Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-15491

 

KEMET CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

57-0923789

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681

(Address of principal executive offices, zip code)

 

(864) 963-6300

(Registrant’s telephone number, including area code)

 

Former name, former address and former fiscal year, if changed since last report: N/A

 

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 x  NO o

 

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 (§ 232.405 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 x NO o

 

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.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  x NO

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of November 6, 2012 was 44,917,587.

 

 

 



Table of Contents

 

KEMET CORPORATION AND SUBSIDIARIES

Form 10-Q for the Quarter Ended September 30, 2012

 

INDEX

 

 

 

Page

PART I FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2012 and March 31, 2012

 

2

 

 

 

Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended September 30, 2012 and September 30, 2011

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended September 30, 2012 and September 30, 2011

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2012 and September 30, 2011

 

5

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

6

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

48

 

 

 

Item 4. Controls and Procedures

 

48

 

 

 

PART II OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

49

 

 

 

Item 1A. Risk Factors

 

49

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

Item 3. Defaults Upon Senior Securities

 

49

 

 

 

Item 4. Mine Safety Disclosures

 

49

 

 

 

Item 5. Other Information

 

49

 

 

 

Item 6. Exhibits

 

50

 

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

Exhibit 101

 

 

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

 

KEMET CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

 

September 30,
2012

 

March 31, 
2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

160,495

 

$

210,521

 

Accounts receivable, net

 

99,160

 

104,950

 

Inventories, net

 

224,773

 

212,234

 

Prepaid expenses and other

 

41,041

 

32,259

 

Deferred income taxes

 

5,658

 

6,370

 

Total current assets

 

531,127

 

566,334

 

Property and equipment, net of accumulated depreciation of $773,184 and $761,522 as of September 30, 2012 and March 31, 2012, respectively

 

316,182

 

315,848

 

Goodwill

 

35,584

 

36,676

 

Intangible assets, net

 

40,102

 

41,527

 

Other assets

 

17,802

 

15,167

 

Total assets

 

$

940,797

 

$

975,552

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

1,576

 

$

1,951

 

Accounts payable

 

82,156

 

74,404

 

Accrued expenses

 

88,623

 

89,079

 

Income taxes payable

 

622

 

2,256

 

Total current liabilities

 

172,977

 

167,690

 

Long-term debt, less current portion

 

359,621

 

345,380

 

Other non-current obligations

 

90,098

 

101,229

 

Deferred income taxes

 

4,788

 

2,257

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.01, authorized 10,000 shares, none issued

 

 

 

Common stock, par value $0.01, authorized 175,000 shares, issued 46,508 shares at September 30, 2012 and March 31, 2012

 

465

 

465

 

Additional paid-in capital

 

466,906

 

470,059

 

Retained deficit

 

(123,727

)

(81,053

)

Accumulated other comprehensive income

 

6,658

 

12,020

 

Treasury stock, at cost (1,600 and 1,839 shares at September 30, 2012 and March 31, 2012, respectively)

 

(36,989

)

(42,495

)

Total stockholders’ equity

 

313,313

 

358,996

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

940,797

 

$

975,552

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2



Table of Contents

 

KEMET CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share data)

(Unaudited)

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

215,991

 

$

265,514

 

$

439,623

 

$

555,370

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales

 

183,053

 

203,319

 

374,374

 

413,823

 

Selling, general and administrative expenses

 

27,983

 

28,355

 

55,238

 

58,631

 

Research and development

 

6,833

 

7,362

 

14,566

 

14,448

 

Restructuring charges

 

8,522

 

1,605

 

9,786

 

2,630

 

Goodwill impairment

 

1,092

 

 

1,092

 

 

Write down of long-lived assets

 

4,234

 

 

4,234

 

 

Settlement gain on benefit plan

 

(1,675

)

 

(1,675

)

 

Net (gain) loss on sales and disposals of assets

 

(31

)

(40

)

73

 

83

 

Total operating costs and expenses

 

230,011

 

240,601

 

457,688

 

489,615

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(14,020

)

24,913

 

(18,065

)

65,755

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest income

 

(26

)

(31

)

(57

)

(74

)

Interest expense

 

10,136

 

7,282

 

20,593

 

14,682

 

Other (income) expense, net

 

(996

)

1,297

 

515

 

1,202

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(23,134

)

16,365

 

(39,116

)

49,945

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

1,787

 

2,047

 

3,558

 

3,778

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(24,921

)

$

14,318

 

$

(42,674

)

$

46,167

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.55

)

$

0.32

 

$

(0.95

)

$

1.10

 

Diluted

 

$

(0.55

)

$

0.27

 

$

(0.95

)

$

0.88

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

44,911

 

44,370

 

44,860

 

41,924

 

Diluted

 

44,911

 

52,230

 

44,860

 

52,307

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

KEMET CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

(Unaudited)

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

$

(24,921

)

$

14,318

 

$

(42,674

)

$

46,167

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

3,907

 

(11,592

)

(4,059

)

(8,487

)

Defined benefit pension plans, net of tax impact

 

(1,244

)

100

 

(1,142

)

216

 

Defined benefit post-retirement plan adjustments

 

(232

)

(91

)

(161

)

(161

)

Other comprehensive income (loss)

 

2,431

 

(11,583

)

(5,362

)

(8,432

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(22,490

)

$

2,735

 

$

(48,036

)

$

37,735

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

KEMET CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

Net income (loss)

 

$

(42,674

)

$

46,167

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

23,177

 

 

23,011

 

Amortization of debt discount and debt issuance costs

 

1,924

 

2,056

 

Net loss on sales and disposals of assets

 

73

 

83

 

Stock-based compensation expense

 

2,506

 

2,175

 

Goodwill impairment

 

1,092

 

 

Write down of long-lived assets

 

4,234

 

 

Settlement gain on benefit plan

 

(1,675

)

 

Change in deferred income taxes

 

838

 

379

 

