UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the period ended December 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-20289
KEMET CORPORATION
Exact name of registrant as specified in its charter
DELAWARE 57-0923789
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or organization)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Common Stock Outstanding at: February 7, 2001
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Share Data)
December 31, March 31,
2000 2000
------------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 190,143 $ 75,735
Short-term investments 93,186 123,687
Accounts receivable (less allowances of $30,595 at
December 31, 2000, and $15,779 at March 31, 2000) 129,341 94,127
Inventories:
Raw materials and supplies 89,035 53,532
Work in process 74,617 58,220
Finished goods 32,209 19,207
---------- --------
Total inventories 195,861 130,959
Prepaid expenses and other current assets 48,107 4,688
Deferred income taxes 32,220 20,099
---------- --------
Total current assets 688,858 449,295
Property and equipment (less accumulated depreciation of
$302,970 at December 31, 2000, and $276,841 at March 31, 2000) 536,688 423,399
Intangible assets (less accumulated amortization of $20,706
at December 31, 2000, and $17,654 at March 31, 2000) 44,570 46,198
Other assets 8,044 8,364
---------- --------
Total assets $1,278,160 $927,256
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 170,078 $123,708
Accrued expenses 52,171 42,045
Income Taxes 41,047 23,388
---------- --------
Total current liabilities 263,296 189,141
Long-term debt 100,000 100,000
Other non-current obligations 54,749 54,757
Deferred income taxes 38,442 35,902
---------- --------
Total liabilities 456,487 379,800
Common stock put liability 17,312 -
Stockholders' equity:
Common stock - par value $.01, 300,000,000 shares authorized;
87,539,161 shares issued at December 31, 2000, and
87,025,908 shares issued at March 31, 2000 875 870
Additional paid-in capital 316,724 308,724
Retained earnings 511,745 237,846
Accumulated other comprehensive income 486 16
Treasury stock, at cost (600,000 shares at December 31, 2000) (25,469) -
---------- --------
Total stockholders' equity 804,361 547,456
---------- --------
Total liabilities and stockholders' equity $1,278,160 $927,256
========== ========
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See accompanying notes to consolidated financial statements.
Item 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollars in Thousands Except Per Share Data)
Three months ended Nine months ended
December 31, December 31,
---------------------- -----------------------
2000 1999 2000 1999
--------- --------- ----------- ---------
Net Sales $ 374,930 $ 215,139 $1,068,148 $ 563,976
Operating costs and expenses:
Cost of goods sold, exclusive of depreciation 180,919 149,638 526,929 409,016
Selling, general and administrative expenses 14,494 12,388 40,318 35,280
Research and development 7,188 6,234 18,978 15,811
Depreciation and amortization 16,460 14,419 48,005 41,280
--------- -------- --------- ---------
Total operating costs and expenses 219,061 182,679 634,230 501,387
Operating income 155,869 32,460 433,918 62,589
Other expense (income):
Interest income (4,809) - (11,803) -
Interest expense 1,971 2,295 5,673 7,538
Other 2,170 3,459 5,548 7,914
--------- --------- --------- ---------
Total other expense (income) (668) 5,754 (582) 15,452
Earnings before income taxes 156,537 26,706 434,500 47,137
Income tax expense 59,134 8,546 160,598 15,084
--------- --------- --------- ---------
Net earnings $ 97,403 $ 18,160 $ 273,902 $ 32,053
========= ========= ========= =========
PER SHARE DATA
Net earnings per share:
Basic $ 1.11 $ 0.23 $ 3.14 $ 0.41
Diluted $ 1.10 $ 0.22 $ 3.09 $ 0.40
Weighted average shares outstanding:
Basic 87,416,454 79,713,170 87,324,976 79,016,082
Diluted 88,678,409 81,199,048 88,782,412 80,706,986
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See accompanying notes to consolidated financial statements.
Item 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
Nine months ended
December 31,
----------------------
2000 1999
-------- --------
Sources (uses) of cash:
Net cash from operating activities $246,724 $ 93,615
Investing activities:
Purchase of short-term investments (202,354) -
Proceeds from maturity of short-term investments 232,854 -
Additions to property and equipment (163,253) (49,543)
Other 591 101
-------- --------
Net cash used by investing activities (132,162) (49,442)
Financing activities:
Proceeds from sale of common stock to Employees Savings Plan 836 590
Purchase of treasury stock (10,399) -
Proceeds from exercise of stock options including related tax benefit 6,817 12,698
Net repayments of revolving/swingline loan - (51,600)
Proceeds from put options 2,592 -
-------- --------
Net cash used by financing activities (154) (38,312)
-------- --------
Net increase in cash 114,408 5,861
Cash at beginning of period 75,735 3,914
-------- --------
Cash at end of period $190,143 $ 9,775
======== ========
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See accompanying notes to consolidated financial statements.
