KEM: KEMET Corp Analysis and Research Report

2018-09-14 - by Asif , Contributing Analyst - 46 views

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Business Overview

KEMET is a leading global manufacturer of a wide variety of capacitors, and Electro-magnetic compatible ("EMC") devices, sensors and actuators. With respect to capacitors, the company compete in the passive electronic component industry, specifically multilayer ceramic, tantalum, film and aluminum (solid & electrolytic) capacitors. Product offerings include surface mount capacitors, which are attached directly to the circuit board; leaded capacitors, which are attached to the circuit board using lead wires; and chassis-mount and other pin-through-hole board-mount capacitors, which utilize attachment methods such as screw terminal and snap-in.

Capacitors are electronic components that store, filter, and regulate electrical energy and current flow. As an essential passive component used in nearly all circuit boards, capacitors are typically used for coupling, decoupling, filtering, oscillating and wave shaping and are used in communication systems, servers, personal computers, tablets, cellular phones, automotive electronic systems, defense and aerospace systems, consumer electronics, power management systems and many other electronic devices and systems (basically anything that plugs in or has a battery).

KEMET’s capacitor product line consists of many distinct part configurations distinguished by various attributes, such as dielectric (or insulating) material, configuration, encapsulation, capacitance (at various tolerances), voltage, performance characteristics and packaging. Most of its customers have multiple capacitance requirements, often within each of their products. The company's broad product offering allows it to meet the majority of those needs independent of application and end use.

The company's EMC business offers a broad line of electrical noise management products. As circuits become more complex within a device, and the amount of information being communicated between devices increases at a dramatic rate, the quality of electronic signals becomes key to the integrity of the information being communicated. TOKIN EMC products play a key role in maintaining signal integrity across a number of end markets including telecommunications, mobile computing, automotive and general industries. The sensor and actuator business manufactures products that sense and respond to human activity, physical vibration, and electric current. These products are found in home appliances, consumer devices and industrial electrical equipment. In addition, electromechanical actuation devices that are critical to the manufacture of semiconductor devices and the management of industrial and chemical gas flow. Sensors are an important family of devices as the “internet-of-things” continues to permeate everyday life.

KEMET operates twenty-four production facilities in Europe, North America, and Asia, and employs approximately 14,750 employees worldwide. Commodity manufacturing previously located in the United States has been substantially relocated to its lower-cost manufacturing facilities in Mexico, China and parts of Europe. Production remaining in the United States focuses primarily on early-stage manufacturing of new products and other specialty products for which customers are predominantly located in North America. The company also have low cost manufacturing facilities located in Vietnam and Thailand.

The company's products are sold into a wide range of different end markets, including computing, industrial, telecommunications, transportation, consumer, defense and healthcare across all geographic regions. No single end market industry accounted for more than 30% of net sales, although one electronics distributor, TTI, Inc., accounted for more than 10% of net sales in the three-month period ended June 30, 2018. In addition, an aggregate of over 10% of its net sales in the three-month period ended June 30, 2018 were driven by sales to electronic manufacturing services providers ("EMS") for incorporation into Apple Inc. products. No single end-use direct customer accounted for more than 5% of its net sales for the three-month period ended June 30, 2018. During the three-month period ended June 30, 2018 the company introduced 15,833 new products of which 83 were first to market. In addition, the company continue to focus on specialty products which accounted for 33.2% of its revenue over this period.

The company believe the long-term demand for the various types of capacitors the company offer will grow on a regional and global basis due to a variety of factors, including increasing demand for and complexity of electronic products, growing demand for technology in emerging markets and the ongoing development of new solutions for energy generation and conservation.

KEMET Corp is organized into three segments: Solid Capacitor segment (“Solid Capacitors”), Film and Electrolytic segment (“Film and Electrolytic”) and Electro-magnetic, Sensors & Actuators (“MSA”). Each segment is responsible for the operations of certain manufacturing sites as well as all related research and development efforts. The sales, marketing and corporate functions are shared by each of the segments.

