UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

x

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

For the fiscal year ended March 31, 2004

Or

o

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

 

For the transition period from               to               

Commission File Number: 0-20289


KEMET Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

57-0923789
(IRS Employer
Identification No.)

2835 KEMET Way, Simpsonville, South Carolina
(Address of principal executive offices)

29681
(Zip Code)

 

Registrant’s telephone number, including area code: (864) 963-6300

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 Par Value

 

New York Stock Exchange

(Title of class)

 

 

 

Securities registered pursuant to Section 12(g) of the Act: None


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. x  Yes  o  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.   x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). x  Yes  o  No

Aggregate market value of voting Common Stock held by non-affiliates of the registrant as of September 30, 2003, computed by reference to the closing sale price of the registrant’s Common Stock was approximately $1,019,128,600.

Number of shares of each class of Common Stock outstanding as of May 31, 2004:  Common Stock, $.01 Par Value 86,496,284

 



DOCUMENTS INCORPORATED BY REFERENCE

1.     Portions of the definitive Proxy Statement relating to the annual meeting of Stockholders to be held on July 21, 2004: Part III

PART I

ITEM 1.   BUSINESS

General

KEMET Corporation which together with its subsidiaries is referred to herein as “KEMET” or the “Company” is one of the world’s largest manufacturers of tantalum and multilayer ceramic capacitors (“MLCC”) and solid aluminum capacitors, based on net sales for the calendar year ending December 31, 2003. In the year ended March 31, 2004 (“fiscal year 2004”), KEMET generated net sales of $433.9 million, down 3% from $447.3 million in fiscal year 2003. In fiscal year 2004, total net sales were broken down geographically as follows: North American sales were approximately 49%, Asian sales were approximately 32%, and European sales were approximately 19%. During fiscal year 2004, the Company shipped approximately 27.1 billion capacitors.

Capacitors are electronic components that store, filter, and regulate electrical energy and current flow and are one of the essential passive components used on circuit boards. Virtually all electronic applications and products contain capacitors, including communication systems, data processing equipment, personal computers, cellular phones, automotive electronic systems, military and aerospace systems, and consumer electronics.

Since its divestiture from Union Carbide Corporation (“UCC”) in December 1990, KEMET’s business strategy is to be the preferred capacitor supplier to the world’s most successful electronics original equipment manufacturers (“OEM”), Electronics Manufacturing Services providers (“EMS”), and electronics distributors. The Company’s customers include Alcatel, Arrow Electronics, Avnet, Celestica, Compaq, Dell, Delphi, Flextronics, Hewlett-Packard, IBM, Intel, Jabil, Jaco, Lucent Technologies, Motorola, Nokia, Pioneer, Qualcomm, Sanmina-SCI, Siemens, Solectron, TTI, and Visteon. KEMET reaches these customers through a direct, salaried sales force that calls on customer locations around the world.

Background of Company

KEMET’s operations began in 1919 as a business of UCC 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, the Company changed its manufacturing focus from vacuum tube parts to tantalum capacitors. The Company entered the market for tantalum capacitors in 1958 as one of approximately 25 United States manufacturers. By 1966, the Company was the United States’ market leader in tantalum capacitors. In 1969, the Company began production of ceramic capacitors as one of approximately 35 United States manufacturers.

The current Company was formed in 1990 by certain members of the Company’s management at the time, Citicorp Venture Capital, Ltd. (“CVC”), and other investors that acquired the outstanding common stock of KEMET Electronics Corporation from UCC.

2




Public Offerings, Recapitalization, and Stock Purchases

In October 1992, the Company completed an initial public offering of its common stock and a related recapitalization to simplify its capital structure. In June 1993, the Company completed an additional public offering of common stock and used the net proceeds to reduce outstanding indebtedness.

In January 2000, the Company sold 6,500,000 shares of its common stock in a public offering for $142.6 million in net cash proceeds after deducting underwriting fees and offering expenses. The net proceeds were used to repay outstanding debt under the Company’s short-term credit facility and to fund capital expenditures. Included in the offering were 2,193,220 shares sold by a stockholder of the Company which were shares of non-voting common stock that were converted into common stock on a share-for-share basis.

The Board of Directors authorized programs to purchase up to 8.0 million shares of its common stock on the open market. Through March 31, 2004, the Company had made purchases of 2.1 million shares for $38.7 million. The Company does not anticipate any further stock purchases under this authorization. Approximately 615,000 treasury stock shares were subsequently reissued in connection with the exercise of employee stock options. At March 31, 2004, the Company held approximately 1,485,000 treasury shares at a cost of $27.4 million.

Stock Splits

In September 1995, the Company’s Board of Directors declared a two-for-one stock split whereby one additional common share, par value $.01, was issued for each common share outstanding to shareholders of record on September 13, 1995.

In May 2000, the Board of Directors declared a two-for-one stock split. The record date for the split was May 24, 2000, with distribution of the additional shares on June 1, 2000.

Outstanding Debt

In May 1998, the Company sold $100.0 million of its Senior Notes pursuant to the terms of a Note Purchase Agreement dated as of May 1, 1998. These Senior Notes have a final maturity date of May 4, 2010, with required principal payments beginning on May 4, 2006. In April 2002, the Company entered into an Offering Basis Loan Agreement (the “Agreement”) with a bank. The Agreement is an uncommitted credit facility which allows borrowings by the Company in an aggregate principal amount not to exceed $50.0 million for a term not to exceed 180 days for any single borrowing. The interest rate charged on any borrowing under the Agreement is mutually agreed upon by the Bank and the Company at the time of such borrowing.

The Capacitor Industry

Because of their fundamental nature and widespread application, demand for capacitors tends to reflect the general demand for electronic products, which, though cyclical, has been growing over the past several decades. Growth in the electronics market and the corresponding growth in the capacitor market was fueled by:

The development of new products and applications, such as cellular phones, personal computers, and electronic controls for engines and machinery;

The increase in the electronic content of existing products, such as home appliances, medical equipment, and automobiles; and

The growth in the number of capacitors required in certain complex electronic products that use state-of-the-art microprocessors.

3




Capacitors

Capacitors are electronic components consisting of conducting materials separated by a dielectric, or insulating material, which allows a capacitor to interrupt the flow of electrical current. Capacitors can be either surface-mount or leaded. Surface mounting is an assembly technique used by customers in production of high volumes of circuit boards for electronic products.

KEMET manufactures a full line of capacitors, including tantalum, multilayer ceramic, and solid aluminum. Most customers buy both tantalum and ceramic capacitors from the Company. KEMET manufactures these types of capacitors in many different sizes and configurations. The Company produces surface-mount capacitors, which are attached directly to the circuit board without lead wires, and leaded capacitors, which are attached to the circuit board using lead wires.

The choice of capacitor dielectric is driven by the engineering specifications and 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, 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 are expected to be more effective in special applications.

Management believes that sales of surface-mount capacitors, including multilayer ceramic, tantalum, and solid aluminum capacitors will continue to grow more rapidly than other types of capacitors in both the United States and worldwide markets because technological breakthroughs in electronics are regularly expanding the number and type of applications for these products.

Our Strategy

KEMET has used its position as a leading, high-quality manufacturer of capacitors to capitalize on the increasingly demanding requirements of its customers. Key elements of the Company’s strategy include the following business objectives:

Maintaining Long-Term Customer Relationships.   KEMET continually seeks to maintain the number of business relationships it has with leading electronics companies and to increase the percentage of each key customer’s requirements which the Company supplies under these relationships. Key customers have moved toward long-term buying relationships with a limited number of capacitor manufacturers as a method to increase long-term quality and reduce the overall cost of acquiring component products. Key customers are demanding increased levels of service to provide ease of ordering, just-in-time delivery to multiple facilities, flexible scheduling, computerized paperless purchasing, specialized packaging, and a full breadth of product offerings. KEMET believes that it has responded to each of these customer needs and positioned the Company to capture a larger portion of OEM and EMS capacitor supply requirements. In addition, KEMET will continue to develop and expand preferred supplier relationships with its customers to ensure its ability to meet their rapidly changing demands. Preferred supplier and other similar long-term relationships accounted for more than 80% of KEMET’s net sales for fiscal year 2004.

Providing Product Breadth and Service Flexibility.   KEMET manufactures a full line of products with different specifications in order to respond to the needs of its customers. During fiscal year 2004, the Company shipped approximately 27.1 billion capacitors, with types being distinguished by dielectric material, configuration, encapsulation, capacitance level and tolerance, performance characteristics, marking, and packaging.

KEMET believes that it is a market leader in reliable and timely delivery of capacitor products. As most key customers have moved to just-in-time inventory management, the timeliness and reliability of

4




shipments by their suppliers have become increasingly important. The Company has designed its manufacturing facilities and order entry system to respond quickly to customer needs and has invested over $10 million in an easy-to-buy-from order entry system. KEMET’s order entry system provides on-line pricing, scheduled delivery dates, and accurate inventory information and provides a direct link between the Company and its major distributors.

Manufacturing High-Quality Products.   KEMET is a leader in an industry in which customers require high quality standards and exacting product specifications. The Company emphasizes continuous product improvement and a company-wide commitment to quality. As a result, KEMET has received numerous quality awards from customers such as Alcatel, AT&T, Ford, General Instrument, General Motors, Honeywell, Intel, Motorola, Rockwell International, Rolm Systems, Solectron, Sun Microsystems, Texas Instruments, and 3Com.

Improving Current Products and Developing New Products.   KEMET’s customers increasingly look for greater capacitance in smaller products, higher frequency response for fast microprocessors, and lower resistance to extend battery life in portable electronics. To respond to its customers’ needs, the Company has several high-capacitance, high-frequency response product development initiatives.

In a capacitor, an insulator, or dielectric, separates two electrodes, one being an anode and the other a cathode. Positive charges in the anode are attracted to negative charges in the cathode, while the insulator keeps the charges separate allowing the capacitor to store electrons. The highest unit volumes of capacitors are ceramics, tantalums, or aluminums. Ceramic capacitors have low levels of capacitance, relative to tantalum and aluminum, but are very fast devices. Relative to ceramics and aluminums, tantalums provide the most capacitance per volume. Like tantalums, aluminums have a high level of capacitance while being faster than tantalums, but require more volume to provide the same level of capacitance as tantalums.

KEMET has created faster tantalum capacitors by using new organic cathode polymers obtained through a technical alliance with NEC Corporation. These high-capacitance, high-frequency-response organic tantalum capacitors are called KO-CAPs (KEMET Organic Capacitors). KEMET has also achieved faster tantalum capacitors by designing new architectures, called MATs (Multiple Anode Capacitors). KEMET introduced the world’s fastest tantalum capacitor, a KO-MAT, through combining new organic cathode polymers with new architecture to produce a multiple-anode organic tantalum capacitor.

Ceramic capacitors are produced by building up layers of ceramic dielectric material between layers of electrodes. To gain higher capacitance in the same volume, there must be a higher number of layers of material, which means each layer must be thinner. Over the past several years, KEMET has made continual improvements which soon will allow the Company to produce layers approaching one micron thicknesses, which is close to the leading edge of technology in the world.

Finally, through a technical alliance with Showa Denko K.K., KEMET has fast, high-capacitance solid aluminum capacitors which, unlike traditional aluminum capacitors, are truly surface mountable. These capacitors are called AO-CAPs (Aluminum Organic Capacitors) .

High-frequency electronics are evolving very rapidly. There are significant differences between the functional characteristics and the cost of tantalum, ceramic, and solid aluminum capacitors. Electronics designers choose from among these capacitor technologies based on the functional and cost requirements of specific applications. Most of KEMET’s competitors focus on one of these capacitor technologies. KEMET has the most complete line of capacitor technologies across the three primary capacitor types. KEMET wants to be positioned to provide the best solution to meet the customer’s needs, especially in high-frequency, high-capacitance applications, regardless of the capacitor technology chosen.

Remaining an Overall Low-cost Producer.   KEMET’s customers are under worldwide competitive pressure to reduce their product costs and these pressures are passed along to component manufacturers.

5




The Company believes that it has achieved a leading position as an overall low-cost producer of capacitors. To maintain this position, it is constantly seeking to reduce material and labor costs, develop cost-efficient manufacturing equipment and processes, and design manufacturing plants for efficient production.

KEMET has been able to reduce the manufacturing cost of its products by increasing materials utilization efficiency and production yields. KEMET has a dedicated engineering team that continues to develop faster and more efficient automated manufacturing, assembly, testing, and packaging machines and processes.

KEMET has manufacturing facilities in the Carolinas and Mexico. In July 2003, the Company announced a reorganization of its operations that will result in relocating commodity production facilities from the United States to low-cost locations in Mexico and China. A production facility opened in Suzhou, China, in October of 2003, and a second facility is scheduled to open in the autumn of 2004. The Company’s production facilities are highly integrated into a virtual factory through information technology. The Company has developed an industry-leading global logistics system to deliver parts with near-perfect on-time delivery to any customer location in the world.

Markets and Customers

KEMET’s products are sold to a variety of OEMs in a broad range of industries including the computer, communications, automotive, military, and aerospace industries. KEMET also sells an increasing number of its products to EMS providers, which also serve OEMs in these industries. The Company is not dependent on any one customer or group of related customers. Two customers each in fiscal 2004 and fiscal 2003 accounted for over 10% of the Company’s net sales. No customer accounted for more than 10% of sales in fiscal 2002. The Company’s top 50 customers accounted for approximately 96% of the Company’s net sales during fiscal year 2004.

The following table presents an overview of the diverse industries that incorporate the Company’s capacitors into their products and the general nature of those products.

Industry

 

 

 

Products

Automotive

 

Audio systems, power train electronics, instrumentation, airbag systems, anti-lock braking systems, electronic engine controls, air conditioning controls, and security systems

Business Equipment

 

Copiers, point-of-sale terminals, and fax machines

Communications

 

Cellular phones, modems, telephones, switching equipment, and relays

Computer-related

 

Personal computers, workstations, mainframes, computer peripheral equipment, power supplies, disk drives, printers, and local area networks

Industrial

 

Electronic controls, measurement equipment, instrumentation, and medical electronics

Military/Aerospace

 

Avionics, radar, guidance systems, and satellite communications

 

KEMET produced a small percentage of its capacitors under military specification standards sold for both military and commercial uses. The Company does not sell any of its capacitors directly to the U.S. government. Although the Company does not track sales of capacitors by industry, the Company estimates that sales of its capacitors to OEMs that produce products principally for the military and aerospace industries accounted for less than 3% of its net sales during fiscal year 2004. Certain of the Company’s other customers may also purchase capacitors for products in the military and aerospace industries.

