ITEM 1. BUSINESS
General
KEMET Corporation and its subsidiaries ("KEMET" or the "Company")is the world's largest manufacturer of solid tantalum capacitors and the world's fourth largest manufacturer of multilayer ceramic capacitors, based on net sales for the calendar year ending December 31, 1999. According to industry sources, tantalum and ceramic capacitors are the two fastest growing sectors of the United States capacitor industry. In fiscal year 2000, KEMET generated net sales of $822.1 million, up 45% from $565.6 million in fiscal year 1999. International sales accounted for approximately 50% of the net sales for fiscal year 2000. During fiscal year 2000, the Company shipped approximately 31.5 billion capacitors, comprised of approximately 35,000 different types of 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. Capacitors alter the relationship of currents and voltages in a given electrical system, filter or smooth out electrical signals where required, and retard signals of low frequencies while permitting signals of higher frequencies to pass with minimal attenuation. Different types of capacitors are distinguished based on dielectric material, configuration, capacitance level and tolerance, performance characteristics, marking and packaging. In addition, capacitors differ based on the method employed to attach them to the circuit board. Surface-mounting allows capacitors to be soldered directly to a circuit board, rather than having lead wires passed through holes to be soldered on the reverse side of a board.
A wide variety of electronic applications utilize KEMET capacitors. These applications include communication systems, data processing equipment, personal computers, cellular phones, automotive electronic systems, and military and aerospace systems.
KEMET utilizes a direct sales force to market its capacitors to a diverse and growing number of OEMs, Electronic Manufacturing Service providers and electronics distributors. The Company's largest customers include Alcatel, Arrow Electronics, Compaq, Dell, Ford, General Motors, Hewlett-Packard, IBM, Intel, Lucent Technologies, Motorola, Nokia, Qualcomm, SCI Systems, Siemens, Solectron and TTI.
Since its divestiture from Union Carbide ("UCC") in December 1990, the Company has pursued one distinct vision: To establish a distinctive competence that differentiates KEMET as the unquestioned best-in-class supplier. The core values that support this vision are:
Best trained and motivated people;
Company-wide quality concept (as evidenced by ISO 9000 and QS-9000 registration at all of KEMET's facilities);
An easy-to-buy-from philosophy (supported by the Company's direct sales force and executed by KEMET's key account teams);
Lowest cost producer (by achieving significant production cost savings through the focused plant concept and the transfer to and expansion of manufacturing operations in Mexico where the Company can take advantage of lower overall costs); and
Leading edge of technology (as evidenced by the Company's continued increase in expenditures for new product development and the design and development of new machinery and equipment).
Background of Company
KEMET's operations began in 1919 as a business of UCC to manufacture component parts for vacuum tubes. As vacuum tubes were gradually replaced by solid- state transistors, the Company changed its manufacturing focus from vacuum tube parts to tantalum capacitors, and later added ceramic capacitors to meet the expected need for capacitors in electronic circuit boards. The Company entered the market for tantalum capacitors in 1958 as one of approximately 25 United States manufacturers. By 1966, the Company was the United States' market leader in tantalum capacitors, a position which it still holds in an industry consisting of four major tantalum capacitor manufacturers. In 1969, the Company began production of ceramic capacitors as one of approximately 35 United States manufacturers. Within five years, the Company was the second largest United States manufacturer of ceramic capacitors, a position which it still holds in a market consisting of five major capacitor manufacturers.
The current Company was formed in 1990 by certain members of the Company's current management, Citicorp Venture Capital, Ltd. ("CVC"), and other investors to acquire the outstanding common stock of KEMET Electronics Corporation from UCC.
Public Offerings and Recapitalization
In October 1992, the Company completed an initial public offering of its common stock and a related recapitalization to simplify its capital structure. In June 1993, the Company completed an additional public offering of common stock and used the net proceeds to reduce outstanding indebtedness.
On January 20, 2000, the Company sold 6,500,000 shares of its common stock in a public offering for $142.6 million in net cash proceeds after deducting underwriting fees and offering expenses. Included in the shares sold were 2,193,220 shares of non-voting common stock that were converted into common stock on a share-for-share basis. The net proceeds were used to repay outstanding debt under the Company's short-term credit facility and will be used to fund future capital expenditures.
Stock Splits
On September 6, 1995, the Board of Directors declared a two-for-one stock split whereby one additional common share, par value $.01, was issued for each common share outstanding to shareholders of record on September 13, 1995.
On May 15, 2000, the Company's Board of Directors declared a two-for-one stock split. The record date for the split was May 24, 2000, with distribution of the additional shares on June 1, 2000. All references in the consolidated financial statements to number of shares outstanding, price per share, per- share amounts and stock option plan data have been restated to reflect the split.
