KEMET Electronics Corporation
World Sales Headquarters
P.O. Box 5928
Greenville, SC 29606
Phone: 864.963.6300
Fax: 864.963.6521
www.kemet.com
KEMET Electronics S.A.
1-3, Avenue de la Paix
P.O. Box 76
Ch-1211
Geneva 20, Switzerland
Phone: 41.22.715.0100
Fax: 41.22.715.0170
KEMET Electronics Marketing (S) Pte Ltd.
101 Thompson Road
#23-03 United Square
Singapore 307591
Phone: 65.353.6636
Fax: 65.353.6656
ANNUAL REPORT 2005
Highlights of Fiscal 2005
Years ended March 31, (Dollars in thousands except per share data)
2003
2004
2005
Net sales
Net loss
Net loss per share, diluted
Net cash provided by (used in) operating activities
$447,332
$ 433,882
$ 425,338
$(55,988)
$(111,975)
$(174,094)
$ (0.65)
$ (1.30)
$
(2.01)
$ 43,710
$ 38,452
$ (12,752)
Cash and cash equivalents, short-term investments, and investments in marketable securities
$263,585
$ 271,284
$ 219,466
Stockholders’ equity
$793,275
$ 684,478
$ 515,203
Net Sales (In Millions)
Earnings (Loss) Per Share — Diluted
Stockholders’ Equity (In Millions)
$1,500
1,200
900
600
300
0
’00
’01
’02
’03
’04
’05
$5
4
3
2
1
0
-1
-2
-3
’00
’01
’02
’03
’04
’05
$900
675
450
225
0
’00
’01
’02
’03
’04
’05
KEMET Electronics Corporation
World Sales Headquarters
P.O. Box 5928
Greenville, SC 29606
Phone: 864.963.6300
Fax: 864.963.6521
www.kemet.com
KEMET Electronics S.A.
1-3, Avenue de la Paix
P.O. Box 76
Ch-1211
Geneva 20, Switzerland
Phone: 41.22.715.0100
Fax: 41.22.715.0170
KEMET Electronics Marketing (S) Pte Ltd.
101 Thompson Road
#23-03 United Square
Singapore 307591
Phone: 65.353.6636
Fax: 65.353.6656
ANNUAL REPORT 2005
Highlights of Fiscal 2005
Years ended March 31, (Dollars in thousands except per share data)
2003
2004
2005
Net sales
Net loss
Net loss per share, diluted
Net cash provided by (used in) operating activities
$447,332
$ 433,882
$ 425,338
$(55,988)
$(111,975)
$(174,094)
$ (0.65)
$ (1.30)
$
(2.01)
$ 43,710
$ 38,452
$ (12,752)
Cash and cash equivalents, short-term investments, and investments in marketable securities
$263,585
$ 271,284
$ 219,466
Stockholders’ equity
$793,275
$ 684,478
$ 515,203
Net Sales (In Millions)
Earnings (Loss) Per Share — Diluted
Stockholders’ Equity (In Millions)
$1,500
1,200
900
600
300
0
’00
’01
’02
’03
’04
’05
$5
4
3
2
1
0
-1
-2
-3
’00
’01
’02
’03
’04
’05
$900
675
450
225
0
’00
’01
’02
’03
’04
’05
Dear Fellow Shareholders
Fiscal 2005 was a year of transition for KEMET. In March 2005, Dave Maguire retired from the KEMET board after
a 43-year career with the company. Dave is highly respected at KEMET as well as throughout the entire electronics
industry. All of KEMET is grateful for his many contributions over the years and wish him the best in his retirement.
He’s earned it.
I joined KEMET as Chief Executive Officer in April 2005. KEMET is a team on a mission: to be a successful company,
which means that we have to be profitable. Being profitable in the short-term is important to employees as well as
shareholders and other stakeholders.
I will not try to gloss-over or defend the FY2005 results. I have said that our number one priority is “The math must
work,” and it clearly was not working. We did make progress on many fronts. However, our financial performance
was unacceptable, and it will improve. Your company is taking immediate action on numerous fronts to bring the
company to the performance levels you want and expect.
We have taken immediate actions to adjust our cost/expense to revenue ratio. We are reaching the conclusion of
the reorganization of our global operations, announced in July 2003. Over 90% of our production workforce is now
in low-cost locations. Our first production facility in Suzhou, China, is performing well, and our second should be
on-line as you read this. These facilities manufacture products close to the major customers that are consuming them.
I am realigning the company to a more flatly structured organization with accountability and responsibility lower
in the organization. I want the people who are close to the action — and close to the customer — to have the
responsibility and authority to make the correct decisions to satisfy our customers and improve profitability.
Additionally, I am establishing three sales/field units to focus on specific geographies and all customers within those
geographies. The leaders of these field units will report directly to me. I intend to be close to our customers and
make sure their needs are our priorities.
There are two pillars of success for any company in this industry — customer focus and technology leadership. In my
early visits with customers, I have clearly received the message that they enjoy doing business with KEMET. Our Easy-
To-Buy-From model is working. Customers want us to succeed. This is a strong foundation on which we can grow.
I have also been impressed with KEMET’s dedication to providing leading-edge technology that meets the needs of
our customers. We had numerous new product introductions during the year. We are seeing increases in shipments
of our innovative organic tantalum-polymer products, which we call KO-CAPs. We are also making advances in new
high-capacitance, multilayer ceramic capacitors. All these new parts are environmentally friendly, in accordance
with new environmental legislation around the world.
I have arrived at KEMET at a challenging time for the company, in particular, and the electronics industry, in general.
I appreciate the depth of experience of KEMET’s employees, many of whom have decades of knowledge about the
electronics industry. We will tap into and leverage that knowledge as we chart a course for KEMET’s future. We will
seek ways to sell more to our existing customers and to find new customers for our products, while continuing to
reduce costs.
Further details of our forward course are still being determined as I write this, but I can assure you I came to
KEMET to help our team win. I look forward to reporting back to you on our progress toward success in the future.
Thank you for your continued support of KEMET.
Sincerely,
Per-Olof Loof
Chief Executive Officer
Corporate Profile
KEMET Corporation is one of the world’s
leading suppliers of tantalum, multilayer
ceramic and solid aluminum electronic
capacitors. Our vision is to be the preferred
supplier of standardized components
among customers demanding the highest
standards of quality, delivery and service.
Board of Directors
Officers
Key Subsidiaries
Frank G. Brandenberg
Chairman
Former Corporate Vice President
and Sector President of Northrop
Grumman Corporation
Maureen E. Grzelakowski
Technology Industry Consultant
Per-Olof Loof
Chief Executive Officer of
KEMET Corporation
E. Erwin Maddrey, II
President
Maddrey and Associates,
an investment and consulting firm
Joseph D. Swann
President of Rockwell Automation
Power Systems and
Senior Vice President of
Rockwell Automation
Charles E. Volpe
Former President and
Chief Operating Officer of
KEMET Corporation
KEMET Electronics Corporation
2835 Kemet Way
Simpsonville
South Carolina 29681
KEMET de Mexico S.A. de C.V.
Av. Carlos Salazar y Blv. Manuel
Cavazos Lerma #15
Matamoros
Tamaulipas
Mexico 87380
KEMET Electronics S.A.
1-3, Avenue de la Paix
Ch-1211 Geneva 20
Switzerland
KEMET Electronics Asia Ltd.
30 Canton Road, Room 1512
Silver Cord Tower II
Tsimshatshui Kowloon
Hong Kong
KEMET Electronics Marketing (S) Pte Ltd.
101 Thompson Road
#23-03 United Square
Singapore 307591
KEMET Electronics (Suzhou) Co., Ltd.
Block 8, Suchun Industrial Square
Suchun Road, Suzhou Industrial Park
Suzhou, Jiangsu 215021
People’s Republic of China
Per-Olof Loof
CEO
James P. McClintock
President and COO
David E. Gable
VP and CFO
Larry C. McAdams
VP Human Resources
J. Kelly Vogt
VP Sales and Marketing
Daniel E. LaMorte
VP and CIO
Dr. Philip M. Lessner
VP Tantalum Technology and
Technical Marketing
Guy T. Williams
VP Engineering and Facilities
James A. Bruorton III
VP Global Distribution Sales
John E. Schneider
VP Sales — Asia
John R. Warner III
VP Strategy and Communications
Donald R. Aldworth
VP Quality
Joseph S. Porter
VP Sales — Americas
Michael W. Boone
Treasurer, Senior Director of Finance
and Secretary
Dear Fellow Shareholders
Fiscal 2005 was a year of transition for KEMET. In March 2005, Dave Maguire retired from the KEMET board after
a 43-year career with the company. Dave is highly respected at KEMET as well as throughout the entire electronics
industry. All of KEMET is grateful for his many contributions over the years and wish him the best in his retirement.
He’s earned it.
I joined KEMET as Chief Executive Officer in April 2005. KEMET is a team on a mission: to be a successful company,
which means that we have to be profitable. Being profitable in the short-term is important to employees as well as
shareholders and other stakeholders.
I will not try to gloss-over or defend the FY2005 results. I have said that our number one priority is “The math must
work,” and it clearly was not working. We did make progress on many fronts. However, our financial performance
was unacceptable, and it will improve. Your company is taking immediate action on numerous fronts to bring the
company to the performance levels you want and expect.
We have taken immediate actions to adjust our cost/expense to revenue ratio. We are reaching the conclusion of
the reorganization of our global operations, announced in July 2003. Over 90% of our production workforce is now
in low-cost locations. Our first production facility in Suzhou, China, is performing well, and our second should be
on-line as you read this. These facilities manufacture products close to the major customers that are consuming them.
I am realigning the company to a more flatly structured organization with accountability and responsibility lower
in the organization. I want the people who are close to the action — and close to the customer — to have the
responsibility and authority to make the correct decisions to satisfy our customers and improve profitability.
Additionally, I am establishing three sales/field units to focus on specific geographies and all customers within those
geographies. The leaders of these field units will report directly to me. I intend to be close to our customers and
make sure their needs are our priorities.
There are two pillars of success for any company in this industry — customer focus and technology leadership. In my
early visits with customers, I have clearly received the message that they enjoy doing business with KEMET. Our Easy-
To-Buy-From model is working. Customers want us to succeed. This is a strong foundation on which we can grow.
I have also been impressed with KEMET’s dedication to providing leading-edge technology that meets the needs of
our customers. We had numerous new product introductions during the year. We are seeing increases in shipments
of our innovative organic tantalum-polymer products, which we call KO-CAPs. We are also making advances in new
high-capacitance, multilayer ceramic capacitors. All these new parts are environmentally friendly, in accordance
with new environmental legislation around the world.
I have arrived at KEMET at a challenging time for the company, in particular, and the electronics industry, in general.
I appreciate the depth of experience of KEMET’s employees, many of whom have decades of knowledge about the
electronics industry. We will tap into and leverage that knowledge as we chart a course for KEMET’s future. We will
seek ways to sell more to our existing customers and to find new customers for our products, while continuing to
reduce costs.
Further details of our forward course are still being determined as I write this, but I can assure you I came to
KEMET to help our team win. I look forward to reporting back to you on our progress toward success in the future.
Thank you for your continued support of KEMET.
Sincerely,
Per-Olof Loof
Chief Executive Officer
Corporate Profile
KEMET Corporation is one of the world’s
leading suppliers of tantalum, multilayer
ceramic and solid aluminum electronic
capacitors. Our vision is to be the preferred
supplier of standardized components
among customers demanding the highest
standards of quality, delivery and service.
Board of Directors
Officers
Key Subsidiaries
Frank G. Brandenberg
Chairman
Former Corporate Vice President
and Sector President of Northrop
Grumman Corporation
Maureen E. Grzelakowski
Technology Industry Consultant
Per-Olof Loof
Chief Executive Officer of
KEMET Corporation
E. Erwin Maddrey, II
President
Maddrey and Associates,
an investment and consulting firm
Joseph D. Swann
President of Rockwell Automation
Power Systems and
Senior Vice President of
Rockwell Automation
Charles E. Volpe
Former President and
Chief Operating Officer of
KEMET Corporation
KEMET Electronics Corporation
2835 Kemet Way
Simpsonville
South Carolina 29681
KEMET de Mexico S.A. de C.V.
Av. Carlos Salazar y Blv. Manuel
Cavazos Lerma #15
Matamoros
Tamaulipas
Mexico 87380
KEMET Electronics S.A.
1-3, Avenue de la Paix
Ch-1211 Geneva 20
Switzerland
KEMET Electronics Asia Ltd.
30 Canton Road, Room 1512
Silver Cord Tower II
Tsimshatshui Kowloon
Hong Kong
KEMET Electronics Marketing (S) Pte Ltd.
101 Thompson Road
#23-03 United Square
Singapore 307591
KEMET Electronics (Suzhou) Co., Ltd.
Block 8, Suchun Industrial Square
Suchun Road, Suzhou Industrial Park
Suzhou, Jiangsu 215021
People’s Republic of China
Per-Olof Loof
CEO
James P. McClintock
President and COO
David E. Gable
VP and CFO
Larry C. McAdams
VP Human Resources
J. Kelly Vogt
VP Sales and Marketing
Daniel E. LaMorte
VP and CIO
Dr. Philip M. Lessner
VP Tantalum Technology and
Technical Marketing
Guy T. Williams
VP Engineering and Facilities
James A. Bruorton III
VP Global Distribution Sales
John E. Schneider
VP Sales — Asia
John R. Warner III
VP Strategy and Communications
Donald R. Aldworth
VP Quality
Joseph S. Porter
VP Sales — Americas
Michael W. Boone
Treasurer, Senior Director of Finance
and Secretary
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧
(cid:134)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20289
KEMET Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2835 KEMET Way, Simpsonville, South Carolina
(Address of principal executive offices)
57-0923789
(IRS Employer
Identification No.)
29681
(Zip Code)
Registrant’s telephone number, including area code: (864) 963-6300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 Par Value
(Title of class)
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ⌧
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). ⌧ Yes (cid:134) No
Aggregate market value of voting Common Stock held by non-affiliates of the registrant as of
September 30, 2004, computed by reference to the closing sale price of the registrant’s Common Stock was
approximately $699,663,900.
Number of shares of each class of Common Stock outstanding as of May 31, 2005: Common Stock, $.01 Par
Value 86,613,204
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive proxy statement relating to the annual meeting of stockholders to be
held on July 20, 2005: Part III
ITEM 1. BUSINESS
General
PART I
KEMET Corporation which together with its subsidiaries is referred to herein as “KEMET” or the
“Company” is a leading manufacturer of tantalum capacitors, multilayer ceramic capacitors (“MLCC”),
and solid aluminum capacitors. For the year ended March 31, 2005 (“fiscal year 2005”), KEMET
generated net sales of $425.3 million, down 2.0% from $433.9 million in fiscal year 2004. In fiscal year
2005, total net sales were broken down geographically as follows: North American sales were
approximately 46.6%, Asian sales were approximately 33.1%, and European sales were approximately
20.3%. During fiscal year 2005, the Company shipped approximately 33.6 billion capacitors compared to
27.1 billion in fiscal year 2004.
Capacitors are electronic components that store, filter, and regulate electrical energy and current flow
and are one of the essential passive components used on circuit boards. Virtually all electronic applications
and products contain capacitors, including communication systems, data processing equipment, personal
computers, cellular phones, automotive electronic systems, military and aerospace systems, and consumer
electronics.
Since its divestiture from Union Carbide Corporation (“UCC”) in December 1990, KEMET’s
business strategy is to be the preferred capacitor supplier to the world’s most successful electronics original
equipment manufacturers (“OEM”), Electronics Manufacturing Services providers (“EMS”), and
electronics distributors. The Company’s customers include Alcatel, Arrow Electronics, Avnet, Bosch,
Celestica, Delphi, Flextronics, Hewlett-Packard, Hon Hai, IBM, Intel, J.C. Tally, Jabil, Jaco, Motorola,
Sanmina-SCI, Siemens, Solectron, TRW, TTI, and Visteon. KEMET reaches these customers through a
direct, salaried sales force that calls on customer locations around the world.
Background of Company
KEMET’s operations began in 1919 as a business of UCC to manufacture component parts for
vacuum tubes. In the 1950s, Bell Laboratories invented solid-state transistors along with tantalum
capacitors and other passive components necessary for their operation. As vacuum tubes were gradually
replaced by transistors, the Company changed its manufacturing focus from vacuum tube parts to tantalum
capacitors. The Company entered the market for tantalum capacitors in 1958 as one of approximately
25 United States manufacturers. By 1966, the Company was the United States’ market leader in tantalum
capacitors. In 1969, the Company began production of ceramic capacitors as one of approximately
35 United States manufacturers.
The Company was formed in 1990 by certain members of the Company’s management at the time,
Citicorp Venture Capital, Ltd., and other investors that acquired the outstanding common stock of
KEMET Electronics Corporation from UCC.
Public Offerings, Recapitalization, and Stock Purchases
In October 1992, the Company completed an initial public offering of its common stock and a related
recapitalization to simplify its capital structure. In June 1993, the Company completed an additional public
offering of common stock and used the net proceeds to reduce outstanding indebtedness.
2
In January 2000, the Company sold 6,500,000 shares of its common stock in a public offering for
$142.6 million in net cash proceeds after deducting underwriting fees and offering expenses. The net
proceeds were used to repay outstanding debt under the Company’s short-term credit facility and to fund
capital expenditures.
The Board of Directors has previously authorized programs to purchase up to 8.0 million shares of its
common stock on the open market. Through March 31, 2005, the Company had made purchases of
2.1 million shares for $38.7 million, none of which occurred during fiscal year 2005. The Company does not
anticipate any further stock purchases under this authorization. Approximately 615,000 treasury stock
shares were subsequently reissued in connection with the exercise of employee stock options. At March 31,
2005, the Company held approximately 1,460,000 treasury shares at a cost of $26.9 million.
Stock Splits
In September 1995, the Company’s Board of Directors declared a two-for-one stock split whereby one
additional common share, par value $.01, was issued for each common share outstanding to shareholders
of record on September 13, 1995.
In May 2000, the Board of Directors declared a two-for-one stock split. The record date for the split
was May 24, 2000, with distribution of the additional shares on June 1, 2000.
Outstanding Debt
In May 1998, the Company sold $100.0 million of its Senior Notes pursuant to the terms of a Note
Purchase Agreement dated as of May 1, 1998. These Senior Notes have a final maturity date of May 4,
2010, with required principal payments beginning on May 4, 2006.
The Capacitor Industry
Because of their fundamental nature and widespread application, demand for capacitors tends to
reflect the general demand for electronic products, which, though cyclical, has been growing over the past
several decades. Growth in the electronics market and the corresponding growth in the capacitor market
was fueled by:
• The development of new products and applications, such as cellular phones, personal computers,
and electronic controls for engines and machinery;
• The increase in the electronic content of existing products, such as home appliances, medical
equipment, and automobiles; and
• The growth in the number of capacitors required in certain complex electronic products that use
state-of-the-art microprocessors.
Capacitors
Capacitors are electronic components consisting of conducting materials separated by a dielectric, or
insulating material, which allows a capacitor to interrupt the flow of electrical current. Capacitors can be
either surface-mount or leaded. Surface mounting is an assembly technique used by customers in
production of high volumes of circuit boards for electronic products.
KEMET manufactures a full line of capacitors, including tantalum, multilayer ceramic, and solid
aluminum. Most customers buy both tantalum and ceramic capacitors from the Company. KEMET
manufactures these types of capacitors in many different sizes and configurations. The Company produces
surface-mount capacitors, which are attached directly to the circuit board without lead wires, and leaded
capacitors, which are attached to the circuit board using lead wires.
3
The choice of capacitor dielectric is driven by the engineering specifications and the application of the
component product into which the capacitor is incorporated. Product design engineers in the electronics
industry typically select capacitors on the basis of capacitance levels, size, and cost. Tantalum and ceramic
capacitors are commonly used in conjunction with integrated circuits, and the same circuit may, and
frequently does, contain both ceramic and tantalum capacitors. Generally, ceramic capacitors are more
cost-effective at lower capacitance values, tantalum capacitors are more cost-effective at higher
capacitance values, and solid aluminum capacitors can be more effective in special applications.
Management believes that sales of surface-mount capacitors, including multilayer ceramic, tantalum,
and solid aluminum capacitors will continue to grow more rapidly than other types of capacitors in both
the United States and worldwide markets; because, technological breakthroughs in electronics are
regularly expanding the number and type of applications for these products.
Our Strategy
KEMET has used its position as a leading, high-quality manufacturer of capacitors to capitalize on the
increasingly demanding requirements of its customers. Key elements of the Company’s strategy include the
following business objectives:
Maintaining Long-Term Customer Relationships. KEMET continually seeks to maintain the existing
business relationships it has with leading electronics companies and to increase the percentage of each
customer’s requirements which the Company supplies under these relationships. KEMET seeks to
continue growing with emerging electronics companies around the globe through its distributor network
and its direct sales force. Customers around the globe are demanding increased levels of service to provide
ease of ordering, just-in-time delivery to multiple facilities, flexible scheduling, computerized paperless
purchasing, specialized packaging, and a full breadth of product offerings. KEMET believes that it has
responded to each of these customer needs and positioned the Company to capture a larger portion of
OEM and EMS capacitor supply requirements. In addition, KEMET will continue to develop and expand
preferred supplier relationships with its OEM and EMS customers and its distributors to ensure its ability
to meet their rapidly changing demands.
Providing Product Breadth and Service Flexibility. KEMET manufactures a full line of products with
different specifications in order to respond to the needs of its customers. During fiscal year 2005, the
Company shipped approximately 33.6 billion capacitors of various types, with types being distinguished by
dielectric material, configuration, encapsulation, capacitance level and tolerance, performance
characteristics, marking, and packaging.
KEMET believes that it is a market leader in reliable and timely delivery of capacitor products. As
most customers have moved to just-in-time inventory management, the timeliness and reliability of
shipments by their suppliers have become increasingly important. The Company has designed its
manufacturing facilities and order entry system to respond quickly to customer needs and has invested over
$10 million in an easy-to-buy-from order entry system. KEMET’s order entry system provides on-line
pricing, scheduled delivery dates, and accurate inventory information and provides a direct link between
the Company and its major distributors.
Manufacturing High-Quality Products. KEMET is a leader in an industry in which customers require
high quality standards and exacting product specifications. The Company has built its brand reputation on
continuous improvements and a company-wide commitment to quality products and services. Ranked best
in class by independent surveys and recognized by numerous customer awards, KEMET strives to exceed
customer expectations to achieve preferred supplier status. The Company continues to utilize Lean and Six
Sigma methods to drive towards zero defects while increasing process speed and eliminating non-value
added activities.
4
Improving Current Products and Developing New Products. KEMET’s customers increasingly look for
greater capacitance in smaller products, higher frequency response for fast microprocessors, and lower
resistance to extend battery life in portable electronics. To respond to its customers’ needs, the Company
has several high-capacitance, high-frequency response product development initiatives.
In a capacitor, an insulator, or dielectric, separates two electrodes. Positive charges are stored on one
electrode and negative charges on the other, while the insulator keeps the charges separate allowing the
capacitor to store electrons. The highest unit volumes of capacitors are ceramics, tantalums, and
aluminums. Ceramic capacitors have low levels of capacitance, relative to tantalum and aluminum, but are
very fast devices. Relative to ceramics and aluminums, tantalums provide the most capacitance per volume.
Like tantalums, aluminums have a high level of capacitance while being faster than tantalums, but require
more volume to provide the same level of capacitance as tantalums.
KEMET has created faster tantalum capacitors by using new organic cathode polymers obtained
through a technical alliance with NEC Tokin Corporation (“NEC”). These high-capacitance,
high-frequency-response organic tantalum capacitors are called KO-CAPs (KEMET Organic Capacitors).
KEMET has also achieved faster tantalum capacitors by designing new architectures, called MATs
(Multiple Anode Capacitors). KEMET introduced the world’s fastest tantalum capacitor, a KO-MAT,
through combining new organic cathode polymers with new architecture to produce a multiple-anode
organic tantalum capacitor. KEMET pays NEC royalties upon reaching certain sales volume targets. In
fiscal years 2005 and 2004, the amount of royalties was immaterial.
Ceramic capacitors are produced by building up layers of ceramic dielectric material between layers of
electrodes. To gain higher capacitance in the same volume, there must be a higher number of layers of
material, which means each layer must be thinner. Over the past several years, KEMET has made
continual improvements which allows the Company to produce layers approaching one micron thicknesses.
Finally, through a technical alliance with Showa Denko K.K., KEMET offers for sale fast,
high-capacitance solid aluminum capacitors which, unlike traditional aluminum capacitors, are truly
surface mountable. These capacitors are called AO-CAPs (Aluminum Organic Capacitors). KEMET pays
Showa Denko royalties when certain sales volumes are met. In fiscal years 2005 and 2004, the amount of
royalties was immaterial.
High-frequency electronics are evolving very rapidly. There are significant differences between the
functional characteristics and the cost of tantalum, ceramic, and solid aluminum capacitors. Electronics
designers choose from among these capacitor technologies based on the functional and cost requirements
of specific applications. Most of KEMET’s competitors focus on one of these capacitor technologies.
KEMET has the most complete line of capacitor technologies across the three primary capacitor types.
KEMET wants to be positioned to provide the best solution to meet the customers’ needs, especially in
high-frequency, high-capacitance applications, regardless of the capacitor technology chosen.
In addition to product line expansion in the high frequency area, KEMET has also expanded its
specialty product lines. To facilitate this, KEMET purchased certain assets of Wilson Greatbatch’s
high-voltage and high-temperature Sierra-KD ceramic product line in July 2003. Since that time, KEMET
development personnel have made significant improvements in the production processes for those
products and also leveraged the technology to internally develop high-voltage commercial ceramic surface
mount and leaded product lines. KEMET has also introduced a tantalum military-COTS (“commercial off
the shelf”) product line and ceramic and tantalum medical product lines. New specialty product lines also
include the introduction of ceramic open-mode product whose primary markets are automotive and high
reliability power supplies. It is anticipated that this expansion of specialty product lines will continue
during the next fiscal year.
5
Remaining an Overall Low-cost Producer. KEMET’s customers are under worldwide competitive
pressure to reduce their product costs and these pressures are passed along to component manufacturers.
The Company believes that it has achieved a strong position as an overall low-cost producer of capacitors.
To maintain this position, it is constantly seeking to reduce material and labor costs, develop cost-efficient
manufacturing equipment and processes, and design manufacturing plants for efficient production.
KEMET has been able to reduce the manufacturing cost of its products by increasing materials
utilization efficiency and production yields. KEMET has a dedicated engineering team that continues to
develop faster and more efficient automated manufacturing, assembly, testing, and packaging machines
and processes.
KEMET has manufacturing facilities in the Carolinas, Mexico and China. In July 2003, the Company
announced a reorganization of its operations that will result in relocating commodity production facilities
from the United States to low-cost locations in Mexico and China. A production facility opened in Suzhou,
China, in October of 2003, and a second facility is scheduled to open in the summer of 2005. The
Company’s production facilities are highly integrated into a virtual factory through information technology.
The Company has developed a global logistics system to deliver parts with near-perfect on-time delivery to
any customer location in the world.
Markets and Customers
KEMET’s products are sold to a variety of OEMs in a broad range of industries including the
computer, communications, automotive, military, and aerospace industries. KEMET also sells an
increasing number of its products to EMS providers, which also serve OEMs in these industries. The
Company is not dependent on any one customer or group of related customers. Two customers each in
fiscal year 2005, fiscal year 2004, and fiscal year 2003 accounted for over 10% of the Company’s net sales.
The Company’s top 50 customers accounted for approximately 95% of the Company’s net sales during
fiscal year 2005.
The following table presents an overview of the diverse industries that incorporate the Company’s
capacitors into their products and the general nature of those products.
Industry
Automotive. . . . . . . . . . . .
Audio systems, power train electronics, instrumentation, airbag systems,
anti-lock braking systems, electronic engine controls, air conditioning controls,
and security systems
Products
Business Equipment . . . . Copiers, point-of-sale terminals, and fax machines
Communications . . . . . . . Cellular phones, modems, telephones, switching equipment, and relays
Computer-related . . . . . .
Personal computers, workstations, mainframes, computer peripheral
equipment, power supplies, disk drives, printers, and local area networks
Industrial . . . . . . . . . . . . .