Note 1. Basis of Financial Statement Preparation
The consolidated financial statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and Subsidiaries (KEMET or the Company). In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company's fiscal year ending March 31, 2000, Form 10-K. Net sales and operating results for the nine months ended December 31, 2000, are not necessarily indicative of the results to be expected for the full year.
Note 2. Reconciliation of basic earnings per common share to diluted earnings
per common share.
In accordance with FASB Statement No. 128, the Company has included the following table presenting a reconciliation of basic EPS to diluted EPS fully displaying the effect of dilutive securities.
Computation of Basic and Diluted Earnings Per Share
(Dollars in Thousands Except Per Share Data)
For the three months ended December 31,
2000 1999
------------------------------- --------------------------------
Outstanding Outstanding
Earnings Shares EPS Earnings Shares EPS
-------- ----------- ------ -------- ----------- ------
Basic EPS $ 97,403 87,416,454 $ 1.11 $ 18,160 79,713,170 $ 0.23
Effect of dilutive securities:
Employee stock options - 1,104,271 (0.01) - 1,485,878 (0.01)
Put options - 157,684 - - - -
-------- ----------- ------ -------- ---------- ------
Diluted EPS $ 97,403 88,678,409 $ 1.10 $ 18,160 81,199,048 $ 0.22
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For the nine months ended December 31,
2000 1999
------------------------------- --------------------------------
Outstanding Outstanding
Earnings Shares EPS Earnings Shares EPS
-------- ----------- ------ --------- ----------- ------
Basic EPS $273,902 87,324,976 $ 3.14 $ 32,053 79,016,082 $ 0.41
Effect of dilutive securities:
Employee stock options - 1,408,208 (0.05) - 1,690,904 (0.01)
Put options - 49,228 - - 0 -
-------- ---------- ------ -------- ---------- ------
Diluted EPS $273,902 88,782,412 $ 3.09 $ 32,053 80,706,986 $ 0.40
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Note 3. Stockholders' Equity
In August 2000, the Company announced a stock repurchase program of up to 4.0 million shares of its common stock. During the quarter ended December 31, 2000, the Company repurchased 0.6 million shares of its common stock at prices ranging from $14.50 to $20.00 per share.
In connection with the stock repurchase program, and in addition to the purchases described above, the Company sold 800,000 put options during the quarter and had 1.0 million put options outstanding at December 31, 2000. The options expire at various dates through June 2001. At December 31, 2000, the $17.3 million aggregate exercise price of 800,000 put options was classified as Common Stock Put Liability, and the related offset was recorded in Treasury Stock, net of $2.2 million of premiums received.
Note 4. Adoption of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities"
Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. It requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. For derivatives designated as cash flow hedges, to the extent effective, changes in fair value are recognized in accumulated other comprehensive income (AOCI) until the hedged item is recognized in earnings. Ineffectiveness is recognized immediately in earnings. For derivatives designated as fair value hedges, changes in fair value are recognized in earnings.
The adoption of SFAS No. 133 did not result in a significant transition adjustment and is therefore not separately captioned in the statement of earnings as cumulative effect of a change in accounting principle. The transition adjustment as of October 1, 2000, was a gain of approximately $0.9 million net of tax, and is included in cost of goods sold for the period.
Foreign Currency Risk and Related Hedging Activities
Management of the Company monitors its risk associated with the volatility of certain foreign currencies against its functional currency, the U.S. dollar. Forecasted transactions denominated in foreign currencies, such as payroll and other operating costs of the Company's Mexican facilities, are hedged using derivative forward contracts. These contracts have been designated as cash flow hedges and are monitored for effectiveness on a monthly basis. At December 31, 2000, the maximum length of time over which the Company is hedging its foreign currency exposure is twelve months. Changes in the fair value of these contracts, to the extent effective as hedges, are recorded in AOCI. The Company had no impact on earnings resulting from ineffectiveness for the three months ended December 31, 2000. As contracts mature and the hedged forecasted transactions impact earnings, gains and losses are reclassified from AOCI into earnings as a component of cost of goods sold. During the three months ended December 31, 2000, gains of $175 thousand were recognized in cost of goods sold as contracts matured. As of December 31, 2000, net derivative gains of $445 thousand were included in AOCI, all of which are expected to be reclassified into earnings during the next twelve months.
Raw Material Purchase Contracts and Related Hedging Activities
In order to ensure an appropriate supply of certain metals used as raw materials in the manufacture of its products, including palladium and tantalum, the Company enters into purchase contracts with suppliers who also act as counterparties in contracts meeting the SFAS No. 133 definition of derivatives or embedded derivatives. The majority of these contracts qualify for the "normal purchases and normal sales" exclusion within SFAS No. 138, and are not required to be accounted for as derivatives.