Change in operating assets

 

(18,656

)

18,438

 

Change in operating liabilities

 

2,520

 

(42,517

)

Other

 

17

 

1,197

 

Net cash provided by (used in) operating activities

 

(26,624

)

50,989

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Capital expenditures

 

(30,343

)

(20,105

)

Acquisition, net of cash received

 

 

(11,584

)

Net cash used in investing activities

 

(30,343

)

(31,689

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from issuance of debt

 

15,825

 

 

Deferred acquisition payments

 

(6,617

)

 

Payments of long-term debt

 

(1,576

)

(4,084

)

Net borrowings (payments) under other credit facilities

 

 

(3,153

)

Proceeds from exercise of stock options

 

42

 

159

 

Debt issuance costs

 

(275

)

(29

)

Change in restricted cash

 

 

(36,497

)

Net cash provided by (used in) financing activities

 

7,399

 

(43,604

)

Net decrease in cash and cash equivalents

 

(49,568

)

(24,304

)

Effect of foreign currency fluctuations on cash

 

(458

)

(584

)

Cash and cash equivalents at beginning of fiscal period

 

210,521

 

152,051

 

Cash and cash equivalents at end of fiscal period

 

$

160,495

 

$

127,163

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

 

Notes to Condensed Consolidated Financial Statements

 

Note 1. Basis of Financial Statement Presentation

 

The condensed consolidated financial statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2012 (the “Company’s 2012 Annual Report”).

 

Net sales and operating results for the three and six months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year.  The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to current year presentation.

 

The significant accounting policies followed by the Company are presented in the Company’s 2012 Annual Report.

 

Recently Issued Accounting Pronouncements

 

New accounting standards adopted

 

In September 2011, the FASB issued ASU 2011-08, Guidance on Testing Goodwill for Impairment.  ASU 2011-08 gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test.  If entities determine, on the basis of qualitative factors, that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, the two-step impairment test would be required.  Otherwise, further testing would not be needed.  ASU 2011-08 was effective for the Company on April 1, 2012 and did not have a material effect on the Company’s financial position.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income.  ASU 2011-12 defers the requirement in ASU 2011-05 that companies present reclassification adjustments for each component of AOCI in both OCI and net income on the face of the financial statements.  ASU 2011-12 requires companies to continue to present amounts reclassified out of AOCI on the face of the financial statements or disclosed in the notes to the financial statements.  ASU 2011-12 also defers the requirement to report reclassification adjustments in interim periods and requires companies to present only total comprehensive income in either a single continuous statement or two consecutive statements in interim periods.  ASU 2011-05 and ASU 2011-12 was effective for the Company on April 1, 2012 and did not have a material effect on the Company’s financial position.

 

There are currently no other accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.

 

Restricted Cash

 

A guarantee was issued by a European bank on behalf of the Company in August 2006 in conjunction with the establishment of a Value-Added Tax (“VAT”) registration in The Netherlands.  The bank guarantee is in the amount of EUR 1.5 million ($1.9 million). A deposit was placed with a European bank for EUR 1.7 million ($2.1 million). The deposit is in KEMET’s name, and KEMET receives any interest earned by this deposit. However, the deposit is pledged to the European bank, and the bank can use the money if a valid claim against the bank guarantee is made. The bank guarantee will remain valid until it is discharged by the beneficiary.

 

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Table of Contents

 

Fair Value Measurement

 

The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The first two inputs are considered observable and the last is considered unobservable. The levels of inputs are as follows:

 

·                  Level 1—Quoted prices in active markets for identical assets or liabilities.

 

·                  Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and March 31, 2012 are as follows (amounts in thousands):

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

Value

 

Fair Value

 

 

 

 

 

 

 

Value

 

Fair Value

 

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

Fair Value Measurement Using

 

March 31,

 

March 31,

 

Fair Value Measurement Using

 

 

 

2012

 

2012

 

Level 1

 

Level 2 (2)

 

Level 3

 

2012

 

2012

 

Level 1

 

Level 2 (2)

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money markets (1)

 

$

26,239

 

$

26,239

 

$

26,239

 

$

 

$

 

$

26,215

 

$

26,215

 

$

26,215

 

$

 

$

 

Long-term debt

 

361,197

 

362,301

 

360,325

 

1,976

 

 

347,331

 

362,086

 

358,700

 

3,386

 

 

 


(1)       Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

(2)       The valuation approach used to calculate fair value was a discounted cash flow for each respective debt facility.

 

Revenue Recognition

 

A portion of sales is related to 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. The Company recognizes revenue when title to the products transfers to the customer.

 

A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company’s 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 Company’s local sales office. This program allows the distributor to ship its higher-priced inventory and debit the Company for the difference between KEMET’s list price and the lower authorized price for that specific transaction. Management analyzes historical SFSD activity to determine the SFSD exposure on the global distributor inventory at the balance sheet date.  The establishment of these reserves is recognized as a component of the line item “Net sales” on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable, net” on the Condensed Consolidated Balance Sheets.

 

The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1% for the quarters and six months ended September 30, 2012 and 2011. The Company recognizes warranty costs when they are both probable and reasonably estimable.

 

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Table of Contents

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments. Estimates and assumptions are based on historical data and other assumptions that management believes 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.

 

The Company’s judgments are based on management’s 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 unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.

