film and
Electrolytic restructuring, in June 2010 we began production of standard and commodity Film and Electrolytic products in one of our existing facilities in Monterrey, Mexico.
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KEMET in Asia Pacific
Over the past several years, low production costs and proximity to large, growing markets have caused many of our key customers to
relocate production facilities to Asia, particularly China. We have a well-established sales and logistics network in Asia to support our customers' Asian operations. In calendar year
2003, we commenced shipments from our production facility in Suzhou, China, near Shanghai ("Suzhou Plant A"). In connection with the Evox Rifa acquisition, which was completed in April 2007, we added
another Chinese operation in Nantong, China, as well as a manufacturing operation in Batam, Indonesia. With the Arcotronics acquisition, which was completed in October 2007, we have further expanded
our presence in China with a manufacturing operation in Anting, China. These operations will continue to support the former Evox Rifa and Arcotronics customer bases in Asia with top quality film and
electrolytic capacitors. In the fourth quarter of fiscal year 2010, we began to manufacture aluminum polymer products in a facility in Suzhou, China ("Suzhou Plant B"). During the second quarter of
fiscal year 2012, we expect to begin production of standard and commodity Film and Electrolytic products in a new facility in Suzhou, China ("Suzhou Plant C"). Manufacturing operations in China are
expected to continue to grow and we anticipate that our production capacity in China may be equivalent to Mexico in the future. The vision for KEMET China is to be a Chinese operation, with Chinese
management and workers, to help achieve our objective of being a global company. These facilities will be responsible for maintaining our traditional excellence in quality, service, and delivery,
while accelerating cost-reduction efforts and supporting efforts to grow our customer base in Asia.
KEMET in Europe
As previously mentioned we acquired the tantalum business unit of EPCOS in April 2006, acquired Evox Rifa in April 2007, and acquired
Arcotronics in October 2007. These acquisitions have provided us with manufacturing operations in Europe. We currently have one or more manufacturing locations in Bulgaria, Finland, Germany, Italy,
Portugal, Sweden, and the United Kingdom. In addition, we operate a research and development center in Farjestaden, Sweden. We will maintain and enhance our strong European sales and customer service
infrastructure, allowing us to continue to meet the local preferences of European customers who remain an important focus for KEMET going forward.
In
September 2009, we announced plans to reduce operating costs by consolidating the manufacturing of certain products and by implementing other lean initiatives. Manufacturing
consolidation plans include the movement of certain standard, high-volume products to lower cost manufacturing locations. We anticipate the plans will be completed in the second half of
fiscal year 2014; however, the length of time required to complete the restructuring activities is dependent upon a number of factors, including the ability to continue to manufacture products
required to meet customer demand while at the same time relocating certain production lines, and the progress of discussions with union and government representatives in certain European locations
concerning the optimization of product mix and related headcount requirements in such manufacturing locations. In April 2010, we reported that we reached an agreement with three labor unions in Italy
and with the regional government in Emilia Romagna, Italy to proceed with our planned restructuring process. In addition, in July 2010, we relocated our Amsterdam Hub facility from The Netherlands to
the Czech Republic as part of our cost reduction measures. This relocation has allowed shipping lane optimization and customer consolidation (bi-weekly or weekly) for all import and export
shipments. Our European manufacturing plants will continue to ship direct to 'local' customers (which are customers located in the same country as the plant). During the remainder of this
restructuring effort, we expect to spend between $28 million to $33 million, primarily in our Film and Electrolytic Business Group. We expect our restructuring plan to result in a
reduction in our European operating cost structure of approximately $3 million in fiscal year 2012 compared to fiscal year 2011. We anticipate that benefits from the restructuring efforts will
continue to grow during fiscal years 2013 and 2014. During fiscal year
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2014,
we expect to realize the full potential of the restructuring plan, achieving total annualized operational cost reductions of approximately $24 million versus fiscal year 2011.
Global Sales and Logistics
In recent years, it has become more complicated to do business in the electronics industry. Market-leading electronics manufacturers
have spread their facilities globally. The growth of the electronics manufacturing services industry has resulted in a more challenging supply chain. New Asian electronics manufacturers are emerging
rapidly. In order to drive down costs, the most successful business models in the electronics industry are based on tightly integrated supply chain logistics. Our direct worldwide sales force and a
well-developed global logistics infrastructure distinguish us in the marketplace and will remain a hallmark of KEMET in meeting the needs of our global customers. The North America and
South America ("Americas") sales staff is organized into four areas supported by regional offices. The sales staff for Europe, Middle East and Africa ("EMEA") is organized into five areas, also
supported by regional offices. The Asia and Pacific Rim ("APAC") sales staff is organized into four areas (China, Singapore, Taiwan and India), and is also supported by regional offices. We also have
independent sales representatives located in seven countries worldwide including: Brazil, Puerto Rico, South Korea, and the United States.
In
our major markets, we market and sell our products primarily through a direct sales force. In addition, we use independent commissioned representatives. We believe our direct sales
force creates a distinct competence in the marketplace and has enabled us to establish and maintain strong relationships with our customers. With a global sales organization that is customer-focused,
our direct sales personnel from around the world serve on KEMET Global Account Teams. These teams are committed to serving any customer location in the world with a dedicated KEMET representative.
This approach requires a blend of accountability and responsibility for specific customer locations, guided by an overall account strategy for each customer.
Electronics
distributors are an important distribution channel in the electronics industry and accounted for 50%, 48%, and 47% of our net sales in fiscal years 2011, 2010 and 2009,
respectively. In fiscal years 2011, 2010 and 2009, TTI, Inc. accounted for more than 10% of net sales.
A
portion of our net sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. Our distributor
policy includes inventory price protection and "ship-from-stock and debit" ("SFSD") programs common in the industry.
The
SFSD program provides a mechanism for the distributor to meet a competitive price after obtaining authorization from the local Company sales office. This program allows the
distributor to ship its higher-priced inventory and debit us for the difference between our list price and the lower authorized price for that specific transaction. We establish reserves for the SFSD
program based primarily on historical SFSD activity and the actual inventory levels of certain distributor customers.
Sales by Geography
In fiscal year 2011 and 2010, net sales by region were as follows (dollars in millions):
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Fiscal Year 2011
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Fiscal Year 2010
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Net Sales
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% of Total
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Net Sales
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% of Total
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Americas
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$
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254.1
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25
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Americas
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$
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180.1
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24
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APAC
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381.7
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37
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%
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APAC
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285.0
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39
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%
|
|
EMEA
|
|
|
382.7
|
|
|
38
|
%
|
EMEA
|
|
|
271.2
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,018.5
|
|
|
|
|
|
|
$
|
736.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Table of Contents
We
believe our regional balance of revenues is a benefit to our business. The geographic diversity of our net sales diminishes the impact of regional sales decreases caused by various
holiday seasons. While sales in the U.S. are the lowest of the three regions, the U.S. remains the leading region in the world for product design-in activity where engagement with OEM
design engineers determines product placement independent of the region of the world where the final product is manufactured.
Inventory and Backlog
Although we manufacture and inventory standardized products, a portion of our products are produced to meet specific customer
requirements. Cancellations by customers of orders already in production could have an impact on inventories. However, historically, cancellations have not been significant.
Our
customers often encounter uncertain or changing demand for their products. They historically order products from us based on their forecast. If demand does not meet their forecasts,
they may cancel or reschedule the shipments included in our backlog, in many instances without penalty. Additionally, many of our customers have started to require shorter lead times and "just in
time" delivery. As a result of these factors, the twelve month order backlog is no longer a meaningful trend indicator for us.
Competition
The market for capacitors is highly competitive. The capacitor industry is characterized by, among other factors, a
long-term trend toward lower prices, low transportation costs, and few import barriers. Competitive factors that influence the market for our products include product quality, customer
service, technical innovation, pricing, and timely delivery. We believe that we compete favorably on the basis of each of these factors.
Our
major global competitors include AVX Corporation, EPCOS, Matsushita Electric Industrial Company, Ltd. (Panasonic), Murata Manufacturing Co., Ltd., NEC TOKIN
Corporation, Sanyo Electric Co., Ltd., Taiyo Yuden Co., Ltd., TDK Corporation, WIMA GmbH & Co., KG and Vishay. These competitors, among others, cover
the breadth of our capacitor offerings.
Raw Materials
The principal raw materials used in the manufacture of our products are tantalum powder, palladium, aluminum and silver. These
materials are considered commodities and are subject to price volatility.
Due
to market constraints, we no longer purchase tantalum powder under long-term contracts. Instead, we forecast our tantalum needs for the short-term (twelve
weeks) and make purchases based upon those forecasts; we currently have purchase agreements outstanding for three to six months. While the financial impact of these decisions are
short-term in nature given that we are not currently party to any long-term supply agreements, they could impact our financial performance from period to period given that we
do not hedge any of our raw material exposure and we may be unable to pass on to a significant number of our customers any fluctuations in our raw material costs. Additionally, any delays in obtaining
raw materials for our products could hinder our ability to manufacture our products, negatively impacting our competitive position and our relationships with our customers.
Presently,
a finite number of suppliers process tantalum ore into capacitor-grade tantalum powder. If there are significant fluctuations in demand, based on leadtime of ore to tantalum
smelter, an increase in the price of tantalum may result. If we are unable to pass the price increase on to our customers, it could have an adverse affect on our profitability.
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Palladium
is a precious metal used in the manufacture of multilayer ceramic capacitors ("MLCC") and is mined primarily in Russia and South Africa. We continue to pursue ways to reduce
palladium usage in ceramic capacitors in order to minimize the price risk. The amount of palladium that we require has generally been available in sufficient quantities; however, the price of
palladium is driven by the market which has shown significant price fluctuations. For instance, in fiscal year 2011 the price of palladium
fluctuated between $415 and $855 per troy ounce. Price increases and the possibility of our inability to pass such increases on to our customers could have an adverse effect on profitability.
Silver
and aluminum have generally been available in sufficient quantities, and we believe there are a sufficient number of suppliers from which we can purchase our requirements. An
increase in the price of silver and aluminum that we are unable to pass on to our customers, however, could have an adverse affect on our profitability.
Patents and Trademarks
At March 31, 2011, we held the following patents and trademarks:
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
Trademarks
|
|
|
United States
|
|
|
87
|
|
|
8
|
|
|
Foreign
|
|
|
43
|
|
|
119
|
|
We
believe that the success of our business is not materially dependent on the existence or duration of any patent, license, or trademark other than the trademarks "KEMET" and "KEMET
Charged". Our engineering and research and development staffs have developed and continue to develop proprietary manufacturing processes and equipment designed to enhance our manufacturing facilities
and reduce costs.
Research and Development
Research and development expenses were $25.9 million, $22.1 million and $29.0 million for fiscal years 2011, 2010
and 2009, respectively. These amounts include expenditures for product development and the design and development of machinery and equipment for new processes and cost reduction efforts. Most of our
products and manufacturing processes have been designed and developed by our engineers. We continue to invest in new technology to improve product performance and production efficiencies.
Segment Reporting
We are organized into three business groups: Tantalum, Ceramic, and Film and Electrolytic. Each business group is responsible for the
operations of certain manufacturing sites as well as all related research and development efforts. The sales and marketing functions are
shared by each of the business groups, the cost of which are allocated to the business groups based on their respective budgeted net sales. See Note 7, "Segment and Geographic Information" to
our consolidated financial statements.
Tantalum Business Group
Our Tantalum Business Group is a leading manufacturer of solid tantalum and aluminum capacitors. Over the past fifty years, we have
made significant investments in our tantalum capacitor business and, based on net sales, we believe that we are the largest tantalum capacitor manufacturer in the world. We believe we have one of the
broadest lines of tantalum product offerings and are one of the leaders in the growing market for high-frequency surface mount tantalum and aluminum polymer capacitors. For fiscal years
2011 and 2010, our Tantalum Business Group had consolidated net sales of $486.6 million and $343.8 million, respectively.
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Our
Tantalum Business Group's broad product portfolio, industry leading process and materials technology, global manufacturing base and on-time delivery capabilities allow us
to serve a wide range of customers in a diverse group of end markets, including computing, telecommunications, consumer, medical, military, automotive and general industries. This business group
operates five manufacturing sites in Portugal, Mexico and China and maintains a product innovation center in the United States. Our Tantalum Business Group employs over 4,700 employees worldwide.
Ceramic Business Group
Our Ceramic Business Group offers an extensive line of multilayer ceramic capacitors in a variety of sizes and configurations. We are
one of the two leading ceramic capacitor manufacturers in the United States and among the ten largest manufacturers worldwide. For fiscal years 2011 and 2010, our Ceramic Business Group had
consolidated net sales of $210.5 million and $171.2 million, respectively.
Our
Ceramic Business Group high temperature and capacitance-stable product lines provide us with what we believe to be a significant advantage over many of our competitors, especially in
high
reliability markets, such as medical, industrial, defense and aerospace. Our other significant end markets include computing, telecommunications, automotive and general industries. This business group
operates two manufacturing sites in Mexico and a finishing plant in China and maintains a product innovation center in the United States. Our Ceramic Business Group employs over 2,500 employees
worldwide.
Film and Electrolytic Business Group
Our Film and Electrolytic Business Group produces film, paper and wet aluminum electrolytic capacitors. We entered this market through
the acquisitions of Evox Rifa and Arcotronics in fiscal year 2008. Film capacitors are preferred where high reliability is a determining factor, while wet aluminum electrolytic capacitors are
preferred when high capacitance at a reasonable cost is required. We are one of the world's largest suppliers of film and one of the leaders in wet aluminum electrolytic capacitors for
high-value custom applications. For fiscal years 2011 and 2010, our Film and Electrolytic Business Group had consolidated net sales of $321.4 million and $221.4 million,
respectively.
Our
Film and Electrolytic Business Group primarily serves the industrial, automotive, consumer and telecom markets. We believe that our Film and Electrolytic Business Group's product
portfolio, technology and experience position us to significantly benefit from the continued growth in alternative energy solutions. We operate fifteen film and electrolytic manufacturing sites
throughout Europe, Asia and Mexico and operate a product innovation center in Sweden. In June 2011, we expect to begin the production of power film capacitors in the United States to support
alternative energy products and emerging green technologies, such as hybrid electric drive vehicles. In fiscal year 2013, we expect to begin production of electrolytic capacitors to further support
alternative energy products and emerging green technologies. Our Film and Electrolytic Business Group employs over 2,900 employees worldwide.
In
September 2009, we announced plans to reduce operating costs by consolidating the manufacturing of certain products and by implementing other lean initiatives. Manufacturing
consolidation plans include the movement of certain standard, high-volume products to lower cost manufacturing locations. We anticipate the plans will be completed in the second half of
fiscal year 2014; however, the length of time required to complete the restructuring activities is dependent upon a number of factors, including the ability to continue to manufacture products
required to meet customer demand while at the same time relocating certain production lines and the progress of discussions with union and government representatives in certain European locations
concerning the optimization of product mix and related headcount requirements in such manufacturing locations. In April 2010, we reported that we reached an agreement with three labor unions in Italy
and with the regional
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government
in Emilia Romagna, Italy to proceed with our planned restructuring process. In addition, in July 2010, we relocated our Amsterdam Hub facility from the Netherlands to the Czech Republic as
part of our cost reduction measures. This relocation will allow shipping lane optimization and customer consolidation (bi-weekly or weekly) for all import shipments. Our European
manufacturing plants will continue to ship direct to 'local' customers (which are customers located in the same country as the plant). During the remainder of this restructuring effort, we expect to
spend between $28 million to $33 million, primarily in our Film and Electrolytic Business Group. We expect our restructuring plan to result in a reduction in our operating cost structure
in Europe of approximately $3 million in fiscal year 2012 compared to fiscal year 2011. We anticipate that benefits from the restructuring efforts will continue to grow during fiscal years 2013
and 2014. During fiscal year 2014, we expect to realize the full potential of the restructuring plan, achieving total annualized operational cost reductions of approximately $24 million versus
fiscal year 2011.
Environmental and Regulatory Compliance
We are subject to various North American, European, and Asian federal, state, and local environmental laws and regulations relating to
the protection of the environment, including those governing the handling and management of certain chemicals and materials used and generated in manufacturing electronic components. Based on the
annual costs incurred over the past several years, we do not believe that compliance with these laws and regulations will have a material adverse effect on our capital expenditures, earnings, or
competitive position. We believe, however, that it is reasonably likely that the trend in environmental litigation, laws, and regulations will continue to be toward stricter standards. Such changes in
the laws and regulations may require us to make additional capital expenditures which, while not currently estimable with certainty, are not presently expected to have a material adverse effect on our
financial condition.
Our
Guiding Principles support a strong commitment to economic, environmental, and socially sustainable development. As a result of this commitment, we have adopted the Electronic
Industry Code of Conduct. The Electronic Industry Code of Conduct is a comprehensive code of conduct that addresses all aspects of corporate responsibility including Labor, Health and Safety, the
Environment, and Business Ethics. It outlines standards to ensure working conditions in the electronic industry supply
chain are safe, that workers are treated with respect and dignity, that manufacturing processes are environmentally friendly and that materials are sourced responsibly.
Policies,
programs, and procedures implemented throughout KEMET ensure compliance with legal and regulatory requirements, the content of the Electronic Industry Code of Conduct, and
customer contractual requirements related to social and environmental responsibility.
We
are committed to these business ethics, labor, health and safety, and environmental standards.
KEMET
fully supports the position of the Electronic Industry Citizenship Coalition ("EICC"), the Electronic Components, Assemblies and Materials Association ("ECA") and the
Tantalum-Niobium International Study Center ("TIC") to avoid the use of conflict minerals which directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or
adjoining countries, in line with full compliance to the EICC's Electronic Industry Code of Conduct. KEMET's tantalum supply base has been and continues to be certified to be sourced from conflict
free zones. All of KEMET's tantalum material suppliers have complied with and issued signed Letters of Certification attesting that KEMET Corporation will not receive tantalum powders made from
tantalum ores illegally mined in the Democratic Republic of Congo. This policy and certification process is being implemented for all conflict minerals. KEMET will immediately discontinue doing
business with any supplier found to be purchasing materials which directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or adjoining countries. KEMET will
continue to work through the EICC, ECA and TIC towards the goal of greater transparency in the supply chain.
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KEMET
is aware of section 1502 "Conflict Minerals" of the Dodd-Frank Wall Street Reform and Consumer Protection Act and will comply with all reporting requirements.
Employees
We have approximately 11,000 employees as of March 31, 2011, of whom 600 are located in the United States, 5,400 are located in
Mexico, 2,800 in Asia and 2,200 in Europe. We believe that our future success will depend in part on our ability to recruit, retain, and motivate qualified personnel at all levels of the Company. The
number of employees represented by labor organizations at KEMET locations in each of the following countries is: 4,500 hourly employees in
Mexico (as required by Mexican law), 760 employees in Italy, 750 employees in Indonesia, 360 employees in Portugal, 330 employees in China, 290 employees in Bulgaria, 210 employees in Finland and 90
employees in Sweden. In fiscal year 2011, we did not experience any major work stoppages. Our labor costs in Mexico, Asia and various locations in Europe are denominated in local currencies, and a
significant depreciation or appreciation of the United States dollar against the local currencies would increase or decrease our labor costs.
