1
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 June 30, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the 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 (IRS Employer
jurisdiction of Identification No.)
incorporation or organization)
2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681
- ------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
864-963-6300
-------------------------------
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Common Stock Outstanding at: August 13, 1996
Title of Each Class Number of Shares Outstanding
- --------------------------------------------------------------------------------
Common Stock, $.01 Par Value 37,587,541
Non-Voting Common Stock, $.01 Par Value 1,096,610
2
Part I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in Thousands Except Per Share Data
June 30, March 31,
1996 1996
---------- ----------
(unaudited)
ASSETS
Current Assets:
Cash $ 3,553 $ 3,408
Notes and accounts receivable (less allowances of $9,521 and $10,376
June 30, 1996 and March 31, 1996, respectively) 40,280 52,069
Inventories:
Raw materials and supplies 32,587 31,981
Work in process 33,126 27,748
Finished goods 21,670 23,992
-------- --------
Total inventories 87,383 83,721
Prepaid expenses 2,252 2,077
Deferred income taxes 13,380 13,973
-------- --------
Total current assets 146,848 155,248
Property and equipment (less accumulated depreciation of $123,359 and
$116,021 at June 30, 1996 and March 31, 1996, respectively) 290,139 267,541
Intangible assets (less accumulated amortization of $11,067 and
$10,566 at June 30, 1996 and March 31, 1996, respectively) 63,032 63,533
Other assets 3,457 3,506
-------- --------
Total assets $503,476 $489,828
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt $ 20,277 $ 270
Accounts payable, trade 44,522 73,030
Accrued expenses 28,960 35,063
Income taxes 11,862 13,877
-------- --------
Total current liabilities 105,621 122,240
Long-term debt, excluding current installments 95,850 78,072
Other non-current obligations 49,404 49,524
Deferred income taxes 30,135 28,052
-------- --------
Total liabilities $281,010 $277,888
Stockholders' equity:
Common stock, par value $.01, authorized 100,000,000 shares, issued
and outstanding 37,583,632 and 37,514,393 shares at June 30, 1996 and
March 31, 1996, respectively 376 375
Non-voting common stock, par value $.01, authorized 12,000,000 shares,
issued and outstanding 1,096,610 at June 30, 1996 and March 31, 1996 11 11
Additional paid-in capital 137,150 136,344
Retained earnings 84,943 75,218
-------- --------
222,480 211,948
Equity adjustments from foreign currency translation (14) (8)
-------- --------
Total stockholders' equity 222,466 211,940
-------- --------
Total liabilities and stockholders' equity $503,476 $489,828
======== ========
See accompanying notes to consolidated financial statements.
3
ITEM 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS OF EARNINGS
(Dollars in Thousands Except Per Share Data)
Three months ended
June 30,
-------------------
1996 1995
----- -----
(unaudited) (unaudited)
Net Sales $125,726 $152,534
Operating costs and expenses:
Cost of goods sold, exclusive of depreciation 84,842 104,992
Selling, general and administrative expenses 11,201 10,091
Research, development and engineering 4,782 4,607
Depreciation and amortization 7,978 7,972
-------- --------
108,803 127,662
Operating income 16,923 24,872
Other expense:
Interest expense 1,253 1,301
Other 358 2,443
-------- --------
Earnings before income taxes 15,312 21,128
Income tax expense 5,587 8,387
-------- --------
Net earnings available for common shareholders $ 9,725 $12,741
======== ========
Per Common Share Information:
Net earnings per common share $0.25 $0.33
======== ========
Weighted average shares outstanding 39,210,818 39,028,114
========== ==========
See accompanying notes to consolidated financial statements.
4
ITEM 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Thousands
Three months ended
June 30,
---------------------------
1996 1995
----- -----
(unaudited) (unaudited)
Sources (uses) of cash:
Net cash from operating activities $(8,211) $27,467
Investing activities:
Additions to property and equipment (30,290) (23,505)
Proceeds from disposals of property 60 6
Other (6) (37)
-------- --------
Net cash used by investing transactions (30,236) (23,536)
Financing activities:
Proceeds from employees savings plan 537 260
Proceeds from exercise stock options including related tax benefit 271 201
Repayment of long-term debt (65) (4,259)
Net proceeds from revolving/swingline loan 37,850 -
-------- --------
Net cash provided financing transactions 38,593 (3,798)
-------- --------
Net increase in cash 146 133
Cash at beginning of period 3,408 4,181
------- --------
Cash at end of period $3,553 $4,314
======== ========
See accompanying notes to consolidated financial statements.
5
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, 1996 Form 10-K. Net sales and
operating results for the three months ended June 30, 1996 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.
