This week, we revisit a market leader in the development and manufacture of capacitors, and the largest manufacturer of tantalum capacitors. Kemet Corporation (KEM) has recently concluded its restructuring of its business units and has continued to increase its profitability.
The company aims to complete its acquisition of NEC Tokin this year, which should be quickly accretive to the company’s sales and profitability. Between FY 2013 and FY 2015, NEC Tokin grew adjusted EBITDA by over 700%.
The company has more than doubled cash levels over the past four quarters, from $32.9 million to $65 million with another $25 to $30 million expected additions by year-end.
In its most recent fiscal year (FY) 2016 results (ending March 31, 2016), Kemet again grew its gross margin over the previous year, from 19.4% in FY 2015 to 22.2% in FY 2016.
Kemet recently announced a bond repurchase of up to $20 million this fiscal year.
These bonds are a fantastic opportunity for investors to diversify into the electronics industry with a market leader who is not only growing, but solidifying its balance sheet as well. In light of the company’s solid results and improving balance sheet, we have marked these higher yielding and high cash flow bonds for additional weighting in both our FX1 and FX2 managed income portfolios.
NEC Tokin Acquisition
In 2012, Kemet acquired a 34% stake in NEC Tokin, a joint venture with Japan’s NEC corporation. Based in Tokyo, NEC Tokin manufactures tantalum, electromagnetic and electromechanical capacitors and access devices. Since that time, Kemet has been instrumental in NEC Tokin’s growth. Between FY 2013 (ending 3/31/2013) and FY 2016, NEC Tokin’s revenues grew by $124 million to $492 million. More impressively, adjusted EBITDA improved over that same time period from $9 million in 2013 to $73.6 million, an increase of over 700%.
Now, Kemet is in the final stages of acquiring the remaining shares of NEC Tokin, to be completed by the end of this year. As Kemet’s CEO Per Loof, stated, “We do believe that the NEC Tokin acquisition should be a significant event and potential game changer for Kemet, providing increased shareholder value.”
Cash is King
Over the past few quarters, Kemet has continued to increase its cash levels.
June 2015 $32.9 M in cash
Sept 2015 $39.2 M in cash
Dec 2015 $43.2 M in cash
Mar 2016 $65.0 M in cash
In addition, on its most recent quarterly results conference call, the company indicated that it expects to grow cash by another $25 to $30 million by year-end. With the marked increase in its cash levels, it comes as little surprise that the company has initiated a buy-back of its outstanding bonds. At the conclusion of its fiscal year 2016 (ending March 31, 2016), Kemet’s Board of Directors authorized a debt repurchase plan, initially up to $20 million over the course of the company’s fiscal year 2017 (beginning April 1, 2016), with a goal of lowering ongoing interest payments and improving the company’s balance sheet.
Kemet has also actively monitored the outstanding balance of their credit revolver over the past year. The company paid down $9.6 million on its revolver during FY 2016. In addition, the bank that holds the company’s revolver recently increased the borrowing amount from $60 million to $65 million, an indication of the company’s improving financial position.
We reviewed Kemet Corporation in July 2012 and again in November 2015. At our last review, the company was in process of concluding its restructuring of its Film and Electrolytic Business Group. As part of the restructuring of this group, Kemet reduced headcount by 240 employees between September 2014 and December 2015. These reductions have translated to cost reductions of $5.0 million per quarter.
About the Issuer
KEMET Laboratories was founded by Union Carbide in 1919, and KEMET Corporation (KEM) became a US listed company in 1992. Headquartered in Simpsonville, SC and employing about 9,800 people worldwide, KEMET has 20 manufacturing facilities in Mexico, China, Indonesia, Europe, and the United States. KEMET’s extensive network of global distribution partners serve a customer base that includes nearly all of the world’s major electronics original equipment manufacturers (including Alcatel-Lucent, Apple, Bosch, Cisco Systems, Continental AG, Dell, Hewlett- Packard, IBM, Intel, Motorola, Nokia, and TRW), electronics manufacturing services providers (including Celestica, Flextronics International, Jabil Circuit, Sanmina-SCI) and distributors (including TTI, Arrow Electronics and Avnet).
KEMET is a global manufacturer of multilayer ceramic, solid & electrolytic aluminum, tantalum and film capacitors. Capacitors are passive electronic components that store, filter, and regulate electrical energy and current flow. Capacitors come in various shapes and sizes with a myriad of technical specifications, and are required in anything that has an electric current (from iPods to giant windmills.) They are numerous in some devices, with over 3000 utilized in some flat panel TV’s and over 700 in some smartphones. Capacitors are typically used to filter out interference, smooth the output of power supplies, block the flow of direct current while allowing alternating current to pass and for many other purposes. Generally, ceramic capacitors are more cost-effective at lower capacitance values, and tantalum capacitors are more cost-effective at higher capacitance values.