However, certain of the contracts containing embedded derivatives with terms that are not clearly and closely related to the host contracts with suppliers are accounted for as derivatives and recorded on the balance sheet at fair value. Changes in the fair value of these contracts are recorded as a component of cost of goods sold. During the three months ended December 31, 2000, the Company recorded losses of $14.4 million and as of December 31, 2000, had a derivative liability of $12.9 million related to such contracts, all of which expire within six months.
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
Net Sales for the quarter and nine months ended December 31, 2000, increased 74% and 89%, respectively, to $374.9 million and $1,068.1 million as compared to the same periods last year. The increase in net sales was attributable to increased unit volume and average selling prices as overall demand for tantalum and ceramic capacitors exceeded industry capacity. Partial material cost pass- throughs for tantalum and palladium also contributed to the increase in revenues. Sales of surface-mount capacitors for the quarter and nine months ended December 31, 2000, were $341.3 million and $961.2 million, an increase of 82% and 99%, respectively, from the prior-year periods, as demand increased across all market segments. Domestic sales for the same periods increased 69% and 76% to $175.7 million and $504.6 million, respectively. Export sales, led by increased shipments in both Europe and Asia, increased 79% and 103% to $199.2 million and $563.5 million for the quarter and nine months ended December 31, 2000, respectively.
Cost of sales, exclusive of depreciation, for the quarter and nine months ended December 31, 2000, was $180.9 million and $526.9 million, respectively, as compared to $149.6 million and $409.0 million for the same periods last year. As a percentage of net sales, cost of sales, exclusive of depreciation, was 48% and 49% for the quarter and nine months ended December 31, 2000, respectively, as compared to 70% and 73% for the prior-year periods. The decrease in cost of sales as a percentage of sales is primarily the result of higher unit volume, increases in average selling prices, and improved manufacturing margins achieved through operating efficiencies and cost reduction programs.
Selling, general and administrative expenses for the quarter and nine months ended December 31, 2000, were $14.5 million, or 3.9% of sales, and $40.3 million, or 3.8% of sales, respectively, as compared to $12.4 million, or 5.7% of sales, and $35.3 million, or 6.2% of sales, for the prior-year periods. Selling, general and administrative expenses as a percent of sales decreased from the prior-year periods primarily due to increased sales and the Company's continued efforts to control overhead expenses.
Research and development expenses for the quarter and nine months ended December 31, 2000, were $7.2 million and $19.0 million, respectively, as compared to $6.2 million and $15.8 million for the prior comparable periods.
The Company's entrance into the solid aluminum organic capacitor business is an example of the Company's continued objective to invest in the development of new products and technologies. Shipments of this new aluminum product line are scheduled to begin in the fourth quarter of the current fiscal year.
Depreciation and amortization expense for the quarter and nine months ended December 31, 2000, were $16.5 million and $48.0 million, respectively, as compared to $14.4 million and $41.3 million for the prior comparable periods. This increase was primarily due to the increase in capital expenditures over the past fiscal year as the Company expanded its product line and continued to invest in additional capacity to support increased market demand.
Operating income for the quarter and nine months ended December 31, 2000, was $155.9 million and $433.9 million, respectively, compared to $32.5 million and $62.6 million for the comparable periods in the prior year. The increase in operating income resulted primarily from a combination of the aforementioned higher sales levels and improved manufacturing margins.
Interest income for the quarter and nine months ended December 31, 2000, was $4.8 million and $11.8 million, respectively, compared to $0 for the same periods last year. The increase in interest income is due to the investment of a portion of the proceeds of the Company's public offering of common stock completed in January 2000 and an increase in short-term investments as a result of the positive cash flow generated from operations in excess of capital investment spending.
Interest expense for the quarter and nine months ended December 31, 2000, was $2.0 million and $5.7 million, respectively, compared to $2.3 million and $7.5 million for the prior-year periods. The decrease in interest expense was due to a reduction in long-term debt as compared to the prior periods.
Income tax expense totaled $59.1 million and $160.6 million for the quarter and nine months ended December 31, 2000, compared to $8.5 million and $15.1 million for the comparable periods ended December 31, 1999. The increase in income taxes is the result of higher net earnings from increased sales and improved manufacturing margins.
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from working capital requirements, capital expenditures and interest payments on its indebtedness. The Company intends to satisfy its liquidity requirements primarily with funds provided by operations, short-term investments, borrowings under its revolving credit facility and amounts advanced under its foreign accounts receivable discounting arrangements.
Cash flows from operating activities for the nine months ended December 31, 2000, amounted to a surplus of $246.7 million, compared with a surplus of $93.6 million for the nine months ended December 31, 1999. The increase in cash flow was primarily a result of the growth in net income and the timing of cash flows from current assets and liabilities such as accounts receivable, inventories, accounts payable, accrued liabilities and income taxes payable.