6




Sales and Distribution

KEMET’s domestic sales, and most of its international sales, are made through the Company’s direct sales and customer service employees. The Company’s domestic sales staff is located in four regional offices, thirteen local offices, and eight satellite offices. A substantial majority of the Company’s international sales are made through three regional, three local, and eight satellite offices in Europe; eight locations in Asia; two locations in Canada; one location in Mexico; and one location in Brazil. The Company also has independent sales representatives located in Korea, Puerto Rico, and the United States.

KEMET markets and sells its products in its major markets with a direct sales force, in contrast to its competitors, which generally utilize independent commissioned representatives or a combination of representatives and direct sales employees. The Company believes its direct sales force creates a distinctive competence in the market place and has established strong relationships with its customers. With a global sales organization that is customer-based, KEMET’s direct sales personnel from around the world serve on KEMET Key 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 to specific customer locations, guided by an overall account strategy for each key customer.

Electronics distributors are an important distribution channel in the electronics industry and accounted for approximately 51%, 43%, and 33% of the Company’s net sales in fiscal years 2004, 2003, and 2002, respectively. In fiscal years 2004 and 2003, two distributors of passive components each accounted for more than 10% of net sales.

The Company’s distributor policy includes inventory price protection and “ship-from-stock and debit” programs common in the industry. The price protection policy protects the value of the distributors’ inventory in the event the Company reduces its published selling price to distributors. This program allows the distributor to debit the Company for the difference between KEMET’s list price and the lower authorized price for specific parts. The Company reserves for price protection when it is authorized. The ship-from-stock and debit 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 the Company for the difference between KEMET’s list price and the lower authorized price for that specific transaction. The Company has established a financial reserve based on the amount of distributors’ inventory of the Company’s products. Each sale under this program requires specific authorization.

Sales by Geography

In fiscal 2004, total net sales were broken down geographically as follows: North American sales were approximately 49%, Asian sales were approximately 32%, and European sales were approximately 19%. Although management believes that the Company is able to provide a level of delivery and service that is competitive with local suppliers, the Company’s capacitor market shares in European and Asian markets tend to be significantly lower than in the United States because some international electronics manufacturers prefer to purchase components from local producers. As a result, a large percentage of the Company’s export sales are made to foreign operations of U.S. manufacturers. A portion of the Company’s European sales are denominated in local currencies and the Euro; therefore, a significant appreciation of the U.S. dollar against such foreign currencies or the Euro would reduce the gross profit realized by the Company on its European sales as measured in U.S. dollars. Substantially all of the Company’s European export shipments are made duty-paid, free delivery as required by local market conditions (see note 9 to Consolidated Financial Statements).

7




Inventory and Backlog

Although the Company manufactures and inventories standardized products, a portion of its products are produced to meet specific customer requirements. Cancellations by customers of orders already in production could have an impact on inventories; however, cancellations have not been significant to date.

The backlog of outstanding orders for the Company’s products was $69.0 million and $31.1 million at March 31, 2004 and 2003, respectively. The current backlog is expected to be filled during the first quarter of fiscal 2005. Most of the orders in the Company’s backlog may be cancelled by its customers, in whole or in part, although some may be subject to penalty.

Competition

The market for tantalum, ceramic, and aluminum capacitors is highly competitive. The capacitor industry is characterized by, among other factors, a long-term trend toward lower prices for capacitors, low transportation costs, and few import barriers. Competitive factors that influence the market for the Company’s products include product quality, customer service, technical innovation, pricing, and timely delivery. The Company believes that it competes favorably on the basis of each of these factors.

The Company’s major domestic competitors include AVX Corporation and Vishay Intertechnology, Inc., in the production of tantalum and ceramic capacitors. The Company’s major foreign competitors include Kyocera/AVX Corporation, Murata Manufacturing Company Ltd., Samsung Electronics Co. Ltd., TDK Corporation, Yageo, and Taiyo Yuden in the production of ceramic capacitors and NEC Corporation, EPCOS, Kyocera/AVX Corporation and Samsung Electronics Co. Ltd. in the production of tantalum capacitors.

Raw Materials

The most expensive raw materials used in the manufacture of the Company’s products are tantalum powder, palladium, and silver. These materials are considered commodities and are subject to price volatility. Tantalum powder is primarily purchased under long-term contracts, while palladium and silver are primarily purchased on the spot and forward markets, depending on market conditions. For example, if the Company believes that prices are likely to rise, it may purchase a significant amount of its annual requirements for forward delivery.

Tantalum powder is used in the manufacture of tantalum capacitors. Management believes the tantalum needed has generally been available in sufficient quantities to meet manufacturing requirements. However, the increase in demand for tantalum capacitors during fiscal year 2001, along with the limited number of tantalum powder suppliers, led to increases in tantalum prices and impacted availability. Tight supplies of tantalum raw material and some tantalum powders caused the price to increase from under $50 per pound early in calendar 2000 to over $300 per pound in calendar 2001. During the fiscal years ended March 31, 2004 and 2003, the Company recorded $12.4 million and $40.8 million, respectively, of charges related to a tantalum inventory purchase commitment that exceeded market prices (See Critical Accounting Policies and Long Term Supply Agreement).

During fiscal 2001, the Company entered into a joint venture agreement with Australasian Gold Mines NL, which subsequently changed its name to Tantalum Australia NL (“TAA”), to establish an independent source of tantalum to meet the increasing demand for tantalum capacitors from key customers. KEMET also committed to acquire material from the joint venture. This transaction closed in April 2001, and included KEMET acquiring a ten percent equity interest in TAA. Upon successfully achieving the objective of establishing an independent source of tantalum material, KEMET relinquished its interest in the joint venture in exchange for the termination of its obligation to purchase material.

8




KEMET retained its equity interest in TAA, which has been diluted to less than nine percent on a fully-diluted basis.

Although palladium is presently found primarily in South Africa and Russia, the Company believes that there are a sufficient number of domestic and foreign suppliers from which the Company can purchase its palladium requirements. Although palladium required by the Company has generally been available in sufficient quantities, the limited number of suppliers could lead to higher prices, and the inability of the Company to pass any increase on to its customers could have an adverse effect on the margin of those products in which the metal is used. The Company continues to take actions to minimize the impact of future palladium price increases on its profit margins. The Company has a major product development initiative to shift from the production of MLCCs using palladium or silver electrodes to processes using base metal electrodes, such as nickel.

Silver and aluminum have generally been available in sufficient quantities, and the Company believes there are a sufficient number of suppliers from which the Company can purchase its requirements.

Patents and Trademarks

At March 31, 2004, the Company held 10 United States and 36 foreign patents and 13 United States and 79 foreign trademarks. The Company has entered into few licensing arrangements for technology or products as it believes that the success of its business is not materially dependent on the existence or duration of any patent, license, or trademark other than the name “KEMET.” The Company’s engineering and research and development staffs have developed and continue to develop proprietary manufacturing processes and equipment designed to enhance the Company’s manufacturing facilities and reduce costs.

Research and Development

Research and Development expenses were $24.4 million for fiscal year 2004 compared to $25.3 million for fiscal year 2003. 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 the Company’s products and manufacturing processes have been designed and developed by Company engineers. The Company continues to invest in new technology to improve product performance and production efficiencies.

Environmental

The Company is subject to various Mexican, Chinese, and United States 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 used and generated in manufacturing electronic components. Based on the annual costs incurred by the Company over the past several years, management does not believe that compliance with these laws and regulations will have a material adverse effect on the Company’s capital expenditures, earnings, or competitive position. The Company believes, 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 law and regulations may require the Company to make additional capital expenditures which, while not currently estimable with certainty, are not presently expected to have a material adverse effect on the Company’s financial condition. See “Legal Proceedings” for a discussion of certain other environmental matters.

Employees

As of April 30, 2004, KEMET had approximately 8,800 employees, of whom approximately 1,400 were located in the United States, approximately 7,000 were located in Mexico, 300 in China, and the remainder were located in the Company’s foreign sales offices. The Company believes that its future success will

9




depend in part on its ability to recruit, retain, and motivate qualified personnel at all levels of the Company. While none of its United States employees are unionized, the Company has approximately 2,900 hourly employees in Mexico represented by labor unions as required by Mexican law. The Company has not experienced any major work stoppages and considers its relations with its employees to be good. In addition, the Company’s labor costs in Mexico are denominated in pesos, and Mexican inflation or a significant depreciation of the United States dollar against the Mexican peso would increase the Company’s labor costs in Mexico.

Securities Exchange Act Reports

The Company maintains an Internet website at the following address: www.kemet.com. KEMET makes available on or through its Internet website certain reports and amendments to those reports that are filed with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934. 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 the Company’s website free of charge as soon as reasonably practicable after KEMET electronically files the information with, or furnishes it to, the SEC.

ITEM 2.   PROPERTIES

KEMET is headquartered in Simpsonville, South Carolina, and has a total of 18 operating manufacturing plants and distribution centers located in the southeastern United States, Mexico, and China. The manufacturing operations are in Simpsonville and Fountain Inn, South Carolina; Shelby, North Carolina; Matamoros, Monterrey, and Ciudad Victoria, Mexico; and Suzhou, China, which opened in calendar 2003. The Company’s existing manufacturing and assembly facilities have approximately 2.4 million square feet of floor space and are highly automated with proprietary manufacturing processes and equipment.

The Mexican facilities operate under the Maquiladora Program. In general, a company that operates under the program is afforded certain duty and tax preferences and incentives on products brought back into the United States. The Company has operated in Mexico since 1969 and approximately 80% of its employees are located in Mexico. The Company’s Mexican facilities in Matamoros are located within five miles of Brownsville, Texas, with easy access for daily shipments of work-in-process and finished products. The Company also has manufacturing facilities in Monterrey that commenced operations in 1991. The Company constructed and put into production a new manufacturing plant in Monterrey in 1996. During fiscal year 2000, the Company began production in a new manufacturing facility for tantalum capacitors in Ciudad Victoria, Mexico. The Company’s manufacturing processes and standards, including compliance with applicable environmental and worker safety laws and regulations, are essentially identical in the United States and Mexico. The Company’s Mexican and Chinese operations, like its United States operations, have won numerous quality, environmental, and safety awards.

Most of the Company’s manufacturing and assembly facilities produce one product or a family of closely related products. Management believes that this focused approach to manufacturing allows each facility to shorten manufacturing time, optimize product flow, and avoid long and costly equipment retooling and employee training time, all of which leads to overall reduced costs.

The Company has developed just-in-time manufacturing and sourcing systems. These systems enable the Company to meet customer requirements for faster deliveries while minimizing the need to carry significant inventory levels. The Company continues to emphasize flexibility in all of its manufacturing operations to improve product delivery response times.

Management believes that substantially all of its property and equipment is in good condition and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs.

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The following table provides certain information regarding the Company’s principal facilities:

Location

 

 

 

Square
Footage

 

Type of
Interest

 

Description
of Use

 

Date
Constructed
Acquired or
First
Occupied by
Company

 

Simpsonville, South Carolina(1)

 

372,000

 

Owned

 

Manufacturing/ Headquarters

 

 

1963

 

 

Matamoros, Mexico(1)

 

291,000

 

Owned

 

Manufacturing

 

 

1985

 

 

Monterrey, Mexico(2)

 

275,000

 

Owned

 

Manufacturing

 

 

1991

 

 

Ciudad Victoria, Mexico

 

259,000

 

Owned

 

Manufacturing

 

 

1999

 

 

Fountain Inn, South Carolina

 

249,000

 

Owned

 

Manufacturing

 

 

1985

 

 

Monterrey, Mexico

 

229,000

 

Owned

 

Manufacturing

 

 

1996

 

 

Greenwood, South Carolina(3)

 

132,000

 

Owned

 

Idle—Listed for Sale

 

 

1981

 

 

Mauldin, South Carolina

 

129,000

 

Owned

 

Manufacturing

 

 

1971

 

 

Suzhou, China(4)

 

127,000

 

Leased

 

Manufacturing

 

 

2003

 

 

Shelby, North Carolina

 

123,000

 

Owned

 

Manufacturing

 

 

1981

 

 

Mauldin, South Carolina

 

80,000

 

Leased

 

Distribution/ Storage

 

 

1976

 

 

Matamoros, Mexico(3)

 

68,000

 

Owned

 

Idle—Listed for Sale

 

 

1977

 

 

Brownsville, Texas

 

60,000

 

Leased

 

Shipping/ Distribution

 

 

1992

 

 


(1)          Includes four separate manufacturing facilities.

(2)          Includes two separate manufacturing facilities.

(3)          Manufacturing facilities, one in Matamoros, Mexico, and the Greenwood, South Carolina, facility were closed as part of cost savings initiatives in fiscal 2003.

(4)          Includes two separate manufacturing facilities, one became operational in the latter half of calendar 2003 and one which is planned for future operations. The Company entered into an agreement for a third facility that is being constructed.

ITEM 3.   LEGAL PROCEEDINGS

The Company has periodically incurred, and may continue to incur, liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”) and analogous state laws with respect to sites used for off-site management or disposal of Company-derived wastes. The Company has been named as a potentially responsible party (“PRP”) at the Seaboard Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a “de minimis” party and does not expect its total exposure to be material. In addition, UCC, the former owner of the Company, is a PRP at certain sites relating to the off-site disposal of wastes from properties presently owned by the Company. The Company is participating in coordination with UCC in certain PRP-initiated activities related to these sites. The Company expects that it will bear some portion of the liability with respect to these sites; however, any such share is not presently expected to be material to the Company’s financial condition or results of operations. In connection with the acquisition in 1990, UCC agreed, subject to certain limitations, to indemnify the Company with respect to the foregoing sites.

The Company or its 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 the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted to a vote of security holders during the Company’s quarter ended March 31, 2004.

