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Kemet Corporation: Vertically Integrated Tantalum Capacitor Manufacturer
Posted by: Mark Lin (IP Logged)
Date: February 19, 2013 09:35AM

Founded in 1919 by Union Carbide and listed in 1992, Kemet Corporation (KEM) is a global manufacturer of a wide variety of capacitors, including tantalum, multilayer ceramic, solid and electrolytic aluminum and film and paper capacitors. It operates 22 production facilities in ten countries globally and employs more than 10,000 employees worldwide, with a global sales force covering the Americas, EMEA and Asia.

KEM is organized into three business groups: Tantalum, Ceramic, and Film and Electrolytic. KEM's Tantalum Business Group is the largest tantalum capacitor manufacturer in the world based on net sales of $417 million in fiscal 2012. KEM has significantly invested in its tantalum capacitor business for the past 50 years, and it acquired Blue Powder, the largest production location for tantalum powder in the Western Hemisphere, in February 2012. Its Ceramic Business Group is one of the two leading ceramic capacitor manufacturers in the U.S. and among the 10 largest manufacturers worldwide, generating $213 million of sales in fiscal 2012. It has an edge in high reliability markets such as medical, industrial, defense and aerospace because of the Cermaic Business Group's high temperature and capacitance-stable product lines. With net sales of $354 million in fiscal 2012, its Film and Electrolytic Business Group is one of the world’s largest suppliers of film and among the leading manufacturer of wet aluminum electrolytic capacitors for high-value custom applications.

Business Quality

KEM is now the only vertically integrated sizable tantalum capacitor manufacturer in the world, following the acquisition of its former supplier Niotan in March 2012. With its ability to manufacture close to 80% of its tantalum powder requirements in-house going forward, it will further cement KEM's position as a strategic supplier to its global accounts by doing research and development on its tantalum powder to meet customer and market needs.

The proposed integration of NEC Tokin, an Asian-focused Japanese manufacturer of tantalum and other capacitors, and KEM is expected to create a global integrated electronic component solutions companies with targeted annual revenues approaching $2 billion (double KEM's current revenues) and projected EBITDA of $300 to $400 million. Applying a conservative EV/EBITDA of 5x to the projected EBITDA of the combined entity, KEM could be a billion-dollar company in the making.

In a conference call on March 12, 2012, KEM announced the joint venture and proposed integration of NEC Tokin, a manufacturer of tantalum and other capacitors, electro-magnetic materials, piezoelectric components, electro-mechanical devices and access devices. KEM completed the first step in their alliance with the completion of a capital injection of USD50 million (approximately JPY4.4 billion) in February 2013. The transaction comprises three major steps, with the second and third steps effected as two call options that expire in August 2014 and May 2018, respectively. First, KEM will acquire a 34% equity stake in NEC Tokin for $50 million and form a joint venture with NEC, which has been completed. Second, KEM will increase its ownership stake in NEC to 49% for an additional $50 million. Finally, KEM will acquire the remaining 51% ownership to have full control, through a final payment based on the greater of US$250 million or six times 12 months trailing EBITDA. NEC Tokin is a manufacturer of tantalum and other capacitors, electro-magnetic materials, piezoelectric components, electro-mechanical devices and access devices, currently has revenues and EBITDA of $755 million and $70 million, respectively. KEM derives 34% of its fiscal 2012 sales from Asia and NEC Tokin is expected to add significantly to that number. KEM sees minimal overlap between the both of them as NEC Tokin is more consumer and Asia focused.

Cost Control and Reduction

On the cost side, strategic acquisitions made by KEM to vertically integrate its supply chain in its Tantalum Business Group and Electrolytic Business Group, will result in significant costs savings in raw materials. In March 2012, KEM completed its acquisition of Niotan Incorporated, a leading manufacturer of tantalum powders, which was one of its former suppliers. This transaction will provide KEM with a constant and reliable supply of tantalum powder and result in a reduction in raw material costs amounting to $40 million in fiscal 2014 ending March. The purchase price is $75 million, with $30 million paid at closing and $45 million in deferred payments over 30 months. Including $10 million in royalty payments, KEM has to pay approximately $10 million every six months till September 2014. KEM also acquired an aluminum foil processing facility in Knoxville, Tenn., in June 2011 to secure the raw material supply necessary for the manufacture of its aluminum electrolytic capacitors. It is also currently consolidating its existing three facilities in Italy into one new facility in Pontaccio, Italy, and recently opened a new facility in Skopje, Macedonia, in October 2012, all part of initiatives to reduce manufacturing costs. This is part of KEM's plans to move more of its manufacturing to low cost areas in Europe like Bulgaria and Macedonia and Asia.

Investment Risks

KEM's profitability is adversely impacted by any increase in its principal raw materials such as tantalum powder, tantalum ore, palladium, aluminum and silver. For example, the price of palladium fluctuated between $563 and $833 per troy ounce in fiscal 2011 and KEM has responded to the price volatility by seeking ways to reduce palladium usage in its ceramic capacitors. While KEM experienced significant raw material price fluctuations in the tantalum supply chain in fiscal 2012, this is expected to change going forward with the March 2012 acquisition of Niotan Incorporated, its former supplier of tantalum powders.

KEM sells its products through three channels, with electronics distributors, original equipment manufacturers and electronics manufacturing service providers accounting for 42%, 15% and 43% of its 2012 fiscal sales. Historically, the booking trends for electronics distributors have been more volatile than that of the original equipment manufacturers and electronics manufacturing service distributors.

Valuation and Financial Analysis Charts

KEM Historical P/B and P/NTA Multiple

KEM Earnings-Cash Flow Comparison

KEM Cash-Debt-Market Capitalization Comparison

Stocks Discussed: KEM,
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