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, 2005

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

57-0923789

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

2835 KEMET Way, Simpsonville, South Carolina

29681

(Address of principal executive offices)

(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, 2004, computed by reference to the closing sale price of the registrant’s Common Stock was approximately $699,663,900.

Number of shares of each class of Common Stock outstanding as of May 31, 2005: Common Stock, $.01 Par Value 86,613,204

 




DOCUMENTS INCORPORATED BY REFERENCE

1.     Portions of the definitive proxy statement relating to the annual meeting of stockholders to be held on July 20, 2005: 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 a leading manufacturer of tantalum capacitors, multilayer ceramic capacitors (“MLCC”), and solid aluminum capacitors. For the year ended March 31, 2005 (“fiscal year 2005”), KEMET generated net sales of $425.3 million, down 2.0% from $433.9 million in fiscal year 2004. In fiscal year 2005, total net sales were broken down geographically as follows: North American sales were approximately 46.6%, Asian sales were approximately 33.1%, and European sales were approximately 20.3%. During fiscal year 2005, the Company shipped approximately 33.6 billion capacitors compared to 27.1 billion in fiscal year 2004.

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, Bosch, Celestica, Delphi, Flextronics, Hewlett-Packard, Hon Hai, IBM, Intel, J.C. Tally, Jabil, Jaco, Motorola, Sanmina-SCI, Siemens, Solectron, TRW, 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 Company was formed in 1990 by certain members of the Company’s management at the time, Citicorp Venture Capital, Ltd., and other investors that acquired the outstanding common stock of KEMET Electronics Corporation from UCC.

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.

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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.

The Board of Directors has previously authorized programs to purchase up to 8.0 million shares of its common stock on the open market. Through March 31, 2005, the Company had made purchases of 2.1 million shares for $38.7 million, none of which occurred during fiscal year 2005. 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, 2005, the Company held approximately 1,460,000 treasury shares at a cost of $26.9 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.

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.

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.

3




The choice of capacitor dielectric is driven by the engineering specifications and the application of the component product into which the capacitor is incorporated. Product design engineers in the electronics industry typically select capacitors on the basis of capacitance levels, size, and cost. Tantalum and ceramic capacitors are commonly used in conjunction with integrated circuits, and the same circuit may, and frequently does, contain both ceramic and tantalum capacitors. Generally, ceramic capacitors are more cost-effective at lower capacitance values, tantalum capacitors are more cost-effective at higher capacitance values, and solid aluminum capacitors can be more effective in 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 existing business relationships it has with leading electronics companies and to increase the percentage of each customer’s requirements which the Company supplies under these relationships. KEMET seeks to continue growing with emerging electronics companies around the globe through its distributor network and its direct sales force. Customers around the globe 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 OEM and EMS customers and its distributors to ensure its ability to meet their rapidly changing demands.

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 2005, the Company shipped approximately 33.6 billion capacitors of various types, 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 customers have moved to just-in-time inventory management, the timeliness and reliability of 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 has built its brand reputation on continuous improvements and a company-wide commitment to quality products and services. Ranked best in class by independent surveys and recognized by numerous customer awards, KEMET strives to exceed customer expectations to achieve preferred supplier status. The Company continues to utilize Lean and Six Sigma methods to drive towards zero defects while increasing process speed and eliminating non-value added activities.

4




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. Positive charges are stored on one electrode and negative charges on the other, while the insulator keeps the charges separate allowing the capacitor to store electrons. The highest unit volumes of capacitors are ceramics, tantalums, and 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 Tokin Corporation (“NEC”). 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. KEMET pays NEC royalties upon reaching certain sales volume targets. In fiscal years 2005 and 2004, the amount of royalties was immaterial.

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 allows the Company to produce layers approaching one micron thicknesses.

Finally, through a technical alliance with Showa Denko K.K., KEMET offers for sale fast, high-capacitance solid aluminum capacitors which, unlike traditional aluminum capacitors, are truly surface mountable. These capacitors are called AO-CAPs (Aluminum Organic Capacitors). KEMET pays Showa Denko royalties when certain sales volumes are met. In fiscal years 2005 and 2004, the amount of royalties was immaterial.

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 customers’ needs, especially in high-frequency, high-capacitance applications, regardless of the capacitor technology chosen.

In addition to product line expansion in the high frequency area, KEMET has also expanded its specialty product lines. To facilitate this, KEMET purchased certain assets of Wilson Greatbatch’s high-voltage and high-temperature Sierra-KD ceramic product line in July 2003. Since that time, KEMET development personnel have made significant improvements in the production processes for those products and also leveraged the technology to internally develop high-voltage commercial ceramic surface mount and leaded product lines. KEMET has also introduced a tantalum military-COTS (“commercial off the shelf”) product line and ceramic and tantalum medical product lines. New specialty product lines also include the introduction of ceramic open-mode product whose primary markets are automotive and high reliability power supplies. It is anticipated that this expansion of specialty product lines will continue during the next fiscal year.

5




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. The Company believes that it has achieved a strong 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, Mexico and China. 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 summer of 2005. The Company’s production facilities are highly integrated into a virtual factory through information technology. The Company has developed a 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 year 2005, fiscal year 2004, and fiscal year 2003 accounted for over 10% of the Company’s net sales. The Company’s top 50 customers accounted for approximately 95% of the Company’s net sales during fiscal year 2005.

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 produces 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 2005. 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 United States 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 offices in Europe; six 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 Global Account Teams. These teams are committed to serving any customer location in the world with a dedicated KEMET representative. This approach requires a blend of accountability and responsibility to specific customer locations, guided by an overall account strategy for each customer.

Electronics distributors are an important distribution channel in the electronics industry and accounted for approximately 52%, 51%, and 43% of the Company’s net sales in fiscal years 2005, 2004, and 2003, respectively. In fiscal years 2005 and 2004, two distributors of passive components each accounted for more than 10% of net sales.

The Company’s distributor policy includes a price protection program which 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 establishes price protection reserves on specific parts residing in distributors’ inventories in the period that the price protection is formally authorized by the Company’s management.

The Company’s distributor policy also includes a “ship-from-stock and debit” (“SFSD”) program which 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 establishes reserves for its SFSD program based primarily on certain distributors’ actual inventory levels comprising 91% to 95% of the total global distributor inventory. The remaining 5% to 9% is estimated based on actual distributor inventory and current sales trends. Management analyzes historical SFSD activity to determine the SFSD exposure on the global distributor inventory at the balance sheet date. Should the distributors increase inventory levels, the estimation of the inventory at the distributors for the remaining 5% to 9% could be estimated at an incorrect amount. However, the Company believes that the difference between the estimate and the ultimate actual amount would be immaterial.

Sales by Geography

In fiscal year 2005, total net sales were broken down geographically as follows: North American sales were approximately 46.6%, Asian sales were approximately 33.1%, and European sales were approximately 20.3%. 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 Asian and European 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 international 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

7




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).

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 $50.2 million and $69.0 million at March 31, 2005 and 2004, respectively. The current backlog is expected to be filled during the first quarter of fiscal year 2006. 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 U.S. 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 year 2005, the Company was able to renegotiate the pricing arrangement under tantalum inventory purchase commitment, and accordingly, the Company reversed $11.8 million of the original charges.

8




During fiscal year 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. 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. KEMET retained its equity interest in TAA, which has been reduced to less than eight 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 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 significantly reduced the palladium and silver requirements in the production of MLCCs with a major shift in the production process 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, 2005, the Company held 65 United States and 36 foreign patents and 13 United States and 79 foreign trademarks. The Company 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 $26.6 million for fiscal year 2005 compared to $24.4 million for fiscal year 2004. 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.

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Employees

As of April 30, 2005, KEMET had approximately 8,100 employees, of whom approximately 1,200 were located in the United States, approximately 6,200 were located in Mexico, 600 in China, and the remainder were located in the Company’s foreign sales offices. The Company believes that its future success will 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 4,200 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 Mexican 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 of 1934 Reports

The Company maintains an Internet website at the following address: http://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 (“SEC”) 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.

Code of Business Integrity and Ethics

The Company maintains a Code of Business Integrity and Ethics (the “Code”) that is followed by all of the management of KEMET. This includes the Chief Executive Officer, the Chief Financial and Accounting Officer, the accounting staff and other members of management. The Company’s website includes a copy of the Code, and it can be downloaded free of charge at http://www.kemet.com. A copy of the Code has been included as an Exhibit to the 2005 Annual Report filed on Form 10-K.

ITEM 2.                PROPERTIES

KEMET is headquartered in Simpsonville, South Carolina, and has a total of 19 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 year 2003. The Company’s existing manufacturing and assembly facilities have approximately 2.5 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 this 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 77% 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.