Electronic controls, measurement equipment, instrumentation, and medical
electronics
Military/Aerospace . . . . . Avionics, radar, guidance systems, and satellite communications
KEMET produces a small percentage of its capacitors under military specification standards sold for
both military and commercial uses. The Company does not sell any of its capacitors directly to the U.S.
government. Although the Company does not track sales of capacitors by industry, the Company estimates
that sales of its capacitors to OEMs that produce products principally for the military and aerospace
industries accounted for less than 3% of its net sales during fiscal year 2005. Certain of the Company’s
other customers may also purchase capacitors for products in the military and aerospace industries.
6
Sales and Distribution
KEMET’s domestic sales, and most of its international sales, are made through the Company’s direct
sales and customer service employees. The Company’s United States sales staff is located in four regional
offices, thirteen local offices, and eight satellite offices. A substantial majority of the Company’s
international sales are made through three regional offices in Europe; six locations in Asia; two locations
in Canada; one location in Mexico; and one location in Brazil. The Company also has independent sales
representatives located in Korea, Puerto Rico, and the United States.
KEMET markets and sells its products in its major markets with a direct sales force, in contrast to its
competitors, which generally utilize independent commissioned representatives or a combination of
representatives and direct sales employees. The Company believes its direct sales force creates a distinctive
competence in the market place and has established strong relationships with its customers. With a global
sales organization that is customer-based, KEMET’s direct sales personnel from around the world serve on
KEMET Global Account Teams. These teams are committed to serving any customer location in the world
with a dedicated KEMET representative. This approach requires a blend of accountability and
responsibility to specific customer locations, guided by an overall account strategy for each customer.
Electronics distributors are an important distribution channel in the electronics industry and
accounted for approximately 52%, 51%, and 43% of the Company’s net sales in fiscal years 2005, 2004, and
2003, respectively. In fiscal years 2005 and 2004, two distributors of passive components each accounted for
more than 10% of net sales.
The Company’s distributor policy includes a price protection program which protects the value of the
distributors’ inventory in the event the Company reduces its published selling price to distributors. This
program allows the distributor to debit the Company for the difference between KEMET’s list price and
the lower authorized price for specific parts. The Company establishes price protection reserves on specific
parts residing in distributors’ inventories in the period that the price protection is formally authorized by
the Company’s management.
The Company’s distributor policy also includes a “ship-from-stock and debit” (“SFSD”) program
which provides a mechanism for the distributor to meet a competitive price after obtaining authorization
from the local Company sales office. This program allows the distributor to ship its higher-priced inventory
and debit the Company for the difference between KEMET’s list price and the lower authorized price for
that specific transaction. The Company establishes reserves for its SFSD program based primarily on
certain distributors’ actual inventory levels comprising 91% to 95% of the total global distributor
inventory. The remaining 5% to 9% is estimated based on actual distributor inventory and current sales
trends. Management analyzes historical SFSD activity to determine the SFSD exposure on the global
distributor inventory at the balance sheet date. Should the distributors increase inventory levels, the
estimation of the inventory at the distributors for the remaining 5% to 9% could be estimated at an
incorrect amount. However, the Company believes that the difference between the estimate and the
ultimate actual amount would be immaterial.
Sales by Geography
In fiscal year 2005, total net sales were broken down geographically as follows: North American sales
were approximately 46.6%, Asian sales were approximately 33.1%, and European sales were
approximately 20.3%. Although management believes that the Company is able to provide a level of
delivery and service that is competitive with local suppliers, the Company’s capacitor market shares in
Asian and European markets tend to be significantly lower than in the United States because some
international electronics manufacturers prefer to purchase components from local producers. As a result, a
large percentage of the Company’s international sales are made to foreign operations of U.S.
manufacturers. A portion of the Company’s European sales are denominated in local currencies and the
7
euro; therefore, a significant appreciation of the U.S. dollar against such foreign currencies or the euro
would reduce the gross profit realized by the Company on its European sales as measured in U.S. dollars.
Substantially all of the Company’s European export shipments are made duty-paid, free delivery as
required by local market conditions (see note 9 to consolidated financial statements).
Inventory and Backlog
Although the Company manufactures and inventories standardized products, a portion of its products
are produced to meet specific customer requirements. Cancellations by customers of orders already in
production could have an impact on inventories; however, cancellations have not been significant to date.
The backlog of outstanding orders for the Company’s products was $50.2 million and $69.0 million at
March 31, 2005 and 2004, respectively. The current backlog is expected to be filled during the first quarter
of fiscal year 2006. Most of the orders in the Company’s backlog may be cancelled by its customers, in
whole or in part, although some may be subject to penalty.
Competition
The market for tantalum, ceramic, and aluminum capacitors is highly competitive. The capacitor
industry is characterized by, among other factors, a long-term trend toward lower prices for capacitors, low
transportation costs, and few import barriers. Competitive factors that influence the market for the
Company’s products include product quality, customer service, technical innovation, pricing, and timely
delivery. The Company believes that it competes favorably on the basis of each of these factors.
The Company’s major U.S. competitors include AVX Corporation and Vishay Intertechnology, Inc.,
in the production of tantalum and ceramic capacitors. The Company’s major foreign competitors include
Kyocera/AVX Corporation, Murata Manufacturing Company Ltd., Samsung Electronics Co. Ltd., TDK
Corporation, Yageo, and Taiyo Yuden in the production of ceramic capacitors and NEC Corporation,
EPCOS, Kyocera/AVX Corporation and Samsung Electronics Co. Ltd. in the production of tantalum
capacitors.
Raw Materials
The most expensive raw materials used in the manufacture of the Company’s products are tantalum
powder, palladium, and silver. These materials are considered commodities and are subject to price
volatility. Tantalum powder is primarily purchased under long-term contracts, while palladium and silver
are primarily purchased on the spot and forward markets, depending on market conditions. For example, if
the Company believes that prices are likely to rise, it may purchase a significant amount of its annual
requirements for forward delivery.
Tantalum powder is used in the manufacture of tantalum capacitors. Management believes the
tantalum needed has generally been available in sufficient quantities to meet manufacturing requirements.
However, the increase in demand for tantalum capacitors during fiscal year 2001, along with the limited
number of tantalum powder suppliers, led to increases in tantalum prices and impacted availability. Tight
supplies of tantalum raw material and some tantalum powders caused the price to increase from under $50
per pound early in calendar 2000 to over $300 per pound in calendar 2001. During the fiscal years ended
March 31, 2004 and 2003, the Company recorded $12.4 million and $40.8 million, respectively, of charges
related to a tantalum inventory purchase commitment that exceeded market prices (see Critical
Accounting Policies and Long-Term Supply Agreement). During fiscal year 2005, the Company was able to
renegotiate the pricing arrangement under tantalum inventory purchase commitment, and accordingly, the
Company reversed $11.8 million of the original charges.
8
During fiscal year 2001, the Company entered into a joint venture agreement with Australasian Gold
Mines NL, which subsequently changed its name to Tantalum Australia NL (“TAA”), to establish an
independent source of tantalum to meet the increasing demand for tantalum capacitors from key
customers. This transaction closed in April 2001, and included KEMET acquiring a ten percent equity
interest in TAA. Upon successfully achieving the objective of establishing an independent source of
tantalum material, KEMET relinquished its interest in the joint venture. KEMET retained its equity
interest in TAA, which has been reduced to less than eight percent on a fully-diluted basis.
Although palladium is presently found primarily in South Africa and Russia, the Company believes
that there are a sufficient number of suppliers from which the Company can purchase its palladium
requirements. Although palladium required by the Company has generally been available in sufficient
quantities, the limited number of suppliers could lead to higher prices, and the inability of the Company to
pass any increase on to its customers could have an adverse effect on the margin of those products in which
the metal is used. The Company continues to take actions to minimize the impact of future palladium price
increases on its profit margins. The Company has significantly reduced the palladium and silver
requirements in the production of MLCCs with a major shift in the production process using base metal
electrodes, such as nickel.
Silver and aluminum have generally been available in sufficient quantities, and the Company believes
there are a sufficient number of suppliers from which the Company can purchase its requirements.
Patents and Trademarks
At March 31, 2005, the Company held 65 United States and 36 foreign patents and 13 United States
and 79 foreign trademarks. The Company believes that the success of its business is not materially
dependent on the existence or duration of any patent, license, or trademark other than the name
“KEMET.” The Company’s engineering and research and development staffs have developed and
continue to develop proprietary manufacturing processes and equipment designed to enhance the
Company’s manufacturing facilities and reduce costs.
Research and Development
Research and development expenses were $26.6 million for fiscal year 2005 compared to $24.4 million
for fiscal year 2004. These amounts include expenditures for product development and the design and
development of machinery and equipment for new processes and cost reduction efforts. Most of the
Company’s products and manufacturing processes have been designed and developed by Company
engineers. The Company continues to invest in new technology to improve product performance and
production efficiencies.
Environmental
The Company is subject to various Mexican, Chinese, and United States federal, state, and local
environmental laws and regulations relating to the protection of the environment, including those
governing the handling and management of certain chemicals used and generated in manufacturing
electronic components. Based on the annual costs incurred by the Company over the past several years,
management does not believe that compliance with these laws and regulations will have a material adverse
effect on the Company’s capital expenditures, earnings, or competitive position. The Company believes,
however, that it is reasonably likely that the trend in environmental litigation, laws, and regulations will
continue to be toward stricter standards. Such changes in the law and regulations may require the
Company to make additional capital expenditures which, while not currently estimable with certainty, are
not presently expected to have a material adverse effect on the Company’s financial condition. See “Legal
Proceedings” for a discussion of certain other environmental matters.
9
Employees
As of April 30, 2005, KEMET had approximately 8,100 employees, of whom approximately 1,200 were
located in the United States, approximately 6,200 were located in Mexico, 600 in China, and the remainder
were located in the Company’s foreign sales offices. The Company believes that its future success will
depend in part on its ability to recruit, retain, and motivate qualified personnel at all levels of the
Company. While none of its United States employees are unionized, the Company has approximately
4,200 hourly employees in Mexico represented by labor unions as required by Mexican law. The Company
has not experienced any major work stoppages and considers its relations with its employees to be good. In
addition, the Company’s labor costs in Mexico are denominated in Mexican pesos, and Mexican inflation
or a significant depreciation of the United States dollar against the Mexican peso would increase the
Company’s labor costs in Mexico.
Securities Exchange Act of 1934 Reports
The Company maintains an Internet website at the following address: http://www.kemet.com. KEMET
makes available on or through its Internet website certain reports and amendments to those reports that
are filed with the Securities and Exchange Commission (“SEC”) in accordance with the Securities
Exchange Act of 1934. These include annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K. This information is available on the Company’s website free of charge as
soon as reasonably practicable after KEMET electronically files the information with, or furnishes it to,
the SEC.
Code of Business Integrity and Ethics
The Company maintains a Code of Business Integrity and Ethics (the “Code”) that is followed by all
of the management of KEMET. This includes the Chief Executive Officer, the Chief Financial and
Accounting Officer, the accounting staff and other members of management. The Company’s website
includes a copy of the Code, and it can be downloaded free of charge at http://www.kemet.com. A copy of
the Code has been included as an Exhibit to the 2005 Annual Report filed on Form 10-K.
ITEM 2. PROPERTIES
KEMET is headquartered in Simpsonville, South Carolina, and has a total of 19 manufacturing plants
and distribution centers located in the southeastern United States, Mexico, and China. The manufacturing
operations are in Simpsonville and Fountain Inn, South Carolina; Shelby, North Carolina; Matamoros,
Monterrey, and Ciudad Victoria, Mexico; and Suzhou, China, which opened in calendar year 2003. The
Company’s existing manufacturing and assembly facilities have approximately 2.5 million square feet of
floor space and are highly automated with proprietary manufacturing processes and equipment.
The Mexican facilities operate under the Maquiladora Program. In general, a company that operates
under this program is afforded certain duty and tax preferences and incentives on products brought back
into the United States. The Company has operated in Mexico since 1969 and approximately 77% of its
employees are located in Mexico. The Company’s Mexican facilities in Matamoros are located within five
miles of Brownsville, Texas, with easy access for daily shipments of work-in-process and finished products.
The Company also has manufacturing facilities in Monterrey that commenced operations in 1991. The
Company constructed and put into production a new manufacturing plant in Monterrey in 1996. During
fiscal year 2000, the Company began production in a new manufacturing facility for tantalum capacitors in
Ciudad Victoria, Mexico. The Company’s manufacturing processes and standards, including compliance
with applicable environmental and worker safety laws and regulations, are essentially identical in the
United States and Mexico. The Company’s Mexican and Chinese operations, like its United States
operations, have won numerous quality, environmental, and safety awards.
10
Most of the Company’s manufacturing and assembly facilities produce one product or a family of
closely related products. Management believes that this focused approach to manufacturing allows each
facility to shorten manufacturing time, optimize product flow, and avoid long and costly equipment
retooling and employee training time, all of which leads to overall reduced costs.
The Company has developed just-in-time manufacturing and sourcing systems. These systems enable
the Company to meet customer requirements for faster deliveries while minimizing the need to carry
significant inventory levels. The Company continues to emphasize flexibility in all of its manufacturing
operations to improve product delivery response times.
Management believes that substantially all of its property and equipment is in good condition, and the
Company believes that, on the overall, it has sufficient capacity to meet its current and projected
manufacturing and distribution needs.
The Company has listed its Greenwood, South Carolina facility with a real estate broker for sale.
Accordingly, this facility is presented on the Consolidated Balance Sheets as Property held for sale. There
are two additional facilities (one in Matamoros, Mexico and one in Mauldin, South Carolina) that are idle
and are ready for sale. The Company is in the process of determining the future of these facilities. Finally,
the Company’s leased facility in Brownsville, Texas is being subleased by an outside company.
The following table provides certain information regarding the Company’s principal facilities:
Location
Simpsonville, South Carolina(1). . . . . .
Matamoros, Mexico(2). . . . . . . . . . . . . .
Monterrey, Mexico(2) . . . . . . . . . . . . . .
Ciudad Victoria, Mexico . . . . . . . . . . . .
Fountain Inn, South Carolina . . . . . . . .
Monterrey, Mexico . . . . . . . . . . . . . . . . .
Greenwood, South Carolina(3) . . . . . .
Mauldin, South Carolina(4) . . . . . . . . .
Suzhou, China(5) . . . . . . . . . . . . . . . . . .
Suzhou, China(6) . . . . . . . . . . . . . . . . . .
Shelby, North Carolina(8) . . . . . . . . . . .
Mauldin, South Carolina . . . . . . . . . . . .
Matamoros, Mexico(4). . . . . . . . . . . . . .
Brownsville, Texas(7) . . . . . . . . . . . . . . .
Square
Footage
Type of
Interest
Description of Use
372,000 Owned Manufacturing/Headquarters
291,000 Owned Manufacturing
275,000 Owned Manufacturing
259,000 Owned Manufacturing
249,000 Owned Manufacturing
229,000 Owned Manufacturing
132,000 Owned
129,000 Owned
127,000 Leased Manufacturing
127,000 Leased Manufacturing
123,000 Owned Manufacturing
Idle—Property Held for Sale
Idle—Ready for Sale
80,000 Leased Distribution/Storage
68,000 Owned
Idle—Ready for Sale
60,000 Leased Shipping/Distribution
Date
Constructed,
Acquired or
First
Occupied by
Company
1963
1985
1991
1999
1985
1996
1981
1971
2003
2005
1981
1976
1977
1992
(1)—Includes two separate manufacturing facilities.
(2)—Includes three manufacturing facilities for Matamoros and two manufacuturing facilities for
Monterrey.
(3)—The Greenwood, South Carolina facility has been listed with a broker and is available for sale. The
Company is reporting this facility as Property held for sale on the Consolidated Balance Sheets.
(4)—Manufacturing facilities, one in Matamoros, Mexico and the Mauldin, South Carolina, facility were
closed as part of the cost savings initiatives in fiscal year 2003.
(5)—Includes two separate manufacturing facilities, one became operational in the latter half of calendar
year 2003 and one which is used for storage.
11
(6)—This manufacturing facility is scheduled to begin operations in fiscal year 2006.
(7)—The Brownsville, Texas facility is being subleased to an outside company. KEMET is leasing back
5,000 square feet.
(8)—The Shelby, North Carolina facility is scheduled to be closed in the fiscal second quarter 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company has periodically incurred, and may continue to incur, liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”) and
analogous state laws with respect to sites used for off-site management or disposal of Company-derived
wastes. The Company has been named as a potentially responsible party (“PRP”) at the Seaboard
Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a
“de minimis” party and does not expect its total exposure to be material. In addition, UCC is a PRP at
certain sites relating to the off-site disposal of wastes from properties presently owned by the Company.
The Company is participating in coordination with UCC in certain PRP-initiated activities related to these
sites. The Company expects that it will bear some portion of the liability with respect to these sites;
however, any such share is not presently expected to be material to the Company’s financial condition or
results of operations. In connection with the acquisition in 1990, UCC agreed, subject to certain
limitations, to indemnify the Company with respect to the foregoing sites.
The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their
respective operations, including workers’ compensation or work place safety cases, some of which involve
claims of substantial damages. Although there can be no assurance, based upon information known to the
Company, the Company does not believe that any liability which might result from an adverse
determination of such lawsuits would have a material adverse effect on the Company’s financial condition
or results of operations.
In January 2005, the Company filed a lawsuit against AVX Corporation (“AVX”) to protect trade
secrets relating to the development and manufacture of tantalum polymer capacitors. KEMET has been
manufacturing these advanced components since 1999, and they now constitute the fastest growing
segment of the tantalum capacitor market. KEMET was seeking judgment against AVX for actual and
exemplary damages, attorney’s fees, and injunctive relief to eliminate any commercial advantage that
otherwise would be derived by AVX from the misappropriation of KEMET trade secrets. While the
Company still believes in the merits of the case, the lawsuit was dismissed in order to allow management to
be able to focus on the important business challenges it currently faces.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the Company’s quarter ended
March 31, 2005.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s Common Stock is traded on the New York Stock Exchange under the symbol KEM.
The Company had approximately 30,400 stockholders as of June 1, 2005, of which approximately 331 were
stockholders of record. The following table represents the high and low sale prices of the Company’s
Common Stock for the periods indicated:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Fiscal Year 2005
Low
$ 10.80
$ 7.80
$ 7.44
$ 7.70
$ 15.11
$ 12.25
$ 9.35
$ 9.01
High
Fiscal Year 2004
Low
$ 7.55
$ 9.69
$ 11.80
$ 12.88
$ 10.78
$ 13.95
$ 14.29
$ 16.70
The Company has not declared or paid any cash dividends on its Common Stock since the initial
public offering in October 1992. The Company does not anticipate paying dividends in the foreseeable
future. Any future determination to pay dividends will be at the discretion of the Company’s Board of
Directors and will depend upon, among other factors, the capital requirements, operating results, and
financial condition of the Company. See “Management’s Discussion and Analysis of Results of Operations
and Financial Condition-Liquidity and Capital Resources” contained in this Form 10-K for fiscal year
2005.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes our selected historical consolidated financial information for each of
the last five years. The selected financial information under the captions “Income Statement Data,” “Per
Share Data,” “Balance Sheet Data,” and “Other Data” shown below has been derived from the Company’s
audited Consolidated Financial Statements. This table should be read in conjunction with other
consolidated financial information of KEMET, including “Management’s Discussion and Analysis of
Results of Operations and Financial Condition” and the Consolidated Financial Statements, included
elsewhere herein. The data set forth below may not be indicative of KEMET’s future financial condition or
results of operations (see Item 7 “Safe Harbor Statement”).
2005(1)
Fiscal Years Ending March 31,
2004(1)
2003(1)
Dollars in thousands except per share data
2002
2001
Income Statement Data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss). . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . .
Per Share Data:
Net income (loss) per share—basic . . . . .
Net income (loss) per share—diluted. . . .
Weighted-average shares outstanding
$
425,338
(174,842)
(6,295)
6,511
$
433,882
(159,014)
(3,847)
6,472
$
447,332
(97,002)
(3,818)
6,097
$
508,555
(40,365 )
(9,809 )
6,736
$ (174,094) $ (111,975) $
(55,988) $
(27,289 ) $
$ 1,406,147
566,986
(16,713)
7,507
352,346
$
$
(2.01) $
(2.01) $
(1.30) $
(1.30) $
(0.65) $
(0.65) $
(0.32 ) $
(0.32 ) $
4.05
4.00
—Basic. . . . . . . . . . . . . . . . . . . . . . . . . . .
—Diluted. . . . . . . . . . . . . . . . . . . . . . . . .
86,518,923
86,518,923
86,412,281
86,412,281
86,167,563
86,167,563
85,773,763
85,773,763
86,930,965
88,181,118
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . .
Other non-current obligations. . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . .
Other Data:
Cash flow provided by (used in)
$
$
758,097
184,579
100,000
48,951
515,203
$
$
971,046
313,731
100,000
61,623
684,478
$ 1,101,010
463,535
100,000
57,617
793,275
$
$ 1,171,714
454,776
100,000
48,926
855,045
$
$ 1,366,530
460,055
100,000
51,084
886,176
$
operating activities . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . .
$
$
(12,752) $
39,581
26,639
$
38,452
25,835
24,449
$
$
43,710
22,197
25,268
$
$
(34,219 ) $
78,546
26,334
$
392,440
210,559
27,145
(1)—Includes special charges of $122.9 million, $108.9 million, and $75.9 million for the fiscal years ended March 31,
2005, 2004, and 2003, respectively, which are described in Item 7 under Results of Operations.
14
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis provides information that the Company believes is useful in
understanding KEMET’s operating results, cash flows, and financial condition for the three years ended
March 31, 2005. 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.
Except for the historical information contained here, 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. The Company’s actual 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 “Safe Harbor Statement” and, from time to time, in the Company’s other filings
with the Securities and Exchange Commission.
Overview
KEMET is a leading manufacturer of tantalum capacitors, multilayer ceramic capacitors, and solid
aluminum capacitors. Capacitors are electronic components that store, filter, and regulate electrical energy
and current flow and are one of the essential passive components used on circuit boards. Virtually all
electronic applications and products contain capacitors, including communication systems, data processing
equipment, personal computers, cellular phones, automotive electronic systems, military and aerospace
systems, and consumer electronics.
The Company’s business strategy is to generate revenues by being the preferred capacitor supplier to
the world’s most successful electronics original equipment manufacturers, electronics manufacturing
services providers, and electronics distributors. The Company reaches these customers through a direct,
salaried sales force that calls on customer locations around the world. In fiscal year 2005, total net sales
were broken down geographically as follows: North American sales were approximately 46.6%, Asian sales
were approximately 33.1%, and European sales were approximately 20.3%.
The Company manufactures capacitors in the United States, Mexico, and China. Commodity
manufacturing in the United States is being relocated (see “Enhanced Strategic Plan”) to the Company’s
lower-cost manufacturing facilities in Mexico and China. Production that remains in the U.S. will focus
primarily on early-stage manufacturing of new products and other specialty products for which customers
are predominantly located in North America.
The market for tantalum, ceramic, and aluminum capacitors is highly competitive. The capacitor
industry is characterized by, among other factors, a long-term trend toward lower prices for capacitors, low
transportation costs, and few import barriers. Competitive factors that influence the market for the
Company’s products include product quality, customer service, technical innovation, pricing, and timely
delivery. The Company believes that it competes favorably on the basis of each of these factors.
15
Electronic products are in a long-term growth phase as evidenced by the proliferation of cellular
phones, personal computers, and consumer electronics. The growth of the capacitor industry, however, has
been cyclical, and lower average selling prices for capacitors have corresponded with the long-term growth
in units. The following is an illustration (it does not represent an actual time period, actual quantities,
actual prices, etc.) of the dynamics within the capacitor industry:
Long-term
Average
Capacitor Unit
Growth
U
n
i
t
s
Average
Selling Prices
Capacitor
Unit Sales
Time
Average Selling Prices (“ASPs”)—Capacitor average selling prices have trended down over the long-
term growth period. KEMET estimates the historical average annual decrease in ASPs to be approximately
5% to 6%. This, in turn, requires the Company to effectively manage costs to remain competitive. An
example of this is the Company’s decision to move the manufacture of commodity manufacturing to low-
cost locations. (See “Enhanced Strategic Plan.”)
Cyclicality—Periods of significant expansion and correction have marked the long-term growth of
the capacitor market.
Expansion periods—Expansion periods usually offer the opportunity for the Company to exercise
more control over ASPs as industry capacity utilization is high. Customer demand often exceeds the
available supply. Firm or higher pricing combined with higher volumes cause this to be the most
profitable part of the cycle for the industry, and the industry generally adds capacity during this
period.
Correction periods—Correction periods usually offer the opportunity for the customer to exercise
more control over ASPs as industry capacity exceeds customer demand. Lower pricing combined with
lower volumes during this period cause this to be the least profitable part of the cycle for the industry.
The fiscal year ended March 31, 2001 represented a cyclical peak, and the Company reported record
revenues and profits of $1.4 billion and $352.3 million, respectively. During such an expansion period, the
Company is challenged with meeting demand and not over expanding capacity, which it may not be able to
bring on line until after the expansion. The increase in demand requires maintaining higher raw material
inventory levels at higher prices, which challenges the Company to increase inventory turnover as well as
manage inventory at a reasonable level to reduce issues such as obsolescence, particularly when the
expansion ends.
16
The four fiscal years following fiscal year 2001, fiscal years 2002 through 2005, represent what the
Company considers an unprecedented correction phase of the long-term growth trend. Demand decreased
markedly, and the quarterly decline in ASPs was often in excess of the historical average annual decrease.
During such a correction period, the Company is challenged with aligning costs with the reduced stream of
revenues. The Company must remain financially sound with sufficient financial liquidity to not only
operate effectively during the correction phase but also have the financial wherewithal to react when the
next expansion cycle begins. During this correction phase, the Company initiated a number of initiatives
(see Fiscal Year 2005 Special Charges, Fiscal Year 2004 Special Charges, and Fiscal Year 2003 Special
Charges) to meet these challenges.
At March 31, 2005, the Company had $219.5 million of cash and short and long-term investments.
KEMET intends to satisfy both its short-term and long-term liquidity requirements primarily with existing
cash and cash equivalents and cash provided by operations.
Enhanced Strategic Plan
On July 2, 2003, KEMET announced its Enhanced Strategic Plan (“Plan”) to enhance the Company’s
position as a global leader in passive electronic technologies. KEMET believes that there have been
profound changes in the competitive landscape of the electronics industry over the past several years. The
Company listened carefully to its customers’ description of their future directions, and is aligning
KEMET’s future plans closely with their plans. Building on the Company’s foundation of success in being
the preferred supplier to the world’s most successful electronics manufacturers and distributors, KEMET
is adapting so as to continue to succeed in the new global environment.
KEMET’s strategy has three foundations:
• Enhancing the Company’s position as the market leader in quality, delivery, and service through
outstanding execution;
• Having a global mindset, with an increased emphasis on growing KEMET’s presence in Asia; and
• Accelerating the pace of innovations to broaden the Company’s product portfolio.
To execute the Plan, KEMET is reorganizing its operations around the world. Over the next nine
months, several KEMET facilities will be relocated based on access to key customers, access to key
technical resources and knowledge, and availability of low-cost resources. KEMET estimates it will incur
special charges of approximately $39 million (of which $32 million had been spent through March 31,
2005) over the period of the reorganization related to movement of manufacturing operations. This will
yield an approximate one-year payback based on unit volumes at the time of the announcement, and a
$50-60 million savings with volume recovery by fiscal year 2006, if unit growth continues as it has in recent
quarters. In addition, there will be special charges reflecting the change in status of the facilities that will
be vacated through this move. The timing of the special charges is dependent on the timing of operational
decisions, some of which have not yet been finalized, and on operational activities yet to occur. See Fiscal
Year 2005 Special Charges and Fiscal Year 2004 Special Charges under Results of Operations.
KEMET in the United States
KEMET’s corporate headquarters will remain in Greenville, South Carolina, though individual
functions will evolve to support global activities in Asia, Europe, and North America, either from
Greenville, South Carolina or through locations in appropriate parts of the world.
Commodity manufacturing currently in the United States will be relocated to the Company’s lower-
cost manufacturing facilities in Mexico and China. Approximately 500 production-related jobs in the
United States will be impacted by this relocation over the next nine months. Production that remains in the
17
U.S. will focus primarily on early-stage manufacturing of new products and other specialty products for
which customers are predominantly located in North America.
To accelerate the pace of innovations, the KEMET Innovation Center was created. The primary
objectives of the Innovation Center are to ensure the flow of new products and robust manufacturing
processes that will keep the Company at the forefront of its customers’ product designs, while enabling
these products to be transferred rapidly to the most appropriate KEMET manufacturing location in the
world for low-cost, high-volume production. The main campus of the KEMET Innovation Center is
located in Greenville, South Carolina.
