ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis provide information that we believe is useful in understanding our operating results, cash flows, and financial condition for the three fiscal years ended
March 31, 2019
,
2018
, and
2017
. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and related notes appearing elsewhere in this report. The discussions in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Our actual future results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the Item 1A, “Risk Factors” and, from time to time, in our other filings with the Securities and Exchange Commission.
Our Competitive Strengths
We believe that our Company benefits from the following competitive strengths:
Strong Customer Relationships
We have a large and diverse customer base. We believe that our emphasis on quality control and our performance history establishes loyalty with OEMs, EMSs and distributors. Our customer base includes most of the world’s major electronics OEMs (including Bosch Group, Cisco Systems, Inc., Continental AG, Dell Inc., Apple Inc., Google LLC, Nintendo, Tesla Inc., Delphi Technologies PLC, ABB Group, and Horiba), EMSs (including Celestica Inc., Flextronics International LTD, Jabil Circuit, Inc., and Sanmina-SCI Corporation) and distributors (including TTI, Inc., Arrow Electronics, Inc., Satori Electric Co., and Avnet, Inc.). Our strong, extensive and efficient worldwide distribution network is one of our differentiating factors. We believe our ability to provide innovative and flexible service offerings, superior customer support and focus on speed-to-market results in a more rewarding customer experience, earning us a high degree of customer loyalty.
Breadth of Our Diversified Product Offering and Markets
We believe that we have the most complete line of primary capacitor types spanning a full spectrum of dielectric materials including tantalum, multilayer ceramic, solid and electrolytic aluminum and film capacitors. As discussed below, our acquisition of (and previous private label partnership with) TOKIN, has expanded our product offerings and markets. As a result, we believe we can satisfy virtually all of our customers’ capacitance needs, thereby strengthening our position as their supplier of choice. In addition, through our acquisition of TOKIN, we have products to assist in the management of electronic noise within a device and in communications between devices, as well as products that can sense and respond to human activity, physical vibration, and electric current.
We sell our products into a wide range of end-markets, including computing, industrial, telecommunications, transportation, consumer, defense and healthcare across all geographical regions. No single end market industry accounted for more than 30% of net sales; although, one customer, an electronics distributor, accounted for more than 10% of our net sales in fiscal year
2019
. No single end-use direct customer accounted for more than 5% of our net sales in fiscal year
2019
. We believe that well-balanced product, geographic and customer diversification helps us mitigate some of the negative financial impact through economic cycles.
Leading Market Positions and Operating Scale
Based on net sales, we believe that we are the largest manufacturer of tantalum capacitors in the world and one of the largest manufacturers of direct current film capacitors in the world and have a substantial market position in the specialty ceramic and custom wet aluminum electrolytic markets. KEMET's Polymer Tantalum sales now lead the industry with greater than
50.0%
market share. As discussed below, our acquisition of (and previous private label partnership with) TOKIN allows us to achieve true scale in operations to manage raw materials sourcing as well as maximize efficiencies. We believe that our leading market positions and operating scale allow us to realize production efficiencies, leverage economies of scale and capitalize on growth opportunities in the global capacitor market.
Strong Presence in Specialty Products
We engage in design collaboration with our customers in order to meet their specific needs and provide them with customized products satisfying their engineering specifications. Whether at the concept or design stage, KEMET provides engineering tools and samples to our customers to enable them to make the best product selections. KEMET’s Field Application Engineers (experts in electrical circuits) and Technical Product Managers (experts in product applications) assist our Sales team as they navigate the product selection process with our customers. During fiscal years
2019
and
2018
, respectively, specialty products accounted for
39.4%
and
41.8%
of our revenue. By allocating an increasing portion of our management resources and research and development (“R&D”) investment particularly through our acquisition of (and previous partnership with) TOKIN to specialty products, we have established ourselves as one of the leading innovators in this
fast growing, emerging segment of the market, including healthcare, renewable energy, telecommunication infrastructure and oil and gas.
Low-Cost and Strategic Locations
We believe our manufacturing plants located in Mexico, China, Vietnam, Indonesia, Thailand, Bulgaria, and Macedonia provide some of the lowest cost production facilities in the industry. Many of our key customers relocated or added production facilities to Asia, particularly China. We believe our manufacturing production footprint is essential to best meet our customers' demands, production needs, and total value proposition.
Our Brand
Founded by Union Carbide in 1919 as KEMET Laboratories, we believe that we have established a reputation as a high quality, efficient and affordable partner that sets our customers’ needs as the top priority. This has allowed us to successfully attract loyal clientele and enable us to expand our operations and market share over the past few years. We believe our commitment to addressing the needs of the industry in which we operate has differentiated us from our competitors. In addition to our traditional reputation of being the “Easy-To-Buy-From” company by providing excellent customer service and on-time delivery, we have now evolved to be the “Easy-To-Design-In” company with the addition of technical resources like KEMET’s online Engineering Center and capacitor selection simulation tools.
Our People
We believe that we have successfully developed a unique corporate culture based on innovation, customer focus and commitment. We have a strong, highly experienced and committed team in each of our markets. Many of our professionals have developed unparalleled experience in building leadership positions in new markets, as well as successfully integrating acquisitions. Our 21-member senior management team has an average of 18 years of experience with us and an average of 28 years of experience in the manufacturing industry.
Business Strategy
Our strategy is to use our position as a leading, high-quality manufacturer of electronic components and materials to capitalize on the increasingly demanding requirements of our customers. Refer to “Item 1.
Business
” for KEMET's strategic highlights. Other important elements of our strategy include:
One KEMET Campaign.
We continue to focus on improving our commercial and technological capabilities through various initiatives that all fall under our One KEMET campaign. The One KEMET campaign aims to ensure that we, as a company, are focused on the same goals and working with the same processes and systems to ensure consistent quality and service that allow us to provide our customers with the technologies they require at a competitive “total cost of ownership.” This effort was launched to ensure that, as we continue to grow, we not only remain grounded in our core principles but that we also use those principles, operating procedures and systems as the foundation from which to expand. These initiatives include our Lean and Six Sigma culture evolution, our global customer accounts management program and our evolution toward a philosophy of being “easy to design-in.”
Develop Our Significant Customer Relationships and Industry Presence.
We continue to focus on our responsiveness to our customers’ needs and requirements by making order entry and fulfillment easier, faster, more flexible and more reliable for our customers. This will be accomplished by focusing on building products around customers’ needs and by giving decision-making authority to customer-facing personnel and by providing purpose-built systems and processes.
Leverage Our Technological Competence and Expand Our Leadership in Specialty Products
We continue to leverage our technological competence and our acquisition of TOKIN, by introducing new products in a timely and cost-efficient manner. This allows us to generate an increasing portion of our sales from new and customized solutions that meet our customers’ varied and evolving electronic component needs, as well as to improve our financial performance. We believe that by continuing to build on our strength in the higher growth and higher margin specialty segments of the capacitor, electro-magnetic, sensor and actuator markets, we will be well-positioned to achieve our long-term growth objectives while also improving our profitability. During fiscal year
2019
, we introduced
31,902
new products of which
336
were first to market, and specialty products accounted for
39.4%
of our revenue over this period.
Further Expand Our Broad Capacitance Capabilities
We identify ourselves as the "Electronic Components" company and strive to be the supplier of choice for all our customers' capacitance needs across the full spectrum of dielectric materials including tantalum, multilayer ceramic, solid and electrolytic aluminum, film and paper. While we believe we have the most complete line of capacitor technologies across these primary capacitor types, we intend to continue to research and pursue additional capacitance technologies and solutions to maximize the breadth of our product offerings. As discussed below through our acquisition of TOKIN, we have further expanded our product offerings to electric double layer capacitors, electro-magnetic devices, sensors, and actuators. This expansion of product offerings is a continuation of our focus on the higher margin specialty segments of the market.
Selectively Target Complementary Acquisitions and Equity Investments
As strategic opportunities are identified, we will evaluate and possibly pursue them if they would enable us to enhance our competitive position and expand our market presence. Our strategy is to acquire complementary capacitor and other related businesses allowing us to leverage our business model, potentially including those involved in other passive components that are synergistic with our customers’ technologies and our current product offerings. For example, in fiscal year 2012, we acquired KBP, which has allowed us to vertically integrate certain manufacturing processes within Solid Capacitors. Further, as described below, in fiscal year 2018 we acquired TOKIN, a manufacturer of tantalum capacitors and electro-magnetic devices.
In fiscal year 2018, we entered into a Joint Venture Agreement for the formation of KEMET Jianghai Electronic Components Co. Ltd., a limited liability company located in Nantong, China with Jianghai (Nantong) Film Capacitor Co., Ltd, a subsidiary of Nantong Jianghai Capacitor Co. Ltd ("Jianghai"). KEMET Jianghai Electronic Components manufactures axial electrolytic, (H)EV Film DC brick, solid aluminum electrolytic, and hybrid aluminum electrolytic capacitors for distribution through the KEMET and Jianghai sales channels.
Also, during fiscal year 2018, the Company invested in Novasentis' Series-D round of funding. Novasentis makes the world's thinnest, electro mechanical polymer-based actuators that provide rich haptic feedback for a variety of applications, including augmented/virtual reality and wearables. Novasentis supplies its "smart" film and KEMET applies its expertise in manufacturing film capacitors to the development and commercial production of the actuators.
Promote the KEMET Brand Globally
We are focused on promoting the KEMET brand globally by highlighting the high-quality and high reliability of our products and our superior customer service. We will continue to market our products to new and existing customers around the world to expand our business. We continue to be recognized by our customers as a leading global supplier. For example, in calendar years 2015, 2016, and 2017, we received the “Global Operations Excellence Award” from TTI, Inc.
On June 29, 2018, we received the “Supplier of the Year Award” in the “Consistent Supply Chain ” category for calendar year 2018 from Elektronika Sales Pvt. Ltd and on March 22, 2019 TTI, Inc. announced that KEMET won the 2018 “Supplier Excellence Award.”
Global Sales & Marketing Strategy
Our motto “Think Global, Act Local” describes our approach to sales and marketing. Each of our four sales regions (Americas, EMEA, JPKO and APAC) have account managers, field application engineers and strategic marketing managers. In addition, we also have local customer and quality-control support in each region. This organizational structure allows us to respond to the needs of our customers on a timely basis and in their native language. The regions are managed locally and report to a senior manager who is on the KEMET Leadership Team. Furthermore, this organizational structure ensures the efficient communication of our global goals and strategies and allows us to serve the language, cultural and other region-specific needs of our customers. Our customer base is approximately 180,000 strong, with our top 1,000 customers accounting for about 50.0% of our revenues. Our go-to-market strategy includes a combination of strong engagement face to face with those top customers and an industry leading state of the art digital platform to engage the remaining customers. In addition, we partner with all the premier distributors in the electronics industry to ensure we obtain the biggest reach and leverage their expertise in stocking and servicing those customers.
TOKIN Acquisition
Through our acquisition of TOKIN and the previous cross licensing agreement and Amended and Restated Private Label Agreement with TOKIN, we have expanded product offerings and markets for both KEMET and TOKIN. KEMET’s strong presence in the western hemisphere and TOKIN's excellent position in Japan and Asia significantly enhanced our customer reach and has created cross-selling opportunities. Through TOKIN we believe we can achieve true scale in operations allowing us to manage raw materials sourcing as well as maximize efficiencies and best practices in manufacturing and product development. We believe that the international management team of KEMET and TOKIN allows us to be more sensitive and
aware of region-specific business needs compared to our competitors. Combining our R&D capabilities and university relationships allows us to be on the forefront of new developments and technological advancements in the capacitor industry. Leveraging R&D investment in both Japan and the U.S. enables KEMET to diversify beyond capacitors in the passives market as a result of the TOKIN acquisition.
Since the acquisition of TOKIN, the Company has been able to improve its cash balance, net debt, and interest expense. The purchase of TOKIN gave the Company access to the Japanese capital markets, which allowed the Company to refinance its U.S. based debt with a Japanese bank. Interest rates in Japan are significantly less than in the U.S., which contributed to the lower interest expense in fiscal year 2019 compared to fiscal years 2018 and 2017.
Recent Developments and Trends
TOKIN
On April 19, 2017, the Company completed its acquisition of TOKIN, which at that time it became a 100% owned indirect subsidiary of KEMET. As such, the results for fiscal year 2017 and the first 19 days of fiscal year 2018 do not include TOKIN's sales and expenses. See Note
2
, "
Acquisitions
" to the Consolidated Financial Statements for further discussion on the TOKIN acquisition
.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the US federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign-sourced earnings.
In fiscal year 2018, the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118, because the Company had not yet completed its accounting for all of the tax effects of the Act. Certain provisions of the Act did not impact the Company until the fiscal year 2019. These provisions include, but are not limited to, the base erosion anti-abuse tax (“BEAT”), the provision designed to tax global intangible low-taxed income (“GILTI”), the foreign-derived intangible income (“FDII”) provision, the expansion of the IRC Sec. 162(m) limitation, and the provision designed to limit interest expense deductions.
