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 September 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 jurisdiction of (IRS Employer
incorporation or organization 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 X NO
Common Stock Outstanding at: November 8, 1996
Title of Each Class Number of Share Outstanding
Common Stock, $.01 Par Value 37,667,469
Non-Voting Common Stock, $.01 Par Value 1,096,610
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Part I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Per Share Data)
September 30, March 31,
1996 1996
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash $ 1,928 $ 3,408
Notes and accounts receivable (less allowances of $6,884 and $10,376
September 30, 1996 and March 31, 1996, respectively) 47,430 52,069
Inventories:
Raw materials and supplies 32,782 31,981
Work in process 37,061 27,748
Finished goods 16,958 23,992
-------- --------
Total inventories 86,801 83,721
Prepaid expenses 1,892 2,077
Deferred income taxes 11,381 13,973
-------- --------
Total current assets 149,432 155,248
Property and equipment (less accumulated depreciation of $130,543 and
$116,021 at September 30, 1996 and March 31, 1996, respectively) 299,754 267,541
Intangible assets (less accumulated amortization of $11,470 and
$10,566 at September 30, 1996 and March 31, 1996, respectively) 62,628 63,533
Other assets 3,443 3,506
-------- --------
Total assets $515,257 $489,828
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term debt $42,935 $ 270
Accounts payable, trade 40,753 73,030
Accrued expenses 30,016 35,063
Income taxes 7,858 13,877
-------- --------
Total current liabilities 121,562 122,240
Long-term debt, excluding current installments 80,000 78,072
Other non-current obligations 64,301 49,524
Deferred income taxes 25,858 28,052
-------- --------
Total liabilities $291,721 $277,888
Stockholders' equity:
Common stock, par value $.01, authorized 100,000,000 shares, issued
and outstanding 37,612,226 and 37,514,393 shares at September 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 September 30, 1996 and March 31, 1996 11 11
Additional paid-in capital 137,944 136,344
Retained earnings 85,216 75,218
-------- --------
223,547 211,948
Equity adjustments from foreign currency translation (11) (8)
-------- --------
Total stockholders' equity 223,536 211,940
-------- --------
Total liabilities and stockholders' equity $515,257 $489,828
======== ========
See accompanying notes to consolidated financial statements.
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ITEM 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS OF EARNINGS
(Dollars in Thousands Except Per Share Data)
Three months ended Six months ended
September 30, September 30,
------------------------- ------------------
1996 1995 1996 1995
----- ----- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales $130,192 $160,684 $255,918 $313,217
Operating costs and expenses:
Cost of goods sold, exclusive of depreciation 87,155 109,831 171,996 214,823
Selling, general and administrative expenses 11,846 10,858 23,047 20,949
Research, development and engineering 5,677 4,487 10,458 9,094
Depreciation and amortization 8,220 8,086 16,198 16,056
Early retirement costs 15,407 - 15,407 -
-------- -------- -------- --------
128,305 133,262 237,106 260,922
Operating income 1,887 27,422 18,812 52,295
Other expense:
Interest expense 1,545 1,219 2,799 2,521
Other 272 2,252 631 4,694
-------- -------- -------- --------
Earnings before income taxes 70 23,951 15,382 45,080
Income tax expense (benefit) (203) 9,003 5,384 17,391
-------- -------- -------- --------
Net earnings available for common shareholders $ 273 $14,948 $ 9,998 $27,689
======== ======== ======== ========
Per Common Share Information:
Net earnings per common share $0.01 $0.38 $ 0.26 $ 0.71
======== ======== ======== ========
Weighted average shares outstanding 39,169,234 39,149,644 39,190,136 39,094,676
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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ITEM 1 - Financial Statements
KEMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six months ended
September 30,
---------------------------
1996 1995
---- ----
(unaudited) (unaudited)
Sources (uses) of cash:
Net cash from operating activities $ (342) $64,516
Investing activities:
Additions to property and equipment (47,397) (57,385)
Proceeds from disposals of property 67 3
Other (2) (38)
-------- --------
Net cash used by investing transactions (47,332) (57,420)
Financing activities:
Proceeds from employees savings plan 757 432
Proceeds from exercise stock options including related tax benefit 844 189
Repayment of long-term debt (132) (120)
Net proceeds from revolving/swingline loan 44,725 (5,750)
-------- --------
Net cash provided financing transactions 46,194 (5,249)
-------- --------
Net increase (decrease) in cash (1,480) 1,847
Cash at beginning of period 3,408 4,181
------- --------
Cash at end of period $1,928 $6,028
======== ========
See accompanying notes to consolidated financial statements.