 

Inventories

 

Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):

 

 

 

September 30,
2012

 

March 31,
2012

 

Raw materials and supplies

 

$

90,403

 

$

86,845

 

Work in process

 

84,182

 

72,411

 

Finished goods

 

67,594

 

70,122

 

 

 

242,179

 

229,378

 

Inventory reserves

 

(17,406

)

(17,144

)

 

 

$

224,773

 

$

212,234

 

 

Note 2. Debt

 

A summary of debt is as follows (amounts in thousands):

 

 

 

September 30,
2012

 

March 31,
2012

 

10.5% Senior Notes, net of premium of $4,066 and $3,539 as of September 30, 2012 and March 31, 2012, respectively

 

$

359,066

 

$

343,539

 

Other

 

2,131

 

3,792

 

Total debt

 

361,197

 

347,331

 

Current maturities

 

(1,576

)

(1,951

)

Total long-term debt

 

$

359,621

 

$

345,380

 

 

The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters and six months ended September 30, 2012 and 2011, is as follows (amounts in thousands):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Contractual interest expense

 

$

9,182

 

$

6,270

 

$

18,669

 

$

12,626

 

Amortization of debt issuance costs

 

426

 

280

 

852

 

555

 

Amortization of debt (premium) discount

 

(144

)

598

 

(298

)

1,254

 

Imputed interest on acquisition related obligations

 

672

 

134

 

1,370

 

247

 

 

 

$

10,136

 

$

7,282

 

$

20,593

 

$

14,682

 

 

10.5% Senior Notes

 

On May 5, 2010, the Company completed a private placement of $230.0 million in aggregate principal amount of the Company’s 10.5% Senior Notes due 2018 (the “10.5% Senior Notes”).  On March 27, 2012 and April 3, 2012, the Company completed the sale of $110.0 million and $15.0 million aggregate principal amount of its 10.5% Senior Notes due 2018, respectively,  at an issue price of 105.5% of the principal amount plus accrued interest from November 1, 2011. The Senior Notes were issued as additional notes under the indenture, dated May 5, 2010, among the Company, the guarantors party thereto and Wilmington Trust

 

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Company, as trustee. Debt issuance costs related to the 10.5% Senior Notes, net of amortization, were $7.4 million as of September 30, 2012; these costs are being amortized over the term of the 10.5% Senior Notes.  Debt premium related to the 10.5% Senior Notes as of September 30, 2012 were $4.1 million which will be amortized over the term of the 10.5% Senior Notes.

 

The Company had interest payable related to the 10.5% Senior Notes included in the line item “Accrued expenses” on its Condensed Consolidated Balance Sheets of $15.6 million and $14.7 million at September 30, 2012 and March 31, 2012, respectively.

 

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 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 of the Singapore facility can be used to issue letters of credit.  The facilities expire on September 30, 2014.

 

Debt issuance costs related to the Loan and Security Agreement, net of amortization, were $0.8 million and $0.9 million as of September 30, 2012 and March 31, 2012, respectively.  These costs are being amortized over the term of the Loan and Security Agreement.  As discussed in Note 17, “Subsequent Event”, a standby letter of credit for $16.0 million was delivered to the beneficiary on October 8, 2012.  There were no borrowings against the Loan and Security Agreement as of September 30, 2012 and March 31, 2012.

 

Note 3. Goodwill Impairment

 

The Company’s annual goodwill impairment test is assessed as of May 31st of each fiscal year. Testing was not completed prior to the deadline for filing the Form 10-Q for the first quarter ended June 30, 2012.  Due to reduced earnings and cash flows caused by macro-economic factors and excess capacity issues in our industry, the Company revised its earnings forecast; and as a result, recorded a $1.1 million goodwill impairment charge in the second quarter of fiscal year 2013, which represents all of the goodwill related to the KEMET Foil Manufacturing, LLC (“KEMET Foil”) reporting unit.   The Company has evaluated the effect of not recording the impairment in the first quarter of fiscal year 2013 and determined that the goodwill impairment charge is not material to the first or second quarter Condensed Consolidated Financial Statements.

 

Note 4. Write Down of Long-Lived Assets

 

During the second quarter of fiscal year 2013, the Company incurred impairment charges totaling $4.2 million related to the Film and Electrolytic Business Group (“Film and Electrolytic”). In connection with the consolidation of two manufacturing facilities within Italy, the Company obtained appraisals for each of these facilities.  These appraisals indicated that there was a decrease in the market price of the manufacturing facilities, and therefore, the carrying amounts for these manufacturing facilities were reviewed for recoverability.  It was determined that the carrying amounts of the manufacturing facilities were not recoverable since they exceeded the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). The impairment was measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.  The Company utilized the market approach to estimate fair value of the long-lived asset group.  The impairment charge is recorded on the Condensed Consolidated Statements of Operations line item “Write down of long-lived assets” in the second quarter of fiscal year 2013.

 

Note 5. Restructuring Charges

 

A summary of the expenses aggregated on the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters and six months ended September 30, 2012 and 2011, is as follows (amounts in thousands):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Cost of relocating manufacturing equipment

 

$

1,015

 

$

638

 

$

1,161

 

$

1,385

 

Personnel reduction costs

 

7,507

 

967

 

8,625

 

1,245

 

 

 

$

8,522

 

$

1,605

 

$

9,786

 

$

2,630

 

 

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Six month period Ended September 30, 2012

 

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, removing excess capacity, moving production to lower cost locations and eliminating unnecessary costs throughout the Company.  Restructuring charges in the six months ended September 30, 2012 related to this plan are primarily comprised of the following: $2.8 million in termination benefits associated with converting the Landsberg, Germany manufacturing facility into a technology center and $1.7 million in termination benefits associated with converting the Weymouth, United Kingdom manufacturing facility into a technology center.  The total termination benefits expected for the conversion of the Weymouth manufacturing facility are $2.6 million; the expected completion is the third quarter of fiscal year 2014. The Company also incurred $3.9 million for reductions in production workforce across the entire Company and reducing administrative overhead within the Company as a whole.  In addition to these personnel reduction costs, the Company incurred manufacturing relocation costs of $1.2 million for relocation of equipment to Bulgaria, China, Macedonia and Mexico and for the consolidation of manufacturing operations within Italy.

 

Six month period ended September 30, 2011

 

Restructuring charges in the six month period ended September 30, 2011 were primarily comprised of manufacturing relocation costs of $1.4 million for relocation of equipment to China and Mexico.  In addition, the Company incurred $1.2 million in personnel reduction costs primarily due to headcount reductions in the Mexican operations of the Tantalum Business Group (“Tantalum”).