KEMET in Mexico
KEMET believes its Mexican operations are among the most cost efficient in the world, and they will
continue to be the Company’s primary production facilities supporting North American and European
customers. One of the strengths of KEMET Mexico is that it is truly a Mexican operation, including
Mexican management and workers. These facilities will be responsible for maintaining KEMET’s
traditional excellence in quality, service, and delivery, while driving costs down. The facilities in Victoria
and Matamoros will remain focused primarily on tantalum capacitors, and the facilities in Monterrey will
continue to focus on ceramic capacitors.
KEMET in China
In recent years, low production costs and proximity to large, growing markets have caused many of
KEMET’s key customers to relocate production facilities to Asia, particularly China. KEMET has a well-
established sales and logistics network in Asia to support its customers’ Asian operations. The Company’s
initial China production facilities in Suzhou near Shanghai commenced shipments in October 2003.
Manufacturing operations in China will continue to grow, and KEMET anticipates that production
capacity in China may be equivalent to Mexico within two to three years, with most of the equipment to
support these operations being transferred from existing capacity in the United States or Mexico. Like
KEMET Mexico, the vision for KEMET China is to be a Chinese operation, with Chinese management
and workers, to help achieve KEMET’s objective of being a global company. These facilities will be
responsible for maintaining KEMET’s traditional excellence in quality, service, and delivery, while
accelerating cost-reduction efforts and supporting efforts to grow the Company’s customer base in Asia.
KEMET in Europe
KEMET will maintain and enhance its strong European sales and customer service infrastructure,
allowing KEMET to continue to meet the local preferences of European customers who remain an
important focus for KEMET going forward.
Global Sales and Logistics
In recent years, it has become more complex to do business in the electronics industry. Market-leading
electronics manufacturers have spread their facilities more globally. The growth of the electronics
manufacturing services (EMS) industry has resulted in a more challenging supply chain. New Asian
electronics manufacturers are emerging rapidly. The most successful business models in the electronics
industry are based on tightly integrated supply chain logistics to drive down costs. KEMET’s direct salaried
sales force worldwide and a well-developed global logistics infrastructure distinguish it in the marketplace
and will remain a hallmark of KEMET in meeting the needs of its global customers.
All components of the plan are within their cost estimates and are expected to be completed within six
months of the date of this filing.
18
Critical Accounting Policies
The Company’s significant accounting policies are summarized in note 1 to the consolidated financial
statements. The following identifies a number of policies which require significant judgments or estimates.
The Company’s estimates and assumptions are based on historical data and other assumptions that
KEMET believes are reasonable in the circumstances. 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.
The judgments are based on management’s 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. It is important that a reader of the financial statements understand that
actual results could differ from these estimates, assumptions, and judgments.
KEMET’s management believes the following critical accounting policies contain the most significant
judgments and estimates used in the preparation of the consolidated financial statements.
INVENTORIES. Inventories are valued at the lower of cost or market, with cost determined under
the first-in, first-out method and market based upon net realizable value. The valuation of inventories
requires management to make estimates. The Company must assess the prices at which it believes the
finished goods inventory can be sold compared to its cost. A sharp decrease in unit demand could
adversely impact earnings as the cost of finished goods may exceed what the market will bear.
The net realizable value of raw materials purchased under long-term supply contracts also requires
significant judgments by management. In fiscal years 2004 and 2003, the Company recorded losses totaling
$53.2 million related to tantalum raw material. In fiscal year 2004, the Company wrote down approximately
$12.4 million under a tantalum supply agreement. In fiscal year 2003, the Company wrote down
approximately $16.4 million in on-hand inventory of tantalum powder and wire and approximately
$24.4 million related to contractual commitments to purchase tantalum powder and wire at prices above
market through calendar year 2006. This was done because the current market prices of tantalum were
substantially below the prices carried in tantalum raw materials inventory, and the Company was
committed to purchase tantalum in the future under a long-term contract. These actions involved
significant judgments on the part of the Company, including determining the amount of losses, their
timing, and their amount.
The determination was made after management concluded that the substantial decline in the demand
for tantalum capacitors was likely to continue for the foreseeable future. Combining this assessment with
the worldwide overcapacity in tantalum production, KEMET could not foresee when tantalum prices
might recover from their depressed levels. This determination was made after it was apparent that
customers’ inventory levels had dropped without any effect on the demand or pricing for tantalum
capacitors and after the settlement of tantalum pricing litigation as described in Note 10: Commitments.
Although the Company believes that the losses as well as their timing were appropriate under the
circumstances, visibility for future demand and pricing is limited, and the judgments made by management
necessarily involved subjective assessments.
The net realizable value of current tantalum inventory and the losses with respect to future tantalum
commitments were calculated based on current market prices for tantalum. There is no established market
on which tantalum raw materials are regularly traded and quoted. The Company based its determination
of current market price on quotations from suppliers of these materials. In quantifying the charges that
were recorded against future purchase commitments, the Company assumed, for lack of another
benchmark, the current market prices would continue through calendar year 2006, when KEMET’s
purchase commitments were scheduled to end. Had other assumptions on current and future prices for
19
tantalum been made, the amount of the inventory losses against purchase commitments would have been
different.
If tantalum prices were to recover in the future, the Company would not reverse the write-downs
recorded on raw materials inventory or the charges that were recorded against the purchase commitments,
so that the cost of materials will continue to reflect these losses regardless of future price increases in
tantalum. This could have the effect of increasing earnings in future periods from what they would have
been had KEMET not taken these actions until future raw material prices were known with certainty. If
tantalum prices experience further declines, as they did in fiscal years 2004 and 2003, the Company could
also be required to incur further losses.
During fiscal year 2005, the Company renegotiated the contract with Cabot Corporation associated
with the tantalum purchase commitment. As a result of the contract renegotiation, a portion of the 2004
and 2003 purchase commitment losses were reversed. In the fiscal year ended March 31, 2005, the
Company decreased its purchase commitment liability by recognizing a gain of $11.8 million.
Commencing in fiscal year 2003, KEMET included depreciation and amortization as a component of
its cost of inventories, as required by U.S. generally accepted accounting principles. 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 inventories and expensing them through cost of goods sold over time. The Company has
considered the effect of this change in policy on fiscal year 2004 and prior consolidated financial
statements and confirmed that had the Company adopted this policy previously, it would not have resulted
in any material changes to those consolidated financial statements.
ASSET IMPAIRMENT—GOODWILL and LONG-LIVED-ASSETS. KEMET adopted
SFAS No. 142, “Goodwill and Other Intangible Assets,” on April 1, 2002. Under SFAS No. 142, goodwill,
which represents the excess of purchase price over fair value of net assets acquired, and intangible assets
with indefinite useful lives are no longer amortized but are to be tested for impairment at least on an
annual basis in accordance with the provisions of SFAS No. 142.
The Company’s goodwill is tested for impairment at least on an annual basis. The impairment test
involves a comparison of the fair value of its reporting unit, as defined under SFAS No. 142, with carrying
amounts. If the reporting unit’s aggregated 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 being measured exceeds its fair value, up to the
total amount of its assets. The Company determined fair value based on a market approach which
incorporates quoted market prices of the Company’s common stock and the premiums offered to obtain
controlling interest for companies in the electronics industry. Downward movement in either stock prices
or premiums paid for controlling interest in the electronics industry could have a material effect on the fair
value of goodwill in future measurement periods. On an ongoing basis, KEMET expects to perform its
impairment tests during the first quarter of each fiscal year and when otherwise warranted. In accordance
with SFAS No. 142, KEMET completed its annual goodwill impairment test in the first quarter of fiscal
years 2005, 2004, and 2003, none of which indicated impairment. During the fiscal fourth quarter 2005,
KEMET completed another goodwill impairment test due to the asset impairment the Company recorded
in fiscal fourth quarter 2005. See below for a discussion on the fiscal fourth quarter 2005 Asset
Impairment. This test yielded no goodwill impairment. In addition, KEMET also performs its annual
impairment test on the goodwill related to the acquired The Forest Electric Company (“FELCO”) each
year in the fiscal third quarter. No impairment was noted during that test.
As of March 31, 2005, KEMET had unamortized goodwill in the amount of $30.5 million.
For the impairment or disposal of long-lived assets, KEMET follows the guidance as prescribed in
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with
20
SFAS No. 144, long-lived assets and intangible assets subject to amortization would be 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 of a long-lived asset to be held and used are measured 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, the Company uses
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, projections of sales, cost of good sold, and capital spending. 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 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 on a pre-tax basis.
Using the factors above, a test for recoverability of the Company’s tantalum and ceramic assets was
performed as of March 31, 2005. The results of the test for recoverability indicated that the carrying
amount of the long-lived assets exceeded the estimated future undiscounted cash flows. As a result,
KEMET calculated the excess of the carrying amount of the long-lived assets over its fair value on a
pre-tax discounted cash flow basis using the factors above. The discount rate used was an estimation of
KEMET’s pretax, weighted-average cost of capital. The Company had to make certain assumptions as to the
future cash flows to be generated by the underlying assets. Those items included the amount of volume
increases, average selling prices decreases, anticipated cost reductions, and the estimated remaining useful
life of the equipment. Fair market value was based on the discounted cash flows that the equipment will
generate over the remaining useful lives. The Company, accordingly, recognized a non-cash impairment
charge of $100.2 million ($44.2 million for tantalum products and $56.0 million for ceramic products). The
Company believes that it is appropriate to record these impairments due to:
• a decrease in the Company’s (as well as its competitors’ as a whole) market capitalization;
• continuing average selling price erosion; and
• the continued operating losses the Company has recently incurred.
For further discussion of the impairment charge, see Fiscal Year 2005 Special Charges.
Future changes in assumptions may negatively impact future valuations. In future tests for
recoverability, adverse changes in undiscounted cash flow assumptions could result in an impairment of
certain long-lived assets that would require a non-cash charge to the Consolidated Statements of
Operations and may have a material effect on the Company’s financial condition and operating results.
REVENUE RECOGNITION. Revenue is recognized from sales when a product is shipped and
title has transferred. The Company recognizes revenue only when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured.
A portion of sales is related to products designed to meet customer specific requirements. These
products typically have stricter tolerances making them useful to the specific customer requesting the
product and to customers with similar or less stringent requirements. Products with customer specific
requirements are tested and approved by the customer before the Company mass produces and ships the
product. The Company recognizes revenue at shipment as the sales terms for products produced with
customer specific requirements do not contain a final customer acceptance provision or other provisions
that are unique and would otherwise allow the customer different acceptance rights.
21
A portion of sales is made to distributors under agreements allowing certain rights of return and price
protection on unsold merchandise held by distributors. The Company’s distributor policy includes
inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.
The price protection policy protects the value of the distributors’ inventory in the event the Company
reduces its published selling price to distributors. This program allows the distributor to debit the
Company for the difference between KEMET’s list price and the lower authorized price for specific parts.
The Company establishes price protection reserves on specific parts residing in distributors’ inventories in
the period that the price protection is formally authorized by the Company’s management. The distributors
also have the right to return to KEMET a certain portion of the purchased inventory, which will not exceed
5% of the overall purchases. KEMET estimates future returns based on historical patterns of the
distributors and records an allowance on the Consolidated Balance Sheets.
The SFSD program provides a mechanism for the distributor to meet a competitive price after
obtaining authorization from the local Company sales office. This program allows the distributor to ship its
higher-priced inventory and debit the Company for the difference between KEMET’s list price and the
lower authorized price for that specific transaction. The Company establishes reserves for its SFSD
program based primarily on the actual inventory levels of certain distributor customers. The actual
inventory levels at these distributors comprise 91% to 95% of the total global distributor inventory. The
remaining 5% to 9% is estimated based on actual distributor customer inventory and current sales trends.
Management analyzes historical SFSD activity to determine the SFSD exposure on the global distributor
inventory at the balance sheet date. Should the distributors increase inventory levels, the estimation of the
inventory at the distributors for the remaining 5% to 9% could be estimated at an incorrect amount.
However, the Company believes that the difference between the estimate and the ultimate actual amount
would be immaterial.
The establishment of these reserves is recognized as a component of the line item Net sales on the
Consolidated Statements of Operations, while the associated reserves are included in the line item
Accounts receivable on the Company’s Consolidated Balance Sheets.
POSTRETIREMENT BENEFITS. KEMET’s management, along with the assistance of an
actuarial firm, performs an actuarial valuation of its postretirement plans’ benefit obligations.
Management makes certain assumptions that have a significant effect on the obligations such as the:
• weighted-average discount rate—used to arrive at the net present value of the obligation;
• salary increases—used to calculate the impact future pay increases will have on postretirement
obligations; and
• medical cost inflation—used to calculate the impact future medical costs will have on
postretirement obligations.
Management understands 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.
Management bases its assumptions on either historical or market data that it considers reasonable in
the circumstances. Variations in these assumptions could have a significant effect on the amounts reported
through the Consolidated Statements of Operations.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(“the Act”) became law in the United States. The Act introduces a prescription drug benefit under
Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is
at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position
SFAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
22
Improvement and Modernization Act of 2003,” the Company determined its plan is not actuarially
equivalent to the Medicare prescription drug benefit and there was no impact or benefit from the Act.
The measurement date used to determine postretirement benefits is March 31.
The Company froze accrual of benefits of its domestic non-contributory pension plan on June 30,
2003. Prior to the end of fiscal year 2004, KEMET terminated and liquidated its defined benefit pension
plan and, as a result, recognized $50.4 million in pension settlement charges. During fiscal year 2005,
KEMET recognized $0.6 million of additional costs relating to the final settlement of its defined benefit
pension plan. The termination of the pension plan is anticipated to result in future savings of
approximately $6 million per year. KEMET continues to provide other defined contribution retirement
plans to its employees.
INCOME TAXES. Income taxes are accounted for under the asset and liability method, as
prescribed by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be
recovered or settled. Valuation allowances are recognized to reduce deferred tax assets to the amount that
is more likely than not to be realized.
Management believes that is more likely than not that the net deferred taxes for the U.S., Switzerland,
China and Australia 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. Management has 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. KEMET
continues to have small net deferred tax assets (future tax benefits) in several other countries which the
Company expects to realize assuming, based on certain estimates and assumptions, sufficient taxable
income in certain foreign tax jurisdictions to utilize these deferred tax benefits. If these estimates and
related assumptions change in the future, the Company may be required to reduce the value of the
deferred tax assets resulting in additional tax expense.
Results of Operations
The following table sets forth for the periods indicated certain of the Company’s financial data as a
percentage of revenue:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs and expenses:
Fiscal Years ended March 31,
2003
2004
2005
100 %
100%
100%
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain)/loss on long-term supply contract . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . .
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . .
Pension settlement charges. . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and impairment charges. . . . . . . . . . . . . . . .
95%
−3%
12%
6%
0%
31%
95%
3%
12%
6%
12%
9%
88 %
9 %
12 %
6 %
0 %
7 %
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
−41%
−37%
−22 %
Other (income) and expense. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
−1%
−40%
1%
−41%
0%
−37%
−11%
−26%
−2 %
−20 %
−7 %
−13 %
23
The following table sets forth, for the periods indicated, the % increase/(decrease) from the preceding
fiscal year of certain items of the Company’s financial data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain)/loss on long-term supply contract . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . .
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension settlement charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and impairment charges. . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) and expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years ended March 31,
2005 2004
−3%
−2 %
−3 %
−195 %
1 %
9 %
−99 %
221 %
10 %
284 %
9 %
−104 %
55 %
6%
−70%
−6%
−3%
0%
28%
64%
−93%
80%
45%
100%
Comparison of Fiscal Year 2005 to Fiscal Year 2004
Net sales:
Net sales for fiscal year 2005 were $425.3 million, which represented a 2.0% decrease from fiscal year
2004 net sales of $433.9 million. The decrease in net sales was primarily attributable to a 3.7% decline in
capacitor average selling prices (“ASPs” or “ASP”) with the balance being product mix. Unit volumes
increased 24.0% to approximately 33.6 billion units from approximately 27.1 billion units in fiscal year
2004. ASPs historically decreased approximately 5% to 6% annually. During fiscal year 2005, ASPs
decreased at a level approximating historical values.
Cost of goods sold:
Cost of goods sold for the fiscal year ended March 31, 2005, was $403.0 million as compared to
$414.0 million for the fiscal year ended March 31, 2004, a 2.7% decrease. The decrease in cost of goods
sold occurred even though there was an increase in unit volumes, which increased 24.0% in fiscal year 2005
versus fiscal year 2004. The Company believes many of the actions it initiated or carried out during fiscal
years 2005, 2004, and 2003 (see Fiscal Year 2005 Special Charges, Fiscal Year 2004 Special Charges, and
Fiscal Year 2003 Special Charges) resulted in lower costs and more efficient operations and accounted for
the relatively low percentage decrease in cost of goods sold versus the higher increase in volumes. In
addition, manufacturing throughput increased in fiscal year 2005 as higher volumes resulted in the
absorption of fixed costs over more units versus fiscal year 2004.
Research and development:
Research and development expenses were $26.6 million for fiscal year 2005, compared to
$24.4 million for fiscal year 2004. These costs reflect the Company’s continuing commitment to the
development and introduction of new products, such as the launch of its commercial grade high-voltage
ceramic surface mount capacitor product line in May 2004, along with the improvement of product
performance and production efficiencies. While these advancements extend our leading position in certain
capacitor technology, the new products did not have a material impact on our revenues or cost of goods
sold in either fiscal year 2005 or 2004.
24
Special charges:
Special charges for the fiscal year ended March 31, 2005, were $122.9 million as compared to
$108.9 million for the prior fiscal year. The following table reflects the charges in both fiscal years
(in millions):
Manufacturing relocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lamina investment write-off. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term asset impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Previous restructuring adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and impairment charges. . . . . . . . . . . . . . . . . . . . . . .
Pension plan settlement charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain/(loss) on long-term supply contract . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold charges, primarily inventory charges . . . . . . . .
Accelerated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total special charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years Ended March 31,
2005
$ 7.8
11.5
8.5
2.4
100.2
(0.4)
$ 130.0
$ 0.6
(11.8)
—
4.1
$ 122.9
2004
$ 5.5
18.7
—
—
16.3
—
$ 40.5
$ 50.4
12.4
5.6
—
$ 108.9
Change
$ 2.3
(7.2)
8.5
2.4
83.9
(0.4)
$ 89.5
$ (49.8)
(24.2)
(5.6)
4.1
$ 14.0
The charges are explained in detail by quarter for both fiscal year 2005 and 2004 later in this section.
Operating loss:
The operating loss for the fiscal year ended March 31, 2005, was $174.8 million compared to $159.0
million in the prior year. The increase in operating loss from the prior year was principally from a
combination of the aforementioned lower sales levels and increased special charges, offset by cost
reductions in cost of goods sold.
Other income:
Other income increased in fiscal year 2005 compared to fiscal year 2004 partially as the result of more
interest income during fiscal year 2005. Upon the death of a former executive officer of the Company
during fiscal year 2005, the Company received $5.3 million in proceeds from an insurance policy on which
KEMET was the beneficiary, of which $5.0 million was included in Other income in fiscal year 2005.
Income taxes:
The effective tax rate for fiscal year 2005 was (1.1%), resulting in tax expense of $1.9 million. This
compares to an effective tax rate of 29.3% for fiscal year 2004 that resulted in a tax benefit of $46.4 million.
Even though the Company had a worldwide loss for fiscal year 2005, income tax expense is still being
incurred in various foreign jurisdictions. No tax benefit is recognized for the domestic tax loss for fiscal
year 2005 due to the establishment of a valuation allowance during fiscal year 2004. Future fluctuations in
the valuation allowance are expected to result in a tax rate below the 30% to 36% historical average.
25
Fiscal Year 2005 Special Charges
A summary of the special charges incurred in fiscal year 2005 is as follows (in millions):
Manufacturing relocation costs . . . . . . . . . . . . . . . .
Reduction in workforce . . . . . . . . . . . . . . . . . . . . . . .
Equipment write-offs . . . . . . . . . . . . . . . . . . . . . . . . .
Lamina investment write-off. . . . . . . . . . . . . . . . . . .
Long-term asset impairment. . . . . . . . . . . . . . . . . . .
Previous restructuring adjustments . . . . . . . . . . . . .
Restructuring and impairment charges(1) . . . . . . .
Pension plan settlement charges(2) . . . . . . . . . . . . .
Gain on long-term supply contract(2) . . . . . . . . . . .
Accelerated depreciation(3) . . . . . . . . . . . . . . . . . . .
Total 2005 special charges. . . . . . . . . . . . . . . . . . . . .
$ 2.6
—
—
—
—
$ 2.6
$ —
—
—
$ 2.6
30-Jun 30-Sep
Quarter Ended
31-Dec
$ 1.6
5.8
8.5
2.4
$ 1.7
—
—
—
31-Mar
$ 1.9
5.7
—
—
100.2
(0.4)
$ 107.4
Total
$ 7.8
11.5
8.5
2.4
100.2
(0.4)
$ 130.0
$ 0.4
(0.7)
2.1
$ 109.2
$ 0.6
(11.8)
4.1
$ 122.9
—
$ 1.7
—
$ 18.3
$ 0.2
(11.1)
—
$ —
—
2.0
$ (9.2) $ 20.3
(1)—Restructuring and impairment charges—These costs are included as a separate line item on the
Consolidated Statements of Operations.
(2)—Pension plan settlement charges and Gain on long-term supply contract are both shown as separate
items on the Consolidated Statements of Operations.
(3)—Accelerated depreciation is a component of cost of goods sold.
The Company reports a measure entitled Special Charges. These charges are considered items
outside of normal operations, and it is the intent of KEMET to provide more information to explain the
operating results. Since some of the items are not considered restructuring charges as defined by U.S.
generally accepted accounting principles, the Company has provided the breakout of U.S. generally
accepted accounting principles restructuring and impairment charges and those other charges and
adjustments separately.
Manufacturing relocation and employee termination costs—During fiscal year 2005, the Company
recognized $7.8 million in costs relating to the Plan (discussed below under Fiscal Year ended March 31,
2004). As of March 31, 2005, the Company had recorded cumulative charges of $32.0 million relating to
the Plan. The balance of the $39 million is expected to be realized ratably over the next three quarters. The
timing and amounts of the charges are dependent on the timing of operational decisions, some of which
have not been finalized, and on operational activities yet to occur. The Company also announced
additional restructuring programs in fiscal third quarter 2005 of $5.8 million and in fiscal fourth quarter
2005 of $5.3 million. These two restructuring charges reduced the Company’s workforce by approximately
1,120 employees. The Company also recognized a $0.4 million charge relating to the resignation of its
former Chief Executive Officer.
Equipment write-offs and impaired assets—During the fiscal fourth quarter 2005, the Company
assessed the current economic environment of the capacitor industry and estimated results for future
periods. The Company assessed the net cash flows of certain asset groupings for a period of time in the
future and compared the results with the net book value of its assets. Accordingly and in compliance with
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company recorded
a fourth quarter non-cash charge of $100.2 million to account for this difference. In fiscal third quarter
2005, the Company also recorded a charge of $8.5 million relating to the write-off of equipment no longer
used.
26
Write-down of investment in unconsolidated subsidiary—During the fiscal third quarter 2005, the
Company wrote down an investment in an unconsolidated subsidiary (Lamina Ceramics, Inc.) due to the
underlying value being less than our share of the book value resulting in a $2.4 million charge.
Previous restructuring adjustments—During fiscal fourth quarter 2005, KEMET analyzed its previous
restructuring accruals and determined that a portion of the previous restructurings would not be utilized.
Accordingly, the Company reversed $0.4 million in accruals related to previous restructuring charges.
Pension plan settlement charges—In the fiscal second quarter 2005 and in the fiscal fourth quarter
2005, the Company recognized additional costs relating to the settlement of the Company’s pension plan.
The Company does not anticipate any additional costs relating to the defined benefit plan in the future. As
noted above, the item has been shown as a separate component on the Consolidated Statements of
Operations and is further discussed in note 5.
Gain on long-term supply contract—During the fiscal second quarter 2005 and fiscal fourth quarter
2005, the Company recognized a gain on a long-term supply contract. This gain was the result of contract
modifications made. This gain offset prior losses taken in fiscal years 2004 and 2003 for the difference
between the contractual price and the Company’s estimate of future prices through calendar year 2006.
This item has been shown as a separate component on the Consolidated Statements of Operations and is
discussed further in note 10.
Accelerated depreciation—KEMET recognized accelerated depreciation of $4.1 million ($2 million in
fiscal third quarter 2005 and $2.1 million in fiscal fourth quarter 2005, respectively) related to the
anticipated shut-down of a manufacturing facility by mid calendar year 2005.
Fiscal Year 2004 Special Charges
A summary of the special charges incurred in fiscal year 2004 is as follows (in millions):
30-Jun
Manufacturing relocation . . . . . . . . . . . . . . . . . . . . $ —
Reduction in workforce . . . . . . . . . . . . . . . . . . . . . .
0.3
Impaired long-lived assets . . . . . . . . . . . . . . . . . . . . —
Restructuring and impairment charges(1) . . . . . . $ 0.3
Pension plan settlement charges(2) . . . . . . . . . . . . $ —
Loss on long-term supply contract(2) . . . . . . . . . . —
Cost of goods sold, primarily inventory
Quarters Ended
30-Sep
$ 2.3
8.4
17.9
$ 28.6
$ —
12.4
31-Dec
$ 1.5
8.9
(1.6)
$ 8.8
$ —
—
31-Mar
$ 1.7
1.1
—
$ 2.8
Total
$ 5.5
18.7
16.3
$ 40.5
$ 50.4
—
$ 50.4
12.4
charges(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Total 2004 special charges. . . . . . . . . . . . . . . . . . . . $ 0.3
5.6
$ 46.6
—
$ 8.8
—
$ 53.2
5.6
$ 108.9
(1)—Restructuring and impairment charges—These costs are included as a separate line item on the
Consolidated Statements of Operations.
(2)—Pension plan settlement charges and Loss on long-term supply contract are both shown as separate
items on the Consolidated Statements of Operations.
(3)—Item shown as a component of Cost of goods sold on the Consolidated Statements of Operations.
The Company reports a measure entitled Special Charges. These charges are considered items
outside of normal operations, and it is the intent of KEMET to provide more information to explain the
operating results. Since some of the items are not considered restructuring charges as defined by U.S.
generally accepted accounting principles, the Company has provided the breakout of U.S. generally
27
accepted accounting principles restructuring and impairment charges and those other charges and
adjustments separately.
Impaired long-lived assets—In 1999, the Company entered into the market for solid aluminum
capacitors and has since made significant technology advances in both high-capacitance multilayer ceramic
capacitors and organic tantalum capacitors, limiting the applications of solid aluminum capacitors. As a
result, KEMET reorganized its solid aluminum capacitor product line. The Company recognized a
$17.9 million non-cash charge in fiscal second quarter 2004 related to the impairment of equipment and
facilities. In fiscal third quarter 2004 the Company recognized proceeds from equipment disposals relating
to the reorganization of the solid aluminum product line generating $1.6 million more in cash than
anticipated.
Reduction in workforce and Manufacturing relocation costs—The Plan included moving manufacturing
operations to low-cost facilities in Mexico and China. Approximately $18.7 million and $5.5 million of
reductions in workforce and manufacturing relocation costs, respectively, were incurred in fiscal year 2004.
Loss on long-term supply contract—During fiscal second quarter 2004, the Company recorded an
additional loss of $12.4 million related to the tantalum supply agreement with Cabot Corporation that
extends through calendar year 2006. (See Fiscal Year 2003 Special Charges for a further discussion on this
subject).
Pension plan settlement charges—The Company froze the accrual of benefits of its domestic non-
contributory pension plan on June 30, 2003. Prior to the end of fiscal year 2004, KEMET terminated and
liquidated its defined benefit pension plan and, as a result, recognized $50.4 million in non-recurring
pension plan settlement charges during the fiscal fourth quarter 2004.
Cost of goods sold, primarily inventory charges—Inventory charges represent inventory obsoleted or
scrapped associated with the aforementioned impairment of the solid aluminum capacitor product line. A
charge of $5.6 million was recorded in fiscal second quarter 2004.