In fiscal year 2019, the Company completed its accounting for the enactment-date income tax effects of the Act, based on legislative updates relating to the Act currently available. These tax effects related to the one-time transition tax, the reduced corporate tax rate, and an additional limitation for executive compensation under IRC Sec. 162(m). For further information on the impact of the Act on the Company, refer to Note
11
, “
Income Taxes.”
Tariffs
On July 6, 2018, the United States government-imposed tariffs according to Section 301 of the Trade Act, on particular products that are imported into the United States from China. The Company primarily imports film, tantalum Polymer, and MSA products into the United States from China. The impact on the Company's future results from these tariffs is expected to be minimal as the Company does not import a significant number of products into the United States from China, and the Company expects to pass the entire cost of the tariffs onto its direct customers and distributors.
Long-term debt
On October 29, 2018, the Company entered into a
JPY 33.0 billion
Term Loan Agreement (the “TOKIN Term Loan Facility”) by and among TOKIN, the lenders party thereto (the “Lenders”) and Sumitomo Mitsui Trust Bank, Limited in its capacity as agent (the “Agent”), arranger and Lender. Funding for the TOKIN Term Loan Facility occurred on November 7, 2018. The proceeds, which were net of an arrangement fee withheld from the funding amount, were
JPY 32.1 billion
, or approximately
$283.9 million
using the exchange rate as of November 7, 2018.
The proceeds from the TOKIN Term Loan Facility were used by TOKIN to make intercompany loans (the “Intercompany Loans”) to the Company. The proceeds, along with other cash on hand, were used to prepay in full the outstanding amounts under the Company's Term Loan Credit Agreement with Bank of America, N.A. of
$323.4 million
and a prepayment premium of
1.0%
. For further information, refer to Note
3
, “
Debt.”
Dividends
During fiscal year 2019, the Company announced its intention to pay regular quarterly cash dividends to holders of our common stock. During the fiscal year, the Company declared and paid two quarterly cash dividends of $0.05 per share of its common stock. On May 16, 2019, the Company announced a cash dividend of $0.05 per share of the Company's common stock. Payment will be made on June 10, 2019 to shareholders of record at the close of business on May 30, 2019.
Any future determination to pay dividends will be at the discretion of the Company’s Board and will depend upon, among other factors, the capital requirements, operating results, and financial condition of the Company.
Restructuring
The Company has implemented restructuring plans which include programs to increase competitiveness by removing excess capacity, relocating production to lower cost locations, relocating corporate functions to the new headquarters, and eliminating unnecessary costs throughout the Company. Significant restructuring plans which include personnel reduction costs that occurred during fiscal year ended
March 31, 2019
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected to be incurred
|
|
Incurred during year ended March 31, 2019
|
|
Cumulative incurred to date
|
|
Restructuring Plan
|
Segment
|
Personnel Reduction Costs
|
Relocation & Exit Costs
|
|
Personnel Reduction Costs
|
Relocation & Exit Costs
|
|
Personnel Reduction Costs
|
Relocation & Exit Costs
|
|
TOKIN operational & overhead function reduction in force
|
MSA, Corporate, & Solid
Capacitors
|
$
|
5,339
|
|
$
|
—
|
|
|
$
|
942
|
|
$
|
—
|
|
|
$
|
5,339
|
|
$
|
—
|
|
|
Tantalum powder facility relocation
(1)
|
Solid Capacitors
|
850
|
|
2,468
|
|
|
—
|
|
3,355
|
|
|
—
|
|
3,355
|
|
|
Axial electrolytic production relocation from Granna to Evora
|
Film and Electrolytic
|
879
|
|
3,232
|
|
|
—
|
|
2,296
|
|
|
—
|
|
2,296
|
|
|
Reorganization due to decline of MnO2 Products
|
Solid Capacitors
|
1,798
|
|
—
|
|
|
1,585
|
|
—
|
|
|
1,585
|
|
—
|
|
|
All Other
(2)
|
Corporate, Film and Electrolytic
|
|
|
|
296
|
|
305
|
|
|
|
|
___________________________________________
(1)
The Company expects to recover approximately
$0.9 million
related to tantalum reclaim, which would decrease the cumulative expenses incurred to date for relocation and exit costs upon the completion of reclaim activities.
(2)
The Company incurred
$0.6 million
in restructuring charges for minor projects not included in the table above during fiscal year ended
March 31, 2019
, consisting of
$0.3 million
each in personal reduction costs and relocation and exit costs.
Off-Balance Sheet Arrangements
As of
March 31, 2019
, other than operating lease commitments as described in Note
15
,
“Commitments and Contingencies”
, we are not a party to any off-balance sheet financing arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our accounting policies are summarized in Note 1,
“Organization and Significant Accounting Policies”
to the consolidated financial statements. The following identifies a number of policies which require significant judgments and estimates or are otherwise deemed critical to our financial statements.
Our estimates and assumptions are based on historical data and other assumptions that we believe are reasonable. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
Our judgments are based on our assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the consolidated financial statements. Readers should understand that actual future results could differ from these estimates, assumptions, and judgments.
A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (i.e., 1%, 10%, etc.) are included to allow readers of this Annual Report on Form 10-K to understand a general cause and effect of changes in the estimates and do not represent our predictions of variability. For these estimates, it should be noted that future events rarely develop exactly as forecast, and estimates require regular review and adjustment. We believe the following critical accounting policies contain the most significant judgments and estimates used in the preparation of the consolidated financial statements:
REVENUE RECOGNITION.
The Company recognizes revenue under the guidance provided in ASC 606. Consistent with the terms of ASC 606, the Company records revenue on product sales in the period in which the Company
satisfies its performance obligation by transferring control over a product to a customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for transferring products to a customer.
The Company sells its products to distributors, OEMs, and EMS providers, and the sales price may include adjustments for sales discounts, price adjustments, and sales allowances. The Company has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis. The principle forms of these adjustments include:
|
|
|
|
•
|
Inventory price protection and ship-from-stock and debit (“SFSD”) programs,
|
|
|
|
|
•
|
Distributor rights of returns,
|
|
|
|
|
•
|
Limited assurance warranties
|
The Company's inventory price protection and SFSD programs provide authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. KEMET's SFSD program is specific to certain distributors within the Americas and EMEA regions. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative, and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly. We believe this methodology enables us to make reliable estimates of future adjustments under the SFSD program. If the historical SFSD run rates used in our calculation changed by 1% in fiscal year
2019
, net sales would be impacted by
$1.3 million
.
Select distributors have the right to return a certain portion of their purchased inventory to KEMET from the previous fiscal quarter. The Company estimates future returns based on historical return patterns and records a corresponding right of return asset and refund liability as a component of the line items, “Inventories, net” and “Accrued expenses,” respectively, on the Consolidated Balance Sheets. The Company also offers volume-based rebates on a case-by-case basis to certain customers in each of the Company’s sales channels.
The Company's sales allowances are recognized as a reduction in the line item “Net sales” on the Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable, net” on the Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company’s estimates.
INVENTORIES.
Inventories are valued at the lower of cost or net realizable value. For most of the inventory, cost is determined under the first-in, first-out method. For tool crib, a component of our raw material inventory, cost is determined under the average cost method. The valuation of inventories requires us to make estimates. We also must assess the prices at which we believe the finished goods inventory can be sold compared to its cost. A sharp decrease in demand could adversely impact earnings as the reserve estimates could increase.
Excess and obsolete inventories are based on a combination of usage, age, order requirements, and sales history. Raw materials and tool crib obsolescence reserves are based on usage over one and two years, respectively, and the Company maintains reserves for raw materials and tool cribs that exceed these ages. Finished goods obsolescence reserves are either based on product age limits determined by market requirements, and/or based on excess quantities that exceed product orders and historical product sales.
PENSION AND POST-RETIREMENT BENEFITS.
Our management, with the assistance of actuarial firms, performs actuarial valuations of the fair values of our pension and post-retirement plans’ benefit obligations. We make certain assumptions that have a significant effect on the calculated fair value of the obligations such as the:
|
|
|
|
•
|
discount rate—used to arrive at the net present value of the obligation; and
|
|
|
|
|
•
|
salary increases—used to calculate the impact future pay increases will have on post-retirement obligations.
|
We understand that these assumptions directly impact the actuarial valuation of the obligations recorded on the Consolidated Balance Sheets and the income or expense that flows through the Consolidated Statements of Operations.
We base our assumptions on either historical or market data that we consider reasonable. Variations in these assumptions could have a significant effect on the amounts reported in Consolidated Balance Sheets and the Consolidated
Statements of Operations. The most critical assumption relates to the discount rate. A 25 basis point increase or decrease in the weighted average discount rate would result in changes to the projected benefit obligation of ($4.0) million and $4.4 million, respectively.
GOODWILL AND LONG-LIVED ASSETS.
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, and intangible assets with indefinite useful lives are tested for impairment at least on an annual basis. We perform our impairment test during the fourth quarter of each fiscal year and when otherwise warranted.
We evaluate our goodwill on a reporting unit basis. This requires us to estimate the fair value of the reporting units based on the future net cash flows expected to be generated. The impairment test involves a comparison of the fair value of each reporting unit, with the corresponding carrying amounts. If the reporting unit’s carrying amount exceeds its fair value, then an indication exists that the reporting unit’s goodwill may be impaired. The impairment to be recognized is measured by the amount by which the carrying value of the reporting unit’s goodwill being measured exceeds its implied fair value. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the sum of the amounts assigned to identified net assets. As a result, the implied fair value of goodwill is generally the residual amount that results from subtracting the value of net assets including all tangible assets and identified intangible assets from the fair value of the reporting unit’s fair value. We determine the fair value of our reporting units using an income-based, discounted cash flow (“DCF”) analysis, and market-based approaches (Guideline Publicly Traded Company Method and Guideline Transaction Method) which examine transactions in the marketplace involving the sale of the stocks of similar publicly-owned companies, or the sale of entire companies engaged in operations similar to KEMET. In addition to the above described reporting unit valuation techniques, our goodwill impairment assessment also considers our aggregate fair value based upon the value of our outstanding shares of common stock.
Our goodwill balance of
$40.3 million
is comprised of
$35.6 million
related to KBP, which is within the Tantalum product line of the Solid Capacitors reportable segment, and
$4.7 million
related to IntelliData, which is a corporate asset. As part of our annual impairment testing, we determine the fair value of the relevant reporting unit(s) using an income-based, DCF analysis for KBP at the Tantalum product line level, and an internal rate of return analysis for IntelliData.
Significant assumptions used in the DCF analysis are:
|
|
|
|
•
|
the discount rate based on the weighted average cost of capital (“WACC”),
|
|
|
|
|
•
|
estimated sales growth rates, and
|
|
|
|
|
•
|
the estimated market price and production cost for tantalum products
|
Our WACC is determined through market comparisons combined with small stock and equity risk premiums. Tantalum’s sales growth rates are estimated through KEMET’s three-year strategic plan.
Long-lived assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or group of assets may not be recoverable. A long-lived asset classified as held for sale is initially measured and reported at the lower of its carrying amount or fair value less cost to sell.
Long-lived assets to be disposed of other than by sale are classified as held and used until the long-lived asset is disposed of.
Tests for the recoverability, when necessary, of a long-lived asset to be held and used are performed by comparing the carrying amount of the long-lived asset to the sum of the estimated future undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, we use future projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. These assumptions include, among other estimates, periods of operation and projections of sales and cost of sales. Changes in any of these estimates could have a material effect on the estimated future undiscounted cash flows expected to be generated by the asset. If it is determined that the book value of a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value. The fair value is calculated as the discounted cash flows of the underlying assets.
We evaluate the value of our other indefinite-lived intangible assets (trademarks) using an income-based, relief from royalty analysis.
The Company completed its impairment test on goodwill and intangible assets with indefinite useful lives as of January 1,
2019
and
concluded that goodwill and indefinite-lived assets were not impaired
nor were they at risk of failing step one of the impairment test as the fair value of each of the assets exceeds the carrying value. The type of events that could result in a future goodwill impairment could include an increase of over 100 basis points in the Company's derived weighted-average
cost of capital, which could be driven by stock price volatility, increases in government or corporate bond market rates, or other factors. A one percent increase or decrease in the discount rate used in the goodwill and indefinite-lived assets valuation would have resulted in changes in fair value in the following amounts, and would not have resulted in an impairment charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate Sensitivity, in millions
|
|
|
|
Fair Value in Excess of Carrying Value, %
|
|
+1%
|
|
-1%
|
|
Goodwill - KBP
|
|
92.6
|
%
|
|
$
|
(56.0
|
)
|
|
$
|
64.0
|
|
|
Goodwill - IntelliData
|
|
118.1
|
%
|
|
(0.9
|
)
|
|
1.0
|
|
|
Trademarks
|
|
609.3
|
%
|
|
(7.7
|
)
|
|
9.0
|
|
INCOME TAXES.
Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual effective tax rate reflected in our consolidated financial statements is different from that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The Company periodically evaluates its net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. For interim reporting purposes, the Company records income taxes based on the expected annual effective income tax rate, taking into consideration global forecasted tax results and the effect of discrete tax events. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. All deferred tax assets are reported as noncurrent in the Consolidated Balance Sheets.
We believe that it is more likely than not that a portion of the deferred tax assets in various jurisdictions will not be realized, based on the scheduled reversal of deferred tax liabilities, the recent history of cumulative losses, and the insufficient evidence of projected future taxable income to overcome the loss history. We have provided a valuation allowance related to any benefits from income taxes resulting from the application of a statutory tax rate to the deferred tax assets. We continue to have net deferred tax assets (future tax benefits) in several jurisdictions which we expect to realize, assuming, based on certain estimates and assumptions, sufficient taxable income can be generated to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional tax expense. The amount of future income required for the Company to realize its net deferred tax assets is
$227.1 million
.
Differences between the provision for income taxes on earnings from continuing operations and the amount computed using the U.S. Federal statutory income tax rate are primarily due to the changes in the U.S. and foreign valuation allowances, tax non-deductible permanent differences, and differences due to U.S. and foreign tax law changes.
The accounting rules require that we recognize, in our financial statements, the impact of a tax position, if that position is “more likely than not” of not being sustained on audit, based on the technical merits of the position. Any accruals for estimated interest and penalties would be recorded as a component of income tax expense.
To the extent that the provision for income taxes changed by 1.0% of
income
before income taxes, consolidated net
income
would have changed by
$1.7 million
in fiscal year
2019
.
Results of Operations
Historically, revenues and earnings may or may not be representative of future operating results due to various economic and other factors. The following table sets forth the Consolidated Statements of Operations for the periods indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net sales
(1)
|
|
$
|
1,382,818
|
|
|
$
|
1,200,181
|
|
|
$
|
757,338
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
|
924,276
|
|
|
860,744
|
|
|
571,944
|
|
|
Selling, general and administrative expenses
|
|
202,642
|
|
|
173,620
|
|
|
107,658
|
|
|
Research and development
(1)
|
|
44,612
|
|
|
39,114
|
|
|
26,693
|
|
|
Restructuring charges
|
|
8,779
|
|
|
14,843
|
|
|
5,404
|
|
|
(Gain) loss on write down and disposal of long-lived assets
|
|
1,660
|
|
|
(992
|
)
|
|
10,671
|
|
|
Total operating costs and expenses
|
|
1,181,969
|
|
|
1,087,329
|
|
|
722,370
|
|
|
Operating income
(1)
|
|
200,849
|
|
|
112,852
|
|
|
34,968
|
|
|
Non-operating (income) expense:
|
|
|
|
|
|
|
|
Interest income
|
|
(2,035
|
)
|
|
(809
|
)
|
|
(24
|
)
|
|
Interest expense
|
|
21,239
|
|
|
32,882
|
|
|
39,755
|
|
|
Acquisition (gain) loss
|
|
—
|
|
|
(130,880
|
)
|
|
—
|
|
|
Change in value of TOKIN options
|
|
—
|
|
|
—
|
|
|
(10,700
|
)
|
|
Other (income) expense, net
(1)
|
|
11,214
|
|
|
24,592
|
|
|
(3,871
|
)
|
|
Income before income taxes and equity income (loss) from equity method investments
(1)
|
|
170,431
|
|
|
187,067
|
|
|
9,808
|
|
|
Income tax expense (benefit)
(1)
|
|
(39,460
|
)
|
|
9,132
|
|
|
4,294
|
|
|
Income before equity income (loss) from equity method investments
(1)
|
|
209,891
|
|
|
177,935
|
|
|
5,514
|
|
|
Equity income (loss) from equity method investments
|
|
(3,304
|
)
|
|
76,192
|
|
|
41,643
|
|
|
Net income
(1)
|
|
$
|
206,587
|
|
|
$
|
254,127
|
|
|
$
|
47,157
|
|
______________________________________________________________________________
(1)
Fiscal years ended March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
Consolidated Comparison of Fiscal Year
2019
to Fiscal Year
2018
Net Sales
Net sales of
$1.4 billion
in fiscal year
2019
increased
15.2%
from
$1.2 billion
in fiscal year
2018
primarily due to an
increased
in Solid Capacitor net sales
$164.6 million
. In addition, Film and Electrolytic net sales
increased
by
$4.3 million
, and MSA net sales
increased
by
$13.8 million
.
The
increase
in Solid Capacitors net sales was primarily driven by
a $111.8 million increase in distributor sales across the Americas, APAC, and EMEA regions. The $111.8 million increase consisted of a $72.8 million increase in Ceramic product line sales and a $39.0 million increase in Tantalum product line sales. Also contributing to the increase in net sales was a $30.6 million increase in OEM sales across the APAC, EMEA, and JPKO regions, and a $28.0 million increase in EMS sales across all regions. These increases in net sales were partially offset by a $3.2 million decrease in distributor sales in the JPKO region and a $2.7 million decrease in OEM sales in the Americas region. In addition, Solid Capacitors net sales was unfavorably impacted by $0.5 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
The
increase
in Film and Electrolytic net sales was primarily driven by
a $10.5 million increase in distributor sales across the Americas and EMEA regions. Also contributing to the increase in net sales was $1.7 million increase in EMS sales in the Americas region and a $0.8 million increase in OEM sales in the JPKO region. These increases in net sales were partially offset by a $5.6 million decrease in OEM sales across the APAC and EMEA regions and a $3.1 million decrease in distributor sales across the APAC and JPKO regions. In addition, there was an unfavorable impact of $0.1 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
The
increase
in MSA net sales was primarily driven by
a $15.0 million increase in OEM sales in the JPKO region. Also contributing to the increase in net sales was a $4.3 million increase in EMS sales across all regions and a $3.7 million increase in distributor sales across the Americas and EMEA regions. These increase in net sales were partially offset by a $5.5 million decrease in distributor sales across the APAC and JPKO regions and a $3.8 million decrease in OEM sales across the Americas, APAC, and JPKO regions.
In fiscal years
2019
and
2018
, net sales by channel and the percentages of net sales by region to total net sales were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
Fiscal Year 2018
|
|
|
|
Net Sales
|
|
% of
Total
|
|
Net Sales
|
|
% of
Total
|
|
APAC
|
|
$
|
533,340
|
|
|
38.6
|
%
|
|
$
|
479,987
|
|
|
40.0
|
%
|
|
EMEA
|
|
315,535
|
|
|
22.8
|
%
|
|
277,898
|
|
|
23.1
|
%
|
|
Americas
|
|
337,842
|
|
|
24.4
|
%
|
|
259,105
|
|
|
21.6
|
%
|
|
JPKO
|
|
196,101
|
|
|
14.2
|
%
|
|
183,191
|
|
|
15.3
|
%
|
|
Total
|
|
$
|
1,382,818
|
|
|
|
|
$
|
1,200,181
|
|
|
|
In fiscal years
2019
and
2018
, the percentages of net sales by channel to total net sales were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
Fiscal Year 2018
|
|
|
|
Net Sales
|
|
% of Total
|
|
Net Sales
|
|
% of Total
|
|
OEM
|
|
$
|
598,306
|
|
|
43.3
|
%
|
|
$
|
563,495
|
|
|
46.9
|
%
|
|
Distributor
|
|
584,618
|
|
|
42.2
|
%
|
|
470,324
|
|
|
39.2
|
%
|
|
EMS
|
|
199,894
|
|
|
14.5
|
%
|
|
166,362
|
|
|
13.9
|
%
|
|
Total
|
|
$
|
1,382,818
|
|
|
|
|
$
|
1,200,181
|
|
|
|
Gross Margin
Gross margin for the fiscal year ended March 31,
2019
of
$458.5 million
(
33.2%
of net sales)
increased
$119.1 million
or
35.1%
from
$339.4 million
(
28.3%
of net sales) in the prior fiscal year. Gross margin as a percentage of net sales improved
490
basis points.
Solid Capacitors gross margin
increased
$118.4 million
, or
43.1%
primarily due to
an increase in net sales, as well as continued margin improvement due to our restructuring activities, vertical integration, and manufacturing process improvements resulting from our cost reduction activities.
Film and Electrolytic gross margin
increased
$4.8 million
, or
31.6%
primarily due to
an increase in net sales, as well as continued margin improvement due to our restructuring activities and manufacturing process improvements resulting from our cost reduction activities.
MSA gross margin
decreased
$4.1 million
, or
8.4%
primarily due to
a change in the sales mix to lower margin products
.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses of
$202.6 million
(
14.7%
of net sales) for fiscal year
2019
increased
$29.0 million
, or
16.7%
compared to
$173.6 million
(
14.5%
of net sales) for fiscal year
2018
. The increase was primarily attributable to a $11.8 million increase in payroll and related expenses, primarily consisting of salaries and incentive-based compensation, a $8.7 million increase in ERP integration and technology transition costs, a $4.0 million increase in rent and software costs, and a $2.8 million increase in consulting expenses. Additionally, $2.5 million of the overall increase was attributed to 19 additional days of ownership of our TOKIN subsidiary during the fiscal year ended March 31, 2019, compared to the fiscal year ended March 31, 2018. Partially offsetting these increases was a $1.5 million decrease in legal fees incurred defending anti-trust litigation claims.
Research and Development
R&D expenses of
$44.6 million
(
3.2%
of net sales) for fiscal year
2019
increased
$5.5 million
or
14.1%
compared to
$39.1 million
(
3.3%
of net sales). The increase was primarily related to an increase in payroll and related expenses of $4.9 million, a $0.8 million increase in expenses related to supplies, and a $0.6 million increase in costs attributed to the 19 additional days of ownership of our TOKIN subsidiary during the fiscal year ended March 31, 2019, compared to the fiscal year ended March 31, 2018.
(Gain) Loss on Write Down and Disposal of Long-Lived Assets
During fiscal year
2019
, KEMET recorded a net loss on the write down and disposal of long-lived assets of
$1.7 million
, which was comprised of
$0.7 million
in impairment charges and
$1.0 million
in net losses on the sale and disposal of long-lived assets.
The impairment charges were primarily related to the write down of idle land and machinery of $0.5 million and $0.2 million, respectively, at TOKIN.
The
$1.0 million
net loss on write down and disposal of long-lived assets primarily consisted of the disposal of furniture and fixtures resulting from the Company relocation of its corporate headquarters to Fort Lauderdale, Florida and the disposal of old machinery throughout the Company that was no longer being used.
During fiscal year
2018
, the Company recorded a net gain on the write down and disposal of long-lived assets of
$1.0 million
, which was comprised of
$1.2 million
in net gains on the sale and disposal of long-lived assets offset by
$0.2 million
in impairment charges. The net gains on the sale and disposal of long-lived assets were primarily related to the sale of equipment, land, and buildings from KFM, which was shut down in fiscal year 2017. On March 13, 2018, the Company sold KFM's land and buildings to a third party for a gross sales price of
$3.6 million
. The net proceeds realized by the Company were approximately
$3.4 million
after payment of
$0.2 million
in closing costs. The Company realized a gain on the sale of the land and buildings of approximately
$1.9 million
during the year ended
March 31, 2019
as a result of the sale. In addition, the Company sold KFM's equipment for a
$1.4 million
gain. These gains were partially offset by MSA's loss on disposals of assets of
$1.3 million
primarily related to equipment and buildings used for discontinued products and Solid Capacitors' loss of approximately
$0.6 million
related to the relocation of its K-Salt operations from a leased facility to its existing Matamoros, Mexico facility.
Restructuring Charges
Restructuring charges of
$8.8 million
in fiscal year
2019
decreased
$6.1 million
or
40.9%
from
$14.8 million
in fiscal year
2018
.
The Company incurred
$8.8 million
in restructuring charges in the fiscal year ended
March 31, 2019
comprised of
$2.8 million
in personnel reduction costs and
$6.0 million
in relocation and exit costs. The personnel reduction costs of
$2.8 million
were primarily due to
$0.9 million
in costs related to headcount reductions in the TOKIN legacy group across various internal and operational functions, and
$1.6 million
in costs related to reorganization in the Solid Capacitors reportable segment due to a permanent structural change driven by the decline of MnO2 products,
$0.3 million
in severance charges related to personnel reductions in the Film and Electrolytic reportable segment resulting from a reorganization of the segment's management structure.