Securities Exchange Act of 1934 Reports
We maintain an Internet website at the following address:
http://www.kemet.com.
KEMET
makes available on or through our Internet website certain reports and amendments to those reports that are filed or furnished to the Securities and Exchange Commission ("SEC") pursuant to
Section 13(a) or 15(d) in accordance with the Exchange Act. These include annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K. This information is available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the
SEC.
Global Code of Conduct
On May 3, 2010, we adopted a new Global Code of Conduct ("Code of Conduct"), effective August 1, 2010, which is
applicable to all employees, officers, and directors of the Company. The Code of Conduct addresses among other things, ethics in the workplace and marketplace, guidance for making decisions and
reporting violations of the law and the Code of Conduct, and the importance of protecting the Company's assets. The Code of Conduct was filed on May 6, 2010, with the SEC in our Current Report
on Form 8-K. Effective August 1, 2010, the Code of Conduct and any amendments thereto will be immediately available at
http://www.kemet.com.
ITEM 1A. RISK FACTORS.
This report contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ
materially from those expressed in, or implied by, our forward-looking statements. Words such as "expects," "anticipates," "believes,"
"estimates" and other similar expressions or future or conditional verbs such as "will," "should," "would" and "could" are intended to identify such forward-looking statements. Readers of this report
should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made,
and we undertake no obligation to update any forward-looking statement.
All
forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking
statements. We face risks that are inherent in the businesses and the market places in which we operate. While management
15
Table of Contents
believes
these forward-looking statements are accurate and reasonable, uncertainties, risks and factors, including those described below, could cause actual results to differ materially from those
reflected in the forward-looking statements.
Factors
that may cause the actual outcome and results to differ materially from those expressed in, or implied by, these forward-looking statements include, but are not necessarily
limited to the following: (i) adverse economic conditions could impact our ability to realize operating plans if the demand for our products declines, and such conditions could adversely affect
our liquidity and ability to continue to operate; (ii) adverse economic conditions could cause the write down of long-lived assets; (iii) an increase in the cost or a
decrease in the availability of our principal raw materials; (iv) changes in the competitive environment; (v) uncertainty of the timing of customer product qualifications in heavily
regulated industries; (vi) economic, political, or regulatory changes in the countries in which we operate; (vii) difficulties, delays or unexpected costs in completing the restructuring
plan; (viii) inability to attract, train and retain effective employees and management; (ix) inability to develop innovative products to maintain customer relationships and offset
potential price erosion in older products; (x) exposure to claims alleging product defects; (xi) the impact of laws and regulations that apply to our business, including those relating
to environmental matters; (xii) volatility of financial and credit markets affecting our access to capital; (xiii) needing to reduce the total costs of our products to remain
competitive; (xiv) potential limitation on the use of net operating losses to offset possible future taxable income; (xv) restrictions in our debt agreements that limit our flexibility
in operating our business; (xvi) additional exercise of the warrant by K Equity which could potentially result in the existence of a significant stockholder who could seek to influence our
corporate decisions; and (xvii) recent events in Japan could negatively impact our sales and supply chain.
Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and could cause actual results to differ
materially from those included, contemplated or implied by the forward-looking statements made in this report, and the reader should not consider the above list of factors to be a complete set of all
potential risks or uncertainties.
Adverse economic conditions could impact our ability to realize operating plans if the demand for our products declines; and such conditions could adversely affect our
liquidity and ability to continue to operate.
While our operating plans provide for cash generated from operations to be sufficient to cover our future operating requirements, many
factors, including reduced demand for our products, currency exchange rate fluctuations, increased raw material costs, and other adverse market conditions could cause a shortfall in net cash generated
from operations. As an example, the electronics industry is a highly cyclical industry. The demand for capacitors tends to reflect the demand for products in the electronics market. Customers'
requirements for our capacitors fluctuate as a result of changes in general economic activity and other factors that affect the demand for their products. During periods of increasing demand for their
products, they typically seek to increase their inventory of our products to avoid production bottlenecks. When demand for their products peaks and begins to decline, they may rapidly decrease orders
for our products while they use up accumulated inventory. Business cycles vary somewhat in different geographical regions, such as Asia, and within customer industries. We are also vulnerable to
general economic events beyond our control and our sales and profits may suffer in periods of weak demand.
TTI, Inc.,
an electronics distributor, accounted for over 10% of our net sales in fiscal years 2011, 2010 and 2009. If our relationship with TTI, Inc. were to terminate, we
would need to determine alternative means of delivering our products to the end-customers served by TTI, Inc.
Our
ability to realize operating plans is also dependent upon meeting our payment obligations and complying with any applicable financial covenants under our debt agreements. If cash
generated from
16
Table of Contents
operating,
investing and financing activities is insufficient to pay for operating requirements and to cover interest payment obligations under debt instruments, planned operating and capital
expenditures may need to be reduced.
Adverse economic conditions could cause the write down of long-lived assets.
Long-lived assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset or group of assets may not be recoverable. In the event that the test shows that the carrying value of certain
long-lived assets is
impaired, we would be required to take an impairment charge to earnings under U.S. generally accepted accounting principles. However, such a charge would have no direct effect on our cash.
An increase in the cost or decrease in the availability of our principal raw materials could adversely affect profitability.
The principal raw materials used in the manufacture of our products are tantalum powder, palladium, aluminum and silver. These
materials are considered commodities and are subject to price volatility. Due to market constraints, we no longer purchase tantalum powder under long-term contracts. Instead, we forecast
our tantalum needs for the short-term (twelve weeks) and make purchases based upon those forecasts; we currently have purchase agreements outstanding for three to six months. While the
financial impact of these decisions is short-term in nature given that we are not currently party to any long-term supply agreements, they could impact our financial
performance from period to period given that we do not hedge any of our raw material exposure and we may be unable to pass any fluctuations in our raw material costs on to our customers. Additionally,
any delays in obtaining raw materials for our products could hinder our ability to manufacture our products, negatively impacting our competitive position and our relationships with our customers.
Presently,
a finite number of suppliers process tantalum ore into capacitor-grade tantalum powder. If there are significant fluctuations in demand, based on leadtime of ore to tantalum
smelter, an increase in the price of tantalum may result. If we are unable to pass the price increase on to our customers it could have an adverse affect on our profitability.
Palladium
is a precious metal used in the manufacture of multilayer ceramic capacitors and is mined primarily in Russia and South Africa. We continue to pursue ways to reduce palladium
usage in ceramic capacitors in order to minimize the price risk. The amount of palladium that we require has generally been available in sufficient quantities; however the price of palladium is driven
by the market which has shown significant price fluctuations. For instance, in fiscal year 2011 the price of palladium fluctuated between $415 and $855 per troy ounce. Price increases and the
possibility of our inability to pass such increases on to our customers could have an adverse effect on profitability.
Silver
and aluminum have generally been available in sufficient quantities, and we believe there are a sufficient number of suppliers from which we can purchase our requirements. An
increase in the price of silver and aluminum that we are unable to pass on to our customers, however, could have an adverse affect on our profitability.
Changes in the competitive environment could harm our business.
The capacitor business is highly competitive worldwide, with low transportation costs and few import barriers. Competition is based on
factors such as product quality and reliability, availability, customer service, timely delivery and price. The industry has become increasingly consolidated and globalized in recent years, and our
primary U.S. and non-U.S. competitors, some of which are larger than us, have significant financial resources. The greater financial resources of such competitors may enable them to commit
larger amounts of capital in response to changing market conditions. Some
17
Table of Contents
competitors
may also have the ability to use profits from other operations to subsidize losses sustained in their businesses with which we compete. Certain competitors may also develop product or
service innovations that could put us at a disadvantage.
Uncertainty of the timing of customer product qualifications in heavily regulated industries could affect the timing of product revenues and profitability arising from these
industries.
Our capacitors are incorporated into products used in diverse industries. Certain of these industries, such as military, aerospace and
medical, are heavily regulated, with long and sometimes unpredictable product approval and qualification processes. Due to such regulatory compliance issues, there can be no assurances as to the
timing of product revenues and profitability arising from our product development and sales efforts in these industries.
We manufacture many capacitors in Europe, Mexico and Asia and economic political or regulatory changes in any of these regions could adversely affect our profitability.
Our international operations are subject to a number of special risks, in addition to the same risks as our domestic business. These
risks include currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and
possibly more stringent) labor regulation, risk of governmental expropriation, domestic and foreign customs and tariffs, current and changing regulatory regimes, differences in the availability and
terms of financing, political instability and potential increases in taxes. These factors could impact our production capability or adversely affect our results of operations or financial condition.
We may experience difficulties, delays or unexpected costs in completing our restructuring plan.
In the second quarter of fiscal year 2010, we initiated a restructuring plan designed to improve the operating performance of our Film
and Electrolytic business group. However, any anticipated benefits of this restructuring activity will not be realized until future periods. We anticipate the plan will be completed in the second half
of fiscal year 2014.
We
may not realize, in full or in part, the anticipated benefits of the restructuring plan without encountering difficulties, which may include complications in the transfer of
production knowledge, loss of key employees and/or customers, the disruption of ongoing business and possible inconsistencies in standards, controls and procedures. We are party to collective
bargaining agreements in certain jurisdictions in which we operate which could potentially prevent or delay execution of parts of our restructuring plan.
Our inability to attract, train and retain effective employees and management could harm our business.
Our success depends upon the continued contributions of our executive officers and certain other employees, many of whom have many
years of experience with us and would be extremely difficult to replace. We must also attract and retain experienced and highly skilled engineering, sales and marketing and managerial personnel.
Competition for qualified personnel is intense in our industry, and we may not be successful in hiring and retaining these people. If we lost the services of our executive officers or our other highly
qualified and experienced employees or cannot attract and retain other qualified personnel, our business could suffer through less effective management due to loss of accumulated knowledge of our
business or through less successful products due to a reduced ability to design, manufacture and market our products.
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We must continue to develop innovative products to maintain relationships with our customers and to offset potential price erosion in older products.
While most of the fundamental technologies used in the passive components industry have been available for a long time, the market is
nonetheless typified by rapid changes in product designs and technological advances allowing for better performance, smaller size and/or lower cost. New applications are frequently found for existing
technologies, and new technologies occasionally replace existing technologies for some applications or open up new business opportunities in other areas of application. We believe that successful
innovation is critical for maintaining profitability in the face of potential erosion of selling prices for existing products and to ensure the flow of new products and robust manufacturing processes
that will keep us at the forefront of our customers' product designs. Non-customized commodity products are especially vulnerable to price pressure, but customized products have also
experienced price pressure in recent years. Developing and marketing new products requires start-up costs that may not be recouped if these products or production techniques are not
successful. There are numerous risks inherent in product development, including the risks that we will be unable to anticipate the direction of technological change or that we will be unable to
develop and market new products and applications in a timely fashion to satisfy customer demands. If this occurs, we could lose customers and experience adverse effects on our results of operations.
We may be exposed to claims alleging product defects.
Our business exposes us to claims alleging product defects or nonconformance with product specifications. We may be held liable for, or
incur costs related to, such claims if any of our products, or products in which our products are incorporated, are found to have caused end market product application failures, product recalls,
property damage or personal injury. Provisions in our agreements with our customers and distributors which are designed to limit our exposure to potential material product defect claims, including
warranty, indemnification, waiver and limitation of liability provisions, may not be effective under the laws of some jurisdictions. If we cannot successfully defend ourselves against product defect
claims, we may incur substantial liabilities. Regardless of the merits or eventual outcome, defect claims could entail substantial expense and require the time and attention of key management
personnel.
Our
commercial general liability insurance may not be adequate to cover all liabilities arising out of product defect claims and, at any time, insurance coverage may not be available on
commercially reasonable terms or at all. If liability coverage is insufficient, a product defect claim could result in liability to us which could materially and adversely affect our results of
operations or financial condition. Even if we have adequate insurance coverage, product defect claims or recalls could result in negative publicity or force us to devote significant time and attention
to those matters.
Various laws and regulations that apply to our business, including those relating to environmental matters, could limit our ability to operate as we are currently and could
result in additional costs.
We are subject to various laws and regulations of federal, state and local authorities in the countries in which we operate regarding a
wide variety of matters, including environmental, employment, land use, anti-trust, and others that affect the day-to-day operations of our business. The
liabilities and requirements associated with the laws and regulations that affect us may be costly and time-consuming. There can be no assurance that we have been or will be at all times
in compliance with such applicable laws and regulations. Failure to comply may result in the assessment of administrative, civil and criminal penalties, the issuance of injunctions to limit or cease
operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting our operations. If we are pursued for sanctions, costs or liabilities in
respect of these matters, our operations and, as a result, our profitability could be materially and adversely affected.
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We
are subject to a variety of U.S. federal, state and local, as well as foreign, environmental laws and regulations relating, among other things, to wastewater discharge, air emissions,
handling of hazardous materials, disposal of solid and hazardous wastes, and remediation of soil and groundwater contamination. We use a number of chemicals or similar substances, and generate wastes,
that are considered hazardous. We are required to hold environmental permits to conduct many of our operations. Violations of environmental laws and regulations could result in substantial fines,
penalties, and other sanctions. Changes in environmental laws or regulations (or in their enforcement) affecting or limiting, for example, our chemical uses, certain of our manufacturing processes, or
our disposal practices, could restrict our ability to operate as we are currently operating or impose additional costs. In addition, we may experience releases of certain chemicals or discover
existing contamination, which could cause us to incur material cleanup costs or other damages.
Volatility of financial and credit markets could affect our access to capital.
The continued uncertainty in the global financial and credit markets could impact our ability to implement new financial arrangements
or to modify our existing financial arrangements. An inability to obtain new financing or to further modify existing financing could adversely impact the execution of our restructuring plans and delay
the realization of the expected cost reductions. Our ability to generate adequate liquidity will depend on our ability to execute our operating plans and to manage costs in light of developing
economic conditions. An unanticipated decrease in sales, or other factors that would cause the actual outcome of our plans to differ from expectations, could create a shortfall in cash available to
fund our liquidity needs. Being unable to access new capital, experiencing a shortfall in cash from operations to fund our liquidity needs and the failure to implement an initiative to offset the
shortfall in cash would likely have a material adverse effect on our business.
We must consistently reduce the total costs of our products to remain competitive.
Our industry is intensely competitive and prices for existing commodity products tend to decrease steadily over their life cycle. There
is substantial and continuing pressure from customers to reduce the total cost of using our parts. To remain competitive, we must achieve continuous cost reductions through process and product
improvements.
We
must also be in a position to minimize our customers' shipping and inventory financing costs and to meet their other goals for rationalization of supply and production. Our growth and
the profit margins of our products will suffer if our competitors are more successful in reducing the total cost to customers of their products than we are. We must also continue to introduce new
products that offer performance advantages over our existing products and can thereby achieve premium prices, offsetting the price declines in our more mature products.
Our use of net operating losses to offset possible future taxable income could be limited by ownership changes.
In addition to the general limitations on the carryback and carryforward of net operating losses under Section 172 of the
Internal Revenue Code (the "Code"), Section 382 of the Code imposes further limitations on the utilization of net operating losses by a corporation following ownership changes which result in
more than a 50 percentage point change in ownership of a corporation within a three year period. Therefore, the future utilization of our net operating losses may be subject to limitation for
federal income tax purposes related to regular and alternative minimum tax.
The
issuance of the Platinum Warrant to K Financing, as described above, may be deemed to have been an "ownership change" for purposes of Section 382 of the Code. If such an
ownership change is deemed to have occurred, the amount of our taxable income that can be offset by our net operating loss carryforwards in taxable years after the ownership change will be severely
limited. While we believe
20
Table of Contents
that
the issuance of the Platinum Warrant did not result in an ownership change for purposes of Section 382 of the Code, there is no assurance that our view will be unchallenged. Moreover, the
exercise of part or all of the Platinum Warrant may be deemed to have given rise to an ownership change in the future.
The
application of Section 382 of the Code now or in the future could limit a substantial part of our future utilization of available net operating losses. Such limitation could
require us to pay substantial additional federal and state taxes and interest. Such tax and interest liabilities may adversely affect our liquidity and financial position.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The agreement governing our new revolving credit facility and the indenture governing the Exchange Notes and certain of our other debt
agreements contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other
things:
-
•
-
incur additional indebtedness or issue certain preferred stock;
-
•
-
pay dividends on, or make distributions in respect of, capital stock or repurchase capital stock;
-
•
-
make certain investments or other restricted payments;
-
•
-
sell certain assets;
-
•
-
create liens or use assets as security in other transactions;
-
•
-
enter into sale and leaseback transactions;
-
•
-
merge, consolidate or transfer or dispose of substantially all of our assets; and
-
•
-
engage in transactions with affiliates.
The
agreement governing our new revolving credit facility also includes a fixed charge coverage ratio covenant that we must satisfy if an event of default occurs or in the event that we
do not meet certain excess availability requirements under our new revolving credit facility. Our ability to comply with this covenant is dependent on our future performance, which may be subject to
many factors, some of which are beyond our control.
K Equity may obtain significant influence over all matters submitted to a stockholder vote, which may limit the ability of other shareholders to influence corporate
activities and may adversely affect the market price of our common stock.
As part of the consideration for entering into the Platinum Credit Facility, K Financing received the Platinum Warrant to purchase up
to 26,848,484 shares of our common stock (subject to certain adjustments), representing 49.9% of our outstanding common stock at the time of issuance on a post-exercise basis. This
Platinum Warrant was subsequently transferred to K Equity, an affiliate of K Financing. On December 20, 2010, K Equity sold a portion of the Platinum Warrant equal to 10,893,608 shares
which was exercised on a net exercise basis and the resulting 10,000,000 shares of which were sold by underwriters in an offering, leaving a remainder of 15,954,876 shares subject to the Platinum
Warrant. To the extent that K Equity exercises the remainder of the Platinum Warrant in whole or in part but does not sell all or a significant part of the shares it acquires upon exercise,
K Equity may own up to 30.1% of our outstanding common stock. As a result, K Equity may have substantial influence over the outcome of votes on all matters requiring approval by our
stockholders, including the election of directors, the adoption of amendments to our restated certificate of incorporation and by-laws and approval of significant corporate transactions. K
Equity could also take actions that have the effect of delaying or preventing a change in control of us or discouraging others
21
Table of Contents
from
making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions make be taken even if other stockholders oppose them. Moreover, this
concentration of stock ownership may make it difficult for stockholders to replace management. In addition, this significant concentration of stock ownership may adversely affect the trading price for
our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. This concentration of control could be disadvantageous to other stockholders
with interests different from those of our officers, directors and principal stockholders, and the trading price of shares of our common stock could be adversely affected.
Recent events in Japan could negatively impact our sales and supply chain.
To date, we have not experienced any decrease in our customers' demands for our products as a result of the recent earthquake and
tsunami in Japan. However, these events might impact the supply chains of our customers which could result in delays or cancellations of orders by our customers. Such delays or cancellations would
adversely affect our results of operations.
We
currently have enough supply on hand to meet our short term needs. However, we could experience supply shortages or delays in receiving supplies in the future due to the recent events
in Japan. Such shortages or delays could impact our ability to meet our customers' demands.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We are headquartered in Simpsonville, South Carolina, which is part of the greater Greenville metropolitan area, and have a total of 22
manufacturing plants located in the United States, Mexico, Europe and Asia. Some of our plants manufacture products for multiple business groups. Our existing manufacturing and assembly facilities
have approximately 3 million square feet of floor space and are highly automated with proprietary manufacturing processes and equipment.