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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 the Company believes that, on the overall, it has sufficient capacity to meet its current and projected manufacturing and distribution needs.

The Company has listed its Greenwood, South Carolina facility with a real estate broker for sale. Accordingly, this facility is presented on the Consolidated Balance Sheets as Property held for sale. There are two additional facilities (one in Matamoros, Mexico and one in Mauldin, South Carolina) that are idle and are ready for sale. The Company is in the process of determining the future of these facilities. Finally, the Company’s leased facility in Brownsville, Texas is being subleased by an outside company.

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

 

 

 

 

 

 

 

 

Date

 

 

 

 

 

 

 

 

 

Constructed,

 

 

 

 

 

 

 

 

 

Acquired or

 

 

 

 

 

 

 

 

 

First

 

 

 

Square

 

Type of

 

 

 

Occupied by

 

Location

 

 

 

Footage

 

Interest

 

Description of Use

 

Company

 

Simpsonville, South Carolina(1)

 

372,000

 

Owned

 

Manufacturing/Headquarters

 

 

1963

 

 

Matamoros, Mexico(2)

 

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—Property Held for Sale

 

 

1981

 

 

Mauldin, South Carolina(4)

 

129,000

 

Owned

 

Idle—Ready for Sale

 

 

1971

 

 

Suzhou, China(5)

 

127,000

 

Leased

 

Manufacturing

 

 

2003

 

 

Suzhou, China(6)

 

127,000

 

Leased

 

Manufacturing

 

 

2005

 

 

Shelby, North Carolina(8)

 

123,000

 

Owned

 

Manufacturing

 

 

1981

 

 

Mauldin, South Carolina

 

80,000

 

Leased

 

Distribution/Storage

 

 

1976

 

 

Matamoros, Mexico(4)

 

68,000

 

Owned

 

Idle—Ready for Sale

 

 

1977

 

 

Brownsville, Texas(7)

 

60,000

 

Leased

 

Shipping/Distribution

 

 

1992

 

 


(1)—Includes two separate manufacturing facilities.

(2)—Includes three manufacturing facilities for Matamoros and two manufacuturing facilities for Monterrey.

(3)—The Greenwood, South Carolina facility has been listed with a broker and is available for sale. The Company is reporting this facility as Property held for sale on the Consolidated Balance Sheets.

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

(5)—Includes two separate manufacturing facilities, one became operational in the latter half of calendar year 2003 and one which is used for storage.

11




(6)—This manufacturing facility is scheduled to begin operations in fiscal year 2006.

(7)—The Brownsville, Texas facility is being subleased to an outside company. KEMET is leasing back 5,000 square feet.

(8)—The Shelby, North Carolina facility is scheduled to be closed in the fiscal second quarter 2006.

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 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.

In January 2005, the Company filed a lawsuit against AVX Corporation (“AVX”) to protect trade secrets relating to the development and manufacture of tantalum polymer capacitors. KEMET has been manufacturing these advanced components since 1999, and they now constitute the fastest growing segment of the tantalum capacitor market. KEMET was seeking judgment against AVX for actual and exemplary damages, attorney’s fees, and injunctive relief to eliminate any commercial advantage that otherwise would be derived by AVX from the misappropriation of KEMET trade secrets. While the Company still believes in the merits of the case, the lawsuit was dismissed in order to allow management to be able to focus on the important business challenges it currently faces.

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, 2005.

12




PART II

ITEM 5.                MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s Common Stock is traded on the New York Stock Exchange under the symbol KEM. The Company had approximately 30,400 stockholders as of June 1, 2005, of which approximately 331 were stockholders of record. The following table represents the high and low sale prices of the Company’s Common Stock for the periods indicated:

 

 

Fiscal Year 2005

 

Fiscal Year 2004

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

15.11

 

$

10.80

 

$

10.78

 

$

7.55

 

Second Quarter

 

$

12.25

 

$

7.80

 

$

13.95

 

$

9.69

 

Third Quarter

 

$

9.35

 

$

7.44

 

$

14.29

 

$

11.80

 

Fourth Quarter

 

$

9.01

 

$

7.70

 

$

16.70

 

$

12.88

 

 

The Company has not declared or paid any cash dividends on its Common Stock since the initial public offering in October 1992. The Company 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 2005.

13




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 Results of Operations and Financial Condition” 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 Ending March 31,

 

 

 

2005(1)

 

2004(1)

 

2003(1)

 

2002

 

2001

 

 

 

Dollars in thousands except per share data

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

425,338

 

$

433,882

 

$

447,332

 

$

508,555

 

$

1,406,147

 

Operating income (loss)

 

(174,842

)

(159,014

)

(97,002

)

(40,365

)

566,986

 

Interest income

 

(6,295

)

(3,847

)

(3,818

)

(9,809

)

(16,713

)

Interest expense

 

6,511

 

6,472

 

6,097

 

6,736

 

7,507

 

Net income (loss)

 

$

(174,094

)

$

(111,975

)

$

(55,988

)

$

(27,289

)

$

352,346

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share—basic

 

$

(2.01

)

$

(1.30

)

$

(0.65

)

$

(0.32

)

$

4.05

 

Net income (loss) per share—diluted

 

$

(2.01

)

$

(1.30

)

$

(0.65

)

$

(0.32

)

$

4.00

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

—Basic

 

86,518,923

 

86,412,281

 

86,167,563

 

85,773,763

 

86,930,965

 

—Diluted

 

86,518,923

 

86,412,281

 

86,167,563

 

85,773,763

 

88,181,118

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

758,097

 

$

971,046

 

$

1,101,010

 

$

1,171,714

 

$

1,366,530

 

Working capital

 

184,579

 

313,731

 

463,535

 

454,776

 

460,055

 

Long-term debt

 

100,000

 

100,000

 

100,000

 

100,000

 

100,000

 

Other non-current obligations

 

48,951

 

61,623

 

57,617

 

48,926

 

51,084

 

Stockholders’ equity

 

$

515,203

 

$

684,478

 

$

793,275

 

$

855,045

 

$

886,176

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Cash flow provided by (used in) operating activities

 

$

(12,752

)

$

38,452

 

$

43,710

 

$

(34,219

)

$

392,440

 

Capital expenditures

 

39,581

 

25,835

 

22,197

 

78,546

 

210,559

 

Research and development

 

$

26,639

 

$

24,449

 

$

25,268

 

$

26,334

 

$

27,145

 


(1)—Includes special charges of $122.9 million, $108.9 million, and $75.9 million for the fiscal years ended March 31, 2005, 2004, and 2003, respectively, which are described in Item 7 under Results of Operations.

14




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, 2005. 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 the “Safe Harbor Statement” and, from time to time, in the Company’s other filings with the Securities and Exchange Commission.

Overview

KEMET is a leading manufacturer of tantalum capacitors, 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 year 2005, total net sales were broken down geographically as follows: North American sales were approximately 46.6%, Asian sales were approximately 33.1%, and European sales were approximately 20.3%.

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.

15




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

16




The four fiscal years following fiscal year 2001, fiscal years 2002 through 2005, 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 2005 Special Charges, Fiscal Year 2004 Special Charges, and Fiscal Year 2003 Special Charges) to meet these challenges.

At March 31, 2005, the Company had $219.5 million of cash and short and long-term investments. KEMET intends to satisfy both its short-term and long-term liquidity requirements primarily with existing cash and cash equivalents and cash provided by operations.

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 carefully 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 nine 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 $39 million (of which $32 million had been spent through March 31, 2005) 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 year 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 2005 Special Charges and 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, South Carolina or through locations in appropriate parts of the world.

Commodity manufacturing currently in the United States will be relocated to the Company’s lower-cost manufacturing facilities in Mexico and China. Approximately 500 production-related jobs in the United States will be impacted by this relocation over the next nine months. Production that remains in the

17




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 is located in Greenville, South Carolina.

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 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 focus on ceramic capacitors.

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 its customers’ Asian operations. The Company’s initial China production facilities in Suzhou near Shanghai commenced shipments in October 2003. Manufacturing operations in China will continue to grow, 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.

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

18




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. The Company 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 cost of finished goods may exceed what the market will bear.

The net realizable value of raw materials purchased under long-term supply contracts also requires significant judgments by management. In fiscal years 2004 and 2003, the Company recorded losses totaling $53.2 million related to tantalum raw material. In fiscal year 2004, the Company wrote down approximately $12.4 million under a tantalum supply agreement. In fiscal year 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, and the Company was 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 decline 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 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 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, the current market prices would continue through calendar year 2006, when KEMET’s purchase commitments were scheduled to end. Had other assumptions on current and future prices for

19




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 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 years 2004 and 2003, the Company could also be required to incur further losses.