Capital expenditures were $163.3 million for the nine months ended December 31, 2000, compared to $49.5 million for the nine months ended December 31, 1999. The Company continues to invest in capital to support its long-term growth objectives and to better meet customers' needs. The Company estimates its capital expenditures for fiscal year 2001 to be approximately $210.0 million.
During the nine months ended December 31, 2000, the Company's indebtedness (long-term debt and current portion of long-term debt) did not change. At December 31, 2000, the Company had unused availability under its revolving credit facility and swingline loan of approximately $150.0 million and $10.0 million, respectively.
KEMET believes its strong financial position will permit the financing of its business needs and opportunities in an orderly manner. It is anticipated that ongoing operations will be financed primarily by internally generated funds. In addition, the Company has the flexibility to meet short-term working capital and other temporary requirements through utilization of its borrowings under its bank credit facilities.
From time to time, information provided by the Company, including, but not
limited to, statements in this report or other statements made by or on behalf
of the company, may contain "forward-looking" information within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934. Such statements involve a number of risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. The cautionary statements set
forth in the Company's 2000 Annual Report 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.
Item 3. Market Risk
Market risk disclosure included in the Company's fiscal year ending March 31, 2000, Form 10-K, Part II, Item 7 A, is still applicable as of December 31, 2000, with the exception of the commodity price risk updated below and the updated disclosure concerning the Mexican peso forward foreign exchange contracts, which is included in Note 4 of this Form 10-Q.
Commodity Price Risk
The Company purchases various precious metals used in the manufacture of capacitors, primarily palladium and tantalum, and is therefore exposed to certain commodity price risks.
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. There has been a dramatic increase in the price of palladium attributed to delays from the Russian supply of the metal, which has caused the price to fluctuate between $433 and $972 per troy ounce over the past year. As a result, the Company is aggressively implementing alternatives, including base metals, to reduce palladium usage in ceramic capacitors and minimize the price risk.
Tantalum powder is a metal used in the manufacture of tantalum capacitors and is primarily purchased under annual contracts. Management believes the tantalum needed has generally been available in sufficient quantities to meet manufacturing requirements. However, the recent increase in demand for tantalum capacitors, along with the limited number of tantalum powder suppliers, has led to increases in tantalum prices and impacted availability. Tight supplies of tantalum raw material and some tantalum powders have led to price increases of as much as 60%. During the quarter ended December 31, 2000, the Company executed a memorandum of understanding with an Australian mining company to establish a 50/50 joint venture that would own and fund the development of the mining company's existing tantalum projects, and construct
and operate one or more processing plants in Australia. The joint venture provides the opportunity to participate in the establishment of a potential independent supply source of tantalum to meet the Company's increasing demand for the metal and is expected to close during the fourth fiscal quarter of this year. The Company continues to explore various alternative sources of supply to ensure a supply of tantalum at reasonable prices.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Other than as reported above and in the Company's fiscal year ending March 31,
2000, Form 10-K under the caption "Item 3. Legal Proceedings," the Company
is not currently a party to any material pending legal proceedings, other than
routine litigation incidental to the business of the Company.
Item 2. Change in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10. Amendment No. 1 to KEMET Corporation 1992 Key Employee
Stock Option Plan Article 7
(b) Reports on Form 8-K.
None
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 13, 2001
KEMET Corporation
/S/ D.R. Cash -------------------------- D.R. Cash Senior Vice President and Chief Financial Officer |
.1 Exhibit
Effective 10/23/00
Amendment No. 1 to KEMET Corporation
1992 Key Employee Stock Option Plan
1. Article 7 is hereby amended and restated in its entirety as follows:
ARTICLE 7
Shares Subject to the Plan
Except as provided in Sections 6.4 and 6.6 and Article 8,
an aggregate of 8,000,000 shares of Common Stock shall be subject
to this Plan. Except as provided in Sections 6.4 and 6.6 and Article
8, the Options shall be limited so that the sum of the following
shall not as of any given time exceed 8,000,000 shares: (i) all Shares
subject to Options outstanding under this Plan at the given time and
(ii) all Shares which shall have been sold by the Company by reason
of the exercise at or prior to the given time of any of the Options.
The Common Stock issued under the Plan may be either authorized and
unissued shares, shares reacquired and held in the treasury of the
Corporation, or both, all as from time to time determined by the
Board. In the event any Option shall expire or be terminated before
it is fully exercised, then all Shares formerly subject to such Option
as to which such Option was not exercised shall be available for any
Option subsequently granted in accordance with the provisions of this
Plan.
2. Except as so amended, the 1992 Key Employee Stock Plan will
continue in full force and effect.