Kemet 10Q 2006 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the period ended June 30, 2005.

o 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 jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681

(Address of principal executive offices, zip code)

(864) 963-6300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

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

Common Stock Outstanding at: June 30, 2005

Title of Each Class		Number of Shares Outstanding
Common Stock, $.01 Par Value		86,617,656

PART 1 - - FINANCIAL INFORMATION

ITEM 1 - Financial Statements

KEMET CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands except per share data)

(Unaudited)

	June 30, 2005			March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	36,502		$	26,898
Short-term investments	60,114			34,992
Accounts receivable, net	61,887			59,228
Inventories:
Raw materials and supplies	46,385			47,534
Work in process	38,357			41,862
Finished goods	40,985			44,539
Total inventories	125,727			133,935
Prepaid expenses and other current assets	10,455			9,571
Deferred income taxes	5,704			5,945
Total current assets	300,389			270,569
Property and equipment, net of accumulated depreciation of $576.3 million and $577.7 million as of June 30, 2005 and March 31, 2005, respectively	278,406			279,626
Property held for sale	2,326			2,326
Investments in U.S. government marketable securities	122,010			157,576
Investments in affiliates	371			682
Goodwill	30,471			30,471
Intangible assets, net	13,261			13,512
Other assets	3,343			3,335
Total assets	$	750,577		$	758,097

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	20,000		$	—
Accounts payable, trade	33,395			38,943
Accrued expenses	30,071			34,617
Income taxes payable	10,300			12,430
Total current liabilities	93,766			85,990
Long-term debt	80,000			100,000
Postretirement benefits and other non-current obligations	48,276			48,951
Deferred income taxes	7,592			7,953
Total liabilities	229,634			242,894

Stockholders’ equity:
Common stock, par value $0.01, authorized 300,000,000 shares issued 88,072,391 and 88,023,605 shares at June 30, 2005 and March 31, 2005, respectively	881			880
Additional paid-in capital	318,015			317,728
Retained earnings	223,881			220,846
Accumulated other comprehensive income	4,981			2,669
Treasury stock, at cost (1,454,735 and 1,460,455 shares at June 30, 2005 and March 31, 2005, respectively)	(26,815		)	(26,920		)
Total stockholders’ equity	520,943			515,203

Total liabilities and stockholders’ equity	$	750,577		$	758,097

See accompanying notes to consolidated financial statements.

KEMET CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollars in thousands except per share data)

(Unaudited)

	Three months ending June 30,
	2005			2004
Net sales	$	114,104		$	122,383

Operating costs and expenses:
Cost of goods sold	94,990			100,124
Selling, general and administrative	12,226			12,878
Research and development	6,217			6,297
Restructuring charges	8,173			2,550
Total operating costs and expenses	121,606			121,849

Operating income/(loss)	(7,502		)	534

Other (income) and expense:
Interest expense	1,668			1,623
Interest income	(1,325		)	(1,910		)
Other expense	1,064			2,285
Total other expense	1,407			1,998

Loss before income taxes	(8,909		)	(1,464		)

Income tax expense/(benefit)	(11,944		)	387

Net income/(loss)	$	3,035		$	(1,851	)

Net income/(loss) per share:
Basic	$	0.04		$	(0.02	)
Diluted	$	0.04		$	(0.02	)

Weighted-average shares outstanding:
Basic	86,612,454			86,494,650
Diluted	86,660,437			86,494,650

See accompanying notes to consolidated financial statements.

KEMET CORPORATION AND SUBSIDIARIES

Consolidated Statement of Cash Flows

(Dollars in thousands except per share data)

(Unaudited)

	Three months ended June 30,
	2005			2004
Operating activities:
Net income/(loss)	$	3,035		$	(1,851	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization	11,935			17,443
Change in operating assets	3,464			(6,189		)
Change in operating liabilities	(12,836		)	(18,737		)
Tax benefit on stock options exercised	—			69
Net cash provided by/(used in) operating activities	5,598			(9,265		)

Investing activities:
Purchases of short-term investments	—			(20,049		)
Proceeds from maturity of short-term investments	10,000			91
Additions to property and equipment	(6,424		)	(9,435		)
Purchases of U.S. government marketable securities	—			(104,071		)
Other	38			132
Net cash provided by/(used in) investing activities	3,614			(133,332		)

Financing activities:
Proceeds from sale of common stock to Employee Savings Plan	366			366
Proceeds from exercise of stock options	26			30
Net cash provided by financing activities	392			396

Net increase/(decrease) in cash and cash equivalents	9,604			(142,201		)

Cash and cash equivalents at beginning of period	26,898			183,528

Cash and cash equivalents at end of period	$	36,502		$	41,327

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 its 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 U.S. 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, 2005, Form 10-K. Net sales and operating results for the three-month period ended June 30, 2005, are not necessarily indicative of the results to be expected for the full year.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.

Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2005), “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. 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 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 rehandling 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 allcoation 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. The Company is currently evaluating the impact that the adoption of SFAS No. 151 will have on its consolidated financial statements.

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. This interpretation is effective no later than the end of the fiscal year ending after December 15, 2005, and is not expected to have an impact on the consolidated financial statements of the Company.

Stock-based Compensation

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations in accounting for stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has elected the “disclosure only” provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which provide pro forma disclosure of earnings as if stock compensation were recognized on the fair-value basis.

Had compensation costs for the Company’s three stock option plans been determined based on the fair value at the grant date for awards, consistent with the provisions of SFAS No. 123, the Company’s net income/(loss) and income/(loss) per share would have been different from the pro forma amounts indicated below (dollars in thousands except per share data):

		Three Months Ended June 30,
		2005				2004
Net income/(loss)
As reported		$	3,035			$		(1,851	)
Less stock-based compensation expense determined under fair- value-based methods, net of related tax effects		(1,471			)	(1,263			)
Pro forma net income/(loss)		$		1,564		$	(3,114		)
Income/(loss) per share:
Basic	As reported	$		0.04		$	(0.02		)
	Pro forma	$		0.02		$	(0.04		)

Diluted	As reported	$		0.04		$	(0.02		)
	Pro forma	$		0.02		$	(0.04		)

The pro forma amounts indicated above recognize compensation expense on a straight-line basis over the vesting period of the grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for option grants issued during the three month period ended June 30, 2005: expected life of 5 years; a risk-free interest rate of 3.63%; expected volatility of 49.1%; dividend yield of 0.0%; and fair value of $3.21. The weighted-average assumptions for option grants issued during the three month period ended June 30, 2004 include expected life of 5 years; a risk-free interest rate of 0.91%; expected volatility of 54.5%; dividend yield of 0.0%; and fair value of $7.02.

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.

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 management. The distributors also have the right to return to KEMET a certain portion of the purchased inventory, which will not exceed 5% of their 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 actual inventory levels of certain distributor customers. The actual inventory levels at these distributors comprise 91% - 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 estimate 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 Consolidated Balance Sheets.

The Company provides a limited warranty to its customers that the products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1% for the years ending March 31, 2005, 2004, 2003, and for the three months ending June 30, 2005 and 2004. The Company recognizes warranty costs when identified.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, assumptions, and judgments. Estimates and assumptions are based on historical data and other assumptions that management 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 Company’s judgments are based on management’s assessment as to the effect certain estimates , assumptions, or future trends or events may have on the financial condition and results of operations reported in KEMET’s unaudited consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.

Note 2. Reconciliation of basic income/(loss) per common share

In accordance with FASB Statement No. 128, “Earnings per Share”, 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 Income/(Loss) Per Share

(Dollars in thousands expect per share data)

	For the three months ended June 30,
	2005					2004
	Income		Shares	Per Share		Loss			Shares	Per Share
	(numerator)		(denominator)	Amount		(numerator)			(denominator)	Amount
Basic EPS	$	3,035	86,612,454	$	0.04	$	(1,851	)	86,494,650	$	(0.02	)

Effect of dilutive securities:
Stock options	—		47,983	—		—			—	—
Diluted EPS	$	3,035	86,660,437	$	0.04	$	(1,851	)	86,494,650	$	(0.02	)

The three months ended June 30, 2005, excluded potentially dilutive securities of approximately 4,716,000 and the three months ended June 30, 2004, excluded potentially dilutive securities of approximately 4,304,000, in the computations of diluted income/(loss) per share because the effect would have been anti-dilutive.

Note 3. Derivatives and Hedging

The Company uses certain derivative financial instruments to reduce exposures to volatility of foreign currencies and commodities impacting the costs of its products.