Refinancing of Outstanding Senior Debt
On October 18, 1996, the Company refinanced the entire balance of its outstanding revolving credit facility and swingline credit facility with new credit facilities. These new credit facilities, each of which has a term of five years, include a $150.0 million revolving credit facility and a $10.0 million swingline credit facility. In May 1998, the Company sold $100 million of its Senior Notes due May 4, 2010.
The Capacitor Industry
The Company estimates that worldwide capacitor consumption was approximately $16.4 billion in 1999, with tantalum and ceramic capacitors comprising approximately 40% of the market. According to industry sources, tantalum and ceramic capacitors accounted for approximately 59% of the $2.9 billion market for capacitors consumed in the United States in 1999 and constituted the two fastest growing sectors of the United States capacitor market.
Because of their fundamental nature and widespread application, demand for capacitors tends to reflect the general demand for electronic products, which has been growing over the past several years. Growth in the electronics market and the corresponding growth in the capacitor market has been fueled by: the development of new products and applications, such as cellular phones, personal computers and electronic controls for engines and machinery;
the increase in the electronic content of existing products, such as home appliances, medical equipment and automobiles; and
the growth in the number of capacitors required in certain complex electronic products that use state-of-the-art microprocessors.
The capacitor industry has shifted its manufacturing focus from traditional leaded capacitors toward surface-mount capacitors in order to increase circuit board densities, decrease the size of electronic components and more highly automate production. Surface-mount capacitors are generally smaller than similar leaded capacitors and can be mounted on both sides of a circuit board. To meet the increased demand for surface-mount capacitors, the Company has invested $460.7 million in capital expenditures during the past five years with a substantial portion spent to expand surface-mount manufacturing.
Our Strategy
KEMET has used its position as a leading, high-quality manufacturer of capacitors to capitalize on the increasingly demanding requirements of its customers. Key elements of the Company's strategy include the following business objectives:
Maintaining Long-Term Customer Relationships. KEMET continually seeks to maintain the number of business relationships that it has with leading OEMs and to increase the percentage of each OEM's requirements that the company supplies under these relationships. OEMs have moved toward long-term buying relationships with a limited number of capacitor manufacturers as a method to increase long-term quality and reduce the overall cost of acquiring component products. OEMs are demanding increased levels of service to provide ease of ordering, just-in-time delivery to multiple facilities, flexible scheduling, computerized paperless purchasing, specialized packaging and full breadth of product offerings. KEMET believes that it has responded to each of these customer needs and positioned the Company to capture a larger portion of OEMs' capacitor supply requirements. In addition, KEMET will continue to develop and expand preferred supplier relationships with its customers to ensure its ability to meet their rapidly changing demands. Preferred supplier or other similar long-term relationships with OEMs accounted for approximately 56% of KEMET's net sales for fiscal year 2000.
Providing Product Breadth and Service Flexibility. KEMET manufactures a full line of products with different specifications in order to respond to the needs of its customers. During fiscal year 2000, the Company manufactured approximately 31.5 billion capacitors, comprised of approximately 35,000 different types of capacitors, with types being distinguished by dielectric material, configuration, encapsulation, capacitance level and tolerance, performance characteristics, marking and packaging.
KEMET believes that it is a market leader in reliable and timely delivery of capacitor products. As most OEMs have moved to just-in-time inventory management, the timeliness and reliability of shipments by their suppliers have become increasingly important. The Company has designed its manufacturing facilities and order entry system to respond quickly to customer needs and has invested over $10.0 million in an easy-to-buy-from order entry system. KEMET's order entry system provides on-line pricing, scheduled delivery dates and accurate inventory information and provides a direct link between the Company and its major distributors.
Manufacturing High-Quality Products. KEMET is a leader in an industry in which customers require high-quality standards and exacting product specifications. The Company emphasizes continuous product improvement and a company-wide commitment to quality. As a result, KEMET has received numerous quality awards from customers such as Advanced Technology Labs, Alcatel, AT&T, Ford, General Instrument, General Motors, Honeywell, Motorola, Rockwell International, Rolm Systems, Solectron, Sun Microsystems, Texas Instruments and 3M.
Investing in Surface-Mount Manufacturing Capacity. Demand for capacitors has evolved from leaded toward surface-mount capacitors, as KEMET's customers continue to increase circuit board densities and shift to more highly automated production techniques. The Company believes that by increasing surface-mount capacity to meet the demands of its OEM customers, it will increase sales in the growing surface-mount capacitor market. During the past five fiscal years, the Company has invested $460.7 million in capital expenditures, a substantial portion of which was spent to expand surface-mount manufacturing capacity. This has allowed the Company to increase its sales of surface-mount capacitors at a compound annual rate of 16% during such five- year period. KEMET currently operates at or near capacity at its surface- mount manufacturing facilities, and intends to make further capital investments in surface-mount manufacturing capacity in order to serve the growing needs of its customers. For fiscal year 2000, sales of surface-mount capacitors accounted for approximately 86% of the net sales, as compared to 81% for fiscal year 1999 and 77% for fiscal year 1998.