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Item 1 - 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 ended March 31, 1996 Form 10-K. Net sales and operating
results for the six months ended September 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 Incentive Program
On June 5, 1996, the Company announced an early retirement incentive program for
its U.S. hourly and salaried employees. The Company reduced the U.S. hourly and
salaried workforce by 409 people with annualized cost savings of approximately
$15 million. The total cost of the program is $15.4 million ($9.9 million after
tax) and is 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the quarter and six months ended September 30, 1996, were $130.2
million and $255.9 million, a decrease of $30.5 million or 19% and $57.3 million
or 18%, respectively, from the comparable periods of the prior year. The
decrease in net sales was primarily attributable to the drawdown of excess
inventory that was accumulated by customers in prior periods. Sales of
surface-mount capacitors for the quarter and six months ended September 30,
1996, were $91.6 million and $178.3 million, a decline of 17% and 15%,
respectively, from comparable prior year periods and sales of leaded capacitors
declined 24% and 25% to $38.6 million and $77.6 million. Sales also declined in
both the domestic and export markets for the quarter and six months ended
September 30, 1996, compared to the comparable prior years periods with domestic
sales declining 19% and 18% to $76.5 million and $150.0 million, respectively,
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and export sales declining 18% and 19% to $53.7 million and $105.9 million.
Cost of sales, exclusive of depreciation for the quarter and six months ended
September 30, 1996, were $87.2 million and $172.0 million, respectively, as
compared to $109.8 million and $214.8 million for the quarter and six months
ended September 30, 1995. As a percentage of net sales, cost of sales,
exclusive of depreciation was 67% for both the quarter and six months ended
September 30, 1996, as compared to 68% and 69% for the comparable periods of the
prior year. The decrease in cost of sales as a percentage of sales is primarily
a result of the benefits realized from the movement of certain production
operations to lower cost manufacturing facilities in Mexico and cost containment
actions implemented in the first fiscal quarter. Also, the Company started to
realize in the quarter ended September 30, 1996, the savings associated with the
early retirement incentive program.
Selling, general and administrative expenses for the quarter and six months
ended September 30, 1996 were $11.8 million and $23.0 million (both 9% of net
sales), respectively, as compared to $10.9 million and $20.9 million (both 7% of
net sales) for the comparable periods of the prior year. The increase in
selling, general and administrative expenses is primarily due to increased
marketing expenses.
Research, development and engineering expenses for the quarter and six months
ended September 30, 1996, were $5.7 million and $10.5 million, respectively, as
compared to $4.5 million and $9.1 million for the prior comparable periods. The
increase reflects the Company's continued development of new products and
processes and the continued enhancement of manufacturing efficiencies.
Depreciation and amortization expense for the quarter and six months ended
September 30, 1996, were $8.2 million and $16.2 million, substantially the same
level for the comparable periods of the prior year.
The Company recorded a pretax charge of $15.4 million ($9.9 million after tax)
in the quarter ended September 30, 1996, in connection with an early retirement
incentive program. The program reduced the U.S. hourly and salaried workforce
by 409 people which is expected to result in an annualized cost savings of
approximately $15.0 million.
Operating income for the quarter and six months ended September 30, 1996, was
$1.9 million and $18.8 million, respectively, compared to $27.4 million and
$52.3 million for the comparable periods in the prior year. The decline
resulted primarily from the decrease in sales and the early retirement incentive
program as discussed above.
Income tax benefit totaled $0.2 million for the quarter ended September 30,
1996, compared to income tax expense of $9.0 million for the quarter ended
September 30, 1995. The tax benefit recorded in the quarter ended September 30,
1996, includes a retroactive tax benefit adjustment on earnings for the quarter
ended June 30, 1996. Income tax expense for the six months ended September 30,
1996, was $5.4 million or 35.0% of earnings as compared to $17.4 million or
38.6% of earnings for the comparable period of the prior year. The decrease in
the effective rate for the six months ended September 30, 1996, was primarily
the result of increased foreign sales corporation benefits and various state tax
savings strategies.
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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 credit facilities and amounts advanced under
its foreign accounts receivable discounting arrangements.
On October 18, 1996, the Company refinanced the entire balance of its
outstanding revolving credit facility and swingline credit facility with new
credit facilities totaling $175.0 million. These new credit facilities, each of
which has a term of five years, include a $165.0 million revolving credit
facility which bears interest at KEMET's option at either the base rate (or the
bank's prime rate), the Euro-dollar rate (Adjusted London Interbank Offered
Rate) plus the applicable margin or the Money Market rate (which is a rate
quoted by an individual member or members of the bank group). The applicable
spread over LIBOR is determined quarterly by the Consolidated Funded Debt to
Consolidated Total Capital ratio (as defined in the Credit Agreement). In
addition to the revolving credit facility, the Company has entered into a $10.0
million swingline credit facility which bears interest at a rate not to exceed
the higher of the bank's prime rate minus 1% and the Federal Funds rate plus
.5%.
Certain of the Company's domestic subsidiaries have issued guarantees under the
Company's new credit facilities, and the stock of the Company's Swiss subsidiary
has been pledged in support of any indebtedness incurred under the credit
facilities.
Additional liquidity is generated by the Company through its accounts receivable
discounting arrangements. On August 26, 1996, KEMET Electronics, S.A., a wholly
owned subsidiary of the Company, renewed its discounting agreement with Swiss
Bank Corporation. All terms and conditions remain in full force and effect
until September 30, 1997.