 

Reconciliation of restructuring liability

 

A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets are as follows (amounts in thousands):

 

 

 

Quarters Ended September 30, 2012

 

Quarters Ended September 30, 2011

 

 

 

Personnel

 

Manufacturing

 

Personnel

 

Manufacturing

 

 

 

Reductions

 

Relocations

 

Reductions

 

Relocations

 

Beginning of period

 

$

11,184

 

$

 

$

1,751

 

$

 

Costs charged to expense

 

7,507

 

1,015

 

967

 

638

 

Costs paid or settled

 

(4,048

)

(1,015

)

(1,529

)

(638

)

Change in foreign exchange

 

376

 

 

(68

)

 

End of period

 

$

15,019

 

$

 

$

1,121

 

$

 

 

 

 

Six Months Ended September 30, 2012

 

Six Months Ended September 30, 2011

 

 

 

Personnel

 

Manufacturing

 

Personnel

 

Manufacturing

 

 

 

Reductions

 

Relocations

 

Reductions

 

Relocations

 

Beginning of period

 

$

11,474

 

$

 

$

1,827

 

$

 

Costs charged to expense

 

8,625

 

1,161

 

1,245

 

1,385

 

Costs paid or settled

 

(4,851

)

(1,161

)

(1,906

)

(1,385

)

Change in foreign exchange

 

(229

)

 

(45

)

 

End of period

 

$

15,019

 

$

 

$

1,121

 

$

 

 

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Note 6. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income

 

Comprehensive income (loss) for the quarters and six months ended September 30, 2012 and 2011 includes the following components (amounts in thousands):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

$

(24,921

)

$

14,318

 

$

(42,674

)

$

46,167

 

 

 

 

 

 

 

 

 

 

 

Currency translation gain (loss)(1)

 

3,907

 

(11,592

)

(4,059

)

(8,487

)

Amortization of defined benefit pension plans

 

(1,244

)

100

 

(1,142

)

216

 

Amortization of postretirement benefit plan

 

(232

)

(91

)

(161

)

(161

)

 

 

$

(22,490

)

$

2,735

 

$

(48,036

)

$

37,735

 

 


(1) Due primarily to the Company’s permanent re-investment assertion relating to foreign earnings, there was no significant deferred tax effect associated with the cumulative currency translation gains and losses during the quarters and six months ended September 30, 2012 and 2011.

 

The components of “Accumulated other comprehensive income” on the Condensed Consolidated Balance Sheets are as follows (amounts in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

Foreign currency translation gain

 

$

14,048

 

$

18,107

 

Defined benefit pension plans

 

(9,224

)

(8,082

)

Defined benefit postretirement plan adjustments

 

1,834

 

1,995

 

 

 

$

6,658

 

$

12,020

 

 

Note 7. Acquisitions

 

Cornell Dubilier Foil, LLC

 

On June 13, 2011, the Company completed its acquisition of Cornell Dubilier Foil, LLC (whose name was subsequently changed to KEMET Foil Manufacturing, LLC), a Tennessee based manufacturer of etched foils utilized as a core component in the manufacture of aluminum electrolytic capacitors. The purchase price was $15 million plus a $0.5 million working capital adjustment, of which $11.6 million (net of cash received) was paid at closing and $1.0 million was paid on the first anniversary of the closing date and $1.0 million is to be paid on each of the next two anniversaries of the closing date. The Company recorded goodwill of $1.1 million and amortizable intangibles of $1.6 million. The allocation of the purchase price to specific assets and liabilities was based on the relative fair value of all assets and liabilities. Factors contributing to the purchase price which resulted in the goodwill (which is tax deductible) included the trained workforce. Pro forma results are not presented because the acquisition was not material to the consolidated financial statements. KEMET Foil is included within Film and Electrolytic.

 

As discussed in Note 3, “Impairment Charges,” the goodwill recorded for KEMET Foil was fully impaired in the second quarter of fiscal year 2013.

 

Niotan Incorporated

 

On February 21, 2012, KEMET acquired all of the outstanding shares of Niotan Incorporated, whose name was subsequently changed to KEMET Blue Powder Corporation (“Blue Powder”), a leading manufacturer of tantalum powders, from an affiliate of Denham Capital Management LP. Blue Powder has its headquarters and principal operating location in Carson City, Nevada. KEMET paid an initial purchase price of $30.5 million (net of cash received) at the closing of the transaction. Additional deferred payments of $45 million are payable over a thirty-month period after the closing and a working capital adjustment of $0.4 million was paid in April 2012. KEMET made the first installment payment of $5.0 million in August of 2012.  KEMET will also be required to make quarterly royalty payments for tantalum powder produced by Blue Powder, in an aggregate amount equal to $10 million by December 31, 2014. The Company determined that the royalty payments should be treated as part of the consideration for Blue Powder instead of a separate transaction because (i) it is paid to the selling shareholder who is not continuing with Blue Powder, (ii) it was based solely on the negotiation process and (iii) KEMET now owns the technology. The Company recorded goodwill of $35.6 million and amortizable intangibles of $22.4 million. The allocation of the purchase price to specific assets and liabilities was

 

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based on the relative fair value of all assets and liabilities. Factors contributing to the purchase price which resulted in the goodwill (which is not tax deductible) include market recognition of the world class quality of Blue Powder’s tantalum powder, the Company’s cost savings due to vertical integration and Blue Powder’s ability to provide a constant and reliable supply of tantalum powder. Pro forma results are not presented because the acquisition was not material to the consolidated financial statements. Blue Powder is included within Tantalum.

 

The total discounted purchase price for Blue Powder was $82.0 million which includes (amounts in thousands):

 

Cash at closing

 

$

30,656

 

Deferred payments (discounted)

 

41,938

 

Royalty payments (discounted)

 

8,975

 

Working capital adjustment

 

421

 

 

 

$

81,990

 

 

The purchase price was determined through arms-length negotiations between representatives of the Company and Denham Capital Management LP.