Hedging Foreign Currencies

Certain operating expenses at the Company’s Mexican facilities are paid in Mexican pesos. In order to hedge these forecasted cash flows, management purchases forward contracts to buy Mexican pesos for periods and amounts consistent with the related underlying cash flow exposures. These contracts are designated as hedges at inception and monitored for effectiveness on a routine basis. At June 30, 2005 and March 31, 2005, the Company had outstanding forward exchange contracts that mature within approximately nine months and twelve months, respectively, to purchase Mexican pesos with notional amounts of $46.8 million and $60.9 million, respectively. The fair values of these contracts totaled $4.9 million and $3.1 million at June 30, 2005 and March 31, 2005, respectively, and are recorded as a derivative asset on the Company’s Consolidated Balance Sheets under Prepaid expenses and other current assets. During the next twelve months, it is estimated that approximately $4.9 million of the gain on these contracts will be recorded to cost of goods sold. The impact of the changes in fair values of these contracts resulted in accumulated other comprehensive income/(loss) (“AOCI/(L)”), net of taxes, of $1.8 million and $(0.5) million for the three-month periods ended June 30, 2005 and 2004, respectively.

Certain sales are made in euros. In order to hedge these forecasted cash flows, management purchases forward contracts to sell euros for periods and amounts consistent with the related underlying cash flow exposures. These contracts are designated as hedges at inception and monitored for effectiveness on a routine basis. At June 30, 2005 and March 31, 2005, the Company had no outstanding euro forward exchange contracts. The changes in fair value of these contracts resulted in accumulated other comprehensive income, net of taxes, of $0.3 million in the quarter ended June 30, 2004.

Changes in the derivatives’ fair values are deferred and recorded as a component of AOCI/(L) until the underlying transaction is recorded. When the hedged item affects income, gains or losses are reclassified from AOCI/(L) to the Consolidated Statements of Operations as Cost of goods sold for forward contracts to purchase Mexican pesos and as Net sales for forward contracts to sell euros. Any ineffectiveness, if material, in the Company’s hedging relationships is recognized immediately as a loss.

The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.

Interest Rate Swaps

In August 2003, the Company entered into an interest rate swap contract (the “Swap”) which effectively converted its $100 million aggregate principal amount of 6.66% senior notes to floating rate debt adjusted semi-annually based on six-month LIBOR plus 3.35%. In October 2004, this contract was terminated for a $0.1 million gain and was recognized in other income for the fiscal year ended March 31, 2005. The fair value of the Swap, based upon market estimates provided by the counterparties, was approximately $0.7 million at June 30, 2004, and was recorded as a derivative liability on the Company’s Consolidated Balance Sheets under Prepaid expenses and other current assets. The change in fair value of this derivative instrument resulted in other expense of $2.3 million for the three months ended June 30, 2004.

Note 4. Restructuring and Impairment Charges

On July 2, 2003, KEMET announced the Enhanced Strategic Plan (the “Plan”) which consisted of reorganizing its operations around the world, resulting in the location of virtually all of its production in low cost regions to be completed in mid fiscal year 2006. This relocation allows KEMET access to key customers, access to key technical resources and knowledge, and access to available low-cost resources. KEMET estimates it will incur special charges of approximately $39 million over the period of the reorganization related to the movement of manufacturing operations to low-cost facilities in Mexico and China. As of June 30, 2005, cumulative restructuring costs incurred totaled approximately $34.5 million. Costs related to this movement of manufacturing operations are shown as manufacturing relocation costs in the chart below. The Company also announced an additional reduction in workforce during June 2005 which impacted personnel in the United States, Mexico and Europe. Finally, the Company recorded a charge for the termination of a contract relating to a facility to be shutdown.

A reconciliation of the beginning and ending liability balances for restructuring charges included in the liabilities section of the Consolidated Balance Sheets for the periods ended June 30, 2005 and 2004 is shown below (dollars in thousands):

	Three Months Ended June 30, 2005								Three Months Ended June 30, 2004
	Personnel Reductions			Manufacturing Relocations			Termination of a Contract		Personnel Reductions			Manufacturing Relocations
Beginning of period	$	6,794		$	—		$	—	$	7,177		$	—
Costs charged to expense	4,851			2,483			839		—			2,550
Costs paid or settled	(5,132		)	(2,483		)	—		(600		)	(2,550		)
End of period	$	6,513		$	—		$	839	$	6,577		$	—

Manufacturing relocation costs are expensed as actually incurred, therefore no liability is recorded in the Consolidated Balance Sheets for these costs. Costs charged to expense are aggregated in the Consolidated Statements of Operations line, Restructuring charges.

Personnel reductions – During June 2005, the Company announced a reduction in force effecting 138 people in the U.S., Mexico and Europe. Accordingly, the Company recognized a charge of $5.2 million. In addition, the Company reversed $0.3 million related to unused restructuring accruals during the first fiscal quarter ending June 30, 2005.