Comparison of Fiscal Year 2004 to Fiscal Year 2003
Net sales:
Net sales for fiscal year 2004 were $433.9 million, of which $2.4 million resulted from acquisitions
made during fiscal year 2004. Fiscal year 2004 net sales less the acquisitions were $431.5 million, which
represented a 4% decrease from fiscal year 2003 net sales of $447.3 million. The decrease in net sales was
primarily attributable to a 35% decline in capacitor ASPs with the balance being product mix. Unit
volumes increased 54% to approximately 27.1 billion units from approximately 17.6 billion units in fiscal
year 2003. ASPs historically decrease approximately 5% to 6% annually. During fiscal year 2003 and the
first half of 2004, ASP decreases significantly exceeded their historical averages. During the last six months
of fiscal year 2004, ASPs moderated or slightly increased.
Cost of goods sold:
Cost of goods sold for the fiscal year ended March 31, 2004 less $3.6 million resulting from
acquisitions made during fiscal year 2004, was $410.4 million as compared to $392.1 million for the year
ended March 31, 2003. This represents a 4.7% increase year over year. The increase in cost of goods sold
was not commensurate with the increase in unit volumes, which increased 54% in fiscal year 2004 versus
fiscal year 2003. The Company believes many of the actions it initiated or carried out during fiscal years
2004 and 2003 (see Fiscal Year 2004 Special Charges and Fiscal Year 2003 Special Charges) resulted in
lower costs and more efficient operations and account for the relatively low percentage increase in cost of
goods sold versus the higher increase in volumes. In addition, manufacturing throughput increased in fiscal
year 2004 as higher volumes resulted in the absorption of fixed costs over more units versus fiscal
year 2003.
28
Research and development:
Research and development expenses were $24.4 million for fiscal year 2004, compared to
$25.3 million for fiscal year 2003. These costs reflect the Company’s continuing commitment to the
development and introduction of new products along with the improvement of product performance and
production efficiencies such as 67 tantalum parts announced in March 2004 along with the improvement of
product performance and production efficiencies. None of these items, on a separate or aggregate basis,
had a material impact to Net sales or Cost of goods sold during fiscal year 2004 or 2003.
Special charges:
Special charges for the fiscal year ended March 31, 2004, were $108.9 million as compared to
$75.9 million for the prior fiscal year. The following table reflects the charges in each fiscal year
(in millions):
Manufacturing relocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and impairment charges. . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year Ended March 31,
Change
$ 5.5
(8.4)
11.7
$ 8.8
2004
$ 5.5
18.7
16.3
$ 40.5
2003
$ —
27.1
4.6
$ 31.7
Pension settlement charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on long-term supply contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold, primarily inventory charges . . . . . . . . . . . . . . . . . .
Total special charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 50.4
12.4
5.6
$ 108.9
$ —
40.8
3.4
$ 75.9
$ 50.4
(28.4)
2.2
$ 33.0
The Fiscal Year 2004 Special Charges are explained above. The Fiscal Year 2003 Special Charges are
explained later in this section.
Operating loss:
The Operating loss for the fiscal year ended March 31, 2004, was $159.0 million compared to
$97.0 million in the prior year. The increase in Operating loss from the prior year was principally from
a combination of the aforementioned lower sales levels, corresponding reduction in manufacturing
margins, and increased special charges.
Other income:
Other income decreased in fiscal year 2004 compared to fiscal year 2003 primarily as a result of
$7.8 million of gains on the termination of swap contracts in fiscal year 2003 versus $4.4 million in
fiscal year 2004.
Income taxes:
The effective tax rate for fiscal year 2004 was 29.3%, resulting in a tax benefit of $46.4 million. This
compares to an effective tax rate of 36.3% for fiscal year 2003 that resulted in a tax benefit of $31.9 million.
The decrease in the tax benefit was principally due to the establishment of a valuation allowance in fiscal
year 2004 related to net operating loss carryforwards. Future fluctuations in the valuation allowance are
expected to result in a lower effective tax rate.
29
Fiscal Year 2003 Special Charges
A summary of the special charges incurred in fiscal year 2003 are as follows (in millions):
Reduction in workforce . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired long-lived assets . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and impairment charges(1) . . . . . . . . . .
Loss on long-term supply contract(2) . . . . . . . . . . . . . .
Cost of goods sold, primarily inventory charges(3) . . .
Total 2003 special charges. . . . . . . . . . . . . . . . . . . . . . . .
30-Sep
$ 9.1
4.6
$ 13.7
$ —
—
$ 13.7
Quarter Ended
31-Dec
$ —
—
$ —
$ 40.8
1.8
$ 42.6
31-Mar
$ 18.0
—
$ 18.0
$ —
1.6
$ 19.6
Total
$ 27.1
4.6
$ 31.7
$ 40.8
3.4
$ 75.9
(1)—Restructuring and impairment charges—These costs are included as a separate line item on the
Consolidated Statements of Operations.
(2)—Loss on long-term supply contract are both shown as separate items on the Consolidated Statements
of Operations.
(3)—Item shown as a component of cost of goods sold on the Consolidated Statements of Operations.
The Company reports a measure entitled Special Charges. These charges are considered items
outside of normal operations, and it is the intent of KEMET to provide more information to explain the
operating results. Since some of the items are not considered restructuring charges as defined by U.S.
generally accepted accounting principles, the Company has provided the breakout of U.S. generally
accepted accounting principles restructuring and impairment charges and those other charges and
adjustments separately.
Special charges represent the closing of one manufacturing facility in Greenwood, South Carolina,
and one of three manufacturing facilities in Matamoros, Mexico, which was announced in July 2002. These
actions were part of KEMET’s cost saving initiatives in response to the prolonged downturn in the
electronics industry. A description of the charges expensed during fiscal year 2003 follows:
Impaired long-lived assets—The impaired assets consisted of certain long-lived assets associated with
the closing of a manufacturing facility in Greenwood, South Carolina.
Employee termination costs—The Company made manufacturing and support personnel reductions of
approximately 185 and 240 employees in the U.S. and Mexico, respectively during the fiscal second quarter
2003. In fiscal fourth quarter 2003, workforce reductions, primarily from U.S. facilities, totaled
approximately 280 employees, with approximately 170 being from voluntary early retirements and the
remainder being from a reduction in workforce. In addition to normal retirement benefits, the early
retirement program included a special retirement bonus based on length of service to encourage
participation. Severance benefits based on years of service were provided to other employees affected by
the reduction in force.
Inventory and related supply agreement—In fiscal third quarter 2003, the Company announced that it
agreed to an extension of the term of its tantalum supply agreement with Cabot Corporation (“Cabot”).
The Company records inventory at the lower of cost or market and estimated losses associated with
inventory received under the extended supply agreement were approximately $16.4 million. In addition,
the Company’s estimated future losses for the commitment to purchase tantalum at above-market prices
were approximately $24.4 million. Accordingly, a $40.8 million charge was recorded in fiscal third
quarter 2003.
30
Cost of goods sold, primarily inventory charges—Inventory charges consisted of the sale of excess
palladium at a loss of $1.8 million during fiscal third quarter 2003. In the fiscal fourth quarter 2003, the
Company terminated palladium forward contracts at a loss of $1.6 million.
Quarterly Results of Operations
The following table sets forth certain quarterly information for the fiscal years ended March 31, 2005
and 2004. This information, in the opinion of the Company’s management, reflects all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly this information when read in
conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
First
Quarter
Net sales . . . . . . . . . . . . . . . . . . .
Operating income (loss)(1) . . .
Net loss . . . . . . . . . . . . . . . . . . . .
Net loss per share (basic). . . . .
Net loss per share (diluted) . . .
Weighted-average shares
$
$
$
$
$
$
122,383
$
534
(1,851) $
(0.02) $
(0.02) $
Fiscal year ended March 31, 2005
Fourth
Third
Second
Quarter
Quarter
Quarter
Dollars in thousands except per share data
106,022
$
$
(7,178) $
(7,465) $
(0.09) $
(0.09) $
$
425,338
101,430
95,503
(38,154) $ (130,044 ) $ (174,842)
(38,861) $ (125,917 ) $ (174,094)
(2.01)
(2.01)
(0.45) $
(0.45) $
(1.45 ) $
(1.45 ) $
Total
outstanding (basic) . . . . . . . .
86,494,650
86,506,738
86,525,730
86,548,572
86,518,923
Weighted-average shares
outstanding (diluted) . . . . . .
86,494,650
86,506,738
86,525,730
86,548,572
86,518,923
First
Quarter
Net sales . . . . . . . . . . . . . . . . . . .
Operating loss(1). . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . .
Net loss per share (basic). . . . .
Net loss per share (diluted) . . .
Weighted-average shares
$
$
$
$
$
$
105,362
(10,436) $
(3,571) $
(0.04) $
(0.04) $
Fiscal year ended March 31, 2004
Fourth
Third
Second
Quarter
Quarter
Quarter
Dollars in thousands except per share data
$
100,084
(72,257) $
(43,280) $
(0.50) $
(0.50) $
$
111,335
(19,275) $
(13,072) $
(0.15) $
(0.15) $
433,882
$
117,101
(57,046 ) $ (159,014)
(52,052 ) $ (111,975)
(1.30)
(1.30)
(0.60 ) $
(0.60 ) $
Total
outstanding (basic) . . . . . . . .
86,349,086
86,403,086
86,434,209
86,462,742
86,412,281
Weighted-average shares
outstanding (diluted) . . . . . .
86,349,086
86,403,086
86,434,209
86,462,742
86,412,281
(1)—Operating income (loss) as a percentage of net sales fluctuates from quarter to quarter due to a
number of factors, including net sales fluctuations, restructuring and impairment charges, product
mix, the timing and expense of moving product lines to lower-cost locations, and the relative mix of
sales among distributors, original equipment manufacturers, and electronics manufacturing services
providers.
Liquidity and Capital Resources
The Company’s liquidity needs arise from working capital requirements, capital expenditures, and
principal and interest payments on its indebtedness. The Company defines working capital to be total
current assets less total current liabilities as reflected on its Consolidated Balance Sheets. The Company
intends to satisfy both its short-term and long-term liquidity requirements primarily with existing cash and
cash equivalents and cash provided by operations.
31
The following table sets forth for the dates indicated the Company’s working capital:
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
$ 184,579
March 31,
2004
$ 313,731
2003
$ 463,535
Fiscal Year 2005 vs. Fiscal Year 2004 Working Capital
The Company’s working capital decreased by approximately $129.2 million at the end of fiscal year
2005 compared to the end of fiscal year 2004. The cash and cash equivalents balance decreased to $26.9
million at March 31, 2005, from $183.5 million at March 31, 2004, or $156.6 million primarily as a result of
the Company’s investment in long-term U.S. government securities.
Fiscal year 2005 most significant items:
Significant uses of cash during fiscal year 2005 included investments of $104.1 million in
U.S. government securities with maturities greater than one year, $39.6 million used to fund capital
expenditures, and a net $6.9 million to purchase/sell short-term investments.
Operations:
Cash used in operations was $12.8 million in fiscal year 2005. In fiscal year 2005, the $174.1 million net
loss was primarily offset by $171.1 million in non-cash depreciation, amortization and impairment charges.
Contributing to the cash used in operations were higher receivables ($0.7 million), higher inventories ($3.0
million), higher prepaid expenses and other current assets ($0.3 million), lower accrued expenses and
income taxes payable ($10.0 million), and the non-cash gain on a long-term supply contract ($11.8 million).
The Company expects the working capital items, listed above, to remain consistent in fiscal year 2006.
Investing:
As previously mentioned, the Company increased its investment in property and equipment by
$13.8 million to $39.6 million in fiscal year 2005 compared to $25.8 million in fiscal year 2004. The capital
expenditures in fiscal year 2005 principally represented the Company’s efforts to invest in operations around
the world under the aforementioned Plan as facilities were being relocated based on access to key customers,
technical resources, and knowledge and availability of low-cost resources. Reorganization activities will
continue during calendar year 2005 and are targeted to be completed by December 2005. The Company
estimates its capital expenditures for fiscal year 2006 to be approximately $20.0 million.
Since the end of fiscal year 2004, the Company has continued to add to its holdings of long-term
U.S. government marketable securities. As of March 31, 2005, the Company had approximately $157.6
million invested in long-term U.S. government marketable securities versus a balance at March 31, 2004 of
$84.6 million.
Fiscal Year 2004 vs. Fiscal Year 2003 Working Capital
The Company’s working capital decreased by approximately $149.8 million at the end of fiscal year
2004 compared to the end of fiscal year 2003. The cash and cash equivalents balance decreased to $183.5
million at March 31, 2004, from $263.6 million at March 31, 2003.
Operations:
Cash provided by operations was $38.5 million in fiscal year 2004. The fiscal year 2004 $112.0 million
net loss was offset by $89.4 million in non-cash depreciation, amortization and impairment charges and a
$55.1 million decrease in inventories partially offset by working capital accounts such as accounts receivable,
32
accounts payable, and accrued expenses. The decrease in inventories was made to offset the fiscal year 2003
build-up of inventory as operations were relocated to foreign locations.
Investing:
The Company’s investment in property and equipment in fiscal year 2004 was $25.8 million, which was
$3.6 million higher than fiscal year 2003’s capital expenditures of $22.2 million. Capital expenditures in
fiscal year 2003 principally reflect completion of projects initiated during and prior to fiscal year 2002, a
period in which demand was substantially higher. The capital expenditures in fiscal year 2004 represented the
Company’s efforts to invest in operations relating to the aforementioned Plan of relocating facilities to low-
cost geographies, and the Company’s commitment to improve product quality, expand into new products, and
improve manufacturing efficiencies.
Other areas:
The Board of Directors had previously authorized programs to purchase up to 8.0 million shares of its
common stock on the open market. Through March 31, 2005, the Company had made purchases of
2.1 million shares for $38.7 million, none of which was repurchased in fiscal year 2005. The Company does
not anticipate any further stock purchases under this authorization. Approximately 615,000 treasury stock
shares were subsequently reissued for the exercise of employee stock options. At March 31, 2005, the
Company held approximately 1,460,455 treasury shares at a cost of $26.9 million.
In May 1998, the Company sold $100.0 million of its Senior Notes pursuant to the terms of a Note
Purchase Agreement dated as of May 1, 1998, between the Company and the eleven purchasers of the
Senior Notes. These Senior Notes have a final maturity date of May 4, 2010, with annual required $20.0
million principal repayments beginning on May 4, 2006. The Senior Notes bear interest at a fixed rate of
6.66%, with interest payable semiannually beginning November 4, 1998. The terms of the Note Purchase
Agreement include various restrictive covenants typical of transactions of this type, and require the
Company to meet certain financial tests including a minimum net worth test and a maximum ratio of debt
to total capitalization. The net proceeds from the sale of the Senior Notes were used to repay existing
indebtedness and for general corporate purposes. The Company was in compliance with its covenants at
March 31, 2005, and at the time of this filing. Borrowings are secured by guarantees of certain of the
Company’s wholly-owned subsidiaries. See note 3 to the consolidated financial statements.
In April 2002, the Company entered into an Offering Basis Loan Agreement (the “Loan Agreement”)
with a bank. The Loan Agreement is an uncommitted credit facility which allows the Company to request
borrowings in an aggregate principal amount not to exceed $50.0 million for a term not to exceed 180 days
for any single borrowing. The interest rate charged on any borrowing under the Loan Agreement is
mutually agreed upon by the bank and the Company at the time of such borrowing. The Company has no
borrowings under this agreement at the time of this filing.
As discussed in Item 3 and note 12 to the consolidated financial statements, the Company or its
subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations,
including workers’ compensation or work place safety cases and environmental issues, some of which
involve claims of substantial damages. Although there can be no assurance, based upon information known
to the Company, the Company does not believe that any liability which might result from an adverse
determination of such lawsuits would have a material adverse effect on the Company.
The Company believes its financial position will permit the financing of its business needs and
opportunities.
33
Long-term Supply Agreement
In fiscal third quarter 2003, the Company announced that it agreed to an extension of the term of its
tantalum supply agreement with Cabot Corporation (“Cabot”). The extended agreement relates to both
tantalum powder and tantalum wire products and calls for reduced prices, higher volumes, and a term
through 2006. The Company purchased approximately $17.7 million, $22.2 million, and $38.1 million of
material from Cabot in the fiscal years ended March 31, 2005, 2004, and 2003, respectively. The additional
commitment totals $23.4 million; $11.8 million for calendar year 2005 and $11.6 million for calendar year
2006. If the Company’s demand for tantalum exceeds the amount supplied under the contract, Cabot has
the option to sell additional product to the Company at prices approximating market throughout the term.
The Company records inventories at the lower of cost or market. In the period ended March 31, 2003,
estimated losses associated with inventory received under the extended supply agreement were $16.4
million, and the Company’s estimated future losses for the commitment to purchase tantalum at above-
market prices were approximately $24.4 million. In the fiscal year ended March 31, 2004, the Company
estimated that future losses for the commitment to purchase tantalum at above-market prices were
approximately $12.4 million. Accordingly, $12.4 million and $40.8 million in charges were recorded in the
fiscal years ended March 31, 2004 and 2003, respectively. In the fiscal year ended March 31, 2005, the
Company renegotiated the tantalum supply agreement which resulted in a reduction of the future liability
of KEMET. As a result of the renegotiations, the Company recorded a gain of $11.8 million in fiscal
year 2005.
Commitments
As of March 31, 2005, the Company had contractual obligations in the form of non-cancelable
operating leases (see note 10 to the consolidated financial statements), long-term contracts for the
purchase of tantalum powder and wire (see note 10 to the consolidated financial statements), debt (see
note 3 to the consolidated financial statements), and interest payments relating to the Senior Notes
as follows:
Description
Operating leases . . . . . . . . . . . .
Tantalum supply agreement . .
Debt. . . . . . . . . . . . . . . . . . . . . . .
Interest payments . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
2006
2007
2008
2009
2010
Thereafter
Total
$ 3,331 $ 2,392 $ 1,856 $ 1,136 $
612 $ 1,866 $ 11,193
23,400
—
100,000
20,000
23,310
666
$ 24,591 $ 37,186 $ 26,518 $ 24,466 $ 22,610 $ 22,532 $ 157,903
—
20,000
1,998
—
20,000
3,330
—
20,000
4,662
8,800
20,000
5,994
14,600
—
6,660
In order to hedge forecasted cash flows related to manufacturing facilities in Mexico, management
purchased forward contracts to buy Mexican pesos for periods and amounts consistent with the related
underlying cash flow exposures. At March 31, 2005 and 2004, the Company had outstanding forward
exchange contracts that mature within approximately one year to purchase Mexican pesos with notional
amounts of $60.9 million and $57.7 million, respectively. The fair values of the contracts at March 31, 2005
and 2004, resulted in $3.1 million and $0.3 million of derivative assets, respectively.
Acquisitions
In fiscal first quarter 2004, the Company acquired certain assets from Wilson Greatbatch
Technologies, Inc (“GTI”). The $2.3 million cash purchase included the non-medical, high-voltage and
high-temperature ceramic capacitor and EMI filter product lines of GTI’s Greatbatch-Sierra, Inc.
subsidiary. The product lines were acquired as part of the Company’s strategic objective to broaden its
high-performance capacitor solutions to support customers’ increasing technical requirements.
34
In fiscal second quarter 2004, the Company announced it purchased an equity position of $2.5 million
in Lamina Ceramics, Inc. (“Lamina Ceramics”), and entered into a business agreement with Lamina
Ceramics to develop and commercialize high-performance, low-temperature co-fired ceramic-on-metal
(“LTCC-M”) solutions for advanced electronic systems. Lamina Ceramics is a manufacturer of multilayer
ceramic electronic packages, boards, and components using proprietary LTCC-M technology. As of
March 31, 2005, the Company and Lamina Ceramics have no products under development and therefore,
the Company has no liability relating to this business agreement. The Company wrote down its investment
in Lamina Ceramics by $2.4 million in fiscal year 2005.
In fiscal third quarter 2004, the Company announced it had acquired The Forest Electric Company
(“FELCO”) of Melrose Park, Illinois. FELCO manufactures and sells industry-leading custom magnetic
solutions. This $2.4 million acquisition broadens KEMET's product portfolio, leveraging KEMET's
industry-leading capabilities in quality, delivery, and service to further penetrate customers in the military,
aerospace, and industrial market segments. Approximately $2.1 million of goodwill was recorded as part of
the transaction.
Adoption of Accounting Standards
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equities” (“SFAS No. 150”).
SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of
freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is
effective for financial instruments entered or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
significantly impact the Company’s consolidated financial statements.
In May 2004, the FASB issued FASB Staff Position (“FSP FAS”) 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”,
which provides guidance on the accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the “Act”) for employers that sponsor postretirement
health care plans that provide prescription drug benefits. The Act introduced a prescription drug benefit
under Medicare (Medicare Part D), as well as, a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP FAS 106-2 states
that under the guidance provided by the Statement of Financial Accounting Standards No. 106,
“Employers’ Accounting for Postretirement Benefits Other Than Pensions”, health care coverage provided
by Medicare shall be taken into account in measuring the employer’s postretirement health care obligation
and that currently enacted changes in relevant laws should be considered in current period measurements
of net periodic postretirement benefit cost and the accumulated pension benefit obligation. FSP FAS 106-2
is effective in the first reporting period beginning after June 15, 2004. The adoption of FSP FAS 106-2 in
the quarter ended September 30, 2004 did not impact the Company’s consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. This statement amends
Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” and removes the “so
abnormal” criterion that under certain circumstances could have led to the capitalization of these items.
SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and re-handling costs be
recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as
defined in ARB No. 43. SFAS No. 151 also requires that allocation of fixed production overhead expenses
to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for all fiscal years beginning after June 15, 2005 (fiscal year 2007). The Company is currently
evaluating the impact that the adoption of SFAS No. 151 will have on its consolidated financial statements.
35
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based
compensation awards using a fair value method and record such expense in its financial statements. In
addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the
income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is
effective beginning as of the first annual reporting period beginning after June 15, 2005 (fiscal year 2007).
The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its
consolidated financial statements. The cumulative effect of adoption, if any, will be measured and
recognized in the consolidated statements of operations on the date of adoption.
In March 2005, the FASB issued FASB Interpretation No. 47. FASB Interpretation No. 47 clarifies
the term “asset retirement obligation” as used in SFAS No. 143 “Accounting for Asset Retirement
Obligations.” This guidance requires an entity to record a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably estimated. Since this is an
interpretation, the effective date is immediate. This interpretation does not have an impact on the
consolidated financial statements of the Company.
In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-1. FSP No. 109-1 provides
guidance on the application of SFAS No. 109 “Accounting for Income Taxes” as it relates to the provision
within the American Jobs Creation Act of 2004 which allows a tax deduction on qualified production
activities. The Company considered this FSP during our fiscal year-end preparation of the tax accrual and
notes that it did not have a material impact on the consolidated financial statements.
In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-2. FSP No. 109-2 addresses
the special one-time dividends received deduction on repatriation of certain foreign earnings to a U.S.
taxpayer created by the American Jobs Creation Act of 2004. As of March 31, 2005, unremitted earnings of
the subsidiaries outside the United States were deemed to be permanently invested. No current plans are
expected for repatriation under the American Jobs Creation Act of 2004. No deferred tax liability was
recognized with regard to such earnings. It is not practicable to estimate the income tax liability that might
be incurred if such earnings were remitted to the United States.
Safe Harbor Statement
From time to time, information provided by the Company, including but not limited to statements in
this report or other statements made by or on behalf of the Company, may contain “forward-looking”
information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements involve a number of risks and uncertainties. The
Company’s actual results could differ materially from those discussed in the forward-looking statements.
The cautionary statements set forth herein under the heading Safe Harbor Statement identify important
factors that could cause actual results to differ materially from those in any forward-looking statements
made by or on behalf of the Company.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. The Company intends that these forward-looking
statements be subject to the safe harbor created by that provision. These forward-looking statements
involve risks and uncertainties beyond the Company’s control. The inclusion of this forward-looking
information should not be regarded as a representation by the Company that the future events, plans, or
expectations contemplated by the Company will be achieved. Furthermore, past performance in operations
and share price is not necessarily predictive of future performance. Finally, the Company cannot assume
responsibility for certain information that is based upon market estimates.
The Company wishes to caution readers that the following important factors, among others, in some
cases have affected, and in the future could affect, KEMET’s actual results and could cause KEMET’s
36
actual consolidated results for the fiscal first quarter 2006 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the Company whether contained
herein, in other documents subsequently filed by the Company with the SEC, or in oral statements:
A moderating growth rate in end-use products that incorporate the Company’s products and the
effects of a downturn in the general economy or in general business conditions;
Underutilization of KEMET’s plants and factories, or of any plant expansion or new plant,
including, but not limited to, those in Mexico and China, resulting in production inefficiencies and
higher costs; start-up expenses, inefficiencies, delays, and increased depreciation costs in connection
with the start of production in new plants and expansions; capacity constraints that could limit the
ability to continue to meet rising demand for surface-mount capacitors;
Occurrences affecting the slope or speed of decline of the pricing curve for the Company’s
products, or affecting KEMET’s ability to reduce product and other costs, and to increase
productivity; the effect of changes in the mix of products sold and the resulting effects on gross
margins;
Difficulties in obtaining raw materials, supplies, power, natural resources, and any other items
needed for the production of capacitors; the effects of quality deviations in raw materials, particularly
tantalum powder and ceramic dielectric materials; the effects of significant price increases for
tantalum, palladium, or silver or an inability to obtain adequate supplies of tantalum from the limited
number of suppliers;
The amount and rate of growth in the Company’s selling, general, and administrative expenses
and the impact of unusual items resulting from KEMET’s ongoing evaluation of its business
strategies, asset valuations, and organizational structure;
The acquisition of fixed assets and other assets, including inventories and accounts receivable; the
making or incurring of any expenditures and expenses, including, but not limited to, depreciation and
research and development expenses; and the amount of and any changes to tax rates; or
The effect of any changes in trade, monetary, and fiscal policies, laws, and regulations; other
activities of governments, agencies, and similar organizations; social and economic conditions, such as
trade restrictions or prohibitions, inflation, and monetary fluctuations; import and other charges or
taxes; the ability or inability of KEMET to obtain, or hedge against, foreign currency; foreign
exchange rates and fluctuations in those rates, particularly a strengthening of the U.S. dollar;
nationalization; unstable governments and legal systems; intergovernmental disputes; the costs and
other effects of legal and administrative cases and proceedings (whether civil, such as environmental
and product-related, or criminal); settlements, investigations, claims, and changes in those items;
lawsuits, developments or assertions by or against the Company relating to intellectual property rights
and intellectual property licenses; adoption of new or changes in accounting policies and practices and
the application of such policies and practices; the effects of changes within KEMET’s organization,
particularly at the executive officer level, or in compensation and benefit plans; the amount, type, and
cost of the financing which the Company has and any changes to that financing; the effects of severe
weather on KEMET’s operations, including disruptions at manufacturing facilities; the effects of a
disruption in KEMET’s computerized ordering systems; and the effects of a disruption in KEMET’s
communications systems.
Effect of Inflation
Inflation generally affects the Company by increasing the cost of labor, equipment, and raw materials.
The Company does not believe that inflation has had any material effect on the Company’s business over
the past three fiscal years except as noted in the following discussion in Commodity Price Risk.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
A portion of the Company’s sales to its customers and operating costs in Europe are denominated in
the euro, thereby creating an exposure to foreign currency exchange rates. Also, a portion of the
Company’s costs in its Mexican operations are denominated in Mexican pesos, creating an exposure to
foreign currency exchange rates. In order to minimize its exposure, the Company will periodically enter
into forward foreign exchange contracts in which the future cash flows in the euro or Mexican peso are
hedged against the U.S. dollar. At March 31, 2005, the Company had open foreign exchange contracts to
purchase Mexican pesos with a notional amount of $60.9 million and a fair value of $3.1 million. The
Company did not have any euro foreign exchange contracts outstanding at March 31, 2005. See note 15 to
the consolidated financial statements.
The impact of changes in the relationship of other currencies to the U.S. dollar has historically not
been significant, and such changes in the future are not expected to have a material impact on the
Company’s results of operations or cash flows. The Company does not use derivative financial instruments
if there is no underlying business transaction supporting or related to the derivative financial instrument.
Commodity Price Risk
The Company purchases various precious metals used in the manufacture of capacitors and is
therefore exposed to certain commodity price risks. These precious metals consist primarily of palladium
and tantalum.
Palladium is a precious metal used in the manufacture of multilayer ceramic capacitors and is mined
primarily in Russia and South Africa. Currently, the Company uses forward contracts and spot buys to
secure the acquisition of palladium and manage the price volatility in the market. The Company is also
aggressively pursuing ways to reduce palladium usage in ceramic capacitors and minimize the price risk.