The relocation and exits costs of
$6.0 million
were primarily due to
$3.4 million
in costs related to the relocation of its tantalum powder equipment from Carson City, Nevada to its plant in Matamoros, Mexico and
$2.3 million
in costs related to the relocation of axial electrolytic production equipment from Granna, Sweden to its plant in Evora, Portugal.
The Company incurred
$14.8 million
in restructuring charges in the fiscal year ended
March 31, 2018
, comprised of
$12.6 million
related to personnel reduction costs and
$2.3 million
of relocation and exit costs.
The personnel reduction costs of
$12.6 million
were due to
$5.2 million
related to a voluntary reduction in force in the Film and Electrolytic reportable segment's Italian operations;
$4.4 million
related to a headcount reduction in the TOKIN legacy group across various internal and operational functions;
$2.7 million
in severance charges across various overhead functions in the Simpsonville, South Carolina office as these functions were relocated to the Company's new corporate headquarters in Fort Lauderdale, Florida; and
$0.2 million
in headcount reductions related to a European sales reorganization.
The relocation and exit costs of
$2.3 million
included
$0.9 million
in lease termination penalties related to the relocation of global marketing, finance and accounting, and information technology functions to the Company's Fort Lauderdale office,
$0.8 million
in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant,
$0.4 million
in exit costs related to the shut-down of operations for KFM, and
$0.1 million
related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.
Operating Income
Operating income for fiscal year
2019
of
$200.8 million
increased
$87.9 million
compared to operating income of
$112.9 million
in fiscal year
2018
. The improvement was primarily due to a
$119.1 million
increase
in gross margin and a
$6.1 million
decrease
in restructuring charges. These improvements to operating income were partially offset by a
$29.0 million
increase
in SG&A expenses, a
$5.5 million
increase
in R&D expenses, and a
$2.7 million
unfavorable impact from (gain) loss on write down and disposal of long-lived assets.
Non-Operating (Income) Expense, net
Non-operating expense, net was
$30.4 million
in fiscal year
2019
compared to non-operating income, net of
$74.2 million
in fiscal year
2018
. The
$104.6 million
unfavorable change was primarily attributable to the acquisition gain of
$130.9 million
recognized during fiscal year 2018, compared to no such gain in fiscal year 2019. In addition, the Company recognized a
$15.9 million
loss on the early extinguishment of debt in fiscal year 2019. Partially offsetting these unfavorable changes were the following favorable items which occurred during the fiscal year 2019 versus fiscal year 2018: a $
12.9 million
decrease in net interest expense, a $
3.3 million
decrease in anti-trust litigation fines, a $
4.5 million
gain related to research and development grant reimbursements from the Japanese and Italian governments, and a $
20.3 million
net favorable change in foreign currency exchange gain, which was primarily due to the change in the value of the Chinese Yuan Renminbi, Thai Baht, British Pound, and the Euro.
Income Taxes
Income tax benefit of
$39.5 million
for fiscal year
2019
decreased
by
$48.6 million
compared to income tax expense of
$9.1 million
in fiscal year
2018
. The fiscal year 2019 income tax benefit was primarily comprised of
$50.1 million
related to the partial release of valuation allowances in the U.S. and Japan, offset in part by
$10.4 million
in income tax expense related to foreign operations and
$0.2 million
in income tax expense related to U.S. operations.
Fiscal year
2018
income tax expense of
$9.1 million
was comprised of
9.7 million
in foreign income tax expense and a
$0.6 million
U.S. federal income tax benefit. The U.S. federal benefit of
$0.6 million
included an estimated
$0.8 million
tax benefit resulting from the Tax Cuts and Jobs Act of 2017.
Equity Income (Loss) from Equity Method Investments
Equity loss from equity method investments of
$3.3 million
in fiscal year
2019
had an
unfavorable
change of
$79.5 million
compared to
$76.2 million
in fiscal year
2018
. The change was primarily related to the TOKIN acquisition that occurred in the first quarter of fiscal year 2018. The Company recognized equity income of $84.2 million related to our 34% economic interest in TOKIN for the 19-day period ended April 19, 2017 for the sale of TOKIN's electrical-mechanical devices ("EMD") business and a $9.0 million unfavorable removal of the cost basis of the portion of equity investment related to the EMD division. TOKIN is now a fully owned subsidiary of the Company and there were no such gains from our equity method investments in fiscal year 2019. In fiscal year 2019, the Company impaired its investment in Novasentis by
$2.7 million
.
Reportable Segment Comparison of Fiscal Year
2019
to Fiscal Year
2018
The following table sets forth the operating income (loss) for each of our reportable segments for the fiscal years
2019
and
2018
. The table also sets forth each of the reportable segments’ net sales as a percentage of total net sales and total operating income as a percentage of total net sales (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
Amount
|
|
% of Total
Sales
|
|
Amount
|
|
% of Total
Sales
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
|
$
|
935,838
|
|
|
67.7
|
%
|
|
$
|
771,240
|
|
|
64.3
|
%
|
|
Film and Electrolytic
(1)
|
|
206,240
|
|
|
14.9
|
%
|
|
201,977
|
|
|
16.8
|
%
|
|
MSA
|
|
240,740
|
|
|
17.4
|
%
|
|
226,964
|
|
|
18.9
|
%
|
|
Total
(1)
|
|
$
|
1,382,818
|
|
|
100.0
|
%
|
|
$
|
1,200,181
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
|
$
|
348,150
|
|
|
|
|
|
$
|
234,473
|
|
|
|
|
|
Film and Electrolytic
(1)
|
|
8,183
|
|
|
|
|
|
3,622
|
|
|
|
|
|
MSA
|
|
22,546
|
|
|
|
|
15,694
|
|
|
|
|
Corporate
|
|
(178,030
|
)
|
|
|
|
|
(140,937
|
)
|
|
|
|
|
Total
(1)
|
|
$
|
200,849
|
|
|
14.5
|
%
|
|
$
|
112,852
|
|
|
9.4
|
%
|
_______________________________________________
(1)
Fiscal year ending March 31, 2018 adjusted due to the adoption of ASC 606.
Solid Capacitors
The table below sets forth net sales, operating income and operating income as a percentage of net sales for our Solid Capacitors reportable segment for fiscal years
2019
and
2018
(amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
Tantalum product line net sales
|
|
$
|
563,255
|
|
|
|
|
$
|
495,114
|
|
|
|
|
Ceramic product line net sales
|
|
372,583
|
|
|
|
|
276,126
|
|
|
|
|
Solid Capacitors net sales
|
|
$
|
935,838
|
|
|
|
|
|
$
|
771,240
|
|
|
|
|
|
Solid Capacitors operating income
|
|
$
|
348,150
|
|
|
37.2
|
%
|
|
$
|
234,473
|
|
|
30.4
|
%
|
Net Sales
Solid Capacitors net sales of
$935.8 million
in fiscal year
2019
increased
$164.6 million
or
21.3%
from
$771.2 million
in fiscal year
2018
. Tantalum product line net sales of
$563.3 million
in fiscal year
2019
increased
$68.1 million
or
13.8%
from
$495.1 million
in fiscal year
2018
. Ceramic product line net sales of
$372.6 million
in fiscal year
2019
increased
$96.5 million
or
34.9%
from
$276.1 million
in fiscal year
2018
.
The
increase
in Solid Capacitors net sales was primarily driven by
a $111.8 million increase in distributor sales across the Americas, APAC, and EMEA regions. The $111.8 million increase consisted of a $72.8 million increase in Ceramic product line sales and a $39.0 million increase in Tantalum product line sales. Also contributing to the increase in net sales was a $30.6 million increase in OEM sales across the APAC, EMEA, and JPKO regions, and a $28.0 million increase in EMS sales across all regions. These increases in net sales were partially offset by a $3.2 million decrease in distributor sales in the JPKO region and a $2.7 million decrease in OEM sales in the Americas region. In addition, Solid Capacitors net sales was unfavorably impacted by $0.5 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
Reportable Segment Operating Income
Segment operating income of
$348.2 million
for fiscal year
2019
increased
$113.7 million
or
48.5%
from
$234.5 million
for fiscal year
2018
. The
increase
in operating income was primarily attributable to an increase in gross margin of
$118.4 million
, which was driven by
an increase in net sales, as well as continued margin improvement due to our restructuring activities, vertical integration, and manufacturing process improvements resulting from our cost reduction activities.
Also contributing to the increase in operating income was a
$2.5 million
decrease
in SG&A expenses and a
$0.5 million
decrease in net loss on write down and disposal of long-lived assets. Partially offsetting these improvements was a
$3.9 million
increase
in restructuring charges and a
$3.8 million
increase
in R&D expenses.
Film and Electrolytic
The table below sets forth net sales, operating income and operating income as a percentage of net sales for our Film and Electrolytic reportable segment for the fiscal years
2019
and
2018
(amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
Net sales
(1)
|
|
$
|
206,240
|
|
|
|
|
|
$
|
201,977
|
|
|
|
|
|
Segment operating income
(1)
|
|
8,183
|
|
|
4.0
|
%
|
|
3,622
|
|
|
1.8
|
%
|
______________________________________________
(1)
Fiscal year ending March 31, 2018 adjusted due to the adoption of ASC 606.
Net Sales
Film and Electrolytic net sales of
$206.2 million
in fiscal year
2019
increased
$4.3 million
or
2.1%
from
$202.0 million
in fiscal year
2018
. The increase in net sales was primarily driven by
a $10.5 million increase in distributor sales across the Americas and EMEA regions. Also contributing to the increase in net sales was $1.7 million increase in EMS sales in the Americas region and a $0.8 million increase in OEM sales in the JPKO region. These increases in net sales were partially offset by a $5.6 million decrease in OEM sales across the APAC and EMEA regions and a $3.1 million decrease in distributor sales across the APAC and JPKO regions. In addition, there was an unfavorable impact of $0.1 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
Reportable Segment Operating Income
Segment operating income of
$8.2 million
in fiscal year
2019
increased
$4.6 million
from
$3.6 million
in fiscal year
2018
. The
increase
in operating income was primarily attributable to a
$4.8 million
increase
in gross margin driven by
an increase in net sales, as well as continued margin improvement due to our restructuring activities and manufacturing process improvements resulting from our cost reduction activities.
The increase was also attributed to a
$3.1 million
decrease
in restructuring charges and a
$0.6 million
decrease
in SG&A expenses. These improvements were partially offset by a
$3.3 million
decrease in net gain on write down and disposal of long-lived assets and a
$0.6 million
increase
in R&D expenses.
Electro-Magnetic, Sensors, and Actuators
The following table sets forth net sales, operating income, and operating income as a percentage of net sales for our MSA reportable segment in fiscal years
2019
and
2018
(amounts in thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
Net sales
|
|
$
|
240,740
|
|
|
|
|
|
$
|
226,964
|
|
|
|
|
Segment operating income
|
|
22,546
|
|
|
9.4
|
%
|
|
15,694
|
|
|
6.9
|
%
|
Net Sales
MSA net sales of
$240.7 million
in fiscal year
2019
increased
$13.8 million
or
6.1%
from
$227.0 million
in fiscal year
2018
. The
increase
in net sales was primarily driven by
a $15.0 million increase in OEM sales in the JPKO region. Also contributing to the increase in net sales was a $4.3 million increase in EMS sales across all regions and a $3.7 million increase in distributor sales across the Americas and EMEA regions. These increase in net sales were partially offset by a $5.5 million
decrease in distributor sales across the APAC and JPKO regions and a $3.8 million decrease in OEM sales across the Americas, APAC, and JPKO regions.
Reportable Segment Operating Income
Segment operating income of
$22.5 million
in fiscal year
2019
increased
$6.9 million
from
$15.7 million
in fiscal year
2018
. The increase in operating income was primarily due to a
$6.6 million
decrease
in SG&A expenses resulting from a decrease in payroll expenses that was caused by a reduction in head count. Also contributing to the increase in operating income was a
$2.9 million
decrease
in restructuring charges, a
$1.3 million
decrease
in net loss on write down and disposal of long-lived assets, and a
$0.2 million
decrease
in R&D expenses
. Partially offsetting these improvements was a
$4.1 million
decrease
in gross margin, which was primarily driven by
a change in the sales mix to lower margin products
.
Consolidated Comparison of Fiscal Year
2018
to Fiscal Year
2017
Net sales
Net sales of
$1.2 billion
for fiscal year
2018
increased
58.5%
from
$757.3 million
for fiscal year
2017
. Solid Capacitor and Film and Electrolytic sales increased by
$196.1 million
and
$19.7 million
, respectively and net sales for MSA, our new reportable segment in fiscal year 2018, was
$227.0 million
. Prior to the acquisition of TOKIN on April 19, 2017, the Company did not have any MSA sales.
The increase in Solid Capacitors net sales was primarily driven by the addition of net sales of $133.8 million resulting from the TOKIN acquisition and an increase in net sales to the legacy products distributor channel of $81.7 million.