Our
facilities in Mexico operate under the Maquiladora Program. In general, a company that operates under this program is afforded certain duty and tax preferences and incentives on
products brought into the United States. Our manufacturing standards, including compliance with worker safety laws and regulations, are essentially identical in the United States, Mexico, Europe and
Asia. Our Mexican, European and Asian operations, similar to our United States operations, have won numerous quality, environmental and safety awards.
We
have developed just-in-time manufacturing and sourcing systems. These systems enable us to meet customer requirements for faster deliveries while minimizing
the need to carry significant inventory levels. We continue to emphasize flexibility in all of our manufacturing operations to improve product delivery response times.
We
believe that substantially all of our property and equipment is in good condition, and that overall, we have sufficient capacity to meet our current and projected manufacturing and
distribution needs.
22
Table of Contents
The
following table provides certain information regarding our principal facilities:
|
|
|
|
|
|
|
|
|
|
Location(1)
|
|
Square
Footage
(in thousands)
|
|
Type of
Interest
|
|
Description
of Use
|
|
Simpsonville, South Carolina(2)
|
|
|
372
|
|
Owned
|
|
Headquarters, Innovation Center and Advanced Tantalum Manufacturing
|
|
Tantalum Business Group
|
|
|
|
|
|
|
|
|
Matamoros, Mexico
|
|
|
286
|
|
Owned
|
|
Manufacturing
|
|
Suzhou, China(3)
|
|
|
353
|
|
Leased
|
|
Manufacturing
|
|
Ciudad Victoria, Mexico
|
|
|
265
|
|
Owned
|
|
Manufacturing
|
|
Evora, Portugal
|
|
|
233
|
|
Owned
|
|
Manufacturing
|
|
Ceramic Business Group
|
|
|
|
|
|
|
|
|
Monterrey, Mexico(4)
|
|
|
532
|
|
Owned
|
|
Manufacturing
|
|
Film and Electrolytic Business Group
|
|
|
|
|
|
|
|
|
Sasso Marconi, Italy
|
|
|
215
|
|
Owned
|
|
Manufacturing
|
|
Suzhou, China
|
|
|
134
|
|
Leased
|
|
Manufacturing
|
|
Granna, Sweden
|
|
|
132
|
|
Owned
|
|
Manufacturing
|
|
Suomussalmi, Finland
|
|
|
121
|
|
Leased
|
|
Manufacturing
|
|
Batam, Indonesia
|
|
|
86
|
|
Owned
|
|
Manufacturing
|
|
Kyustendil, Bulgaria
|
|
|
82
|
|
Owned
|
|
Manufacturing
|
|
Landsberg, Germany
|
|
|
81
|
|
Leased
|
|
Manufacturing
|
|
Weymouth, United Kingdom
|
|
|
96
|
|
Leased
|
|
Manufacturing
|
|
Vergato, Italy
|
|
|
78
|
|
Owned
|
|
Manufacturing
|
|
Monghidoro, Italy
|
|
|
71
|
|
Owned
|
|
Manufacturing
|
|
Anting, China
|
|
|
38
|
|
Owned
|
|
Manufacturing
|
|
Nantong, China
|
|
|
30
|
|
Leased
|
|
Manufacturing
|
|
Farjestaden, Sweden
|
|
|
28
|
|
Leased
|
|
Manufacturing
|
|
Northampton, United Kingdom
|
|
|
8
|
|
Leased
|
|
Manufacturing
|
-
(1)
-
In
addition to the locations listed within this table, the company has acquired land in Italy to be used as the site for a new manufacturing facility in
order to consolidate our Italian operations.
-
(2)
-
In
June 2011, we expect to begin the production of power film capacitors in this facility to support alternative energy products and emerging green
technologies, such as hybrid electric drive vehicles. In fiscal year 2013, we expect to begin production of electrolytic capacitors to further support alternative energy products and emerging green
technologies.
-
(3)
-
Includes
two manufacturing facilities, one of which also performs finishing for Ceramic products.
-
(4)
-
Includes
two manufacturing facilities and houses production of F&E product lines.
Over
the past several years, low production costs and proximity to large, growing markets have caused many of our key customers to relocate production facilities to Asia, particularly
China. We have a well-established sales and logistics network in Asia to support our customers' Asian operations. In calendar year 2003, we commenced shipments from our production facility
in Suzhou, China near Shanghai ("Suzhou Plant A"). In connection with the Evox Rifa acquisition, which was completed in April 2007, we added another Chinese operation in Nantong, China as well as a
manufacturing operation in Batam, Indonesia. With the Arcotronics acquisition, which was completed in October 2007, we have further expanded our presence in China with a manufacturing operation in
Anting, China. These operations will continue to support the former Evox Rifa and Arcotronics customer bases in Asia with top quality film and electrolytic capacitors. In the fourth quarter of fiscal
year 2010, we began
23
Table of Contents
to
manufacture aluminum polymer products in a new leased facility in Suzhou Plant B. During the second quarter of fiscal year 2012, we expect to begin production of standard and commodity Film and
Electrolytic products in a new leased facility in Suzhou, China ("Suzhou Plant C").
ITEM 3. LEGAL PROCEEDINGS.
We or our subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including
workers' compensation or work place safety cases, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to us, we do not believe that
any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on our financial condition or results of operations.
ITEM 4. [RESERVED AND REMOVED]
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, business experience, positions and offices held and period served in such positions or offices for each of the executive
officers and certain key employees of the Company is as listed below.
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Years with
Company(1)
|
|
|
Per-Olof Loof
|
|
|
60
|
|
Chief Executive Officer and Director
|
|
|
6
|
|
|
William M. Lowe, Jr.
|
|
|
58
|
|
Executive Vice President and Chief Financial Officer
|
|
|
3
|
|
|
Robert R. Argüelles
|
|
|
44
|
|
Senior Vice President, Operational Excellence and Quality
|
|
|
3
|
|
|
Conrado Hinojosa
|
|
|
46
|
|
Executive Vice President, Tantalum Business Group
|
|
|
12
|
|
|
Marc Kotelon
|
|
|
47
|
|
Senior Vice President Sales—Global Sales
|
|
|
17
|
|
|
Charles C. Meeks, Jr.
|
|
|
50
|
|
Executive Vice President, Ceramic Business Group
|
|
|
27
|
|
|
Susan B. Barkal
|
|
|
48
|
|
Vice President, Corporate Quality and Chief Compliance Officer
|
|
|
11
|
|
|
Daniel E. LaMorte
|
|
|
65
|
|
Vice President and Chief Information Officer
|
|
|
7
|
|
|
Dr. Phillip M. Lessner
|
|
|
52
|
|
Senior Vice President and Chief Technology Officer
|
|
|
15
|
|
|
Larry C. McAdams
|
|
|
59
|
|
Vice President, Human Resources
|
|
|
27
|
|
|
Dr. Daniel F. Persico
|
|
|
55
|
|
Vice President, Strategic Marketing and Business Development
|
|
|
10
|
|
|
R. James Assaf
|
|
|
51
|
|
Vice President, General Counsel and Secretary
|
|
|
3
|
|
|
Michael W. Boone
|
|
|
60
|
|
Vice President and Treasurer
|
|
|
24
|
|
|
David S. Knox
|
|
|
47
|
|
Vice President and Corporate Controller
|
|
|
3
|
|
-
(1)
-
Includes
service with Union Carbide Corporation.
Executive Officers
Per-Olof Loof, Chief Executive Officer and Director, was named such in April 2005. Mr. Loof was previously the
Managing Partner of QuanStar Unit LLC, a management consulting firm. Prior to this, he served as Chief Executive Officer of Sensormatic Electronics Corporation and in various management roles
with Andersen Consulting, Digital Equipment Corporation, AT&T and NCR. Mr. Loof serves as a board member of Global Options Inc., and Devcon International Corporation. He received a
"civilekonom examen" degree in economics and business administration from the Stockholm School of Economics.
William
M. Lowe, Jr., Executive Vice President and Chief Financial Officer, was named such in July 2008. Mr. Lowe was previously the Vice President, Chief Operating Officer and
Chief Financial
24
Table of Contents
Officer
of Unifi, Inc., a producer and processor of textured synthetic yarns from January 2004 to October 2007. Prior to holding that position, he was Executive Vice President and Chief
Financial Officer for Metaldyne, an automotive components manufacturer. He also held various financial management positions with ArvinMeritor, Inc., a premier global supplier of integrated
automotive components. He received his Bachelor of Science degree in business administration with a major in accounting from Tri-State University and is a Certified Public Accountant.
Robert
R. Argüelles, Senior Vice President, Operational Excellence and Quality, joined KEMET as such in September 2008. Mr. Argüelles previously
served as Vice President and Plant Manager with Continental Automotive Systems, which followed his role as a top research and development executive in Continental's North American Chassis &
Safety division. Prior to Continental Automotive, Mr. Argüelles worked at Valeo Electronics/ITT Automotive where he was the Product Line Director for Valeo's North American
Sensors and Electronics product lines. Mr. Argüelles began his career serving in technical roles at Electronic Data Systems in the Delco Chassis Division. He received a Bachelor
of Science degree in Mechanical Engineering, Dynamics and Controls, from Old Dominion University in Norfolk, Virginia.
Conrado
Hinojosa, Executive Vice President, Tantalum Business Group, was named such in May 2011. He joined KEMET in 1999 in the position of Plant Manager of the Monterrey 3 plant in
Mexico. Mr. Hinojosa later served as the Operations Director for the Tantalum Division in Matamoros, Mexico and was later named Vice President, Tantalum Business Group in June 2005 and Senior
Vice President, Tantalum Business Group in October 2007. Prior to joining KEMET, Mr. Hinojosa held numerous manufacturing positions with IBM de Mexico and had previous experience with Kodak.
Mr. Hinojosa received a Masters of Business Administration degree from Instituto Technologico de Estudios Superiores de Monterrey and a Bachelor of Science degree in Mechanical Engineering from
Universidad Autonoma de Guadalajara.
Marc
Kotelon, Senior Vice President, Global Sales, was named such in August 2008. He joined KEMET in 1994 and has held various positions of increased responsibility in the sales area
prior to the appointment to his current position. Mr. Kotelon received a Bachelor of Science degree in Electronics from Ecole Centrale d'Electronique/Paris.
Charles
C. Meeks, Jr., Executive Vice President, Ceramic, Film and Electrolytic Business Group, was named such in May 2011. He joined Union Carbide/KEMET in 1983 in the position of
Process Engineer, and has held various positions of increased responsibility including the positions of Plant Manager and Director of Operations, Ceramic Business Group. He was named Vice President,
Ceramic Business Group in June 2005, Senior Vice President, Ceramic Business Group in October 2007 and Senior Vice President, Ceramic, Film and Electrolytic Business Group in March 2010. In addition,
since January 2000, Mr. Meeks has served as President of Top Notch Inc., a private company that offers stress management therapy services. Mr. Meeks received a Masters of Business
Administration degree and a Bachelor of Science degree in Ceramic Engineering from Clemson University.
Susan
B. Barkal, Vice President of Quality and Chief Compliance Officer, was named such in December 2008. Ms. Barkal joined KEMET in November 1999, and has served as Quality
Manager for Tantalum Business Group, Technical Product Manager for all Tantalum product lines and Director of Tantalum Product Management. Ms. Barkal holds a Bachelor of Science degree in
Chemical Engineering from Clarkson University and a Master of Science degree in Mechanical Engineering from California Polytechnic University.
Daniel
E. LaMorte, Vice President and Chief Information Officer, joined KEMET as such in May 2004. Prior to joining KEMET, Mr. LaMorte held numerous Information Technology
positions with Keycorp, Elf Acquitaine, Fisher Scientific and U.S. Steel Corp. Mr. LaMorte had previously served as Vice President of Worldwide Marketing and Sales for Chemcut, a manufacturer
of capital equipment and chemicals in the electronics industry. Prior to Keycorp, Mr. LaMorte served as Chief Information
25
Table of Contents
Officer
at Submit Order, an E-commerce start-up in Columbus, Ohio. Mr. LaMorte holds a Bachelor of Science degree from the University of Pittsburgh and a Master of
Business Administration from Fairleigh Dickinson University.
Dr. Philip
M. Lessner, Senior Vice President, Chief Technology Officer and Chief Scientist, was named such in May 2011. He joined KEMET in 1996 as a Technical Associate in the
Tantalum Technology Group. He has held several positions of increased responsibility in the Technology and Product Management areas including Senior Technical Associate, Director Tantalum Technology,
Director Technical Marketing Services, Vice President Tantalum Technology and Vice President, Chief Technology Officer and Chief Scientist prior to his appointment to his current position.
Mr. Lessner received a Ph.D. in Chemical Engineering from the University of California, Berkeley and a Bachelor of Engineering in Chemical Engineering from Cooper Union.
Larry
C. McAdams, Vice President and Chief Human Resources Officer, joined Union Carbide/KEMET in 1983. He previously served as the site Human Resources Manager at the Columbus, GA;
Shelby, NC; and Fountain Inn, SC, plants. Since 1991, he has been assigned to the corporate HR staff, where he was appointed a Director in 1999, Senior Director in 2002, and Vice President in 2003.
Mr. McAdams received a Bachelor of Arts in Political Science from Clemson University and attended the University of South Carolina School of Law.
Dr. Daniel
F. Persico, Vice President, Strategic Marketing and Business Development, joined KEMET in November 1997, and served as Director of Tantalum Technology, Vice President
of Tantalum Technology, and Vice President of Organic Process Technology. Prior to his return to KEMET in December 2006, he held the position of the Executive Vice President and Chief Technology
Officer of H.W. Sands Corporation, a manufacturer and distributor of specialty chemicals. Dr. Persico holds a Ph.D. in Chemistry from the University of Texas and a Bachelor of Science degree in
Chemistry from Boston College.
Other Key Employees
R. James Assaf, Vice President, General Counsel and Secretary, was named such in July 2008. Mr. Assaf joined KEMET as Vice
President, General Counsel in March 2008. Prior to joining KEMET, Mr. Assaf served as General Manager for InkSure Inc., a start-up seller of product authentication solutions.
He had also previously held several positions with Sensormatic Electronics Corporation, including Associate General Counsel and Director of Business Development, Mergers & Acquisitions. Prior
to Sensormatic, Mr. Assaf served as an Associate Attorney with the international law firm Squire Sanders & Dempsey. Mr. Assaf received his Bachelor of Arts degree from Kenyon
College and his Juris Doctor degree from Case Western Reserve University School of Law.
Michael
W. Boone, Vice President and Treasurer, was named such in July 2008. Mr. Boone joined KEMET in June 1987 as Manager of Credit and Cash Management and has previously held
the positions of Senior Director of Finance and Corporate Secretary before his appointment to his current
position. Mr. Boone holds a Bachelor of Business Administration degree in Banking and Finance from the University of Georgia.
David
S. Knox, Vice President and Corporate Controller, joined KEMET as such in February 2008. From November 1999 through February 2008, Mr. Knox held various financial positions
at Unifi, Inc. and was the Corporate Controller from August 2002 through February 2008. Mr. Knox received a Bachelor of Science degree in Business Administration from the University of
North Carolina at Chapel Hill and is a Certified Public Accountant.
26
Table of Contents
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
On November 5, 2010, the Company filed with the Secretary of State of Delaware a Certificate of Amendment to its Restated
Certificate of Incorporation to effect the Reverse Stock Split of the Company's common stock at a ratio equal to one-for-three. The Reverse Stock Split was approved at a
special meeting of our stockholders on November 3, 2010. All share and per share data in this Form 10-K gives effect to the Reverse Stock Split. On November 15, 2010,
our common stock commenced trading on the NYSE under the ticker symbol "KEM" (NYSE: KEM).
We
had 73 stockholders of record as of April 30, 2011. The following table represents the high and low sale prices of our common stock for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2011
|
|
Fiscal Year 2010
|
|
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
First
|
|
$
|
7.35
|
|
$
|
4.20
|
|
$
|
0.84
|
|
$
|
0.24
|
|
|
Second
|
|
|
11.88
|
|
|
6.78
|
|
|
1.60
|
|
|
0.45
|
|
|
Third
|
|
|
14.82
|
|
|
8.31
|
|
|
1.60
|
|
|
1.15
|
|
|
Fourth
|
|
|
16.49
|
|
|
12.90
|
|
|
1.74
|
|
|
1.24
|
|
We
have not declared or paid any cash dividends on our common stock since our initial public offering in October 1992. We do not anticipate paying dividends in the foreseeable future.
Any future determination to pay dividends will be at the discretion of our Board and will depend upon, among other factors, the capital requirements, operating results, and our financial condition.
See
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."
In
fiscal year 2008, we reactivated our share buyback program and repurchased 1.2 million shares of our common stock. In fiscal year 2009, we indefinitely suspended the share
buyback program and since that time we have not repurchased any shares of our common stock.