Improving Current Products and Developing New Products. KEMET's customers increasingly look for greater capacitance in smaller products. To respond to its customers' needs, the Company continues to develop smaller surface-mount capacitors in anticipation of continuing trends toward miniaturization of end products. KEMET believes it is a technology leader and continues to support a strong research and development program to meet the needs of its customers. The Company has also entered into technical alliances with NEC Corporation to produce KO-Caps (high-performance conductive polymer tantalum capacitors) and Showa Denko K.K. to produce solid conductive polymer aluminum surface-mount capacitors.
Remaining an Overall Low-cost Producer. KEMET's customers are under worldwide competitive pressure to reduce their product costs and these pressures are passed along to component manufacturers. The Company believes that it has achieved a leading position as an overall low-cost producer of capacitors. To maintain this position, it is constantly seeking to reduce materials and labor costs, develop cost-efficient manufacturing equipment and processes and design manufacturing plants for efficient production.
KEMET has been able to reduce the manufacturing cost of its products by increasing materials utilization efficiency and production yields. In addition, the Company has been successful at reducing assembly direct labor costs by locating plants in areas with relatively low-cost labor. KEMET capacitors have been assembled in Mexico for approximately 30 years.
KEMET has a dedicated engineering team who continue to develop faster and more efficient automated manufacturing, assembly, testing and packaging machines and processes. The Company has designed each of its manufacturing and assembly facilities to produce one product or a family of closely related products. KEMET's management believes that this focused approach to manufacturing allows each facility to shorten manufacturing time, optimize product flow, and avoid long and costly equipment retooling and employee training time, all of which lead to overall reduced costs.
Capacitors
Capacitors are electronic components consisting of conducting materials separated by a dielectric or insulating material (such as tantalum, ceramic, aluminum, film, paper or mica), which allow a capacitor to interrupt the flow of electrical current. They are divided between leaded and surface-mount capacitors, describing the method by which the capacitors are attached to the circuit board.
KEMET manufactures a full line of capacitors using two types of dielectrics, solid tantalum and multilayer ceramic. Most customers buy both tantalum and ceramic capacitors from the Company. KEMET manufactures these types of capacitors in many different sizes and configurations. The Company produces leaded capacitors, which are attached to a circuit board using lead wires, and surface-mount capacitors, which are attached directly to the circuit board without lead wires.
The choice of capacitor dielectric is driven by the engineering specifications and application of the component product into which the capacitor is incorporated. Product design engineers in the electronics industry typically select capacitors on the basis of capacitance levels, size and cost. Tantalum and ceramic capacitors continue to be the preferred dielectrics in new design applications, as compared to capacitors made of other dielectrics. Tantalum and ceramic capacitors are commonly used in conjunction with integrated circuits, and are best suited for applications requiring lower to medium capacitance values. Generally, ceramic capacitors are more cost-effective at lower capacitance values, and tantalum capacitors are more cost-effective at higher capacitance values.
Management believes that sales of tantalum and ceramic capacitors will continue to grow more rapidly than other types of capacitors in both the United States and worldwide markets because technological breakthroughs in electronics are regularly expanding the number and type of applications for these products. Both tantalum and ceramic capacitors have special properties valuable for surface-mount applications.
Leaded and Surface-Mount Capacitors
The Company manufactures both leaded and surface-mount capacitors. The capacitors are distinguished based on the method by which they are attached to the circuit board. Despite the differences in configuration between leaded and surface-mount capacitors, both types of capacitors rely on similar technology.
The manufacture of the internal capacitor element is the same whether it is ultimately incorporated into a leaded or surface-mount capacitor. Consequently, much of the know-how and some of the capital equipment required to produce these products is common. The primary distinction between leaded and surface-mount capacitors occurs in the assembly, testing and finishing stages, which utilize different equipment and processes. Surface-mount capacitors must be able to withstand temperatures up to 260 degrees Centigrade during circuit board assembly and are placed on circuit boards using high- speed automatic placement equipment. These requirements result in quality and process standards greater than those demanded for leaded components.
The Company believes it has taken advantage of the growth of the surface-mount capacitor market and is an industry leader in designing and marketing surface- mount capacitors. Demand has shifted from leaded to surface-mount capacitors because surface-mount capacitors are more commonly incorporated into new product designs which rely on higher density circuit boards. As a result, worldwide sales of leaded capacitors have been declining over the past five years and have been offset by an increase in worldwide sales of surface-mount capacitors. Consequently, although KEMET intends to make further capital investments in surface-mount manufacturing capacity to serve the growing needs of its customers, the Company's results of operations and growth prospects could be adversely affected in the event that the Company does not continue to increase its sales and production of surface-mount capacitors.