Tantalum powder is a metal used in the manufacture of tantalum capacitors. Management believes
the tantalum needed has generally been available in sufficient quantities to meet manufacturing
requirements. However, the increase in demand for tantalum capacitors during fiscal year 2001, along with
the limited number of tantalum powder suppliers, led to increases in tantalum prices and impacted
availability. Limited supplies of tantalum raw material and some tantalum powders caused the price to
increase from under $50 per pound early in calendar 2000 to over $300 per pound in calendar 2001. As a
result of the fluctuations in tantalum prices and the need to assure a supply of tantalum powder, the
Company entered into a long-term supply agreement for tantalum powder at the then-prevailing market
rate. During the fiscal years ended March 31, 2004 and 2003, the Company recorded $12.4 million and
$40.8 million, respectively, of charges related to a tantalum inventory purchase commitment that exceeded
market prices. In addition, due to the renegotiation of a tantalum inventory purchase agreement, the
Company recorded a gain on the purchase commitment of $11.8 million during fiscal year 2005. See
Critical Accounting Policies and Long-Term Supply Agreement. Also, see notes 10 and 15 to the
consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form 10-K. See Item 16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
(a). The Company’s management evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of
March 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005,
which is the end of the period covered by this report.
(b). During the fourth quarter of fiscal year 2005, there were no changes in the Company’s internal
control over financial reporting that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Internal Control Over Financial Reporting
Refer to “Report of Management” and “Report of Independent Registered Public Accounting Firm”
on pages 48, 49, and 50 of KEMET’s Fiscal Year 2005 Form 10-K. There has been no change in the
Company’s internal control over financial reporting that occurred during the fiscal fourth quarter 2005 that
has materially affected, or is reasonably likely to material affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
39
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CERTAIN KEY EMPLOYEES OF THE
REGISTRANT
PART III
Name
Per-Olof Loof(2) . . . . . . . . . . . . . . . . . .
James P. McClintock . . . . . . . . . . . . . .
David E. Gable . . . . . . . . . . . . . . . . . . .
J. Kelly Vogt. . . . . . . . . . . . . . . . . . . . . .
Larry C. McAdams . . . . . . . . . . . . . . . .
Daniel E. LaMorte . . . . . . . . . . . . . . . .
Dr. Philip M. Lessner . . . . . . . . . . . . . .
Age
Position
54 Chief Executive Officer and Director
49 President and Chief Operating Officer
45 Vice President and Chief Financial Officer
43 Vice President, Sales and Marketing
53 Vice President, Human Resources
59 Vice President and Chief Information Officer
Vice President, Tantalum Technology &
46
Technical Marketing
Guy T. Williams, Jr. . . . . . . . . . . . . . . .
James A. Bruorton III . . . . . . . . . . . . .
John E. Schneider . . . . . . . . . . . . . . . . .
John R. Warner III . . . . . . . . . . . . . . . .
52 Vice President, Engineering and Facilities
56 Vice President, Global Distribution Sales
50 Vice President, Sales—Asia
Vice President, Strategy and
45
Donald R. Aldworth . . . . . . . . . . . . . . .
Joseph S. Porter. . . . . . . . . . . . . . . . . . .
Michael W. Boone . . . . . . . . . . . . . . . .
56 Vice President, Quality
48 Vice President, Sales—Americas
54
Treasurer, Senior Director of Finance and
Communications
Secretary
Frank G. Brandenberg . . . . . . . . . . . . .
Maureen E. Grzelakowski . . . . . . . . . .
E. Erwin Maddrey, II . . . . . . . . . . . . . .
David E. Maguire(3). . . . . . . . . . . . . . .
Joseph D. Swann . . . . . . . . . . . . . . . . . .
Charles E. Volpe . . . . . . . . . . . . . . . . . .
58 Chairman of the Board of Directors
51 Director
64 Director
70 Former Chairman of the Board of Directors
63 Director
67 Director
Years with
Company(1)
0
26
8
22
22
1
9
26
32
21
5
20
25
18
0
0
0
44
0
30
(1)—Includes service with UCC.
(2)—Mr. Loof joined the Company on April 4, 2005.
(3)—Mr. Maguire retired as Chairman of the Company and as a Director on March 31, 2005.
Directors and Executive Officers
Per-Olof Loof, Chief Executive Officer and Director, was named such in April 2005. Mr. Loof was
previously the Managing Partner of QuanStar Group LLC, a management consulting firm. Prior thereto,
he served as Chief Executive Officer of Sensormatic Electronics Corporation and in various management
roles with Andersen Consulting, Digital Equipment Corporation, AT&T and NCR. Mr. Loof serves as a
board member of Global Options Inc., and Devcon International Corporation. He received a “civilekonom
examen” degree in economics and business administration from the Stockholm School of Economics.
James P. McClintock, President and Chief Operating Officer, was named such in November 2003.
Previously, he served as Vice President, Global Manufacturing, and led the start-up of the Company’s
newest facility located in Suzhou, China. He has been employed with UCC/KEMET for 26 years with prior
assignments in engineering, technology, and manufacturing. Mr. McClintock holds a B.S. in Mechanical
Engineering from North Carolina State University.
David E. Gable, Vice President and Chief Financial Officer, joined KEMET in 1998 in the position of
Corporate Controller. He served in that capacity until he was appointed to his current position in
40
September 2003. Prior to joining KEMET, Mr. Gable held numerous financial positions with Michelin
North America. He has also had previous experience in public accounting and is a Certified Public
Accountant (“CPA”). Mr. Gable received an MBA from Clemson University and a BS in Accounting and
Mathematics from Anderson University.
J. Kelly Vogt, Vice President, Sales and Marketing, joined UCC/KEMET in 1984 as a Production
Supervisor in tantalum manufacturing. In 1986, he joined Field Sales as a Sales Representative in
Schaumburg, Illinois. Subsequent assignments included District Sales Manager (Mid-Atlantic), Global
Account Manager (General Motors), and Director of Sales. In 1998, he returned to Greenville, SC, as
Director of Ceramic Marketing, and was later appointed Vice President, Sales Worldwide in 2003. He
assumed his current position in 2004. Mr. Vogt received his B.S. degree from Tusculum College.
Larry C. McAdams, Vice President, Human Resources, joined UCC/KEMET in 1983. He previously
served as the site Human Resources Manager at the Columbus, GA; Shelby, NC; and Fountain Inn, SC,
plants. Since 1991, he has been assigned to the corporate HR staff, where he was appointed a Director in
1999, Senior Director in 2002, and Vice President in 2003. Mr. McAdams received a B.A. in Political
Science from Clemson University and attended the University of South Carolina School of Law.
Daniel E. LaMorte, Vice President and Chief Information Officer, joined KEMET as such in
May 2004. Prior to joining KEMET, Mr. LaMorte held numerous Information Technology positions with
Keycorp, Elf Acquitaine, Fisher Scientific and U.S. Steel Corp. Mr. LaMorte had previously served a Vice
President of Worldwide Marketing and Sales for Chemcut, a manufacturer of capital equipment and
chemicals in the electronics industry. Prior to Keycorp, Mr. LaMorte served as Chief Information Officer
at Submit Order, an E-commerce start-up in Columbus, Ohio. Mr. LaMorte holds a B.S. degree from the
University of Pittsburgh and an MBA from Fairleigh Dickinson University.
Frank G. Brandenberg, Chairman and Director, was named such in October 2003. Before his
retirement in 2003, Mr. Brandenberg was a Corporate Vice President and Sector President of Northrop
Grumman Corporation. Prior to joining Northrop, he previously spent 28 years at Unisys where his last
position was Corporate Vice President and President, Client/Server Systems, and then later served as the
President and Chief Executive Officer of EA Industries, Inc. He received a Bachelor of Science degree in
Industrial Engineering and a Masters of Science degree in Operations Research from Wayne State
University and completed the Program for Management Development at the Harvard Business School.
Maureen E. Grzelakowski, Director, was named such in November 2004. Ms. Grzelakowski is a
technology industry consultant and is a senior advisor to Investor Growth Capital. Ms. Grzelakowski
previously held management positions with AT&T and Motorola, and was most recently the Senior Vice
President responsible for Wireless Activity at Dell Computer Co. Ms. Grzelakowski serves as a board
member of Vallent Corporation. She received a Masters of Science degree in Computer Science, a Masters
of Business Administration degree and a Bachelor of Science degree in computer science/electrical
engineering from Northwestern University.
E. Erwin Maddrey, II, Director, was named such in May 1992. Mr. Maddrey is President of Maddrey
and Associates. Mr. Maddrey was President, Chief Executive Officer, and a Director of Delta Woodside
Industries, a textile manufacturer, from 1984 through June 2000. Prior thereto, Mr. Maddrey served as
President, Chief Operating Officer, and Director of Riegel Textile Corporation. Mr. Maddrey also serves
on the board of directors for Blue Cross/Blue Shield of South Carolina; Delta Woodside Industries, Inc.;
Delta Apparel Company; and Renfro Corp.
David E. Maguire served as Chairman from August 1992 until his retirement in March 2005 and as
Chief Executive Officer and Director from December 1990 until January 2002. Mr. Maguire also served as
President from November 1997 until June 1999 and from December 1990 until October 1996. Previously,
Mr. Maguire served as Chairman, President, and Chief Executive Officer of KEMET Electronics
41
Corporation from April 1987 until December 1990. He also served in a number of capacities with the
KEMET capacitor business of Union Carbide, most recently as Vice President from June 1978 until
April 1987.
Joseph D. Swann, Director, was named such in October 2003. Mr. Swann is the President of Rockwell
Automation Power Systems and a Senior Vice President of Rockwell Automation. Mr. Swann also serves
on the board of directors for Velocys Corporation and Axiom Automotive Technologies. He earned a
Bachelor of Science degree in Ceramic Engineering from Clemson University and a Masters of Business
Administration degree from Case Western Reserve University.
Charles E. Volpe, Director, was named such in December 1990. Prior to his retirement from KEMET
Corporation in March 1996, Mr. Volpe served as President and Chief Operating Officer (October 1995-
March 1996), Executive Vice President and Chief Operating Officer (October 1992-October 1995),
Executive Vice President (December 1990-October 1992), and Executive Vice President and Director of
KEMET Electronics Corporation (April 1987-December 1990). Between August 1966 and April 1987, he
served in a number of capacities with the KEMET capacitor business of Union Carbide, most recently as
General Manager.
Other Key Employees
Dr. Philip M. Lessner, Vice President, Tantalum Technology & Technical Marketing, was named such
in August 2004. He joined KEMET in 1996 and previously served as Director of Technical Marketing
Services and Director of Business Identification since May 2003. Dr. Lessner received a Ph.D. in Chemical
Engineering with a focus in Electrochemical Engineering from the University of California, Berkeley and a
Bachelor’s degree in Chemical Engineering from Cooper Union.
Guy T. Williams, Jr., Vice President, Engineering and Facilities, joined UCC/KEMET in 1979 as
Maintenance Superintendent in the Simpsonville Plant. Subsequent assignments have included five years
as Production Superintendent for the Shelby Plant and, since 1988, various positions in the Equipment
Engineering Department including Process Equipment Manager, Ceramic Equipment Manager, and most
recently, Ceramic Equipment Engineering Director. Mr. Williams holds a B.S. and M.S. in Mechanical
Engineering from Clemson University.
James A. Bruorton III, Vice President, Global Distribution Sales, was named such in 2005. He joined
UCC/KEMET in 1973 in the Human Resources Department. In 1974, he transferred to the marketing
administration and sales organization and has held a number of different management positions. These
included Manager, Marketing Administration Group; South Central District Sales Manager; Senior
Director, Global Distribution Sales; and most recently Vice President, Global Channel Sales.
Mr. Bruorton received his B.S. in Industrial Education from Clemson University.
John E. Schneider, Vice President Sales—Asia, joined UCC/KEMET in 1984 as a Sales
Representative in San Diego, California. In 1985, he was promoted to District Manager and later Area
Manager covering Northern California and the Pacific Northwest. In 1994, Mr. Schneider was transferred
to Singapore to be Director of S.E. Asia Operations to expand KEMET’s sales and warehousing
capabilities. In 1998, he returned to California to become Senior Director, Western Area, which included
the establishment of sales and warehousing operations in Latin America. In 2003, Mr. Schneider was
appointed Vice President, Sales-America, prior to accepting his current assignment in 2004. He received
his B.S. degree in Selling and Sales Management from Bowling Green State University.
John R. Warner III, Vice President, Strategy and Communications, joined KEMET in 2000 as
Director of Investor and Public Relations. Prior to joining KEMET, he was President of Capital Insights,
LLC, a venture capital firm, and previously he was a CPA with KPMG LLP, leaving as Senior Manager.
42
Mr. Warner received a Masters of Accountancy from the University of Georgia and B.S. in Accounting
from Clemson University.
Donald R. Aldworth, Vice President, Quality, was appointed such in February 2004. He joined the
Company in 1985 and was responsible for the production scheduling and quality function for the newly
formed tantalum chip startup operation at the Mauldin Plant. He has worked in a variety of manufacturing
and quality positions, including Director of Operations of the Matamoros Plants from 1999 to 2002. Prior
to joining KEMET, he worked for Westinghouse Electric and Century Motors. Mr. Aldworth holds a
B.S. degree in Industrial Engineering from Georgia Institute of Technology.
Joseph S. Porter, Vice President, Sales—Americas, joined KEMET in 1980 as a Customer
Specifications Analyst in Simpsonville, SC. Since 1983, he has held numerous positions in the sales
organization including account management, global market segment management, and geographical
management covering the Southeastern and most recently the Midwestern U.S. States and Canada.
Mr. Porter holds a B.A. degree in Biology from Erskine College.
Michael W. Boone, Treasurer, Senior Director of Finance and Secretary, was named Senior Director
of Finance in 2004, Secretary in April 2001, and Treasurer in August 2000. Mr. Boone joined KEMET in
June 1987 as Manager of Credit and Cash Management. Mr. Boone holds a B.B.A. in Banking and
Finance from the University of Georgia.
Audit Committee
KEMET has an Audit Committee made up of the following independent, non-management directors:
E. Erwin Maddrey, II (Chairman of Audit Committee), Frank G. Brandenberg, and Maureen E.
Grzelakowski. Mr. Maddrey is KEMET’s “Audit Committee Financial Expert;” however,
Mr. Brandenberg and Ms. Grzelakowski both have prior financial statement experience. All three have
served on audit committees with other companies. The Charter for KEMET’s Audit Committee (the
“Charter”) can be found in the Company’s definitive proxy statement for its annual stockholders’ meeting
to be held on July 20, 2005, which is incorporated herein by reference. The Charter can also be
downloaded, free of charge, from KEMET’s website at http://www.kemet.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company’s definitive
proxy statement for its annual stockholders’ meeting to be held on July 20, 2005. The information specified
in Item 402(k) and (1) of Regulation S-K and set forth in the Company’s definitive proxy statement for its
annual stockholders’ meeting to be held on July 20, 2005, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the Company’s definitive
proxy statement for its annual stockholders’ meeting to be held on July 20, 2005.
43
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by security holders and equity
compensation plans that were not approved by security holders as of March 31, 2005:
(a)
(b)
Number of
securities to
be issued upon
exercise of
outstanding
options, warrants,
and rights
Weighted-average
exercise price
of outstanding
options, warrants,
and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
Plan category
Equity compensation plans approved by
stockholders. . . . . . . . . . . . . . . . . . . . . . .
2,853,915
$ 11.88
4,109,320
Equity compensation plans not
approved by stockholders . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,590,855
4,444,770
$ 13.61
$ 12.50
236,245
4,345,565
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the Company’s definitive
proxy statement for its annual stockholders’ meeting to be held on July 20, 2005.
44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
Information regarding the fees and services of KEMET’s principal accountants is incorporated by
reference to the material under the heading “Appointment of Independent Registered Public Accounting
Firm” in the Company definitive proxy statement for its annual stockholders’ meeting to be held on
July 20, 2005.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The following financial statements are filed as a part of this report:
Managements’ Assessment of Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm On Managements’ Assessment of
Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended March 31, 2005, 2004, and 2003 . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended
March 31, 2005, 2004, and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004, and 2003. . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
49
51
52
53
54
55
56
(a) (2) Financial Statement Schedules
Financial statement schedules are omitted because they are not applicable or because the required
information is included in the financial statements or notes.
(a) (3) List of Exhibits
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed
with the Commission.
3.1
3.2
4.1
10.1
10.2
Restated Certificate of Incorporation of the registrant, as amended to date (incorporated by
reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter
ended December 31, 1992).
By-laws of the registrant, as amended to date (incorporated by reference to Exhibit 3.2 to the
Company’s Quarterly Report on Form 10-Q for the Quarter ended December 31, 1992).
Certificate representing shares of Common Stock of the registrant (incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).
Registration Agreement, dated as of December 21, 1990, by and among the registrant and each
of the investors and executives listed on the schedule of investors and executives attached thereto
(incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement of Form S-1
[Reg. No. 33-48056]).
Form of Amendment No. 1 to Registration Agreement, dated as of April 28, 1993 (incorporated
by reference to Exhibit 10.3.1 to the Company’s Registration Statement on Form S-1 [Reg.
No. 33-61898]).
45
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Services Agreement, dated as of December 21, 1990, as amended as of March 30, 1992, by and
between the registrant and KEMET Electronics Corporation (incorporated by reference to
Exhibit 10.4 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).
1992 Executive Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Company’s
Registration Statement on Form S-1 [Reg. No. 33-48056]).
Form of Grant of Nonqualified Stock Option, dated April 6, 1992, by and between the registrant
and each of the executives listed on the schedule attached thereto (incorporated by reference to
Exhibit 10.12.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).
Form of KEMET Electronics Corporation Distributor Agreement (incorporated by reference to
Exhibit 10.16 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).
Form of KEMET Electronics Corporation Standard Order Acknowledgment, Quotation, and
Volume Purchase Agreement (incorporated by reference to Exhibit 10.17 to the Company’s
Registration Statement on Form S-1 [Reg. No. 33-48056]).
Form of KEMET Electronics Corporation Product Warranty (incorporated by reference to
Exhibit 10.18 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).
Amendment No. 1 to Stock Purchase and Sale Agreement, dated as of December 21, 1990. The
registrant agrees to furnish supplementally to the Commission a copy of any omitted schedule or
exhibit to the Agreement upon Request by the Commission (incorporated by reference to
Exhibit 10.20.1 to the Company’s Registration Statement on Form S-1 [Reg. No. 33-48056]).
Form of Deferred Compensation Plan for Key Managers effective as of January 1, 1995
(incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for
the year ended March 31, 1995).
Form of Collateral Assignment and Split Dollar Insurance (incorporated by reference to
Exhibit 10.31 to the Company’s Annual Report of Form 10-K for the year ended March 31,
1995).
1995 Executive Stock Option Plan by and between the registrant and each of the executives listed
on the schedule attached hereto (incorporated by reference to Exhibit 10.33 to the Company’s
Annual Report on Form 10-K for the year ended March 31, 1996).
Executive Bonus Plan by and between the registrant and each of the executives listed on the
schedule attached hereto (incorporated by reference to Exhibit 10.34 to the Company’s Annual
Report on Form 10-K for the year ended March 31, 1996).
Amendment No. 2 to Services Agreement by and between the registrant and KEMET
Electronics Corporation (incorporated by reference to Exhibit 10.4.1 to the Company’s Annual
Report on Form 10-K for the year ended March 31, 1996).
Amendment No. 3 to Services Agreement dated as of January 1, 1996, by and between the
registrant and KEMET Electronics Corporation (incorporated by reference to Exhibit 10.4.2 to
the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).
Amendment No. 4 to Services Agreement dated as of March 1, 1996, by and between the
registrant and KEMET Electronics Corporation (incorporated by reference to Exhibit 10.4.3 to
the Company’s Annual Report on Form 10-K for the year ended March 31, 1996).
Amendment No. 1 to KEMET Corporation 1992 Key Employee Stock Option Plan effective
October 23, 2000 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended December 31, 2000).
46
10.18
2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 4.3 to the
Company’s Registration Statement on Form S-8 [Reg. No. 333-123308]).
10.19 KEMET’s Code of Business Integrity and Ethics
21.1 Subsidiaries of KEMET Corporation
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification of the Chief Executive Officer Pursuant to Section 302
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
32.1 Certification of the Chief Executive Officer Pursuant to Section 906
32.2 Certification of the Chief Financial Officer Pursuant to Section 906
47
Managements’ Assessment of Internal Control Over Financial Reporting
KEMET Corporation and Subsidiaries
MANAGEMENT RESPONSIBILITY FOR FINANCIAL INFORMATION
Responsibility for the integrity and objectivity of the financial information presented in this Annual
Report rests with KEMET’s management. The accompanying financial statements have been prepared in
accordance with U.S. generally accepted accounting principles, applying certain estimates and judgments
as required.
KEMET maintains an effective internal control structure. It consists, in part, of organizational
arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive
systems and control procedures. An important element of the control environment is an ongoing internal
audit program. Our system contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
To assure the effective administration of internal controls, we carefully select and train our
employees, develop and disseminate written policies and procedures, provide appropriate communication
channels, and foster an environment conducive to the effective functioning of controls. We believe that it is
essential for the Company to conduct its business affairs in accordance with the highest ethical standards.
KPMG LLP, an independent registered public accounting firm, is retained to audit KEMET’s
consolidated financial statements and management’s assessment of the effectiveness of the Company’s
internal control over financial reporting. Its accompanying report is based on audits conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
The Audit Committee of the Board of Directors is composed solely of independent, non-management
directors, and is responsible for recommending to the Board the independent registered public accounting
firm to be retained for the coming year, subject to stockholder ratification. The Audit Committee meets
periodically and privately with the independent registered public accounting firm, with the Company’s
internal auditors, as well as with KEMET management, to review accounting, auditing, internal control
structure and financial reporting matters.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting of the Company.
Management conducted an evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded
that the Company’s internal control over financial reporting was effective as of March 31, 2005.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting
as of March 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm,
as stated in their report which is included herein.
/s/ PER-OLOF LOOF
Per-Olof Loof
Chief Executive Officer
/s/ DAVID E. GABLE
David E. Gable
Chief Financial and Accounting Officer
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
KEMET Corporation:
We have audited managements’ assessment, included in the accompanying Managements’ Report on
Internal Control Over Financial Reporting, that KEMET Corporation maintained effective internal
control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). KEMET Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on managements’ assessment and an
opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements’ assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of the financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, managements’ assessment that KEMET Corporation maintained effective internal
control over financial reporting as of March 31, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, KEMET Corporation
maintained, in all material respects, effective internal control over financial reporting as of March 31, 2005,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
49
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Consolidated Balance Sheets of KEMET Corporation and subsidiaries as of
March 31, 2005 and 2004, and the related consolidated statement of operations, stockholders’ equity and
comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2005
and our report dated June 14, 2005 expressed an unqualified opinion on those consolidated financial
statements.
Greenville, South Carolina
June 14, 2005
/s/ KPMG LLP
KPMG LLP
50
Report of Independent Registered Public Accounting Firm
The Board of Directors
KEMET Corporation:
We have audited the accompanying Consolidated Balance Sheets of KEMET Corporation and
subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period
ended March 31, 2005. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of KEMET Corporation and subsidiaries as of March 31, 2005 and 2004,
and the results of their operations and their cash flows for each of the years in the three-year period ended
March 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of KEMET Corporation’s internal control over financial reporting
as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by
the Committee on Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
June 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective
operation of, internal control over financial reporting.
Greenville, South Carolina
June 14, 2005
/s/ KPMG LLP
KPMG LLP
51
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Dollars in thousands except per share data
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories:
Raw materials and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in U.S. government marketable securities . . . . . . . . . . . . . . .
Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits and other non-current obligations. . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, par value $0.01, authorized 300,000,000 shares issued
88,023,605 and 87,953,720 shares at March 31, 2005 and 2004,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income/(loss) . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (1,460,455 and 1,485,455 shares at March 31,
March 31, 2005
March 31, 2004
$ 26,898
34,992
59,228
47,534
41,862
44,539
133,935
9,571
5,945
270,569
279,626
2,326
157,576
682
30,471
13,512
3,335
$ 758,097
$ 38,943
34,617
12,430
85,990
100,000
48,951
7,953
242,894
$ 183,528
3,172
58,541
59,751
41,250
28,015
129,016
6,979
29,046
410,282
421,835
2,326
84,584
3,610
30,471
14,617
3,321
$ 971,046
$ 38,268
42,420
15,863
96,551
100,000
61,623
28,394
286,568
880
317,728
220,846
2,669
879
317,497
394,940
(1,457)
2005 and 2004, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,920 )
515,203
(27,381)
684,478
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 758,097
$ 971,046
See accompanying notes to the consolidated financial statements.
52
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Dollars in thousands except per share data
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fiscal years ended March 31,
2004
433,882
2005
425,338
$
$
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain)/loss on long-term supply contract . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plan settlement charges . . . . . . . . . . . . . . . . . . . . . .
Restructuring and impairment charges . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) and expense:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense/(income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share:
402,974
(11,767)
51,734
26,639
618
129,982
600,180
(174,842)
(6,295)
6,511
(2,849)
(172,209)
1,885
413,980
12,355
51,246
24,449
50,398
40,468
592,896
(159,014 )
(3,847 )
6,472
(3,311 )
(158,328 )
(46,353 )
$ (174,094) $ (111,975 ) $
2003
447,332
392,143
40,833
54,390
25,268
—
31,700
544,334
(97,002)
(3,818)
6,097
(11,387)
(87,894)
(31,906)
(55,988)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(2.01) $
(2.01) $
(1.30 ) $
(1.30 ) $
(0.65)
(0.65)
Weighted-average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,518,923
86,518,923
86,412,281
86,412,281
86,167,563
86,167,563
See accompanying notes to the consolidated financial statements.
53
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
Dollars in thousands except share amounts
Balance at March 31, 2002 . . . . . . .
Comprehensive income (loss):
Net loss. . . . . . . . . . . . . . . . . . . .
Unrealized loss on foreign
exchange contracts, net $3,547
tax . . . . . . . . . . . . . . . . . . . . .
Unrealized securities loss, net $283
tax . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation gain
Total comprehensive loss . . . . . . . .
Exercise of stock options. . . . . . . . .
Tax benefit on exercise of stock
options . . . . . . . . . . . . . . . . . . . .
Purchases of stock by employee
savings plan. . . . . . . . . . . . . . . . .
Put options proceeds. . . . . . . . . . . .
Put options settlement . . . . . . . . . .
Balance at March 31, 2003 . . . . . . .
Comprehensive income (loss):
Net loss. . . . . . . . . . . . . . . . . . . .
Unrealized gain on foreign
exchange contracts, net $875 tax
Unrealized securities gain, net
$709 tax . . . . . . . . . . . . . . . . .
Foreign currency translation loss.
Total comprehensive loss . . . . . . . .
Exercise of stock options. . . . . . . . .
Tax benefit on exercise of stock
options . . . . . . . . . . . . . . . . . . . .
Purchases of stock by employee
savings plan. . . . . . . . . . . . . . . . .
Put options settlement . . . . . . . . . .
Balance at March 31, 2004 . . . . . . .
Comprehensive income (loss):
Net loss. . . . . . . . . . . . . . . . . . . .
Unrealized gain on foreign
exchange contracts, net $120 tax
Unrealized securities gain, net $0
tax . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation gain
Total comprehensive loss . . . . . . . .
Exercise of stock options. . . . . . . . .
Tax benefit on exercise of stock
options . . . . . . . . . . . . . . . . . . . .
Purchases of stock by employee
savings plan. . . . . . . . . . . . . . . . .
Balance at March 31, 2005 . . . . . . .