To a lesser degree, an increase in legacy Ceramic products' net sales of $6.0 million in the EMS channel across
all regions and $10.2 million in the OEM channel in the EMEA and APAC regions also contributed to the increase in Solid Capacitors net sales. These increases were partially offset by a $28.0 million decrease in net sales in the OEM channel for legacy Tantalum products across all regions. In addition, Solid Capacitors net sales was favorably impacted by $6.1 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
The increase in Film and Electrolytic net sales was driven by an increase in net sales in the distributor channel across the APAC and EMEA regions of $
13.7 million,
and to a lesser degree, a $3.3 million increase in net sales in the OEM channel of the EMEA region and a $4.2 million increase in the EMS channel across the Americas, EMEA, and APAC regions. These increases were partially offset by a decrease in net sales of $1.2 million in the OEM channel across the Americas, APAC, and JPKO regions. In addition, there was a favorable impact of $7.6 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
In fiscal years
2018
and
2017
, net sales by region were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
Fiscal Year 2017
|
|
|
|
Net Sales
|
|
% of Total
|
|
Net Sales
|
|
% of Total
|
|
APAC
|
|
$
|
479,987
|
|
|
40.0
|
%
|
|
$
|
288,764
|
|
|
38.1
|
%
|
|
EMEA
|
|
277,898
|
|
|
23.1
|
%
|
|
237,437
|
|
|
31.4
|
%
|
|
Americas
|
|
259,105
|
|
|
21.6
|
%
|
|
224,056
|
|
|
29.6
|
%
|
|
JPKO
|
|
183,191
|
|
|
15.3
|
%
|
|
7,081
|
|
|
0.9
|
%
|
|
Total
|
|
$
|
1,200,181
|
|
|
|
|
$
|
757,338
|
|
|
|
In fiscal years
2018
and
2017
, the percentages of net sales by channel to total net sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
Fiscal Year 2017
|
|
|
|
Net Sales
|
|
% of Total
|
|
Net Sales
|
|
% of Total
|
|
OEM
|
|
$
|
563,495
|
|
|
46.9
|
%
|
|
$
|
246,397
|
|
|
32.5
|
%
|
|
Distributors
|
|
470,324
|
|
|
39.2
|
%
|
|
354,639
|
|
|
46.8
|
%
|
|
EMS
|
|
166,362
|
|
|
13.9
|
%
|
|
156,302
|
|
|
20.7
|
%
|
|
Total
|
|
$
|
1,200,181
|
|
|
|
|
$
|
757,338
|
|
|
|
Gross Margin
Gross margin for the fiscal year ended March 31,
2018
of
$339.4 million
(
28.3%
of net sales)
increased
$154.0 million
or
83.1%
from
$185.4 million
(
24.5%
of net sales) in the prior fiscal year. Gross margin as a percentage of net sales improved 380 basis points.
Solid Capacitors gross margin
increased
$100.4 million
, or
57.5%
due to an increase in net sales, cost improvements in vertical integration, favorable foreign currency impact to manufacturing costs, and manufacturing process improvements resulting from annual cost reduction activities, as well as our acquisition of TOKIN. TOKIN contributed $47.0 million to Solid Capacitors gross margin in fiscal year
2018
.
Film and Electrolytic gross margin
increased
$4.3 million
, or
39.9%
due an increase in net sales, as well as the benefit of completed restructuring activities.
MSA gross margin was
$49.3 million
for the fiscal year ended March 31,
2018
.
SG&A
SG&A expenses of
$173.6 million
(
14.5%
of net sales) for fiscal year
2018
increased
$66.0 million
or
61.3%
compared to
$107.7 million
(
14.2%
of net sales) for fiscal year
2017
. The increase was primarily attributable to $41.9 million in SG&A expenses incurred by TOKIN for the fiscal year ended March 31, 2018. In addition, the increase was related to $15.7 million in increased payroll-related expenses and benefits, a $9.1 million increase in office related expenses and rent, a $4.1 million increase in professional fees and a $2.4 million increase in travel related expenses. These increases were partially offset by a $7.0 million decrease in ERP integration and technology transition costs and a $0.4 million decrease in legal expenses.
Research and Development
R&D expenses of
$39.1 million
(
3.3%
of net sales) for fiscal year
2018
increased
$12.4 million
or
46.5%
compared to
$26.7 million
(
3.5%
of net sales). The increase was primarily related to $10.1 million in R&D expenses incurred by TOKIN for fiscal year 2018 and $2.2 million in increased payroll-related expenses.
(Gain) Loss on Write Down and Disposal of Long-Lived Assets
During fiscal year
2018
, the Company recorded a net gain on the write down and disposal of long-lived assets of
$1.0 million
, which was comprised of
$1.2 million
in net gains on the sale and disposal of long-lived assets offset by
$0.2 million
in impairment charges. The net gains on the sale and disposal of long-lived assets were primarily related to the sale of equipment, land, and buildings from KFM, which was shut down in fiscal year 2017. On March 13, 2018, the Company sold KFM's land and buildings to a third party for a gross sales price of
$3.6 million
. The net proceeds realized by the Company were approximately
$3.4 million
after payment of
$0.2 million
in closing costs. The Company realized a gain on the sale of the land and buildings of approximately
$1.9 million
during the year ended
March 31, 2018
as a result of the sale. In addition, the Company sold KFM's equipment for a
$1.4 million
gain. These gains were partially offset by MSA's loss on disposals of assets of
$1.3 million
primarily related to equipment and buildings used for discontinued products and Solid Capacitors' loss of approximately
$0.6 million
related to the relocation of its K-Salt operations from a leased facility to its existing Matamoros, Mexico facility.
During fiscal year
2017
, the Company recorded a net loss on write down and disposal of long-lived assets of
$10.7 million
, which was comprised of
$10.3 million
in impairment charges and
$0.4 million
in net losses on the sale and disposal of long-lived assets. In fiscal year 2017, Film and Electrolytic incurred impairment charges totaling
$8.2 million
. The impairment charges consisted of the following two actions.
On August 31, 2016, KEMET Electronics Corporation, a wholly-owned subsidiary of KEMET made the decision to shut-down operations of its wholly-owned subsidiary, KFM. Operations at KFM’s Knoxville, Tennessee plant ceased as of October 31, 2016. The Company recorded impairment charges related to KFM totaling
$4.1 million
comprised of
$3.0 million
for the write down of property plant and equipment and
$1.1 million
for the write down of intangible assets.
The Company also recorded impairment charges of
$4.1 million
related to a decline in real estate market conditions surrounding its vacated Sasso Marconi, Italy manufacturing facility.
In fiscal year 2017, Solid Capacitors incurred impairment charges totaling
$2.1 million
related to the relocation of our leased K-salt facility to our existing Matamoros, Mexico facility.
Restructuring Charges
Restructuring charges of
$14.8 million
in fiscal year
2018
increased
$9.4 million
or
174.7%
from
$5.4 million
in fiscal year
2017
.
The Company incurred
$14.8 million
in restructuring charges in the fiscal year ended
March 31, 2018
, comprised of
$12.6 million
related to personnel reduction costs and
$2.3 million
of relocation and exit costs.
The personnel reduction costs of
$12.6 million
were due to
$5.2 million
related to a voluntary reduction in force in the Film and Electrolytic reportable segment's Italian operations;
$4.4 million
related to a headcount reduction in the TOKIN legacy group across various internal and operational functions;
$2.7 million
in severance charges across various overhead functions in the Simpsonville, South Carolina office as these functions were relocated to the Company's new corporate headquarters in Fort Lauderdale, Florida; and
$0.2 million
in headcount reductions related to a European sales reorganization.
The relocation and exit costs of
$2.3 million
included
$0.9 million
in lease termination penalties related to the relocation of global marketing, finance and accounting, and information technology functions to the Company's Fort Lauderdale office,
$0.8 million
in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant,
$0.4 million
in exit costs related to the shut-down of operations for KFM, and
$0.1 million
related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.
The Company incurred
$5.4 million
in restructuring charges in the fiscal year ended
March 31, 2017
, including
$2.2 million
related to personnel reduction costs and
$3.2 million
of relocation and exit costs.
The personnel reduction costs of
$2.2 million
corresponded with the following:
$0.3 million
related to the consolidation of certain Solid Capacitor manufacturing in Matamoros, Mexico;
$0.4 million
for headcount reductions related to the shut-down of operations for KFM;
$0.3 million
related to headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines and laboratories to lower cost regions;
$0.3 million
for overhead reductions in Sweden;
$0.3 million
in U.S. headcount reductions related to the relocation of global marketing functions to the Company’s Fort Lauderdale, Florida office;
$0.3 million
in headcount reductions related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico;
$0.2 million
in overhead reductions for the relocation of research and development operations from Weymouth, England to Evora, Portugal; and
$0.1 million
in manufacturing headcount reductions related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant.
The relocation and exit costs of
$3.2 million
included
$1.9 million
in expenses related to contract termination costs related to the shut-down of operations for KFM;
$0.6 million
in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant;
$0.6 million
for transfers of Film and Electrolytic production lines and R&D functions to lower cost regions; and
$0.1 million
related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.
Operating Income
Operating income for fiscal year
2018
of
$112.9 million
increased
$77.9 million
compared to operating income of
$35.0 million
in fiscal year
2017
. The improvement was primarily due a
$154.0 million
increase
in gross margin and an
$11.7 million
improvement in (gain) loss on write down and disposal of long-lived assets. These improvements to operating income were partially offset by a
$66.0 million
increase
in SG&A expenses, a
$12.4 million
increase
in R&D expenses, and a
$9.4 million
increase
in restructuring charges.
Non-Operating (Income) Expense, net
Non-operating income, net was
$74.2 million
in fiscal year
2018
compared to a net expense of
$25.2 million
in fiscal year
2017
. The
$99.4 million
improvement was primarily due to a
$130.9 million
gain on acquisition in fiscal 2018 and a $7.7 million decrease in net interest and amortization expense under the Term Loan and Credit Agreement for fiscal year 2018 as compared to net interest and amortization expense under the Senior Notes in fiscal year 2017. Partially offsetting these favorable changes were the following unfavorable changes: a $16.9 million net unfavorable change in foreign currency exchange gain/(loss), which was primarily due to the change in the value of the Chinese Yuan Renminbi, Euro, Great Britain Pound, Thai Baht, and Japanese Yen, compared to the U.S. dollar; a
$10.7 million
decrease in gains related to the TOKIN Option as there was no such gain recorded in fiscal year 2018 compared to fiscal year 2017; $11.3 million in antitrust litigation fines recorded in fiscal year 2018, $1.1 million in integration expenses incurred by TOKIN in fiscal year 2018, and $0.6 million increase in net other operating expenses.
Income Taxes
Income tax expense of
$9.1 million
in fiscal year
2018
increased
$4.8 million
compared to income tax expense of
$4.3 million
in fiscal year
2017
. The increase was primarily driven by income tax expense from foreign operations. Of the
$4.8 million
increase,
$3.3 million
related income tax expense from operations of newly acquired subsidiaries.
Fiscal year
2018
income tax expense of
$9.1 million
was comprised of
9.7 million
in income tax expense related to foreign operations and a
$0.6 million
of U.S. federal income tax benefit. The U.S. federal benefit of
$0.6 million
included an estimated
$0.8 million
tax benefit resulting from the Tax Cuts and Jobs Act of 2017.
Fiscal year
2017
income tax expense of
$4.3 million
was comprised of $4.3 million in foreign income tax expense. No U.S. federal income tax expense benefit was recognized for the U.S. taxable loss for fiscal year 2017 due to a valuation allowance provided for U.S. net operating losses.
Equity Income (Loss) from Equity Method Investments
In fiscal year
2018
, we incurred equity income related to our equity method investments of
$76.2 million
compared to
$41.6 million
in fiscal year
2017
. The increase was primarily due to equity income of $84.2 million related to our 34% economic interest in TOKIN for the 19-day period ended April 19, 2017, which included the gain on the sale of the EMD business. The increase was also due to $0.8 million and $0.4 million of income from TOKIN's equity method investments, Nippon Yttrium Co., Ltd ("NYC") and NT Sales Co., Ltd ("NTS"), respectively. Partially offsetting these favorable items was a $9.0 million removal of the balance of the cost basis of the portion of equity investment related to the EMD division which was established at the time of initial acquisition of 34% of TOKIN, as well as $0.1 million of loss from our joint venture with Novasentis.