The following table shows the respective percentages of the Company's sales of surface-mount capacitors and leaded capacitors for the fiscal years ended March 31, 2000, 1999 and 1998.
Markets and Customers
KEMET's products are sold to a variety of OEMs in a broad range of industries including the computer, communications, automotive, military and aerospace industries. KEMET also sells an increasing number of its products to EMS providers, which also serve OEMs in these industries. The Company is not dependent on any one customer or group of related customers. One customer in fiscal years 2000, 1999 and 1998 accounted for over 10% of the Company's net sales. The Company's top 50 customers accounted for approximately 90% of the Company's net sales during fiscal year 2000. Preferred supplier and similar long-term relationships with OEMs accounted for approximately 56% of the Company's net sales in fiscal years 2000, 1999 and 1998.
The following table presents an overview of the diverse industries that incorporate the Company's capacitors into their products and the general nature of those products.
Industry Products - -------- --------
Automotive Audio systems, powertrain electronics, instrumentation, airbag systems, anti-lock braking systems, electronic engine controls, air conditioning controls and security systems Business Equipment Copiers, point-of-sale terminals and typewriters, Communications cellular phones, modems, telephones, switching equipment and relays Computers Personal computers, workstations, mainframes, computer peripheral equipment, power supplies, disk drives, printers and local area networks Industrial Electronic controls, measurement equipment, instrumentation and medical electronics Military/Aerospace Avionics, radar, guidance systems and satellite communications
KEMET produced less than 1% of its capacitors under military specification standards sold for both military and commercial uses during fiscal year 2000. The Company does not sell any of its capacitors directly to the U.S. government. Although the Company does not track sales of capacitors by industry, the Company estimates that sales of its capacitors to OEMs which produce products principally for the military and aerospace industries accounted for less than 3% of its net sales during fiscal year 2000. Certain of the Company's other customers may also purchase capacitors for products in the military and aerospace industries.
Sales and Distribution
KEMET's domestic sales, and most of its international sales, are made through the Company's direct sales and customer service employees. The Company's domestic sales staff is located in seven regional offices, eleven local offices and seven satellite offices. A substantial majority of the Company's international sales are made through seven local sales offices and nine satellite offices in Europe, six Far East locations, two Canadian locations, and one Mexican location. The Company also has independent sales representatives located in Argentina, Australia, Israel, Puerto Rico, South Africa, and South Korea.
KEMET markets and sells its products in its major markets with a direct sales force in contrast to its competitors which generally utilize independent commissioned representatives or a combination of representatives and direct sales employees. The Company believes its direct sales force creates a distinctive competence in the market place and has established an enviable relationship with its customers. With a global sales organization that is customer-based, KEMET's direct sales personnel from around the world serve on KEMET Key Account Teams. These teams are committed to serving any customer location in the world with a dedicated KEMET representative. This approach requires a unique blend of accountability and responsibility to specific customer locations, guided by an overall account strategy for each key customer.
Electronics distributors are an important distribution channel in the electronics industry and accounted for approximately 39%, 29%, and 32% of the Company's net sales in fiscal years 2000, 1999 and 1998, respectively. In fiscal year 2000, TTI, Inc., a distributor of passive components, accounted for more than 10% of net sales.
The Company's distributor policy includes the inventory price protection and "ship-from-stock and debit" 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. The Company has established a rolling 12-month financial reserve for this program. The ship-from-stock and debit 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. Each sale under this program requires specific authorization. The Company expenses these authorized discounts on a monthly basis and the expense is included in calculating net sales.
International Sales
During fiscal year 2000, the Company exported approximately $413.2 million of capacitors, representing approximately 50% of the Company's net sales. Although management believes that the Company is able to provide a level of delivery and service that is competitive with local suppliers, the Company's capacitor market shares in European and Asian markets tend to be significantly lower than in the United States because some international electronics manufacturers prefer to purchase components from local producers. As a result, a large percentage of the Company's export sales are made to foreign operations of U.S. manufacturers. A portion of the Company's European sales are denominated in local currencies and the Euro; therefore, a significant appreciation of the U.S. dollar against such foreign currencies or the Euro would reduce the gross profit realized by the Company on its European sales as measured in U.S. dollars. Substantially all of the Company's European export shipments are made duty-paid, free delivery as required by local market conditions (see note 9 to Consolidated Financial Statements).
Inventory and Backlog
Although the Company manufactures and inventories standardized products, a portion of its products are produced to meet specific customer requirements. Cancellations by customers of orders already in production could have an impact on inventories; however, cancellations have not been significant to date.
The backlog of outstanding orders for the Company's products was $354.2 million, and $50.6 million, at March 31, 2000 and 1999, respectively. The increase was primarily a result of extended industry lead times resulting in increased customer reserve capacity. The current backlog is expected to be filled during the next 12 months. Most of the orders in the Company's backlog may be canceled by its customers, in whole or in part, although some may be subject to penalty.