During fiscal year 2005, the Company renegotiated the contract with Cabot Corporation associated with the tantalum purchase commitment. As a result of the contract renegotiation, a portion of the 2004 and 2003 purchase commitment losses were reversed. In the fiscal year ended March 31, 2005, the Company decreased its purchase commitment liability by recognizing a gain of $11.8 million.

Commencing in fiscal year 2003, KEMET included depreciation and amortization as a component of its cost of inventories, as required by U.S. generally accepted accounting principles. 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. The Company has considered the effect of this change in policy on fiscal year 2004 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.

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 its annual goodwill impairment test in the first quarter of fiscal years 2005, 2004, and 2003, none of which indicated impairment. During the fiscal fourth quarter 2005, KEMET completed another goodwill impairment test due to the asset impairment the Company recorded in fiscal fourth quarter 2005. See below for a discussion on the fiscal fourth quarter 2005 Asset Impairment. This test yielded no goodwill impairment. In addition, KEMET also performs its annual impairment test on the goodwill related to the acquired The Forest Electric Company (“FELCO”) each year in the fiscal third quarter. No impairment was noted during that test.

As of March 31, 2005, 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

20




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 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. The fair value is calculated as the discounted cash flows of the underlying assets on a pre-tax basis.

Using the factors above, a test for recoverability of the Company’s tantalum and ceramic assets was performed as of March 31, 2005. The results of the test for recoverability indicated that the carrying amount of the long-lived assets exceeded the estimated future undiscounted cash flows. As a result, KEMET calculated the excess of the carrying amount of the long-lived assets over its fair value on a pre-tax discounted cash flow basis using the factors above. The discount rate used was an estimation of KEMET’s pretax, weighted-average cost of capital. The Company had to make certain assumptions as to the future cash flows to be generated by the underlying assets. Those items included the amount of volume increases, average selling prices decreases, anticipated cost reductions, and the estimated remaining useful life of the equipment. Fair market value was based on the discounted cash flows that the equipment will generate over the remaining useful lives. The Company, accordingly, recognized a non-cash impairment charge of $100.2 million ($44.2 million for tantalum products and $56.0 million for ceramic products). The Company believes that it is appropriate to record these impairments due to:

·       a decrease in the Company’s (as well as its competitors’ as a whole) market capitalization;

·       continuing average selling price erosion; and

·       the continued operating losses the Company has recently incurred.

For further discussion of the impairment charge, see Fiscal Year 2005 Special Charges.

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 from sales when a product is shipped and title has transferred. The Company recognizes revenue only when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured.

A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. Products with customer specific requirements are tested and approved by the customer before the Company mass produces and ships the product. The Company recognizes revenue at shipment as the sales terms for products produced with customer specific requirements do not contain a final customer acceptance provision or other provisions that are unique and would otherwise allow the customer different acceptance rights.

21




A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company’s distributor policy includes inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.

The 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 establishes price protection reserves on specific parts residing in distributors’ inventories in the period that the price protection is formally authorized by the Company’s management. The distributors also have the right to return to KEMET a certain portion of the purchased inventory, which will not exceed 5% of the overall purchases. KEMET estimates future returns based on historical patterns of the distributors and records an allowance on the Consolidated Balance Sheets.

The SFSD program provides a mechanism for the distributor to meet a competitive price after obtaining authorization from the local Company sales office. This program allows the distributor to ship its higher-priced inventory and debit the Company for the difference between KEMET’s list price and the lower authorized price for that specific transaction. The Company establishes reserves for its SFSD program based primarily on the actual inventory levels of certain distributor customers. The actual inventory levels at these distributors comprise 91% to 95% of the total global distributor inventory. The remaining 5% to 9% is estimated based on actual distributor customer inventory and current sales trends. Management analyzes historical SFSD activity to determine the SFSD exposure on the global distributor inventory at the balance sheet date. Should the distributors increase inventory levels, the estimation of the inventory at the distributors for the remaining 5% to 9% could be estimated at an incorrect amount. However, the Company believes that the difference between the estimate and the ultimate actual amount would be immaterial.

The establishment of these reserves is recognized as a component of the line item Net sales on the Consolidated Statements of Operations, while the associated reserves are included in the line item Accounts receivable on the Company’s Consolidated Balance Sheets.

POSTRETIREMENT BENEFITS.   KEMET’s management, along with the assistance of an actuarial firm, performs an actuarial valuation of its postretirement plans’ benefit obligations. Management makes certain assumptions that have a significant effect on the obligations such as the:

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

·       salary increases—used to calculate the impact future pay increases will have on postretirement obligations; and

·       medical cost inflation—used to calculate the impact future medical costs will have on postretirement 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 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,

22




Improvement and Modernization Act of 2003,” the Company determined its plan is not actuarially equivalent to the Medicare prescription drug benefit and there was no impact or benefit from the Act.

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. During fiscal year 2005, KEMET recognized $0.6 million of additional costs relating to the final settlement of its defined benefit pension plan. The termination of the pension plan is anticipated to result in future savings of approximately $6 million per year. KEMET continues to provide other defined contribution retirement plans to its employees.

INCOME TAXES.   Income taxes are accounted for under the asset and liability method, as prescribed by SFAS No. 109, “Accounting for Income 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.

Management believes that is more likely than not that the net deferred taxes for the U.S., Switzerland, China and Australia 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 deferred tax assets. KEMET continues to have small net deferred tax assets (future tax benefits) in several other countries which the Company expects to realize assuming, based on certain estimates and assumptions, sufficient 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 tax expense.

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,

 

 

 

2005

 

2004

 

2003

 

Net sales

 

 

100

%

 

 

100

%

 

 

100

%

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

95

%

 

 

95

%

 

 

88

%

 

(Gain)/loss on long-term supply contract

 

 

-3

%

 

 

3

%

 

 

9

%

 

Selling, general and administrative expenses

 

 

12

%

 

 

12

%

 

 

12

%

 

Research and development

 

 

6

%

 

 

6

%

 

 

6

%

 

Pension settlement charges

 

 

0

%

 

 

12

%

 

 

0

%

 

Restructuring and impairment charges

 

 

31

%

 

 

9

%

 

 

7

%

 

Operating loss

 

 

-41

%

 

 

-37

%

 

 

-22

%

 

Other (income) and expense

 

 

-1

%

 

 

0

%

 

 

-2

%

 

Loss before income taxes

 

 

-40

%

 

 

-37

%

 

 

-20

%

 

Income tax (benefit)/expense

 

 

1

%

 

 

-11

%

 

 

-7

%

 

Net loss

 

 

-41

%

 

 

-26

%

 

 

-13

%

 

 

23




The following table sets forth, for the periods indicated, the % increase/(decrease) from the preceding fiscal year of certain items of the Company’s financial data:

 

 

Fiscal Years ended March 31,

 

 

 

        2005        

 

        2004        

 

Net sales

 

 

-2

%

 

 

-3

%

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

-3

%

 

 

6

%

 

(Gain)/loss on long-term supply contract

 

 

-195

%

 

 

-70

%

 

Selling, general and administrative expenses

 

 

1

%

 

 

-6

%

 

Research and development

 

 

9

%

 

 

-3

%

 

Pension settlement charges

 

 

-99

%

 

 

0

%

 

Restructuring and impairment charges

 

 

221

%

 

 

28

%

 

Operating loss

 

 

10

%

 

 

64

%

 

Other (income) and expense

 

 

284

%

 

 

-93

%

 

Loss before income taxes

 

 

9

%

 

 

80

%

 

Income tax (benefit)/expense

 

 

-104

%

 

 

45

%

 

Net loss

 

 

55

%

 

 

100

%

 

 

Comparison of Fiscal Year 2005 to Fiscal Year 2004

Net sales:

Net sales for fiscal year 2005 were $425.3 million, which represented a 2.0% decrease from fiscal year 2004 net sales of $433.9 million. The decrease in net sales was primarily attributable to a 3.7% decline in capacitor average selling prices (“ASPs” or “ASP”) with the balance being product mix. Unit volumes increased 24.0% to approximately 33.6 billion units from approximately 27.1 billion units in fiscal year 2004. ASPs historically decreased approximately 5% to 6% annually. During fiscal year 2005, ASPs decreased at a level approximating historical values.