Reportable Segment Comparison of Fiscal Year
2018
to Fiscal Year
2017
The following table sets forth the operating income (loss) for each of our reportable segments for the fiscal years
2018
and
2017
. The table also sets forth each of the reportable segments’ net sales as a percentage of total net sales and the operating income components as a percentage of total net sales (amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
|
|
Amount
|
|
% of Total
Sales
|
|
Amount
|
|
% of Total
Sales
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
|
$
|
771,240
|
|
|
64.3
|
%
|
|
$
|
575,110
|
|
|
75.9
|
%
|
|
Film and Electrolytic
(1)
|
|
201,977
|
|
|
16.8
|
%
|
|
182,228
|
|
|
24.1
|
%
|
|
MSA
|
|
226,964
|
|
|
18.9
|
%
|
|
—
|
|
|
—
|
%
|
|
Total
(1)
|
|
$
|
1,200,181
|
|
|
100.0
|
%
|
|
$
|
757,338
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
|
$
|
234,473
|
|
|
|
|
$
|
147,662
|
|
|
|
|
Film and Electrolytic
(1)
|
|
3,622
|
|
|
|
|
(9,028
|
)
|
|
|
|
MSA
(2)
|
|
15,694
|
|
|
|
|
—
|
|
|
|
|
Corporate
(1)
|
|
(140,937
|
)
|
|
|
|
(103,666
|
)
|
|
|
|
Total
|
|
$
|
112,852
|
|
|
9.4
|
%
|
|
$
|
34,968
|
|
|
4.6
|
%
|
_______________________________________________
(1)
Fiscal years ending March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
(2)
After the TOKIN acquisition in fiscal year 2018, MSA became a new reportable segment.
Solid Capacitors
The table below sets forth net sales, operating income and operating income as a percentage of net sales for our Solid Capacitors reportable segment for the fiscal years
2018
and
2017
(amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
Tantalum product line net sales
|
|
$
|
495,114
|
|
|
|
|
$
|
342,184
|
|
|
|
|
Ceramic product line net sales
|
|
276,126
|
|
|
|
|
232,926
|
|
|
|
|
Net sales
|
|
$
|
771,240
|
|
|
|
|
|
$
|
575,110
|
|
|
|
|
|
Segment operating income
|
|
$
|
234,473
|
|
|
30.4
|
%
|
|
$
|
147,662
|
|
|
25.7
|
%
|
Net Sales
Solid Capacitors net sales of
$771.2 million
in fiscal year
2018
increased
$196.1 million
or
34.1%
from
$575.1 million
in fiscal year
2017
. Tantalum product line net sales of
$495.1 million
in fiscal year
2018
increased
$152.9 million
or
44.7%
from
$342.2 million
in fiscal year
2017
. Ceramic product line net sales of
$276.1 million
in fiscal year
2018
increased
$43.2 million
or
18.5%
from
$232.9 million
in fiscal year
2017
.
The
increase
in Solid Capacitors net sales was primarily driven by the addition of net sales of $133.8 million resulting from the TOKIN acquisition and an increase in net sales to the legacy products distributor channel of $81.7 million.
To a lesser degree, an increase in legacy Ceramic products' net sales of $6.0 million in the EMS channel across
all regions and $10.2 million in the OEM channel in the EMEA and APAC regions also contributed to the increase in Solid Capacitors net sales. These increases were partially offset by a $28.0 million decrease in net sales in the OEM channel for legacy Tantalum products across all regions. In addition, Solid Capacitors net sales was favorably impacted by $6.1 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
Reportable Segment Operating Income
Segment operating income of
$234.5 million
for fiscal year
2018
increased
$86.8 million
or
58.8%
from
$147.7 million
for fiscal year
2017
. The
increase
in operating income was primarily attributable to an increase in gross margin of
$100.4 million
. TOKIN contributed $47.0 million in additional gross margin in fiscal year 2018. Legacy KEMET gross margin increased $53.3 million, or 30.6%, primarily driven by an increase in net sales, cost improvements in vertical integration, favorable foreign currency impact to manufacturing costs, and manufacturing process improvements resulting from our cost reduction activities. In addition, there was a
$1.6 million
improvement in (gain) loss on write down and disposal of long-lived assets. Partially offsetting these improvements were a
$10.5 million
increase in SG&A expenses and a
$5.0 million
increase in R&D expenses. TOKIN accounted for $10.2 million of the increase in SG&A expenses and $4.1 million of the increase in R&D expenses.
Film and Electrolytic
The table below sets forth net sales, operating income (loss) and operating income (loss) as a percentage of net sales for our Film and Electrolytic reportable segment for the fiscal years
2018
and
2017
(amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
|
|
Amount
|
|
% to Net
Sales
|
|
Amount
|
|
% to Net
Sales
|
|
Net sales
(1)
|
|
$
|
201,977
|
|
|
|
|
|
$
|
182,228
|
|
|
|
|
|
Segment operating income (loss)
(1)
|
|
3,622
|
|
|
1.8
|
%
|
|
(9,028
|
)
|
|
(5.0
|
)%
|
_______________________________________________
(1)
Fiscal years ending March 31, 2018 and 2017 adjusted due to the adoption of ASC 606
Net Sales
Film and Electrolytic net sales of
$202.0 million
in fiscal year
2018
increased
$19.7 million
or
10.8%
from
$182.2 million
in fiscal year
2017
. The increase in net sales was primarily driven by an increase in net sales in the distributor channel across all the APAC and EMEA regions of $13.7 million,a $3.3 million increase in net sales in the OEM channel of the EMEA region and a $4.2 million increase in the EMS channel across the Americas, EMEA, and APAC regions. These increases were partially offset by a decrease in net sales of $1.2 million in the OEM channel across the Americas, APAC, and JPKO regions. In addition, there was a favorable impact of $7.6 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
Reportable Segment Operating Income (Loss)
Segment operating income of
$3.6 million
in fiscal year
2018
improved
$12.7 million
from
$9.0 million
of operating loss in fiscal year
2017
. The improvement was primarily attributable to a
$4.3 million
increase in gross margin driven by higher net sales, as well as the benefit of completed restructuring activities. The increase was also attributed to an
$11.7 million
improvement in (gain) loss on the write down and disposal of long-lived assets. These improvements were partially offset by a
$2.1 million
increase in restructuring charges, a
$0.7 million
increase in SG&A expenses, and a
$0.6 million
increase in R&D expenses.
Liquidity and Capital Resources
Our liquidity needs arise from working capital requirements, acquisitions, capital expenditures, principal and interest payments on debt, costs associated with the implementation of our restructuring plans, and dividend payments. Historically, these cash needs have been met by cash flows from operations, borrowings under our loan agreements, and existing cash and cash equivalents balances.
TOKIN Term Loan Facility
On October 29, 2018, the Company entered into the TOKIN Term Loan Facility and received funding on November 7, 2018. The proceeds, which were net of an arrangement fee withheld from the funding amount, were
JPY 32.1 billion
, or approximately
$283.9 million
using the exchange rate as of November 7, 2018. Net of the arrangement fee, bank issuance costs, and other indirect issuance costs, the Company's net proceeds from the TOKIN Term Loan Facility was
$281.8 million
.
The proceeds from the TOKIN Term Loan Facility were used by TOKIN to make Intercompany Loans. The proceeds, along with other cash on hand, were used to prepay in full the outstanding amounts under the Company’s Term Loan Credit Agreement of
$323.4 million
and a prepayment premium of
1.0%
.
The TOKIN Term Loan Facility consists of (i) a
JPY 16.5 billion
(approximately
$146.0 million
using the exchange rate as of November 7, 2018) Term Loan A tranche (the “Term Loan A”) and (ii) a
JPY 16.5 billion
(approximately
$146.0 million
using the exchange rate as of November 7, 2018) Term Loan B tranche (the “Term Loan B” and, together with the Term Loan A, collectively, the “Term Loans”). Principal payments under Term Loan A are required semi-annually, in the amount of
JPY 1.4 billion
(approximately
$12.4 million
using the exchange rate as of
March 31, 2019
), while the principal of Term Loan B is due in one payment at maturity. At each reporting period, the carrying value of the loan is translated from JPY to U.S. Dollars (“USD”) using the spot exchange rate as of the end of the reporting period. The carrying value of the TOKIN Term Loan Facility at
March 31, 2019
was
$276.8 million
.
Interest payments are due semi-annually on the Term Loans, with the interest rate based on a margin over the six-month Japanese TIBOR. The applicable margin for Term Loan A is
2.00%
and for Term Loan B is
2.25%
. Japanese TIBOR at
March 31, 2019
was
0.13%
. Interest payable related to the TOKIN Term Loan Facility included in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets was
$0.1 million
as of
March 31, 2019
.
The Term Loans mature on September 30, 2024. KEMET and certain subsidiaries of TOKIN provided guarantees of the obligations under the Term Loans, which will also be secured by certain assets, properties and equity interests of TOKIN and its material subsidiaries. The Term Loans contain customary covenants applicable to both the Company and to TOKIN, including maintenance of a consolidated net leverage ratio, the absence of two consecutive years of consolidated operating losses and the maintenance of certain required levels of consolidated net assets. The TOKIN Term Loan Facility also contains customary events of default. The Company may prepay the Term Loans at any time, subject to certain notice requirements and reimbursement of loan breakage costs.
Revolving Line of Credit
In connection with the closing of the TOKIN Term Loan Facility on October 29, 2018, the Company entered into Amendment No. 10 to the Loan and Security Agreement, Waiver and Consent (the “Revolver Amendment”), by and among KEMET, KEC, the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., a national banking association, as agent for the lenders. The Revolver Amendment provides the Company with, among other things, increased flexibility for certain restricted payments (including dividends), and released certain pledges that allowed the Company to obtain the TOKIN Term Loan Facility to pay down the Term Loan Credit Agreement. The revolving line of credit has a facility amount of up to
$75.0 million
which is based on factors including outstanding eligible accounts receivable, inventory, and equipment collateral. There were no borrowings under the revolving line of credit during fiscal year 2019, and the Company’s available borrowing capacity under the Loan and Security Agreement was
$66.0 million
as of
March 31, 2019
.
Customer Advances
In September, November, and February of fiscal year 2019, the Company entered into three agreements with different customers (the “Customers”) pursuant to which the Customers agreed to make advances (collectively, the “Advances”) to the Company in an aggregate amount of up to
$72.0 million
(collectively, the “Customer Capacity Agreements”). The Company is using these Advances to fund the purchase of production equipment and to make other investments and improvements in its business and operations (the “Investments”) to increase overall capacity to produce various electronic components of the type and part as may be sold by the Company to the Customers from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advances.
The Advances from the Customers are being made in quarterly
installments (“Installments”) over an expected period of 18 to 24 months from the effective date of the Customer Capacity Agreements.
The Advances will be repaid beginning on the date that production from the Investments is sufficient to meet the Company's obligations under the agreements with the Customers. Repayments will be made on a quarterly basis as determined by calculations that generally consider the number of components purchased by the Customers during the quarter. Repayments based on the calculations will continue until either the Advances are repaid in full, or December 31, 2038 for all three Customers. The Company has a quarterly repayment cap in the agreement with each of the Customers and is not required to make any quarterly repayments to the Customers that in the aggregate exceeds
$1.8 million
. If the Customers do not purchase a number of components that would require full repayment of the Advances by December 31, 2038, then the Advances shall be deemed repaid in full. Additionally, if the Customers do not purchase a number of components that would require a payment on the Advances for a period of 16 consecutive quarters, the Advances shall be deemed repaid in full.
As of
March 31, 2019
, the Company has received a total of
$13.4 million
in Advances from these Customers. Since the debt is non-interest bearing, we have recorded debt discounts on the Advances.
T
hese discounts are being amortized over the expected life of the Advances through interest expense. During fiscal year 2019, the Company had
$16.3 million
in capital expenditures related to the Customer Capacity Agreements.
Derivatives
On November 7, 2018, the Company entered into two cross-currency swaps designated as fair value hedges to hedge the foreign currency risk on the Intercompany Loans. These agreements are contracts to exchange floating-rate payments in JPY with floating rate payments in USD. The swaps are intended to offset in the same period the remeasurement of the carrying value of the underlying foreign currency Intercompany Loans. The terms of these cross-currency swaps are as follows:
|
|
|
|
•
|
An amortizing cross-currency swap with an initial notional value
JPY 16.5 billion
. The notional amount is amortized by approximately
JPY 1.4 billion
every six months and matures on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus
2.00%
. Interest payments are made by the Company in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and USD Libor plus
2.70%
.
|
|
|
|
|
•
|
A non-amortizing cross-currency swap contract with a notional value of
JPY 16.5 billion
maturing on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus
2.25%
. Interest payments are made by the Company in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and USD Libor plus
3.15%
.
|
Also, on November 7, 2018, the Company entered into a cross-currency swap designated as a net investment hedge to hedge the JPY currency exposure of the Company's net investment in TOKIN. This agreement is a contract to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. The terms of this cross-currency swap are as follows:
|
|
|
|
•
|
An amortizing cross-currency swap with an initial notional value of
JPY 33.0 billion
. The notional amount is amortized by approximately
JPY 1.4 billion
every six months and matures on September 30, 2024. Interest payments are made by the Company in JPY on March 31 and September 30 of each year based on the JPY notional value and a fixed rate of
2.61%
. The Company receives interest in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of
6.25%
.
|
Short-term Liquidity
Cash and cash equivalents of
$207.9 million
as of March 31,
2019
decreased
$78.9 million
from
$286.8 million
as of March 31,
2018
. Our net working capital (current assets less current liabilities)
decreased
$27.7 million
, with the balance as of
March 31, 2019
of
$363.6 million
compared to
$391.3 million
of net working capital as of
March 31, 2018
, with the decrease primarily driven by the cash holdings of TOKIN. Cash and cash equivalents held by our foreign subsidiaries totaled $139.6 million and $196.8 million at
March 31, 2019
and
2018
, respectively, with the decrease primarily driven by cash holdings of TOKIN and Suzhou, China. Our operating income outside the U.S. is no longer deemed to be permanently reinvested in foreign jurisdictions. However, we currently do not intend nor foresee a need to repatriate cash and cash equivalents held by foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue U.S. withholding taxes on the distributed foreign earnings.