11




PART II

ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company’s Common Stock is traded on the New York Stock Exchange under the symbol KEM. The Company had approximately 31,700 stockholders as of June 1, 2004, of which approximately 400 were stockholders of record. The following table represents the high and low sale prices of the Common Stock for the periods indicated:

 

 

Fiscal 2004

 

Fiscal 2003

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

10.78

 

$

7.55

 

$

22.40

 

$

17.30

 

Second Quarter

 

13.95

 

9.69

 

17.75

 

8.05

 

Third Quarter

 

14.29

 

11.80

 

11.50

 

6.13

 

Fourth Quarter

 

16.70

 

12.88

 

9.53

 

7.10

 

 

The Company has not declared or paid any cash dividends on its Common Stock since the initial public offering in October 1992. The Company currently intends to retain earnings to support its growth strategy and does not anticipate paying dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the Company’s Board of Directors and will depend upon, among other factors, the capital requirements, operating results, and financial condition of the Company. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources” contained in this Form 10-K for fiscal year 2004.

12




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 the Company’s audited Consolidated Financial Statements. 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 KEMET’s future financial condition or results of operations (see Item 7 “Safe Harbor Statement”).

 

 

Fiscal Years Ended March 31,

 

 

 

2004(1)

 

2003(1)

 

2002(1)

 

2001

 

2000

 

 

 

Dollars in thousands except per share data

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

433,882

 

$

447,332

 

$

508,555

 

$

1,406,147

 

$

822,095

 

Operating income (loss)

 

(159,014

)

(97,002

)

(40,365

)

566,986

 

124,315

 

Interest income

 

(3,847

)

(3,818

)

(9,809

)

(16,713

)

(2,079

)

Interest expense

 

6,472

 

6,097

 

6,736

 

7,507

 

9,135

 

Net earnings (loss)

 

$

(111,975

)

$

(55,988

)

$

(27,289

)

$

352,346

 

$

70,119

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per share—basic

 

$

(1.30

)

$

(0.65

)

$

(0.32

)

$

4.05

 

$

0.87

 

Net earnings (loss) per share—diluted

 

$

(1.30

)

$

(0.65

)

$

(0.32

)

$

4.00

 

$

0.85

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

—basic

 

86,412,281

 

86,167,563

 

85,773,763

 

86,930,965

 

80,650,376

 

—diluted

 

86,412,281

 

86,167,563

 

85,773,763

 

88,181,118

 

82,411,634

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

969,808

 

$

1,101,010

 

$

1,171,714

 

$

1,366,530

 

$

927,256

 

Working capital

 

313,731

 

463,535

 

454,776

 

460,055

 

260,154

 

Long-term debt

 

100,000

 

100,000

 

100,000

 

100,000

 

100,000

 

Other non-current obligations

 

61,623

 

57,617

 

48,926

 

51,084

 

54,757

 

Stockholders’ equity

 

684,478

 

793,275

 

855,045

 

886,176

 

547,456

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Cash flow from provided by (used in) operating activities

 

$

38,452

 

$

43,710

 

$

(34,219

)

$

392,440

 

$

183,052

 

Capital expenditures

 

25,835

 

22,197

 

78,546

 

210,559

 

82,009

 

Research and development

 

24,449

 

25,268

 

26,334

 

27,145

 

24,910

 


(1)          Includes special charges of $108.9 million, $75.9 million, and $55.7 million for the fiscal years ended March 31, 2004, 2003, and 2002, respectively, which are described in Item 7 under Results of Operations.

13




ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion and analysis provides information that the Company believes is useful in understanding KEMET’s operating results, cash flows, and financial condition for the three years ended March 31, 2004. 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 here, 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. The Company’s actual 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 “Safe Harbor Statement” and, from time to time, in the Company’s other filings with the Securities and Exchange Commission.

Overview

KEMET Corporation is one of the world’s largest manufacturers of tantalum, multilayer ceramic capacitors, and solid aluminum capacitors. Capacitors are electronic components that store, filter, and regulate electrical energy and current flow and are one of the essential passive components used on circuit boards. Virtually all electronic applications and products contain capacitors, including communication systems, data processing equipment, personal computers, cellular phones, automotive electronic systems, military and aerospace systems, and consumer electronics.

The Company’s business strategy is to generate revenues by being the preferred capacitor supplier to the world’s most successful electronics original equipment manufacturers, electronics manufacturing services providers, and electronics distributors. The Company reaches these customers through a direct, salaried sales force that calls on customer locations around the world. In fiscal 2004, total net sales were broken down geographically as follows: North American sales were approximately 49%, Asian sales were approximately 32%, and European sales were approximately 19%.

The Company manufactures capacitors in the United States, Mexico, and China. Commodity manufacturing in the United States is being relocated (see “Enhanced Strategic Plan”) to the Company’s lower-cost manufacturing facilities in Mexico and China. Production that remains in the U.S. will focus primarily on early-stage manufacturing of new products and other specialty products for which customers are predominantly located in North America.

The market for tantalum, ceramic, and aluminum capacitors is highly competitive. The capacitor industry is characterized by, among other factors, a long-term trend toward lower prices for capacitors, low transportation costs, and few import barriers. Competitive factors that influence the market for the Company’s products include product quality, customer service, technical innovation, pricing, and timely delivery. The Company believes that it competes favorably on the basis of each of these factors.

14




Electronic products are in a long-term growth phase as evidenced by the proliferation of cellular phones, personal computers, and consumer electronics. The growth of the capacitor industry, however, has been cyclical, and lower average selling prices for capacitors have corresponded with the long-term growth in units. The following is an illustration (it does not represent an actual time period, actual quantities, actual prices, etc.) of the dynamics within the capacitor industry:

Average Selling Prices (“ASPs”)—Capacitor average selling prices have trended down over the long-term growth period. KEMET estimates the historical average annual decrease in ASPs to be approximately 5% to 6%. This, in turn, requires the Company to effectively manage costs to remain competitive. An example of this is the Company’s decision to move the manufacture of commodity manufacturing to low-cost locations. (See “Enhanced Strategic Plan”)

CyclicalityPeriods of significant expansion and correction have marked the long-term growth of the capacitor market.

Expansion periods—Expansion periods usually offer the opportunity for the Company to exercise more control over ASPs as industry capacity utilization is high. Customer demand often exceeds the available supply. Firm or higher pricing combined with higher volumes cause this to be the most profitable part of the cycle for the industry, and the industry generally adds capacity during this period.

Correction periods—Correction periods usually offer the opportunity for the customer to exercise more control over average selling prices as industry capacity exceeds customer demand. Lower pricing combined with lower volumes during this period cause this to be the least profitable part of the cycle for the industry.

The fiscal year ended March 31, 2001 represented a cyclical peak, and the Company reported record revenues and profits of $1.4 billion and $352.3 million, respectively. During such an expansion period, the Company is challenged with meeting demand and not over expanding capacity, which it may not be able to bring on line until after the expansion. The increase in demand requires maintaining higher raw material inventory levels at higher prices, which challenges the Company to increase inventory turnover as well as

15




managing inventory to a reasonable level to reduce issues such as obsolescence, particularly when the expansion ends.

The three fiscal years following fiscal year 2001; fiscal year 2002, fiscal year 2003, and fiscal year 2004, represent what the Company considers an unprecedented correction phase of the long-term growth trend. Demand decreased markedly and the quarterly decline in ASPs was often in excess of the historical average annual decrease. During such a correction period, the Company is challenged with aligning costs with the reduced stream of revenues. The Company must remain financially sound with sufficient financial liquidity to not only operate effectively during the correction phase but also have the financial wherewithal to react when the next expansion cycle begins. During this correction phase, the Company initiated a number of initiatives (see Fiscal Year 2004 Special Charges, Fiscal Year 2003 Special Charges, and Fiscal Year 2002 Special Charges) to meet these challenges.

At March 31, 2004, the Company had $271.3 million of cash and short and long-term investments. KEMET intends to satisfy both its short-term and long-term liquidity requirements primarily with cash and cash equivalents provided by operations, the sale of investments, and borrowings under its uncommitted Loan Agreement.

Enhanced Strategic Plan

On July 2, 2003, KEMET announced its Enhanced Strategic Plan (“Plan”) to enhance the Company’s position as a global leader in passive electronic technologies. KEMET believes that there have been profound changes in the competitive landscape of the electronics industry over the past several years. The Company listened closely to its customers’ description of their future directions, and is aligning KEMET’s future plans closely with their plans. Building on the Company’s foundation of success in being the preferred supplier to the world’s most successful electronics manufacturers and distributors, KEMET is adapting so as to continue to succeed in the new global environment.

KEMET’s strategy has three foundations:

·       Enhancing the Company’s position as the market leader in quality, delivery, and service through outstanding execution;

·       Having a global mindset, with an increased emphasis on growing KEMET’s presence in Asia; and

·       Accelerating the pace of innovations to broaden the Company’s product portfolio.

To execute the Plan, KEMET is reorganizing its operations around the world. Over the next eighteen months, several KEMET facilities will be relocated based on access to key customers, access to key technical resources and knowledge, and availability of low-cost resources. KEMET estimates it will incur special charges of approximately $35 million over the period of the reorganization related to movement of manufacturing operations. This will yield an approximate one-year payback based on unit volumes at the time of the announcement, and a $50-60 million savings with volume recovery by fiscal 2006, if unit growth continues as it has in recent quarters. In addition, there will be special charges reflecting the change in status of the facilities that will be vacated through this move. The timing of the special charges is dependent on the timing of operational decisions, some of which have not yet been finalized, and on operational activities yet to occur. See Fiscal Year 2004 Special Charges under Results of Operations.

KEMET in the United States

KEMET’s corporate headquarters will remain in Greenville, South Carolina, though individual functions will evolve to support global activities in Asia, Europe, and North America, either from Greenville or through locations in appropriate parts of the world.

16




Commodity manufacturing currently in the United States will be relocated to the Company’s lower-cost manufacturing facilities in Mexico and China. Approximately 650 production-related jobs in the United States will be impacted by this relocation over the next eighteen months. Production that remains in the U.S. will focus primarily on early-stage manufacturing of new products and other specialty products for which customers are predominantly located in North America.

To accelerate the pace of innovations, the KEMET Innovation Center was created. The primary objectives of the Innovation Center are to ensure the flow of new products and robust manufacturing processes that will keep the Company at the forefront of its 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 will be located in the Greenville, South Carolina, area.

KEMET in Mexico

KEMET believes its Mexican operations are among the most cost efficient in the world, and they will continue to be the Company’s primary production facilities supporting North American and European customers. One of the strengths of KEMET de Mexico is that it is truly a Mexican operation, including Mexican management and workers. These facilities will be 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, and the facilities in Monterrey will continue to support ceramic capacitor lines.

KEMET in China

In recent years, low production costs and proximity to large, growing markets have caused many of KEMET’s key customers to relocate production facilities to Asia, particularly China. KEMET has a well-established sales and logistics network in Asia to support customers’ Asian operations. The Company’s initial China production facilities in Suzhou near Shanghai commenced shipments in October 2003. Manufacturing operations in China will grow rapidly, and KEMET anticipates that production capacity in China may be equivalent to Mexico within two to three years, with most of the equipment to support these operations being transferred from existing capacity in the United States or Mexico. Like KEMET Mexico, the vision for KEMET China is to be a Chinese operation, with Chinese management and workers, to help achieve KEMET’s objective of being a global company. These facilities will be responsible for maintaining KEMET’s traditional excellence in quality, service, and delivery, while accelerating cost-reduction efforts and supporting efforts to grow the Company’s customer base in Asia.

KEMET in Europe

KEMET will maintain and enhance its strong European sales and customer service infrastructure, allowing KEMET to continue to meet the local preferences of European customers who remain an important focus for KEMET going forward.

Global Sales and Logistics

In recent years, it has become more complex to do business in the electronics industry. Market-leading electronics manufacturers have spread their facilities more globally. The growth of the electronics manufacturing services (EMS) industry has resulted in a more challenging supply chain. New Asian electronics manufacturers are emerging rapidly. The most successful business models in the electronics industry are based on tightly integrated supply chain logistics to drive down costs. KEMET’s direct salaried sales force worldwide and a well-developed global logistics infrastructure distinguish it in the marketplace and will remain a hallmark of KEMET in meeting the needs of its global customers.

17




All components of the plan are within their original cost estimates and are expected to be completed within twenty-four months of the date of this filing.

Critical Accounting Policies

The Company’s significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. The following identifies a number of policies which require significant judgments or estimates.

The Company’s estimates and assumptions are based on historical data and other assumptions that KEMET believes are reasonable in the circumstances. 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 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 Consolidated Financial Statements. It is important that a reader of the financial statements understand that actual results could differ from these estimates, assumptions, and judgments.

KEMET’s management believes the following critical accounting policies contain the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements.

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 management to make estimates. For instance, units shipped decreased substantially after fiscal 2001 and reduced the turnover of finished goods inventories. The Company computes an obsolescence reserve by gauging the current demand for a specific product, comparing it with historical trends, and taking into account general economic conditions. The Company also must assess the prices at which it believes the finished goods inventory can be sold compared to its cost. A sharp decrease in unit demand could adversely impact earnings as the reserve estimates could increase. Conversely, a sharp increase in unit demand could favorably impact earnings as the reserve estimates could decrease.

The net realizable value of raw materials purchased under long-term supply contracts also requires significant judgments by management. In fiscal 2004 and 2003, the Company recorded losses totaling $53.2 million related to tantalum raw material. In fiscal 2004, the Company recorded a $12.4 million charge for the estimated future losses for the commitment to purchase tantalum at above-market prices under a tantalum supply agreement. In fiscal 2003, the Company wrote down approximately $16.4 million in on-hand inventory of tantalum powder and wire and approximately $24.4 million related to contractual commitments to purchase tantalum powder and wire at prices above market through calendar year 2006. This was done because the current market prices of tantalum were substantially below the prices carried in tantalum raw materials inventory, which the Company committed to purchase tantalum in the future under a long-term contract. These actions involved significant judgments on the part of the Company, including determining the amount of losses, their timing, and their amount.

The determination was made after management concluded that the substantial fall-off in the demand for tantalum capacitors was likely to continue for the foreseeable future. Combining this assessment with the worldwide overcapacity in tantalum production, KEMET could not foresee when tantalum prices might recover from their currently depressed levels. This determination was made after it was apparent that customers’ inventory levels had dropped without any effect on the demand or pricing for tantalum capacitors and after the settlement of tantalum pricing litigation as described in Note 10: Commitments. Although the Company believes that the losses as well as their timing were appropriate under the

18




circumstances, visibility for future demand and pricing is limited and the judgments made by management necessarily involved subjective assessments.