Competition
The market for tantalum and ceramic capacitors is highly competitive. The capacitor industry is characterized by, among other factors, a long-term trend toward lower prices for capacitors, low transportation costs and few import barriers. Competitive factors that influence the market for the Company's products include product quality, customer service, technical innovation, pricing and timely delivery. The Company believes that it competes favorably on the basis of each of these factors.
The Company's major domestic competitors include AVX Corporation in the production of tantalum and ceramic capacitors and Vishay Intertechnology, Inc., in the production of tantalum and surface-mount ceramic capacitors. The Company's major foreign competitors include AVX Corporation in the production of tantalum and ceramic capacitors, Murata Manufacturing Company Ltd. and TDK Corporation in the production of ceramic capacitors, and NEC Corporation in the production of tantalum capacitors.
Raw Materials
The principal raw materials used in the manufacture of the Company's products are tantalum powder, palladium and silver. These materials are considered commodities and are subject to price volatility. Tantalum powder is primarily purchased under annual contracts, while palladium and silver are primarily purchased on the spot and forward markets, depending on market conditions. For example, if the Company believes that prices are likely to rise, it may purchase a significant amount of its annual requirements on a forward delivery basis.
There are presently three suppliers that process tantalum ore into capacitor- grade tantalum powder. Management believes tantalum required by the Company has generally been available in sufficient quantities to meet requirements and that there are a sufficient number of tantalum processors relative to foreseeable demand; however, the limited number of tantalum powder suppliers could lead to increases in tantalum prices that the Company may not be able to pass on to its customers.
Although palladium is presently found primarily in South Africa and Russia, the Company believes that there are a sufficient number of domestic and foreign suppliers from which the Company can purchase its palladium requirements. Although the palladium required by the Company has generally been available in sufficient quantities, the limited number of palladium suppliers could lead to higher prices, and the inability of the Company to pass any increase on to its customers could have an adverse effect on the margin of those products in which the metal is used. The Company continues to take actions to minimize the impact of future palladium price increases on its profit margins.
Silver has generally been available in sufficient quantities, and the Company believes there are a sufficient number of suppliers from which the Company can purchase its silver requirements.
Patents and Trademarks
At March 31, 2000, the Company held 38 United States and 29 foreign patents and four United States and 62 foreign trademarks. The Company does not generally engage in licensing technology or products, whether as licensor or licensee. The Company believes that the success of its business is not materially dependent on the existence or duration of any patent, license or trademark, other than the name "KEMET." The Company's engineering and research and development staffs have developed and continue to develop proprietary manufacturing processes and equipment designed to enhance the Company's manufacturing facilities and reduce costs.
Research and Development
Research and Development expenses were $23.9 million for fiscal year 2000 compared to $21.1 million for fiscal year 1999. These amounts include expenditures for product development and the design and development of machinery and equipment for new processes and cost reduction efforts. Most of the Company's products and manufacturing processes have been designed and developed by Company engineers. The Company continues to invest in new technology to improve product performance and production efficiencies.
Environmental
The Company is subject to various Mexican and United States federal, state and local environmental laws and regulations relating to the protection of the environment, including those governing the handling and management of certain chemicals used and generated in manufacturing electronic components. Based on the annual costs incurred by the Company over the past several years, management does not believe that compliance with these laws and regulations will have a material adverse effect on the Company's capital expenditures, earnings or competitive position. The Company believes, however, that it is reasonably likely that the trend in environmental litigation and laws and regulations will continue to be toward stricter standards. Such changes in the law and regulations may require the Company to make additional capital expenditures which, while not currently estimable with certainty, are not presently expected to have a material adverse effect on the Company's financial condition. See "Legal Proceedings" for a discussion of certain other environmental matters.
Employees
As of March 31, 2000, KEMET had approximately 14,200 employees, of whom approximately 4,000 were located in the United States, approximately 10,100 were located in Mexico, and the remainder were located in the Company's foreign sales offices. The Company believes that its future success will depend in part on its ability to recruit, retain and motivate qualified personnel at all levels of the Company. While none of its United States employees are unionized, the Company has approximately 7,700 hourly employees in Mexico represented by labor unions as required by Mexican law. The Company has not experienced any major work stoppages and considers its relations with its employees to be good. In addition, the Company's labor costs in Mexico are denominated in pesos, and Mexican inflation or a significant depreciation of the United States dollar against the Mexican peso would increase the Company's labor costs in Mexico.
ITEM 2.