27
Table of Contents
PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return for the past five fiscal years, beginning on April 1, 2006,
with the Russell Microcap Index and a peer group (the "Peer Group") comprised of certain companies which manufacture capacitors and with which we generally compete. The Peer Group is comprised of AVX
Corporation, Thomas & Betts Corporation and Vishay Intertechnology, Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among KEMET Corporation, the Russell MicroCap Index
and a Peer Group
-
*
-
$100
invested on 3/31/06 in stock or index, including reinvestment of dividends. Fiscal year ended March 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative Total Return, Fiscal Years Ended
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
Kemet Corporatin
|
|
|
100.00
|
|
|
80.78
|
|
|
42.66
|
|
|
2.59
|
|
|
14.78
|
|
|
52.20
|
|
|
Russell MicroCap
|
|
|
100.00
|
|
|
103.05
|
|
|
82.27
|
|
|
47.97
|
|
|
79.22
|
|
|
99.27
|
|
|
Peer Group
|
|
|
100.00
|
|
|
92.96
|
|
|
69.82
|
|
|
43.25
|
|
|
78.39
|
|
|
114.21
|
|
28
Table of Contents
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by stockholders and equity compensation plans that were not approved
by stockholders as of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Plan category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants,
and rights
|
|
Weighted-average
exercise price of
outstanding
options, warrants,
and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
|
|
Equity compensation plans approved by stockholders
|
|
|
1,626,380
|
|
$
|
15.03
|
|
|
568,995
|
|
|
Equity compensation plans not approved by stockholders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,626,380
|
|
$
|
15.03
|
|
|
568,995
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes our selected historical consolidated financial information for each of the last five years. The selected
financial information under the captions "Income Statement Data," "Per Share Data," "Balance Sheet Data," and "Other Data" shown below has been derived from our audited consolidated financial
statements. This selected financial information reflects the Reverse Stock Split of the Company's common stock at a ratio equal to one-for-three. This table should be read in
conjunction with other consolidated financial information of KEMET, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial
statements, included elsewhere herein. The data set forth below may not be indicative of our
29
Table of Contents
future
financial condition or results of operations (see Item 1A, "Risk Factors") (amounts in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008(3)
|
|
2007(1)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,018,488
|
|
$
|
736,335
|
|
$
|
804,385
|
|
$
|
850,120
|
|
$
|
658,714
|
|
|
Operating income (loss)
|
|
|
129,261
|
|
|
7,697
|
|
|
(271,112
|
)
|
|
(8,881
|
)
|
|
7,078
|
|
|
Interest income
|
|
|
(218
|
)
|
|
(188
|
)
|
|
(618
|
)
|
|
(6,061
|
)
|
|
(6,283
|
)
|
|
Interest expense
|
|
|
30,175
|
|
|
26,008
|
|
|
29,789
|
|
|
21,696
|
|
|
9,865
|
|
|
Net income (loss)(7)
|
|
|
63,044
|
|
|
(69,447
|
)
|
|
(285,209
|
)
|
|
(25,215
|
)
|
|
4,206
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—basic
|
|
$
|
2.11
|
|
$
|
(2.57
|
)
|
$
|
(10.62
|
)
|
$
|
(0.91
|
)
|
$
|
0.15
|
|
|
Net income (loss) per share—diluted
|
|
$
|
1.22
|
|
$
|
(2.57
|
)
|
$
|
(10.62
|
)
|
|
(0.91
|
)
|
|
0.15
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
884,309
|
|
$
|
740,961
|
|
$
|
714,151
|
|
$
|
1,250,999
|
|
$
|
942,373
|
|
|
Working capital
|
|
|
316,866
|
|
|
226,600
|
|
|
195,142
|
|
|
239,059
|
|
|
337,943
|
|
|
Long-term debt(2)(4)(5)(6)
|
|
|
231,215
|
|
|
231,629
|
|
|
280,752
|
|
|
269,354
|
|
|
195,931
|
|
|
Other non-current obligations
|
|
|
59,727
|
|
|
55,626
|
|
|
57,316
|
|
|
80,130
|
|
|
19,587
|
|
|
Stockholders' equity(7)
|
|
|
359,753
|
|
|
284,272
|
|
|
240,039
|
|
|
576,831
|
|
|
577,419
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used in) operating activities
|
|
$
|
113,968
|
|
$
|
54,620
|
|
$
|
5,725
|
|
$
|
(20,563
|
)
|
$
|
21,933
|
|
|
Capital expenditures
|
|
|
34,989
|
|
|
12,921
|
|
|
30,541
|
|
|
43,605
|
|
|
28,670
|
|
|
Research and development
|
|
|
25,864
|
|
|
22,064
|
|
|
28,956
|
|
|
35,699
|
|
|
33,385
|
|
-
(1)
-
In
fiscal year 2007, the Company acquired the EPCOS tantalum business unit.
-
(2)
-
In
fiscal year 2007, the Company issued $175.0 million in Convertible Notes.
-
(3)
-
In
fiscal year 2008, the Company acquired Evox Rifa on April 24, 2007 and Arcotronics on October 12, 2007.
-
(4)
-
In
fiscal year 2008, the Company entered into two Senior Facility Agreements with UniCredit whereby it borrowed a total of
€96.8 million.
-
(5)
-
In
fiscal year 2009, the Company paid the outstanding balance on its Senior Notes and refinanced Facility A with UniCredit totaling
€60.0 million ($79.8 million). On April 3, 2009, the Company extended Facility B with UniCredit totaling €35.0 million
($46.6 million). The scheduled amortization of Facility A was amended effective June 30, 2009.
-
(6)
-
In
fiscal year 2010, the Company repurchased $93.9 million in face value of Convertible Notes and incurred additional borrowings of
$57.8 million with K Financing.
-
(7)
-
In
fiscal year 2010, the Platinum Warrant was initially classified as a derivative and the Company recorded a mark-to-market
adjustment of $81.1 million through earnings. As of September 29, 2009, the strike price of the Platinum Warrant became fixed and the Company reevaluated the Platinum Warrant concluding
that the Platinum Warrant is indexed to the Company's own stock and should be classified as a component of equity. The Company reclassified the warrant liability of $112.5 million into the line
item "Additional paid-in capital" on the Consolidated Balance Sheets and the Platinum Warrant was no longer marked-to-market.
30
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash
flows, and financial condition for the three fiscal years ended March 31, 2011. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements and related notes appearing elsewhere in this report. Except for the historical information contained herein, the discussions in this document contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Our actual future results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the Item 1A, "Risk Factors" and, from time to time, in our other filings with
the Securities and Exchange Commission.
Business Overview
We are a leading global manufacturer of a wide variety of capacitors. Our product offerings include tantalum, multilayer ceramic, solid
and electrolytic aluminum and film and paper capacitors. Capacitors are fundamental components of most electronic circuits and are found in communication systems, data processing equipment, personal
computers, cellular phones, automotive electronic systems, defense and aerospace systems, consumer electronics, power management systems
and many other electronic devices and systems. Capacitors are typically used to filter out interference, smooth the output of power supplies, block the flow of direct current while allowing
alternating current to pass and for many other purposes. We manufacture a broad line of capacitors in many different sizes and configurations using a variety of raw materials. Our product line
consists of over 250,000 distinct part configurations distinguished by various attributes, such as dielectric (or insulating) material, configuration, encapsulation, capacitance level and tolerance,
performance characteristics and packaging. Most of our customers have multiple capacitance requirements, often within each of their products. Our broad product offering allows us to meet the majority
of those needs independent of application and end use. In fiscal year 2011, fiscal year 2010 and fiscal year 2009, we shipped 35 billion, 31 billion and 32 billion capacitors,
respectively. We believe the medium-to-long term demand for the various types of capacitors we offer will continue to grow on a regional and global basis due to a variety of
factors, including increasing demand for and complexity of electronic products, growing demand for technology in emerging markets and the ongoing development of new solutions for energy generation and
conservation.
Our Competitive Strengths
We believe that we benefit from the following competitive strengths:
Strong Customer Relationships.
We have a large and diverse customer base. We believe that our persistent emphasis on quality control
and history of
performance establishes loyalty with OEMs, EMSs and distributors. Our customer base includes most of the world's major electronics OEMs (including Alcatel-Lucent USA, Inc.,
Apple Inc., Cisco Systems, Inc., Dell Inc., Hewlett-Packard Company, International Business Machines Corporation, Intel Corporation, Motorola, Inc. and Nokia Corporation),
EMSs (including Celestica Inc., Elcoteq SE, Flextronics International LTD, Jabil Circuit, Inc. and Sanmina-SCI Corporation) and distributors (including
TTI, Inc., Arrow Electronics, Inc. and Avnet, Inc.). Our strong, extensive and efficient worldwide distribution network is one of our differentiating factors. We believe our ability to
provide innovative and flexible service offerings, superior customer support and focus on speed-to-market result in a more rewarding customer experience, earning us a high
degree of customer loyalty.
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Table of Contents
Breadth of Our Diversified Product Offering and Markets.
We believe that we have the most complete line of primary capacitor types,
across a full
spectrum of dielectric materials including tantalum, ceramic,
solid and electrolytic aluminum, film and paper. As a result, we believe we can satisfy virtually all of our customers' capacitance needs, thereby strengthening our position as their supplier of
choice. We sell our products into a wide range of different end markets, including computing, industrial, telecommunications, transportation, consumer, defense and healthcare markets across all
geographic regions. No single end market segment accounted for more than 30% and only one customer, TTI, Inc., accounted for more than 10% of our net sales in fiscal year 2011. Our largest
customer is a distributor, and no single end use customer accounted for more than 5% of our net sales in fiscal year 2011. We believe that well-balanced product, geographic and customer
diversification help us mitigate some of the negative financial impact through economic cycles.
Leading Market Positions and Operating Scale.
Based on net sales, we believe that we are the largest manufacturer of tantalum
capacitors in the world
and one of the largest manufacturers of direct current film capacitors in the world and have a significant market position in the specialty ceramics and custom wet aluminum electrolytic markets. We
believe that our leading market positions and operating scale allow us to realize production efficiencies, leverage economies of scale and capitalize on growth opportunities in the global capacitor
market.
Strong Presence in Specialty Products.
We engage in design collaboration with our customers in order to meet their specific needs and
provide them
with customized products satisfying their engineering specifications. During fiscal years 2011 and 2010, respectively, specialty products accounted for 36.5% and 29.6% of our revenue. By allocating an
increasing portion of our management resources and research and development investment to specialty products, we have established ourselves as one of the leading innovators in this fast growing
emerging segment of the market, which includes healthcare, renewable energy, telecom infrastructure and oil and gas. For example, in August 2009, we were selected as one of thirty companies to receive
a grant from the Department of Energy. Our $15.1 million award will enable us to produce film and electrolytic capacitors within the United States to support alternative energy products and
emerging green technologies such as hybrid electric drive vehicles. Producing these parts in the United States will allow us to compete effectively in the alternative energy market in North America
and South America.
Low-Cost Production.
We believe we have some of the lowest cost production facilities in the industry. Many of our key customers have
relocated their production facilities to Asia, particularly China. We believe our manufacturing facilities in China have low production costs and are in close proximity to the large and growing
Chinese market; in addition, we have the ability to increase capacity and change product mix to meet our customers' needs. We believe our operations in Mexico, which are our primary production
facilities supporting our North American and, to a larger extent, European customers, are among the most cost-efficient in the world.
Our Brand.
Founded by Union Carbide in 1919 as KEMET Laboratories, we believe that we have a reputation as a high quality, efficient and
affordable
partner that sets our customers' needs as the top priority. This has allowed us to successfully attract loyal clientele and enabled us to expand our operations and market share over the past few
years. We believe our commitment to addressing the needs of the industry in which we operate has differentiated us from our competitors and established us as the
"Easy-To-Buy-From" company.
Our People.
We believe that we have successfully developed a unique corporate culture based on innovation, customer focus and
commitment. We have a
strong, highly experienced and committed team in each of our markets. Many of our professionals have developed unparalleled experience in building leadership positions in new markets, as well as
successfully integrating acquisitions. Our 16 member management team has an average of over 12 years of experience with us and an average of over 25 years of experience in the
manufacturing industry.
32
Table of Contents
Business Strategy
Our strategy is to use our position as a leading, high-quality manufacturer of capacitors to capitalize on the increasingly
demanding requirements of our customers. Key elements of our strategy include:
One KEMET Campaign.
We continue to focus on improving our business capabilities through various initiatives that all fall under our One
KEMET
campaign. The One KEMET campaign aims to ensure that we as a company are focused on the same goals and working with the same processes and systems to ensure consistent quality and service. This effort
was launched to ensure that as we continue to grow we not only remain grounded in our core principles but that we use those principles, operating procedures and systems as the foundation from which to
expand. These initiatives include our global Oracle software implementation which is on schedule, our Lean and Six Sigma culture evolution and our global customer accounts management system which is
now in place and growing.
Develop Our Significant Customer Relationships and Industry Presence.
We intend to continue to be responsive to our customers' needs
and requirements
and to make order entry and fulfillment easier, faster, more flexible and more reliable for our customers, by focusing on building products around customers' needs, by giving decision making authority
to customer-facing personnel and by providing purpose-built systems and processes, such as our Easy-To-Buy-From order entry system.
Continue to Pursue Low-Cost Production Strategy.
We are actively pursuing measures that will allow us to maintain our position as a
low-cost producer of capacitors with facilities close to our customers. We have shifted and will continue to shift production to low cost locations in order to reduce material and labor
costs. Additionally, we are focused on developing more cost-efficient manufacturing equipment and processes, designing manufacturing plants for more efficient production and reducing
work-in-process ("WIP") inventory by building products from start to finish in one factory. Furthermore, we are implementing the Lean and Six Sigma methodology to drive towards
zero product defects so that quality remains a given in the minds of our customers.
Leverage Our Technological Competence and Expand Our Leadership in Specialty Products.
We continue to leverage our technological
competence to
introduce new products in a timely and cost-efficient manner and generate an increasing portion of our sales from new and customized solutions to meet our customers' varied and evolving
capacitor needs as well as to improve financial performance. We believe that by continuing to build on our strength in the higher growth and higher margin specialty segments of the capacitor market,
we will be well positioned to achieve our long-term growth objectives while also improving our profitability. During fiscal year 2011, we introduced 14,947 new products of which 129 were
first to market, and specialty products accounted for 36.5% of our revenue over this period.
Further Expand Our Broad Capacitance Capabilities.
We define ourselves as "The Capacitance Company" and strive to be the supplier of
choice for all
our customers' capacitance needs across the full spectrum of dielectric materials including tantalum, ceramic, solid and electrolytic aluminum, film and paper. While we believe we have the most
complete line of capacitor technologies across these primary capacitor types, we intend to continue to research and pursue additional capacitance technologies and solutions in order to maximize the
breadth of our product offerings.
Selectively Target Complementary Acquisitions.
We expect to continue to evaluate and pursue strategic acquisition opportunities, some
of which may be
significant in size, which would enable us to enhance our competitive position and expand our market presence. Our strategy is to acquire complementary capacitor and other related businesses that
would allow us to leverage our business model, potentially
including those involved in other passive components that are synergistic with our customers' technologies and our current product offerings.
33
Table of Contents
Promote the KEMET Brand Globally.
We are focused on promoting the KEMET brand globally by highlighting the high-quality and high
reliability of our products and our superior customer service. We will continue to market our products to new and existing customers around the world in order to expand our business. We continue to be
recognized by our customers as a leading global supplier. For example, in calendar year 2010, we received the "Supplier Excellence Award" from TTI, Inc., an electronics distributor.
Global Sales & Marketing Strategy.
Our motto "Think Global Act Local" describes our approach to sales and marketing. Each of
our three sales
regions (Americas, EMEA and APAC) has account managers, field application engineers and strategic marketing managers in the region. In addition, we also have local customer and quality-control support
in each region. This organizational structure allows us to respond to the needs of our customers on a timely basis and in their native language. The regions are managed locally and report to a senior
manager who is on the KEMET Leadership Team. Furthermore, this organizational structure ensures the efficient communication of our global goals and strategies and allows us to serve the language,
cultural and other region-specific needs of our customers.
KEMET
is organized into three business groups: Tantalum, Ceramic, and Film and Electrolytic. Each business group is responsible for the operations of certain manufacturing sites as well
as all related research and development efforts. The sales and marketing functions are shared by each of the business groups, the costs of which are allocated to the business groups. In addition, all
corporate costs are allocated to the business groups. See Note 7, "Segment and Geographic Information" to our consolidated financial statements.
Recent Developments and Trends
Net sales for the quarter ended March 31, 2011 were $261.5 million, which is a 22.8% increase over the same quarter last
fiscal year. Net income was $21.1 million, or $0.57 per
basic share and $0.40 per diluted share for the fourth quarter of fiscal year 2011 compared to net income of $0.3 million or $0.01 per basic and diluted share for the same quarter last
year.
On
November 3, 2010, our shareholders approved a Reverse Stock Split of our common stock at a ratio of 1-for-3. The Reverse Stock Split became effective
November 5, 2010, pursuant to a Certificate of Amendment to our Restated Certificate of Incorporation filed with the Secretary of State of Delaware. We had 27.1 million shares of common
stock issued and outstanding immediately following the completion of the Reverse Stock Split. We are authorized in the Restated Certificate of Incorporation to issue up to a total of
300.0 million shares of common stock at a $0.01 par value per share, which was unchanged by the amendment. The Reverse Stock Split did not affect the registration of the common stock under the
Exchange Act or the listing of the common stock, under the symbol "KEM", although the post-split shares have a new listing with a new CUSIP number. In the Consolidated Balance Sheets, the
line item "Stockholders' equity" has been retroactively adjusted to reflect the Reverse Stock Split for all periods presented by reducing the line item "Common stock" and increasing the line item
"Additional paid-in capital", with no change to Stockholders' equity in the aggregate. All share and per share computations have been retroactively adjusted for all periods presented to
reflect the decrease in shares as a result of this transaction except as otherwise noted.
On
December 20, 2010, in connection with a secondary offering in which K Equity was the selling security holder, K Equity sold a portion of the Platinum Warrant representing the
right to purchase 10.9 million shares of our common stock to the underwriters of the secondary offering, who exercised their full portion of the warrant in a cashless exercise, based on an
exercise price of $1.05 per share and a closing price of $12.80, and received a net settlement of 10.0 million shares of our common stock. These shares were sold as part of a secondary offering
and KEMET did not receive any of the proceeds from the transaction. K Equity retained the unsold portion of the warrant, representing the
34
Table of Contents
right
to purchase 16.0 million shares of our common stock. In March 2011, the Company registered seven million shares subject to issuance upon the partial exercise of the remaining Platinum
Warrant.
On
April 8, 2010, we reported that we had reached an agreement with three labor unions in Italy and with the regional government in Emilia Romagna, Italy to proceed with the first
phase of our restructuring plan. We intend to focus on producing specialty products in Europe and the U.S. and shift standard and commodity production to lower cost regions.
On May 5, 2010, we completed a private placement of $230.0 million in aggregate principal amount of our 10.5% Senior
Notes due 2018 (the "10.5% Senior Notes"). The private placement of the 10.5% Senior Notes resulted in proceeds to us of $222.2 million. We used a portion of the proceeds of the private
placement to repay all of the outstanding indebtedness under our credit facility with K Financing, LLC, our EUR 60 million credit facility and EUR 35 million credit
facility with UniCredit and our term loan with a subsidiary of Vishay. We used a portion of the remaining proceeds to fund a previously announced tender offer to purchase $40.5 million in
aggregate principal amount of our 2.25% Convertible Senior Notes (the "Convertible Notes") and to pay costs incurred in connection with the private placement, the tender offer and the foregoing
repayments. We incurred $6.6 million in costs related to the execution of the offering.
On
October 26, 2010, we filed a Form S-4 to offer, in exchange for our Old Notes, up to $230.0 million in aggregate principal amount of 10.5% Senior
Notes due 2018 and the guarantees thereof which have been registered under the Securities Act of 1933, as amended ("Securities Act"). The Form S-4 was declared effective on
December 14, 2010 and on January 13, 2011 we completed the exchange for all of the Old Notes.
On September 30, 2010, KEMET Electronics Corporation ("KEC") and KEMET Electronics Marketing (S) Pte Ltd. ("KEMET
Singapore") (each a "Borrower" and, collectively, the "Borrowers") entered into a Loan and Security Agreement (the "Loan and Security Agreement"), with Bank of America, N.A, as the administrative
agent and the initial lender. The Loan and Security Agreement provides a $50 million revolving line of credit, which is bifurcated into a U.S. facility (for which KEC is the Borrower) and a
Singapore facility (for which KEMET Singapore is the Borrower). The size of the U.S. facility and the Singapore facility can fluctuate as long as the Singapore facility does not exceed
$30 million and the total facility does not exceed $50 million. A portion of the U.S. facility and the Singapore facility can be used to issue letters of credit. The Loan and Security
Agreement expires on September 30, 2014.
As announced on June 21, 2010, our common stock was approved for listing on the NYSE Amex. Trading commenced on the NYSE Amex on
June 22, 2010, under the ticker symbol "KEM" (NYSE Amex: KEM).
On
November 11, 2010, we provided written notice to the NYSE Amex that we intended to transfer our listing to the New York Stock Exchange ("NYSE"). We voluntarily ceased trading
on the NYSE Amex, with the last day of trading on the NYSE Amex being on November 12, 2010. Our common stock commenced trading on November 15, 2010, on the NYSE under the ticker symbol
"KEM" (NYSE: KEM).