The net realizable value of current tantalum inventory and the losses with respect to future tantalum commitments were calculated based on current market prices for tantalum. There is no established market on which tantalum raw materials are regularly traded and quoted. The Company based its determination of current market price on quotations from suppliers of these materials. In quantifying the charges that were recorded against future purchase commitments, the Company assumed, for lack of another benchmark, that current market prices would continue through 2006, when KEMET’s purchase commitments end. Had other assumptions on current and future prices for tantalum been made, the amount of the inventory losses against purchase commitments would have been different.

If tantalum prices were to recover in the future, the Company would not reverse the write-downs recorded on raw materials inventory or the charges that were recorded against the purchase commitments, so that the cost of materials will continue to reflect these losses regardless of future price increases in tantalum. This could have the effect of increasing the earnings in future periods from what they would have been had KEMET not taken these actions until future raw material prices were known with certainty. If tantalum prices experience further declines, as they did in fiscal year 2004, the Company could also be required to incur further losses.

ASSET IMPAIRMENT—GOODWILL and LONG-LIVED-ASSETS.   KEMET adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” on April 1, 2002. Under SFAS No. 142, goodwill, which represents the excess of purchase price over fair value of net assets acquired, and intangible assets with indefinite useful lives are no longer amortized but are to be tested for impairment at least on an annual basis in accordance with the provisions of SFAS No. 142.

The Company’s goodwill is tested for impairment at least on an annual basis. The impairment test involves a comparison of the fair value of its reporting unit, as defined under SFAS No. 142, with carrying amounts. If the reporting unit’s aggregated 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 being measured exceeds its fair value, up to the total amount of its assets. The Company determined fair value based on a market approach which incorporates quoted market prices of the Company’s common stock and the premiums offered to obtain controlling interest for companies in the electronics industry. Downward movement in either stock prices or premiums paid for controlling interest in the electronics industry could have a material effect on the fair value of goodwill in future measurement periods. On an ongoing basis, KEMET expects to perform its impairment tests during the first quarter of each fiscal year and when otherwise warranted. In accordance with SFAS No. 142, KEMET completed the transitional goodwill impairment test upon adoption on April 1, 2002, and completed its annual goodwill impairment test in the first quarter of fiscal 2004 and 2003, none of which indicated impairment.

As of March 31, 2004, KEMET had unamortized goodwill in the amount of $30.5 million.

For the impairment or disposal of long-lived assets, KEMET follows the guidance as prescribed in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144, long-lived assets and intangible assets subject to amortization would be 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 measured by comparing the carrying amount of the long-lived asset to the sum of the estimated future undiscounted cash flows

19




expected to be generated by the asset. In estimating the future undiscounted cash flows, the Company uses 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, projections of sales, cost of good sold, and capital spending. 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 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.

As a result of these factors, a test for recoverability of the Company’s tantalum and ceramic assets was performed. The estimated future undiscounted cash flows expected to be generated by these assets was consistent with the tests of recoverability discussed above. The results of the test for recoverability indicated that the estimated future undiscounted cash flows exceeded the carrying amount of the long-lived asset and therefore, no impairment exists.

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 the Company’s financial condition and operating results.

REVENUE RECOGNITION.   Revenue is recognized when a product is shipped. A portion of sales is made to distributor customers, which under certain conditions, allows for returns of overstocked inventory and provides protection against price reductions initiated by the Company. At the time sales to distributors are recorded, allowances are also recognized against net sales for estimated product returns and price protection. Historical distributor returns and price adjustments on both a consolidated level and on an individual distributor level as well as the general economic climate are considered in determining the allowances. These procedures require the exercise of significant judgments, but the Company believes they reasonably estimate future credits for returns and price adjustments. Variations in these assumptions could have a significant effect on the amounts reported through the Consolidated Statements of Operations.

PENSION AND OTHER POST-RETIREMENT BENEFITS.   KEMET engages an independent actuarial firm to perform an actuarial valuation of the fair values of its post-retirement plans’ benefit obligations. Management provides the actuarial firm with certain assumptions that have a significant effect on the fair value of the obligations such as the:

·       Weighted-average discount rate—used to arrive at the net present value of the obligation;

·       return on assets—used to estimate the growth in invested asset values available to satisfy certain obligations;

·       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.

Management understands 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.

Management bases its assumptions on either historical or market data that it considers reasonable in the circumstances. Variations in these assumptions could have a significant effect on the amounts reported through the Consolidated Statements of Operations.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) became law in the United States. The Act introduces a prescription drug benefit under

20




Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position SFAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the Company believes its Plan is not actuarially equivalent to the Medicare prescription drug benefit and any impact or benefit from the Act will not be significant. The measurement date used to determine postretirement benefits is March 31.

The Company froze accrual of benefits of its domestic non-contributory pension plan on June 30, 2003. Prior to the end of fiscal year 2004, KEMET terminated and liquidated its defined benefit pension plan and, as a result, recognized $50.4 million in pension settlement charges. The termination of the pension plan is anticipated to result in future savings of $6 million per year. KEMET continues to provide other defined contribution retirement plans to its employees.

TAXES.   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. Management evaluates its tax assets and liabilities on a periodic basis and adjusts these balances on a timely basis as appropriate. Management believes that it has adequately provided for its future tax consequences based upon current facts and circumstances and current tax law. However, should management’s tax positions be challenged and not prevail, different outcomes could result and have a significant impact on the amounts reported through the Consolidated Statements of Operations.

The carrying value of the Company’s net deferred tax assets (future tax benefits expected to be realized ) assumes that KEMET will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain foreign tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, the Company may be required to reduce the value of the deferred tax assets resulting in additional income tax expense.

Management believes that it is more likely than not that the U.S. deferred tax assets 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. Management has provided a valuation allowance related to any benefits from income taxes resulting from the application of a statutory tax rate to the net operating losses. Management evaluates the deferred tax assets on a periodic basis and assesses the need for additional valuation allowances.

21



Results of Operations

The following table sets forth for the periods indicated certain of the Company’s financial data as a percentage of revenue:

 

 

Fiscal Years
ended March 31,

 

 

 

2004

 

2003

 

2002

 

Net sales

 

100

%

100

%

100

%

Operating costs and expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

95

 

88

 

82

 

Loss on long-term supply contract

 

3

 

9

 

 

Selling, general, and administrative expenses

 

12

 

12

 

11

 

Research and development

 

6

 

6

 

5

 

Pension settlement charges

 

12

 

 

 

Restructuring and impairment charges

 

9

 

7

 

10

 

Operating loss

 

(37

)

(22

)

(8

)

Other (income) and expense:

 

 

(2

)

 

Loss before income taxes

 

(36

)

(20

)

(8

)

Income tax benefit

 

(11

)

(7

)

(3

)

Net loss

 

(26

)%

(13

)%

(5

)%

 

The following table sets forth for the periods indicated certain of the Company’s financial data for each fiscal year the percentage increase or (decrease) in such item from the preceding fiscal year:

 

 

Fiscal Years
ended March 31,

 

 

 

2004

 

2003

 

Net sales

 

(3

)%

(12

)%

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold

 

6

 

(6

)

Loss on long-term supply contract

 

(70

)

 

Selling, general, and administrative expenses

 

(6

)

 

Research and development

 

(3

)

(4

)

Pension settlement charges

 

 

 

Restructuring and impairment charges

 

28

 

(36

)

Operating loss

 

64

 

140

 

Other (income) and expense:

 

(93

)

2,595

 

Loss before income taxes

 

80

 

116

 

Income tax benefit

 

45

 

137

 

Net loss

 

100

%

105

%

 

Comparison of Fiscal Year 2004 to Fiscal Year 2003

Net sales for fiscal year 2004 were $433.9 million, of which $2.4 million resulted from acquisitions made during fiscal year 2004. Fiscal year 2004 net sales less the acquisitions were $431.5 million, which represented a 4% decrease from fiscal year 2003 net sales of $447.3 million. The decrease in net sales was primarily attributable to a 35% decline in capacitor average selling prices (“ASPs” or “ASP”) with the balance being product mix. Unit volumes increased 54% to approximately 27.1 billion units from approximately 17.6 billion units in fiscal year 2003. ASPs historically decreased approximately 5% to 6% annually. During fiscal year 2003 and the first half of fiscal year 2004, ASP decreases significantly exceeded

22




their historical averages. During the last six months of fiscal year 2004, ASPs moderated or slightly increased. Based on the ASP activity during the latter half of fiscal year 2004, the Company does not expect ASPs to decrease at the rate they did during fiscal year 2004.

Cost of goods sold for the fiscal year ended March 31, 2004, was $414.0 million as compared to $392.1 million for the fiscal year ended March 31, 2003. Cost of goods sold for the fiscal year ended March 31, 2004, net of cost of sales related to acquisitions and depreciation not previously capitalized (see next paragraph) was $419.7 million as compared to $392.1 million for the fiscal year ended March 31, 2003, a 7% increase. The increase in cost of goods sold was not commensurate with the increase in unit volumes, which increased 54% in fiscal year 2004 versus fiscal year 2003. The Company believes many of the actions it initiated or carried out during fiscal years 2004, 2003, and 2002 (See Fiscal Year 2004 Special Charges, Fiscal Year 2003 Special Charges, and Fiscal Year 2002 Special Charges) resulted in lower costs and more efficient operations and accounted for the relatively low percentage increase in cost of sales versus the higher increase in volumes. In addition, manufacturing throughput increased in fiscal year 2004 as higher volumes resulted in the absorption of fixed costs over more units versus fiscal year 2003.

Commencing in fiscal year 2003, KEMET included depreciation and amortization as a component of its cost of inventories, as required by accounting principles generally accepted in the United States of America. When KEMET Electronics Corporation was formed as a separate entity in 1987, it continued the Union Carbide practice of expensing depreciation and amortization costs in the current period, rather than including such costs as a component of inventories and expensing them through cost of goods sold over time. Due to the significant decrease in inventories during the fiscal year ended March 31, 2004, cost in cost of goods sold was reduced by $9.3 million compared to the amount the Company would have realized during the fiscal year related to depreciation not previously capitalized had the Company previously capitalized depreciation and amortization. The Company has considered the effect of this change in policy on current and prior consolidated financial statements and confirmed that had the Company adopted this policy previously, it would not have resulted in any material changes to those consolidated financial statements.

Research and development expenses were $24.4 million for fiscal year 2004, compared to $25.3 million for fiscal year 2003. These costs reflect the Company’s continuing commitment to the development and introduction of new products, such as the addition of 67 tantalum parts announced in March 2004 and the launch of its commercial grade high voltage ceramic surface mount capacitor product line in May 2004, along with the improvement of product performance and production efficiencies.

Special charges for the fiscal year ended March 31, 2004, were $108.9 million as compared to $75.9 million for the prior fiscal year. The following table reflects the charges in both fiscal years (in millions):

 

 

Fiscal Year
Ended March 31,

 

 

 

2004

 

2003

 

Change

 

Impaired long-lived assets

 

$

16.3

 

$

4.6

 

$

11.7

 

Employee termination and manufacturing relocation costs

 

24.2

 

27.1

 

(2.9

)

Subtotal—Restructuring and impairment charges

 

40.5

 

31.7

 

8.8

 

Loss on long-term supply contract

 

12.4

 

40.8

 

(28.4

)

Pension settlement charges

 

50.4

 

 

50.4

 

Cost of goods sold—primarily inventory charges

 

5.6

 

3.4

 

2.2

 

Total special charges

 

$

108.9

 

$

75.9

 

$

33.0

 

 

(The italics correspond to a classification found on the Statements of Operations.)

The charges are explained in detail by quarter for both fiscal year 2004 and 2003 later in this section.

23




The operating loss for the fiscal year ended March 31, 2004, was $159.0 million compared to $97.0 million in the prior year. The increase in operating loss from the prior year was principally from a combination of the aforementioned lower sales levels, corresponding reduction in manufacturing margins, and increased special charges.

Other income decrease from in fiscal year 2004 compared to fiscal year 2003 primarily as the result of $7.8 million of gains on the termination of swap contracts in fiscal year 2003 versus $4.4 million in fiscal year 2004.

The effective tax rate for fiscal year 2004 was 29.3%, resulting in a tax benefit of $46.4 million. This compares to an effective tax rate of 36.3% for fiscal year 2003 that resulted in a tax benefit of $31.9 million. The decrease in the tax benefit rate was principally due to the establishment of a valuation allowance in the current fiscal year related to net operating loss carryforwards. Future fluctuations in the valuation allowance are expected to result in a tax rate below the 34% to 36% historical average.

Fiscal Year 2004 Special Charges

A summary of the special charges incurred in fiscal year 2004 are as follows (in millions):

 

 

Quarter Ended

 

 

 

 

 

Jun 30

 

Sep 30

 

Dec 31

 

Mar 31

 

Total

 

Impaired long-lived assets

 

 

$

 

 

$

17.9

 

$

(1.6

)

$

 

$

16.3

 

Employee termination and manufacturing relocation costs

 

 

0.3

 

 

10.7

 

10.4

 

2.8

 

24.2

 

Subtotal—Restructuring and impairment charges

 

 

0.3

 

 

28.6

 

8.8

 

2.8

 

40.5

 

Loss on long-term supply contract

 

 

 

 

12.4

 

 

 

12.4

 

Pension settlement charges

 

 

 

 

 

 

50.4

 

50.4

 

Cost of goods sold—primarily inventory charges

 

 

 

 

5.6

 

 

 

5.6

 

Total special charges

 

 

$

0.3

 

 

$

46.6

 

$

8.8

 

$

53.2

 

$

108.9

 

 

(The italics correspond to a classification found on the Statements of Operations.)

Restructuring and impairment charges primarily represent the charges associated with executing the aforementioned Plan that the Company announced in July 2003 and asset impairment charges related the reorganization of the solid aluminum business line. The Company estimates that it will incur approximately $35.0 million, excluding impairments, in total charges related to the Plan, which is targeted for completion in June 2005. Employee termination costs include charges related to the eventual relocation of approximately 650 production-related jobs from domestic operations as well as charges, primarily revisions in the contract with the Matamoros employee union, impacting approximately 1,250 employees in Mexico.

Special Charges in the Quarter Ended June 30, 2003

Employee termination costs—These were additional costs related to the workforce reduction actions initiated in the quarter ended March 31, 2003.