Common Stock
Outstanding
Shares
85,923,365
Amount
$ 878
Additional
Paid-In
Capital
$ 321,734
Retained
Earnings
$ 562,903
Accumulated
Other
Comprehensive
Income (Loss)
$ 3,808
Total
Stock
holders’
Equity
$ 855,045
Treasury
Stock
$ (34,278 )
—
—
—
(55,988)
—
—
(55,988)
—
—
—
228,430
—
87,671
—
—
86,239,466
—
—
—
—
145,810
—
82,989
—
86,468,265
—
—
—
—
25,000
—
—
—
—
—
—
1
—
—
879
—
—
—
—
—
—
—
—
879
—
—
—
—
—
—
—
—
—
(1,486)
728
1,070
225
(3,726)
318,545
—
—
—
—
(1,876)
212
841
(225)
317,497
—
—
—
—
(314)
(212)
—
—
—
—
—
—
—
—
506,915
(111,975)
—
—
—
—
—
—
—
394,940
(174,094)
—
—
—
—
—
(6,451)
(620)
267
—
—
—
—
—
(2,996)
—
1,047
538
(46)
—
—
—
—
(1,457)
—
3,685
361
80
—
—
—
—
—
4,210
(6,451)
(620)
267
(62,792)
2,724
—
728
—
—
—
(30,068 )
—
—
—
—
2,687
1,071
225
(3,726)
793,275
(111,975)
1,047
538
(46)
(110,436)
811
—
212
—
—
(27,381 )
841
(225)
684,478
—
—
—
—
461
—
(174,094)
3,685
361
80
(169,968)
147
(212)
69,885
86,563,150
1
$ 880
757
$ 317,728
—
$ 220,846
—
$ 2,669
—
$ (26,920 )
758
$ 515,203
See accompanying notes to the consolidated financial statements.
54
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Dollars in thousands
Fiscal Years ended March 31,
2004
2003
2005
Sources (uses) of cash and cash equivalents
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (174,094) $ (111,975 )
Adjustments to reconcile net loss to net cash provided by
$ (55,988)
(used in) operating activities:
Depreciation, amortization and impairment charges. . . . . . . . . . .
Loss/(gain) on long-term supply contract . . . . . . . . . . . . . . . . . . . .
Other non-current obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain/(loss) on investments and interest rate swaps . . . . . . . . . . . .
Loss/(gain) on sale and disposal of equipment . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other non-current assets and liabilities . . . . . . . . . . . .
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . .
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit/(expense) of stock options exercised . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . .
Investing activities:
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity of short-term investments . . . . . . . . . . . . . .
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product line acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from termination of interest rate swaps. . . . . . . . . . . . . . . .
Investment in U.S. government marketable securities. . . . . . . . . . . .
Proceeds from U.S. government marketable securities called . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . .
171,087
(11,767)
(612)
3,135
10,307
2,552
78
(687)
(2,963)
(310)
711
(9,977)
(212)
(12,752)
(20,049)
13,177
(39,581)
—
—
660
(104,071)
5,000
81
(144,783)
89,403
12,355
4,006
(360 )
(1,451 )
(42,863 )
11,107
(11,885 )
55,058
(859 )
(10,903 )
46,607
212
38,452
(32,402 )
29,230
(25,835 )
(4,850 )
(2,130 )
1,406
(109,983 )
25,000
(598 )
(120,162 )
Financing activities:
758
Proceeds from sale of common stock to employee savings plan . . . .
147
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . .
—
Put option settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Proceeds from put options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
905
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . .
(156,630)
Net increase (decrease) in cash and cash equivalents . . . . . .
Cash and cash equivalents at beginning of fiscal year. . . . . . . . . . . . . . .
183,528
Cash and cash equivalents at end of fiscal year . . . . . . . . . . . . . . . . . . . . $ 26,898
842
811
—
—
1,653
(80,057 )
263,585
$ 183,528
75,391
40,833
8,691
(6,317)
1,162
30,648
(55,333)
(23,317)
75,318
4,670
(23,886)
(28,890)
728
43,710
(14,959)
14,959
(22,197)
(113)
—
6,317
—
—
952
(15,041)
1,071
2,724
(3,726)
225
294
28,963
234,622
$ 263,585
Supplemental Cash Flow Statement Information:
Interest paid, including capitalized interest of $136, $132, and $246
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes (received) paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,660
2,801
$
6,660
$ (45,216 )
$ 6,660
$ (32,785)
See accompanying notes to the consolidated financial statements.
55
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Nature of Business and Organization
KEMET Corporation which together with its subsidiaries is referred to herein as “KEMET” or the
“Company” is a leading manufacturer of tantalum capacitors, multilayer ceramic capacitors, and solid
aluminum capacitors. The Company is headquartered in Simpsonville, South Carolina, and has
manufacturing plants located in South Carolina, North Carolina, Mexico and China. Additionally, the
Company has wholly-owned foreign subsidiaries which primarily provide sales support for KEMET’s
products in foreign markets.
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the accounts of its
wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents, of $17.5 million and $129.1 million at March 31, 2005 and 2004, respectively, consist
of direct obligations of the U.S. government, U.S. government agencies, and investment-grade commercial
paper with an initial term of less than three months. For purposes of the Consolidated Statements of Cash
Flows, the Company considers all highly liquid debt instruments with original maturities of three months
or less to be cash equivalents.
Investments
Investments consist of debt securities as well as equity securities of public and privately-held
companies. The debt securities, which consist of U.S. government marketable securities, are classified as
held-to-maturity securities, mature in excess of three months, and are carried at amortized cost. The effect
of amortizing these securities is recorded in current income/(loss) as interest income.
The Company’s equity investments in public companies are classified as available-for-sale securities
and are carried at fair value with unrealized gains and losses net of tax, reported as a separate component
of other comprehensive income (loss) until realized. The available-for-sale securities are intended to be
held for an indefinite period but may be sold in response to unexpected future events. The Company has
an equity investment with less than 20% ownership interest in a privately-held company. The Company
does not have the ability to exercise significant influence over this company, and the investment is
accounted for under the cost method. All of the aforementioned investments are included in “Short-term
investments,” “Investments in U.S. government marketable securities,” or “Investments in affiliates” on
the Consolidated Balance Sheets.
A decline in market value of any available-for-sale or held-to-maturity security below cost that is
deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The
impairment is charged to income/(loss) and a new cost basis for the security is established. To determine
whether an impairment is other-than-temporary, the Company considers whether it has the ability and
intent to hold the investment until a market price recovery and considers whether evidence indicating the
cost of the investment is recoverable outweighs evidence to the contrary.
56
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to reduce exposures to volatility of
foreign currencies and commodities impacting the cost of its products and to convert its fixed rate debt to a
floating rate basis.
The Company accounts for derivatives and hedging activities in accordance with Statement of
Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and
Hedging Activities,” as amended. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other contracts and hedging
activities. It requires the recognition of all derivative instruments as either assets or liabilities in the
Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting
treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated
as a hedge and, if so, the type of hedge. For derivative financial instruments not designated as a hedge,
changes in fair value are recognized in income/ (loss). For derivatives designated as cash flow hedges, to
the extent effective, changes in fair value are recognized in Accumulated other comprehensive
income/(loss) until the hedged item is recognized in income/(loss). Ineffectiveness is recognized
immediately in income/(loss). For derivatives designated as fair value hedges, changes in fair value are
recognized in income/(loss).
Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is determined by the
“first-in, first-out” (FIFO) method. The Company has consigned inventory at certain customer locations
totaling $3.5 million and $2.6 million at March 31, 2005 and 2004, respectively.
Commencing in fiscal year 2003, KEMET included depreciation and amortization as a component of its
cost of inventories, as required by U.S. generally accepted accounting principles. 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
inventories and expensing them through cost of goods sold over time. Due to the significant decrease in
inventories during the fiscal year ended March 31, 2004, cost in cost of goods sold was reduced by $9.3 million
compared to the amount the Company would have realized during the fiscal year related to depreciation not
previously capitalized had the Company previously capitalized depreciation and amortization. The Company
has considered the effect of this change in policy on fiscal year 2004 and prior consolidated financial
statements and confirmed that had the Company adopted this policy previously, it would not have resulted in
any material changes to those consolidated financial statements.
Property and Equipment
Property and equipment are carried at cost. Depreciation is calculated principally using the straight-
line method over the estimated useful lives of the respective assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the
terms of the respective leases. Maintenance costs are expensed; expenditures for renewals and
improvements are generally capitalized. Upon sale or retirement of property and equipment, the related
57
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
cost and accumulated depreciation are removed and any gain or loss is recognized. In October 2001, the
FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (SFAS No. 144). SFAS No. 144 requires entities to test long-lived assets,
excluding goodwill and other intangible assets that are not amortized, for recoverability whenever events or
changes in circumstances indicate that the entity may not be able to recover the carrying value of such
assets. An impairment loss would be recognized for an asset that is assessed as being impaired.
SFAS No. 144 was adopted by the Company effective April 1, 2002. Reviews are regularly performed to
determine whether facts and circumstances exist which indicate that the carrying amount of assets may not
be recoverable. The Company assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets over their remaining lives
against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount
over the fair value of those assets. The Company has to make certain assumptions as to the future cash
flows to be generated by the underlying assets. Those items include the amount of volume increases,
average selling prices decreases, anticipated cost reductions, and the estimated remaining useful life of the
equipment. Fair market value is based on the discounted cash flows that the equipment will generate over
the remaining useful lives. The Company recorded $108.7 million, $16.3 million, and $4.6 million in
impairment losses for the fiscal years ended March 31, 2005, 2004, and 2003, respectively. See note 13 for a
further discussion on these impairment losses.
Goodwill and Intangible Assets
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” on April 1, 2002.
Under SFAS No. 142, goodwill, which represents the excess of purchase price over fair value of net assets
acquired, and intangible assets with indefinite useful lives are no longer amortized but will be tested for
impairment at least on an annual basis in accordance with the provisions of SFAS No. 142. See Note 2,
“Goodwill and Intangible Assets” for a discussion of the adoption of SFAS 142 and the annual goodwill
and other identifiable intangible assets impairment tests.
The Company’s goodwill is tested for impairment at least on an annual basis. The impairment test
involves a comparison of the fair value of its reporting unit as defined under SFAS No. 142, with carrying
amounts. If the reporting unit’s aggregated 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 being measured exceeds its fair value, up to the
total amount of its assets. The Company determined fair value based on a market approach which
incorporates quoted market prices of the Company’s common stock and the premiums offered to obtain
controlling interest for companies in the electronics industry. KEMET performs its impairment tests
during the first quarter of each fiscal year and when otherwise warranted. In addition, KEMET also
performs its annual impairment test on the goodwill related to the acquired The Forest Electric Company
(“FELCO”) each year in the fiscal third quarter. No impairment was noted during that test.
The Company also tests impairment of other identifiable intangible assets including indefinite-lived
trademarks, as well as patents and technology that have definite lives and will continue to be amortized.
For purposes of determining the fair value of its trademarks, the Company uses a discounted cash flow
model that considers the costs of royalties in the absence of trademarks owned by the Company.
58
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
Other Assets
Other assets consist principally of the cash surrender value of life insurance policies and deferred
compensation assets.
Deferred Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. 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 effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Stock-based Compensation
The Company applies the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
interpretations in accounting for stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded the exercise price. The
Company has elected the “disclosure only” provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” which provide pro forma disclosure of earnings as if stock compensation were recognized
on the fair value basis.
Had compensation costs for the Company’s three stock option plans been determined based on the
fair value at the grant date for awards in fiscal years 2005, 2004, and 2003, consistent with the provisions of
Statement No. 123, the Company’s net loss and loss per share would have been increased to the pro forma
amounts indicated below (dollars in thousands except per share data):
Fiscal Years ended March 31,
2004
2005
2003
Net loss as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (174,094) $ (111,975 ) $ (55,988)
Less stock-based compensation expense determined under fair-
value-based methods, net of related tax effects . . . . . . . . . . . . . .
(3,601)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (179,300) $ (115,563 ) $ (59,589)
(3,588 )
(5,206)
Net loss per share:
Basic
Diluted
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2.01) $
(2.07) $
(2.01) $
(2.07) $
(1.30 ) $
(1.34 ) $
(1.30 ) $
(1.34 ) $
(0.65)
(0.69)
(0.65)
(0.69)
The pro forma amounts indicated above recognize compensation expense on a straight-line basis over
the vesting period of the grant. The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average assumptions: expected life of
5 years for 2005, 2004, and 2003; a risk-free interest rate of 2.2% for fiscal year 2005, 1.0% for fiscal year
59
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
2004, and 2.8% for fiscal year 2003; expected volatility of 35.3% for fiscal year 2005, 54.1% for fiscal year
2004, and 54.8% for fiscal year 2003; and a dividend yield of 0.0% for all three fiscal years.
Concentrations of Credit and Other Risks
The Company sells to customers located throughout the United States and the world. Credit
evaluations of its customers’ financial conditions are performed periodically, and the Company generally
does not require collateral from its customers. Two customers each accounted for more than 10% of net
sales in the fiscal years ended March 31, 2005, 2004, and 2003. There were no customers’ accounts
receivable balances exceeding 10% of the total at March 31, 2005 and 2004, respectively.
The Company, as well as the industry, utilizes electronics distributors for a large percentage of its
sales. Electronics distributors are an effective means to distribute the products to the end-users. For the
fiscal years ending March 31, 2005, 2004, and 2003, net sales to electronics distributors accounted for 52%,
51%, and 43%, respectively, of the Company’s total net sales.
The Company has the majority of its manufacturing being performed in Mexico where 77% of the
Company’s employees work. Of this 77%, approximately 68% of these employees are unionized as
required by Mexican law.
Foreign Operations
Financial statements of the Company’s Mexican operations are prepared using the U.S. dollar as its
functional currency. Translation of the Mexican operations, as well as gains and losses from non-U.S.
dollar foreign currency transactions, such as those resulting from the settlement of foreign receivables or
payables, are reported in the Consolidated Statements of Operations.
Translation of other foreign operations to U.S. dollars occurs using the current exchange rate for
balance sheet accounts and an average exchange rate for results of operations. Such translation gains or
losses are recognized as a component of equity in Accumulated other comprehensive income/(loss).
Comprehensive Income/(Loss)
Comprehensive income/(loss) consists of net income/(losses), foreign currency translation
gains/(losses), unrealized gains/(losses) from available-for-sale securities, and unrealized gains/(losses)
from cash flow hedges and is presented in the Consolidated Statements of Stockholders’ Equity and
Comprehensive Loss.
Accumulated other comprehensive income/(loss) contained in the stockholders’ equity section of the
Consolidated Balance Sheets consisted of the following:
Currency forward contract gains/(losses), net . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized securities losses, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
$ 3,018
128
(477 )
2004
$ (667)
48
(838)
Total accumulated other comprehensive income/(loss). . . . . . . . . . . . . . . . .
$ 2,669
$ (1,457)
60
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
The currency forward contract losses were net of income tax (benefit)/expense of $112 and $(8) at
March 31, 2005 and 2004, respectively. There was no income tax impact on unrealized securities losses at
March 31, 2005 and 2004, respectively.
Revenue Recognition
Revenue is recognized from sales when a product is shipped and title has transferred. The Company
recognizes revenue only when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the
buyer is fixed or determinable, and (4) collectibility is reasonably assured.
A portion of sales is related to products designed to meet customer specific requirements. These
products typically have stricter tolerances making them useful to the specific customer requesting the
product and to customers with similar or less stringent requirements. Products with customer specific
requirements are tested and approved by the customer before the Company mass produces and ships the
product. The Company recognizes revenue at shipment as the sales terms for products produced with
customer specific requirements do not contain a final customer acceptance provision or other provisions
that are unique and would otherwise allow the customer different acceptance rights.
A portion of sales is made to distributors under agreements allowing certain rights of return and price
protection on unsold merchandise held by distributors. The Company’s distributor policy includes
inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.
The price protection policy protects the value of the distributors’ inventory in the event the Company
reduces its published selling price to distributors. This program allows the distributor to debit the
Company for the difference between KEMET’s list price and the lower authorized price for specific parts.
The Company establishes price protection reserves on specific parts residing in distributors’ inventories in
the period that the price protection is formally authorized by management. The distributors also have the
right to return to KEMET a certain portion of the purchased inventory, which will not exceed 5% of the
overall purchases. KEMET estimates future returns based on historical patterns of the distributors and
records an allowance on the Consolidated Balance Sheets.
The SFSD program provides a mechanism for the distributor to meet a competitive price after
obtaining authorization from the local Company sales office. This program allows the distributor to ship its
higher-priced inventory and debit the Company for the difference between KEMET’s list price and the
lower authorized price for that specific transaction. The Company establishes reserves for its SFSD
program based primarily on the actual inventory levels of certain distributor customers. The actual
inventory levels at these distributors comprise 91% to 95% of the total global distributor inventory. The
remaining 5% to 9% is estimated based on actual distributor customer inventory and current sales trends.
Management analyzes historical SFSD activity to determine the SFSD exposure on the global distributor
inventory at the balance sheet date. Should the distributors increase inventory levels, the estimation of the
inventory at the distributors for the remaining 5% to 9% could be estimated at an incorrect amount.
However, the Company believes that the difference between the estimate and the ultimate actual amount
would be immaterial.
61
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
The establishment of these allowances is recognized as a component of the line item Net sales on the
Consolidated Statements of Operations, while the associated reserves are included in the line item
Accounts receivable on the Company’s Consolidated Balance Sheets.
The following table shows the reserve and allowance balances as a component of Accounts receivable
at March 31, 2005 and 2004:
Ship from stock and debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for SFSD, customer returns, price protections, and other . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total account receivable allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
$ 11,098
2,338
604
144
14,184
250
$ 14,434
2004
$ 11,389
5,340
162
243
17,134
663
$ 17,797
The Company provides a limited warranty to its customers that the products meet certain
specifications. The warranty period is generally limited to one year, and the Company’s liability under the
warranty is generally limited to a replacement of the product or refund of the purchase price of the
product. Warranty costs as a percentage of Net sales were less than 1% for March 31, 2005, 2004, and
2003, respectively. The Company recognizes warranty costs when identified.
Shipping and Handling Costs
The Company’s shipping and handling costs are reflected in Cost of goods sold in the Consolidated
Statements of Operations. Shipping and handling costs were $9.3 million, $8.4 million, and $6.9 million in
the fiscal years ended March 31, 2005, 2004, and 2003, respectively.
Exit Costs
The Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities” on January 1, 2003. SFAS No. 146 addresses financial accounting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 (Issue No. 94-3), “Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability, as defined in FASB Concepts Statement
No. 6, “Elements of Financial Statements”, is incurred. Under Issue No. 94-3, a liability for an exit cost was
recognized at the date of a commitment to an exit plan. SFAS No. 146 was effective for exit or disposal
activities that were initiated after December 31, 2002.
Income/(Loss) per Share
The Company calculates income/(loss) per share in accordance with SFAS No. 128, “Earnings per
Share.” Basic income/(loss) per share is computed using the weighted-average number of shares
outstanding. Diluted income/(loss) per share is computed using the weighted-average number of shares
62
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
outstanding adjusted for the incremental shares attributed to outstanding options to purchase common
stock and for put options issued by the Company, if such effects are dilutive.
Environmental Cost
The Company recognizes liabilities for environmental remediation when it is probable that a liability has
been incurred and can be reasonably estimated. The Company determines its liability on a site-by-site basis,
and it is not discounted or reduced for possible recoveries from insurance carriers. Expenditures that extend
the life of the related property or mitigate or prevent future environmental contamination are capitalized.
Business Segments
The Company has determined, using the criteria in SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” that it operates in a single reporting segment. The Company’s
products may be categorized generally based upon primary raw material (tantalum, palladium, or
aluminum) or method of attachment (surface-mount or leaded), and are sold to original equipment
manufacturers, electronics manufacturing services providers, and electronics distributors. Geographic
information is included in note 9. The following chart discloses our net sales by method of attachment for
the fiscal years ending March 31, 2005, 2004, and 2003:
Fiscal Years ended March 31,
2004
2005
2003
Net sales by method of attachment:
Surface-mount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leaded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 342,040
80,400
2,898
$ 425,338
$ 350,042
82,909
931
$ 433,882
$ 362,259
85,073
—
$ 447,332
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make a number of estimates and assumptions. 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. Significant items subject to such estimates
and assumptions include the carrying amount of property and equipment, intangibles and goodwill;
valuation allowances for accounts receivables, price protection and customers’ returns, and deferred
income taxes; environmental liabilities; valuation of derivative instruments and assets and obligations
related to employee benefits. Actual results could differ from these estimates and assumptions.
Reclassification
Certain prior-year amounts have been reclassified to conform to fiscal year 2005 presentation. These
reclassifications had no impact on previously reported net losses or stockholders’ equity.
63
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Organization and Significant Accounting Policies (Continued)
Other
All dollar amounts are presented in thousands unless otherwise noted.
Note 2: Goodwill and Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business
Combinations” (SFAS No. 141), and Statement of Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets” (SFAS No. 142). Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001. SFAS 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. SFAS 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. SFAS 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 SFAS No. 142, the Company completed impairment tests of its
goodwill and other identifiable intangible assets including indefinite-lived trademarks, as well as patents
and technology that have definite lives and will continue to be amortized. No impairment of goodwill or
intangible assets was noted.
For purposes of determining the fair value of its trademarks, the Company utilizes a discounted cash
flow model which considers the costs of royalties in the absence of trademarks owned by the Company.
Based upon the Company’s analysis of legal, regulatory, contractual, competitive and economic factors, the
Company deemed that trademarks, which consist of the KEMET trade name and logo, have an indefinite
useful life because they are expected to contribute to cash flows indefinitely.
The Company’s goodwill is tested for impairment at least on an annual basis. The impairment test
involves a comparison of the fair value of its reporting unit as defined under SFAS No. 142, with carrying
amounts. If the reporting unit’s aggregated 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 being measured exceeds its fair value, up to the
total amount of its assets. The Company determined fair value based on a market approach which
incorporates quoted market prices of the Company’s common stock and the premiums offered to obtain
controlling interest for companies in the electronics industry.
KEMET performs its impairment test during the first quarter of each fiscal year and when otherwise
warranted. KEMET performed this impairment test in the quarters’ ended June 30, 2004 and 2003 and
concluded no goodwill impairment existed. Due to the asset impairment that the Company recorded in
March 2005, the Company also performed a goodwill impairment test as of March 31, 2005. No
impairment existed.
On June 30, 2003, the Company acquired certain assets from Wilson Greatbatch Technologies, Inc
(“GTI”). The $2.3 million cash purchase included the non-medical, high-temperature ceramic capacitor
and EMI filter product lines of GTI’s Greatbatch-Sierra, Inc. subsidiary. The product lines were acquired
as part of the Company’s strategic objective to broaden its high-performance capacitor solutions to support
64
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Goodwill and Intangible Assets (Continued)
customers’ increasing technical requirements. No goodwill was recorded as part of the transaction.
Approximately $2.1 million of patents and technology were recorded as part of the transaction.
On December 17, 2003, the Company announced it had acquired The Forest Electric Company
(“FELCO”) of Melrose Park, Illinois. Approximately $2.1 million of goodwill and $0.5 million of patents
and technology, which have an amortization period of seven years, were recorded as part of the
transaction. The Company performs the test of goodwill on an annual basis in the third fiscal quarter or
from time to time when necessary. The Company estimates the discounted cash flows that this business will
generate over a specified time period and compares that amount to the carrying amount of the goodwill
associated with FELCO. At March 31, 2005, there was no impairment on the FELCO goodwill.
March 31, 2005
March 31, 2004
Carrying Accumulated Carrying
Amortization Amount
Amount
Accumulated
Amortization
Unamortized Intangibles:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized intangibles . . . . . . . . . . . . . . . . . . . . . . .
$ 30,471
7,181
37,652
Amortized Intangibles:
Patents and technology—5-25 years . . . . . . . . . . . . . . .
Other—8-10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized intangibles . . . . . . . . . . . . . . . . . . . . . . . . .
14,655
914
15,569
8,549
689
9,238
$ 30,471
7,181
37,652
14,655
914
15,569
$ 53,221
$ 9,238
$ 53,221
7,549
584
8,133
$ 8,133
Amortization Expense
Patents and technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years ended March 31,
2003
$ 800
157
$ 957
2005
$ 1,001
104
$ 1,105
2004
$ 1,138
108
$ 1,246
The expected amortization expense for the fiscal years ending March 31, 2006, 2007, 2008, 2009, and
2010 is $1,005, $974, $943, $588, and $475 respectively.
Note 3: Debt
In May 1998, the Company sold $100,000 of its Senior Notes pursuant to the terms of a Note Purchase
Agreement dated May 1, 1998, between the Company and eleven purchasers of the Senior Notes. The
Senior Notes have a final maturity date of May 4, 2010, and begin amortizing on May 4, 2006. The Senior
Notes bear interest at a fixed rate of 6.66%, with interest payable semiannually beginning November 4,
1998. The aggregate maturities of the debt subsequent to March 31, 2005, follow: 2007, $20,000; 2008,
$20,000; 2009, $20,000; 2010, $20,000; and 2011, $20,000. The Company had interest payable, included in
Accrued expenses, on its Consolidated Balance Sheets of $2.7 million and $2.7 million at March 31, 2005
and 2004, respectively.
The Company is subject to restrictive covenants under its Note Purchase Agreement which, among others,
restrict its ability to make loans or advances or to make investments and require it to meet financial tests related
65
KEMET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 3: Debt (Continued)
principally to funded debt and net worth. At March 31, 2005, the Company was in compliance with such
covenants. Borrowings are secured by guarantees of certain of the Company’s wholly-owned subsidiaries.
In April 2002, the Company entered into an Offering Basis Loan Agreement (the “Loan Agreement”)
with a bank. The Loan Agreement is an uncommitted credit facility which allows the Company to request
borrowings in an aggregate principal amount not to exceed $50.0 million for a term not to exceed 180 days
for any single borrowing. The interest rate charged on any borrowing under the Loan Agreement is
mutually agreed upon by the Bank and the Company at the time of such borrowing. As of March 31, 2005
and 2004, the Company had no borrowings under this arrangement.
Note 4: Other Non-Current Obligations
Non-current obligations are summarized as follows:
Deferred compensation (note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued postretirement medical plan liability (note 6) . . . . . . . . . . . . . . . . .
Loss on inventory supply agreement (note 10) . . . . . . . . . . . . . . . . . . . . . . . .
Environmental liabilities and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
$ 1,374
43,358
2,829
1,390
2004
$ 1,489
43,036
15,575
1,523
Other non-current obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,951
$ 61,623
66
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Employee Pension and Savings Plans
Until March 1, 2004, the Company had a non-contributory pension plan (“Plan”) which covered
substantially all employees in the United States who met age and service requirements. The Plan provided
defined benefits that were based on years of credited service, average compensation (as defined), and the
primary social security benefit. The effective date of the Plan was April 1, 1987. Effective March 1, 2004,
the Company terminated the Plan through a combination of lump-sum payments to participants and the
purchase of non-participating annuity contracts. As a result of the termination and settlement, the
Company has no Plan-related assets or liabilities at March 31, 2005. The measurement date used to
determine Plan benefits was March 31.
The cost of pension benefits under the Plan was determined by management using the “projected unit
credit” actuarial cost method.
Components of net periodic pension cost include the following:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of:
Transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special termination benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
Fiscal Years ended March 31,
2003
$ 3,681
8,877
(7,448)
795
7,927
(8,205)
2005
$ —
—
—
$
—
—
—
—
618
—
—
(5)
1,359
187
50,398
—
—
(23)
1,054
1,668
—
3,638
Total net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 618
$ 52,456
$ 11,447
The special termination benefits and curtailment were the result of personnel reductions occurring
within fiscal years 2003 and 2002. The settlement charge was a result of the termination of the Plan,
effective March 1, 2004.
The following weighted-average assumptions were used to determine the projected benefit obligation
at the measurement date and the net periodic cost for the Plan:
Fiscal Years ended March 31,
2004
2003
2005
Projected benefit obligation:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A N/A
N/A N/A
6.50%
4.00%
Net periodic benefit cost:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on Plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
N/A
N/A
6.50 %
4.00 %
7.00 %
6.75%
4.00%
7.00%
67
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Employee Pension and Savings Plans (Continued)
A reconciliation of the Plan’s projected benefit obligation, fair value of the Plan assets, and funding
status is as follows:
Accumulated benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
$
—
March 31,
2005
2004
Projected benefit obligation:
Net obligation at beginning of fiscal year . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special termination benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net benefit obligation at end of fiscal year . . . . . . . . . . . . . . . . . $
Fair value of Plan assets:
Fair value of Plan assets at beginning of fiscal year . . . . . . . . $
Actual return on Plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of Plan assets at end of fiscal year. . . . . . . . . . . . . . . . $
Funding status:
Funded status at end of fiscal year . . . . . . . . . . . . . . . . . . . . . . $
Unrecognized net actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . . . . .
Net prepaid asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 144,671
795
7,927
33,700
(9,731)
(26,247)
(151,115)
—
—
$
$ 119,535
12,243
29,068
(9,731)
(151,115)
—
$
$
$
—
—
—
—
The Company sponsored an unfunded deferred compensation plan for key managers until July 1, 2003
when the plan was curtailed. This plan was non-qualified and provided certain key employees defined
pension benefits which would equal those provided by the Company’s non-contributory pension plan if the
plan were not limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code.