Cash flows from operating activities for the six months ended September 30,
1996, amounted to a deficit of $.3 million compared with a $64.5 million surplus
for the six months ended September 30, 1995. The decline in cash flows was
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 invested to support current and long-term growth were $47.4
million for the six months ended September 30, 1996 compared to $57.4 million
for the six months ended September 30, 1995. The Company continues to invest in
capital that is critical to KEMET's long-term outlook. Expenditures were
primarily for expanding production capabilities of the tantalum and ceramic
surface-mount product lines.
During the six months ended September 30, 1996, the Company increased its
indebtedness (long-term debt and current portion of long-term debt) by $44.7
million which consisted primarily of the financing of capital expenditures. The
Company had unused availability under its revolving credit facilities as of
September 30, 1996 of approximately $55.0 million.
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The Company 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 the utilization of borrowings
under its credit facilities.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 10, 1996, an action was commenced in the United States District
Court, District of Massachusetts captioned A. Barbuto Design Company v. KEMET
Electronics Corporation. The complaint alleges that KEMET Electronics
Corporation (KEC), a wholly owned subsidiary of the Company, breached an
agreement with the plaintiff and engaged in unfair competition under
Massachusetts law in connection with the manufacture by KEC of certain presses
used by KEC to produce capacitors. The plaintiff alleges that KEC is currently
manufacturing such presses in violation of an alleged agreement with the
plaintiff not to do so. Prior to February 1995, KEC purchased certain presses
manufactured by the plaintiff to produce capacitors. The plaintiff is seeking a
permanent injunction enjoining KEC from manufacturing such presses, damages in
an unspecified amount, attorneys fees, litigation expenses, costs, prejudgment
interest and such further relief as the court deems just and proper. KEC
believes this lawsuit is without merit and intends to defend itself vigorously.
Other than as reported above and in the Company's Form 10-K for the fiscal year
ended March 31, 1996 under the caption "Item 3. Legal Proceedings" and
Form 10-Q for the quarter ended June 30, 1996 under the caption "Part II - Other
Information", 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.
(a) The Company held its Annual Meeting of Stockholders on July 24, 1996.
(b) 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 management's nominees for directors as listed in the definitive
proxy statement of the Company dated as of June 24, 1996, and such nominees were
elected.
(c) Briefly described below is each matter voted upon at the Annual Meeting of
Stockholders.
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(i) Election of Directors of the Company.
All of proxy nominees for directors as listed in the proxy statement were
elected for a three year term with the following vote:
Broker
Nominee In Favor Against Abstained Non-Votes
-------- ----------- ---------- --------- -----------
E. Erwin Maddrey, II 32,911,128 0 1,048,094 3,622,942
Terry R. Weaver 32,803,681 0 1,155,541 3,622,942
(ii) The approval of the 1995 Executive Stock Option Plan covering 1,950,000
Shares of Common Stock with the following vote:
Broker
In Favor Against Abstained Non-Votes
---------- --------- --------- ----------
22,641,878 1,034,493 330,881 13,574,912
(iii) The approval of the Executive Bonus Plan:
Broker
In Favor Against Abstained Non-Votes
---------- --------- --------- ----------
32,700,637 986,574 279,911 3,615,402
(iv) The ratification of the appointment of KPMG Peat Marwick LLP, independent
certified public accountants, to examine the financial statements of the Company
for the fiscal year ending March 31, 1997:
Broker
In Favor Against Abstained Non-Votes
---------- -------- --------- ----------
33,847,408 51,167 60,647 3,622,942
Item 5. Other Information.
On July 24, 1996, the Company adopted a severance program for certain key
employees. The program provides for severance payments and certain other
benefits to covered employees who are terminated or otherwise no longer employed
by the Company following a change in control (as defined in the severance
agreements). The severance program covers approximately 220 employees.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Credit Agreement, dated as of October 18, 1996, by and among KEMET
Corporation, as borrower, Wachovia Bank of Georgia, N.A. as Agent, and ABN AMRO
Bank N.V. Atlanta Agency, as Co-Agent, and the lenders set forth on the
signatures pages thereto. The registrant agrees to furnish supplementally to
the Commission a copy of any omitted schedule or exhibit to the Credit Agreement
upon request by the Commission.
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10.2 Swingline Note, dated as of October 18, 1996, between KEMET Corporation, as
borrower, and Wachovia Bank of South Carolina, N.A., as lender.
10.2.1 Guaranty Agreement, dated as of October 18, 1996, between KEMET
Electronics Corporation, as guarantor, and Wachovia Bank of South Carolina,
N.A., as lender.
10.3 Twelfth amendment to the Purchase Agreement, as amended, by and between
KEMET Electronics, S.A., Geneva and Swiss Bank Corporation, Geneva dated as of
August 26, 1996.
10.4 Form of Severance Agreement for certain key employees as of
August 1, 1996.
11.1 Computation of Per Share Earnings.
(b) Reports on Form 8-K.
None.
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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: November 8, 1996
KEMET Corporation
/S/ J.J. Jerozal
J.J. Jerozal
Chief Financial Officer and
Treasurer
(Principal Accounting and
Financial Officer)