 

The following table presents the preliminary allocations of the aggregate purchase price based on the assets and liabilities estimated fair values (amounts in thousands):

 

 

 

Fair Value

 

Cash

 

$

153

 

Accounts receivable

 

479

 

Inventories

 

7,305

 

Prepaid expenses

 

186

 

Property, plant and equipment

 

15,122

 

Goodwill

 

35,584

 

Intangible assets

 

22,420

 

Deferred income taxes

 

311

 

Other noncurrent assets

 

1,303

 

Current liabilities

 

(873

)

Total net assets acquired

 

$

81,990

 

 

The allocation of the purchase price is preliminary as the Company is still evaluating the inventory valuation and tax attributes of the transaction.

 

The following table presents the amounts assigned to intangible assets (amounts in thousands except useful life data):

 

 

 

Fair

 

Useful

 

 

 

Value

 

Life (years)

 

Developed technology

 

$

22,300

 

18

 

Software

 

120

 

4

 

 

 

$

22,420

 

 

 

 

The useful life for developed technology is 18 years which is primarily based on the history of the underlying chemical and production processes and an estimate of the future economic benefit.

 

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Note 8. Goodwill and Intangible Assets

 

The following table highlights the Company’s intangible assets (amounts in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

Indefinite Lived Intangible Assets:

 

 

 

 

 

 

 

 

 

Trademarks

 

$

7,644

 

$

 

$

7,644

 

$

 

 

 

 

 

 

 

 

 

 

 

Amortized Intangibles:

 

 

 

 

 

 

 

 

 

Customer relationships, patents and other (3-18 years)

 

43,172

 

10,714

 

43,813

 

9,930

 

 

 

$

50,816

 

$

10,714

 

$

51,457

 

$

9,930

 

 

The changes in the carrying amount of goodwill for the six month periods ended September 30, 2012 and 2011 are as follows (amounts in thousands):

 

 

 

Six Months Ended
September 30,

 

 

 

2012

 

2011

 

Gross balance at the beginning of fiscal year

 

$

36,676

 

$

 

Acquisitions

 

 

36,676

 

Impairment charges

 

(1,092

)

 

 

 

$

35,584

 

$

36,676

 

 

Note 9. Segment and Geographic Information

 

The Company is organized into three business groups: Tantalum, the Ceramic Business Group (“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, general and administrative functions are shared by the business groups and substantially all expenses are allocated to each business group based on the business group’s respective budgeted net sales. Substantially all research and development expenses are direct costs to the respective business group.

 

Tantalum

 

Tantalum operates in seven manufacturing sites in the United States, Mexico, China and Portugal. This business group produces tantalum and aluminum polymer capacitors and produces tantalum powder used in the production of tantalum capacitors. Tantalum shares with Ceramic the Company’s product innovation center in the United States.  Tantalum products are sold in all regions of the world.

 

Ceramic

 

Ceramic operates in two manufacturing sites in Mexico. This business group produces ceramic capacitors. The business group shares with Tantalum the Company’s product innovation center in the United States. In addition, Ceramic maintains a design and manufacturing plant for electrical transformers, inductors, chokes, coils and filters in the United States. Ceramic products are sold in all regions of the world.

 

Film and Electrolytic

 

Film and Electrolytic operates in fourteen manufacturing sites in Europe, Asia and North America. This business group produces film, paper, and electrolytic capacitors. Film and Electrolytic also operates a machinery division located in Italy that provides automation solutions for the manufacture, processing and assembly of metalized films, film/foil and electrolytic capacitors; and designs, assembles and installs automation solutions for the production of energy storage devices. In addition, this business group has a product innovation center in Sweden. Film and Electrolytic products are sold in all regions of the world.

 

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The following table reflects each business group’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the quarters and six months ended September 30, 2012 and 2011 (amounts in thousands):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales:

 

 

 

 

 

 

 

 

 

Tantalum

 

$

109,308

 

$

112,290

 

$

218,507

 

$

234,733

 

Ceramic

 

53,116

 

56,112

 

104,661

 

115,491

 

Film and Electrolytic

 

53,567

 

97,112

 

116,455

 

205,146

 

 

 

$

215,991

 

$

265,514

 

$

439,623

 

$

555,370

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) (1):

 

 

 

 

 

 

 

 

 

Tantalum

 

$

(579

)

$

10,601

 

$

1,904

 

$

28,013

 

Ceramic

 

6,882

 

10,553

 

13,479

 

21,409

 

Film and Electrolytic (2)

 

(20,323

)

3,759

 

(33,448

)

16,333

 

 

 

$

(14,020

)

$

24,913

 

$

(18,065

)

$

65,755

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses:

 

 

 

 

 

 

 

 

 

Tantalum

 

$

6,206

 

$

6,705

 

$

12,018

 

$

12,913

 

Ceramic

 

1,864

 

2,002

 

3,929

 

3,805

 

Film and Electrolytic

 

3,450

 

3,145

 

7,230

 

6,293

 

 

 

$

11,520

 

$

11,852

 

$

23,177

 

$

23,011

 

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Sales by region:

 

 

 

 

 

 

 

 

 

North and South America (“Americas”)

 

$

62,243

 

$

81,663

 

$

122,728

 

$

154,422

 

Europe, Middle East, Africa (“EMEA”)

 

70,673

 

106,897

 

150,058

 

209,609

 

Asia and Pacific Rim (“APAC”)

 

83,075

 

76,954

 

166,837

 

191,339

 

 

 

$

215,991

 

$

265,514

 

$

439,623

 

$

555,370

 

 


(1)         Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Total restructuring:

 

 

 

 

 

 

 

 

 

Tantalum

 

$

1,987

 

$

864

 

$

2,031

 

$

899

 

Ceramic

 

1,081

 

49

 

1,179

 

88

 

Film and Electrolytic

 

5,454

 

692

 

6,576

 

1,643

 

 

 

$

8,522

 

$

1,605

 

$

9,786

 

$

2,630

 

 

(2)         Film and Electrolytic incurred the following operating expenses (benefits): Goodwill impairment of $1.1 million, Write down of long-lived assets of $4.2 million and a Settlement gain on benefit plan of $(1.7) million.