Expenses related to the deferred compensation plan totaled $0 in fiscal year 2005, $277 in fiscal year 2004,
and $529 in fiscal year 2003. Total benefits accrued under this plan were $0 and $123 at March 31, 2005
and 2004, respectively. The plan was terminated on June 30, 2004, and all participants received a one-time,
cash settlement payment representing the value of their vested benefit on that date.
The Company also sponsors a deferred compensation plan for highly compensated employees. The
plan is non-qualified and allows employees to contribute to the plan. Expenses related to the deferred
compensation plan totaled $887 in fiscal year 2005, $1,111 in fiscal year 2004, and $0 in 2003. Total benefits
accrued under this plan were $1,374 in fiscal year 2005 and $1,366 in fiscal year 2004.
68
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Employee Pension and Savings Plans (Continued)
In addition, the Company has a defined contribution plan (the “Savings Plan”) in which all U.S.
employees who meet certain eligibility requirements may participate. A participant may direct the Company
to contribute amounts, based on a percentage of the participant’s compensation, to the Savings Plan through
the execution of salary reduction agreements. In addition, the participants may elect to make after-tax
contributions. The Company will make annual matching contributions to the Savings Plan up to six percent of
the employee’s salary. The Company contributed $2,614 in fiscal year 2005, $2,245 in fiscal year 2004, and
$1,685 in fiscal year 2003. As part of the Savings Plan, employees may elect to purchase KEMET stock. For
fiscal years 2005, 2004 and 2003, the Savings Plan purchased 69,885, 82,989 and 87,671 shares, respectively.
Note 6: Postretirement Medical and Life Insurance Plans
The Company provides health care and life insurance benefits for certain retired employees who
reach retirement age while working for the Company. The components of the expense for postretirement
medical and life insurance benefits are as follows:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected loss on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special termination benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net periodic benefits cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years ended March 31,
2003
$ 1,128
3,148
119
(172)
1,926
1,033
$ 7,182
2004
$ 1,063
3,384
387
(121)
—
—
$ 4,713
2005
$ 975
3,062
269
—
—
—
$ 4,306
The special termination benefits and curtailment were the result of personnel reductions occurring
within fiscal year 2003.
69
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Postretirement Medical and Life Insurance Plans (Continued)
A reconciliation of the postretirement medical and life insurance plans’ projected benefit obligation,
fair value of plan assets, and funding status is as follows:
March 31,
2005
2004
Projected benefit obligation:
Net obligation at beginning of fiscal year . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain)/loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net benefit obligation at end of fiscal year . . . . . . . . . . . . . . . . . .
$ 56,309
975
3,062
(2,806)
(3,984)
$ 53,556
$ 50,050
1,063
3,384
5,740
(3,928)
$ 56,309
Fair value of plan assets:
Fair value of plan assets at beginning of fiscal year . . . . . . . . .
Employer contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refund to plan sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of fiscal year . . . . . . . . . . . . . . . . .
$ —
3,984
—
—
(3,984)
$ —
$ 3,981
—
(478)
425
(3,928)
$ —
Funding status:
Funded status at end of fiscal year . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . .
Net accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (53,556) $ (56,309)
13,273
$ (43,358) $ (43,036)
10,198
The Company expects to make no contributions to fund Plan assets in fiscal year 2006 as the
Company’s policy is to pay benefits as costs are incurred.
Beginning in May 2005, the Company increased the required premiums requirements for the retirees
due to the continuing health care cost increases. This has been factored into the following benefit
payments schedule for the next five years.
The Company expects to have benefit payments in the future as follows:
Expected benefit payments . . . . . . . . . . . $ 4,474 $ 4,451 $ 4,416 $ 4,321 $ 4,268
2006
2007
2008
2009
2010
Thereafter
$ 19,907
70
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Postretirement Medical and Life Insurance Plans (Continued)
The following weighted-average assumptions were used to determine the projected benefit obligation
at the measurement date and the net periodic cost for the postretirement medical and life insurance plan:
2005
Fiscal Years ended March 31,
2004
2003
Projected benefit obligation:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . .
Net periodic benefit cost:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . .
Expected return on Plan assets. . . . . . . . . . . . . .
Health care cost trend on covered charges. . . . . .
Sensitivity of retiree welfare results
Effect of a one percentage point increase in
assumed health care cost trend:
—On total service and interest costs
5.75%
4.00%
6.00%
4.00%
0.00%
9.50%
6.00 %
4.00 %
6.50 %
4.00 %
7.00 %
10.00 %
6.50%
4.00%
6.75%
4.00%
7.00%
10.50%
decreasing
to ultimate
trend of 5%
in 2013
decreasing
to ultimate
trend of 5%
in 2013
decreasing
to ultimate
trend of 5%
in 2013
components . . . . . . . . . . . . . . . . . . . . . . . . . .
—On post-retirement benefits obligation . .
$ 263
$ 2,758
$ 327
$ 3,265
$ 295
$ 2,627
Effect of a one percentage point decrease in
assumed health care cost trend:
—On total service and interest costs
components . . . . . . . . . . . . . . . . . . . . . . . . . .
—On post-retirement benefits obligation . .
$ (231)
$ (2,466)
$ (285 )
$ (2,911 )
$ (257)
$ (2,338)
The measurement date used to determine postretirement benefits is March 31.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(“the Act”) became law in the United States. The Act introduces a prescription drug benefit under
Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is
at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position
SFAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003,” the Company believes its Plan is not actuarially equivalent
to the Medicare prescription drug benefit and any impact or benefit from the Act was not significant.
71
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Income Taxes
The components of income/(loss) before income taxes consist of:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
Fiscal Years ended March 31,
2004
$ (181,366) $ (170,152 ) $ (98,182)
10,288
11,824
9,157
2003
$ (172,209) $ (158,328 ) $ (87,894)
The provision for income tax expense (benefit) is as follows:
Current:
Fiscal Years ended March 31,
2003
2004
2005
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,872) $ (7,683) $ (64,239)
(1,627)
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,312
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (667) $ (3,490) $ (62,554)
(1,069)
3,274
(824)
5,017
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,403 $ (38,265) $ 29,035
1,865
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(252)
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,552 $ (42,863) $ 30,648
(4,112)
(486)
—
149
Provision/(benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 1,885 $ (46,353) $ (31,906)
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
Statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal taxes . . . . . . . . . . . . . . . . . . . .
Effect of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years ended March 31,
2004
−35.0 %
−2.0 %
1.1 %
12.6 %
−6.0 %
2005
−35.0%
−4.8%
−0.6%
50.9%
−9.4%
2003
−35.0%
0.2%
0.0%
0.0%
−1.5%
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1%
−29.3 %
−36.3%
72
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Income Taxes (Continued)
The significant components of deferred tax assets and liabilities are as follows:
Deferred Tax Assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and inventories allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
2004
$ 94,637
18,614
11,729
6,156
131,136
$ 39,444
18,782
22,220
10,826
91,272
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(106,580)
$ 24,556
(20,015)
$ 71,257
Deferred Tax Liabilities:
Depreciation and differences in basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-amortized intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (21,012) $ (63,772)
—
(1,918)
(2,516)
(674)
(1,725)
$ (26,564) $ (70,605)
(1,093)
(832)
(2,516)
(433)
(678)
Net deferred income tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(2,008) $
652
As of March 31, 2005 and 2004, the Company’s gross deferred tax assets are reduced by a valuation
allowance of $106,580 and $20,015, respectively, due to evidence indicating that a valuation allowance is
required under SFAS No.109. The valuation allowance increased $86,565 during the fiscal year ended
March 31, 2005, principally due to net operating loss carryforwards and asset impairments.
In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of these deductible differences, net of the existing
valuation allowances as of March 31, 2005. The amount of deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
The net deferred income tax asset/(liability) is reflected in the accompanying fiscal year 2005 and 2004
Consolidated Balance Sheets as a $5,945 and $29,046 current asset and a $7,953 and $28,394 non-current
liability, respectively.
73
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Income Taxes (Continued)
As of March 31, 2005, the Company has U.S. net operating loss carryforwards for federal and state
income tax purposes of approximately $227 million and $333 million, respectively. These net operating
losses are available to offset future federal and state taxable income, if any, through 2025. Certain of the
Company’s foreign subsidiaries in Switzerland, China and Australia have deferred tax assets for tax net
operating losses and capital loss carryforwards totaling $3.6 million. There is a greater likelihood of not
realizing the future tax benefits of these deferred tax assets and accordingly, the Company has recorded
valuation allowances related to the net deferred tax assets in these jurisdictions.
At March 31, 2005, $0.3 million of the $94.6 million deferred tax asset for net operating losses
represented losses generated by stock option deductions in excess of book expense. The valuation
allowance related to the $0.3 million deferred tax asset generated by stock option deductions would be
credited to equity when recognized.
The Company has outstanding U.S. Federal income tax refunds of approximately $11.9 million
currently under review by the Internal Revenue Service related to fiscal years 1997 through 2002. These
reviews may alter the timing or amount of taxable income or deduction or the allocation of income among
tax jurisdictions. The amount ultimately paid upon resolution of issues may differ from the amount
accrued. Management anticipates final resolution by mid calendar year 2005, and if successful, collection
would be in calendar year 2005. If the refunds are realized, the Company anticipates a tax benefit to be
recognized which relates to prior tax contingencies which were not realized.
Deferred tax (benefit)/expense of $120, $1,584, and $(3,830) was attributed to other comprehensive
income/(loss) for the fiscal years ended March 31, 2005, 2004, and 2003, respectively.
At March 31, 2005, unremitted earnings of the subsidiaries outside the United States were deemed to
be permanently invested. The Company has approximately $38 million of unremitted foreign earnings. No
current plans are expected for repatriation under the American Jobs Creation Act of 2004. No deferred tax
liability was recognized with regard to such earnings. It is not practicable to estimate the income tax
liability that might be incurred if such earnings were remitted to the United States.
Note 8: Stock Option Plans
The Company has three option plans that reserve shares of common stock for issuance to executives
and key employees. The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). On July 1,
2000, the Company adopted the provisions of FASB Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation,” which require variable accounting treatment on certain re-
priced options. This requires that any increase in the stock price above the July 1, 2000, adoption date
stock price be recognized immediately as compensation expense. For fiscal years 2005, 2004, and 2003, no
compensation cost has been recognized for the stock option plans.
In May 1992, the Company’s stockholders approved the 1992 Key Employee Stock Option Plan, which
authorizes the granting of options to purchase 2,310,000 shares of common stock. The Key Employee
Stock Option Plan was amended in October 2000 by the Board of Directors to provide for the issuance of
options to purchase an additional 2,000,000 shares of common stock. In addition, stockholders approved
the 1995 Executive Stock Option Plan at the 1996 Annual Meeting. This plan provides for the issuance of
options to purchase 3,800,000 shares of common stock to certain executives of the Company. The
74
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Stock Option Plans (Continued)
stockholders also approved the 2004 Long-Term Equity Incentive Plan at the 2004 Annual Meeting. This
plan provides for the issuance of common stock to directors and certain employees of the Company.
These plans provide that shares granted come from the Company’s authorized but unissued common
stock or treasury stock. The prices of the options granted thus far pursuant to these plans are no less than
100% of the value of the shares on the date of grant. Also, the options may not be exercised within one to
two years from the date of grant and no options will be exercisable after ten years from the date of grant
(depends on individual grant).
A summary of the status of the Company’s three current stock option plans as of March 31, 2005,
2004, and 2003, and changes during the fiscal years ended on those dates is presented below:
Fixed Options
Options outstanding at beginning of
Shares
2005
Weighted-
Average
Exercise
Price
March 31,
2004
Weighted-
Average
Exercise
Price
Shares
2003
Weighted-
Average
Exercise
Price
Shares
fiscal year . . . . . . . . . . . . . . . . . . . . . 4,466,215
771,750
(25,000)
(768,195)
Option granted . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . .
Options outstanding at end of fiscal
$
$
13.46
7.97
5.85
13.76
3,848,025
1,072,625
(145,810)
(308,625)
$
13.41
12.76
5.56
14.18
3,355,455
839,500
(228,430 )
(118,500 )
year . . . . . . . . . . . . . . . . . . . . . . . . . . 4,444,770
$
12.50
4,466,215
$
13.46
3,848,025
$
14.42
9.11
11.92
13.42
13.41
Option price range end of fiscal year . .
Option price range for exercised
shares . . . . . . . . . . . . . . . . . . . . . . . .
Options available for grant end of
fiscal year . . . . . . . . . . . . . . . . . . . . .
Options exercisable end of fiscal year. .
Options weighted-average fair value
granted during the fiscal year . . . . . .
Weighted-average exercise price of
options exercisable at end of fiscal
year . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.00 to $19.80
$ 5.00 to $19.80
$ 5.00 to $19.80
$ 5.00 to $9.03
$ 5.00 to $6.75
$ 2.50 to $14.50
4,345,565
2,959,895
2.82
13.42
$
$
349,120
2,730,840
5.97
14.90
$
$
1,105,620
2,290,525
4.51
13.82
$
$
75
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Stock Option Plans (Continued)
The following table summarizes information about stock options outstanding at March 31, 2005:
Options Outstanding
Number
Outstanding
at 3/31/05
Remaining
Contractual Life
Weighted-Average Weighted-Average
Weighted-Average
Range of
Exercise
Prices
$3.96 to $5.94 . . . . . . . . .
$5.95 to $7.92 . . . . . . . . .
$7.93 to $9.90 . . . . . . . . .
$9.91 to $11.88 . . . . . . . .
$11.89 to $13.86 . . . . . . .
$13.87 to $15.84 . . . . . . .
$15.85 to $17.82 . . . . . . .
$17.83 to $19.80 . . . . . . .
218,845
681,500
702,250
29,000
820,125
769,300
1,187,750
36,000
4,444,770
2.1 years
8.8 years
4.8 years
7.4 years
8.5 years
3.4 years
4.1 years
2.9 years
5.5 years
Options Exercisable
Number
Exercisable
at 3/31/05
218,845
60,000
696,000
10,000
—
751,300
1,187,750
36,000
2,959,895
Exercise
Price
$ 5.41
$ 7.61
$ 9.03
$ 11.24
$ 12.77
$ 14.51
$ 17.00
$ 19.15
$ 12.50
Exercise
Price
$ 5.41
$ 6.00
$ 9.03
$ 11.50
$ —
$ 14.50
$ 17.00
$ 19.15
$ 13.42
Note 9: Geographic Information:
The following highlights our net sales by geographic location:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other countries(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years ended March 31,(1)
2003
2004
2005
$ 196,268
$ 189,367
$ 172,707
44,125
69,595
74,834
40,132
40,043
40,171
29,254
34,461
36,147
34,540
28,653
26,313
39,045
17,538
19,336
63,968
54,225
55,830
$ 425,338
$ 433,882
$ 447,332
(1)—Revenues are attributed to countries or regions based on the location of the customer. The Company
sold $66,494 and $57,300 to two customers, each of which accounted for more than 10% of net sales
in the fiscal year ended March 31, 2005. The Company sold $76,264 and $58,942 to two customers,
each of which accounted for more than 10% of net sales in the fiscal year ended March 31, 2004. The
Company sold $48,677 and $45,024 to two customers, each of which accounted for more than 10% of
net sales in the fiscal year ended March 31, 2003.
(2)—Only Malaysia exceeded 5% of consolidated net sales in 2005 ($21.3 million). For fiscal years 2004
and 2003, no country considered part of Asia Pacific exceeded 5% of consolidated net sales.
(3)—No country included in this caption exceeded 5% of consolidated net sales for 2005, 2004, and 2003.
76
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Geographic Information: (Continued)
The following geographic information includes long-lived assets, including property held for sale,
based on physical location:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
$ 102,050
162,937
16,627
338
2004
$ 172,344
243,396
7,831
590
$ 281,952
$ 424,161
Note 10: Commitments
(a) The Company has agreements with distributors and certain other customers that, under certain
conditions, allow for returns of overstocked inventory and provide protection against price reductions
initiated by the Company. Allowances for these commitments are included in the Consolidated Balance
Sheets as reductions in trade accounts receivable (note 11). The Company adjusts sales for anticipated
returns and price protection changes based on historical experience. Charges against sales in fiscal year
2005, fiscal year 2004, and fiscal year 2003 were $68,821, $71,410, and $52,375, respectively. Actual
applications against the allowances in fiscal year 2005, fiscal year 2004, and fiscal year 2003 were $71,771,
$66,325, and $60,865, respectively.
(b) The Company sold put options to institutional parties as part of a program to purchase up to
8.0 million shares of its common stock. Net premiums generated from the sale of outstanding put options
were $0 for fiscal years 2005 and 2004, and $0.2 million for fiscal year 2003 and were accounted for as
Additional paid-in capital. During the fiscal year ended March 31, 2003, the Company paid approximately
$3.7 million to settle put options. The Company does not anticipate any further stock purchases under this
authorization, and the last outstanding put options matured unexercised in July 2003. On July 1, 2003, the
Company was required to adopt Statement of Financial Accounting Standards No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equities” (SFAS No. 150). The
adoption of SFAS No. 150 did not significantly impact its financial results.
77
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Commitments (Continued)
(c) On December 10, 2002, the Company announced that it agreed to an extension of the term of its
tantalum supply agreement with Cabot Corporation (“Cabot”). The extended agreement relates to both
tantalum powder and tantalum wire products and calls for reduced prices, higher volumes, and a term
through calendar 2006. As the prices of tantalum powder and tantalum wire products decreased, the
Company recorded purchase commitment losses as well as inventory losses (if the inventory was on hand).
In fiscal year 2004 and fiscal year 2003, KEMET recorded losses of $12,355 and $40,833, respectively. In
fiscal year 2005, the Company renegotiated the agreement with Cabot and accordingly reversed $11,767 of
the previously recorded commitment losses. The following reconciliation of the beginning and ending
balances included in the liabilities section of the Consolidated Balance Sheets is as follows:
Beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs charged to expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs paid or settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of fiscal year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
$ 24,275
—
(11,767 )
(7,025 )
$ 5,483
2004
$ 24,310
12,355
—
(12,390)
$ 24,275
The remaining purchase commitments for this agreement are $11.8 million for calendar year 2005 and
$11.6 million for calendar year 2006.
Finally, in fiscal year 2005, the Company cancelled silver and palladium purchase commitments with
other suppliers totaling $6.6 million. No gain or loss was recognized as a result of these cancellations. The
Company has no future commitments for these raw materials.
(d) The Company’s leases are primarily for distribution facilities or sales offices that expire
principally between 2006 and 2009. A number of leases require that the Company pay certain executory
costs (taxes, insurance, and maintenance) and contain certain renewal and purchase options. Annual rental
expenses for operating leases were included in results of operations and were approximately $4,157 in
fiscal year 2005, $3,180 in fiscal year 2004, and $2,796 in fiscal year 2003.
78
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Commitments (Continued)
During fiscal year 2005, the Company subleased to an outside company a 60,000 square foot facility
and has leased back 5,000 square feet of this facility. Annual rental income from the sublease was included
in the Consolidated Statements of Operations and was $30 for fiscal year 2005. The sublease rental
expense for fiscal year 2005 was $20.
Future minimum lease payments over the next five fiscal years and thereafter under non-cancelable
operating leases at March 31, 2005, are as follows:
2010
Minimum lease payments . . . . . . . . . . . $ 3,331 $ 2,392 $ 1,856 $ 1,136 $ 612
Sublease rental income. . . . . . . . . . . . . . $ (213) $ (229) $ (230) $ (237) $ (238 )
Net minimum lease payments . . . . . . . . $ 3,118 $ 2,163 $ 1,626 $ 899 $ 374
2007
2008
2006
2009
Thereafter
Total
$ 1,866 $ 11,193
$ (1,265 ) $ (2,412)
$ 601 $ 8,781
Note 11: Supplemental Balance Sheets and Statements of Operations Detail:
Accounts receivable:
Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for price protection and customer returns (note 10).
March 31,
2005
2004
$ 64,126 $ 68,972
7,366
76,338
9,536
73,662
250
14,184
663
17,134
Net accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 59,228 $ 58,541
Useful life
Property and equipment:
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20-40 years
10 years
4-10 years
—
20 years $ 13,036 $ 11,727
116,505
118,041
735,243
649,134
48,646
44,940
32,130
20,566
932,687
857,281
(510,852)
(577,655 )
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 279,626 $ 421,835
Accrued expenses:
Salaries, wages, and related employee costs. . . . . . . . . . . . . . . . . .
Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory supply agreement (note 10). . . . . . . . . . . . . . . . . . . . . . .
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other including restructuring (note 13) . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,615 $ 10,012
5,647
8,700
2,267
15,794
4,625
2,061
1,863
14,453
$ 34,617 $ 42,420
79
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Supplemental Balance Sheets and Statements of Operations Detail: (Continued)
Other (income) expense:
Fiscal Years ended March 31,
2005
2004
2003
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 980 $ (4,434 ) $ (7,815)
—
Loss on write down of equity investment to market . . . . . . . . . . . . . . . . . .
32
Accounts receivable discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,415)
Unrealized foreign currency exchange (gains)/losses . . . . . . . . . . . . . . . . .
—
Life insurance proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,189)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,849 ) $ (3,311 ) $ (11,387)
945
—
300
(5,000 )
(74 )
1,046
—
(300 )
—
377
Note 12: Legal Proceedings
The Company has periodically incurred, and may continue to incur, liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”) and
analogous state laws with respect to sites used for off-site management or disposal of Company-derived
wastes. The Company has been named as a potentially responsible party (“PRP”) at the Seaboard
Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a
“de minimis” party and does not expect its total exposure to be material. In addition, Union Carbide
Corporation (“UCC”) is a PRP at certain sites relating to the off-site disposal of wastes from properties
presently owned by the Company. The Company is participating in coordination with UCC in certain PRP-
initiated activities related to these sites. The Company expects that it will bear some portion of the liability
with respect to these sites; however, any such share is not presently expected to be material to the
Company’s financial condition. In connection with the acquisition in 1990, UCC agreed, subject to certain
limitations, to indemnify the Company with respect to the foregoing sites.
The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their
respective operations, including workers’ compensation or work place safety cases, some of which involve
claims for substantial damages. Although there can be no assurance, based upon information known to the
Company, the Company does not believe that any liability which might result from an adverse
determination of such lawsuits would have a material adverse effect on the Company’s financial condition
or results of operations.
In January 2005, the Company filed a lawsuit against AVX Corporation (“AVX”) to protect trade
secrets relating to the development and manufacture of tantalum polymer capacitors. KEMET has been
manufacturing these advanced components since 1999, and they now constitute the fastest growing
segment of the tantalum capacitor market. KEMET was seeking judgment against AVX for actual and
exemplary damages, attorney’s fees, and injunctive relief to eliminate any commercial advantage that
otherwise would be derived by AVX from the misappropriation of KEMET trade secrets. While the
Company still believes in the merits of the case, the lawsuit was dismissed by the Company in order to
allow management to be able to focus on the important business challenges it currently faces.
80
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Restructuring and Impairment Charges
Since the end of fiscal year 2002, the Company has initiated several restructuring programs in
order to reduce costs, to remove excess capacity, and to make the Company more competitive on a
world-wide basis. Since the beginning of fiscal year 2003, the Company has initiated five different
restructuring initiatives. Since the goals of each of these restructuring programs fall into one of the
rationales listed above, the Company has elected to disclose the impacts on a yearly basis as opposed
to by restructuring program.
A summary of the expenses aggregated in the Consolidated Statements of Operations line
Restructuring and impairment charges expensed in the periods ended March 31, 2005, 2004, and 2003,
were as follows (in millions):
2005
Manufacturing relocation and employee termination costs . . . . . . . $ 18.9
108.7
Impaired long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Writedown in investment in unconsolidated subsidiary . . . . . . . . . . .
2.4
Restructuring and impairment charges. . . . . . . . . . . . . . . . . . . . . . . . . $ 130.0
2004 2003
$ 27.1
4.6
—
$ 31.7
$ 24.2
16.3
—
$ 40.5
Fiscal Years ended March 31,
Fiscal Year ended March 31, 2005
Restructuring and impairment charges incurred during fiscal year 2005 included pre-tax charges
totaling $130.0 million, of which $18.9 million were charges for manufacturing relocation and personnel
reductions, $108.7 million were charges for impaired long-lived assets, and $2.4 million were charges for
the write-down of investment in unconsolidated subsidiary.
Manufacturing relocation and employee termination costs—During fiscal year 2005, the Company
recognized $7.8 million relating to the Plan (discussed below under fiscal year ended March 31, 2004). As
of March 31, 2005, the Company had recorded cumulative charges of $32.0 million relating to the Plan.
The balance of the $39 million is expected to be realized ratably over the next two quarters. The timing and
amounts of the charges are dependent on the timing of operational decisions, some of which have not been
finalized, and on operational activities yet to occur. The Company also announced additional restructuring
programs in fiscal third quarter 2005 of $5.8 million and in fiscal fourth quarter 2005 of $5.3 million. These
two restructuring charges reduced the Company’s workforce by approximately 1,120 employees.
Impaired assets—During the fiscal fourth quarter 2005, the Company assessed the current economic
environment of the capacitors industry and estimated results for future periods. The Company considered
the following:
• a decrease in the Company’s (as well as its competitors’ as a whole) market capitalization;
• continuing average selling price erosion; and
• the continued operating losses the Company has recently incurred.
Based on these factors, the Company assessed the net cash flows of its tantalum and ceramics
assets for a period of time in the future and compared the results with the net book value of the
assets. Accordingly and in compliance with SFAS No. 144 “Impairment of Long-term Assets”, the
Company recorded a fourth quarter non-cash charge of $100.2 million to account for this difference.
81
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Restructuring and Impairment Charges (Continued)
In fiscal third quarter 2005, the Company also recorded a charge of $8.5 million relating to the write-
off of equipment no longer used. Refer to note 1 for the process in which the Company used to
determine the impairment charge.
Write-down of investment in unconsolidated subsidiary—During the fiscal third quarter 2005, the
Company wrote down its investment in an unconsolidated subsidiary (Lamina Ceramics, Inc.) in the
amount of $2.4 million due to the underlying value being less than the Company’s share of the book value.
Fiscal Year Ended March 31, 2004
Restructuring and impairment charges incurred during fiscal year 2004 included pre-tax charges
totaling $40.5 million, of which $24.2 million and $16.3 million were charges for manufacturing relocation
and personnel reductions long-lived asset impairments, respectively.
Manufacturing relocation and employee termination costs—These charges were incurred as part of the
Enhanced Strategic Plan announced in July 2003 that included moving manufacturing operations from the
U.S. to low-cost facilities in Mexico and China. The Company estimates that it will incur approximately
$39.0 million in total charges related to the Enhanced Strategic Plan, which is targeted for completion in
mid calendar year 2005. Employee termination costs were approximately $18.7 million and include charges
related to the eventual relocation of approximately 650 production-related jobs from domestic operations
as well as charges, primarily revisions in the contract with the Matamoros employee union, impacting
approximately 1,250 employees in Mexico. Equipment relocation costs of $5.5 million accounted the
balance of the charges.
Impaired assets—In 1999, the Company entered into the market for solid aluminum capacitors and has
since made significant technology advances in both high-capacitance multilayer ceramic capacitors and
organic tantalum capacitors, limiting the applications of solid aluminum capacitors. As a result, KEMET
reorganized its solid aluminum capacitor business line. The Company recognized a $16.3 million non-cash
charge related to the impairment of aluminum equipment and facilities and, currently, does not anticipate
additional charges related to this product line.
Fiscal Year ended March 31, 2003
Restructuring and impairment charges incurred during fiscal year 2003 included pre-tax charges
totaling $31.7 million, of which $27.1 million and $4.6 million were charges for personnel reductions and
long-lived asset impairment, respectively. These charges were part of an ongoing effort by the Company to
reduce costs after demand substantially decreased in fiscal year 2002.
Manufacturing relocation and employee termination costs—During the quarter ended September 30,
2002, the Company incurred charges of $9.1 million for manufacturing and support personnel reductions
associated with closing manufacturing facilities in Greenwood, South Carolina, and Matamoros, Mexico, of
approximately 185 and 240 employees, respectively. During the quarter ended March 31, 2003, the
Company announced a cost-saving initiative that resulted in charges of $18.0 million associated with
personnel reductions of approximately 255 and 183 in the U.S. and Mexico, respectively. All charges related
to these personnel reductions were paid by March 31, 2003.