ITEM 2. PROPERTIES
KEMET is headquartered in Greenville, South Carolina, and has a total of 13 manufacturing plants located in the southeastern United States and Mexico. The manufacturing operations are in Greenville, Mauldin, Fountain Inn, and Greenwood, South Carolina; Shelby, North Carolina; Matamoros, Monterrey, and Ciudad Victoria, Mexico. The Company's existing manufacturing and assembly facilities have approximately 1.8 million square feet of floor space and are highly automated with proprietary manufacturing processes and equipment.
The Mexican facilities operate under the Maquiladora Program. In general, a company that operates under the program is afforded certain duty and tax preferences and incentives on products brought back into the United States. The Company has operated in Mexico since 1969 and approximately 71% of its employees are located in Mexico. The Company's Mexican facilities in Matamoros are located within five miles of Brownsville, Texas, with easy access for daily shipments of work-in-process and finished products. The Company also has manufacturing facilities in Monterrey which commenced operations in 1991 and were expanded by 130,000 square feet in fiscal year 1997. Also in 1997, the Company constructed and put in production a new manufacturing plant in Monterrey which comprises 240,000 square feet of space. In addition, during fiscal year 2000, the Company began production in a new 250,000 square foot manufacturing facility for tantalum capacitors in Ciudad Victoria, Mexico.
The Company's manufacturing processes and standards, including compliance with applicable environmental and worker safety laws and regulations, are essentially identical in the United States and Mexico. The Company's Mexican operations, like its United States operations, have won numerous quality awards from their customers.
Each of the Company's manufacturing and assembly facilities produces one product or a family of closely related products. Management believes that this focused approach to manufacturing allows each facility to shorten manufacturing time, optimize product flow, and avoid long and costly equipment retooling and employee training time, all of which leads to overall reduced costs.
The Company has developed just-in-time manufacturing and sourcing systems. These systems enable the Company to meet customer requirements for faster deliveries while minimizing the need to carry significant inventory levels. The Company continues to emphasize flexibility in all of its manufacturing operations to improve product delivery response times.
Management believes that substantially all of its property and equipment is in good condition and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs for leaded capacitors. The Company continues to add capacity to meet its projected manufacturing and distribution needs for surface-mount capacitors.
The following table provides certain information regarding the Company's principal facilities:
(1) Includes two separate manufacturing facilities. (2) Includes three separate manufacturing facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) and certain analogous state laws, impose retroactive, strict liability upon certain defined classes of persons associated with releases of hazardous substances into the environment. Among those liable under CERCLA (known collectively as "potentially responsible parties" or "PRPs") is any person who "arranged for disposal" of hazardous substances at a site requiring response action under the statute. While a company's liability under CERCLA is often based upon its proportionate share of overall waste volume or other equitable factors, CERCLA has been widely held to permit imposition of joint and several liability on each PRP. The Company has periodically incurred, and may continue to incur, liability under CERCLA and analogous state laws with respect to sites used for off-site management or disposal of Company-derived wastes. The Company has been named as a PRP at the Seaboard Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a "de minimis" party and does not expect its total exposure to be material. In addition, Union Carbide Corporation (Union Carbide), the former owner of the Company, is a PRP at certain sites relating to the off-site disposal of wastes from properties presently owned by the Company. The Company is participating in coordination with Union Carbide in certain PRP-initiated activities related to these sites. The Company expects that it will bear some portion of the liability with respect to these sites; however, any such share is not presently expected to be material to the Company's financial condition. In connection with the acquisition in 1990, Union Carbide agreed, subject to certain limitations, to indemnify the Company with respect to the foregoing sites.
The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers' compensation or work place safety cases, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the Company's quarter ended March 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. As of December 9, 1999, the Company's Common Stock began trading on the New York Stock Exchange under the symbol KEM. Prior to that date, the Common Stock was traded on the Nasdaq Stock Market under the symbol KMET. At the close of business on June 7, 2000, there were approximately 895 holders of record of the Company's Common Stock. The following table represents the high and low sale prices of the Common Stock as reported by the appropriate exchange for the periods indicated:
The Company has not declared or paid any cash dividends on its Common Stock since the initial public offering in October 1992. The Company currently intends to retain earnings to support its growth strategy and does not anticipate paying dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other factors, the capital requirements, operating results and financial condition of the Company. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources" contained in this Form 10-K for fiscal year 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See accompanying notes to consolidated financial statements.
Note 3: Debt A summary of long-term debt follows (dollars in thousands):
In May 1998, the Company sold $100,000 of its Senior Notes pursuant to the terms of a Note Purchase Agreement dated May 1, 1998, between the Company and the eleven purchasers of the Senior Notes named therein. These Senior Notes have a final maturity date of May 4, 2010, and begin amortizing on May 4, 2006. The Senior Notes bear interest at a fixed rate of 6.66%, with interest payable semiannually beginning November 4, 1998.