Kemet operates three business lines; Tantalum capacitors, Ceramic capacitors and Film and Electrolytic capacitors. Based on net sales, Kemet is the largest manufacturer of tantalum capacitors in the world.
Diversification Across Industries
Kemet’s capacitors have various uses across many different industries. Here is a breakdown of the different industries that made up the company’s fiscal year 2016 revenues.
According to a 2015 report by Paumanok Publications, a market research firm that focuses on the passive components industry, the global capacitor market in fiscal year 2015 was estimated to be $18.2 billion in revenues and 1.76 trillion units. According to the report, the global capacitor market is expected to improve substantially and achieve revenue and unit volume increases of 14% and 19% respectively by fiscal year 2020.
Capacitors are a fundamental component of electronic circuits. As such, demand for capacitors generally follows demand for electronic products, as well as integrated circuits, which, though cyclical, continues to increase. Kemet believes growth in the electronics market and the resulting increasing demand for capacitors will be driven by several factors: development of new products (alternative energy systems, hybrid transportation, smart phones, mobile personal computing devices), increasing electronic content in existing products such as home appliances and automobiles, and consumer desire for mobility and connectivity.
Kemet recently posted its Q4 and fiscal year (FY) 2016 results. The company continues to make progress towards increasing profitability after its restructuring efforts. For fiscal year 2016, Kemet’s gross margin increased to 22.2% as compared to its fiscal year 2015’s gross margin of 19.4%. Operating income for FY 2016 also showed an impressive increase, coming in at $32.3 million as compared to FY 2015’s $22.4 million, an outstanding increase of 44%. Finally, net sales also increased over the previous quarter by 3.8%.
Kemet’s adjusted EBITDA for FY 2016 registered at $91.14 million, with interest expense coming in at $39.61 million. Adjusted EBITDA to interest expense for FY 2016 calculates to 2.3x. This metric should improve over the course of this next year as Kemet pays down its debt, thereby decreasing annual interest expense. In addition, the completion of the NEC Tokin acquisition and the associated increase in adjusted EBITDA should bring coverage close to 3x.
The default risk is Kemet’s ability to perform. The company continues to increase its profitability as evidenced by its continued growth in its gross margin. Restructuring is now behind them and the company has consistently grown its cash levels over the past four quarters. Its debt repurchase plan this fiscal year will reduce its long-term debt by $20 million as well as reduce the company’s annual interest expense. The extremely attractive yields on these 24-month bonds appear to outweigh the risks identified here.
Kemet’s NEC Tokin recently reached a preliminary settlement with plaintiffs in two antitrust class action suits. In consideration of its release from the class action suits, NEC Tokin will pay $37.25 million to a settlement class of direct and indirect purchasers of capacitors. The payments will be made in annual installments extending through December 2019. While Kemet is still waiting for certain government jurisdictions to complete their review of the case and assess any potential liability, this agreement clears a significant hurdle in Kemet’s acquisition of NEC Tokin.
Summary and Conclusion
From its growing cash levels, its increasing gross margins, to its recent decision to reduce its debt by $20 million this fiscal year, Kemet is doing all the right things. Its pending full acquisition of NEC Tokin will add additional revenue streams and products to Kemet’s already competitive suite of products across various industries. These short 24-month bonds provide investors with an excellent opportunity to diversify into the electronics industry with a very sweet bond yielding about 14%. The recent announcement of its bond repurchase program has not only hiked the price for these bonds, but interest level as well, and we have chosen them for additional weighting to our global high yield fixed income portfolios, Fixed-Income1.com and Fixed-Income2.com.
Issuer: KEMET Corporation
Yield to Maturity: ~13.98%
About Durig Capital
At Durig Capital, we provide investors with a specialized, transparent fiduciary service at a very low cost. To obtain higher yields and keep costs as low as possible, we typically bundle smaller retail orders into larger institutional sized orders with many global trading firms and bond platforms. Our professional service enables access to a greater spectrum of bonds, higher yields, and lower price points. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured.
We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful. Our main priority is to provide the best opportunities for our clients. Our bond reviews are published on the Internet and distributed through our free email newsletter to thousands of prospective clients and competitive firms only after we have first served the needs of our clients. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients.
When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.
Disclosure: Durig Capital and certain clients may have a position in Kemet Corporate bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.
To know more about this Kemet bond call our fixed income specialist at 971-327-8847
Tell us what your looking for, or if you have questions about US bond.