35
Table of Contents
Looking out to the first quarter of fiscal year 2012, we anticipate an increase in net sales in a range of 5% to 7% when compared to
the fourth quarter of fiscal year 2011. This increase is primarily due to Film and Electrolytic's machinery division while we anticipate a slight increase in our component sales. Consolidated gross
margin is expected to be comparable to the fourth quarter of fiscal year 2011.
Off-Balance Sheet Arrangements
Other than operating lease commitments, we are not a party to any material off-balance sheet financing arrangements that
have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our accounting policies are summarized in Note 1, "Organization and Significant Accounting Policies" to the consolidated
financial statements. The following identifies a number of policies which require significant judgments and estimates, or are otherwise deemed critical to our financial statements.
Our
estimates and assumptions are based on historical data and other assumptions that we believe are reasonable. These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting
period.
Our
judgments are based on our assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations
reported in the consolidated financial statements. Readers should understand that actual future results could differ from these estimates, assumptions, and judgments.
A
quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used
to assess sensitivity (i.e., 1%, 10%, etc.) are included to allow readers of this Annual Report on Form 10-K to understand a general cause and effect of changes in the
estimates and do not represent our predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecast, and estimates require regular
review and adjustment. We believe the following critical accounting policies contain the most significant judgments and estimates used in the preparation of the consolidated financial statements:
REVENUE RECOGNITION.
We recognize revenue only when all of the following criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.
A
portion of sales consists of products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the
product and to customers with similar or less stringent requirements. Products with customer specific requirements are tested and approved by the customer before we mass produce and ship the products.
We recognize revenue at shipment as the sales terms for products produced with customer specific requirements do not contain a final customer acceptance provision or other provisions that are unique
and would otherwise allow the customer different acceptance rights.
36
Table of Contents
A
portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. Our distributor policy includes inventory
price protection and "ship-from-stock and debit" ("SFSD") programs common in the industry. The price protection policy protects the value of the distributors' inventory in the
event we reduce our published selling price to distributors. This program allows the distributor to debit us for the difference between our list price and the lower authorized price for specific
parts. We establish price protection reserves on specific parts residing in distributors' inventories in the period that the price protection is formally authorized by KEMET.
The
SFSD program provides a mechanism for the distributor to meet a competitive price after obtaining authorization from the local Company sales office. This program allows the distributor to ship its
higher-priced inventory and debit us for the difference between our list price and the lower authorized price for that specific transaction. We establish reserves for our SFSD program based primarily
on historical SFSD activity and certain distributors' actual inventory levels comprising approximately 80% of the total global distributor inventory related to customers which participate in the SFSD
program. Estimates are evaluated on a quarterly basis. If these estimates were changed by 1% in fiscal year 2011, Net sales would be impacted by $0.7 million.
The
establishment of these reserves is recognized as a component of the line item "Net sales" on the Consolidated Statements of Operations, while the associated reserves are included in the line item
"Accounts receivable" on the Consolidated Balance Sheets.
INVENTORIES.
Inventories are valued at the lower of cost or market, with cost determined under the first-in,
first-out method and market based upon net realizable value. The valuation of inventories requires us to make estimates. We also must assess the prices at which we believe the finished
goods inventory can be sold compared to its cost. A sharp decrease in demand could adversely impact earnings as the reserve estimates could increase.
PENSION AND POST-RETIREMENT BENEFITS.
Our management, with the assistance of actuarial firms, performs actuarial valuations of
the fair values of our pension and post-retirement plans' benefit obligations. We make certain assumptions that have a significant effect on the calculated fair value of the obligations
such as the:
-
•
-
weighted-average discount rate—used to arrive at the net present value of the obligation;
-
•
-
salary increases—used to calculate the impact future pay increases will have on post-retirement
obligations; and
-
•
-
medical cost inflation—used to calculate the impact future medical costs will have on
post-retirement obligations.
We
understand that these assumptions directly impact the actuarial valuation of the obligations recorded on the Consolidated Balance Sheets and the income or expense that flows through the
Consolidated Statements of Operations.
We
base our assumptions on either historical or market data that we consider reasonable. Variations in these assumptions could have a significant effect on the amounts reported in Consolidated Balance
Sheets and the Consolidated Statements of Operations. The most critical assumption relates to the discount rate. A 25 basis point increase or decrease in the discount rate would result in changes to
the projected benefit obligation of $(1.5) million and $1.6 million, respectively.
ASSET IMPAIRMENT—GOODWILL AND LONG-LIVED ASSETS.
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, and intangible
37
Table of Contents
assets
with indefinite useful lives are no longer amortized but are tested for impairment at least on an annual basis. We perform our impairment test during the first quarter of each fiscal year and
when otherwise warranted.
We
evaluate our goodwill on a reporting unit basis. This requires us to estimate the fair value of the reporting units based on the future net cash flows expected to be generated. The impairment test
involves a comparison of the fair value of each reporting unit, with the corresponding carrying amounts. If the reporting unit's carrying amount exceeds its fair value, then an indication exists that
the reporting unit's goodwill may be impaired. The impairment to be recognized is measured by the amount by which the carrying value of the reporting unit's goodwill being measured exceeds its implied
fair value. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the sum of the
amounts assigned to identified net assets. As a result, the implied fair value of goodwill is generally the residual amount that results from subtracting the value of net assets including all tangible
assets and identified intangible assets from the fair value of the reporting unit's fair value. We determine the fair value of our reporting units using an income-based, discounted cash flow ("DCF")
analysis, and market-based approaches (Guideline Publicly Traded Company Method and Guideline Transaction Method) which examine transactions in the marketplace involving the sale of the stocks of
similar publicly-owned companies, or the sale of entire companies engaged in operations similar to KEMET. In addition to the above described reporting unit valuation techniques, our goodwill
impairment assessment also considers our aggregate fair value based upon the value of our outstanding shares of common stock.
Long-lived
assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of a
long-lived asset or group of assets may not be recoverable. A long-lived asset classified as held for sale is initially measured and reported at the lower of its carrying
amount or fair value less cost to sell. Long-lived assets to be disposed of other than by sale are classified as held and used until the long-lived asset is disposed of.
Tests
for the recoverability of a long-lived asset to be held and used are performed by comparing the carrying amount of the long-lived asset to the sum of the estimated future
undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, we use future projections of cash flows directly associated with, and which are
expected to arise as a direct result of, the use and eventual disposition of the assets. These assumptions include, among other estimates, periods of operation and projections of sales and cost of
sales. Changes in any of these estimates could have a material effect on the estimated future undiscounted cash flows expected to be generated by the asset. If it is determined that the book value of
a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value. The fair
value is calculated as the discounted cash flows of the underlying assets.
We
perform impairment tests on our goodwill and intangible assets with indefinite useful life during the first quarter of each fiscal year and when otherwise warranted. In the first quarter of fiscal
year 2011, we completed our impairment test on our intangible assets with indefinite useful life and concluded that no further impairment existed. A one percent increase or decrease in the discount
rate used in the valuation would have resulted in changes in the fair value of ($7.0) million and $8.5 million, respectively.
In
the first quarter of fiscal year 2009, we hired an independent appraisal firm to test goodwill for impairment. We recorded a goodwill impairment charge of $88.6 million based on the annual
impairment test, which represented all of the Ceramic goodwill balance and $76.2 million of the Film and Electrolytic goodwill balance. Also occurring in the first quarter
38
Table of Contents
of
fiscal year 2009, and in part as a result of the goodwill impairment testing, we hired an independent appraisal firm to test the long-lived assets of Ceramic for impairment. As a result
of this testing, Ceramic recorded a $5.3 million impairment charge to write off all of its other intangible assets and recorded a $58.6 million impairment charge to write down
long-lived assets. We hired an independent appraisal firm to test goodwill and our long-lived assets groups for impairment as of September 30, 2008. These impairment
tests resulted in a second quarter goodwill impairment charge of $85.7 million to write off all of the remaining goodwill of Film and Electrolytic and Tantalum. Utilizing an independent
appraisal firm, we also completed long-lived asset impairment tests in the third and fourth quarters of fiscal year 2009 and concluded that no further impairment existed. The goodwill
impairment and long-lived asset charge to earnings were non-cash in nature.
The
goodwill and long-lived asset impairment reviews are highly subjective and involve the use of significant estimates and assumptions in order to calculate the impairment charges.
Estimates of business enterprise fair value use discounted cash flow and other fair value appraisal models and involve making assumptions for future sales trends, market conditions, growth rates, cost
reduction initiatives and cash flows for the next several years. Future changes in assumptions may negatively impact future valuations. In future tests for recoverability, adverse changes in
undiscounted cash flow assumptions could result in an impairment of certain long-lived assets that would require a non-cash charge to the Consolidated Statements of Operations
and may have a material effect on our financial condition and operating results.
INCOME TAXES.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than
not to be realized.
We
believe that it is more likely than not that a portion of the deferred tax assets in various jurisdictions will not be realized, based on the scheduled reversal of deferred tax liabilities, the
recent history of cumulative losses, and the insufficient evidence of projected future taxable income to overcome the loss history. We have provided a valuation allowance related to any benefits from
income taxes resulting from the application of a statutory tax rate to the deferred tax assets. We continue to have net deferred tax assets (future tax benefits) in several jurisdictions which we
expect to realize assuming, based on certain estimates and assumptions, sufficient taxable income can be generated to utilize these deferred tax benefits. If these estimates and related assumptions
change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional tax expense.
The
accounting rules require that we recognize in our financial statements, the impact of a tax position, if that position is "more likely than not" of being sustained on audit, based on the technical
merits of the position. Any accruals for estimated interest and penalties would be recorded as a component of income tax expense.
To
the extent that the provision for income taxes changed by 1% of income before income taxes, consolidated net income would change by $0.7 million in fiscal year 2011.
39
Table of Contents
Results of Operations
Historically, revenues and earnings may or may not be representative of future operating results due to various economic and other
factors. The following table sets forth the Consolidated Statements of Operations for the periods indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Net sales
|
|
$
|
1,018,488
|
|
$
|
736,335
|
|
$
|
804,385
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
752,846
|
|
|
611,638
|
|
|
736,551
|
|
|
|
Selling, general and administrative expenses
|
|
|
104,607
|
|
|
86,085
|
|
|
93,505
|
|
|
|
Research and development
|
|
|
25,864
|
|
|
22,064
|
|
|
28,956
|
|
|
|
Restructuring charges
|
|
|
7,171
|
|
|
9,198
|
|
|
30,874
|
|
|
|
Goodwill Impairment
|
|
|
—
|
|
|
—
|
|
|
174,327
|
|
|
|
Write down of long-lived assets
|
|
|
—
|
|
|
656
|
|
|
67,624
|
|
|
|
Net gain on sales and disposals of assets
|
|
|
(1,261
|
)
|
|
(1,003
|
)
|
|
(25,505
|
)
|
|
|
Curtailment gains on benefit plans
|
|
|
—
|
|
|
—
|
|
|
(30,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
129,261
|
|
|
7,697
|
|
|
(271,112
|
)
|
|
Other (income) expense, net
|
|
|
63,513
|
|
|
72,108
|
|
|
17,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
65,748
|
|
|
(64,411
|
)
|
|
(288,411
|
)
|
|
Income tax expense (benefit)
|
|
|
2,704
|
|
|
5,036
|
|
|
(3,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
63,044
|
|
$
|
(69,447
|
)
|
$
|
(285,209
|
)
|
|
|
|
|
|
|
|
|
|
Comparison of Fiscal Year 2011 to Fiscal Year 2010
Overview:
Net sales:
Net sales for fiscal year 2011 were $1,018.5 million, which represents a 38.3% increase from fiscal year 2010 net sales of
$736.3 million. Tantalum, Ceramic and Film and Electrolytic sales increased by $142.8 million, $39.4 million and $100.0 million, respectively. Unit sales volume for fiscal
year 2011 increased 12.6% as compared to fiscal year 2010. Unit sales volume and revenue were positively affected by the global economic recovery which resulted in an increase in demand for
capacitors. Average selling prices increased 22.8% for fiscal year 2011 as compared to fiscal year 2010 primarily due to a positive region mix shift to the Americas and EMEA and we increased prices to
offset the increase in raw material prices. Improving economic conditions led to higher sales in the first three quarters of fiscal year 2011. Net sales for the first quarter of fiscal year 2011
improved to $243.8 million, a 14.5% increase over the fourth quarter of fiscal year 2010, and our net sales improved to $248.6 million in the second quarter of fiscal year 2011, a 2.0%
increase compared to first fiscal quarter of fiscal year 2011. Similarly, our net sales further improved to $264.7 million in the third quarter of fiscal year 2011, a 6.5% increase compared to
the second quarter of fiscal year 2011. The fourth quarter of fiscal year 2011 showed a 1.2% decrease in our net sales to $261.5 million compared to the third quarter of fiscal year 2011.
40
Table of Contents
In fiscal year 2011 and 2010, net sales by region were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2011
|
|
|
|
Fiscal Year 2010
|
|
|
|
Net Sales
|
|
% of Total
|
|
|
|
Net Sales
|
|
% of Total
|
|
|
Americas
|
|
$
|
254.1
|
|
|
25
|
%
|
Americas
|
|
$
|
180.1
|
|
|
24
|
%
|
|
APAC
|
|
|
381.7
|
|
|
37
|
%
|
APAC
|
|
|
285.0
|
|
|
39
|
%
|
|
EMEA
|
|
|
382.7
|
|
|
38
|
%
|
EMEA
|
|
|
271.2
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,018.5
|
|
|
|
|
|
|
$
|
736.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
fiscal year 2011 and 2010, net sales by channel were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2011
|
|
Fiscal Year
2010
|
|
|
Distributors
|
|
|
50
|
%
|
|
48
|
%
|
|
EMS
|
|
|
14
|
%
|
|
15
|
%
|
|
OEM
|
|
|
36
|
%
|
|
37
|
%
|
Gross Margin:
Gross margin for the fiscal year ended March 31, 2011 increased to 26.1% of net sales from 16.9% of net sales in the prior
fiscal year. Several factors contributed to the increase in gross margin percentage in fiscal year 2011. The primary contributor to the higher gross margin was the increase in unit sales volume and
overall average selling prices. During the remainder of this restructuring effort, we expect to spend between $28 million to $33 million, primarily in our Film and Electrolytic Business
Group. We expect our restructuring plan to result in a reduction in our European operating cost structure of approximately $3 million in fiscal year 2012 compared to fiscal year 2011. We
anticipate that benefits from the restructuring efforts will continue to grow during fiscal years 2013 and 2014. During fiscal year 2014, we expect to realize the full potential of the restructuring
plan, achieving total annualized operational cost reductions of approximately $24 million versus fiscal year 2011.
Selling, general and administrative expenses ("SG&A"):
SG&A expenses were $104.6 million, or 10.3% of net sales for fiscal year 2011 compared to $86.1 million, or 11.7% of net
sales for fiscal year 2010. The $18.5 million increase in SG&A expenses for fiscal year 2011 compared to fiscal year 2010 includes the following increases: $8.0 million in selling
expenses consistent with the increase in sales, $5.1 million related to incentive accruals, $2.6 million related to marketing expenses, $1.9 million related to ERP integration
costs and $1.5 million in debt and stock registration related fees in fiscal year 2011 compared to fiscal year 2010. These higher expenses were offset by a decrease in expenses associated with
the cancellation of an incentive plan of $0.9 million which was incurred in the second quarter of fiscal year 2010 and a $1.8 million decrease in depreciation in fiscal year 2011
compared to fiscal year 2010.
Restructuring charges:
During fiscal year 2011, we incurred $7.2 million in restructuring charges compared to $9.2 million in restructuring
charges in fiscal year 2010. The restructuring charges in fiscal year 2011 included $6.0 million in charges for the relocation of equipment to Mexico and China as well as relocation of the
European distribution center, and $1.2 million for reductions in workforce. The $1.2 million in personnel reduction costs related to the following: headcount reductions in Italy,
$0.8 million; the closure of our Nantong, China plant expected to be completed in the second quarter of fiscal year 2012, $0.6 million; and $1.5 million related to the Company's
initiative to reduce overhead within the Company as a whole and headcount reductions in Mexico. These personnel reduction charges were
41
Table of Contents
offset
by a $1.7 million reversal of prior expenses primarily associated with the Cassia Integrazione Guadagni Straordinaria ("CIGS") plan as it was determined that only 107 employees are
expected to participate in the program through October 2012. The agreements with the labor unions allowed the Company to place up to 260 workers, on a rotation basis, on the CIGS plan to save labor
costs. CIGS is a temporary plan to save labor costs whereby a company may temporarily "lay off" employees while the government continues to pay their wages for a maximum of 36 months for the
program. The employees who are in CIGS are not working, but are still employed by the Company. Only employees that are not classified as management or executive level personnel can participate in the
CIGS program. Upon termination of the plan, the affected employees return to work.
During
fiscal year 2010, we recognized charges of $9.2 million for reductions in workforce primarily associated with a headcount reduction of 32 employees in Portugal, a headcount
reduction of 57 employees in Finland, and a headcount reduction of 85 employees in Italy. There were also headcount
reductions at the executive level related to our initiative to reduce overhead within the Company as a whole. In addition to the headcount reduction in Portugal, management incurred charges related to
the relocation of equipment from Portugal to Mexico. Machinery not used for production in Portugal and not relocated to Mexico was disposed of and as such the Company recorded an impairment charge of
$0.7 million to write down the equipment to scrap value. Overall, we incurred charges of $1.6 million related to the relocation of equipment to Mexico from Portugal and various other
locations. The restructuring plan includes implementing programs to make the Company more competitive, removing excess capacity, moving production to lower cost locations, and eliminating unnecessary
costs throughout the Company.
Research and development:
Research and development expenses were $25.9 million, or 2.5% of net sales for fiscal year 2011, compared to
$22.1 million, or 3.0% of net sales for fiscal year 2010. The 17.2% increase resulted from increased activities to ensure that products are available to support KEMET's growth and to meet
customers' needs. The growth in spending also reflects KEMET's increased focus on specialty product development which requires an increase in sampling, tooling, and testing.
Operating income:
Operating income for fiscal year 2011 was $129.3 million compared to $7.7 million in the prior fiscal year. Increased
average selling prices and volume led to a gross margin increase of $140.9 million in fiscal year 2011 as compared to fiscal year 2010. Additionally, in fiscal year 2011 compared to fiscal year
2010, restructuring charges were $2.0 million lower, gain on disposal of assets improved $0.2 million and write down of long lived assets improved $0.7 million. These favorable
items were offset by a $22.3 million increase in operating expenses in fiscal year 2011 compared to fiscal year 2010.
Other (income) expense, net:
Other (income) expense, net was $63.5 million in fiscal year 2011 compared to $72.1 million in fiscal year 2010, a
decrease of $8.6 million. The improvement is primarily attributable to the Platinum Warrant no longer being marked to market in fiscal year 2011 compared to a non-cash
$81.1 million charge related to the increase in value of the Platinum Warrant in fiscal year 2010. In addition, we granted a supplier of tantalum powder and wire and related materials, a
non-exclusive license, with a right to sublicense, concerning certain patents and patent applications which resulted in a net gain of $2.0 million in fiscal year 2011. Also, there
was a gain on foreign currency translation of $(2.9) million in fiscal year 2011 as compared to a $4.1 million loss on foreign currency translation in fiscal year 2010, primarily due to the
change in the value of the Euro compared to the dollar. These items were offset by a $38.2 million non-cash loss recognized on the early extinguishment of debt in fiscal year 2011
compared to a $38.9 million non-cash gain recognized on the early extinguishment of debt in fiscal year
42
Table of Contents
2010.
