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Edited Transcript of KEM earnings conference call or presentation 2-Nov-17 1:00pm GMT

Q2 2018 KEMET Corp Earnings Call

SIMPSONVILLE Nov 3, 2017 (Thomson StreetEvents) -- Edited Transcript of KEMET Corp earnings conference call or presentation Thursday, November 2, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Per-Olof Loof

KEMET Corporation - CEO & Director

* Robin Blackwell

* William M. Lowe

KEMET Corporation - Executive VP & CFO

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Conference Call Participants

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* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

* Matthew Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Joshua Nichols

B. Riley & Co., LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the KEMET Second Quarter Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) It is now my pleasure to hand our program over to Ms. Robin Blackwell, Vice President, Corporate Communications and Relations. Please go ahead.

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Robin Blackwell, [2]

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Thank you, Kristin and good morning everyone. This is Robin Blackwell. Welcome to KEMET's conference call to discuss the financial results for the second quarter fiscal year 2018 ending September 30. Joining me today on the call is Per Loof, Chief Executive Officer; and Bill Lowe, Executive Vice President and Chief Financial Officer. As a reminder to you, a presentation is available on the website, which will help you follow along in the financial portion of the discussion.

Before we begin, we'd like to advise you that all statements addressing expectations or projections about the future are forward-looking statements. Some of these statements includes words such as expects, anticipates, plans, intends, projects and indicates. Although they reflect our current expectations, these statements are not guarantees of future performance and they involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks or 10-Qs and our registration filing statements for additional information on the risks and uncertainties. Now, I will turn the call over to Per.

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Per-Olof Loof, KEMET Corporation - CEO & Director [3]

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Thank you, Robin and good morning everyone. It's been another exciting quarter for KEMET. This is the first full quarter since the TOKIN acquisition and you may recall last quarter we were reporting it as a combined entity, but we're 19 days short of a full quarter due to the transaction closing date of April 19.

Revenue for this quarter is $301.5 million, up 10% quarter-over-quarter. Adjusting for the 19 days, revenue was up 3.4% quarter-over-quarter. GAAP gross margins was 28.2%, up 100 basis points from Q1 and up 340 basis points from a year ago. Non-GAAP gross margins came in at 28.3%, up 100 basis point from Q1 and up 320 basis points from a year ago. EPS fully diluted and on a non-GAAP basis was $0.45, up $0.12 from last quarter and up $0.32 from a year ago. All businesses have grown and as a result, we see revenue growth of [14%] from a year ago. F&E grew 7.2% with revenue of $47.9 million. Solid Capacitors grew [12.5% year-over-year with revenue of $991 million and MSA grew 17% year-over-year with revenue of $63.2 million]. Last quarter, we indicated that we increased CapEx $50 million to $60 million for this fiscal year and this is partly due to our investment in capacity, but also to enable us to add additional technologies, preparing us to build products we know we'll need next year. In addition to the CapEx, we're deploying efficiency measures and optimizing production schedules to satisfy demand driven by increased activity in every market. We will discuss the segments later.

We are experiencing continued strong performance this quarter. Revenue and orders are topping what we saw in Q2. It is still early in the quarter, but Q3 order rates are 16.6% higher than the same day in Q2. This is building backlog for us into Q4 as the seasonal slowdown in the last 2 weeks of December and capacity constraints in certain product areas will affect revenue recognized in the December quarter. We did grow cash this quarter and we expect the trend to continue even as we increase our CapEx spend. Bill is going to talk about that in more detail later.

We are seeing POS levels, which are the highest they have been in 10 years. Incidentally, this is also the seventh sequential quarter of revenue growth for the company and this growth is balanced across regions and products. Inventory in the distribution channel increased 7% and remained stable relative to POS growth and month on hand continued to be stable. We do not see this as an issue for the next couple of quarters, but it's hard to see beyond that. Inventories grew in Europe and in the Americas and only in our 3 large global distribution partners. No disti inventory growth was seen in Asia.

As predicted and reflecting on the prior quarter, the TOKIN acquisition was accretive out of the gate. Our integration teams are in place and focused upon an integrated sales force, supply chain, common technology road map platforms and production systems. Clear goals have been established to cut costs, leveraging synergies by $10 million in the short-term on the sort of that 1 year horizon with an additional $10 million on the mid-term horizon 2 years out. We have successfully merged TOKIN employees into the KEMET's HR platform and the finance teams are working closely together to streamline and automate a consolidated financial statement.