Special Charges in the Quarter Ended September 30, 2003

Impaired long-lived assetsIn 1999, the Company entered into the market for solid aluminum capacitors and has since made significant technology advances in both high-capacitance multilayer ceramic capacitors and organic tantalum capacitors, limiting the applications of solid aluminum capacitors. As a result, KEMET reorganized its solid aluminum capacitor business line. The Company recognized a $17.9 million non-cash charge related to the impairment of equipment and facilities.

24




Employee termination and manufacturing relocation costsThe Plan included moving manufacturing operations to low-cost facilities in Mexico and China. Approximately $8.4 million and $2.3 million of employee termination costs and manufacturing relocation costs, respectively, were incurred in the quarter ended September 30, 2003.

Loss on long-term supply contractThe Company has a tantalum supply agreement with Cabot Corporation that extends through calendar 2006. The Company records inventory at the lower of cost or market. Estimated future losses for the commitment to purchase tantalum at above-market prices under the contract were approximately $12.4 million. Accordingly, a charge for that amount was recorded in the quarter ended September 30, 2003. The Company previously recorded a charge of $40.8 million based on a lower of cost or market valuation under this contract in the quarter ended December 31, 2002.

Cost of goods sold—primarily inventory charges—Inventory charges represent inventory obsoleted or scrapped associated with the aforementioned impairment of the solid aluminum product line.

Special Charges in the Quarter Ended December 31, 2003

Impaired long-lived assets—Proceeds from equipment disposals related to the reorganization of the solid aluminum product line generated $1.6 million more in cash than estimated, which reduced charges in the quarter ended December 31, 2003.

Employee termination and manufacturing relocation costsApproximately $8.9 million and $1.5 million of employee termination costs and manufacturing relocation costs, respectively, related to the Plan were incurred in the quarter ended December 31, 2003.

Special Charges in the Quarter Ended March 31, 2004

Employee termination and manufacturing relocation costsApproximately $1.1 million and $1.7 million of employee termination costs and manufacturing relocation costs, respectively, related to the Plan were incurred in the quarter ended March 31, 2004.

Pension settlement chargesThe Company froze accrual of benefits of its domestic non-contributory pension plan on June 30, 2003. Prior to the end of fiscal 2004, KEMET terminated and liquidated its defined benefit pension plan and, as a result, recognized $50.4 million in non-recurring pension settlement charges. The termination of the pension plan is anticipated to result in future savings of $6 million per year. KEMET continues to provide other defined contribution retirement plans to its employees.

Comparison of Fiscal Year 2003 to Fiscal Year 2002

Net sales for fiscal year 2003 were $447.3 million, which represented a 12% decrease from fiscal year 2002 net sales of $508.6 million. The decrease in net sales was primarily attributable to a decline in capacitor ASPs. Unit volumes increased 36% to approximately 17.6 billion units from approximately 12.9 billion units in fiscal year 2002. The growth in unit volume was more than offset by mix and primarily lower ASPs, which ASPs decreased approximately 31% in fiscal year 2003 versus 2002.

Cost of goods sold for the fiscal year ended March 31, 2003, was $392.1 million as compared to $418.8 million for the year ended March 31, 2002. Cost of goods sold for the fiscal year ended March 31, 2003, net of depreciation not previously capitalized (see next paragraph) was $393.1 million as compared to $418.8 million for the fiscal year ended March 31, 2002, a 6% decrease. Cost of goods sold decreased despite an increase in unit volumes, which increased 36% in fiscal year 2003 versus fiscal year 2002. The Company believes many of the actions it initiated or carried out during fiscal years 2003 and 2002 (See Fiscal Year 2003 Special Charges and Fiscal Year 2002 Special Charges) resulted in lower costs and more

25




efficient operations and account for the relatively low percentage increase in cost of sales versus the higher increase in volumes. In addition, manufacturing throughput increased in fiscal year 2003 as higher volumes resulted in the absorption of fixed costs over more units versus fiscal year 2002.

Beginning in fiscal year 2003, the Company included depreciation and amortization as a component of its cost of inventory. Cost of goods sold in the fiscal year ended March 31, 2003 was approximately $1.0 million less than it would have been had the Company not included depreciation and amortization as a component of its cost of inventories.

Research and development expenses were $25.3 million for fiscal year 2003, compared to $26.3 million for fiscal year 2002. These costs reflect the Company’s continuing commitment to the development and introduction of new products along with the improvement of product performance and production efficiencies.

Special charges for the fiscal year ended March 31, 2003, were $75.9 million as compared to $55.7 million for the prior fiscal year. The following table reflects the charges in both fiscal years (in millions):

 

 

Fiscal Year
Ended March 31

 

 

 

2003

 

2002

 

Change

 

Impaired long-lived assets

 

$

4.6

 

$

32.9

 

$

(28.3

)

Employee termination costs

 

27.1

 

12.8

 

14.3

 

Joint venture termination

 

 

3.7

 

(3.7

)

Subtotal—Restructuring and impairment charges

 

31.7

 

49.4

 

(17.7

)

Loss on long-term supply contract

 

40.8

 

 

40.8

 

Cost of goods sold—primarily inventory charges

 

3.4

 

6.3

 

(2.9

)

Total special charges

 

$

75.9

 

$

55.7

 

$

20.2

 

 

(The italics correspond to a classification found on the Statements of Operations.)

The charges are explained in detail by quarter for both fiscal years 2003 and 2002 later in this section.

The operating loss for the fiscal year ended March 31, 2003, was $97.0 million compared to $40.4 million in the prior year. The increase in operating loss from the prior year was principally from a combination of the aforementioned lower sales levels, corresponding reduction in manufacturing margins, and increased special charges.

Other income increased from in fiscal year 2003 compared to fiscal year 2002 primarily as the result of $6.3 million of gains on the termination of swap contracts in fiscal year 2003 versus $0.0 million in fiscal year 2002.

The effective tax rate was 36% for the fiscal year ended March 31, 2003, as compared to 33% for the fiscal year ended March 31, 2002. The overall tax benefit was higher in fiscal year 2003 due to a reduction in the tax expense on foreign earnings.

26




Fiscal Year 2003 Special Charges

A summary of the special charges incurred in fiscal year 2003 are as follows (in millions):

 

 

Quarter Ended

 

 

 

 

 

Sep 30

 

Dec 31

 

Mar 31

 

Total

 

Impaired long-lived assets

 

$

4.6

 

$

 

$

 

$

4.6

 

Employee termination costs

 

9.1

 

 

18.0

 

27.1

 

Subtotal—Restructuring and impairment charges

 

13.7

 

 

18.0

 

31.7

 

Loss on long-term supply contract

 

 

40.8

 

 

40.8

 

Cost of goods sold—primarily inventory charges

 

 

1.8

 

1.6

 

3.4

 

Total special charges

 

$

13.7

 

$

42.6

 

$

19.6

 

$

75.9

 

 

(The italics correspond to a classification found on the Statements of Operations.)

Special Charges in the Quarter Ended September 30, 2002

Special charges represent the closing of one manufacturing facility in Greenwood, South Carolina, and one of four manufacturing facilities in Matamoros, Mexico, which was announced in July 2002. These actions were part of KEMET’s cost saving initiatives over the past two fiscal years in response to the prolonged downturn in the electronics industry. A description of the charges expensed in the quarter ended September 30, 2002, follows:

Impaired long-lived assets—The impaired assets consisted of certain long-lived assets associated with the closing of a manufacturing facility in Greenwood, South Carolina.

Employee termination costs—The Company made manufacturing and support personnel reductions of approximately 185 and 240 employees in the U.S. and Mexico, respectively.

Special Charges in the Quarter Ended December 31, 2002

On December 10, 2002, the Company announced that it agreed to an extension of the term of its tantalum supply agreement with Cabot Corporation (“Cabot”).

Inventory and Related Supply Agreement—The Company records inventory at the lower of cost or market and estimated losses associated with inventory received under the extended supply agreement were approximately $16.4 million. In addition, the Company’s estimated future losses for the commitment to purchase tantalum at above-market prices were approximately $24.4 million. Accordingly, a $40.8 million charge was recorded.

Cost of goods sold—primarily inventory charges—Inventory charges consisted of the sale of excess palladium at a loss of $1.8 million during the quarter.

Special Charges in the Quarter Ended March 31, 2003

On January 6, 2003, the Company announced a cost-saving initiative in response to the prolonged downturn in the electronics industry.

Employee termination costs—Workforce reductions, primarily from U.S. facilities, totaled approximately 280 employees, with approximately 170 being from voluntary early retirements and the remainder being from a reduction-in-force. In addition to normal retirement benefits, the early retirement program included a special retirement bonus based on length of service to encourage participation. Severance benefits based on years of service were provided to other employees affected by the reduction-in-force.

27




Cost of goods sold—primarily inventory charges—The Company terminated palladium forward contracts at a loss of $1.6 million.

Fiscal Year 2002 Special Charges

A summary of special charges expensed during fiscal 2002, were as follows (in millions):

 

 

Quarter Ended

 

 

 

 

 

Dec 31

 

Mar 31

 

Total

 

Impaired long-lived assets

 

$

11.4

 

$

21.5

 

$

32.9

 

Employee termination costs

 

9.9

 

2.9

 

12.8

 

Joint venture termination

 

3.7

 

 

3.7

 

Subtotal—Restructuring and impairment charges

 

25.0

 

24.4

 

49.4

 

Cost of goods sold—primarily inventory charges

 

6.3

 

 

6.3

 

Total special charges

 

$

31.3

 

$

24.4

 

$

55.7

 

 

(The italics correspond to a classification found on the Statements of Operations.)

Special Charges in the Quarter Ended December 31, 2001

Following two years of tremendous growth in product shipments during calendar years 1999 and 2000, the electronics industry experienced a severe inventory correction. The Company anticipated that lower production levels would continue well into calendar 2002. The Company acted by streamlining manufacturing facilities, accelerating productivity improvement programs, and reducing manufacturing and support personnel in the Company’s U.S. and Mexican facilities. The charges related to the aforementioned activities in the quarter ended December 31, 2001, were as follows:

Impaired long-lived assets—This represents certain long-lived assets used in production, as well as costs related to the disposal of those assets. These assets were retired as part of the effort to streamline manufacturing facilities and in response to a lack of anticipated product demand associated with the production assets.

Employee termination costs—The Company made manufacturing and support personnel reductions of approximately 600 and 1,000 employees in the U.S. and Mexico, respectively.

Termination of joint venture—Through its wholly-owned subsidiary, the Company agreed with Tantalum Australia NL (“TAA”) to sell KEMET’s interest in Tantalum Australia, a joint venture in Australia. The investment was written down to its net realizable value. In conjunction with this transaction, the agreement for the Company to purchase product from Tantalum Australia was also canceled. The Company continues to hold, on a fully-diluted basis, less than 9% equity interest in TAA.

Cost of goods sold—primarily inventory charges—Inventory charges consisted of the loss on sale of excess precious metal inventory, primarily palladium, sold during the quarter.

Special Charges in the Quarter Ended March 31, 2002

The Company announced enhancements to its high-frequency products organization. High-frequency electronics include products such as notebook computers and high-end servers using microprocessors operating at frequencies greater than 1 gHz. Two product lines are targeted at these applications: KEMET organic capacitors (KO-CAP) and solid aluminum organic capacitors (AO-CAP).

28




The special charges incurred in the quarter ended March 31, 2002, were as follows:

Impaired long-lived assets—This represents certain long-lived assets used in production, as well as costs related to the disposal of those assets. These assets were the first-generation of high-frequency solid aluminum production equipment.

Employee termination costs—Consolidation of certain manufacturing and support personnel resulted in a reduction of approximately 350 manufacturing personnel in the U.S. and Mexico in March 2002.

Quarterly Results of Operations

The following table sets forth certain quarterly information for the fiscal years ended March 31, 2004 and 2003. This information, in the opinion of the Company’s management, reflects all adjustments (consisting only of normal recurring adjustments) necessary to present fairly this information when read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein.

 

 

Fiscal year ended March 31, 2004

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Total

 

 

 

Dollars in thousands except per share data

 

Net sales

 

$

105,362

 

$

100,084

 

$

111,335

 

$

117,101

 

$

433,882

 

Operating loss(1)

 

$

(10,436

)

$

(72,257

)

$

(19,275

)

$

(57,046

)

$

(159,014

)

Net loss

 

$

(3,571

)

$

(43,280

)

$

(13,072

)

$

(52,052

)

$

(111,975

)

Net loss per share (basic)

 

$

(0.04

)

$

(0.50

)

$

(0.15

)

$

(0.60

)

$

(1.30

)

Net loss per share (diluted)

 

$

(0.04

)

$

(0.50

)

$

(0.15

)

$

(0.60

)

$

(1.30

)

Weighted-average shares Outstanding (basic)

 

86,349,086

 

86,403,086

 

86,434,209

 

86,462,742

 

86,412,281

 

Weighted-average shares Outstanding (diluted)

 

86,349,086

 

86,403,086

 

86,434,209

 

86,462,742

 

86,412,281

 

 

 

 

Fiscal year ended March 31, 2003

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Total

 

 

 

Dollars in thousands except per share data

 

Net sales

 

$

124,045

 

$

113,055

 

$

103,727

 

$

106,505

 

$

447,332

 

Operating income (loss)(1)

 

$

2,456

 

$

(20,848

)

$

(50,511

)

$

(28,099

)

$

(97,002

)

Net earnings (loss)

 

$

3,422

 

$

(11,149

)

$

(31,725

)

$

(16,536

)

$

(55,988

)

Net earnings (loss) per share (basic)

 

$

0.04

 

$

(0.13

)

$

(0.37

)

$

(0.19

)

$

(0.65

)

Net earnings (loss) per share (diluted)

 

$

0.04

 

$

(0.13

)

$

(0.37

)

$

(0.19

)

$

(0.65

)

Weighted-average shares Outstanding (basic)

 

86,078,012

 

86,163,766

 

86,099,656

 

86,230,198

 

86,167,563

 

Weighted-average shares Outstanding (diluted)

 

86,956,317

 

86,163,766

 

86,099,656

 

86,230,198

 

86,167,563

 


(1)          Operating income (loss) as a percentage of net sales fluctuates from quarter to quarter due to a number of factors, including net sales fluctuations, restructuring and impairment charges, product mix, the timing and expense of moving product lines to lower-cost locations, and the relative mix of sales among distributors, original equipment manufacturers, and electronics manufacturing services providers.