Cost of goods sold:

Cost of goods sold for the fiscal year ended March 31, 2005, was $403.0 million as compared to $414.0 million for the fiscal year ended March 31, 2004, a 2.7% decrease. The decrease in cost of goods sold occurred even though there was an increase in unit volumes, which increased 24.0% in fiscal year 2005 versus fiscal year 2004. The Company believes many of the actions it initiated or carried out during fiscal years 2005, 2004, and 2003 (see Fiscal Year 2005 Special Charges, Fiscal Year 2004 Special Charges, and Fiscal Year 2003 Special Charges) resulted in lower costs and more efficient operations and accounted for the relatively low percentage decrease in cost of goods sold versus the higher increase in volumes. In addition, manufacturing throughput increased in fiscal year 2005 as higher volumes resulted in the absorption of fixed costs over more units versus fiscal year 2004.

Research and development:

Research and development expenses were $26.6 million for fiscal year 2005, compared to $24.4 million for fiscal year 2004. These costs reflect the Company’s continuing commitment to the development and introduction of new products, such as 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. While these advancements extend our leading position in certain capacitor technology, the new products did not have a material impact on our revenues or cost of goods sold in either fiscal year 2005 or 2004.

24




Special charges:

Special charges for the fiscal year ended March 31, 2005, were $122.9 million as compared to $108.9 million for the prior fiscal year. The following table reflects the charges in both fiscal years (in millions):

 

 

Fiscal Years Ended March 31,

 

 

 

   2005   

 

   2004   

 

   Change   

 

Manufacturing relocation

 

$

7.8

 

$

5.5

 

 

$

2.3

 

 

Reduction in workforce

 

11.5

 

18.7

 

 

(7.2

)

 

Equipment write-offs

 

8.5

 

 

 

8.5

 

 

Lamina investment write-off

 

2.4

 

 

 

2.4

 

 

Long-term asset impairment

 

100.2

 

16.3

 

 

83.9

 

 

Previous restructuring adjustments

 

(0.4

)

 

 

(0.4

)

 

Restructuring and impairment charges

 

$

130.0

 

$

40.5

 

 

$

89.5

 

 

Pension plan settlement charges

 

$

0.6

 

$

50.4

 

 

$

(49.8

)

 

Gain/(loss) on long-term supply contract

 

(11.8

)

12.4

 

 

(24.2

)

 

Cost of goods sold charges, primarily inventory charges

 

 

5.6

 

 

(5.6

)

 

Accelerated depreciation

 

4.1

 

 

 

4.1

 

 

Total special charges

 

$

122.9

 

$

108.9

 

 

$

14.0

 

 

 

The charges are explained in detail by quarter for both fiscal year 2005 and 2004 later in this section.

Operating loss:

The operating loss for the fiscal year ended March 31, 2005, was $174.8 million compared to $159.0 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 and increased special charges, offset by cost reductions in cost of goods sold.

Other income:

Other income increased in fiscal year 2005 compared to fiscal year 2004 partially as the result of more interest income during fiscal year 2005. Upon the death of a former executive officer of the Company during fiscal year 2005, the Company received $5.3 million in proceeds from an insurance policy on which KEMET was the beneficiary, of which $5.0 million was included in Other income in fiscal year 2005.

Income taxes:

The effective tax rate for fiscal year 2005 was (1.1%), resulting in tax expense of $1.9 million. This compares to an effective tax rate of 29.3% for fiscal year 2004 that resulted in a tax benefit of $46.4 million. Even though the Company had a worldwide loss for fiscal year 2005, income tax expense is still being incurred in various foreign jurisdictions. No tax benefit is recognized for the domestic tax loss for fiscal year 2005 due to the establishment of a valuation allowance during fiscal year 2004. Future fluctuations in the valuation allowance are expected to result in a tax rate below the 30% to 36% historical average.

25




Fiscal Year 2005 Special Charges

A summary of the special charges incurred in fiscal year 2005 is as follows (in millions):

 

 

Quarter Ended

 

 

 

30-Jun

 

30-Sep

 

 31-Dec 

 

31-Mar

 

Total

 

Manufacturing relocation costs

 

 

$

2.6

 

 

$

1.7

 

 

$

1.6

 

 

$

1.9

 

$

7.8

 

Reduction in workforce

 

 

 

 

 

 

5.8

 

 

5.7

 

11.5

 

Equipment write-offs

 

 

 

 

 

 

8.5

 

 

 

8.5

 

Lamina investment write-off

 

 

 

 

 

 

2.4

 

 

 

2.4

 

Long-term asset impairment

 

 

 

 

 

 

 

 

 

 

 

100.2

 

100.2

 

Previous restructuring adjustments

 

 

 

 

 

 

 

 

(0.4

)

(0.4

)

Restructuring and impairment charges(1)

 

 

$

2.6

 

 

$

1.7

 

 

$

18.3

 

 

$

107.4

 

$

130.0

 

Pension plan settlement charges(2)

 

 

$

 

 

$

0.2

 

 

$

 

 

$

0.4

 

$

0.6

 

Gain on long-term supply contract(2)

 

 

 

 

(11.1

)

 

 

 

(0.7

)

(11.8

)

Accelerated depreciation(3)

 

 

 

 

 

 

2.0

 

 

2.1

 

4.1

 

Total 2005 special charges

 

 

$

2.6

 

 

$

(9.2

)

 

$

20.3

 

 

$

109.2

 

$

122.9

 


(1)—Restructuring and impairment charges—These costs are included as a separate line item on the Consolidated Statements of Operations.

(2)—Pension plan settlement charges and Gain on long-term supply contract are both shown as separate items on the Consolidated Statements of Operations.

(3)—Accelerated depreciation is a component of cost of goods sold.

The Company reports a measure entitled Special Charges.   These charges are considered items outside of normal operations, and it is the intent of KEMET to provide more information to explain the operating results. Since some of the items are not considered restructuring charges as defined by U.S. generally accepted accounting principles, the Company has provided the breakout of U.S. generally accepted accounting principles restructuring and impairment charges and those other charges and adjustments separately.

Manufacturing relocation and employee termination costsDuring fiscal year 2005, the Company recognized $7.8 million in costs relating to the Plan (discussed below under Fiscal Year ended March 31, 2004). As of March 31, 2005, the Company had recorded cumulative charges of $32.0 million relating to the Plan. The balance of the $39 million is expected to be realized ratably over the next three quarters. The timing and amounts of the charges are dependent on the timing of operational decisions, some of which have not been finalized, and on operational activities yet to occur. The Company also announced additional restructuring programs in fiscal third quarter 2005 of $5.8 million and in fiscal fourth quarter 2005 of $5.3 million. These two restructuring charges reduced the Company’s workforce by approximately 1,120 employees. The Company also recognized a $0.4 million charge relating to the resignation of its former Chief Executive Officer.

Equipment write-offs and impaired assetsDuring the fiscal fourth quarter 2005, the Company assessed the current economic environment of the capacitor industry and estimated results for future periods. The Company assessed the net cash flows of certain asset groupings for a period of time in the future and compared the results with the net book value of its assets. Accordingly and in compliance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company recorded a fourth quarter non-cash charge of $100.2 million to account for this difference. In fiscal third quarter 2005, the Company also recorded a charge of $8.5 million relating to the write-off of equipment no longer used.

26




Write-down of investment in unconsolidated subsidiaryDuring the fiscal third quarter 2005, the Company wrote down an investment in an unconsolidated subsidiary (Lamina Ceramics, Inc.) due to the underlying value being less than our share of the book value resulting in a $2.4 million charge.

Previous restructuring adjustmentsDuring fiscal fourth quarter 2005, KEMET analyzed its previous restructuring accruals and determined that a portion of the previous restructurings would not be utilized. Accordingly, the Company reversed $0.4 million in accruals related to previous restructuring charges.

Pension plan settlement charges—In the fiscal second quarter 2005 and in the fiscal fourth quarter 2005, the Company recognized additional costs relating to the settlement of the Company’s pension plan. The Company does not anticipate any additional costs relating to the defined benefit plan in the future. As noted above, the item has been shown as a separate component on the Consolidated Statements of Operations and is further discussed in note 5.

Gain on long-term supply contractDuring the fiscal second quarter 2005 and fiscal fourth quarter 2005, the Company recognized a gain on a long-term supply contract. This gain was the result of contract modifications made. This gain offset prior losses taken in fiscal years 2004 and 2003 for the difference between the contractual price and the Company’s estimate of future prices through calendar year 2006. This item has been shown as a separate component on the Consolidated Statements of Operations and is discussed further in note 10.

Accelerated depreciationKEMET recognized accelerated depreciation of $4.1 million ($2 million in fiscal third quarter 2005 and $2.1 million in fiscal fourth quarter 2005, respectively) related to the anticipated shut-down of a manufacturing facility by mid calendar year 2005.