Manufacturing relocations – During the first fiscal quarters ending June 30, 2005 and 2004, the Company incurred expenses of $2.5 million and $2.6 million, respectively. These costs are related to the Plan. All costs are expensed as incurred.

Termination of a contract – The Company recognized a charge for the early termination of a contract during the first fiscal quarter 2006 related to a future plant closure.

Note 5. Other Postretirement Benefit Plans

The Company provides health care and life insurance benefits for certain retired employees who reach retirement age while working for the Company. The components of the expense for postretirement medical and life insurance benefits are as follows (dollars in thousands):

	Three months ended June 30,
	2005			2004

Service cost	$	152		$		310
Interest cost	460			842
Amortization of actuarial loss	(404		)	134
Total net periodic benefits costs	$	208		$	1,286

The Company expects to make no contributions to fund plan assets in fiscal year 2006 as the Company’s policy is to pay benefits as costs are incurred. The Company estimates its benefits payments in fiscal year 2006 will be approximately $2.1 million. Management is responsible for determining the cost of benefits for this plan. Management considered a number of factors, and consulted with an actuarial firm, when determining this cost.

Note 6. Investments

Investments consist of debt securities as well as equity securities of public and privately-held companies. The debt securities, which consist of U.S. government marketable securities, are classified as held-to-maturity securities, mature in one-month to five years, and are carried at amortized cost. The effect of amortizing these securities is recorded as interest income.

The Company’s equity investments in public companies are classified as available-for-sale securities and are carried at fair value with adjustments recorded net of tax in stockholders’ equity. The available-for-sale securities are intended to be held for an indefinite period but may be sold in response to unexpected future events. The Company has an equity investment with less than 20% ownership interest in a privately-held company. The Company does not have the ability to exercise significant influence and the investment is accounted for under the cost method.

On a periodic basis, the Company reviews the market values of its equity investment classified as available-for-sale securities and the carrying value of its equity investment carried at cost for the purpose of identifying “other-than-temporary” declines in market value and carrying value, respectively, as defined in EITF 03-1. In June 2005, the Company reassessed its available-for-sale investment and determined that its value had declined on an “other than temporary” basis. Accordingly, the Company recorded an after-tax adjustment of $0.6 million. This adjustment has been included as Other expense on the Consolidated Statement of Operations for the three month period ending June 30, 2005. The Company will continue to monitor the available-to-sale equity investment for potential future impairments.

A summary of the components and carrying values of investments on the Consolidated Balance Sheets is as follows (dollars in thousands):

	June 30, 2005		March 31, 2005
Short-term investments	$	60,114	$	34,992
Equity investments:
Available-for-sale	252		563
Cost	119		119
U.S. government marketable securities	122,010		157,576
	$	182,495	$	193,250

Short-term investments consist primarily of U.S. government securities. Recorded value approximates fair value at June 30, 2005 and March 31, 2005.

Note 7. Supply Contracts

The Company has renegotiated the tantalum supply agreement with Cabot Corporation that extends through calendar year 2006. A reconciliation of the beginning and ending balance included in the liabilities section of the Consolidated Balance Sheets is as follows (dollars in thousands):

	Inventory Supply Agreement
	Three months ended June 30, 2005			Twelve months ended March 31, 2005
Beginning of period	$	5,483		$	24,275
Liability reduction	—			(11,767		)
Costs paid or settled	(1,320		)	(7,025		)
End of period	$	4,163		$	5,483

During fiscal year 2005, the Company decreased its liability and recognized a gain of $11.8 million based on an amendment to the Cabot Corporation tantalum supply agreement. As of June 30, 2005, the remaining purchase commitments for this contract are $6.1 million for calendar year 2005 and $11.6 million for calendar year 2006.

Note 8. Accumulated Other Comprehensive Income/(Loss)

Comprehensive income/(loss) for the three months ended June 30, 2005 and 2004 include the following components (dollars in thousands):

	Three Months Ended
	2005		2004
Net income/(loss)	$	3,035	$	(1,851	)
Other comprehensive income/(loss), net of tax:
Currency forward contract gains/(losses)	1,820		(167		)
Unrealized securities gains/(losses)	477		(76		)
Currency translation gain	15		114
Total other comprehensive income/(loss)	$	5,347	$	(1,980	)

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

	June 30, 2005		March 31, 2005
Currency forward contract gains, net of tax	$	4,838	$	3,018
Unrealized securities losses, net of tax	—		(477		)
Currency translation gains	143		128
Total accumulated other comprehensive income	$	4,981	$	2,669

Note 9. Goodwill and Intangible Assets

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS No. 141), and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment. In addition, any unamortized negative goodwill must be written off at the date of adoption. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and was adopted by the Company effective April 1, 2002.