29




Liquidity and Capital Resources

The Company’s liquidity needs arise from working capital requirements, capital expenditures, and principal and interest payments on its indebtedness. The Company defines working capital to be total current assets less total current liabilities as reflected on its balance sheet. The Company intends to satisfy both its short-term and long-term liquidity requirements primarily with cash and cash equivalents provided by operations, the sale of investments, and borrowings under its uncommitted Loan Agreement.

The following table sets forth for the periods indicated the Company’s working capital (in thousands):

 

 

March 31,

 

 

 

2004

 

2003

 

2002

 

Working capital

 

$

313,731

 

463,535

 

454,776

 

 

Working Capital

The Company’s working capital decreased by approximately $149.8 million in fiscal year 2004 compared to fiscal year 2003. The cash and cash equivalents balance decreased to $183.5 million at March 31, 2004, from $263.6 million at March 31, 2003, or $80.1 million. Significant uses of cash during fiscal year 2004 but not in fiscal year 2003 included an investment of $85.0 million in U.S. government securities with maturities greater than one year, $29.0 million used to fund the pension settlement charges, and $7.0 million invested in affiliates and the purchase of a product line. Cash provided from operations was $38.5 million in fiscal year 2004. The fiscal year 2004 $112.0 million net loss was primarily offset by $89.4 million in non-cash depreciation, amortization and impairment charges, a $55.1 million decrease in inventories, and approximately $51.3 million in federal income tax refunds resulting from fiscal year 2003 tax loss carrybacks. Future net operating losses are available as carryforwards. The Company does not expect inventories to decrease as much in fiscal year 2005 and may even increase in the future after significant decreases in fiscal year 2004 and fiscal year 2003 (see third paragraph). The Company increased its investment in property and equipment by $3.6 million to $25.8 million in fiscal year 2004 compared to $22.2 million in fiscal year 2003. The capital expenditures in fiscal year 2004 principally represented the Company’s efforts to invest in operations around the world under the aforementioned Plan as facilities were being relocated based on access to key customers, technical resources, and knowledge and availability of low-cost resources. Reorganization activities will continue during fiscal year 2005 and are targeted to be completed in fiscal year 2006. The Company estimates its capital expenditures for fiscal year 2005 to be approximately $50 million.

Since its fiscal year end, the Company has continued to add to its holdings of long-term U.S. government marketable securities. As of May 31, 2004, the Company had approximately $188.4 million invested in long-term U.S. government marketable securities.

The Company’s working capital increased by approximately $8.7 million in fiscal year 2003 compared to fiscal year 2002. The cash and cash equivalents balance increased to $263.6 million at March 31, 2003, from $234.6 million at March 31, 2002. Cash provided from operations was $43.7 million in fiscal year 2003. The fiscal year 2003 $56.0 million net loss was primarily offset by $75.4 million in non-cash depreciation, amortization and impairment charges and a $75.3 million decrease in inventories partially offset by the net loss and working capital accounts such as accounts receivable, accounts payable, and accrued expenses. The Company decreased its investment in property and equipment by $56.3 million to $22.2 million in fiscal year 2003 compared to $78.5 million in fiscal year 2002. Capital expenditures in fiscal year 2002 principally reflect completion of projects initiated during and prior to fiscal year 2001, a period in which demand was substantially higher. The capital expenditures in fiscal year 2003 represented the Company’s commitment to improve product quality, expand into new products, and improve manufacturing efficiencies.

30




The Board of Directors authorized programs to purchase up to 8.0 million shares of its common stock on the open market. Through March 31, 2004, the Company had made purchases of 2.1 million shares for $38.7 million. The Company does not anticipate any further stock purchases under this authorization. Approximately 615,000 treasury stock shares were subsequently reissued for the exercise of employee stock options. At March 31, 2004, the Company held approximately 1,485,000 treasury shares at a cost of $27.4 million.

In May 1998, the Company sold $100.0 million of its Senior Notes pursuant to the terms of a Note Purchase Agreement dated as of May 1, 1998, between the Company and the eleven purchasers of the Senior Notes. These Senior Notes have a final maturity date of May 4, 2010, with annual required $20.0 million principal repayments beginning on May 4, 2006. The Senior Notes bear interest at a fixed rate of 6.66%, with interest payable semiannually beginning November 4, 1998. The terms of the Note Purchase Agreement include various restrictive covenants typical of transactions of this type, and require the Company to meet certain financial tests including a minimum net worth test and a maximum ratio of debt to total capitalization. The net proceeds from the sale of the Senior Notes were used to repay existing indebtedness and for general corporate purposes. The Company was in compliance with its covenants at March 31, 2004, and at the time of this filing. Borrowings are secured by guarantees of certain of the Company’s wholly-owned subsidiaries. See Note 3 to the Consolidated Financial Statements.

In April 2002, the Company entered into the Loan Agreement with a bank. The Loan Agreement is an uncommitted credit facility which allows borrowings by the Company in an aggregate principal amount not to exceed $50.0 million for a term not to exceed 180 days for any single borrowing. The interest rate charged on any borrowing under the Loan Agreement is mutually agreed upon by the Bank and the Company at the time of such borrowing. The Company has no borrowings under this agreement at the time of this filing.

As discussed in Note 12 to the Consolidated Financial Statements, the Company or its 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 and environmental issues, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company.

The Company believes its financial position will permit the financing of its business needs and opportunities.

Long-term Supply Agreement

On December 10, 2002, the Company announced that it agreed to an extension of the term of its tantalum supply agreement with Cabot Corporation (“Cabot”). The extended agreement relates to both tantalum powder and tantalum wire products and calls for reduced prices, higher volumes, and a term through 2006. The Company received approximately $22.2 million and $38.1 million of material in the fiscal years ended March 31, 2004 and 2003, respectively. The additional commitment totals $61.1 million, an average of $22.2 million each fiscal year through 2006 and $16.7 million in fiscal 2007. If the Company’s demand for tantalum exceeds the amount supplied under the contract, Cabot has the option to sell additional product to the Company at prices approximating market throughout the term. In connection with this extension, the Company and Cabot settled all claims in the litigation regarding the original supply agreement.

The Company records inventories at the lower of cost or market. In the period ended March 31, 2003, estimated losses associated with inventory received under the extended supply agreement were $16.4 million, and the Company’s estimated future losses for the commitment to purchase tantalum at above-market prices were approximately $24.4 million. In the fiscal year ended March 31, 2004, the

31




Company estimated future losses for the commitment to purchase tantalum at above-market prices were approximately $12.4 million. Accordingly, $12.4 million and $40.8 million in charges were recorded in the fiscal years ended March 31, 2004 and 2003, respectively.

Commitments

As of March 31, 2004, the Company had contractual obligations in the form of non-cancelable operating leases (see note 10 to the Consolidated Financial Statements), long-term contracts for the purchase of tantalum powder and wire (see note 10 to the Consolidated Financial Statements), and debt (see note 3 to the Consolidated Financial Statements) as follows (dollars in thousands):

 

 

Fiscal Years Ended March 31

 

 

 

 

 

Description

 

 

 

2005

 

2006

 

2007

 

2008

 

2009

 

Thereafter

 

Total

 

Operating leases

 

$

2,929

 

$

2,371

 

$

1,979

 

$

1,286

 

$

765

 

$

1,702

 

$

11,032

 

Tantalum

 

22,200

 

22,200

 

16,650

 

 

 

 

61,050

 

Debt

 

 

 

20,000

 

20,000

 

20,000

 

40,000

 

100,000

 

Total

 

$

25,129

 

$

24,571

 

$

38,629

 

$

21,286

 

$

20,765

 

$

41,702

 

$

172,082

 

 

The Company entered into an interest rate swap contract that matures in May 2006 which effectively converted its $100 million aggregate principal amount of 6.66% senior notes to floating rate debt adjusted semi-annually based on six-month LIBOR plus 3.35%.

In order to hedge forecasted cash flows related to manufacturing facilities in Mexico, management purchased forward contracts to buy Mexican pesos for periods and amounts consistent with the related underlying cash flow exposures. At March 31, 2004, the Company had outstanding forward exchange contracts that mature within approximately one year to purchase Mexican pesos with notional amounts of $57.7 million.

Certain sales are made in euros. In order to hedge these forecasted cash flows, management purchased forward contracts to sell euros for periods and amounts consistent with the related underlying cash flow exposures. At March 31, 2004, the Company had outstanding forward exchange contracts that mature within approximately six months to sell euros with notional amounts of $17.3 million.

Acquisitions

On June 30, 2003, the Company acquired certain assets from Wilson Greatbatch Technologies, Inc (“GTI”). The $2.3 million cash purchase included the non-medical, high-voltage and high-temperature ceramic capacitor and EMI filter product lines of GTI’s Greatbatch-Sierra, Inc. subsidiary. The product lines were acquired as part of the Company’s strategic objective to broaden its high-performance capacitor solutions to support customers’ increasing technical requirements.

On September 2, 2003, the Company announced an important step in its strategy to be on the leading edge of emerging technologies as it purchased an equity position of $2.5 million in Lamina Ceramics, Inc. (“Lamina Ceramics”), and entered into a business agreement with Lamina Ceramics to develop and commercialize high-performance, low-temperature co-fired ceramic-on-metal (“LTCC-M”) solutions for advanced electronic systems. Lamina Ceramics is a manufacturer of multilayer ceramic electronic packages, boards, and components using proprietary LTCC-M technology.

On December 17, 2003, the Company announced it had acquired The Forest Electric Company (“FELCO”) of Melrose Park, Illinois. FELCO manufactures and sells industry-leading custom magnetic solutions. This $2.4 million acquisition broadens KEMET’s product portfolio, leveraging KEMET’s industry-leading capabilities in quality, delivery, and service to further penetrate customers in the military, aerospace, and industrial market segments. Approximately $2.1 million of goodwill was recorded as part of the transaction.

32




Adoption of Accounting Standards

In December 2003, the FASB revised Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Post Retirement Benefits” (“SFAS No. 132”). SFAS No. 132 retains the disclosures required by the original SFAS No. 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and required additional information on changes in the benefit obligations and fair values of plan assets. Revised SFAS No. 132, responding to concerns expressed by users of financial statements for the need for more information about pension plans, requires additional disclosures about assets, obligations, cash flows, and net periodic benefit cost for defined benefit pension plans and other defined postretirement benefits. Generally, SFAS No. 132 is effective for beginning of the fiscal years ending after December 15, 2003, with some provisions effective in fiscal years commencing after June 15, 2004. The adoption of SFAS No. 132 is not expected to impact the Company’s financial position, results of operations, or cash flow.

Safe Harbor Statement

From time to time, information provided by the Company, including but not limited to statements in this Report or other statements made by or on behalf of the Company, may contain “forward-looking” information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such statements involve a number of risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements. The cautionary statements set forth herein under the heading Safe Harbor Statement identify important factors that could cause actual results to differ materially from those in any forward-looking statements made by or on behalf of the Company.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that these forward-looking statements be subject to the safe harbor created by that provision. These forward-looking statements involve risks and uncertainties beyond the Company’s control. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future events, plans, or expectations contemplated by the Company will be achieved. Furthermore, past performance in operations and share price is not necessarily predictive of future performance. Finally, the Company cannot assume responsibility for certain information that is based upon market estimates.

The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, KEMET’s actual results and could cause KEMET’s actual consolidated results for the first quarter of fiscal year 2005 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company whether contained herein, in other documents subsequently filed by the Company with the SEC, or in oral statements:

A moderating growth rate in end-use products that incorporate the Company’s products and the effects of a downturn in the general economy or in general business conditions;

Underutilization of KEMET’s plants and factories, or of any plant expansion or new plant, including, but not limited to, those in Mexico and China, resulting in production inefficiencies and higher costs; start-up expenses, inefficiencies, delays, and increased depreciation costs in connection with the start of production in new plants and expansions; capacity constraints that could limit the ability to continue to meet rising demand for surface-mount capacitors;

Occurrences affecting the slope or speed of decline of the pricing curve for the Company’s products, or affecting KEMET’s ability to reduce product and other costs, and to increase productivity; the effect of changes in the mix of products sold and the resulting effects on gross margins;

33




Difficulties in obtaining raw materials, supplies, power, natural resources, and any other items needed for the production of capacitors; the effects of quality deviations in raw materials, particularly tantalum powder and ceramic dielectric materials; the effects of significant price increases for tantalum, palladium, or silver or an inability to obtain adequate supplies of tantalum from the limited number of suppliers;

The amount and rate of growth in the Company’s selling, general, and administrative expenses and the impact of unusual items resulting from KEMET’s ongoing evaluation of its business strategies, asset valuations, and organizational structure;

The acquisition of fixed assets and other assets, including inventories and receivables; the making or incurring of any expenditures and expenses, including, but not limited to, depreciation and research and development expenses; any revaluation of assets or related expenses; and the amount of and any changes to tax rates;

The effect of any changes in trade, monetary, and fiscal policies, laws, and regulations; other activities of governments, agencies, and similar organizations; social and economic conditions, such as trade restrictions or prohibitions, inflation, and monetary fluctuations; import and other charges or taxes; the ability or inability of KEMET to obtain, or hedge against, foreign currency; foreign exchange rates and fluctuations in those rates, particularly a strengthening of the U.S. dollar; nationalization; unstable governments and legal systems; intergovernmental disputes; the costs and other effects of legal and administrative cases and proceedings (whether civil, such as environmental and product-related, or criminal); settlements, investigations, claims, and changes in those items; developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses; adoption of new or changes in accounting policies and practices and the application of such policies and practices; the effects of changes within KEMET’s organization, particularly at the executive officer level, or in compensation and benefit plans; the amount, type, and cost of the financing which the Company has and any changes to that financing; the effects of severe weather on KEMET’s operations, including disruptions at manufacturing facilities; the effects of a disruption in KEMET’s computerized ordering systems; and the effects of a disruption in KEMET’s communications systems.