Fiscal Year 2004 Special Charges

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

 

 

Quarters Ended

 

 

 

30-Jun

 

 30-Sep 

 

 31-Dec 

 

 31-Mar 

 

Total

 

Manufacturing relocation

 

 

$

 

 

 

$

2.3

 

 

 

$

1.5

 

 

 

$

1.7

 

 

$

5.5

 

Reduction in workforce

 

 

0.3

 

 

 

8.4

 

 

 

8.9

 

 

 

1.1

 

 

18.7

 

Impaired long-lived assets

 

 

 

 

 

17.9

 

 

 

(1.6

)

 

 

 

 

16.3

 

Restructuring and impairment charges(1)

 

 

$

0.3

 

 

 

$

28.6

 

 

 

$

8.8

 

 

 

$

2.8

 

 

$

40.5

 

Pension plan settlement charges(2)

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

50.4

 

 

$

50.4

 

Loss on long-term supply contract(2)

 

 

 

 

 

12.4

 

 

 

 

 

 

 

 

12.4

 

Cost of goods sold, primarily inventory charges(3) 

 

 

 

 

 

5.6

 

 

 

 

 

 

 

 

5.6

 

Total 2004 special charges

 

 

$

0.3

 

 

 

$

46.6

 

 

 

$

8.8

 

 

 

$

53.2

 

 

$

108.9

 


(1)—Restructuring and impairment charges—These costs are included as a separate line item on the Consolidated Statements of Operations.

(2)—Pension plan settlement charges and Loss on long-term supply contract are both shown as separate items on the Consolidated Statements of Operations.

(3)—Item shown as a component of Cost of goods sold on the Consolidated Statements of Operations.

The Company reports a measure entitled Special Charges.   These charges are considered items outside of normal operations, and it is the intent of KEMET to provide more information to explain the operating results. Since some of the items are not considered restructuring charges as defined by U.S. generally accepted accounting principles, the Company has provided the breakout of U.S. generally

27




accepted accounting principles restructuring and impairment charges and those other charges and adjustments separately.

Impaired long-lived assets—In 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 product line. The Company recognized a $17.9 million non-cash charge in fiscal second quarter 2004 related to the impairment of equipment and facilities. In fiscal third quarter 2004 the Company recognized proceeds from equipment disposals relating to the reorganization of the solid aluminum product line generating $1.6 million more in cash than anticipated.

Reduction in workforce and Manufacturing relocation costs—The Plan included moving manufacturing operations to low-cost facilities in Mexico and China. Approximately $18.7 million and $5.5 million of reductions in workforce and manufacturing relocation costs, respectively, were incurred in fiscal year 2004.

Loss on long-term supply contract—During fiscal second quarter 2004, the Company recorded an additional loss of $12.4 million related to the tantalum supply agreement with Cabot Corporation that extends through calendar year 2006. (See Fiscal Year 2003 Special Charges for a further discussion on this subject).

Pension plan settlement charges—The Company froze the 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 non-recurring pension plan settlement charges during the fiscal fourth quarter 2004.

Cost of goods sold, primarily inventory charges—Inventory charges represent inventory obsoleted or scrapped associated with the aforementioned impairment of the solid aluminum capacitor product line. A charge of $5.6 million was recorded in fiscal second quarter 2004.

Comparison of Fiscal Year 2004 to Fiscal Year 2003

Net sales:

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 ASPs 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 decrease approximately 5% to 6% annually. During fiscal year 2003 and the first half of 2004, ASP decreases significantly exceeded their historical averages. During the last six months of fiscal year 2004, ASPs moderated or slightly increased.

Cost of goods sold:

Cost of goods sold for the fiscal year ended March 31, 2004 less $3.6 million resulting from acquisitions made during fiscal year 2004, was $410.4 million as compared to $392.1 million for the year ended March 31, 2003. This represents a 4.7% increase year over year. 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 and 2003 (see Fiscal Year 2004 Special Charges and Fiscal Year 2003 Special Charges) resulted in lower costs and more efficient operations and account for the relatively low percentage increase in cost of goods sold 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.

28




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 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 such as 67 tantalum parts announced in March 2004 along with the improvement of product performance and production efficiencies. None of these items, on a separate or aggregate basis, had a material impact to Net sales or Cost of goods sold during fiscal year 2004 or 2003.

Special charges:

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 each fiscal year (in millions):

 

 

Fiscal Year Ended March 31,

 

 

 

2004

 

2003

 

Change

 

Manufacturing relocation

 

$

5.5

 

$

 

$

5.5

 

Reduction in workforce

 

18.7

 

27.1

 

(8.4

)

Impaired long-lived assets

 

16.3

 

4.6

 

11.7

 

Restructuring and impairment charges

 

$

40.5

 

$

31.7

 

$

8.8

 

Pension settlement charges

 

$

50.4

 

$

 

$

50.4

 

Loss on long-term supply contract

 

12.4

 

40.8

 

(28.4

)

Cost of goods sold, primarily inventory charges

 

5.6

 

3.4

 

2.2

 

Total special charges

 

$

108.9

 

$

75.9

 

$

33.0

 

 

The Fiscal Year 2004 Special Charges are explained above. The Fiscal Year 2003 Special Charges are explained later in this section.

Operating loss:

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:

Other income decreased in fiscal year 2004 compared to fiscal year 2003 primarily as a 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.

Income taxes:

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 was principally due to the establishment of a valuation allowance in fiscal year 2004 related to net operating loss carryforwards. Future fluctuations in the valuation allowance are expected to result in a lower effective tax rate.

29




Fiscal Year 2003 Special Charges

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

 

 

Quarter Ended

 

 

 

 

 

30-Sep

 

31-Dec

 

31-Mar

 

Total

 

Reduction in workforce

 

 

$

9.1

 

 

 

$

 

 

 

$

18.0

 

 

 

$

27.1

 

 

 

Impaired long-lived assets

 

 

4.6

 

 

 

 

 

 

 

 

 

4.6

 

 

 

Restructuring and impairment charges(1)

 

 

$

13.7

 

 

 

$

 

 

 

$

18.0

 

 

 

$

31.7

 

 

 

Loss on long-term supply contract(2)

 

 

$

 

 

 

$

40.8

 

 

 

$

 

 

 

$

40.8

 

 

 

Cost of goods sold, primarily inventory charges(3)

 

 

 

 

 

1.8

 

 

 

1.6

 

 

 

3.4

 

 

 

Total 2003 special charges

 

 

$

13.7

 

 

 

$

42.6

 

 

 

$

19.6

 

 

 

$

75.9

 

 

 


(1)—Restructuring and impairment charges—These costs are included as a separate line item on the Consolidated Statements of Operations.

(2)—Loss on long-term supply contract are both shown as separate items on the Consolidated Statements of Operations.

(3)—Item shown as a component of cost of goods sold on the Consolidated Statements of Operations.

The Company reports a measure entitled Special Charges.   These charges are considered items outside of normal operations, and it is the intent of KEMET to provide more information to explain the operating results. Since some of the items are not considered restructuring charges as defined by U.S. generally accepted accounting principles, the Company has provided the breakout of U.S. generally accepted accounting principles restructuring and impairment charges and those other charges and adjustments separately.

Special charges represent the closing of one manufacturing facility in Greenwood, South Carolina, and one of three manufacturing facilities in Matamoros, Mexico, which was announced in July 2002. These actions were part of KEMET’s cost saving initiatives in response to the prolonged downturn in the electronics industry. A description of the charges expensed during fiscal year 2003 follows:

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

Employee termination costsThe Company made manufacturing and support personnel reductions of approximately 185 and 240 employees in the U.S. and Mexico, respectively during the fiscal second quarter 2003. In fiscal fourth quarter 2003, 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 workforce. 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.

Inventory and related supply agreement—In fiscal third quarter 2003, the Company announced that it agreed to an extension of the term of its tantalum supply agreement with Cabot Corporation (“Cabot”). 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 in fiscal third quarter 2003.

30




Cost of goods sold, primarily inventory chargesInventory charges consisted of the sale of excess palladium at a loss of $1.8 million during fiscal third quarter 2003. In the fiscal fourth quarter 2003, the Company terminated palladium forward contracts at a loss of $1.6 million.