Also offsetting the favorable items was a $4.1 million increase in net interest expense in fiscal year 2011 compared with fiscal year 2010 primarily related to the restructuring of our
debt to the 10.5% Senior Notes.
Income taxes:
The effective income tax rate for fiscal year 2011 was 4.1%, resulting in an income tax expense of $2.7 million. This compares
to an effective income tax rate of (7.8)% for fiscal year 2010 that resulted in an income tax expense of $5.0 million. The fiscal year 2011 income tax expense is primarily comprised of an
income tax expense resulting from operations in certain foreign jurisdictions totaling $2.5 million and state income tax expense of $0.2 million. The $2.5 million income tax
expense from foreign operations includes a $4.4 million benefit from a net decrease in the valuation allowance reserve of certain foreign subsidiaries. No federal income tax expense is
recognized for the U.S. taxable income for fiscal year 2011 due to the utilization of a portion of the federal net operating loss carryforward resulting in a partial release of the valuation
allowance.
Segment Review:
The following table sets forth the operating income (loss) for each of our business segments for the fiscal years 2011 and 2010. The
table also sets forth each of the segments' net sales as a percentage
43
Table of Contents
of
total net sales, the net income (loss) components as a percentage of total net sales (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2011
|
|
March 31, 2010
|
|
|
|
Amount
|
|
% to Total
Sales
|
|
Amount
|
|
% to Total
Sales
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
$
|
486,595
|
|
|
47.8
|
%
|
$
|
343,797
|
|
|
46.7
|
%
|
|
|
Ceramic
|
|
|
210,509
|
|
|
20.7
|
%
|
|
171,153
|
|
|
23.2
|
%
|
|
|
Film and Electrolytic
|
|
|
321,384
|
|
|
31.6
|
%
|
|
221,385
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,018,488
|
|
|
100.0
|
%
|
$
|
736,335
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
$
|
147,298
|
|
|
|
|
$
|
77,882
|
|
|
|
|
|
|
Ceramic
|
|
|
67,864
|
|
|
|
|
|
50,490
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
50,480
|
|
|
|
|
|
(3,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
265,642
|
|
|
26.1
|
%
|
|
124,697
|
|
|
16.9
|
%
|
|
SG&A expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
45,275
|
|
|
|
|
|
36,948
|
|
|
|
|
|
|
Ceramic
|
|
|
23,845
|
|
|
|
|
|
19,223
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
35,487
|
|
|
|
|
|
29,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
104,607
|
|
|
10.3
|
%
|
|
86,085
|
|
|
11.7
|
%
|
|
R&D expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
12,678
|
|
|
|
|
|
11,139
|
|
|
|
|
|
|
Ceramic
|
|
|
6,362
|
|
|
|
|
|
6,167
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
6,824
|
|
|
|
|
|
4,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,864
|
|
|
2.5
|
%
|
|
22,064
|
|
|
3.0
|
%
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
864
|
|
|
|
|
|
1,941
|
|
|
|
|
|
|
Ceramic
|
|
|
444
|
|
|
|
|
|
543
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
5,863
|
|
|
|
|
|
6,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,171
|
|
|
0.7
|
%
|
|
9,198
|
|
|
1.2
|
%
|
|
Write down of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
—
|
|
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
—
|
|
|
—
|
|
|
656
|
|
|
0.0
|
%
|
|
(Gain) loss on sales and disposals of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
25
|
|
|
|
|
|
(1,226
|
)
|
|
|
|
|
|
Ceramic
|
|
|
(1,578
|
)
|
|
|
|
|
183
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
292
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1,261
|
)
|
|
(0.1
|
)%
|
|
(1,003
|
)
|
|
(0.1
|
)%
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
88,456
|
|
|
|
|
|
28,424
|
|
|
|
|
|
|
Ceramic
|
|
|
38,791
|
|
|
|
|
|
24,374
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
2,014
|
|
|
|
|
|
(45,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
129,261
|
|
|
12.7
|
%
|
|
7,697
|
|
|
1.0
|
%
|
|
Other (income) expense, net
|
|
|
63,513
|
|
|
6.2
|
%
|
|
72,108
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
65,748
|
|
|
6.5
|
%
|
|
(64,411
|
)
|
|
(8.7
|
)%
|
|
Income tax expense
|
|
|
2,704
|
|
|
0.3
|
%
|
|
5,036
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
63,044
|
|
|
6.2
|
%
|
$
|
(69,447
|
)
|
|
(9.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Table of Contents
Tantalum
The table sets forth Net sales, Gross margin, Gross margin as a percentage of net sales, Operating income and Operating income as a
percentage of net sales for our Tantalum business group for the fiscal years 2011 and 2010 (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2011
|
|
March 31, 2010
|
|
|
|
Amount
|
|
% to
Net Sales
|
|
Amount
|
|
% to
Net Sales
|
|
|
Net sales
|
|
$
|
486,595
|
|
|
|
|
$
|
343,797
|
|
|
|
|
|
Gross margin
|
|
|
147,298
|
|
|
30.3
|
%
|
|
77,882
|
|
|
22.7
|
%
|
|
Operating income
|
|
|
88,456
|
|
|
18.2
|
%
|
|
28,424
|
|
|
8.3
|
%
|
Net sales
—Net sales increased $142.8 million or 41.5% during fiscal year 2011, as compared to fiscal year 2010. Unit sales volume for fiscal
year 2011 increased 11.5% as compared to fiscal year 2010. Average selling prices increased 26.9% in fiscal year 2011 as compared to fiscal year 2010. The increase in revenue was primarily driven by
an increase in regional unit sales volumes in the Americas and EMEA as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sales
Volumes
as a % of
Total Unit
Sales
|
|
|
|
|
|
Change in
Units Sold
|
|
|
|
2011
|
|
2010
|
|
|
Americas
|
|
|
20.6
|
%
|
|
16.4
|
%
|
|
40.0
|
%
|
|
EMEA
|
|
|
27.8
|
%
|
|
25.4
|
%
|
|
21.8
|
%
|
|
APAC
|
|
|
51.6
|
%
|
|
58.1
|
%
|
|
(1.1
|
)%
|
Gross Margin
—Gross margin increased $69.4 million during fiscal year 2011 as compared to fiscal year 2010. The primary contributors to the
higher gross margin percentage were the increase in unit sales volume and average selling prices.
Operating income
—Operating income for fiscal year 2011 was $88.5 million as compared to an operating income of $28.4 million for fiscal
year 2010. Operating income was favorably impacted by a $69.4 million increase in gross margin, a $1.1 million decrease in restructuring costs, and a $0.7 million reduction in the
write down of long-lived assets in fiscal year 2011 compared to fiscal
year 2010. These improvements were offset by a $9.9 million increase in operating expenses in fiscal year 2011 compared to fiscal year 2010 as well as a decrease of $1.3 million
primarily related to the receipt of $1.5 million in fiscal year 2011 that was held in escrow related to the fiscal year 2010 sale of wet tantalum capacitors .
45
Table of Contents
Ceramic
The table sets forth Net sales, Gross margin, Gross margin as a percentage of net sales, Operating income and Operating income as a
percentage of net sales for our Ceramic business group for the fiscal years 2011 and 2010 (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2011
|
|
March 31, 2010
|
|
|
|
Amount
|
|
% to
Net Sales
|
|
Amount
|
|
% to
Net Sales
|
|
|
Net sales
|
|
$
|
210,509
|
|
|
|
|
$
|
171,153
|
|
|
|
|
|
Gross margin
|
|
|
67,864
|
|
|
32.2
|
%
|
|
50,490
|
|
|
29.5
|
%
|
|
Operating income
|
|
|
38,791
|
|
|
18.4
|
%
|
|
24,374
|
|
|
14.2
|
%
|
Net sales
—Net sales increased $39.4 million or 23.0% during fiscal year 2011, as compared to fiscal year 2010. The increase was primarily
attributable to higher unit sales volumes and average selling prices. Unit sales volume increased 12.2% during fiscal year 2011, as compared to fiscal year 2010 due to strong market demand across all
regions. Average selling prices increased 9.2% due primarily to region mix improvements over fiscal year 2010. The increase in revenue was primarily driven by an increase in regional unit sales volume
in EMEA and Americas as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sales
Volumes
as a % of
Total Unit
Sales
|
|
|
|
|
|
Change in
Units Sold
|
|
|
|
2011
|
|
2010
|
|
|
Americas
|
|
|
32.1
|
%
|
|
33.1
|
%
|
|
8.6
|
%
|
|
EMEA
|
|
|
34.3
|
%
|
|
27.3
|
%
|
|
41.2
|
%
|
|
APAC
|
|
|
33.5
|
%
|
|
39.6
|
%
|
|
(5.2
|
)%
|
Gross Margin
—Gross margin increased $17.4 million during fiscal year 2011 as compared to fiscal year 2010. The improvement in gross margin can
be attributed primarily to higher unit sales volume and higher average selling prices.
Operating income
—Operating income improved to $38.8 million in fiscal year 2011 from $24.4 million during fiscal year 2010. The
$14.4 million increase in operating income was attributable to the $17.4 million increase in gross margin as well as the gain on sales and disposals of assets of $1.6 million
related to the sale of an idle U.S. facility in fiscal year 2011 compared to the $0.2 million
loss on sales and disposals of assets in fiscal year 2010. These improvements were offset by a $4.8 million increase in operating expenses during fiscal year 2011 as compared to fiscal year
2010.
46
Table of Contents
Film and Electrolytic
The table sets forth Net sales, Gross margin, Gross margin as a percentage of net sales, Operating income (loss) and Operating income
(loss) as a percentage of net sales for our Tantalum business group for the fiscal years 2011 and 2010 (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2011
|
|
March 31, 2010
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
|
Net sales
|
|
$
|
321,384
|
|
|
|
|
$
|
221,385
|
|
|
|
|
|
Gross margin
|
|
|
50,480
|
|
|
15.7
|
%
|
|
(3,675
|
)
|
|
(1.7
|
)%
|
|
Operating income (loss)
|
|
|
2,014
|
|
|
0.6
|
%
|
|
(45,101
|
)
|
|
(20.4
|
)%
|
Net sales
—Net sales increased by $100.0 million or 45.2% in fiscal year 2011, as compared to fiscal year 2010. Unit sales volume for the fiscal
year 2011 increased 27.6% as compared to fiscal year 2010. Average selling prices increased 13.8% for fiscal year 2011 as compared to fiscal year 2010. The net sales increase relates to an increase in
the automotive and industrial customer base across all regions, particularly by EMEA and APAC. Our increase in average selling prices was partially attributed to our effort to expand into alternative
and energy saving products.
Gross Margin
—Gross margin increased $54.2 million during fiscal year 2011 as compared to fiscal year 2010. The increase was due to both
improved average selling prices across all regions and product lines and increased unit sales volume. The manufacturing restructuring plan is ongoing with benefits expected beginning in fiscal year
2012.
Operating income (loss)
—Operating income was $2.0 million in fiscal year 2011, compared to a $45.1 million operating loss in fiscal year
2010. The improvement in operating income of $47.8 million was attributable primarily to the $54.9 million improvement in gross margin as well as the $0.9 million decrease in
restructuring charges. These increases were offset by a $7.6 million increase in operating expenses and a $0.3 million increase in loss on sales and disposals of assets.
Comparison of Fiscal Year 2010 to Fiscal Year 2009
Overview:
Net sales:
Net sales for fiscal year 2010 were $736.3 million, which represented an 8.5% decrease from fiscal year 2009 net sales of
$804.4 million. Film and Electrolytic sales decreased $40.4 million while Tantalum and Ceramic sales decreased by $22.9 million and $4.8 million, respectively. Unit sales
volume for fiscal year 2010 decreased 18.8% as compared to fiscal year 2009. Unit sales volume and revenue were negatively affected by the global economic downturn that adversely impacted all regions
as well as the weak automotive market, a decline in the DC Film product line due to lower demand in the consumer, lighting, and automotive industries and a softening in the High Capacitance Value
("Hi-CV") market in Asia. Average selling prices increased 10.8% for fiscal year 2010 as compared to fiscal year 2009 primarily due to a positive product mix shift to polymer products for
Tantalum. This increase was partially offset by an unfavorable product mix shift in Film and Electrolytic as our most significant sales decrease occurred with industrial customers who purchase our
highest technology products that typically have the highest average selling price. Improving economic conditions led to higher sales in each of the quarters following the fourth quarter of fiscal year
2009 when the impact of the economic downturn had its most adverse affect on our sales and net sales declined to $136.0 million. Net sales for the first quarter of fiscal year 2010 improved to
$150.2 million, a 10.4% increase over the fourth quarter of fiscal year 2009, and our net sales improved to $173.3 million
47
Table of Contents
in
the second quarter of fiscal year 2010, a 15.4% increase compared to first fiscal quarter of fiscal year 2010. Similarly, our net sales further improved to $199.9 million in the third
quarter of fiscal year 2010, a 15.3% increase compared to the second quarter of fiscal year 2010, and our net sales improved to $213.0 million in the fourth quarter of fiscal year 2010, a 6.5%
increase compared to the third fiscal quarter of fiscal year 2010.
By
region, 24% of net sales for the year ended March 31, 2010 were to customers in the Americas, 39% were to customers in APAC, and 37% were to customers in EMEA. For the year
ended March 31, 2009, 25% of net sales were to customers in the Americas, 35% were to customers in APAC, and 40% were to customers in EMEA.
By
channel, 48% of net sales for the year ended March 31, 2010, were to distribution customers, 15% were to EMS customers, and 37% were to OEM customers. For the year ended
March 31, 2009, 47% of net sales were to distribution customers, 20% were to EMS customers, and 33% were to OEM customers.
Gross Margin:
Gross margin for the fiscal year ended March 31, 2010 increased to 16.9% of net sales from 8.4% of net sales in the prior year.
Several factors contributed to the increase in gross margin percentage in fiscal year 2010. Cost savings from several cost reduction plans that were initiated throughout fiscal year 2009 were
partially responsible for the improvement. In fiscal year 2009, we incurred costs in conjunction with the relocation and start up of equipment in China and a $7.5 million lower of cost or
market charge to adjust Ceramic Hi-CV inventory to its net realizable value. In addition, there was an overall increase in average selling prices which contributed to the increase in gross
margin. These improvements were offset by the negative gross margin in Film and Electrolytic.
Selling, general and administrative expenses:
SG&A expenses were $86.1 million, or 11.7% of net sales for fiscal year 2010 compared to $93.5 million, or 11.6% of net
sales for fiscal year 2009. The $7.4 million decrease in SG&A expenses for fiscal year 2010 compared to fiscal year 2009 includes a decrease of $5.9 million in selling expenses primarily
attributable to cost reductions resulting from our reduction in workforce, a 10% wage reduction for all salaried employees effective January 1, 2009 (where possible) and the temporary
suspension of the match in our U.S. defined contribution retirement plan, reducing it from 6% to 0%. Effective August 1, 2009, we reactivated our U.S. defined contribution retirement plan
match, and in Mexico and China we retracted the 10% wage reduction. Effective October 1, 2009, we also retracted our 10% wage reduction in the U.S. In addition, during fiscal year 2010, costs
related to integrating our acquisitions were $5.2 million lower, bad debt expense was $1.3 million lower and pension charges were $2.8 million lower. In addition, we reduced
redundant administrative expenses primarily within Film and Electrolytic and reduced legal expenses. The reduction in these costs was offset by an increase of $10.0 million related to incentive
accruals, information systems, and depreciation.
Restructuring charges:
During fiscal year 2010, we recognized charges of $9.2 million for reductions in workforce primarily associated with a headcount
reduction of 32 employees in Portugal, a headcount reduction of 57 employees in Finland, and a headcount reduction of 85 employees in Italy. There were also headcount reductions at the executive level
related to our initiative to reduce overhead within the Company as a whole. In addition to the headcount reduction in Portugal, management incurred charges related to the relocation of equipment from
Portugal to Mexico. Machinery not used for production in Portugal and not relocated to Mexico was disposed of and, as such, the Company recorded an impairment charge of $0.7 million to write
down the equipment to scrap value. Overall, we incurred
48
Table of Contents
charges
of $1.6 million related to the relocation of equipment to Mexico from Portugal and various other locations. The restructuring plan includes implementing programs to make the Company
more competitive, removing excess capacity, moving production to lower cost locations, and eliminating unnecessary costs throughout the Company. During fiscal year 2009, we recognized charges of
$30.9 million for reductions in workforce worldwide related to three cost reduction plans. We recognized charges of $4.9 million primarily for reductions in workforce in Film and
Electrolytic. We recognized charges of $3.5 million related primarily to the reduction of approximately 1,500 manufacturing positions representing approximately 14% of our workforce. We
recognized charges of $16.1 million related to the rationalization of corporate staff and manufacturing support functions in the U.S., Europe, Mexico, and Asia. Approximately 640 employees were
affected by this action. Additionally, during fiscal year 2009, we incurred expenses of $5.5 million for the relocation of equipment.
Goodwill Impairment and Write Down of Long-Lived Assets:
We tested goodwill for impairment during the first and second quarters of fiscal year 2009. Due to reduced earnings and cash flows
caused by macro-economic factors, excess capacity issues and delays in integrating recently acquired businesses, we reduced our earnings forecast in conjunction with such testing. As a result, our
impairment testing for fiscal year 2009 led to a $174.3 million non-cash goodwill impairment charge to write off all of the carrying value of our goodwill. We determined the
business enterprise fair value by using both an income approach and a market approach. Film and Electrolytic recorded a $137.5 million impairment charge, Tantalum recorded a
$24.4 million impairment charge, and Ceramic recorded a $12.4 million impairment charge.
In
addition, and partially as a result of the goodwill impairment testing, Ceramic recorded a $5.3 million impairment charge to write off all of its other intangible assets and
recorded a $58.6 million impairment
charge to write down its long-lived assets. Also, we closed a research and development facility located in Heidenheim, Germany that served Tantalum. As part of this closure, we abandoned
certain long-lived assets and incurred $1.2 million in impairment charges related to the abandonment.
In
fiscal year 2010, the Company recorded an impairment charge of $0.7 million to write down equipment that was not being used in Portugal to scrap value.
Research and development:
Research and development expenses were $22.1 million, or 3.0% of net sales for fiscal year 2010, compared to
$29.0 million, or 3.6% of net sales for fiscal year 2009. The 23.8% decrease resulted from savings from our reduction in workforce, a 10% wage reduction for all salaried employees effective
January 1, 2009 (where possible) and the temporary suspension of the match in our U.S. defined contribution retirement plan, reducing it from 6% to 0%.