Effect of Inflation

Inflation generally affects the Company by increasing the cost of labor, equipment, and raw materials. The Company does not believe that inflation has had any material effect on the Company’s business over the past three fiscal years except for the following discussion in Commodity Price Risk.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt obligations and interest rate swaps. The Company also has an uncommitted debt financing alternative in the form of an Offering Basis Loan Agreement for $50 million which is priced on a mutually agreed upon rate by the bank and the Company at the time of such borrowing. The Company had not historically used interest rate swaps, interest rate caps, or other derivative financial instruments for the purpose of hedging fluctuations in interest rates. During the fiscal year ended March 31, 2003, the Company began using interest rate swap agreements to effectively convert its fixed rate debt to a floating rate basis. The interest rate differential to be received or paid on the swaps is recognized over the lives of the swaps and any gain or loss on the termination of interest rate swap contracts prior to maturity is recorded as other income or expense. At March 31, 2004, the Company had an interest rate swap contract (the “Swap”) which effectively converted its $100 million aggregate principal

34




amount of 6.66% senior notes to floating rate debt adjusted semi-annually based on six-month LIBOR plus 3.35%. For each 100 basis points the floating rate exceeds the fixed rate, the Company would recognize a pre-tax loss of approximately $1.0 million, and for each 100 basis points the floating rate is less than the fixed rate, the Company would recognize pre-tax income of approximately $1.0 million. During the fiscal years ended March 31, 2004 and 2003, the Company recorded pre-tax gains of $4.4 million and $7.8 million, respectively, related to interest rate swaps. See Note 15 to the Consolidated Financial Statements.

Foreign Currency Exchange Rate Risk

A portion of the Company’s sales to its customers and operating costs in Europe are denominated in the Euro, thereby creating an exposure to foreign currency exchange rates. Also, a portion of the Company’s costs are in its Mexican operations and are denominated in Mexican pesos, creating an exposure to exchange rates. In order to minimize its exposure, the Company will periodically enter into forward foreign exchange contracts in which the future cash flows in the Euro or Mexican peso are hedged against the U.S. dollar. See Note 15 to the Consolidated Financial Statements.

The impact of changes in the relationship of other currencies to the U.S. dollar has historically not been significant, and such changes in the future are not expected to have a material impact on the Company’s results of operations or cash flows. The Company does not use derivative financial instruments if there is no underlying business transaction supporting or related to the derivative financial instrument.

Commodity Price Risk

The Company purchases various precious metals used in the manufacture of capacitors and is therefore exposed to certain commodity price risks. These precious metals consist primarily of palladium and tantalum.

Palladium is a precious metal used in the manufacture of multilayer ceramic capacitors and is mined primarily in Russia and South Africa. Currently, the Company uses forward contracts and spot buys to secure the acquisition of palladium and manage the price volatility in the market. The Company is also aggressively pursuing ways to reduce palladium usage in ceramic capacitors and minimize the price risk.

Tantalum powder is a metal used in the manufacture of tantalum capacitors. Management believes the tantalum needed has generally been available in sufficient quantities to meet manufacturing requirements. However, the increase in demand for tantalum capacitors during fiscal year 2001, along with the limited number of tantalum powder suppliers, led to increases in tantalum prices and impacted availability. Tight supplies of tantalum raw material and some tantalum powders caused the price to increase from under $50 per pound early in calendar 2000 to over $300 per pound in calendar 2001. During the fiscal years ended March 31, 2004 and 2003, the Company recorded $12.4 million and $40.8 million, respectively, of charges related to a tantalum inventory purchase commitment that exceeded market prices. See Critical Accounting Policies and Long Term Supply Agreement. See Note 15 to the Consolidated Financial Statements, and See Note 10 to the Consolidated Financial Statement.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section of this Form 10-K. See Item 16.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

35



PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS, AND CERTAIN KEY EMPLOYEES OF THE REGISTRANT

Name

 

 

 

Age

 

Position

 

Years with
Company(1)

Dr. Jeffrey A. Graves

 

43

 

Chief Executive Officer and Director

 

3

James P. McClintock

 

48

 

President and Chief Operating Officer

 

25

David E. Gable

 

44

 

Vice President and Chief Financial Officer

 

7

J. Kelly Vogt

 

42

 

Vice President, Sales Worldwide

 

19

Ravi G. Sastry

 

44

 

Vice President, Marketing

 

20

Larry C. McAdams

 

52

 

Vice President, Human Resources

 

20

Richard C. Rickenbach

 

55

 

Vice President, Global Manufacturing

 

24

Guy T. Williams, Jr.

 

51

 

Vice President, Engineering and Facilities

 

24

James A. Bruorton III

 

55

 

Vice President, Channel Sales Global

 

30

John E. Schneider

 

49

 

Vice President, Sales—Asia

 

20

Thomas F. Broderick

 

44

 

Vice President, Product Development

 

0

John R. Warner III

 

44

 

Vice President, Strategy & Communication

 

3

Manuel A. Cappella

 

56

 

Vice President/Managing Director, Tantalum & Aluminum Manufacturing, Mexico

 

32

Donald R. Aldworth.

 

55

 

Vice President, Quality

 

19

Joseph S. Porter

 

47

 

Vice President, Sales—Americas

 

24

Michael W. Boone

 

53

 

Treasurer/Director of Finance and Secretary

 

17

David E. Maguire

 

69

 

Chairman of the Board of Directors

 

44

Charles E. Volpe

 

66

 

Director

 

Stewart A. Kohl

 

48

 

Director

 

E. Erwin Maddrey, II

 

63

 

Director

 

Joseph D. Swann

 

62

 

Director

 

Frank G. Brandenberg

 

58

 

Director

 


(1)          Includes service with UCC.

Directors and Executive Officers

Dr. Jeffrey A. Graves, Director and Chief Executive Officer, was named such in March 2003. He was previously appointed President and Chief Operating Officer in October 2002. He was hired by KEMET in July 2001 as Vice President of Technology, which position he held until October 2002. He was also named Vice President of Engineering in May 2002. He previously worked for General Electric Corporation in various management roles in the Corporate Research and Development Center and Power Systems Division. Prior to General Electric, he worked with Rockwell International Corporation and Howmet Corporation. Dr. Graves received a Ph.D. and M.S. in Metallurgical Engineering from the University of Wisconsin and a B.S. in Metallurgical Engineering from Purdue University.

James P. McClintock, President and Chief Operating Officer, was named such in November 2003. Previously, he served as Vice President, Global Manufacturing, and led the start-up of the Company’s newest facility located in Suzhou, China. He has been employed with UCC/KEMET for 25 years with prior assignments in engineering, technology, and manufacturing. Mr. McClintock holds a B.S. in Mechanical Engineering from North Carolina State University.

David E. Gable, Vice President and Chief Financial Officer, joined KEMET in 1998 in the position of Corporate Controller. He served in that capacity until he was appointed to his current position in September 2003. Prior to joining KEMET, Mr. Gable held numerous financial positions with Michelin

36




North America. He has also had previous experience in public accounting and is a CPA. Mr. Gable received an MBA from Clemson University and a BS in Accounting and Mathematics from Anderson University.

J. Kelly Vogt, Vice President, Sales Worldwide, joined UCC/KEMET in 1984 as a Production Supervisor in tantalum manufacturing. In 1986, he joined Field Sales as a Sales Representative in Schaumburg, Illinois. Subsequent assignments included District Sales Manager (Mid-Atlantic), Global Account Manager (General Motors), and Director of Sales. In 1998, he returned to Greenville, SC, as Director of Ceramic Marketing, and assumed his current position in 2003. Mr. Vogt received his B.S. degree from Tusculum College.

Ravi Sastry, Vice President, Marketing, joined UCC/KEMET in 1983. In 1984, he joined Field Sales where he was a Sales Representative in Exton, PA, and a Sales Manager in Minneapolis, MN. In 1989, he transferred to the Product Marketing group and served in a succession of Product Marketing roles which included an assignment in Singapore. In 1995, he returned to Asia and the sales organization where he served as the N.E. Asia Director (Hong Kong) and as Vice President and Managing Director (Asia, Hong Kong, and Singapore). From 2000-2002, Mr. Sastry served as Vice President, International Sales, and was located in Singapore. In 2003, Mr. Sastry returned to Greenville, SC, in his current position. He holds a B.S. in Chemistry from Lander University.

Larry C. McAdams, Vice President, Human Resources, joined UCC/KEMET in 1983. He has 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 B.A. in Political Science from Clemson University and attended the University of South Carolina School of Law.

David E. Maguire, Chairman and Director, has served as Chairman since August 1992. Mr. Maguire also served as Chief Executive Officer, President, and Director from November 1997 until June 1999 and from December 1990 until October 1996, and as Chief Executive Officer and Director from October 1996 until November 1997 and from June 1999 until January 2002. Previously, Mr. Maguire served as Chairman, President, and Chief Executive Officer of KEMET Electronics Corporation from April 1987 until December 1990. He also served in a number of capacities with the KEMET capacitor business of Union Carbide, most recently as Vice President from June 1978 until April 1987.

Charles E. Volpe, Director, was named such in December 1990. Prior to his retirement from KEMET Corporation in March 1996, Mr. Volpe served as President and Chief Operating Officer (October 1995-March 1996), Executive Vice President and Chief Operating Officer (October 1992-October 1995), Executive Vice President (December 1990-October 1992), and Executive Vice President and Director of KEMET Electronics Corporation (April 1987-December 1990). Between August 1966 and April 1987, he served in a number of capacities with the KEMET capacitor business of Union Carbide, most recently as General Manager.

Stewart A. Kohl, Director, was named such in May 1992. Mr. Kohl has been a Managing General Partner in The Riverside Company, an investment company, since October 1993. Mr. Kohl was previously a Vice President of Citicorp North America, Inc., and had been employed by various subsidiaries of Citicorp North America, Inc., since 1988. Mr. Kohl also serves on the board of directors of HammerBlow Corporation; Hudson Sharp Machine Company; Porcelain Products Company; Conferon, Inc.; Delta Petroleum Company; and Shorebanc Holding Company.

E. Erwin Maddrey, II, Director, was named such in May 1992. Mr. Maddrey is President of Maddrey and Associates. Mr. Maddrey was President, Chief Executive Officer, and a Director of Delta Woodside Industries, a textile manufacturer, from 1984 through June 2000. Prior thereto, Mr. Maddrey served as President, Chief Operating Officer, and Director of Riegel Textile Corporation. Mr. Maddrey also serves

37




on the board of directors for Blue Cross/Blue Shield of South Carolina; Delta Woodside Industries, Inc.; Delta Apparel Company; and Renfro Corp.

Joseph D. Swann, Director, was named such in October 2003. Mr. Swann is the President of Rockwell Automation Power Systems and previously served as Senior Vice President of Rockwell Automation/Dodge. Mr. Swann also serves on the board of directors for Velocys Corporation and ATC Distribution Group. He earned a Bachelor of Science degree in Ceramic Engineering from Clemson University and a Masters of Business Administration degree from Case Western Reserve University.

Frank G. Brandenberg, Director, was named such in October 2003. Before his retirement in 2003, Mr. Brandenberg was a Corporate Vice President and Sector President of Northrop Grumman Corporation. Prior to joining Northrop, he previously spent 28 years at Unisys where his last position was Corporate Vice President and President, Client/Server Systems, and then later served as the President and Chief Executive Officer of EA Industries, Inc. He received a Bachelor of Science degree in Industrial Engineering and a Masters of Science degree in Operations Research from Wayne State University and completed the Program for Management Development at the Harvard Business School.

Other Key Employees

Richard C. Rickenbach, Vice President, Global Manufacturing, was appointed such in November 2003. Previously, he has served as Vice President, High-Performance Products Manufacturing (January 2002-November 2003), Director of U.S. Tantalum Operations (June 1999-January 2002), and BME Project Manager (July 1998-June 1999), as well as various other ceramic and tantalum manufacturing management positions since he joined UCC/KEMET in January 1980. Mr. Rickenbach holds a B.S. in Material Science from Lehigh University, an M.S. in Material Science from Cornell University, and an MBA from Boston University.

Guy T. Williams, Jr., Vice President of Engineering and Facilities, joined UCC/KEMET in 1979 as Maintenance Superintendent in the Simpsonville Plant. Subsequent assignments have included five years as Production Superintendent for the Shelby Plant and, since 1988, various positions in the Equipment Engineering Department including Process Equipment Manager, Ceramic Equipment Manager, and most recently, Ceramic Equipment Engineering Director. Mr. Williams holds a B.S. and M.S. in Mechanical Engineering from Clemson University.

James A. Bruorton, III, Vice President, Channel Sales Global, was named such in 2003. He joined UCC/KEMET in 1973 in the Human Resources Department. In 1974, he transferred to the marketing administration and sales organization and has held a number of different management positions. These included Manager, Marketing Administration Group; Senior Director, Global Distribution Sales; and most recently Vice President, Global Distribution Sales. In his current position, he has responsibility for Distribution and Electronics Manufacturing Services sales. Mr. Bruorton received his B.S. in Industrial Education from Clemson University.

John E. Schneider, Vice President Sales—Asia, joined UCC/KEMET in 1984 as a Sales Representative in San Diego, California. In 1985, he was promoted to District Manager and later Area Manager covering Northern California and the Pacific Northwest. In 1994, Mr. Schneider was transferred to Singapore to be Director of S.E. Asia Operations to expand KEMET’s sales and warehousing capabilities. In 1998, he returned to California to become Senior Director, Western Area, which included the establishment of sales and warehousing operations in Latin America. In 2003, Mr. Schneider was appointed Vice President, Sales-America, prior to accepting his current assignment in 2004. He received his B.S. degree in Selling and Sales Management from Bowling Green State University.

Thomas F. Broderick, Vice President of Product Development, joined KEMET in October of 2003. Previously, Mr. Broderick worked for General Electric in the Aircraft Engines division as Team Leader of

38




Materials Application Engineering for the Fan and Compressor Airfoil Center of Excellence. Additionally, he spent a number of years working for the USAF in the Materials Directorate at Wright-Patterson AFB, holding a number of engineering and management positions involved in the development of materials and processes for application in future military systems. Mr. Broderick received his B.S. and M.S. degrees in Materials Science Engineering from Wright State University and the University of Dayton, respectively.

John R. Warner, Vice President, Strategy and Communications, joined KEMET in 2000 as Director of Investor and Public Relations. Prior to joining KEMET, he was President of Capital Insights, LLC, a venture capital firm, and previously he was a CPA with KPMG, leaving as Senior Manager. Mr. Warner received a Masters of Accountancy from the University of Georgia and B.S. in Accounting from Clemson University.

Manuel A. Cappella, Vice President/Managing Director, Tantalum and Aluminum Manufacturing, Mexico, was named such in April 1997. He previously served in various engineering and manufacturing capacities for Union Carbide and KEMET (January 1977-April 1997) and for Union Carbide in Costa Rica (March 1972-January 1977). Mr. Cappella holds a B.S. in Mechanical Engineering and an MBA from the University of Texas.