Quarterly Results of Operations

The following table sets forth certain quarterly information for the fiscal years ended March 31, 2005 and 2004. 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, 2005

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Total

 

 

 

Dollars in thousands except per share data

 

Net sales

 

$

122,383

 

$

106,022

 

$

95,503

 

$

101,430

 

$

425,338

 

Operating income (loss)(1)

 

$

534

 

$

(7,178

)

$

(38,154

)

$

(130,044

)

$

(174,842

)

Net loss

 

$

(1,851

)

$

(7,465

)

$

(38,861

)

$

(125,917

)

$

(174,094

)

Net loss per share (basic)

 

$

(0.02

)

$

(0.09

)

$

(0.45

)

$

(1.45

)

$

(2.01

)

Net loss per share (diluted)

 

$

(0.02

)

$

(0.09

)

$

(0.45

)

$

(1.45

)

$

(2.01

)

Weighted-average shares outstanding (basic)

 

86,494,650

 

86,506,738

 

86,525,730

 

86,548,572

 

86,518,923

 

Weighted-average shares outstanding (diluted)

 

86,494,650

 

86,506,738

 

86,525,730

 

86,548,572

 

86,518,923

 

 

 

 

Fiscal year ended March 31, 2004

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

 

 

 

Quarter

 

Quarter

 

Quarter

 

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

 


(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.

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 Consolidated Balance Sheets. The Company intends to satisfy both its short-term and long-term liquidity requirements primarily with existing cash and cash equivalents and cash provided by operations.

31




The following table sets forth for the dates indicated the Company’s working capital:

 

 

March 31,

 

 

 

2005

 

2004

 

2003

 

Working capital

 

$

184,579

 

$

313,731

 

$

463,535

 

 

Fiscal Year 2005 vs. Fiscal Year 2004 Working Capital

The Company’s working capital decreased by approximately $129.2 million at the end of fiscal year 2005 compared to the end of fiscal year 2004. The cash and cash equivalents balance decreased to $26.9 million at March 31, 2005, from $183.5 million at March 31, 2004, or $156.6 million primarily as a result of the Company’s investment in long-term U.S. government securities.

Fiscal year 2005 most significant items:

Significant uses of cash during fiscal year 2005 included investments of $104.1 million in U.S. government securities with maturities greater than one year, $39.6 million used to fund capital expenditures, and a net $6.9 million to purchase/sell short-term investments.

Operations:

Cash used in operations was $12.8 million in fiscal year 2005. In fiscal year 2005, the $174.1 million net loss was primarily offset by $171.1 million in non-cash depreciation, amortization and impairment charges. Contributing to the cash used in operations were higher receivables ($0.7 million), higher inventories ($3.0 million), higher prepaid expenses and other current assets ($0.3 million), lower accrued expenses and income taxes payable ($10.0 million), and the non-cash gain on a long-term supply contract ($11.8 million). The Company expects the working capital items, listed above, to remain consistent in fiscal year 2006.

Investing:

As previously mentioned, the Company increased its investment in property and equipment by $13.8 million to $39.6 million in fiscal year 2005 compared to $25.8 million in fiscal year 2004. The capital expenditures in fiscal year 2005 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 calendar year 2005 and are targeted to be completed by December 2005. The Company estimates its capital expenditures for fiscal year 2006 to be approximately $20.0 million.

Since the end of fiscal year 2004, the Company has continued to add to its holdings of long-term U.S. government marketable securities. As of March 31, 2005, the Company had approximately $157.6 million invested in long-term U.S. government marketable securities versus a balance at March 31, 2004 of $84.6 million.

Fiscal Year 2004 vs. Fiscal Year 2003 Working Capital

The Company’s working capital decreased by approximately $149.8 million at the end of fiscal year 2004 compared to the end of 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.

Operations:

Cash provided by operations was $38.5 million in fiscal year 2004. The fiscal year 2004 $112.0 million net loss was offset by $89.4 million in non-cash depreciation, amortization and impairment charges and a $55.1 million decrease in inventories partially offset by working capital accounts such as accounts receivable,

32




accounts payable, and accrued expenses. The decrease in inventories was made to offset the fiscal year 2003 build-up of inventory as operations were relocated to foreign locations.

Investing:

The Company’s investment in property and equipment in fiscal year 2004 was $25.8 million, which was $3.6 million higher than fiscal year 2003’s capital expenditures of $22.2 million. Capital expenditures in fiscal year 2003 principally reflect completion of projects initiated during and prior to fiscal year 2002, a period in which demand was substantially higher. The capital expenditures in fiscal year 2004 represented the Company’s efforts to invest in operations relating to the aforementioned Plan of relocating facilities to low-cost geographies, and the Company’s commitment to improve product quality, expand into new products, and improve manufacturing efficiencies.

Other areas:

The Board of Directors had previously authorized programs to purchase up to 8.0 million shares of its common stock on the open market. Through March 31, 2005, the Company had made purchases of 2.1 million shares for $38.7 million, none of which was repurchased in fiscal year 2005. 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, 2005, the Company held approximately 1,460,455 treasury shares at a cost of $26.9 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, 2005, 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 an Offering Basis Loan Agreement (the “Loan Agreement”) with a bank. The Loan Agreement is an uncommitted credit facility which allows the Company to request borrowings 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 Item 3 and 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.

33




Long-term Supply Agreement

In fiscal third quarter 2003, 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 purchased approximately $17.7 million, $22.2 million, and $38.1 million of material from Cabot in the fiscal years ended March 31, 2005, 2004, and 2003, respectively. The additional commitment totals $23.4 million; $11.8 million for calendar year 2005 and $11.6 million for calendar year 2006. 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.

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 Company estimated that 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. In the fiscal year ended March 31, 2005, the Company renegotiated the tantalum supply agreement which resulted in a reduction of the future liability of KEMET. As a result of the renegotiations, the Company recorded a gain of $11.8 million in fiscal year 2005.

Commitments

As of March 31, 2005, 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), debt (see note 3 to the consolidated financial statements), and interest payments relating to the Senior Notes as follows:

Description

 

 

 

2006

 

2007

 

2008

 

2009

 

2010

 

Thereafter

 

Total

 

Operating leases

 

$

3,331

 

$

2,392

 

$

1,856

 

$

1,136

 

$

612

 

$

1,866

 

$

11,193

 

Tantalum supply agreement

 

14,600

 

8,800

 

 

 

 

 

23,400

 

Debt

 

 

20,000

 

20,000

 

20,000

 

20,000

 

20,000

 

100,000

 

Interest payments

 

6,660

 

5,994

 

4,662

 

3,330

 

1,998

 

666

 

23,310

 

Total

 

$

24,591

 

$

37,186

 

$

26,518

 

$

24,466

 

$

22,610

 

$

22,532

 

$

157,903

 

 

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, 2005 and 2004, the Company had outstanding forward exchange contracts that mature within approximately one year to purchase Mexican pesos with notional amounts of $60.9 million and $57.7 million, respectively. The fair values of the contracts at March 31, 2005 and 2004, resulted in $3.1 million and $0.3 million of derivative assets, respectively.

Acquisitions

In fiscal first quarter 2004, 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.

34




In fiscal second quarter 2004, the Company announced 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. As of March 31, 2005, the Company and Lamina Ceramics have no products under development and therefore, the Company has no liability relating to this business agreement. The Company wrote down its investment in Lamina Ceramics by $2.4 million in fiscal year 2005.

In fiscal third quarter 2004, 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.

Adoption of Accounting Standards

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equities” (“SFAS No. 150”). SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not significantly impact the Company’s consolidated financial statements.

In May 2004, the FASB issued FASB Staff Position (“FSP FAS”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) for employers that sponsor postretirement health care plans that provide prescription drug benefits. The Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as, a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP FAS 106-2 states that under the guidance provided by the Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, health care coverage provided by Medicare shall be taken into account in measuring the employer’s postretirement health care obligation and that currently enacted changes in relevant laws should be considered in current period measurements of net periodic postretirement benefit cost and the accumulated pension benefit obligation. FSP FAS 106-2 is effective in the first reporting period beginning after June 15, 2004. The adoption of FSP FAS 106-2 in the quarter ended September 30, 2004 did not impact the Company’s consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. This statement amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” and removes the “so abnormal” criterion that under certain circumstances could have led to the capitalization of these items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and re-handling costs be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as defined in ARB No. 43. SFAS No. 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for all fiscal years beginning after June 15, 2005 (fiscal year 2007). The Company is currently evaluating the impact that the adoption of SFAS No. 151 will have on its consolidated financial statements.

35




In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective beginning as of the first annual reporting period beginning after June 15, 2005 (fiscal year 2007). The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its consolidated financial statements. The cumulative effect of adoption, if any, will be measured and recognized in the consolidated statements of operations on the date of adoption.