 

The following table reflects each business group’s total assets as of September 30, 2012 and March 31, 2012 (amounts in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

Total assets:

 

 

 

 

 

Tantalum

 

$

517,782

 

$

511,193

 

Ceramic

 

183,863

 

201,971

 

Film and Electrolytic

 

239,152

 

262,388

 

 

 

$

940,797

 

$

975,552

 

 

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Note 10.  Defined Benefit Pension and Other Postretirement Benefit Plans

 

The Company sponsors defined benefit pension plans which include seven plans in Europe, one plan in Singapore and two plans in Mexico and a postretirement plan in the United States.  Costs recognized for these benefit plans are recorded using estimated amounts, which may change as actual costs for the fiscal year are determined.

 

In July 2012, Film and Electrolytic paid out retirement benefits which represented more than 20% of a plan’s pension obligation.  As a result, the Company recognized a settlement gain of $1.7 million.

 

The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended September 30, 2012 and 2011 (amounts in thousands):

 

 

 

Pension

 

Postretirement Benefit Plans

 

 

 

Quarters Ended September 30,

 

Quarters Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net service cost

 

$

415

 

$

331

 

$

 

$

 

Interest cost

 

494

 

533

 

7

 

8

 

Expected return on net assets

 

(172

)

(175

)

 

 

Amortization:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

130

 

96

 

(81

)

(91

)

Prior service cost

 

6

 

6

 

 

 

Settlement gain on benefit plan

 

(1,675

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net periodic benefit (income) costs

 

$

(802

)

$

791

 

$

(74

)

$

(83

)

 

The components of net periodic benefit costs relating to the Company’s pension and other postretirement benefit plans are as follows for the six months ended September 30, 2012 and 2011 (amounts in thousands):

 

 

 

Pension

 

Postretirement Benefit Plans

 

 

 

Six Months Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net service cost

 

$

829

 

$

663

 

$

 

$

 

Interest cost

 

988

 

1,067

 

14

 

22

 

Expected return on net assets

 

(344

)

(350

)

 

 

Amortization:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

260

 

191

 

(161

)

(162

)

Prior service cost

 

12

 

12

 

 

 

Settlement gain on benefit plan

 

(1,675

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net periodic benefit (income) costs

 

$

70

 

$

1,583

 

$

(147

)

$

(140

)

 

In fiscal year 2013, the Company expects to contribute up to $2.4 million to the pension plans of which the Company has contributed $1.5 million as of September 30, 2012.  The Company’s policy is to pay benefits as costs are incurred for the postretirement benefit plans.

 

Note 11. Stock-based Compensation

 

Stock Options

 

At September 30, 2012, the Company had four stock option plans that reserved shares of common stock for issuance to executives and key employees: the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”) and the 2011 Omnibus Equity Incentive Plan (the “2011 Incentive Plan”). All of these plans were approved by the Company’s stockholders. The 2011 Incentive Plan has authorized the grant of up to 4.8 million shares of the Company’s common stock, which is comprised of 4.0 million shares under the new plan and 0.8 million shares which remained under the Prior Plans. The 2011 Incentive Plan authorizes the Company to provide equity-based compensation in the form of (1) stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code; (2) stock appreciation rights; (3) restricted stock and restricted stock units; (4) other share-based awards; and (5) performance awards.  Options issued under these plans vest within one to three years and expire ten years from the grant date.  Stock options

 

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granted to the Company’s Chief Executive Officer on January 27, 2010 vest 50% on June 30, 2014 and 50% on June 30, 2015.  If available, the Company issues shares of Common Stock from treasury stock upon exercise of stock options and vesting of restricted stock units.

 

Restricted Stock

 

The Company grants shares of its common stock as restricted stock to members of the Board of Directors, the Chief Executive Officer and a limited group of executives. Restricted stock and restricted stock units granted to the Board of Directors vest within one year. Restricted stock granted to the Chief Executive Officer on January 27, 2010 vests 50% on June 30, 2014 and 50% on June 30, 2015 while restricted stock granted to the Chief Executive Officer on March 28, 2012 vests on June 30, 2017.  Once vested, restricted shares cannot be sold until 90 days after the Chief Executive Officer, the executive or the member of the Board of Directors, as applicable, resigns from his or her position, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership exceeds the target.  Restricted stock granted to the limited group of executives vests 25% per year over four years. In the third quarter of fiscal year 2013, 50 thousand shares of restricted stock units were granted to the non-management members of the Board of Directors.  As of September 30, 2012, there was $2.6 million in unrecognized compensation costs related to the unvested restricted stock based compensation arrangements granted.

 

Long Term Incentive Plans

 

The Company has various long term incentive plans (“LTIP”), the 2013/2014 LTIP is 60% based upon the achievement of an Adjusted EBITDA target over a two year period.  For the performance portion of the 2013/2014 LTIP, participants will receive 50% in cash, which, if earned, will be distributed after the end of the two-year measurement period, and 50% in restricted stock units which, if earned, will be distributed 50% after the end of the two-year measurement period and 50% one year after the end of the two-year measurement period.   The remaining 40% of the award is in the form of time-based restricted stock units which will vest one-third on the first, second and third anniversary of the establishment of the plan (May 14, 2013, 2014 and 2015).  The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis.  In the six month periods ended September 30, 2012 and September 30, 2011, the Company recorded an expense of $0.5 million and $1.4 million, respectively.  The expense recorded for the 2013/2014 LTIP relates to the time-based restricted stock units.  No expense has been recorded related to the performance piece of the 2013/2014 LTIP, the Company will continue to monitor the likelihood of whether the Adjusted EBITDA financial metric will be realized and will adjust compensation expense to match expectations.