In connection with the adoption of SFAS No. 142, the Company completed impairment tests of its goodwill and other identifiable intangible assets including indefinite-lived trademarks. No impairment of goodwill or intangible assets was noted.

For purposes of determining the fair value of its trademarks, the Company utilizes a discounted cash flow model which considers the costs of royalties in the absence of trademarks owned by the Company. Based upon the Company’s analysis of legal, regulatory, contractual, competitive and economic factors, the Company deemed that trademarks, which consist of the KEMET trade name and logo, have an indefinite useful life because they are expected to contribute to cash flows indefinitely.

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.

KEMET performs its impairment test during the first quarter of each fiscal year and when otherwise warranted. KEMET performed this impairment test in the quarters ended June 30, 2005 and 2004 and concluded no goodwill impairment existed.

The following chart highlights the Company’s goodwill and intangible assets (dollars in thousands):

	June 30, 2005				March 31, 2005
	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Unamortized Intangibles:
Goodwill	$	30,471	$	—	$	30,471	$	—
Trademarks	7,181		—		7,181		—
Unamortized intangibles	37,652		—		37,652		—
Amortized Intangibles:
Patents and technology – 5-25 Years	14,655		8,775		14,655		8,549
Other – 8-10 Years	914		714		914		689
Amortized intangibles	15,569		9,489		15,569		9,238
Total goodwill and intangibles	$	53,221	$	9,489	$	53,221	$	9,238

The expected amortization expense for the fiscal years ending March 31, 2006, 2007, 2008, 2009, and 2010 is $1,005, $974, $943, $588, and $475 respectively.

Note 10. Income Taxes

During the quarter ending June 30, 2005, the Internal Revenue Service finalized the examination related to fiscal years 1997 through 2003. This finalization resulted in the receipt of $9.8 million during the June 2005 quarter, and the resultant release of $12.1 million tax benefit not previously recognized.

Note 11. Segment Information

Under SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”, the Company has only one reporting segment, which is passive components. These passive components consists primarily of two product lines based on method of attachment: surface mount and leaded. Net sales by product line are presented below (dollars in thousands):

	Three months ended June 30,
	2005		2004
Surface mount	$	93,934	$	98,399
Leaded	20,170		23,984
Net sales	$	114,104	$	122,383

Note 12. Concentrations of Risks

Sales and Credit Risk

The Company sells to customers located throughout the United States and the world. Credit evaluations of its customers’ financial conditions are performed periodically, and the Company generally does not require collateral from its customers.

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. For the three months ended June 30, 2005 and 2004, sales to electronics distributors accounted for approximately 56% of the Company’s net sales. As a result of the Company’s concentration of sales to electronics distributors the Company may experience fluctuations in its operating results as electronics distributors experience fluctuations in end-market demand or adjust their inventory stocking levels.

At June 30, 2005 and March 31, 2005, no customer accounted for more than 10% of the Company’s accounts receivable balance.

Employees

As of June 30, 2005, KEMET had approximately 8,400 employees, of whom approximately 1,100 were located in the United States, approximately 6,500 were located in Mexico, approximately 600 were located in China, and the remainder were primarily located in the Company’s non-U.S. 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. The Company has approximately 4,600 hourly employees in Mexico represented by labor unions. The Company has not experienced any major work stoppages and considers its relations with its employees to be good.

Note 13. Property Held for Sale

As a result of moving manufacturing operations from the U.S. to low-cost facilities in Mexico and China, one of the manufacturing facilities located in the U.S. is no longer in use and is held for sale according to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The carrying value of this facility at June 30, 2005 is $2.3 million and is separately presented in the Property held for sale line on the Consolidated Balance Sheets. For the three months ended June 30, 2005, no gains or losses were recognized on this facility as the fair value is believed to approximate carrying value based on an external appraisal. On a quarterly basis, management has reviewed this valuation for indications of impairment.

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

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 2005 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.

ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of financial condition and results of operations are based on the Company’s unaudited consolidated financial statements included herein. The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in KEMET’s annual report on Form 10-K for the year ended March 31, 2005. The Company’s critical accounting policies are described under the caption “Critical Accounting Policies” in Item 7 of KEMET’s annual report on Form 10-K for the year ended March 31, 2005.

The C ompany’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in KEMET’s unaudited consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.

Overview

KEMET is a leading manufacturer of tantalum, multilayer ceramic, 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 sales force, as well as a limited number of manufacturing representatives, that call on customer locations around the world.