In March 2005, the FASB issued FASB Interpretation No. 47. FASB Interpretation No. 47 clarifies the term “asset retirement obligation” as used in SFAS No. 143 “Accounting for Asset Retirement Obligations.” This guidance requires an entity to record a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Since this is an interpretation, the effective date is immediate. This interpretation does not have an impact on the consolidated financial statements of the Company.

In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-1. FSP No. 109-1 provides guidance on the application of SFAS No. 109 “Accounting for Income Taxes” as it relates to the provision within the American Jobs Creation Act of 2004 which allows a tax deduction on qualified production activities. The Company considered this FSP during our fiscal year-end preparation of the tax accrual and notes that it did not have a material impact on the consolidated financial statements.

In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-2. FSP No. 109-2 addresses the special one-time dividends received deduction on repatriation of certain foreign earnings to a U.S. taxpayer created by the American Jobs Creation Act of 2004. As of March 31, 2005, unremitted earnings of the subsidiaries outside the United States were deemed to be permanently invested. No current plans are expected for repatriation under the American Jobs Creation Act of 2004. No deferred tax liability was recognized with regard to such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.

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 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. 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

36




actual consolidated results for the fiscal first quarter 2006 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;

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 accounts receivable; the making or incurring of any expenditures and expenses, including, but not limited to, depreciation and research and development expenses; and the amount of and any changes to tax rates; or

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; lawsuits, 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 as noted in the following discussion in Commodity Price Risk.

37




ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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 in its Mexican operations are denominated in Mexican pesos, creating an exposure to foreign currency 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. At March 31, 2005, the Company had open foreign exchange contracts to purchase Mexican pesos with a notional amount of $60.9 million and a fair value of $3.1 million. The Company did not have any euro foreign exchange contracts outstanding at March 31, 2005. 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. Limited 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. As a result of the fluctuations in tantalum prices and the need to assure a supply of tantalum powder, the Company entered into a long-term supply agreement for tantalum powder at the then-prevailing market rate. 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. In addition, due to the renegotiation of a tantalum inventory purchase agreement, the Company recorded a gain on the purchase commitment of $11.8 million during fiscal year 2005. See Critical Accounting Policies and Long-Term Supply Agreement. Also, see notes 10 and 15 to the consolidated financial statements.

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.

38




ITEM 9A.        CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

(a).  The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005, which is the end of the period covered by this report.

(b).  During the fourth quarter of fiscal year 2005, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Internal Control Over Financial Reporting

Refer to “Report of Management” and “Report of Independent Registered Public Accounting Firm” on pages 48, 49, and 50 of KEMET’s Fiscal Year 2005 Form 10-K. There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal fourth quarter 2005 that has materially affected, or is reasonably likely to material affect, the Company’s internal control over financial reporting.

ITEM 9B.       OTHER INFORMATION

None.

39




PART III

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

 

 

 

 

 

Years with

 

Name

 

 

 

Age

 

Position

 

Company(1)

 

Per-Olof Loof(2)

 

54

 

Chief Executive Officer and Director

 

 

0

 

 

James P. McClintock

 

49

 

President and Chief Operating Officer

 

 

26

 

 

David E. Gable

 

45

 

Vice President and Chief Financial Officer

 

 

8

 

 

J. Kelly Vogt

 

43

 

Vice President, Sales and Marketing

 

 

22

 

 

Larry C. McAdams

 

53

 

Vice President, Human Resources

 

 

22

 

 

Daniel E. LaMorte

 

59

 

Vice President and Chief Information Officer

 

 

1

 

 

Dr. Philip M. Lessner

 

46

 

Vice President, Tantalum Technology & Technical Marketing

 

 

9

 

 

Guy T. Williams, Jr.

 

52

 

Vice President, Engineering and Facilities

 

 

26

 

 

James A. Bruorton III

 

56

 

Vice President, Global Distribution Sales

 

 

32

 

 

John E. Schneider

 

50

 

Vice President, Sales—Asia

 

 

21

 

 

John R. Warner III

 

45

 

Vice President, Strategy and Communications

 

 

5

 

 

Donald R. Aldworth

 

56

 

Vice President, Quality

 

 

20

 

 

Joseph S. Porter

 

48

 

Vice President, Sales—Americas

 

 

25

 

 

Michael W. Boone

 

54

 

Treasurer, Senior Director of Finance and Secretary

 

 

18

 

 

Frank G. Brandenberg

 

58

 

Chairman of the Board of Directors

 

 

0

 

 

Maureen E. Grzelakowski

 

51

 

Director

 

 

0

 

 

E. Erwin Maddrey, II

 

64

 

Director

 

 

0

 

 

David E. Maguire(3)

 

70

 

Former Chairman of the Board of Directors

 

 

44

 

 

Joseph D. Swann

 

63

 

Director

 

 

0

 

 

Charles E. Volpe

 

67

 

Director

 

 

30

 

 


(1)—Includes service with UCC.

(2)—Mr. Loof joined the Company on April 4, 2005.

(3)—Mr. Maguire retired as Chairman of the Company and as a Director on March 31, 2005.

Directors and Executive Officers

Per-Olof Loof, Chief Executive Officer and Director, was named such in April 2005. Mr. Loof was previously the Managing Partner of QuanStar Group LLC, a management consulting firm. Prior thereto, he served as Chief Executive Officer of Sensormatic Electronics Corporation and in various management roles with Andersen Consulting, Digital Equipment Corporation, AT&T and NCR. Mr. Loof serves as a board member of Global Options Inc., and Devcon International Corporation. He received a “civilekonom examen” degree in economics and business administration from the Stockholm School of Economics.

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 26 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

40




September 2003. Prior to joining KEMET, Mr. Gable held numerous financial positions with Michelin North America. He has also had previous experience in public accounting and is a Certified Public Accountant (“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 and Marketing, 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 was later appointed Vice President, Sales Worldwide in 2003. He assumed his current position in 2004. Mr. Vogt received his B.S. degree from Tusculum College.

Larry C. McAdams, Vice President, Human Resources, joined UCC/KEMET in 1983. He previously served as the site Human Resources Manager at the Columbus, GA; Shelby, NC; and Fountain Inn, SC, plants. Since 1991, he has been assigned to the corporate HR staff, where he was appointed a Director in 1999, Senior Director in 2002, and Vice President in 2003. Mr. McAdams received a B.A. in Political Science from Clemson University and attended the University of South Carolina School of Law.

Daniel E. LaMorte, Vice President and Chief Information Officer, joined KEMET as such in May 2004. Prior to joining KEMET, Mr. LaMorte held numerous Information Technology positions with Keycorp, Elf Acquitaine, Fisher Scientific and U.S. Steel Corp. Mr. LaMorte had previously served a Vice President of Worldwide Marketing and Sales for Chemcut, a manufacturer of capital equipment and chemicals in the electronics industry. Prior to Keycorp, Mr. LaMorte served as Chief Information Officer at Submit Order, an E-commerce start-up in Columbus, Ohio. Mr. LaMorte holds a B.S. degree from the University of Pittsburgh and an MBA from Fairleigh Dickinson University.

Frank G. Brandenberg, Chairman and 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.

Maureen E. Grzelakowski, Director, was named such in November 2004. Ms. Grzelakowski is a technology industry consultant and is a senior advisor to Investor Growth Capital. Ms. Grzelakowski previously held management positions with AT&T and Motorola, and was most recently the Senior Vice President responsible for Wireless Activity at Dell Computer Co. Ms. Grzelakowski serves as a board member of Vallent Corporation. She received a Masters of Science degree in Computer Science, a Masters of Business Administration degree and a Bachelor of Science degree in computer science/electrical engineering from Northwestern University.

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

David E. Maguire served as Chairman from August 1992 until his retirement in March 2005 and as Chief Executive Officer and Director from December 1990 until January 2002. Mr. Maguire also served as President from November 1997 until June 1999 and from December 1990 until October 1996. Previously, Mr. Maguire served as Chairman, President, and Chief Executive Officer of KEMET Electronics

41




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.

Joseph D. Swann, Director, was named such in October 2003. Mr. Swann is the President of Rockwell Automation Power Systems and a Senior Vice President of Rockwell Automation. Mr. Swann also serves on the board of directors for Velocys Corporation and Axiom Automotive Technologies. 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.

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.

Other Key Employees

Dr. Philip M. Lessner, Vice President, Tantalum Technology & Technical Marketing, was named such in August 2004. He joined KEMET in 1996 and previously served as Director of Technical Marketing Services and Director of Business Identification since May 2003. Dr. Lessner received a Ph.D. in Chemical Engineering with a focus in Electrochemical Engineering from the University of California, Berkeley and a Bachelor’s degree in Chemical Engineering from Cooper Union.