Note 2. Early Retirement Program
On June 5, 1996, the Company announced an early retirement incentive
program for its U.S. hourly and salaried employees. The Company will reduce the
U.S. hourly and salaried workforce by 409 people with annualized cost savings of
approximately $13 million. The total cost of the program is estimated to be $10
million and will be charged to earnings in the quarter ending September 30,
1996. The Senior Management of the Company is not eligible for the early
retirement incentive. This reduction in U.S. workforce reflects the ongoing
consolidation of leaded and military capacitor production in Mexico and
adjustments in the period and overhead costs consistent with current revenue
levels.
Note 3. Other Events
On June 26, 1996, the Company received a letter from Vishay
Intertechnology, Inc. (Vishay) pursuant to which Vishay was seeking to enter
into discussions to explore a business combination with the Company.
On July 1, 1996, in response to the letter, the Company advised Vishay that
it was not interested in engaging in discussion. The Company's Board of
Directors determined that the Company's strong future prospects as an
independent company made discussions with Vishay not in the best interests of
the Company, its stockholders, employees, customers and other stakeholders.
The Company also announced that its Board of Directors adopted a Preferred
Share Purchase Rights Plan and declared a dividend distribution payable to
stockholders of record at the close of business on July 1, 1996 (which is also
6
the payment date), of one Preferred Share Purchase Right on each outstanding
share of the Company's voting and non-voting common stock. The Rights will
initially be represented by the existing certificates for the voting and
non-voting common stock. Stockholders do not need to take any action in
connection with this distribution of Rights. Following certain events, each
Right will entitle stockholders to buy one one-thousandth of a share of a new
series of junior participating preferred stock for an exercise price of $85.
The Rights will be exercisable only if a person or group (with certain
exceptions, including Citicorp Venture Capital, Ltd. and the other parties to an
existing voting agreement), acquires, or announces a tender offer for, 15% or
more of the Company's common stock. In the event that a person or group (except
as previously described) acquires 15% or more of the outstanding common stock,
each holder of a Right (with certain exceptions) will be entitled upon exercise
of the Right to receive common stock having at the time of exercise a market
value of two times the exercise price of the Right. The Company may exchange
the Rights for the Company's common stock on a one-for-one basis at any time
after a person or group (except as previously described) has acquired 15% or
more of the outstanding common stock. The Company will be entitled to redeem
the Rights at $.01 per Right (payable in cash or common stock of the Company, at
the Company's option) at any time before public disclosure that a 15% position
has been acquired. The Rights will expire on July 1, 2006, unless previously
redeemed or exercised. The distribution of the Rights is not a taxable event to
stockholders.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Three Month Period Ended June 30, 1996 and Three Month Period Ended June 30,
1995
Net sales for the three months ended June 30, 1996 were $125.7 million, a
decline of 18% from net sales of $152.5 million for the three months ended June
30, 1995. The decline in first quarter net sales reflect the effects of reduced
demand as a result of distributors and OEM's working off their excess
inventories of both components and finished goods. The Company experienced a
decline in sales in both leaded and surface-mount capacitors due to this weaker
demand and more competitive pricing. Sales of surface-mount capacitors were
$86.6 million for the first quarter of fiscal 1997 a decline of 13% from $100.1
million in the prior year's first quarter and sales of leaded capacitors
declined 25% to $39.1 million from $52.4 million. Sales also declined in both
the domestic and export markets with domestic sales declining 16% to $73.5
million and export sales declining 20% to $52.2 million as compared to the prior
year's first quarter.
Cost of sales, exclusive of depreciation, for the three months ended June
30, 1996 was $84.8 million compared to $105.0 million for the three months ended
June 30, 1995. As a percentage of net sales, cost of sales, exclusive of
7
depreciation, decreased to 67% from 69% primarily as a result of adjustments of
production levels, the implementation of overhead cost containment actions in
response to the reduced demand for capacitors and cost benefits realized from
the movement of production in fiscal year 1996 to lower cost manufacturing
facilities in Mexico.
Selling, general and administrative expenses for the three months ended
June 30, 1996 were $11.2 million, as compared to $10.1 million for the three
months ended June 30, 1995. The increase in selling, general and administrative
expenses is primarily due to the increase in selling and marketing expense of
approximately $0.9 million associated with sales office expansions in Europe,
Asia and South America coupled with the installation of a world-wide company
"intranet" communications system. The Company's marketing philosophy is unique
among capacitor manufacturers. KEMET employs a direct sales force to sell its
products versus independent manufacturers representatives, which results in
sales force expense being relatively constant. Since the Company's selling
expense is not directly related to volume changes in sales, as volume increases
the Company's marketing expense as a percentage of sales is lower, as volume
decreases it is relatively higher.
Research, development and engineering expenses for the three months ended
June 30, 1996 were $4.8 million compared to $4.6 million for the three months
ended June 30, 1995. The increase reflects the Company's continued investments
in new products and technologies and the enhancement of manufacturing
efficiencies.