The Company manufactures capacitors in the United States, Mexico, and China. Substantially all of the 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.

Enhanced Strategic Plan

On July 2, 2003, KEMET announced its Enhanced Strategic Plan (the “Plan”) to enhance the Company’s position as a global leader in passive electronic technologies. KEMET believes that there have been profound changes in the competitive landscape of the electronics industry over the past several years. The Company listened closely to its customers’ description of their future directions, and is aligning KEMET’s future plans closely with their plans. Building on the Company’s

foundation of success in being the preferred supplier to the world’s most successful electronics manufacturers and distributors, KEMET is adapting so as to continue to succeed in the new global environment.

KEMET’s strategy has three foundations:

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

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

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

To execute the Plan, KEMET is in the process of reorganizing its operations around the world. Over the next three months, the remaining U.S. KEMET production 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 $34.5 million had been spent through June 30, 2005) over the period of the reorganization related to movement of manufacturing operations.

KEMET’s Global Presence

KEMET in the United States

KEMET’s corporate headquarters are expected to remain in Greenville, South Carolina, though individual functions will continue to 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.

Substantially all manufacturing currently in the United States will continue to be relocated to the Company’s lower-cost manufacturing facilities in Mexico and China. Production that remains in the U.S. is expected to 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 is expected to 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. 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 force, 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 well-developed global logistics infrastructure distinguishes it in the marketplace and will remain a hallmark of KEMET in meeting the needs of its global customers.

Employees

RESULTS OF OPERATIONS

Recent Trend in Average Selling Prices

Average selling prices for the June 2005 quarter adjusted for changes in product mix, decreased by 3.4% as compared to average selling prices for the March 2005 quarter.

Comparison of the Three-Month Period Ended June 30, 2005, with the Three-Month Period Ended June 30, 2004

Net Sales

Net sales for the three months ended June 30, 2005, decreased 6.8% to $114.1 million as compared to the same period last year. The decrease in net sales was attributable to lower unit prices. Unit volumes in the three-month period ended June 30, 2005 increased 15.3% as compared to the same period last year. Mix-adjusted average selling prices for the June 2005 quarter decreased approximately 18.2% compared to average selling prices for the June 2004 quarter.

Net sales of surface-mount capacitors were 82.3% of net sales or $93.9 million for the three months ended June 30, 2005, compared to 80.4% of net sales or $98.4 million for the same period last year. Net sales of leaded capacitors were 17.7% of net sales or $20.2 million for the three months ended June 30, 2005, versus 19.6% of net sales or $24.0 million during the same period last year.

By region, 44% of net sales for the three months ended June 30, 2005 were to customers in North America, 36% were to Asia, and 20% were to Europe. By region, 46% of net sales for the three months ended June 30, 2004 were to customers in North America, 31% were to Asia, and 23% were to Europe.

By channel, 56% of net sales for the three months ended June 30, 2005 were to distribution customers, 24% were to Electronic Manufacturing Services customers, and 20% were to Original Equipment Manufacturing customers. By channel, 56% of net sales for the three months ended June 30, 2004 were to distribution customers, 23% were to Electronic Manufacturing Services customers, and 21% were to Original Equipment Manufacturing customers.

Cost of Sales

Cost of sales for the three months ended June 30, 2005, was $95.0 million, or 83.2% of net sales, as compared to $100.1 million, or 81.8% of net sales, for the same period last year The decline in average selling prices resulted in the increase in cost of sales as a percentage of net sales. Partially offsetting the average selling prices decrease was the reduction in depreciation expense due to the asset impairment taken at March 31, 2005.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) for the three months ended June 30, 2005, were $12.2 million, or 10.7% of net sales, as compared to $12.9 million, or 10.5% of net sales for the same period last year. While total SG&A dollars decreased on a comparative basis, SG&A increased as a percent of net sales largely as the result of lower net sales in

the current quarter compared to the same quarter in the prior fiscal year.

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2005, were $6.2 million, or 5.4% of net sales, as compared to $6.3 million, or 5.1% of net sales for the same period last year. The Company continues to be committed in the development of new products and technologies, such as organic polymer tantalum and high capacitance ceramic capacitor technologies.

Special Charges

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 charges and those other charges and adjustments separately.