The Company is subject to restrictive covenants under its loan agreements which, among others, restrict its ability to make loans or advances or to make investments and require it to meet financial tests related principally to funded debt, cash flows, and net worth. At March 31, 2000, the Company was in compliance with such covenants. Borrowings are secured by guarantees of certain of the Company's wholly owned subsidiaries.
The aggregate maturities of long-term debt subsequent to March 31, 2000, follow: 2007, $20,000; 2008, $20,000; 2009, $20,000; 2010, $20,000; and 2011, $20,000.
Note 4: Other Non-Current Obligations Non-current obligations are summarized as follows (dollars in thousands):
Included as a part of other non-current obligations is the Company's accrual for environmental liabilities.
Note 5: Employee Pension and Savings Plans
The Company has a non-contributory pension plan (Plan) which covers substantially all employees in the United States who meet age and service requirements. The Plan provides defined benefits that are based on years of credited service, average compensation (as defined), and the primary social security benefit. The effective date of the Plan is April 1, 1987.
The cost of pension benefits under the Plan is determined by an independent actuarial firm using the "projected unit credit" actuarial cost method. Currently payable contributions to the Plan are limited to amounts that are currently deductible for income tax reporting purposes, and are included in accrued expenses in the consolidated balance sheets.
Components of net periodic pension cost include the following (dollars in thousands):
The weighted-average rates used in determining pension cost for the plan are as follows:
A reconciliation of the Plan's projected benefit obligation, fair value of the Plan assets, and funding status is as follows (dollars in thousands):
The Company sponsors an unfunded Deferred Compensation Plan for key managers. This plan is non-qualified and provides certain key employees defined pension benefits which would equal those provided by the Company's non-contributory pension plan if the plan was not limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code. Expenses related to the deferred compensation plan totaled $988 in fiscal 2000, $885 in fiscal 1999, and $2,115 in fiscal 1998. Total benefits accrued under this plan were $7,121 at March 31, 2000, and $6,308 at March 31, 1999.
In addition, the Company has a defined contribution plan (Savings Plan) in which all U.S. employees who meet certain eligibility requirements may participate. A participant may direct the Company to contribute amounts, based on a percentage of the participant's compensation, to the Savings Plan through the execution of salary reduction agreements. In addition, the participants may elect to make after-tax contributions. The Company will make annual matching contributions to the Savings Plan of 30% to 50% and salary reduction contributions up to 7.5% of compensation. The Company contributed $1,801 in fiscal 2000, $1,786 in fiscal 1999 and $1,896 in fiscal 1998.
Note 6: Postretirement Medical and Life Insurance 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):
A reconciliation of the postretirement medical and life insurance plan's projected benefit obligation, fair value of plan assets, and funding status is as follows (dollars in thousands):
Note 7: Income Taxes
The provision for income tax expense consists of (dollars in thousands):
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
The components of deferred tax assets and liabilities are as follows (dollars in thousands):
The net deferred income tax liability is reflected in the accompanying 2000 and 1999 balance sheets as a $20,099 and $10,899 current asset and a $35,902 and $23,771 non-current liability, respectively.
The Company anticipates that the reversal of existing taxable temporary differences will provide sufficient taxable income to realize the remaining deferred tax assets. Accordingly, no valuation allowance has been provided for in 2000 or 1999.
For fiscal year ended March 31, 1999, the Company had a regular tax loss of $10.7 million which was carried back to recover Federal income taxes paid in prior years.
During fiscal years 2000 and 1999, the Company received Federal income tax refunds related to amending various years tax returns. These refunds were recognized as tax benefits during the current year. Interest income received from these refunds was netted against interest expense.
Note 8: Stock Option Plans The Company has two option plans which reserve shares of common stock for issuance to executives and key employees. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation costs for the Company's two stock option plans been determined based on the fair value at the grant date for awards in fiscal year 2000, 1999 and 1998, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (dollars in thousands except per share data):
The pro forma amounts indicated above recognize compensation expense on a straight-line basis over the vesting period of the grant. The pro forma effect on net income for fiscal year 2000 is not representative of the pro forma effects on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996.
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: expected life of 5 years for 2000, 1999 and 1998; a risk-free interest rate of 6.8% for 2000, 5.4% for 1999 and 5.7% for 1998; expected volatility of 49.7% for 2000, 45.1% for 1999 and 42.6% for 1998; and a dividend yield of 0.0% for all three years.
Under the 1992 Executive Stock Option Plan approved by the Company in April 1992, 1,905,120 options were granted to certain executives. In May 1992, the Company also approved the 1992 Key Employee Stock Option Plan, which authorizes the granting of options to purchase 2,310,000 shares of Common Stock. In addition, stockholders approved the 1995 Executive Stock Option Plan at the 1996 Annual Meeting. This plan provides for the issuance of options to purchase 3,800,000 shares of common stock to certain executives.