Based on our current operating plans, we believe domestic cash and cash equivalents, including expected cash generated from operations, are sufficient to fund our operating requirements for at least the next twelve months, including
$6.3 million
in interest payments,
$28.4 million
in debt principal payments, $120.0 million to $135.0 million in capital expenditures,
excluding approximately $45.0 million to $50.0 million of customer-funded capacity expansion related to Customer Capacity Agreements,
$1.9 million
in restructuring payments, and $11.6 million in expected cash dividends. The Company's expected capital expenditures in fiscal year 2020 mainly relate to the Company's continued plan of capacity expansion to support future growth, and to improve our information technology infrastructure around the world. As of
March 31, 2019
, our borrowing capacity, which is based on factors including outstanding eligible accounts receivable, inventory and equipment collateral, under the revolving line of credit was
$66.0 million
. The revolving line of credit expires on
April 28, 2022
.
Cash and cash equivalents
decreased
by
$78.9 million
during the year ended
March 31, 2019
, as compared to an
increase
of
$177.1 million
during the year ended
March 31, 2018
and an
increase
of
$44.8 million
during the year ended
March 31, 2017
as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net cash provided by (used in) operating activities
(1)
|
|
$
|
131,731
|
|
|
$
|
120,761
|
|
|
$
|
71,667
|
|
|
Net cash provided by (used in) investing activities
|
|
(147,012
|
)
|
|
102,364
|
|
|
(25,598
|
)
|
|
Net cash provided by (used in) financing activities
|
|
(56,657
|
)
|
|
(55,798
|
)
|
|
(125
|
)
|
|
Effect of foreign currency fluctuations on cash
(2)
|
|
(6,990
|
)
|
|
9,745
|
|
|
(1,174
|
)
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
|
$
|
(78,928
|
)
|
|
$
|
177,072
|
|
|
$
|
44,770
|
|
_______________________________________________
(1)
Fiscal years ended March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
(2)
Fiscal year ended March 31, 2018 adjusted due to the adoption of ASC 606.
Operating Cash Flow Activities
During fiscal years
2019
,
2018
, and
2017
, cash provided by operating activities totaled
$131.7 million
,
$120.8 million
, and
$71.7 million
, respectively. During fiscal year
2019
, cash provided by operating activities was positively impacted by our net income of
$206.6 million
, a
$7.7 million
increase in accounts payable, and a
$1.0 million
decrease in accrued income taxes. Operating cash flows were negatively impacted by a
$70.6 million
decrease in other operating liabilities, a
$42.8 million
increase in inventories, an
$8.9 million
increase in accounts receivable, and a
$4.4 million
increase in prepaid expenses and other assets. The decrease in other operating liabilities was driven by a
$46.3 million
decrease in accruals for TOKIN anti-trust fines and a
$7.8 million
decrease in restructuring liabilities. The increase in inventory is due to increased customer demand.
During fiscal year
2018
, cash provided by operating activities was positively impacted by our net income of
$254.1 million
. Excluding the acquired balances from TOKIN, operating cash flows were also positively impacted by a
$30.2 million
decrease in accounts receivable, a
$4.3 million
decrease in prepaid expenses and other assets, and a
$1.3 million
increase in accrued income taxes. Excluding the acquired balances from TOKIN, operating cash flows were negatively impacted by a
$16.1 million
decrease in accounts payable and a
$13.8 million
increase in inventories.
During fiscal year
2017
, cash provided by operating activities was positively impacted by our net income of
$47.2 million
, a
$16.8 million
decrease in inventories, a
$6.2 million
increase in accounts payable, and a
$1.7 million
increase in other operating liabilities. Operating cash flows were negatively impacted by a
$2.6 million
increase in accounts receivable and a
$1.8 million
increase in prepaid expenses and other assets.
Investing Cash Flow Activities
During fiscal years
2019
,
2018
, and
2017
, cash provided by (used in) investing activities totaled
$(147.0) million
,
$102.4 million
, and
$(25.6) million
, respectively. During fiscal year
2019
, cash
used in
investing activities included capital expenditures of
$146.1 million
, primarily related to expanding capacity at our manufacturing facilities in Mexico, Portugal, China, Thailand and Japan, as well as information technology projects in the United States and Mexico.
$16.3 million
of the
$146.1 million
in capital expenditures were related to the Customer Capacity Agreements.
Additionally, the Company invested
$4.0 million
in the form of capital contributions to KEMET Jianghai and Novasentis. Offsetting these uses of cash, we had asset sales of
$2.3 million
and received dividends of
$0.8 million
.
During fiscal year
2018
, cash provided by investing activities was primarily due to
$164.0 million
in net cash received attributable to the bargain purchase of TOKIN. Additionally, we had proceeds from asset sales of
$3.6 million
and received dividends of
$2.7 million
. This was partially offset by capital expenditures of
$65.0 million
, primarily related to expanding capacity at our manufacturing facilities in Mexico, Portugal, China, Thailand and Japan, as well as for information technology projects in the United States and Mexico. In addition, the Company invested
$3.0 million
in the form of capital contributions to Novasentis.
During fiscal year
2017
, cash used in investing activities was primarily due to capital expenditures of
$25.6 million
, primarily related to expanding capacity at our manufacturing facilities in Mexico, Italy, Portugal, and China.
Financing Cash Flow Activities
During fiscal years
2019
,
2018
, and
2017
, cash used in financing activities totaled
$56.7 million
,
$55.8 million
, and
$0.1 million
, respectively. During fiscal year
2019
, the Company received
$281.8 million
in proceeds from the TOKIN Term Loan Facility, net of discount, bank issuance costs, and other indirect issuance costs,
$13.4 million
in proceeds from advances from customers, as described in the earlier section titled "Customer Advances", received proceeds on an interest free loan from the Portuguese Government of
$1.1 million
, and received
$0.5 million
in cash proceeds from the exercise of stock options. The Company made
$344.5 million
in payments on long term debt, including two quarterly principal payments on the Term Loan Credit Agreement of $4.3 million, for a total of $8.6 million, $323.4 million to repay the remaining balance on the Term Loan Credit Agreement, and one principal payment on the TOKIN Term Loan Facility of $12.4 million. An early payment premium on the Term Loan Credit Agreement used $3.2 million in cash. Lastly, the Company paid two quarterly cash dividends for a total of
$5.8 million
.
During fiscal year
2018
, cash used in financing activities was impacted by the following payments: (i) $353.0 million to pay off the remaining outstanding balance of the 10.5% Senior Notes, (ii) $33.9 million to repay the remaining outstanding balance of the revolving line of credit, and (iii) three quarterly principal payments on the Term Loan Credit Agreement for
$4.3 million
each, for a total of
$12.9 million
. The Company received
$329.7 million
in proceeds from the Term Loan Credit Agreement, net of discount, bank issuance costs, and other indirect issuance costs, received proceeds from the exercise of stock warrants and stock options for
$8.8 million
and
$5.2 million
, respectively, and received
$0.3 million
in proceeds on an interest free loan from the Portuguese Government.
During fiscal year
2017
, the Company made $0.1 million in net payments on long-term debt, had cash outflows of
$1.1 million
for the purchase of treasury stock, and received
$1.1 million
from the exercise of stock options.
Commitments
At
March 31, 2019
, we had contractual obligations in the form of non-cancellable operating leases and debt, including interest payments (see Note
3
,
“
Debt
”
and Note
15
,
“
Commitments and Contingencies
”
to our consolidated financial statements), European social security, pension benefits, other post-retirement benefits, inventory purchase obligations, fixed asset purchase obligations, acquisition related obligations, and construction obligations as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
Contractual obligations
|
|
Total
|
|
Year 1
|
|
Years 2 - 3
|
|
Years 4 - 5
|
|
More than
5 years
|
|
Debt obligations
(1)
|
|
$
|
305,927
|
|
|
$
|
28,430
|
|
|
$
|
59,509
|
|
|
$
|
55,708
|
|
|
$
|
162,280
|
|
|
Interest obligations
(1)
|
|
28,200
|
|
|
6,326
|
|
|
11,039
|
|
|
8,928
|
|
|
1,907
|
|
|
Operating lease obligations
|
|
48,311
|
|
|
10,898
|
|
|
14,302
|
|
|
9,402
|
|
|
13,709
|
|
|
Pension and other post-retirement benefits
(2)
|
|
94,178
|
|
|
6,758
|
|
|
15,184
|
|
|
18,024
|
|
|
54,212
|
|
|
Employee separation liability
|
|
7,640
|
|
|
594
|
|
|
674
|
|
|
674
|
|
|
5,698
|
|
|
Restructuring liability
|
|
2,181
|
|
|
1,869
|
|
|
312
|
|
|
—
|
|
|
—
|
|
|
Purchase commitments
|
|
31,468
|
|
|
31,468
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Capital lease obligations
|
|
2,049
|
|
|
993
|
|
|
888
|
|
|
168
|
|
|
—
|
|
|
Anti-trust fines and settlements
(3)
|
|
34,880
|
|
|
21,712
|
|
|
10,203
|
|
|
2,965
|
|
|
—
|
|
|
Total
|
|
$
|
554,834
|
|
|
$
|
109,048
|
|
|
$
|
112,111
|
|
|
$
|
95,869
|
|
|
$
|
237,806
|
|
_______________________________________________________________________________
(1)
Refer to Note
3
, “Debt” for additional information. Repayment of the Customer Capacity Agreements assumes the customers purchase products in a quantity sufficient to require the maximum permitted debt repayment amount per quarter.
(2)
Reflects expected benefit payments through fiscal year 2029.
(3)
In addition to amounts reflected in the table, an additional $2.9 million has been recorded in the line item "Accrued expenses," for which the timing of payment has not been determined.
Uncertain Income Tax Positions
We have recognized a liability for our unrecognized uncertain income tax positions of approximately
$2.4 million
as of
March 31, 2019
. The ultimate resolution and timing of payment for remaining matters continues to be uncertain and are, therefore, excluded from the above table.
Non-GAAP Financial Measures
To complement our Consolidated Statements of Operations and Cash Flows, we use non-GAAP financial measures of Adjusted gross margin, Adjusted operating income, Adjusted net income, and Adjusted EBITDA. We believe that Adjusted gross margin, Adjusted operating income, Adjusted net income, and Adjusted EBITDA are complements to U.S. GAAP amounts and such measures are useful to investors. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity.
The following table provides a reconciliation from U.S. GAAP Gross margin to non-GAAP Adjusted gross margin (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Net sales
(1)
|
|
$
|
1,382,818
|
|
|
$
|
1,200,181
|
|
|
$
|
757,338
|
|
|
Cost of sales
(1)
|
|
924,276
|
|
|
860,744
|
|
|
571,944
|
|
|
Gross Margin (GAAP)
(1)
|
|
458,542
|
|
|
339,437
|
|
|
185,394
|
|
|
Gross margin as a % of net sales
|
|
33.2
|
%
|
|
28.3
|
%
|
|
24.5
|
%
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
Plant start-up costs
(2)
|
|
(927
|
)
|
|
929
|
|
|
427
|
|
|
Stock-based compensation expense
|
|
2,756
|
|
|
1,519
|
|
|
1,384
|
|
|
Adjusted gross margin (non-GAAP)
(1)
|
|
$
|
460,371
|
|
|
$
|
341,885
|
|
|
$
|
187,205
|
|
|
Adjusted gross margin as a % of net sales
|
|
33.3
|
%
|
|
28.5
|
%
|
|
24.7
|
%
|
_______________________________________________________________________________
(1)
Fiscal years ending March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
(2)
$0.9 million
in costs incurred during fiscal year 2018 related to the relocation of the Company's tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant were reclassified from “Plant start-up costs” to “Restructuring charges” during fiscal year 2019.