A summary of the special charges recognized in the quarters ended June 30, 2005 and 2004 is as follows (in millions):

	Three months ended June 30,
	2005			2004
Manufacturing relocation costs	$	2.5		$	2.6
Employee termination costs	5.2			—
Termination of contract	0.8			—
Reversal of previously recorded restructuring accrual	(0.3		)	—
Restructuring charges (1)	8.2			2.6

Writedown of an investment in unconsolidated subsidiary (2)	0.6			—
Tax benefit not previously recognized (3)	(12.1		)	—

Special charges/(benefits), net	$	(3.3	)	$	2.6

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

(2) -	Writedown of an investment in unconsolidated subsidiary - These costs are included in Other expense on the Consolidated Statement of Operations.

(3) -	Tax benefit not previously recognized - This benefit is included in Income tax expense/(benefit) on the Consolidated Statement of Operations.

Manufacturing relocation costs – The costs in this item relates to the aforementioned Enhanced Strategic Plan. During the three month period ending June 30, 2005, the Company incurred costs of $2.5 million, which has been recorded as restructuring costs. As of June 30, 2005, cumulative restructuring costs incurred as a result of manufacturing relocation and employee termination totaled approximately $34.5 million. The remaining unspent amount should be utilized primarily in the next three months. During the quarter ended June 20, 2004, the Company incurred $2.6 million relating to manufacturing relocations.

Employee termination costs - In June 2005, the Company recognized a reduction in workforce in which 138 employees were terminated. The employees were located in the U.S., Mexico, and Europe. Accordingly, the Company recognized a charge of $5.2 million to account for the severance costs.

Termination of a contract – In June 2005, the Company recognized a liability for a contract termination. The contract is being terminated due to operations being relocated to other geographies.

Reversal of previous recorded restructuring accrual – During the quarter ending June 30, 2005, a portion of the restructuring charge recorded in March 2005 was deemed unnecessary due to the former Chief Executive Officer obtaining a position with another company. Accordingly, the Company reversed the unused remaining accrual as an element of the current quarter’s restructuring charge.

Write-down of investment in unconsolidated subsidiary – During the first fiscal quarter 2006, the Company determined that the value of its investment in an unconsolidated subsidiary (Tantalum Australia NL) had decreased, and the decrease was deemed other-than-temporary. Therefore, the Company recorded a charge of $0.6 million, net of tax.

Tax benefit not previously recognized – During the first fiscal quarter 2006, the Internal Revenue Service finalized the examination related to fiscal years 1997 through 2003. This finalization in the receipt of $9.8 million during the June 2005 quarter, and the resultant release of $12.1 million tax benefit not previously recognized.

Operating Income/(Loss)

Operating loss for the three months ended June 30, 2005, was $7.5 million, compared to an operating income of $0.5 million for the quarter ended June 30, 2004. The decrease in earnings was primarily due to higher restructuring costs in the current quarter as well as the impact of lower average selling prices.

Other Income and Expense

Interest income was lower in the three months ended June 30, 2005 versus the comparable period in the prior year primarily due to the Company’s lower investments in the first fiscal quarter 2006 versus the corresponding quarter.

Other expense was lower in the three months ended June 30, 2005 versus the comparable period due to losses of $2.3 million in the three month period ending June 30, 2004 relating to the change in fair value of interest rate swaps. During the current fiscal quarter, $0.8 million in other expense related to the other-than-temporary decline in the fair value of the available-to-sale investment noted above.

Income Taxes

The income tax benefit totalled $11.9 million for the three months ended June 30, 2005, compared to an income tax expense of $0.4 million for the three months ended June 30, 2004. The tax benefit relates to the release of $12.1 million in tax benefits not previously recognized. This recognition of tax benefit was made during the three months ending June 30, 2005, due to the finalization of the Internal Revenue Service review relating to fiscal years 1997 through 2003. As of June 30, 2005, $9.8 million of expected U.S. Federal income tax refunds have been received as a result of the concluded review.

Management evaluates its tax assets and liabilities on a periodic basis and adjusts these balances on a timely basis as appropriate, based on certain estimates and assumptions and sufficient future taxable income to utilize its deferred tax benefits. If these estimates and related assumptions change in the future, the Company may be required to increase the value of the net deferred tax liability, resulting in additional income tax expense.

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 intends to satisfy its liquidity requirements primarily with cash and cash equivalents provided by operations and the sale of short-term investments.

The Company increased its cash and cash equivalents by $9.6 million during the three months ended June 30, 2005. Cash was generated from operations, from finance activities, and from investing activities. Each of these is discussed below:

Cash from Operating Activities

Cash flows from operating activities for the three months ended June 30, 2005, generated $5.6 million compared to an usage of $(9.3) million in the prior year. The increase in cash from operating activities in the current period was primarily a result of cash received from a federal tax refund and related interest of $10.4 million and a $4.4 million reduction in inventory offset by decreases in accounts payable and accrued liabilities.