82
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Restructuring and Impairment Charges (Continued)
Impaired long-lived assets—The impaired assets consisted of certain long-lived assets associated with
the closing of a manufacturing facility in Greenwood, South Carolina.
A reconciliation of the beginning and ending liability balances for restructuring charges (which
represents severance related costs only) included in accrued expenses and other non-current obligations on
the Consolidated Balance Sheets were as follows (in millions):
Beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs charged to expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs paid or settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of fiscal year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Years ended
March 31,
2005
$ 7.2
11.1
(11.5 )
$ 6.8
2004
$ 0.8
18.7
(12.3)
$ 7.2
Note 14: Loss Per Share
Basic and diluted loss per share are calculated as follows (share amounts and per share data not in
thousands):
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average shares outstanding (basic) . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average shares outstanding (diluted) . . .
Fiscal Years ended March 31,
2004
2005
$ (174,094) $ (111,975 ) $
86,518,923
—
86,518,923
86,412,281
—
86,412,281
2003
(55,988)
86,167,563
—
86,167,563
Basic loss per share. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted loss per share. . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(2.01) $
(2.01) $
(1.30 ) $
(1.30 ) $
(0.65)
(0.65)
The fiscal years ended March 31, 2005, 2004, and 2003, excluded potentially dilutive securities of
2,960,000, 2,731,000, and 2,623,000, respectively, in the computation of diluted loss per share because the
effect would have been anti-dilutive.
83
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Derivatives, Hedging, and Other Financial Instruments
The Company uses certain derivative instruments (i.e., forward currency contracts) to reduce
exposures to the volatility of foreign currencies and commodities impacting revenues and the costs of its
products. Unrealized gains and losses associated with the change in value of these financial instruments are
recorded in Accumulated other comprehensive income/(loss). The after-tax impact on AOCI/(L) related to
the change in value of these financial instruments is as follows (in millions):
Beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current fiscal year unrealized gains related to the change in value of the
Fiscal years ended
March 31,
2005
$ (0.7 )
2004
$ (1.7)
financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1
0.4
Plus prior fiscal year unrealized losses in AOCI/(L) that were recognized
in the current fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in AOCI/(L) related to financial instruments . . . . . . . . . . . . . . . . .
End of fiscal year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.6
3.7
$ 3.0
0.6
1.0
$ (0.7)
The $3.0 million gain remaining in AOCI/(L) at March 31, 2005 (see note 1: Comprehensive
Income/(Loss) table), is expected to be reclassified to income during the next twelve months as the hedged
items affect earnings.
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 cash flow hedges at inception and monitored for effectiveness on a routine basis. At
March 31, 2005 and 2004, the Company had outstanding forward exchange contracts that mature within
approximately one year to purchase Mexican pesos with notional amounts of $60.9 million and
$57.7 million, respectively. The fair values of these contracts at March 31, 2005 and 2004, totaled
$3.1 million and $0.3 million, respectively, and were recorded as a derivative asset, respectively, on the
Company’s Consolidated Balance Sheets under Prepaid expenses and other current assets. During the next
twelve months, it is estimated that approximately $3.1 million of the gain on these contracts would be
recorded to cost of goods sold. The changes in fair value of these contracts resulted in other
comprehensive gain, net of taxes, of $2.8 million and $1.9 million for the twelve month periods ended
March 31, 2005 and 2004, respectively. The ineffectiveness of these contracts was determined to be
immaterial and was not recorded in the Company’s Consolidated Statements of Operations.
Certain sales are made in euros. In order to hedge these forecasted cash flows, management
purchases forward contracts to sell euros 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. There were no euro contracts outstanding at March 31, 2005. At March 31, 2004, the
Company had outstanding forward exchange contracts that matured within approximately six months to
sell euros with notional amounts of $17.3 million. The fair values of these contracts at March 31, 2004,
totaled $1.0 million, which is recorded as a derivative liability on the Company’s Consolidated Balance
84
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Derivatives, Hedging, and Other Financial Instruments (Continued)
Sheets under Accrued expenses. No such forward contracts were outstanding at the end of fiscal year 2005.
The changes in fair value of these contracts resulted in other comprehensive income/(loss), net of taxes, of
$0.9 million and $(0.9) million for the twelve month periods ended March 31, 2005 and 2004, respectively.
Changes in the derivatives’ fair values are deferred and recorded as a component of AOCI/(L) until
the underlying transaction is recorded. When the hedged item affects income, gains or losses are
reclassified from AOCI/(L) to the Consolidated Statements of Operations as cost of goods sold for forward
contracts to purchase Mexican pesos and as Net sales for forward contracts to sell euros. Any
ineffectiveness, if material, in the Company’s hedging relationships is recognized immediately in loss.
The Company formally documents all relationships between hedging instruments and hedged items,
as well as risk management objectives and strategies for undertaking various hedge transactions.
Hedging Commodity Prices
The Company occasionally enters into contracts for the purchase of its raw materials, primarily
palladium, which are considered to be derivatives or embedded derivatives with underlyings not clearly and
closely related to the host contract. As such, the fair values of these derivatives are recorded on the
Consolidated Balance Sheets as derivative assets or liabilities and the change in fair values is recorded as a
component of Cost of goods sold. At March 31, 2005 and 2004, the Company had no such derivative assets
or liabilities. All other contracts to purchase raw materials qualify for the normal purchases exclusion and
are not accounted for as derivatives.
Interest Rate Swaps
In August 2003, the Company entered into an interest rate swap contract (the “Swap”) 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 3.35%. In October 2004, this contract was
terminated for a $0.1 million gain and was recognized in other income for the fiscal year ended March 31,
2005. The fair value of the Swap, based upon market estimates provided by the counterparties, was
approximately $2.5 million at March 31, 2004, and was recorded as a derivative asset on the Company’s
Consolidated Balance Sheets under Prepaid expenses and other current assets. The change in fair value of
this derivative instrument resulted in Other (income)/expense of $1.2 million and $(3.0) million for the
twelve-month periods ended March 31, 2005 and 2004, respectively.
The Company entered into two interest rate swap contracts in April 2003 that effectively converted its
$100 million aggregate principal amount of 6.66% senior notes to floating-rate debt, both of which were
terminated for a $1.4 million gain, reflected in other income in May 2003 for the fiscal year ended
March 31, 2004.
In the quarter ended March 31, 2003, the Company terminated two interest rate swap contracts it
initiated in November 2002. The contracts effectively converted its $100 million aggregate principal
amount of 6.66% senior notes to floating-rate debt. These derivative instruments resulted in other income
of $1.0 million for the fiscal year ended March 31, 2003.
85
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Derivatives, Hedging, and Other Financial Instruments (Continued)
Other Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable
approximate their fair values. The fair value of the Company’s debt outstanding at March 31, 2005 and
2004 was $101.4 million and $105.6 million, respectively, which was determined based on the 5-Year
Treasury Note Yield compared to its carrying value of $100.0 million.
Note 16: Common Stock
The Board of Directors authorized programs to purchase up to 8.0 million shares of its common stock
on the open market. Through March 31, 2005, the Company had made purchases of 2.1 million shares for
$38.7 million. The Company does not anticipate any further stock purchases under this authorization.
Approximately 615,000 shares were subsequently reissued for the exercise of employee stock options. At
March 31, 2005 and 2004, the Company held 1,460,455 and 1,485,455 treasury shares at a cost of $26.9 million
and $27.4 million, respectively.
Note 17: Investments
Investments consist of debt securities as well as equity securities of public and privately-held
companies. The debt securities, which consist of U.S. government marketable securities, are classified as
held-to-maturity securities, mature in one month to five years, and are carried at amortized cost. The effect
of amortizing these securities is recorded in current loss as interest income.
The Company’s equity investments in public companies are classified as available-for-sale securities
and are carried at fair value net of tax in stockholders’ equity. The available-for-sale securities are intended
to be held for an indefinite period but may be sold in response to unexpected future events. The Company
also has an equity investment with less than 20% ownership interest in a privately-held company. The
Company does not have the ability to exercise significant influence over this company, and the investment
is accounted for under the cost method.
On a periodic basis, the Company reviews the market values of its equity investments classified as
available-for-sale securities and the carrying value of its equity investments carried at cost for the purpose
of identifying “other-than-temporary” declines in market value and carrying value, respectively as defined
in EITF 03-1. The Company’s management has concluded this review and determined that an available-
for-sale equity investment in a publicly-held company had an “other-than-temporary” decline in market
value. The majority of the market decline occurred between the months of September 2003 and June 2004.
The Company considers the impairment “other-than-temporary” based on the duration of this market
value decline and the lack of evidence that the market value will increase. The Company has recognized a
$0.9 million loss equal to the difference between the investment’s cost and its fair market value at
September 30, 2004. The amount is included in Other expense/(income) on the Consolidated Statements
of Operations. Based on the Company’s review for the quarters ending December 31, 2004 and March 31,
2005, the Company determined that a further “other-than-temporary” decline did not exist. The Company
will continue to monitor the available-for-sale equity investment for potential future impairments.
In fiscal third quarter 2005, the Company recorded a $2.4 million write-down associated with its equity
investment in Lamina Ceramics, Inc., the Company’s equity investment carried at cost. At March 31, 2005,
the Company determined that the remaining investment balance approximated fair value.
86
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Investments (Continued)
A summary of the components and carrying values of “Investments” in the Consolidated Balance
Sheets is as follows:
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2005
$ 34,992
2004
$ 3,172
563
119
157,576
$ 193,250
1,130
2,480
84,584
$ 91,366
Non-equity investments of $35.0 million and $157.6 million mature within three months to one year
and one to five years, respectively.
Short-term investments consist primarily of U.S. government securities. The unrealized pretax loss on
available-for-sale securities was $0.5 million and $0.8 million at March 31, 2005 and 2004, respectively.
The recorded values approximate fair value at March 31, 2005 and 2004.
Note 18: Acquisitions
On June 30, 2003, the Company acquired certain assets from Wilson Greatbatch Technologies, Inc
(“GTI”). The $2.3 million cash purchase included the non-medical, high-voltage and high-temperature
ceramic capacitor and EMI filter product lines of GTI’s Greatbatch-Sierra, Inc. subsidiary. The product
lines were acquired as part of the Company’s strategic objective to broaden its high-performance capacitor
solutions to support customers’ increasing technical requirements.
On September 2, 2003, the Company announced it purchased an equity position of $2.5 million in
Lamina Ceramics, Inc. (“Lamina Ceramics”), and entered into a business agreement with Lamina
Ceramics to develop and commercialize high-performance, low-temperature co-fired ceramic-on-
metal (“LTCC-M”) solutions for advanced electronic systems. Lamina Ceramics is a manufacturer of
multilayer ceramic electronic packages, boards, and components using proprietary LTCC-M
technology. In fiscal third quarter 2005, the Company wrote down its investment in Lamina Ceramics
by $2.4 million. On a fully-diluted basis, the Company’s interest in Lamina Ceramics was less than
10% at March 31, 2005 and 2004.
On December 17, 2003, the Company announced it had acquired The Forest Electric Company
(“FELCO”) of Melrose Park, Illinois. FELCO manufactures and sells industry-leading custom magnetic
solutions. This $2.4 million acquisition broadens KEMET’s product portfolio, leveraging KEMET’s
industry-leading capabilities in quality, delivery, and service to further penetrate customers in the military,
aerospace, and industrial market segments. Approximately $2.1 million, not considered material to the
Consolidated Balance Sheets, of goodwill was recorded as part of the transaction.
Pro forma information is not presented herein as the acquisitions did not materially impact the
Company’s Consolidated Financial Statements.
87
KENET CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 19: Property Held for Sale
As a result of moving manufacturing operations from the U.S. to low-cost facilities in Mexico and
China, one of the manufacturing facilities located in the U.S. is no longer in use and is held for sale
according to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The
carrying value of this facility at March 31, 2005 and 2004 is $2.3 million and is separately presented in the
Property held for sale line item on the Consolidated Balance Sheets. For the twelve months ended
March 31, 2005, no gains or losses were recognized on this facility as the fair value is believed to
approximate carrying value based on an external appraisal. The Company does not anticipate any
remediation costs in selling the property. On a quarterly basis, management will review this value for
indications of impairment. For the fiscal fourth quarter 2005, KEMET does not believe that there was any
such impairment.
88
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Date: June 14, 2005
KEMET CORPORATION
(Registrant)
/s/ DAVID E. GABLE
David E. Gable
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: June 14, 2005
Date: June 14, 2005
Date: June 14, 2005
Date: June 14, 2005
Date: June 14, 2005
Date: June 14, 2005
Date: June 14, 2005
/s/ PER-OLOF LOOF
Per-Olof Loof
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ DAVID E. GABLE
David E. Gable
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ FRANK G. BRANDENBERG
Frank G. Brandenberg
Chairman and Director
/s/ MAUREEN E. GRZELAKOWSKI
Maureen E. Grzelakowski
Director
/s/ E. ERWIN MADDREY, II
E. Erwin Maddrey, II
Director
/s/ JOSEPH D. SWANN
Joseph D. Swann
Director
/s/ CHARLES E. VOLPE
Charles E. Volpe
Director
89
KEMET Corporation
Code of Business Integrity and Ethics
Exhibit 10.19
Governing Principle
The fundamental principle governing corporate actions of KEMET Corporation and its subsidiaries
(collectively, “KEMET” or the “Company”) and the actions of employees and officers of the Company is
that ethics and business are inseparable at KEMET, that no business objective can be achieved without
following the highest ethical standards and complying with all the local and national laws and regulations
that pertain to our operations.
Conflict of Interest
No officer or employee of the Company may have a personal, financial or family interest that could in
any way keep the individual from acting in the best interest of the Company. Any actual or potential
conflict of interest must be reported to corporate management as soon as recognized.
Business Relationships
The use of the funds or assets of the Company for any unlawful purpose or to influence others
through bribes is strictly prohibited, i.e., there shall be no reward, gift, or favor bestowed or promised with
a view to perverting the judgment or corrupting the conduct of a person in a position of trust.
Offering or accepting properly recorded business meals, entertainment, or token gifts intended and
understood as simple courtesies meant to foster understanding and communication with suppliers,
customers, and public officials is allowed.
Token tips or minor payments to government, institutional, vendor, or customer service personnel
that simply facilitate service, are traditional in the country or locality, nominal in amount, do not involve a
perversion of judgement or corruption of conduct, and are properly recorded are acceptable. Minor
payments meet this test only if, through the generation of goodwill, and not by any other means, they
encourage timely performance of an act which the recipient already has a duty to perform because of some
legal requirement or job responsibility.
Memberships
Memberships should serve legitimate business needs. They are appropriate only in organizations
whose objectives and activities are lawful and ethical, and fit within the framework of broadly accepted
social values.
Financial Integrity
No unrecorded fund will be established for any purpose. All assets of the Company will be recorded
on the books of the Company at all times unless specifically exempted by corporate procedures which are
consistent with generally accepted accounting principles.
No false entry or entry that obscures the purposes of the underlying transaction shall be made in the
books and records of the Company for any reason.
No payment on behalf of the Company shall be authorized or made with the intention or
understanding that any part of such payment is to be used for a purpose other than that described by the
documents supporting the payment.
Each employee is responsible for the protection of the Company’s assets from loss, damage, misuse or
theft. Company assets, such as funds, products, or computers, may only be used for business purposes and
other purposes approved by management. Company assets may never be used for illegal purposes.
The Company requires honest and accurate recording and reporting of information in order to make
responsible business decisions. This includes such data as quality, safety, and personnel records, as well as
all financial records. All financial books, records and accounts must accurately reflect transactions and
events, and conform both to required accounting principles and to the Company’s system of internal
controls. No false or artificial entries may be made, and no undisclosed or unrecorded funds or assets may
be maintained for any purpose. When a payment is made, it can only be used for the purpose spelled out in
the supporting document.
Corporate Opportunities
Employees are prohibited from (i) taking for themselves personally any opportunities that are
discovered through the use of Company property, information or position; (ii) using corporate property,
information or position for personal gain; and (iii) competing with the Company. Employees have a duty to
the Company to advance its legitimate interests when the opportunity to do so arises.
Confidential Information
Each employee will safeguard all confidential information by marking such information accordingly,
keeping it secure, and limiting access to those who have a need to know in order to do their jobs.
Confidential information includes any information that is not generally known to the public and is helpful
to the Company, or would be helpful to competitors. It also includes information that suppliers and
customers have entrusted to the Company. The obligation to preserve confidential information continues
even after employment ends.
Inside Information and Securities Trading
Company employees are not allowed to trade in securities or any other kind of property based on
knowledge that comes from their jobs, if that information has not been reported publicly. It is against the
laws of many countries, including the U.S., to trade or to “tip” others who might make an investment
decision based on inside information. For example, using non-public information to buy or sell Company
stock, options in Company stock or the stock of a Company supplier, customer or competitor is prohibited.
Compliance with the Law
Company employees are required to comply with all applicable laws and regulations wherever the
Company does business. Perceived pressures from supervisors or demands due to business conditions are
not excuses for violating the law.
Fair Competition and Antitrust
The Company and all employees are required to comply with the antitrust and unfair competition laws
of the many countries in which the Company does business. These laws are complex and vary considerably
from country to country. They generally concern agreements with competitors that harm customers,
including price fixing and allocations of customers or contracts, agreements that unduly limit a customer’s
ability to sell a product, including establishing the resale price of a product or service, or conditioning the
sale of products on an agreement to buy other Company products and services, and attempts to
monopolize, including pricing a product below cost in order to eliminate competition. In the event that an
employee is uncertain or has a question regarding such compliance, he or she should contact their
immediate supervisor for clarification.
Reporting of Behavior
Each employee shall promptly bring to the attention of the Audit Committee of the Board of
Directors any information he or she may have concerning evidence of a material violation of the securities
or other laws, rules or regulations applicable to the Company or its employees or agents. Each employee
shall promptly bring to the attention of the Audit Committee any information he or she may have
concerning any violation of this Code of Business Integrity and Ethics. The Board of Directors may
determine, or designate appropriate persons to determine, appropriate additional disciplinary or other
actions to be taken in the event of violations of this Code of Business Integrity and Ethics and a procedure
for granting any waivers of this Code of Business Integrity and Ethics.
Exhibit 21.1
21.1 List of Subsidiaries as of March 31, 2005
Name of Subsidiary
KEMET Electronics Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Services Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics GMBH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics SARL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Asia Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Marketing (S) Pte Ltd. . . . . . . . . . . . . . . . . . . .
KEMET de Mexico, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics (Canada) Limited . . . . . . . . . . . . . . . . . . . . . . .
KRC Trade Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET International, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Asia Pacific Pte Ltd. . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Pty Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Tantalum Pty Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics (Shanghai) Co., Ltd. . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Greater China Limited . . . . . . . . . . . . . . . . . . .
KEMET Electronics (Suzhou) Co., Ltd.. . . . . . . . . . . . . . . . . . . . . . .
KEMET Electronics Japan Co., Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . .
The Forest Electric Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jurisdiction of Incorporation
Delaware
Delaware
Switzerland
Germany
France
United Kingdom
Hong Kong
Singapore
Mexico
Canada
Delaware
Barbados
Singapore
Australia
Australia
People’s Republic of China
Hong Kong
People’s Republic of China
Japan
Illinois
93
23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Board of Directors
KEMET Corporation:
We consent to the incorporation by reference in the registration statements (No. 333-107411,
333-92963, 33-98912, and 33-93092) on Form S-3; and (333-123308, 333-67849, and 33-96226) on Form S-8,
of KEMET Corporation of our reports dated June 14, 2005, with respect to the Consolidated Balance
Sheets of KEMET Corporation and subsidiaries as of March 31, 2005 and 2004, and the related
Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Loss, and Cash Flows
for each of the years in the three-year period ended March 31, 2005, management’s assessment of the
effectiveness of internal control over financial reporting as of March 31, 2005, and the effectiveness of
internal control over financial reporting as of March 31, 2005, which reports appear in the March 31, 2005
annual report on Form 10-K of KEMET Corporation.
/s/ KPMG LLP
KPMG LLP
Greenville, South Carolina
June 14, 2005
94
I, Per-Olof Loof, certify that:
Exhibit 31.1
1.
I have reviewed this annual report on Form 10-K of KEMET Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations,
and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others with those entities, particularly during the period in which this report is being
prepared; and
b) designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles; and
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal controls over financial reporting.
Date: June 14, 2005
/s/ PER-OLOF LOOF
Per-Olof Loof
Chief Executive Officer and Director
95
I, David E. Gable, certify that:
Exhibit 31.2
1.
I have reviewed this annual report on Form 10-K of KEMET Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations,
and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others with those entities, particularly during the period in which this report is being
prepared; and
b) designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles; and
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal controls over financial reporting.
Date: June 14, 2005
/s/ DAVID E. GABLE
David E. Gable
Vice President and Chief Financial Officer
96
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
I, Per-Olof Loof, hereby certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
The accompanying Annual Report on Form 10-K for the year ended March 31, 2005, fully complies
with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended; and
The information contained in such report fairly presents, in all material respects, the financial
condition and results of operations of KEMET Corporation.
Date: June 14, 2005
/s/ PER-OLOF LOOF
Per-Olof Loof
Chief Executive Officer and Director
The foregoing certifications are being furnished solely pursuant to 18 U.S.C. Section 1350 and are not
being filed as part of this report or as a separate disclosure document.
97
Exhibit 32.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
I, David E. Gable, hereby certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
The accompanying Annual Report on Form 10-K for the year ended March 31, 2005, fully complies
with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended; and
The information contained in such report fairly presents, in all material respects, the financial
condition and results of operations of KEMET Corporation.
Date: June 14, 2005
/s/ DAVID E. GABLE
David E. Gable
Vice President and Chief Financial Officer
The foregoing certifications are being furnished solely pursuant to 18 U.S.C. Section 1350 and are not
being filed as part of this report or as a separate disclosure document.
Dear Fellow Shareholders
Fiscal 2005 was a year of transition for KEMET. In March 2005, Dave Maguire retired from the KEMET board after
a 43-year career with the company. Dave is highly respected at KEMET as well as throughout the entire electronics
industry. All of KEMET is grateful for his many contributions over the years and wish him the best in his retirement.
He’s earned it.
I joined KEMET as Chief Executive Officer in April 2005. KEMET is a team on a mission: to be a successful company,
which means that we have to be profitable. Being profitable in the short-term is important to employees as well as
shareholders and other stakeholders.
I will not try to gloss-over or defend the FY2005 results. I have said that our number one priority is “The math must
work,” and it clearly was not working. We did make progress on many fronts. However, our financial performance
was unacceptable, and it will improve. Your company is taking immediate action on numerous fronts to bring the
company to the performance levels you want and expect.
We have taken immediate actions to adjust our cost/expense to revenue ratio. We are reaching the conclusion of
the reorganization of our global operations, announced in July 2003. Over 90% of our production workforce is now
in low-cost locations. Our first production facility in Suzhou, China, is performing well, and our second should be
on-line as you read this. These facilities manufacture products close to the major customers that are consuming them.
I am realigning the company to a more flatly structured organization with accountability and responsibility lower
in the organization. I want the people who are close to the action — and close to the customer — to have the
responsibility and authority to make the correct decisions to satisfy our customers and improve profitability.
Additionally, I am establishing three sales/field units to focus on specific geographies and all customers within those
geographies. The leaders of these field units will report directly to me. I intend to be close to our customers and
make sure their needs are our priorities.
There are two pillars of success for any company in this industry — customer focus and technology leadership. In my
early visits with customers, I have clearly received the message that they enjoy doing business with KEMET. Our Easy-
To-Buy-From model is working. Customers want us to succeed. This is a strong foundation on which we can grow.
I have also been impressed with KEMET’s dedication to providing leading-edge technology that meets the needs of
our customers. We had numerous new product introductions during the year. We are seeing increases in shipments
of our innovative organic tantalum-polymer products, which we call KO-CAPs. We are also making advances in new
high-capacitance, multilayer ceramic capacitors. All these new parts are environmentally friendly, in accordance
with new environmental legislation around the world.
I have arrived at KEMET at a challenging time for the company, in particular, and the electronics industry, in general.
I appreciate the depth of experience of KEMET’s employees, many of whom have decades of knowledge about the
electronics industry. We will tap into and leverage that knowledge as we chart a course for KEMET’s future. We will
seek ways to sell more to our existing customers and to find new customers for our products, while continuing to
reduce costs.
Further details of our forward course are still being determined as I write this, but I can assure you I came to
KEMET to help our team win. I look forward to reporting back to you on our progress toward success in the future.
Thank you for your continued support of KEMET.
Sincerely,
Per-Olof Loof
Chief Executive Officer
Corporate Profile
KEMET Corporation is one of the world’s
leading suppliers of tantalum, multilayer
ceramic and solid aluminum electronic
capacitors. Our vision is to be the preferred
supplier of standardized components
among customers demanding the highest
standards of quality, delivery and service.
Board of Directors
Officers
Key Subsidiaries
Frank G. Brandenberg
Chairman
Former Corporate Vice President
and Sector President of Northrop
Grumman Corporation
Maureen E. Grzelakowski
Technology Industry Consultant
Per-Olof Loof
Chief Executive Officer of
KEMET Corporation
E. Erwin Maddrey, II
President
Maddrey and Associates,
an investment and consulting firm
Joseph D. Swann
President of Rockwell Automation
Power Systems and
Senior Vice President of
Rockwell Automation
Charles E. Volpe
Former President and
Chief Operating Officer of
KEMET Corporation
KEMET Electronics Corporation
2835 Kemet Way
Simpsonville
South Carolina 29681
KEMET de Mexico S.A. de C.V.
Av. Carlos Salazar y Blv. Manuel
Cavazos Lerma #15
Matamoros
Tamaulipas
Mexico 87380
KEMET Electronics S.A.
1-3, Avenue de la Paix
Ch-1211 Geneva 20
Switzerland
KEMET Electronics Asia Ltd.
30 Canton Road, Room 1512
Silver Cord Tower II
Tsimshatshui Kowloon
Hong Kong
KEMET Electronics Marketing (S) Pte Ltd.
101 Thompson Road
#23-03 United Square
Singapore 307591
KEMET Electronics (Suzhou) Co., Ltd.
Block 8, Suchun Industrial Square
Suchun Road, Suzhou Industrial Park
Suzhou, Jiangsu 215021
People’s Republic of China
Per-Olof Loof
CEO
James P. McClintock
President and COO
David E. Gable
VP and CFO
Larry C. McAdams
VP Human Resources
J. Kelly Vogt
VP Sales and Marketing
Daniel E. LaMorte
VP and CIO
Dr. Philip M. Lessner
VP Tantalum Technology and
Technical Marketing
Guy T. Williams
VP Engineering and Facilities
James A. Bruorton III
VP Global Distribution Sales
John E. Schneider
VP Sales — Asia
John R. Warner III
VP Strategy and Communications
Donald R. Aldworth
VP Quality
Joseph S. Porter
VP Sales — Americas
Michael W. Boone
Treasurer, Senior Director of Finance
and Secretary
KEMET Electronics Corporation
World Sales Headquarters
P.O. Box 5928
Greenville, SC 29606
Phone: 864.963.6300
Fax: 864.963.6521
www.kemet.com
KEMET Electronics S.A.
1-3, Avenue de la Paix
P.O. Box 76
Ch-1211
Geneva 20, Switzerland
Phone: 41.22.715.0100
Fax: 41.22.715.0170
KEMET Electronics Marketing (S) Pte Ltd.
101 Thompson Road
#23-03 United Square
Singapore 307591
Phone: 65.353.6636
Fax: 65.353.6656
ANNUAL REPORT 2005
Highlights of Fiscal 2005
Years ended March 31, (Dollars in thousands except per share data)
2003
2004
2005
Net sales
Net loss
Net loss per share, diluted
Net cash provided by (used in) operating activities
$447,332
$ 433,882
$ 425,338
$(55,988)
$(111,975)
$(174,094)
$ (0.65)
$ (1.30)
$
(2.01)
$ 43,710
$ 38,452
$ (12,752)
Cash and cash equivalents, short-term investments, and investments in marketable securities
$263,585
$ 271,284
$ 219,466
Stockholders’ equity
$793,275
$ 684,478
$ 515,203
Net Sales (In Millions)
Earnings (Loss) Per Share — Diluted
Stockholders’ Equity (In Millions)
$1,500
1,200
900
600
300
0
’00
’01
’02
’03
’04
’05
$5
4
3
2
1
0
-1
-2
-3
’00
’01
’02
’03
’04
’05
$900
675
450
225
0
’00
’01
’02
’03
’04
’05