Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

Commission File Number: 0-20289

KEMET CORPORATION
Exact name of registrant as specified in its charter

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681
(Address of principal executive offices, zip code)

864-963-6300
(Registrant's telephone number, including area code)

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

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

YES  ý            NO  o

        Common Stock Outstanding at: January 31, 2003

Part I—FINANCIAL INFORMATION

ITEM 1—Financial Statements

KEMET CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands except per share data)

See accompanying notes to consolidated financial statements.

2

KEMET CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollars in thousands except per share data)

See accompanying notes to consolidated financial statements.

3

KEMET CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

4

Note 1. Basis of Financial Statement Preparation

        The consolidated financial statements contained herein, other than the March 31, 2002, balance sheet, are unaudited and have been prepared from the books and records of KEMET Corporation and its Subsidiaries ("KEMET" or the "Company"). In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company's fiscal year ending March 31, 2002, Form 10-K. Net sales and operating results for the three- and nine-month periods ended December 31, 2002, are not necessarily indicative of the results to be expected for the full year.

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

        When KEMET Electronics Corporation was formed as a separate entity in 1987, it continued the Union Carbide practice of expensing depreciation and amortization costs in the current period, rather than including such costs as a component of inventory and expensing them through cost of goods sold over time, as required by current generally accepted accounting principles. Beginning with the June 2002 quarter, KEMET included depreciation and amortization as a component of its cost of inventory. The impact of this change on the three-month and nine-month periods ended December 31, 2002, amounted to additional after-tax income of approximately $85,000 and $469,000 or $0.001 and $0.005 per share, respectively. KEMET has also reviewed the financial statements contained in its previously filed 2002 Annual Report on Form 10-K and confirmed that this change would not have resulted in any material changes to those financial statements. In addition, the presentation of the Statement of Operations has been reclassified to include depreciation and amortization expenses of $15.0 million and $16.4 million in cost of goods sold; depreciation of $2.1 million and $2.0 million in selling, general, and administrative expenses; and depreciation of $0.4 million and $0.3 million in research and development expenses in the quarters ended December 31, 2002 and 2001, respectively, and depreciation and amortization expenses of $45.9 million and $48.3 million in cost of goods sold; depreciation of $6.1 million and $5.8 million in selling, general, and administrative expenses; and depreciation of $1.2 million and $0.8 million in research and development expenses in the nine-month periods ended December 31, 2002 and 2001, respectively.

        This change makes KEMET's financial statement presentation more comparable to those of other capacitor manufacturers.

        The Company also converted the cost of a portion of its inventory determined by the last-in, first-out ("LIFO") basis to the first-in, first-out ("FIFO") method during the quarter ended June 30, 2002. The after-tax impact was approximately $544,000 and was not considered material to the consolidated financial statements. Therefore, prior period amounts have not been restated for this change in accounting principle. LIFO was the basis for approximately 6% of inventory costs of certain raw materials at March 31, 2002. After the conversion, 100% of the Company's inventory costs will be determined by the FIFO method.

        See also Note 3.

        Certain prior-year amounts were reclassified to conform to current period presentation.

5

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

        In accordance with FASB Statement No. 128, the Company had net losses for each period presented, therefore there are no reconciling items between basic earnings (loss) per share and diluted earnings (loss) per share as presented below.

Computation of Basic and Diluted Earnings (Loss) Per Share
(Dollars in thousands except per share data)

        The quarter and nine months ended December 31, 2002, excluded potentially dilutive securities of approximately 243,000 and 344,000, respectively, in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive. The quarter and nine months ended December 31, 2001, excluded potentially dilutive securities of approximately 895,000 and 963,000, respectively, in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive.

Note 3. Goodwill and intangible assets

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

        In connection with the adoption of Statement No. 142, the Company completed impairment tests of its goodwill and other identifiable intangible assets including indefinite-lived trademarks, as well as

6

patents and technology that have definite lives and will continue to be amortized. No impairment of assets was noted.

        For purposes of determining the fair value of its trademarks, the Company utilized a discounted cash flow model which considered the costs of royalties in the absence of trademarks owned by the Company.

        For purposes of determining potential impairment of goodwill, the Company aggregated its reporting units as its segments are aggregated to a single reporting segment under Statement No. 131. The Company's publicly traded stock price is utilized as a component of its model for determining fair value in order to evaluate goodwill impairment. Negative goodwill of approximately $661,000 was written off upon adoption of the new standard and was included in "Other income" in the statement of earnings for the quarter ended June 30, 2002, because it was not material.

        The carrying amounts, accumulated amortization, and amortization expense for each of the periods presented are noted below by intangible asset class (in thousands):

7

        The reconciliation of net loss and loss per share, adjusted to exclude goodwill, trademark, and negative goodwill amortization expense, net of tax, for the three- and nine-month periods ended December 31, 2002 and 2001, is as follows (in thousands, except per share amounts):

Note 4. Derivatives and Hedging

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

Hedging Foreign Currencies

        Certain operating expenses at the Company's Mexican facilities are paid in Mexican pesos. In order to hedge these forecasted cash flows, management purchases forward contracts to buy Mexican pesos for periods and amounts consistent with the related underlying cash flow exposures. These contracts are designated as hedges at inception and monitored for effectiveness on a routine basis. At December 31, 2002, the Company had outstanding forward exchange contracts that mature within approximately fifteen months to purchase Mexican pesos with notional amounts of $78.1 million. The fair values of these contracts at December 31, 2002, totaled $2.8 million, which is recorded as a derivative liability on the Company's balance sheet as other current liabilities. During the next 12 months, approximately $2.8 million of the loss on these contracts is expected to be charged to cost of goods sold. The impact of the changes in fair values of these contracts resulted in other comprehensive gain of $45 thousand and $3.9 million for the three months ended December 31, 2002 and 2001, respectively, and other comprehensive gain (loss) of ($6.6) million and $3.5 million for the nine-month periods ended December 31, 2002 and 2001, respectively.

8

Interest Rates Swaps

        In November 2002, the Company entered into two interest rate swap contracts (the "Swaps") which effectively converted its $100 million aggregate principal amount of 6.66% senior notes to floating-rate debt adjusted semi-annually based on six-month LIBOR plus 3.84%. At December 31, 2002, the fair value of the Swaps, based upon market estimates provided by the counterparties, was approximately $0.9 million and was recorded as a derivative asset on the Company's balance sheet as other assets. These derivative instruments reduced interest expense by approximately $0.2 million for the three- and nine-month periods ended December 31, 2002, respectively, and the mark to m