 

The compensation expense associated with stock-based compensation for the quarters ended September 30, 2012 and 2011 are recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):

 

 

 

Quarter Ended September 30, 2012

 

Quarter Ended September 30, 2011

 

 

 

Stock
Options

 

Restricted
Stock

 

LTIPs

 

Stock
Options

 

Restricted
Stock

 

LTIPs

 

Cost of sales

 

$

214

 

$

121

 

$

88

 

$

81

 

$

 

$

125

 

Selling, general and administrative expenses

 

242

 

356

 

161

 

144

 

135

 

499

 

Research and development

 

32

 

 

28

 

 

 

 

 

 

$

488

 

$

477

 

$

277

 

$

225

 

$

135

 

$

624

 

 

The compensation expense associated with stock-based compensation for the six months ended September 30, 2012 and 2011 are recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):

 

 

 

Six Months Ended September 30, 2012

 

Six Months Ended September 30, 2011

 

 

 

Stock
Options

 

Restricted
Stock

 

LTIPs

 

Stock
Options

 

Restricted
Stock

 

LTIPs

 

Cost of sales

 

$

426

 

$

242

 

$

156

 

$

165

 

$

 

$

290

 

Selling, general and administrative expenses

 

496

 

754

 

334

 

291

 

270

 

1,159

 

Research and development

 

50

 

 

48

 

 

 

 

 

 

$

972

 

$

996

 

$

538

 

$

456

 

$

270

 

$

1,449

 

 

In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Net income (loss) for the six month periods ended September 30, 2012 and 2011. Approximately 21 thousand and 52 thousand stock options were exercised in the six months ended September 30, 2012 and 2011, respectively.

 

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Note 12. Income Taxes

 

During the second quarter of fiscal year 2013, the Company incurred $1.8 million of income tax expense which is entirely related to income taxes for foreign operations.  There is no U.S. federal income tax benefit from the second quarter fiscal year 2013 loss due to a valuation allowance on deferred tax assets.

 

During the second quarter of fiscal year 2012, the Company incurred $2.0 million of income tax expense which was comprised of $2.2 million of income tax expense from foreign operations and $0.2 million of state income tax benefit related to a prior year refund. There was no U.S. federal income tax expense related to the second quarter fiscal year 2012 earnings due to the utilization of net operating loss carryforward deductions and a valuation allowance on net deferred tax assets.

 

Income tax expense for the six month period ended September 30, 2012 was $3.6 million, comprised of $3.5 million related to foreign operations and $0.1 million of state income tax expense.

 

Income tax expense for the six month period ended September 30, 2011 was $3.8 million, comprised of $4.8 million related to foreign operations, a $0.9 million U.S. federal income tax benefit related to a prior year settlement, and $0.1 million of state income tax benefit.

 

Note 13. Reconciliation of Basic and Diluted Net Income (Loss) Per Common Share

 

The following table presents a reconciliation of basic EPS to diluted EPS (amounts in thousands, except per share data):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(24,921

)

$

14,318

 

$

(42,674

)

$

46,167

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

44,911

 

44,370

 

44,860

 

41,924

 

Assumed conversion of employee stock options

 

 

299

 

 

335

 

Assumed conversion of warrants

 

 

7,561

 

 

10,048

 

Diluted

 

44,911

 

52,230

 

44,860

 

52,307

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.55

)

$

0.32

 

$

(0.95

)

$

1.10

 

Diluted

 

$

(0.55

)

$

0.27

 

$

(0.95

)

$

0.88

 

 

Common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been antidilutive, are as follows (amounts in thousands):

 

 

 

Quarters Ended September 30,

 

Six Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Assumed conversion of employee stock options

 

1,454

 

903

 

1,444

 

710

 

Assumed conversion of warrants

 

6,591

 

 

6,929

 

 

 

Note 14.  Stockholders’ Equity

 

Concurrent with the consummation of a tender offer in May 2009, the Company issued K Financing, LLC (“K Financing”) a warrant (the “Platinum Warrant”) to purchase up to 26,848,484 shares of the Company’s common stock, subject to certain adjustments, representing approximately 49.9% of the Company’s outstanding common stock at the time of issuance on a post-exercise basis. The Platinum Warrant was subsequently transferred to K Equity, LLC (“K Equity”). The Platinum Warrant may be exercised in exchange for cash, by cashless exercise to the extent of appreciation in the value of the Company’s common stock above the exercise price of the Platinum Warrant, or by combination of the preceding alternatives.

 

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. On May 31, 2011, K Equity sold a portion of the Platinum Warrant equal to 7,538,061 shares which was exercised on a net exercise basis and the resulting 7,000,000 shares of which were sold by underwriters, leaving a remainder of 8,416,815 shares subject to the Platinum Warrant.

 

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Table of Contents

 

Note 15. Concentrations of Risks

 

Sales and Credit Risks

 

The Company sells to customers globally.  Credit evaluations of the Company’s customers’ financial condition are performed periodically, and the Company generally does not require collateral from its customers.  One customer, TTI, Inc., accounted for over 10% of the Company’s net sales in the quarters and six months ended September 30, 2012 and 2011.  There were no customers’ accounts receivable balances exceeding 10% of gross accounts receivable at September 30, 2012 or March 31, 2012.

 

Electronics distributors are an important distribution channel in the electronics industry and accounted for 44% of the Company’s net sales in the six months ended September 30, 2012 and 2011.  As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand or adjust their inventory stocking levels.