Cash from Investing Activities

Cash flows from investing activities for the three months ended June 30, 2005, generated $3.6 million compared to an usage of $133.3 million in the prior year. In the three months ended June 30, 2005, $10 million of short-term investments matured and were converted into cash and cash equivalents which was offset by capital expenditures of $6.4 million. In the three month period ended June 30, 2004, the uses of cash including the purchases of $104.1 million of long-term investments, purchases of $20.0 million of short-term investments, and capital expenditures of $9.4 million.

The Company currently estimates its capital expenditures for fiscal year 2006 to be approximately $25 million.

Cash from Financing Activities

Cash flows from financing activities for the three months ended June 30, 2005 and 2004, generated $0.4 million, respectively. In both periods, cash generated resulted primarily from stock options being exercised during the three month periods.

During the three months ended June 30, 2005, the Company’s indebtedness did not change. The Company was in compliance with the covenants under its $100 million long-term debt as of the most recent reporting period. In May 2006, a principal payment of $20 million will be due and is therefore presented as the Current portion of long-term debt on the Consolidated Balance Sheet at June 30, 2005.

KEMET believes its 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 and cash on hand.

Commitments

As of June 30, 2005, the Company had contractual obligations in the form of non-cancelable operating leases, long-term supply contracts for the purchase of tantalum powder and wire (see Note 10 to the consolidated financial statements), and debt, including interest payments, as follows (dollars in thousands):

	Fiscal years ending March 31,
	Remainder of 2006		2007		2008		2009		2010		Thereafter		Total
Operating leases	$	2,498	$	2,392	$	1,856	$	1,136	$	612	$	1,866	$	10,360
Tantalum supply agreement	8,800		8,800		—		—		—		—		17,600
Debt	—		20,000		20,000		20,000		20,000		20,000		100,000
Interest payments	3,330		5,994		4,662		3,330		1,998		666		19,980
	$	14,628	$	37,186	$	26,518	$	24,466	$	22,610	$	22,532	$	147,940

Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2005), “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 annual reporting period beginning after June 15, 2005. 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.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk disclosure included in the Company’s fiscal year ending March 31, 2005, Form 10-K, Part II, Item 7 A, is still applicable and updated through June 30, 2005 (see Note 3 to the consolidated financial statements).

ITEM 4. 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 June 30, 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 June 30, 2005, which is the end of the period covered by this report.

(b). During the first quarter of fiscal year 2006, 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.

PART II - - OTHER INFORMATION

ITEM 1. Legal Proceedings

Other than as reported in the Company’s fiscal year ending March 31, 2005, 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. The ultimate legal and financial liability of the Company with respect to such litigation cannot be estimated with any certainty. However, in the opinion of management, based on its examination of these matters and its experience to date, the ultimate outcome of these legal proceedings, net of liabilities already accrued in the Company’s Consolidated Balance Sheets and expected insurance proceeds, is not expected to have a material adverse effect on the Company’s consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on the Company’s results of operations and cash flows for that period.

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

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on July 20, 2005.

Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees for directors as listed in the definitive proxy statement of the Company dated June 20, 2005. The nominees were elected.

Briefly describe below is each matter voted upon at the Annual Meeting of Stockholders.

(i) Election of three Directors of the Company:

(a) The Proxy nominees for director as listed in the proxy statement were elected to serve three-year terms with the following vote:

Nominees	In Favor	Withheld
Frank G. Brandenberg	76,270,908	2,044,709
E. Erwin Maddrey II	76,140,649	2,174,968

(b) The Proxy nominee for director as listed in the proxy statement was elected to serve a two-year term with the following vote:

Nominee		In Favor		Withheld
Maureen E. Grzelakowski		76,274,794		2,040,823

(ii) The ratification of the appointment of KPMG LLP as independent registered public accounting firm for the fiscal year ending March 31, 2006:

In Favor		Against		Abstain
77,447,666		806,648		61,303

ITEM 5. Other Information

None.

ITEM 6. Exhibits

Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.

Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.

Exhibit 32.1 Section 1350 Certifications - Principal Executive Officer.

Exhibit 32.2 Section 1350 Certifications - Principal Financial Officer.

Signature

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: August 8, 2005

	KEMET Corporation


	/S/ David E. Gable
	David E. Gable
	Senior Vice President and Chief Financial Officer

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Kemet (KEM) 10-Q2006 Q1 Quarterly report

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