Depreciation and amortization expense was $8.0 million for the
three months ended June 30, 1996, the same level for the three months ended June
30, 1995.
Operating income for the three months ended June 30, 1996 was $16.9 million
compared to $24.9 million for the three months ended June 30, 1995. The decline
resulted primarily from the decrease in net sales as discussed above.
Income tax expense was 36.6% and 39.8% of earnings for the three month
periods ended June 30, 1996 and 1995, respectively. The decrease in the
effective income tax rate was primarily the result of increased foreign sales
corporation benefits and the implementation of various state tax savings
strategies.
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, borrowings under its revolving credit facility and
amounts advanced under its foreign accounts receivable discounting arrangements.
Cash flows from operating activities for the three months ended June 30,
1996 amounted to a deficit of $8.2 million compared with a $27.5 million surplus
for the three months ended June 30, 1995. The decline in cash flow was
8
primarily a result of lower net income and the timing of cash flows from current
assets and liabilities such as accounts receivables, inventories, accounts
payables, accrued liabilities and income taxes payable.
Capital expenditures were $30.3 million for the three months ended June 30,
1996 compared to $23.5 million for the three months ended June 30, 1995. The
Company is continuing to invest in key capital projects for the future. The
majority of capital expenditures during the first quarter of fiscal 1997
represents the completion of capital projects initiated during fiscal year 1996.
On June 17, 1996, the Company entered into an additional $10.0 million
Master Note Facility with Wachovia Bank of South Carolina, N.A. The initial
term of the loan is for a 30 day period with an interest rate of 5.71%.
On July 31, 1996, the Company entered into a $40.0 million credit
agreement with Wachovia Bank of North Carolina, N.A. The additional facility
bears interest at the Company's option at either the base rate (bank's prime
rate) plus the applicable margin, Eurodollar rate (Adjusted London Interbank
Offered Rate) plus the applicable margin, or the offered rate (which is a rate
quoted by the bank). The applicable margin is determined quarterly by the
Consolidated Cash Flow from Operations to Consolidated Funded Debt ratio as
defined in the $40.0 million credit agreement. The new credit facility has a
term of 364 days.
During the three months ended June 30, 1996 the Company increased its
indebtedness (long-term debt and current portion of long-term debt) by $37.9
million which consisted primarily of the financing of capital expenditures
initiated during the prior fiscal year. The Company had unused availability
under its revolving credit facility as of June 30, 1996 of approximately $39.2
million.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 8, 1996, the Registered Agent for the Company in Delaware received
notice of a lawsuit in the Court of Chancery in New Castle County, Delaware
filed against KEMET Corporation and the board of directors individually,
purportedly brought on behalf of its shareholders, that the Company did not
adequately consider the request by Vishay to enter into discussions, and the
suit alleges, among other things, that the Board breached their fiduciary duties
by adopting a preferred share rights plan. The plaintiffs are asking the court,
among other things, to order the Board to auction the Company and deploy the
9
rights plan in a fair and impartial manner. The suit also seeks unspecified
damages. The Company has stated that the suit is without merit and intends to
defend itself and its directors vigorously.
Other than as reported above and in the Company's fiscal year ending March
31, 1996 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.
On July 24, 1996, at the Company's annual meeting, shareholders
re-elected E. Erwin Maddrey, II and elected Terry R. Weaver as Directors of the
Company to serve three-year terms. The Company's shareholders also approved the
1995 Executive Stock Option Plan covering 1,950,000 shares of Common Stock, the
Executive Bonus Plan and ratified the appointment of KPMG Peat Marwick LLP as
independent public accountants for the year ending March 31, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Original Master Note dated June 17, 1996, between KEMET
Corporation, as borrower, and Wachovia Bank of South Carolina, N.A., as lender.
10.1.1 Letter agreement dated June 24, 1996, between KEMET
Corporation, as borrower, and Wachovia Bank of South Carolina, N.A., as lender.
10.2 $40.0 Credit Agreement, dated July 31, 1996, between KEMET
Corporation, as borrower and Wachovia Bank of North Carolina, N.A., as lender.
10.2.1 Guaranty Agreement, dated July 31, 1996, between KEMET
Electronics Corporation, KEMET Services Corporation and KRC Trade Corporation,
as guarantors and Wachovia Bank of North Carolina, N.A., as lender.
11.1 Computation of Per Share Earnings.
(b) Reports on Form 8-K.
10
On July 8, 1996, Form 8-K was filed by the Company detailing the
adoption of a Preferred Share Purchase Rights Plan.
11
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: August 13,1996
KEMET Corporation
/S/ J.J. Jerozal
--------------------------
J.J. Jerozal
Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Accounting and
Financial Officer)