 

Employee Risks

 

As of September 30, 2012, KEMET had approximately 10,000 employees in the following locations:

 

Mexico

 

5,000

 

Asia

 

2,500

 

Europe

 

1,900

 

United States

 

600

 

 

The number of employees represented by labor organizations at KEMET locations in each of the following countries is:

 

Mexico

 

3,400

 

Italy

 

700

 

Bulgaria

 

250

 

Indonesia

 

200

 

China

 

200

 

Finland

 

200

 

Portugal

 

100

 

Sweden

 

100

 

 

For fiscal year 2012 and the current fiscal year to date, the Company has not experienced any major work stoppages. The Company’s 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 labor costs.

 

Note 16. Condensed Consolidating Financial Statements

 

The 10.5% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company’s 100% owned domestic subsidiaries (“Guarantor Subsidiaries”) and secured by a first priority lien on 51% of the capital stock of certain of our foreign restricted subsidiaries (“Non-Guarantor Subsidiaries”).  The Company’s Guarantor Subsidiaries and Non-Guarantor Subsidiaries are not consistent with the Company’s business groups or geographic operations; accordingly this basis of presentation is not intended to present the Company’s financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. The Company is required to present condensed consolidating financial information in order for the subsidiary guarantors of the Company’s public debt to be exempt from reporting under the Securities Exchange Act of 1934, as amended.

 

In fiscal year 2012, the Company incorrectly reflected transactions between the Parent and the Guarantor Subsidiaries in the Condensed Consolidating Financial Statements which did not impact the consolidated results.  As of March 31, 2012, this resulted in an understatement of the Guarantor Subsidiaries’ retained earnings, intercompany receivables and net income by $27.8 million.  Management concluded that the correction of prior periods is immaterial; and accordingly, previous filings have not been revised.  However, during the current period, the Company has corrected its disclosure of the Condensed Consolidating Balance Sheet as of March 31, 2012.  Future filings will be corrected as applicable.

 

In the second quarter of fiscal year 2013, the Company recorded a year-to-date adjustment to properly reflect transactions between the Parent and Guarantor Subsidiaries in the Condensed Consolidating Financial Statements which did not impact the consolidated results. Management concluded that the correction of the first quarter of fiscal year 2013 is immaterial; and accordingly, the previous filing has not been revised.

 

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Table of Contents

 

Condensed consolidating financial statements for the Company’s Guarantor Subsidiaries and Non-Guarantor Subsidiaries are presented in the following tables (amounts in thousands):

 

Condensed Consolidating Balance Sheet

September 30, 2012

(Unaudited)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Reclassifications
and Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,398

 

$

118,578

 

$

33,519

 

$

 

$

160,495

 

Accounts receivable, net

 

 

41,154

 

58,006

 

 

99,160

 

Intercompany receivable

 

268,826

 

214,603

 

215,640

 

(699,069

)

 

Inventories, net

 

 

129,429

 

95,344

 

 

224,773

 

Prepaid expenses and other

 

276

 

14,258

 

26,507

 

 

41,041

 

Deferred income taxes

 

 

872

 

4,786

 

 

5,658

 

Total current assets

 

277,500

 

518,894

 

433,802

 

(699,069

)

531,127

 

Property and equipment, net

 

14

 

114,612

 

201,556

 

 

316,182

 

Investments in subsidiaries

 

431,379

 

467,565

 

10,678

 

(909,622

)

 

Goodwill

 

 

35,584

 

 

 

35,584

 

Intangible assets, net

 

 

30,899

 

9,203

 

 

40,102

 

Other assets

 

7,404

 

6,347

 

4,051

 

 

17,802

 

Long-term intercompany receivable

 

76,659

 

60,250

 

2,881

 

(139,790

)

 

Total assets

 

$

792,956

 

$

1,234,151

 

$

662,171

 

$

(1,748,481

)

$

940,797

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

25

 

$

1,551

 

$

 

$

1,576

 

Accounts payable, trade

 

57

 

38,862

 

43,237

 

 

82,156

 

Intercompany payable

 

60,976

 

451,005

 

159,226

 

(671,207

)

 

Accrued expenses

 

35,523

 

17,008

 

36,092

 

 

88,623

 

Income taxes payable

 

(2,947

)

3,055

 

514

 

 

622

 

Total current liabilities

 

93,609

 

509,955

 

240,620

 

(671,207

)

172,977

 

Long-term debt, less current portion

 

359,066

 

 

555

 

 

359,621

 

Other non-current obligations

 

26,968

 

4,504

 

58,626

 

 

90,098

 

Deferred income taxes

 

 

1,007

 

3,781

 

 

4,788

 

Long-term intercompany payable

 

 

76,659

 

63,131

 

(139,790

)

 

Stockholders’ equity

 

313,313

 

642,026

 

295,458

 

(937,484

)

313,313

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

792,956

 

$

1,234,151

 

$

662,171

 

$

(1,748,481

)

$

940,797

 

 

19



Table of Contents

 

Condensed Consolidating Balance Sheet

March 31, 2012

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Reclassifications
and Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,933

 

$

178,205

 

$

24,383

 

$

 

$

210,521

 

Accounts receivable, net

 

 

42,706

 

62,244

 

 

104,950

 

Intercompany receivable

 

251,970

 

55,863

 

171,921

 

(479,754

)

 

Inventories, net

 

 

121,611

 

90,623

 

 

212,234

 

Prepaid expenses and other

 

306

 

13,537

 

18,416

 

 

32,259

 

Deferred income taxes

 

 

192

 

6,178

 

 

6,370

 

Total current assets

 

260,209

 

412,114

 

373,765

 

(479,754

)

566,334

 

Property and equipment, net

 

20

 

114,615

 

201,213

 

 

315,848

 

Investments in subsidiaries

 

454,517

 

435,970

 

(4,622

)

(885,865

)

 

Goodwill

 

 

36,676

 

 

 

36,676

 

Intangible assets, net

 

 

31,630

 

9,897

 

 

41,527

 

Other assets

 

7,796

 

6,160

 

1,211

 

 

15,167

 

Long-term intercompany receivable

 

79,185

 

62,235

 

1,065

 

(142,485

)