The following table provides reconciliation from U.S. GAAP Operating income to non-GAAP Adjusted operating income (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Operating income (GAAP)
(1)
|
|
$
|
200,849
|
|
|
$
|
112,852
|
|
|
$
|
34,968
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
(Gain) loss on write down and disposal of long-lived assets
|
|
1,660
|
|
|
(992
|
)
|
|
10,671
|
|
|
ERP integration costs/IT transition costs
|
|
8,813
|
|
|
80
|
|
|
7,045
|
|
|
Stock-based compensation
|
|
12,866
|
|
|
7,657
|
|
|
4,720
|
|
|
Restructuring charges
(2)
|
|
8,779
|
|
|
14,843
|
|
|
5,404
|
|
|
Legal expenses related to antitrust class actions
|
|
5,195
|
|
|
6,736
|
|
|
2,640
|
|
|
TOKIN investment-related expenses
|
|
—
|
|
|
—
|
|
|
1,101
|
|
|
Plant start-up costs
(2)
|
|
(927
|
)
|
|
929
|
|
|
427
|
|
|
Adjusted operating income (non-GAAP)
(1)
|
|
$
|
237,235
|
|
|
$
|
142,105
|
|
|
$
|
66,976
|
|
_______________________________________________________________________________
(1)
Fiscal years ending March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
(2)
$0.9 million
in costs incurred during fiscal year 2018 related to the relocation of the Company's tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant were reclassified from “Plant start-up costs” to “Restructuring charges” during fiscal year 2019.
The following table provides a reconciliation from U.S. GAAP Net income to non-GAAP Adjusted net income (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net income (GAAP)
(1)
|
|
$
|
206,587
|
|
|
$
|
254,127
|
|
|
$
|
47,157
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
Equity (income) loss from equity method investments
|
|
3,304
|
|
|
(76,192
|
)
|
|
(41,643
|
)
|
|
Acquisition (gain) loss
|
|
—
|
|
|
(130,880
|
)
|
|
—
|
|
|
Change in value of TOKIN options
|
|
—
|
|
|
—
|
|
|
(10,700
|
)
|
|
(Gain) loss on write down and disposal of long-lived assets
|
|
1,660
|
|
|
(992
|
)
|
|
10,671
|
|
|
Restructuring charges
(2)
|
|
8,779
|
|
|
14,843
|
|
|
5,404
|
|
|
R&D grant reimbursements and grant income
|
|
(4,559
|
)
|
|
—
|
|
|
—
|
|
|
ERP integration costs/IT transition costs
|
|
8,813
|
|
|
80
|
|
|
7,045
|
|
|
Stock-based compensation
|
|
12,866
|
|
|
7,657
|
|
|
4,720
|
|
|
Legal expenses/fines related to antitrust class actions
|
|
11,896
|
|
|
16,636
|
|
|
2,640
|
|
|
Net foreign exchange (gain) loss
|
|
(7,230
|
)
|
|
13,145
|
|
|
(3,758
|
)
|
|
TOKIN investment-related expenses
|
|
—
|
|
|
—
|
|
|
1,101
|
|
|
Plant start-up costs
(2)
|
|
(927
|
)
|
|
929
|
|
|
427
|
|
|
Amortization included in interest expense
|
|
1,872
|
|
|
2,467
|
|
|
761
|
|
|
Income tax effect of non-GAAP adjustments
|
|
(50,012
|
)
|
|
(30
|
)
|
|
(741
|
)
|
|
Loss on early extinguishment of debt
|
|
15,946
|
|
|
486
|
|
|
—
|
|
|
Adjusted net income (non-GAAP)
(1)
|
|
$
|
208,995
|
|
|
$
|
102,276
|
|
|
$
|
23,084
|
|
____________________________________________________________________________
(1)
Fiscal years ending March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
(2)
$0.9 million
in costs incurred during fiscal year 2018 related to the relocation of the Company's tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant were reclassified from “Plant start-up costs” to “Restructuring charges” during fiscal year 2019.
The following table provides reconciliation from U.S. GAAP Net income to non-GAAP Adjusted EBITDA (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net income (U.S. GAAP)
(1)
|
|
$
|
206,587
|
|
|
$
|
254,127
|
|
|
$
|
47,157
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
(39,460
|
)
|
|
9,132
|
|
|
4,294
|
|
|
Interest expense, net
|
|
19,204
|
|
|
32,073
|
|
|
39,731
|
|
|
Depreciation and amortization
|
|
52,628
|
|
|
50,661
|
|
|
38,151
|
|
|
EBITDA (non-GAAP)
(1)
|
|
238,959
|
|
|
345,993
|
|
|
129,333
|
|
|
Excluding the following items:
|
|
|
|
|
|
|
|
Equity (income) loss from equity method investments
|
|
3,304
|
|
|
(76,192
|
)
|
|
(41,643
|
)
|
|
Acquisition (gain) loss
|
|
—
|
|
|
(130,880
|
)
|
|
—
|
|
|
Change in value of TOKIN options
|
|
—
|
|
|
—
|
|
|
(10,700
|
)
|
|
(Gain) loss on write down and disposal of long-lived assets
|
|
1,660
|
|
|
(992
|
)
|
|
10,671
|
|
|
ERP integration costs/IT transition costs
|
|
8,813
|
|
|
80
|
|
|
7,045
|
|
|
Stock-based compensation
|
|
12,866
|
|
|
7,657
|
|
|
4,720
|
|
|
Restructuring charges
(2)
|
|
8,779
|
|
|
14,843
|
|
|
5,404
|
|
|
R&D grant reimbursements and grant income
|
|
(4,559
|
)
|
|
—
|
|
|
—
|
|
|
Legal expenses/fines related to antitrust class actions
|
|
11,896
|
|
|
16,636
|
|
|
2,640
|
|
|
Net foreign exchange (gain) loss
|
|
(7,230
|
)
|
|
13,145
|
|
|
(3,758
|
)
|
|
TOKIN investment-related expenses
|
|
—
|
|
|
—
|
|
|
1,101
|
|
|
Plant start-up costs
(2)
|
|
(927
|
)
|
|
929
|
|
|
427
|
|
|
Loss on early extinguishment of debt
|
|
15,946
|
|
|
486
|
|
|
—
|
|
|
Adjusted EBITDA (non-GAAP)
(1)
|
|
$
|
289,507
|
|
|
$
|
191,705
|
|
|
$
|
105,240
|
|
____________________________________________________________________________
(1)
Fiscal years ending March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
(2)
$0.9 million
in costs incurred during fiscal year 2018 related to the relocation of the Company's tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant were reclassified from “Plant start-up costs” to “Restructuring charges” during fiscal year 2019.
Adjusted gross margin represents net sales less cost of sales excluding adjustments which are outlined in the quantitative reconciliation provided above. Management uses Adjusted gross margin to facilitate our analysis and understanding of our business operations by excluding the items outlined in the quantitative reconciliation provided above which might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations. The Company believes that Adjusted gross margin is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company. Adjusted gross margin should not be considered as an alternative to gross margin or any other performance measure derived in accordance with U.S. GAAP.
Adjusted operating income represents operating income, excluding adjustments which are outlined in the quantitative reconciliation provided above. We use Adjusted operating income to facilitate our analysis and understanding of our business operations by excluding the items outlined in the quantitative reconciliation provided above which might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations. The Company believes that Adjusted operating income is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company and allows investors to monitor and understand changes in our ability to generate income from ongoing operations.
Adjusted operating income should not be considered as an alternative to operating income or any other performance measure derived in accordance with U.S. GAAP.
Adjusted net income represents net income, excluding adjustments which are outlined in the quantitative reconciliation provided above. We use Adjusted net income to evaluate the Company’s operating performance by excluding the items outlined in the quantitative reconciliation provided above which might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations. The Company believes that adjusted net income is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company and allows investors to monitor and understand changes in our ability to generate income from ongoing operations.
Adjusted net income should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with U.S. GAAP.
Adjusted EBITDA represents net income before income tax expense, interest expense, net, and depreciation and amortization, excluding adjustments which are outlined in the quantitative reconciliation provided above. We present Adjusted EBITDA as a supplemental measure of our performance and ability to service debt. We also present adjusted EBITDA because we believe such measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
We believe adjusted EBITDA is an appropriate supplemental measure of debt service capacity because cash expenditures on interest are, by definition, available to pay interest, and tax expense is inversely correlated to interest expense because tax expense goes down as deductible interest expense goes up; depreciation and amortization are non-cash charges. The other items excluded from adjusted EBITDA are excluded to better reflect our continuing operations.
In evaluating adjusted EBITDA, one should be aware that in the future we may incur expenses similar to the adjustments noted above. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these types of adjustments. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity.
Our adjusted EBITDA measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
|
|
|
|
•
|
it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
|
|
|
|
|
•
|
it does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
•
|
it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
|
|
|
|
|
•
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and our adjusted EBITDA measure does not reflect any cash requirements for such replacements;
|
|
|
|
|
•
|
it is not adjusted for all non-cash income or expense items that are reflected in our Consolidated Statements of Cash Flows;
|
|
|
|
|
•
|
it does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;
|
|
|
|
|
•
|
it does not reflect limitations on or costs related to transferring earnings from our subsidiaries to us; and
|
|
|
|
|
•
|
other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.
|
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our U.S. GAAP results and using adjusted EBITDA only supplementary.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. Under this ASU, a customer will apply ASC 350-40 to determine whether to capitalize implementation costs of the cloud computing arrangement that is a service contract or expense them as incurred. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s Condensed Consolidated Financial Statements.
In March 2018, the FASB issued
ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 118.
The amendments in this update provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act. The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. Additionally, this ASU discusses required disclosures that an entity must make with regard to the Act. This ASU is effective immediately as new information is
available to adjust provisional amounts that were previously recorded. The Company has adopted this standard and has finalized its accounting for the Act. See Note
11
, “
Income Taxes”
for additional information on the Act.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The ASU amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. For cash flow hedges existing on the date of adoption, an entity is required to eliminate the separate measurement of ineffectiveness in earnings by means of a cumulative-effect adjustment to accumulated other comprehensive income (“AOCI”) with a corresponding adjustment to the opening balance of retained earnings. ASU 2017-12 becomes effective for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted. In the third quarter of fiscal year 2019, the Company entered into new derivative contracts and elected to early adopt the ASU effective as of October 1, 2018. The adoption of the standard did not result in a cumulative-effect adjustment since the Company has not previously had any ineffectiveness associated with its cash flows hedges.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The update clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. The Company adopted this guidance as of April 1, 2018. In connection with the adoption of this ASU, the Company elected to account for distributions received from equity method investees using the nature of distributions approach, under which distributions are classified based on the nature of activity that generated them. The other provisions of this ASU did not have an impact on the Company's Condensed Consolidated Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases, as modified by ASU 2017-03, Transition and Open Effective Date Information, requiring lessees to recognize a right-of-use asset and a lease liability for all leases. This ASU also requires expanded disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the Company will adopt ASU 2016-02 on April 1, 2019. The Company has substantially completed its preparation for the adoption of this ASU, and the ASU is expected to have a material impact on lease assets and lease liabilities on its Consolidated Balance Sheets upon adoption. This ASU is not expected to have a material effect on the amount of expense recognized in connection with the Company's current practice. The Company plans to elect the optional transition method that will give companies the option to use the effective date as the date of initial application on transition, and as a result, we will not adjust our comparative period financial information or make the new required lease disclosures for periods before the effective date. For information about the Company's future lease commitments as of March 31, 2019, see Note
15
, "
Commitments and Contingencies.
"
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which superseded existing accounting standards for revenue recognition and created a single framework. ASU 2014-09 and its amendments were included primarily in ASC 606. The core principle of ASC 606 is that an entity should recognize revenue for the transfer of goods or services equal to an amount that it expects to be entitled to receive for those goods or services. ASC 606 also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company adopted the requirements of ASC 606 effective in the first quarter of fiscal year 2019, using the full retrospective method, which required us to restate each prior reporting period presented. The Company has applied practical expedient ASC 606-10-65-1(f)(3) and notes that all previously reported historical amounts are adjusted for the impact of ASC 606. See Note
1
, “
Organization and Significant Accounting Polices
,” for tables showing how the adoption of ASC 606 impacted our previously reported Consolidated Balance Sheet as of March 31, 2018 and our Consolidated Statements of Operations, Statements of Comprehensive Income, Statements of Changes in Stockholders' Equity, and Statements of Cash Flows for the fiscal years ended
March 31, 2018
and
2017
.
There are currently no other accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
Effect of Inflation
Inflation generally affects us by increasing the cost of labor, equipment, and raw materials. We do not believe that inflation has had any material effect on our business over the past three fiscal years except for the following discussion in Commodity Price Risk.