Operating income (loss):
Operating income for the fiscal year 2010 was $7.7 million compared to an operating loss of $271.1 million in the prior
fiscal year. In fiscal year 2009, we incurred non-cash charges of $242.0 million for goodwill impairment and the write down of long-lived assets compared to
$0.7 million in fiscal year 2010. Increased average selling prices and decreased costs led to a gross margin increase of $56.9 million in fiscal year 2010 as compared to fiscal year
2009. Additionally, operating expenses were $14.3 million lower than in fiscal year 2009 and restructuring charges were $21.7 million lower than fiscal year 2009. These favorable items
were partially offset by a decrease in gains on the sales and disposals of assets of $24.5 million in fiscal year 2009 compared to fiscal year 2010 and curtailment gains on benefit plans of
$30.8 million in fiscal year 2009.
49
Table of Contents
Other (income) expense, net:
Other (income) expense, net was $72.1 million in fiscal year 2010 compared to $17.3 million in fiscal year 2009, an
increase of $54.8 million. The increase in expense primarily related to an $81.1 million increase in value of the Platinum Warrant, an increase of $18.2 million in foreign
currency translation losses and a $0.4 million decrease in interest income. These increases in expense and decrease in income were partially offset by a $3.8 million decrease in interest
expense and a gain on early extinguishment of debt of $38.9 million in fiscal year 2010 compared to a loss on early extinguishment of debt of $2.2 million in fiscal year 2009.
Income taxes:
The effective income tax rate for fiscal year 2010 was (7.8)%, resulting in an income tax expense of $5.0 million. This compares
to an effective income tax rate of 1.1% for fiscal year 2009 that resulted in an income tax benefit of $3.2 million. The fiscal year 2010 income tax expense is primarily comprised of an income
tax expense resulting from operations in certain foreign jurisdictions totaling $4.1 million. The $4.1 million income tax expense from foreign operations includes a $2.8 million
increase in the valuation allowance reserve of a subsidiary operating in Italy. In addition, there is a $1.0 million state income tax expense, primarily due to the gain on the early
extinguishment of debt. No federal income tax expense is recognized for the U.S. taxable income for fiscal year 2010 due to the utilization of a portion of the federal net operating loss carryforward
resulting in a partial release of the valuation allowance. Future fluctuations in the valuation allowance are expected to result in an income tax rate below the 30% to 36% historical average.
Segment Review:
The following table sets forth the operating income (loss) for each of our business segments for the fiscal years 2010 and 2009
respectively. The table also sets forth each of the segments' net sales as
50
Table of Contents
a
percentage of total net sales, the net income (loss) components as a percentage of total net sales(amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
Amount
|
|
% to Total
Sales
|
|
Amount
|
|
% to Total
Sales
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
$
|
343,797
|
|
|
46.7
|
%
|
$
|
366,675
|
|
|
45.6
|
%
|
|
|
Ceramic
|
|
|
171,153
|
|
|
23.2
|
%
|
|
175,916
|
|
|
21.9
|
%
|
|
|
Film and Electrolytic
|
|
|
221,385
|
|
|
30.1
|
%
|
|
261,794
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
736,335
|
|
|
100.0
|
%
|
$
|
804,385
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
$
|
77,882
|
|
|
|
|
$
|
52,709
|
|
|
|
|
|
|
Ceramic
|
|
|
50,490
|
|
|
|
|
|
9,874
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
(3,675
|
)
|
|
|
|
|
5,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
124,697
|
|
|
16.9
|
%
|
|
67,834
|
|
|
8.4
|
%
|
|
SG&A expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
36,948
|
|
|
|
|
|
37,062
|
|
|
|
|
|
|
Ceramic
|
|
|
19,223
|
|
|
|
|
|
21,803
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
29,914
|
|
|
|
|
|
34,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
86,085
|
|
|
11.7
|
%
|
|
93,505
|
|
|
11.6
|
%
|
|
R&D expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
11,139
|
|
|
|
|
|
13,999
|
|
|
|
|
|
|
Ceramic
|
|
|
6,167
|
|
|
|
|
|
8,291
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
4,758
|
|
|
|
|
|
6,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,064
|
|
|
3.0
|
%
|
|
28,956
|
|
|
3.6
|
%
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
1,941
|
|
|
|
|
|
11,388
|
|
|
|
|
|
|
Ceramic
|
|
|
543
|
|
|
|
|
|
7,143
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
6,714
|
|
|
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,198
|
|
|
1.2
|
%
|
|
30,874
|
|
|
3.8
|
%
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
—
|
|
|
|
|
|
24,378
|
|
|
|
|
|
|
Ceramic
|
|
|
—
|
|
|
|
|
|
12,418
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
—
|
|
|
|
|
|
137,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
—
|
|
|
—
|
|
|
174,327
|
|
|
21.7
|
%
|
|
Write down of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
656
|
|
|
|
|
|
1,855
|
|
|
|
|
|
|
Ceramic
|
|
|
—
|
|
|
|
|
|
65,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
656
|
|
|
0.1
|
%
|
|
67,624
|
|
|
8.4
|
%
|
51
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
Amount
|
|
% to Total
Sales
|
|
Amount
|
|
% to Total
Sales
|
|
|
(Gain) loss on sales and disposals of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
(1,226
|
)
|
|
|
|
|
(26,435
|
)
|
|
|
|
|
|
Ceramic
|
|
|
183
|
|
|
|
|
|
1,123
|
|
|
|
|
|
|
Film and Electrolytic
|
|
|
40
|
|
|
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1,003
|
)
|
|
(0.1
|
)%
|
|
(25,505
|
)
|
|
(3.2
|
)%
|
|
Curtailment gain on benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
—
|
|
|
—
|
|
|
(22,856
|
)
|
|
|
|
|
|
Ceramic
|
|
|
—
|
|
|
—
|
|
|
(7,979
|
)
|
|
|
|
|
|
Film and Electrolytic
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
—
|
|
|
—
|
|
|
(30,835
|
)
|
|
(3.8
|
)%
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
|
|
28,424
|
|
|
|
|
|
13,318
|
|
|
|
|
|
|
Ceramic
|
|
|
24,374
|
|
|
|
|
|
(98,694
|
)
|
|
|
|
|
|
Film and Electrolytic
|
|
|
(45,101
|
)
|
|
|
|
|
(185,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,697
|
|
|
1.0
|
%
|
|
(271,112
|
)
|
|
(33.7
|
)%
|
|
Other expense, net
|
|
|
72,108
|
|
|
9.8
|
%
|
|
17,299
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(64,411
|
)
|
|
(8.7
|
)%
|
|
(288,411
|
)
|
|
(35.9
|
)%
|
|
Income tax expense (benefit)
|
|
|
5,036
|
|
|
0.7
|
%
|
|
(3,202
|
)
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(69,447
|
)
|
|
(9.4
|
)%
|
$
|
(285,209
|
)
|
|
(35.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Table of Contents
Tantalum
The table sets forth Net sales, Gross margin, Gross margin as a percentage of net sales, Operating income and Operating income as a
percentage of net sales for our Tantalum business group for the fiscal years 2011 and 2010 (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
|
Net sales
|
|
$
|
343,797
|
|
|
|
|
$
|
366,675
|
|
|
|
|
|
Gross margin
|
|
|
77,882
|
|
|
22.7
|
%
|
|
52,709
|
|
|
14.4
|
%
|
|
Operating income
|
|
|
28,424
|
|
|
8.3
|
%
|
|
13,318
|
|
|
3.6
|
%
|
Net sales
—Net sales decreased $22.9 million or 6.2% during fiscal year 2010, as compared to fiscal year 2009. Unit sales volume for fiscal year
2010 decreased 18.2% as compared to fiscal year 2009. Unit sales volume and revenue were negatively affected by the global economic downturn that adversely impacted all regions as well as the weak
automotive market in the U.S. and Europe. Average selling prices increased 14.6% for fiscal year 2010 as compared to fiscal year 2009 due to a favorable product mix shift to polymer products. Volumes
for Tantalum products continued to be very strong in Asia, where sales represented 47.9% of total tantalum revenue.
Gross Margin
—Gross margin increased $25.2 million during fiscal year 2010 as compared to fiscal year 2009. The primary contributors to the
higher gross margin percentage were the cost savings initiated throughout fiscal year 2009 through reductions in headcount and other manufacturing expenses, which were realized in fiscal year 2010.
Additionally, there was an increase in sales of higher margin polymer and specialty products which contributed to the increase in gross margin percentage.
Operating income
—Operating income for fiscal year 2010 was $28.4 million as compared to an operating income of $13.3 million for fiscal
year 2009. Operating income was favorably impacted by a $25.2 million increase in gross margin, a $9.4 million decrease in restructuring costs, no charges for goodwill impairment in
fiscal year 2010 compared to charges of $24.4 million in fiscal year 2009, a reduction of $1.2 million in the write down of long-lived assets in fiscal year 2010 compared to
fiscal year 2009, the reduction in operating expenses of $3.0 million related to the closure of a research and development facility located in Heidenheim, Germany, and company-wide
restructuring efforts. Offsets to the gains were a decrease of $25.2 million in gains on the sales and disposals of assets and a decrease of $22.9 million in curtailment gains on benefit
plans.
Ceramic
The table sets forth Net sales, Gross margin, Gross margin as a percentage of net sales, Operating income (loss) and Operating income
(loss) as a percentage of net sales for our Ceramic business group for the fiscal years 2011 and 2010 (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
|
Net sales
|
|
$
|
171,153
|
|
|
|
|
$
|
175,916
|
|
|
|
|
|
Gross margin
|
|
|
50,490
|
|
|
29.5
|
%
|
|
9,874
|
|
|
5.6
|
%
|
|
Operating income (loss)
|
|
|
24,374
|
|
|
14.2
|
%
|
|
(98,694
|
)
|
|
(56.1
|
)%
|
Net sales
—Net sales decreased $4.8 million or 2.7% during fiscal year 2010, as compared to fiscal year 2009. The decrease was attributable to
lower volumes. Volumes decreased 2.8% during fiscal year
53
Table of Contents
2010,
as compared to fiscal year 2009 due primarily to the lingering effects of the global economic downturn as well as softening in the Hi-CV market in Asia and a weakening of the
automotive markets in the U.S. and Europe. Average selling prices in fiscal year 2010 increased 1% compared to fiscal year 2009.
Gross Margin
—Gross margin increased $40.6 million during fiscal year 2010 as compared to fiscal year 2009. A significant contributor to the
lower gross margin in fiscal year 2009 was a $7.5 million lower-of-cost-or-market charge to adjust Hi-CV inventory to its net
realizable value. Price decreases in Hi-CV products in Asia caused the net realizable value of the inventory to fall below its carrying value. Additionally, we continue to improve our
gross margin through cost reductions, product and region mix improvements and improvements in production efficiencies.
Operating income (loss)
—Operating income improved from a loss of $98.7 million during fiscal year 2009 to an operating income of
$24.4 million during fiscal year 2010. The increase in operating income of $123.1 million was attributable to the $40.6 million increase in gross margin as well as the absence in
fiscal year 2010 of charges for goodwill impairment and the write down of long-lived assets compared to charges of $78.2 million in fiscal year 2009. In addition, compared to fiscal
year 2009, restructuring charges decreased by $6.6 million, operating expenses decreased $4.7 million, and loss on sales and disposals of assets decreased $0.9 million in fiscal
year 2010.
Film and Electrolytic
The table sets forth Net sales, Gross margin, Gross margin as a percentage of net sales, Operating loss and Operating loss as a
percentage of net sales for our Film and Electrolytic business group for the fiscal years 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
|
Net sales
|
|
$
|
221,385
|
|
|
|
|
$
|
261,794
|
|
|
|
|
|
Gross margin
|
|
|
(3,675
|
)
|
|
(1.7
|
)%
|
|
5,251
|
|
|
2.0
|
%
|
|
Operating (loss)
|
|
|
(45,101
|
)
|
|
(20.4
|
)%
|
|
(185,736
|
)
|
|
(70.9
|
)%
|
Net sales
—Net sales decreased by $40.4 million or 15.4% in fiscal year 2010, as compared to fiscal year 2009. Unit sales volume for the fiscal
year 2010 decreased 19.1% as compared to fiscal year 2009. Average selling prices decreased 2.0% for fiscal year 2010 as compared to fiscal year 2009. Sales volumes declined in the DC Film product
line due to lower demand in the consumer, lighting, and automotive industries. The average sales price decreased due to a mix shift in Film and Electrolytic as our most significant sales decrease
occurred with industrial customers who purchase our highest technology products that typically have the highest average selling price.
Gross Margin
—Gross margin decreased $8.9 million during fiscal year 2010 as compared to fiscal year 2009. The primary contributors to the lower
gross margin percent were the decline in volume and average selling prices mentioned above. The lower sales levels were not sufficient to cover fixed costs; and therefore, gross margin declined by
$8.9 million in fiscal year 2010 as compared to fiscal year 2009. In fiscal year 2010, we initiated a restructuring plan primarily designed to improve the operating results of Film and
Electrolytic. We anticipate the plan will be completed in the second half of fiscal year 2014.
Operating loss
—Operating loss was $45.1 million in fiscal year 2010, compared to an operating loss of $185.7 million in fiscal year
2009. The improvement in operating loss of $140.6 million was attributable primarily to the non-cash goodwill impairment charge of $137.5 million taken in fiscal year
54
Table of Contents
2009.
Additionally, operating expenses decreased $6.6 million and restructuring charges decreased $5.6 million in fiscal year 2010 compared to fiscal year 2009. Offsetting these items
was a decrease of $8.9 million in gross margin in fiscal year 2010, compared to fiscal year 2009, and no losses on the sales and disposals of assets in fiscal year 2010 compared to a loss on
sales and disposals of assets of $0.2 million in fiscal year 2009.
Liquidity and Capital Resources
Our liquidity needs arise from working capital requirements, acquisitions, capital expenditures, principal and interest payments on
debt, and costs associated with the implementation of our restructuring plan. Historically, these cash needs have been met by cash flows from operations, borrowings under credit agreements and
existing cash balances.
Issuance of 10.5% Senior Notes
On May 5, 2010, we completed a private placement of $230.0 million in aggregate principal amount of our 10.5% Senior
Notes due 2018 (the "10.5% Senior Notes") to several Initial Purchasers (the "Initial Purchasers") represented by Banc of America Securities LLC pursuant to an exemption from the registration
requirements under the Securities Act of 1933, as amended. The
Initial Purchasers subsequently sold the 10.5% Senior Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside of the United States pursuant
to Regulation S under the Securities Act.
The
private placement of the 10.5% Senior Notes resulted in proceeds to us of $222.2 million. We used a portion of the proceeds of the private placement to repay all of the
outstanding indebtedness under our credit facility with K Financing, LLC, our EUR 60 million credit facility and EUR 35 million credit facility with UniCredit and our term loan
with a subsidiary of Vishay. We used a portion of the remaining proceeds to fund a previously announced tender offer to purchase $40.5 million in aggregate principal amount of our 2.25%
Convertible Senior Notes (the "Convertible Notes") and to pay costs incurred in connection with the private placement, the tender offer and the foregoing repayments. We incurred approximately
$6.6 million in costs related to the execution of the offering, and these costs are capitalized and will be amortized over the term of the 10.5% Senior Notes.
The
10.5% Senior Notes were issued pursuant to a 10.5% Senior Notes Indenture, dated as of May 5, 2010, by and among us, our domestic restricted subsidiaries (the "Guarantors")
and Wilmington Trust Company, as trustee (the "Trustee"). The 10.5% Senior Notes will mature on May 1, 2018, and bear interest at a stated rate of 10.5% per annum, payable
semi-annually in cash in arrears on May 1 and November 1 of each year, beginning on November 1, 2010. The 10.5% Senior Notes are our senior obligations and are
guaranteed by each of the Guarantors and secured by a first priority lien on 51% of the capital stock of certain of our foreign restricted subsidiaries.
The
terms of the 10.5% Senior Notes Indenture, among other things, limit our ability and the ability of our restricted subsidiaries to (i) incur additional indebtedness or issue
certain preferred stock; (ii) pay dividends on, or make distributions in respect of, our capital stock or repurchase our capital stock; (iii) make certain investments or other restricted
payments; (iv) sell certain assets; (v) create liens or use assets as security in other transactions; (vi) enter into sale and leaseback transactions; (vii) merge,
consolidate or transfer or dispose of substantially all assets; (viii) engage in certain transactions with affiliates; and (ix) designate subsidiaries as unrestricted subsidiaries. These
covenants are subject to a number of important limitations and exceptions that are described in the 10.5% Senior Notes Indenture.
The
10.5% Senior Notes are redeemable, in whole or in part, at any time on or after May 1, 2014, at the redemption prices specified in the 10.5% Senior Notes Indenture. At any
time prior to May 1, 2013, we may redeem up to 35% of the aggregate principal amount of the 10.5% Senior Notes with the
55
Table of Contents
net
cash proceeds from certain equity offerings at a redemption price equal to 110.5% of the principal amount thereof, together with accrued and unpaid interest, if any, to the redemption date. In
addition, at any time prior to May 1, 2014, we may redeem the 10.5% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 10.5% Senior Notes so
redeemed, plus a "make whole" premium and together with accrued and unpaid interest, if any, to the redemption date.
Upon
the occurrence of a change of control triggering event specified in the 10.5% Senior Notes Indenture, we must offer to purchase the 10.5% Senior Notes at a redemption price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.
The
10.5% Senior Notes Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in
the 10.5% Senior Notes Indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. The 10.5% Senior Notes
Indenture also provides for events of default with respect to the collateral, which include default in the performance of (or repudiation, disaffirmation or judgment of unenforceability or assertion
of unenforceability) by us or a Guarantor with respect to the provision of security documents under the 10.5% Senior Notes Indenture. These events of default are subject to a number of important
qualifications, limitations and exceptions that are described in the 10.5% Senior Notes Indenture. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount
of the then outstanding 10.5% Senior Notes may declare the principal of and accrued but unpaid interest, including additional interest, on all the 10.5% Senior Notes to be due and payable.
On
May 17, 2010, we consummated a tender offer to purchase $40.5 million in aggregate principal amount of our Convertible Notes. We used $37.9 million from the bond
offering discussed above to extinguish the tendered notes. We incurred approximately $0.2 million in costs related to the execution of this tender offer, and these costs were included in the
line item "(Gain) loss on early extinguishment of debt" on the Consolidated Statements of Operations.
Registration Rights Agreement
On May 5, 2010, in connection with the private placement of the 10.5% Senior Notes, we, the Guarantors and the Initial
Purchasers of the 10.5% Senior Notes entered into the Registration Rights Agreement. The terms of the Registration Rights Agreement require the Company and the Guarantors to (i) use our
commercially reasonable efforts to file with the Securities and Exchange Commission within 210 days after the date of the initial issuance of the 10.5% Senior Notes, a registration statement
with respect to an offer to exchange the 10.5% Senior Notes for a new issue of debt securities registered under the Securities Act, with terms substantially identical to those of the 10.5% Senior
Notes (except for provisions relating to the transfer restrictions and payment of additional interest); (ii) use our commercially reasonable efforts to consummate such exchange offer within
270 days after the date of the initial issuance of the 10.5% Senior Notes; and (iii) in certain circumstances, file a shelf registration statement for the resale of the 10.5%
Senior Notes. On October 26, 2010, we filed a Form S-4 to offer, in exchange for our Old Notes, up to $230.0 million in aggregate principal amount of 10.5% Senior
Notes due 2018 and the guarantees thereof which have been registered under the Securities Act of 1933, as amended. The Form S-4 was declared effective on December 14, 2010,
and on January 13, 2011, we completed the exchange for all of the Old Notes.