The Company does not allocate corporate indirect selling, general and administrative (“SG&A”) or shared Research and development (“R&D”) expenses to the segments. Results for the first quarter of fiscal year 2018 have been reclassified to conform to the current period presentation where certain regional SG&A amounts have been allocated to certain segments, and also a portion of the allocation within the segments was allocated to cost of sales.

Recent Developments and Trends

The following items are reflected in the financial statements for the three-month periods ended June 30, 2018:

TOKIN

On April 19, 2017, the Company completed its acquisition of TOKIN, which at that time it became a 100% owned indirect subsidiary of KEMET. As such, the results for the prior year comparative period do not include TOKIN's sales and expenses for the 19 days prior to the date of acquisition. For further information on the acquisition of TOKIN, refer to Note 2, “Acquisitions.”

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings.

The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act. At June 30, 2018, the Company has not completed its accounting for all of the tax effects of the Act. In certain cases, as described below, the Company has made a reasonable estimate of certain effects of the Act. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. The Company’s estimates may also be affected as it gains a more thorough understanding of the tax law. These changes could be material to income tax expense.

The Company has initially determined a $0.8 million tax benefit impact related to the US federal corporate tax rate change to its existing deferred tax balances, which was included as a component of income tax expense from continuing operations for the prior fiscal year. The Company estimates no tax impact from the estimated transition tax repatriation charge of $79.3 million due to net operating loss utilization and a valuation allowance in the U.S. There is no impact to foreign locations. The Company has not been able to finalize the calculation for the one-time transition tax and will continue to account for this item based on its existing accounting under ASC 740, Income Taxes.

Certain provisions of the Act did not impact the Company until the current fiscal year. These provisions include, but are not limited to, the base erosion anti-abuse tax (“BEAT”), the provision designed to tax global intangible low-taxed income (“GILTI”), the foreign-derived intangible income (“FDII”) provision, and the provision designed to limit interest expense deductions. Given the complexity of the new provisions, the Company continues to evaluate the impact the new legislation will have on the Consolidated Financial Statements.

The Company has made sufficient progress in its calculations related to BEAT to reasonably estimate the effect on its estimated annual effective tax rate for the 2019 fiscal year. This adjustment increased the annual effective tax rate by 1.0% and will be further evaluated in future interim periods. However, the Company is still evaluating the effects of GILTI, FDII, and the provision designed to limit interest expense deductions, and the Company is not able to quantify the impact on the Consolidated Financial Statements at this time. In addition, FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either treat taxes due on the GILTI as a current period expense or factor such amounts into the measurement of its deferred taxes. Given the complexity of the GILTI provisions, the Company is still evaluating and has not yet determined its accounting policy.

Restructuring

The Company has implemented restructuring plans which include programs to increase competitiveness by removing excess capacity, relocating production to lower cost locations, relocating corporate function to the new headquarters, and eliminating unnecessary costs throughout the Company. Significant restructuring plans which include personnel reduction costs during the quarter ended June 30, 2018 are summarized below (amounts in thousands):

.Total expected to be incurredIncurred during quarter ended June 30, 2018Cumulative incurred to date
Restructuring PlanSegmentPersonnel Reduction CostsRelocation & Exit CostsPersonnel Reduction CostsRelocation & Exit CostsPersonnel Reduction CostsRelocation & Exit Costs
US overhead function relocation to Fort Lauderdale, FLCorporate2655909(79)2655909
Tantalum powder facility relocationSolid Capacitors8972098

Outlook

For the second quarter of fiscal year 2019, the company expect net sales to be within the $330.0 million to $340.0 million range, gross margin as a percentage of net sales is expected to be between 29.0% and 31.0%, SG&A expenses are expected to be between $43.0 million and $44.0 million, R&D expenses are expected to be approximately $10.5 million to $11.5 million and income taxes are forecasted to be between $3.5 million and $4.0 million. The company expect to spend in the range of $20.0 million to $30.0 million in capital expenditures for the second quarter of fiscal year 2019.

For fiscal year 2019, the company expect net sales to be within the $1.3 billion to $1.4 billion range.


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