These plans provide that shares granted come from the Company's authorized but unissued common stock. The prices of the options granted thus far pursuant to these plans are no less than 100% of the value of the shares on the date of grant. Also, the options may not be exercised within two years from the date of grant and no options will be exercisable after ten years from the date of grant.
In fiscal 1999, the Company's Board of Directors approved an option re-price program for the Key Employee Stock Option Plan and Executive Stock Option Plan, effective February 1, 1999, and April 1, 1999, respectively. Under this program, options to purchase 658,260 shares under the Key Employee Stock Option Plan and 1,048,000 shares under the Executive Stock Option Plan at prices ranging from $9.63 to $16.07 per share were canceled and reissued at $5.00 and $6.00 per share, respectively. The reissued price was the fair market value at that time. The vesting date of the options originally granted in 1995 and 1996 was changed to April 2000. The vesting date for those options originally issued in 1997 remained at October 1999. A summary of the status of the Company's three stock option plans as of March 31, 2000, 1999, and 1998, and changes during the years ended on those dates is presented below:
Note 9: Geographic Information The following geographic information includes net sales based on product shipment destination (1) (dollars in thousands):
Note 10: Commitments
(a) The Company has agreements with distributor customers which, under certain conditions, allow for returns of overstocked inventory and provide protection against price reductions initiated by the Company. Allowances for these commitments are included in the consolidated balance sheets as reductions in trade accounts receivable (note 11). The Company adjusts sales to distributors through the use of allowance accounts based on historical experience.
(b) A subsidiary of the Company sells certain receivables discounted at .60 of 1% above LIBOR for the number of days the receivables are outstanding, with a recourse provision not to exceed 5% of the face amount of the factored receivables. The Company has issued a joint and several guarantee in an aggregate amount up to but not to exceed $4,000 to guarantee this recourse provision. The Company transferred receivables and incurred factoring costs of $372,656 and $3,444 in 2000, $258,619 and $2,988 in 1999, and $283,153 and $2,834 in 1998.
Included in accounts payable, trade, is $44,212 and $32,715 at March 31, 2000 and 1999, respectively, which represents factored receivables collected but not remitted.
(c) The Company's leases consist primarily of manufacturing equipment and expire principally between 2000 and 2005. A number of leases require that the Company pay certain executory costs (taxes, insurance and maintenance) and certain renewal and purchase options. Annual rental expense for operating leases are included in results of operations and were approximately $8,300 in 2000, $10,229 in 1999, and $12,592 in 1998. Future minimum lease payments over the next five years under noncancelable operating leases at March 31, 2000, are as follows (dollars in thousands):
Note 11: Supplementary Balance Sheet and Income Statement Detail (dollars in thousands)
Note 12: Legal Proceedings
The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), and certain analogous state laws, impose retroactive, strict liability upon certain defined classes of persons associated with releases of hazardous substances into the environment. Among those liable under CERCLA (known collectively as "potentially responsible parties" or "PRPs") is any person who "arranged for disposal" of hazardous substances at a site requiring response action under the statute. While a company's liability under CERCLA is often based upon its proportionate share of overall waste volume or other equitable factors, CERCLA has been widely held to permit imposition of joint and several liabilities on each PRP. The Company has periodically incurred, and may continue to incur, liability under CERCLA and analogous state laws, with respect to sites used for off-site management or disposal of Company-derived wastes. The Company has been named as a PRP at the Seaboard Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a "de minimis" party and does not expect its total exposure to be material. In addition, Union Carbide Corporation (Union Carbide), the former owner of the Company, is a PRP at certain sites relating to the off-site disposal of wastes from properties presently owned by the Company. The Company is participating, in coordination with Union Carbide, in certain PRP-initiated activities related to these sites. The Company expects that it will bear some portion of the liability with respect to these sites; however, any such share is not presently expected to be material to the Company's financial condition or results of operations. In connection with the acquisition in 1990, Union Carbide agreed, subject to certain limitations, to indemnify the Company with respect to the foregoing sites.
The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers' compensation or work place safety cases, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company's financial condition or results of operations.
Note 13: Restructuring Charge
(a) The Company recorded a pretax charge of $10.5 million ($7.3 million after tax) in the quarter ended December 31, 1997, in conjunction with a plan to restructure the manufacturing and support operations between its U.S. facilities in North and South Carolina and its Mexican operations in Monterrey, Mexico. Under the restructuring plan, the Company reduced the U.S. workforce by 1,182 people. Through March 31, 1999, the Company has paid $10.5 million in severance, pension, and outplacement costs under the restructuring plan, reducing the liability to zero.
Note 14: Earnings Per Share
Basic and diluted earnings per share are calculated as follows (dollars in thousands except per share data):
Note 15: Financial Instruments
The following table presents the carrying amounts and the estimated fair values of financial instruments at March 31, 2000 and 1999 (dollars in thousands):