The
foregoing description of the 10.5% Senior Notes Indenture and the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the
full text of the 10.5% Senior Notes Indenture and Registration Rights Agreement.
56
Table of Contents
Revolving Line of Credit
On September 30, 2010, KEMET Electronics Corporation ("KEC") and KEMET Electronics Marketing (S) Pte Ltd. ("KEMET
Singapore") (each a "Borrower" and, collectively, the "Borrowers") entered into a Loan and Security Agreement (the "Loan and Security Agreement"), with Bank of America, N.A, as the administrative
agent and the initial lender. The Loan and Security Agreement provides a $50 million revolving line of credit, which is bifurcated into a U.S. facility (for which KEC is the Borrower) and a
Singapore facility (for which KEMET Singapore is the Borrower). The size of the U.S. facility and the Singapore facility can fluctuate as long as the Singapore facility does not exceed
$30 million and the total facility does not exceed $50 million. A portion of the U.S. facility and the Singapore facility can be used to issue letters of credit. The Loan and Security
Agreement expires on September 30, 2014.
Revolving
loans may be used to pay fees and transaction expenses associated with the closing of the credit facilities, to pay obligations outstanding under the Loan and Security
Agreement and for working capital and other lawful corporate purposes of KEC and KEMET Singapore. Borrowings under the U.S. and Singapore facilities are subject to a borrowing base. The borrowing base
consists of:
-
•
-
in the case of the U.S. facility, (A) 85% of KEC's accounts receivable that satisfy certain eligibility criteria
plus (B) the lesser of $4 million and 40% of the net book value of inventory of KEC that satisfy certain eligibility criteria plus (C) the lesser of $3 million and 70% of
the net orderly liquidation percentage of the appraised value of equipment that satisfies certain eligibility criteria less (D) certain reserves, including certain reserves imposed by the
administrative agent in its permitted discretion; and
-
•
-
in the case of the Singapore facility, (A) 85% of KEMET Singapore's accounts receivable that satisfy certain
eligibility criteria less (B) certain reserves, including certain reserves imposed by the administrative agent in its permitted discretion.
Interest
is payable on borrowings monthly at a rate equal to the London Interbank Offer Rate ("LIBOR") or the base rate, plus an applicable margin, as selected by the Borrower. Depending
upon the fixed charge coverage ratio of KEMET Corporation and its subsidiaries on a consolidated basis as of the latest test date, the applicable margin under the U.S. facility varies between 3.00%
and 3.50% for LIBOR advances and 2.00% and 2.50% for base rate advances, and under the Singapore facility varies between 3.25% and 3.75% for LIBOR advances and 2.25% and 2.75% for base rate advances.
The
base rate is subject to a floor that is 100 basis points above LIBOR.
An
unused line fee is payable monthly in an amount equal to 0.75% per annum of the average daily unused portion of the facilities during any month; provided, that such percentage rate is
reduced to (a) 0.50% per annum for any month in which the average daily balance of the facilities is greater than 33.3% of the total revolving commitment and less than 66.6% of the total
revolving commitment, and (b) 0.375% per annum for any month in which the average daily balance of the facilities is greater than or equal to 66.6% of the total revolving commitment. A
customary fee is also payable to the administrative agent on a quarterly basis.
KEC's
ability to draw funds under the U.S. facility and KEMET Singapore's ability to draw funds under the Singapore facility are conditioned upon, among other
matters:
-
•
-
the absence of the existence of a Material Adverse Effect (as defined in the Loan and Security Agreement);
-
•
-
the absence of the existence of a default or an event of default under the Loan and Security Agreement; and
57
Table of Contents
-
•
-
the representations and warranties made by KEC and KEMET Singapore in the Loan and Security Agreement continuing to be
correct in all material respects.
The
parent corporation of KEC—KEMET Corporation—and the Guarantors guarantee the U.S. facility obligations and the U.S. facility obligations are secured by a lien
on substantially all of the assets of KEC and the Guarantors (other than assets that secure the 10.5% Senior Notes). The collection accounts of the Borrowers and Guarantors are subject to a daily
sweep into a concentration account and the concentration account will become subject to full cash dominion in favor of the administrative agent (i) upon an event of default, (ii) if for
five consecutive business days, aggregate availability of all facilities has been less than the greater of (A) 15% of the aggregate revolver commitments at such time and
(B) $7.5 million, or (iii) if for five consecutive business days, availability of the U.S. facility has been less than $3.75 million (each such event, a "Cash Dominion
Trigger Event").
KEC
and the Guarantors guarantee the Singapore facility obligations. In addition to the assets that secure the U.S. facility, the Singapore obligations are also secured by a pledge of
100% of the stock of KEMET Singapore and a security interest in substantially all of KEMET Singapore's assets. As required by the Loan and Security Agreement, KEMET Singapore's bank accounts were
transferred over to Bank of America and upon a Cash Dominion Trigger Event (as defined in the Loan and Security Agreement) will become subject to full cash dominion in favor of the administrative
agent.
A
fixed charge coverage ratio of at least 1.1:1.0 must be maintained as of the last day of each fiscal quarter ending immediately prior to or during any period in which any of the
following occurs and is continuing until none of the following occurs for a period of at least forty-five consecutive days: (i) an event of default, (ii) aggregate
availability of all facilities has been less than the greater of (A) 15% of the aggregate revolver commitments at such time and (B) $7.5 million, or (iii) availability of
the U.S. facility has been less than $3.75 million. The fixed charge coverage ratio tests the EBITDA and fixed charges of KEMET Corporation and its subsidiaries on a consolidated basis.
In
addition, the Loan and Security Agreement includes negative covenants that, subject to exceptions, limit the ability of KEMET Corporation and its direct and indirect subsidiaries to,
among other things:
-
•
-
incur additional indebtedness;
-
•
-
create liens on assets;
-
•
-
make capital expenditures;
-
•
-
engage in mergers, consolidations, liquidations and dissolutions;
-
•
-
sell assets (including pursuant to sale leaseback transactions);
-
•
-
pay dividends and distributions on or repurchase capital stock;
-
•
-
make investments (including acquisitions), loans, or advances;
-
•
-
prepay certain junior indebtedness;
-
•
-
engage in certain transactions with affiliates;
-
•
-
enter into restrictive agreements;
-
•
-
amend material agreements governing certain junior indebtedness; and
-
•
-
change its lines of business.
58
Table of Contents
The
Loan and Security Agreement includes certain customary representations and warranties, affirmative covenants and events of default, which are set forth in more detail in the Loan and
Security Agreement.
As
of March 31, 2011, there were no borrowings against the Loan and Security Agreement.
Short Term Liquidity
Based on our current operating plans management believes that cash generated from operations will be sufficient to cover our operating
requirements for the next twelve months, including $43.7 million in principal and $25.2 million interest payments and expected capital expenditures in the range of $50 million to
$60 million.
Our
cash and cash equivalents increased by $72.9 million for the year ended March 31, 2011, and $40.0 million for the year ended March 31, 2010 and decreased
by $42.2 million for the year ended March 31, 2009 as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Cash provided by operating activities
|
|
$
|
113,968
|
|
$
|
54,620
|
|
$
|
5,725
|
|
|
Cash provided by (used in) investing activities
|
|
|
(29,564
|
)
|
|
(11,421
|
)
|
|
7,229
|
|
|
Cash used in financing activities
|
|
|
(13,338
|
)
|
|
(2,912
|
)
|
|
(53,495
|
)
|
|
Effects of foreign currency fluctuations on cash
|
|
|
1,786
|
|
|
(292
|
)
|
|
(1,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
72,852
|
|
$
|
39,995
|
|
$
|
(42,179
|
)
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2011 compared to Fiscal Year 2010
Cash flows from operations were $114.0 million which was an improvement of $59.3 million in fiscal year 2011 as compared
to fiscal year 2010. The improvement is primarily a result of $119.7 million increase related to operations (net income adjusted for: the loss on early extinguishment of debt, depreciation and
amortization, amortization of debt discount and debt issuance costs, write down of long-lived assets and stock-based compensation) for fiscal year 2011 compared to fiscal year 2010. In
addition, we generated $18.6 million by increasing our operating liabilities (primarily our accrued expenses) in fiscal year 2011 compared to $5.9 million in fiscal year 2010. Offsetting
these increases was a $48.8 million increase in inventories in fiscal year 2011 compared to a decrease in inventories of $7.2 million in fiscal year 2010. In fiscal year 2011, raw
material inventories increased $14.0 million primarily due to price increases in raw materials as well as an increase in the volume of raw material purchases. The increase in raw material
quantities was driven by increased sales levels and accelerated purchases of raw materials that were expected to increase in price. Work in process and finished goods increased $37.5 million as
a result of the increase in sales and demand for our products and an increase in raw material prices. In addition in fiscal year 2010 we increased accounts payable through the negotiation of better
terms by $26.6 million compared to only $9.6 million in fiscal year 2011.
Cash used in investing activities increased $18.1 million in fiscal year 2011 compared to fiscal year 2010 due primarily to a
$22.1 million increase in capital expenditures. The capital expenditure amount for fiscal year 2011 included EUR 2.1 million ($2.9 million) for the acquisition of land in Italy to
be used as the site for a new manufacturing facility in order to consolidate our Italian operations. The
59
Table of Contents
remaining
purchase price for the land in Italy will be paid in seven equal annual payments of EUR 489 thousand ($694 thousand) beginning on April 28, 2013. The remainder of
the increase in capital expenditures is primarily due to machinery and equipment purchases to increase capacity, to assist in new product development and improve product quality. Capital expenditures
were offset by $5.4 million in proceeds from the sale of assets in fiscal year 2011 compared to $1.5 million in proceeds from the disposal of assets in fiscal year 2010.
Cash used in financing activities was $13.3 million in fiscal year 2011 as compared to $2.9 million in fiscal year 2010.
In
fiscal year 2011, proceeds from the issuance of debt resulted from the private placement of $230.0 million in aggregate principal amount of our 10.5% Senior Notes. Proceeds of
$182.5 million were used to repay all of the outstanding indebtedness under our credit facilities with K Financing, LLC ($62.9 million including the Success Fee),
outstanding indebtedness of EUR 45.5 million ($60.7 million) under the EUR 60 million credit facility and outstanding indebtedness of EUR 33 million ($44.0 million)
under the EUR 35 million credit facility with UniCredit and the term loan with a subsidiary of Vishay ($15.0 million). In addition, we used $38.1 million of the proceeds to retire
$40.5 million in aggregate principal amount of our Convertible Notes and $6.6 million of the proceeds to pay costs incurred in connection with the private placement, the tender offer and
the foregoing repayments. We made a principal payment related to UniCredit Facility A on April 1, 2010 for EUR 7.7 million ($10.3 million), $1.5 million to pay costs
incurred in connection with the revolving line of credit and $2.5 million in payments related to short term debt. Our next significant maturity is November 15, 2011 when the Convertible
Note holders have the right to require us to repurchase for cash all or a portion of the Convertible Notes outstanding of $40.6 million.
In
fiscal year 2010, proceeds from the issuance of debt resulted primarily from the Platinum Term Loan, the Platinum Line of Credit Loan, and the Platinum Working Capital Loan.
Approximately $37.8 million in proceeds from the Platinum Term Loan were used to retire $93.9 million in aggregate principal amount of the Convertible Notes (representing 53.7% of the
outstanding Convertible Notes) that were validly tendered on June 26, 2009. Proceeds of $10.0 million from the Platinum Line of Credit Loan were used primarily to pay the fees and
expenses related to execution of the tender offer. Proceeds of $10.0 million from the Platinum Working Capital Loan were used for general corporate purposes. The gain on the early
extinguishment of the Convertible Notes is shown on the line item "(Gain) loss on early extinguishment of debt" on the Consolidated Statements of Operations.
In
fiscal year 2010, payments of debt related primarily to retirement of the Convertible Notes discussed above as well as principal payments on UniCredit Facility A and Facility B.
In
fiscal year 2009, our payments of debt related primarily to the outstanding portion of the senior notes that the Company sold in May 1998 ("Senior Notes"). In the first quarter of
fiscal year 2009, we paid $20.0 million of the outstanding principal balance on our Senior Notes in accordance with the Senior Note agreement. On September 19, 2008, we prepaid our
remaining obligations under the Senior Notes, including the outstanding principal balance of $40.0 million, a make-whole amount of $2.0 million and a prepayment fee of
$0.2 million. The make-whole amount and prepayment fee are shown on the line item "Loss on early retirement of debt" on the Consolidated Statements of Operations.
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Table of Contents
In fiscal year 2009, our proceeds from the issuance of debt related primarily to a loan from a subsidiary of Vishay. As part of the sale of the wet tantalum
capacitor assets to a subsidiary of Vishay, we entered into a three-year term loan agreement. The loan was for $15 million and carried an interest rate of LIBOR plus 4% which was
payable monthly. The entire principal amount of $15 million was scheduled to mature on September 15, 2011 and could be prepaid without penalty. The loan was secured by certain accounts
receivable of KEMET. On May 5, 2010, the Vishay loan was paid in full.
Commitments
At March 31, 2011, we had contractual obligations in the form of non-cancelable operating leases and debt, including
interest payments (see Note 2, "Debt" to our consolidated financial statements), European social security, pension benefits, and other post-retirement benefits as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations
|
|
Total
|
|
Year 1
|
|
Years 2 - 3
|
|
Years 4 - 5
|
|
More than
5 years
|
|
|
Debt obligations(1)
|
|
$
|
277,677
|
|
$
|
43,670
|
|
$
|
3,397
|
|
$
|
610
|
|
$
|
230,000
|
|
|
Interest obligations(1)
|
|
|
172,258
|
|
|
25,217
|
|
|
48,361
|
|
|
48,301
|
|
|
50,379
|
|
|
European social security
|
|
|
7,417
|
|
|
5,343
|
|
|
2,074
|
|
|
—
|
|
|
—
|
|
|
Employee separation liability
|
|
|
20,989
|
|
|
1,279
|
|
|
568
|
|
|
568
|
|
|
18,574
|
|
|
Pension benefits(2)
|
|
|
24,704
|
|
|
4,173
|
|
|
3,580
|
|
|
4,151
|
|
|
12,800
|
|
|
Operating lease obligations
|
|
|
24,726
|
|
|
8,759
|
|
|
11,815
|
|
|
3,509
|
|
|
643
|
|
|
Purchase commitments
|
|
|
3,841
|
|
|
3,841
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other post-retirement benefits(2)
|
|
|
1,281
|
|
|
150
|
|
|
297
|
|
|
280
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
532,893
|
|
$
|
92,432
|
|
$
|
70,092
|
|
$
|
57,419
|
|
$
|
312,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Holders
of the Convertible Notes have the right to require us to repurchase for cash all or a portion of their Convertible Notes on November 15,
2011, 2016 and 2021 at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, if any, in each case, up to but not
including, the date of repurchase. The $40.6 million of Convertible Notes have been included in the "Year 1" column above.
-
(2)
-
Reflects
the expected benefit payments through 2020.
Non-GAAP Financial Measures
To complement our consolidated statements of operations and cash flows, we use non-GAAP financial measures of Adjusted
operating income (loss), Adjusted net income (loss) and Adjusted EBITDA. We believe that Adjusted operating income (loss), Adjusted net income (loss) and Adjusted EBITDA are complements to
U.S. GAAP amounts and such measures are useful to investors. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to net
income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity.
61
Table of Contents
Adjusted
operating income (loss) is calculated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Operating income (loss)
|
|
$
|
129,261
|
|
$
|
7,697
|
|
$
|
(271,112
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
7,171
|
|
|
9,198
|
|
|
30,874
|
|
|
Debt and stock registration related fees
|
|
|
1,531
|
|
|
—
|
|
|
—
|
|
|
ERP integration costs
|
|
|
1,915
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
1,783
|
|
|
1,865
|
|
|
1,070
|
|
|
Gain on sales and disposals of assets
|
|
|
(1,261
|
)
|
|
(1,003
|
)
|
|
(25,505
|
)
|
|
Inventory write downs
|
|
|
2,991
|
|
|
—
|
|
|
16,500
|
|
|
Write down of long-lived assets
|
|
|
—
|
|
|
656
|
|
|
67,624
|
|
|
Cancellation of incentive plan
|
|
|
—
|
|
|
1,161
|
|
|
—
|
|
|
Write off of capitalized advisor fees
|
|
|
—
|
|
|
413
|
|
|
—
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
—
|
|
|
174,327
|
|
|
Curtailment gains on benefit plans
|
|
|
—
|
|
|
—
|
|
|
(30,835
|
)
|
|
Acquisitions integration costs
|
|
|
—
|
|
|
—
|
|
|
5,254
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
14,130
|
|
|
12,290
|
|
|
239,309
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss)
|
|
$
|
143,391
|
|
$
|
19,987
|
|
$
|
(31,803
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted
net income (loss) is calculated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
63,044
|
|
$
|
(69,447
|
)
|
$
|
(285,209
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in interest expense
|
|
|
4,930
|
|
|
13,392
|
|
|
9,918
|
|
|
Net foreign exchange (gain) loss
|
|
|
(2,888
|
)
|
|
4,106
|
|
|
(14,079
|
)
|
|
Share-based compensation expense
|
|
|
1,783
|
|
|
1,865
|
|
|
1,070
|
|
|
Restructuring charges
|
|
|
7,171
|
|
|
9,198
|
|
|
30,874
|
|
|
Debt and stock registration related fees
|
|
|
1,531
|
|
|
—
|
|
|
—
|
|
|
ERP integration costs
|
|
|
1,915
|
|
|
—
|
|
|
—
|
|
|
Gain on licensing of patents
|
|
|
(2,000
|
)
|
|
—
|
|
|
—
|
|
|
Gain on sales and disposals of assets
|
|
|
(1,261
|
)
|
|
(1,003
|
)
|
|
(25,505
|
)
|
|
(Gain) loss on early extinguishment of debt
|
|
|
38,248
|
|
|
(38,921
|
)
|
|
2,212
|
|
|
Write down of long-lived assets
|
|
|
—
|
|
|
656
|
|
|
67,624
|
|
|
Increase in value of warrant
|
|
|
—
|
|
|
81,088
|
|
|
—
|
|
|
Cancellation of incentive plan
|
|
|
—
|
|
|
1,161
|
|
|
—
|
|
|
Write off of capitalized advisor fees
|
|
|
—
|
|
|
413
|
|
|
—
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
—
|
|
|
174,327
|
|
|
Curtailment gains on benefit plans
|
|
|
—
|
|
|
—
|
|
|
(30,835
|
)
|
|
Inventory write downs
|
|
|
2,991
|
|
|
—
|
|
|
16,500
|
|
|
Acquisitions integration costs
|
|
|
—
|
|
|
—
|
|
|
5,254
|
|
|
Tax impact of adjustments
|
|
|
(1,256
|
)
|
|
65
|
|
|
(10,140
|
)
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
51,164
|
|
|
72,020
|
|
|
227,220
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
$
|
114,208
|
|
$
|
2,573
|
|
$
|
(57,989
|
)
|
|
|
|
|
|
|
|
|
|
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