Guy T. Williams, Jr., Vice President, 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, Global Distribution Sales, was named such in 2005. 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; South Central District Sales Manager; Senior Director, Global Distribution Sales; and most recently Vice President, Global Channel 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.

John R. Warner III, 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 LLP, leaving as Senior Manager.

42




Mr. Warner received a Masters of Accountancy from the University of Georgia and B.S. in Accounting from Clemson University.

Donald R. Aldworth, Vice President, 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, Senior Director of Finance and Secretary, was named Senior Director of Finance in 2004, Secretary in April 2001, and Treasurer in August 2000. 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.

Audit Committee

KEMET has an Audit Committee made up of the following independent, non-management directors: E. Erwin Maddrey, II (Chairman of Audit Committee), Frank G. Brandenberg, and Maureen E. Grzelakowski. Mr. Maddrey is KEMET’s “Audit Committee Financial Expert;” however, Mr. Brandenberg and Ms. Grzelakowski both have prior financial statement experience. All three have served on audit committees with other companies. The Charter for KEMET’s Audit Committee (the “Charter”) can be found in the Company’s definitive proxy statement for its annual stockholders’ meeting to be held on July 20, 2005, which is incorporated herein by reference. The Charter can also be downloaded, free of charge, from KEMET’s website at http://www.kemet.com.

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 20, 2005. 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 20, 2005, 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 20, 2005.

43




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, 2005:

 

 

(a)

 

(b)

 

(c)

 

Plan category

 

 

 

Number of
securities to
be issued upon
exercise of
outstanding
options, warrants,
and rights

 

Weighted-average
exercise price
of outstanding
options, warrants,
and rights

 

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))

 

Equity compensation plans approved by stockholders

 

 

2,853,915

 

 

 

$

11.88

 

 

 

4,109,320

 

 

Equity compensation plans not
approved by stockholders

 

 

1,590,855

 

 

 

$

13.61

 

 

 

236,245

 

 

Total

 

 

4,444,770

 

 

 

$

12.50

 

 

 

4,345,565

 

 

 

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 20, 2005.

44




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 Registered Public Accounting Firm” in the Company definitive proxy statement for its annual stockholders’ meeting to be held on July 20, 2005.

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)           (1)   Financial Statements

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

Managements’ Assessment of Internal Control Over Financial Reporting

 

48

 

Report of Independent Registered Public Accounting Firm On Managements’ Assessment of Internal Control Over Financial Reporting

 

49

 

Report of Independent Registered Public Accounting Firm

 

51

 

Consolidated Financial Statements:

 

 

 

Consolidated Balance Sheets as of March 31, 2005 and 2004

 

52

 

Consolidated Statements of Operations for the years ended March 31, 2005, 2004, and 2003

 

53

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended March 31, 2005, 2004, and 2003

 

54

 

Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004, and 2003

 

55

 

Notes to Consolidated Financial Statements

 

56

 

 

(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.

(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, 1993 (incorporated by reference to Exhibit 10.3.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-61898]).

45




 

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).

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).

46




 

10.18

 

2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 [Reg. No. 333-123308]).

10.19

 

KEMET’s Code of Business Integrity and Ethics

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

 

47




Managements’ Assessment of Internal Control Over Financial Reporting

KEMET Corporation and Subsidiaries

MANAGEMENT RESPONSIBILITY FOR FINANCIAL INFORMATION

Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with KEMET’s management. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, applying certain estimates and judgments as required.

KEMET maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control environment is an ongoing internal audit program. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

To assure the effective administration of internal controls, we carefully select and train our employees, develop and disseminate written policies and procedures, provide appropriate communication channels, and foster an environment conducive to the effective functioning of controls. We believe that it is essential for the Company to conduct its business affairs in accordance with the highest ethical standards.

KPMG LLP, an independent registered public accounting firm, is retained to audit KEMET’s consolidated financial statements and management’s assessment of the effectiveness of the Company’s internal control over financial reporting.  Its accompanying report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The Audit Committee of the Board of Directors is composed solely of independent, non-management directors, and is responsible for recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to stockholder ratification. The Audit Committee meets periodically and privately with the independent registered public accounting firm, with the Company’s internal auditors, as well as with KEMET management, to review accounting, auditing, internal control structure and financial reporting matters.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2005. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

/s/ PER-OLOF LOOF

 

/s/ DAVID E. GABLE

 

Per-Olof Loof

David E. Gable

Chief Executive Officer

Chief Financial and Accounting Officer

 

48




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
KEMET Corporation:

We have audited managements’ assessment, included in the accompanying Managements’ Report on Internal Control Over Financial Reporting, that KEMET Corporation maintained effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). KEMET Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements’ assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements’ assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements’ assessment that KEMET Corporation maintained effective internal control over financial reporting as of March 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, KEMET Corporation maintained, in all material respects, effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

49




We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of KEMET Corporation and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statement of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2005 and our report dated June 14, 2005 expressed an unqualified opinion on those consolidated financial statements.

Greenville, South Carolina

/s/ KPMG LLP

 

June 14, 2005

KPMG LLP

 

50




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, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2005. 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, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of KEMET Corporation’s internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Greenville, South Carolina

/s/ KPMG LLP

 

June 14, 2005

KPMG LLP

 

51




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

 

 

March 31, 2005

 

March 31, 2004

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

26,898

 

 

 

$

183,528

 

 

Short-term investments

 

 

34,992

 

 

 

3,172

 

 

Accounts receivable, net

 

 

59,228

 

 

 

58,541

 

 

Inventories:

 

 

 

 

 

 

 

 

 

Raw materials and supplies

 

 

47,534

 

 

 

59,751

 

 

Work in process

 

 

41,862

 

 

 

41,250

 

 

Finished goods

 

 

44,539

 

 

 

28,015

 

 

Total inventories

 

 

133,935

 

 

 

129,016

 

 

Prepaid expenses and other current assets

 

 

9,571

 

 

 

6,979

 

 

Deferred income taxes

 

 

5,945

 

 

 

29,046

 

 

Total current assets

 

 

270,569

 

 

 

410,282

 

 

Property and equipment, net

 

 

279,626

 

 

 

421,835

 

 

Property held for sale

 

 

2,326

 

 

 

2,326

 

 

Investments in U.S. government marketable securities

 

 

157,576

 

 

 

84,584

 

 

Investments in affiliates

 

 

682

 

 

 

3,610

 

 

Goodwill

 

 

30,471

 

 

 

30,471

 

 

Intangible assets, net

 

 

13,512

 

 

 

14,617

 

 

Other assets

 

 

3,335

 

 

 

3,321

 

 

Total assets

 

 

$

758,097

 

 

 

$

971,046

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable, trade

 

 

$

38,943

 

 

 

$

38,268

 

 

Accrued expenses

 

 

34,617

 

 

 

42,420

 

 

Income taxes payable

 

 

12,430

 

 

 

15,863

 

 

Total current liabilities

 

 

85,990

 

 

 

96,551

 

 

Long-term debt

 

 

100,000

 

 

 

100,000

 

 

Postretirement benefits and other non-current obligations

 

 

48,951

 

 

 

61,623

 

 

Deferred income taxes

 

 

7,953

 

 

 

28,394

 

 

Total liabilities

 

 

242,894

 

 

 

286,568

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock, par value $0.01, authorized 300,000,000 shares issued 88,023,605 and 87,953,720 shares at March 31, 2005 and 2004, respectively

 

 

880

 

 

 

879

 

 

Additional paid-in capital

 

 

317,728

 

 

 

317,497

 

 

Retained earnings

 

 

220,846

 

 

 

394,940

 

 

Accumulated other comprehensive income/(loss)

 

 

2,669

 

 

 

(1,457

)

 

Treasury stock, at cost (1,460,455 and 1,485,455 shares at March 31, 2005 and 2004, respectively)

 

 

(26,920

)

 

 

(27,381

)

 

Total stockholders’ equity

 

 

515,203

 

 

 

684,478

 

 

Total liabilities and stockholders’ equity

 

 

$

758,097

 

 

 

$

971,046

 

 

 

See accompanying notes to the consolidated financial statements.

52




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

 

 

Fiscal years ended March 31,

 

 

 

2005

 

2004

 

2003

 

Net sales

 

$

425,338

 

$

433,882

 

$

447,332

 

Operating costs and expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

402,974

 

413,980

 

392,143

 

(Gain)/loss on long-term supply contract

 

(11,767

)

12,355

 

40,833

 

Selling, general and administrative expenses

 

51,734

 

51,246