Donald R. Aldworth, Vice President of Quality, was appointed such in February 2004. He joined the Company in 1985 and was responsible for the production scheduling and quality function for the newly formed tantalum chip startup operation at the Mauldin Plant. He has worked in a variety of manufacturing and quality positions, including Director of Operations of the Matamoros Plants from 1999 to 2002. Prior to joining KEMET, he worked for Westinghouse Electric and Century Motors. Mr. Aldworth holds a B.S. degree in Industrial Engineering from Georgia Institute of Technology.

Joseph S. Porter, Vice President, Sales—Americas, joined KEMET in 1980 as a Customer Specifications Analyst in Simpsonville, SC. Since 1983, he has held numerous positions in the sales organization including account management, global market segment management, and geographical management covering the Southeastern and most recently the Midwestern U.S. States and Canada. Mr. Porter holds a B.A. degree in Biology from Erskine College.

Michael W. Boone, Treasurer/Director of Finance and Secretary, was named Secretary in April 2001, Treasurer in August 2000, and Director of Finance in March 1997. Mr. Boone joined KEMET in June 1987 as Manager of Credit and Cash Management. Mr. Boone holds a B.B.A. in Banking and Finance from the University of Georgia.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from the Company’s definitive proxy statement for its annual stockholders’ meeting to be held on July 21, 2004. The information specified in Item 402(k) and (1) of Regulation S-K and set forth in the Company’s definitive proxy statement for its annual stockholders’ meeting to be held on July 21, 2004, is incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference from the Company’s definitive proxy statement for its annual stockholders’ meeting to be held on July 21, 2004.

39




Equity Compensation Plan Disclosure

The following table summarizes equity compensation plans approved by security holders and equity compensation plans that were not approved by security holders as of March 31, 2004:

 

 

(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 (stock options) approved by stockholders

 

 

2,711,735

 

 

 

$

13.36

 

 

 

274,000

 

 

Equity compensation plans not approved by stockholders

 

 

1,749,980

 

 

 

$

13.61

 

 

 

79,620

 

 

Total

 

 

4,461,715

 

 

 

$

13.46

 

 

 

353,620

 

 

 

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference from the Company’s definitive proxy statement for its annual stockholders’ meeting to be held on July 21, 2004.

PART IV

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding the fees and services of KEMET’s principal accountants is incorporated by reference to the material under the heading “Appointment of Independent Auditors” in the Proxy Statement.

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)           (1) Financial Statements

The following financial statements are filed as a part of this report:

Independent Auditors’ Report

Consolidated Financial Statements:

Consolidated Balance Sheets as of March 31, 2004 and 2003

Consolidated Statements of Operations for the years ended March 31, 2004, 2003, and 2002

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended March 31, 2004, 2003, and 2002

Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003, and 2002

Notes to Consolidated Financial Statements

 

(a)    (2) Financial Statement Schedules

Financial statement schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes.

40




(a)    (3) List of Exhibits

The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.

3.1

 

Restated Certificate of Incorporation of the registrant, as amended to date (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended December 31, 1992).

3.2

 

By-laws of the registrant, as amended to date (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended December 31, 1992).

4.1

 

Certificate representing shares of Common Stock of the registrant (incorporated by reference to Exhibit 4.1 to the Company’s registration Statement on Form S-1 [Reg. No. 33-48056]).

10.1

 

Registration Agreement, dated as of December 21, 1990, by and among the registrant and each of the investors and executives listed on the schedule of investors and executives attached thereto (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement of Form S-1 [Reg. No. 33-48056]).

10.2

 

Form of Amendment No. 1 to Registration Agreement, dated as of April 28, 1994 (incorporated by reference to Exhibit 10.3.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-61898]).

10.3

 

Services Agreement, dated as of December 21, 1990, as amended as of March 30, 1992, by and between the registrant and KEMET Electronics Corporation (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).

10.4

 

1992 Executive Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).

10.5

 

Form of Grant of Nonqualified Stock Option, dated April 6, 1992, by and between the registrant and each of the executives listed on the schedule attached thereto (incorporated by reference to Exhibit 10.12.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).

10.6

 

Form of KEMET Electronics Corporation Distributor Agreement (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).

10.7

 

Form of KEMET Electronics Corporation Standard Order Acknowledgment, Quotation, and Volume Purchase Agreement (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).

10.8

 

Form of KEMET Electronics Corporation Product Warranty (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1[Reg. No. 33-48056]).

10.9

 

Amendment No. 1 to Stock Purchase and Sale Agreement, dated as of December 21, 1990. The registrant agrees to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to the Agreement upon Request by the Commission (incorporated by reference to Exhibit 10.20.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).

10.10

 

Form of Deferred Compensation Plan for Key Managers effective as of January 1, 1995 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1995).

10.11

 

Form of Collateral Assignment and Split Dollar Insurance (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report of Form 10-K for the year ended March 31, 1995).

41




 

10.12

 

1995 Executive Stock Option Plan by and between the registrant and each of the executives listed on the schedule attached hereto (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).

10.13

 

Executive Bonus Plan by and between the registrant and each of the executives listed on the schedule attached hereto (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).

10.14

 

Amendment No. 2 to Services Agreement by and between the registrant and KEMET Electronics Corporation (incorporated by reference to Exhibit 10.4.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).

10.15

 

Amendment No. 3 to Services Agreement dated as of January 1, 1996, by and between the registrant and KEMET Electronics Corporation (incorporated by reference to Exhibit 10.4.2 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).

10.16

 

Amendment No. 4 to Services Agreement dated as of March 1, 1996, by and between the registrant and KEMET Electronics Corporation (incorporated by reference to Exhibit 10.4.3 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).

10.17

 

Amendment No. 1 to KEMET Corporation 1992 Key Employee Stock Option Plan effective October 23, 2000 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000).

21.1

 

Subsidiaries of KEMET Corporation

23.1

 

Consent of Independent Registered Public Accounting Firm

31.1

 

Certification of the Chief Executive Officer Pursuant to Section 302

31.2

 

Certification of the Chief Financial Officer Pursuant to Section 302

32.1

 

Certification of the Chief Executive Officer Pursuant to Section 906

32.2

 

Certification of the Chief Financial Officer Pursuant to Section 906

 

(b)   Reports on Form 8-K.

On January 29, 2004, the Company furnished a report on Form 8-K of a press release made on January 19, 2004, that announced quarterly financial results for the period ended December 31, 2003.

42



 

Report of Independent Registered Public Accounting Firm

The Board of Directors
KEMET Corporation:

We have audited the accompanying consolidated balance sheets of KEMET Corporation and subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended March 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KEMET Corporation and subsidiaries as of March 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective April 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

/s/ KPMG LLP

 

Greenville, South Carolina
April 30, 2004

KPMG LLP

 

43



KEMET CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Dollars in thousands except per share data

 

 

March 31, 2004

 

March 31, 2003

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

183,528

 

 

 

$

263,585

 

 

Short-term investments

 

 

3,172

 

 

 

 

 

Accounts receivable

 

 

57,303

 

 

 

45,418

 

 

Inventories:

 

 

 

 

 

 

 

 

 

Raw materials and supplies

 

 

59,751

 

 

 

91,333

 

 

Work in process

 

 

41,250

 

 

 

43,404

 

 

Finished goods

 

 

28,015

 

 

 

49,337

 

 

Total inventories

 

 

129,016

 

 

 

184,074

 

 

Income tax refund receivable

 

 

 

 

 

24,640

 

 

Prepaid expenses and other current assets

 

 

6,979

 

 

 

6,120

 

 

Deferred income taxes

 

 

29,046

 

 

 

23,947

 

 

Total current assets

 

 

409,044

 

 

 

547,784

 

 

Property and equipment, net

 

 

424,161

 

 

 

485,166

 

 

Investments in U.S. government marketable securities

 

 

84,584

 

 

 

 

 

Investments in affiliates

 

 

3,610

 

 

 

546

 

 

Goodwill and intangible assets, net

 

 

45,088

 

 

 

41,560

 

 

Other assets

 

 

3,321

 

 

 

25,954

 

 

Total assets

 

 

$

969,808

 

 

 

$

1,101,010

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable, trade

 

 

$

38,268

 

 

 

$

49,171

 

 

Accrued expenses

 

 

41,182

 

 

 

35,078

 

 

Income taxes payable

 

 

15,863

 

 

 

 

 

Total current liabilities

 

 

95,313

 

 

 

84,249

 

 

Long-term debt

 

 

100,000

 

 

 

100,000

 

 

Other non-current obligations

 

 

61,623

 

 

 

57,617

 

 

Deferred income taxes

 

 

28,394

 

 

 

65,869

 

 

Total liabilities

 

 

285,330

 

 

 

307,735

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock, par value $.01, authorized 300,000,000 shares, issued 87,953,720 and 87,870,731 shares at March 31, 2004 and 2003, respectively

 

 

879

 

 

 

879

 

 

Additional paid-in capital

 

 

317,497

 

 

 

318,545

 

 

Retained earnings

 

 

394,940

 

 

 

506,915

 

 

Accumulated other comprehensive loss

 

 

(1,457

)

 

 

(2,996

)

 

Treasury stock, at cost (1,485,455 and 1,631,265 shares at March 31, 2004 2003, respectively)

 

 

(27,381

)

 

 

(30,068

)

 

Total stockholders’ equity

 

 

684,478

 

 

 

793,275

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

$

969,808

 

 

 

$

1,101,010

 

 

 

See accompanying notes to consolidated financial statements.

44



KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Dollars in thousands except per share data

 

 

Fiscal Years ended March 31,

 

 

 

2004

 

2003

 

2002

 

Net sales

 

$

433,882

 

$

447,332

 

$

508,555

 

Operating costs and expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

413,980

 

392,143

 

418,791

 

Loss on long-term supply contract

 

12,355

 

40,833

 

 

Selling, general, and administrative expenses

 

51,246

 

54,390

 

54,420

 

Research and development

 

24,449

 

25,268

 

26,334

 

Pension settlement charges

 

50,398

 

 

 

Restructuring and impairment charges

 

40,468

 

31,700

 

49,375

 

Total operating costs and expenses

 

592,896

 

544,334

 

548,920

 

Operating loss

 

(159,014

)

(97,002

)

(40,365

)

Other (income) and expense:

 

 

 

 

 

 

 

Interest income

 

(3,847

)

(3,818

)

(9,809

)

Interest expense

 

6,472

 

6,097

 

6,736

 

Other expense (income)

 

(3,311

)

(11,387

)

3,438

 

Loss before income taxes

 

(158,328

)

(87,894

)

(40,730

)

Income tax benefit

 

(46,353

)

(31,906

)

(13,441

)

Net loss

 

$

(111,975

)

$

(55,988

)

$

(27,289

)

Net loss per share:

 

 

 

 

 

 

 

Basic

 

$

(1.30

)

$

(0.65

)

$

(0.32

)

Diluted

 

$

(1.30

)

$

(0.65

)

$

(0.32

)

Weighted-average shares outstanding:

 

 

 

 

 

 

 

Basic

 

86,412,281

 

86,167,563

 

85,773,763

 

Diluted

 

86,412,281

 

86,167,563

 

85,773,763

 

 

See accompanying notes to consolidated financial statements.

45



KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
Dollars in thousands except share amounts

 

 

Common Stock

 

Additional
Paid-in

 

Retained

 

Accumulated
Other
Comprehensive

 

Treasury

 

Total
Stock-
holders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Equity

 

Balance at March 31, 2001

 

86,019,477

 

 

$

876

 

 

$

322,068

 

$

590,192

 

 

$

2,355

 

 

$

(29,315

)

$

886,176

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(27,289

)

 

 

 

 

(27,289

)

Unrealized gain on foreign exchange contracts, net $1,267 tax

 

 

 

 

 

 

 

 

2,143

 

 

 

2,143

 

Unrealized securities loss, net $425 tax 

 

 

 

 

 

 

 

 

(756

)

 

 

(756

)

Foreign currency translation gain

 

 

 

 

 

 

 

 

66

 

 

 

66

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,836

)

Exercise of stock options

 

299,315

 

 

1

 

 

(1,893

)

 

 

 

 

4,430

 

2,538

 

Tax benefit on exercise of stock options

 

 

 

 

 

1,048

 

 

 

 

 

 

1,048

 

Purchases of stock by Employee Savings Plan

 

104,573

 

 

1

 

 

1,319

 

 

 

 

 

 

1,320

 

Put options proceeds

 

 

 

 

 

599

 

 

 

 

 

 

599

 

Treasury stock purchases

 

(500,000

)

 

 

 

(1,407

)

 

 

 

 

(9,393

)

(10,800

)

Balance at March 31, 2002

 

85,923,365

 

 

878

 

 

321,734

 

562,903

 

 

3,808

 

 

(34,278

)

855,045

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(55,988

)

 

 

 

 

(55,988

)

Unrealized loss on foreign exchange contracts, net $3,547 tax

 

 

 

 

 

 

 

 

(6,451

)

 

 

(6,451

)

Unrealized securities loss, net $283 tax 

 

 

 

 

 

 

 

 

(620

)

 

 

(620

)

Foreign currency translation gain

 

 

 

 

 

 

 

 

267

 

 

 

267

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,792

)

Exercise of stock options

 

228,430

 

 

 

 

(1,486

)

 

 

 

 

4,210

 

2,724

 

Tax benefit on exercise of stock options

 

 

 

 

 

728

 

 

 

 

 

 

728

 

Purchases of stock by Employee Savings Plan

 

87,671

 

 

1

 

 

1,070

 

 

 

 

 

 

1,071

 

Put options proceeds

 

 

 

 

 

225

 

 

 

 

 

 

225

 

Put option settlement

 

 

 

 

 

(3,726

)

 

 

 

 

 

(3,726

)

Balance at March 31, 2003

 

86,239,466

 

 

879

 

 

318,545

 

506,915

 

 

(2,996

)

 

(30,068

)

793,275

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(111,975

)

 

 

 

 

(111,975

)

Unrealized gain on foreign exchange contracts, net $875 tax

 

 

 

 

 

 

 

 

1,047

 

 

 

1,047

 

Unrealized securities gain, net $709 tax 

 

 

 

 

 

 

 

 

538