We've been very pleased with the strong progress of the teams, given the complexities of merging the different systems and cultures together. We can see and sense manufacturing, product, procurement and sales synergies. We feel that we are well underway to work on fine tuning the details. With one notable exception, we have very little customer overlap and with that customer actually very little product overlap. And of course geographically it looks very different as well. Post-merger for Q2, 43% of our business is in Asia, 15% in Japan, 22% in Europe, and 20% in the Americas. Having said that, we believe that over time our cross-selling opportunities are quite sizable.

Digitization, KEMET has taken the offensive with regards to digital initiatives. Starting with our acquisition of IntelliData, KEMET has created an industry-leading digital portfolio to serve our entire customer base, whether it'd be direct engagement through our web properties or through micro services to our distribution partners. This has made a significant difference in our marketing and a disproportionate growth in our distribution channel, serves actually as evidence to this.

To illustrate this, one of our catalog distributors, DigiKey grew their sales of KEMET products 37% in Q1 fiscal '18 over a year ago. At the same time, we're transforming and modernizing our entire business intelligence platform. The new cloud-based data warehouse and data lakes we are building will serve as the foundation to drive our business analytics and intelligence. We see this platform as another essential part of the digitization of KEMET. To put additional clarity, if we look at the tools we have today, you can easily search for parts via our component edge tools, use [case themes] to stimulate the performance of our parts used in the conditions of the engineer circuit. Following this, they can download 3D CAD models into their design and we are in beta test with our newest invention [testing]. Our new coding system will see artificial intelligence to recommend our sales price. What we are delivering is a concept of self-service for each person that interacts with us and increasingly digitally.

Our new coding system will use artificial intelligence as I said to recommend the sales price. The outcome of this that of course will be a turnaround orders of magnitude faster, more accurately and priced for market penetration and price optimization. As I said and as we look at the revenue performance this first half of fiscal '18 and compared to the first half a year ago fiscal '17, our revenue has improved dramatically, of course due primarily to the addition of TOKIN and from $372.2 million a year ago to $575.5 million for the first half of fiscal '18. However, even disregarding that 55% growth and comparing pro forma in both businesses, the growth year-over-year was 14%. We feel good about where we are and as Bill now will discuss the details of financials, we do believe we have a story and with a balance sheet to match. Bill?

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William M. Lowe, KEMET Corporation - Executive VP & CFO [4]

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Thank you, Per and good morning, everyone. I'll begin my review on Slide 3, if you are following along on the website. As Per said, net sales for the quarter were $301.5 million, which is up 10% compared to the prior quarter of $274 million. On a pro forma basis, we're up 3.4% compared to the last quarter of $291.5 million when you include TOKIN's revenue for the first 19 days that we did not own them. Our non-GAAP gross margin percentage improved 320 basis points from 25.1% in the prior year to 28.3% in the current quarter. However, just comparing the legacy KEMET gross margin, gross margin increased $13 million or approximately 420 basis points primarily driven by an increase in net sales as well as from continued variable margin improvement due to our restructuring activities, vertical integration, favorable foreign currency impact on our manufacturing costs and manufacturing process improvements as a result of our cost reductions.

GAAP net income was $12.8 million and our non-GAAP adjusted net income was $26.5 million compared to $7 million in the prior year. Our adjusted EBITDA for the quarter was $49.9 million, an increase of 85.5% from $26.9 million in the prior year. Our non-GAAP net income was $0.53 per basic share and $0.45 per diluted share. As I've previously stated, our adjusted EBITDA for the quarter was $49.9 million, an increase of $6.6 million just from the prior quarter. Non-GAAP SG&A expenses of $38.9 million, which were in our estimated range for the quarter, were up compared to $33.7 million in the prior quarter and our expectation for this next quarter is in a similar range of $39.5 million to $41 million.

Taxes this quarter were $2.9 million and we expect a similar range next quarter from $3 million to $3.8 million. R&D expenses were $9.7 million and we expect a similar number again in Q3.

Moving to Slide 5, capital expenditures during the quarter were $10.5 million compared to $7.3 million in the prior quarter. And as stated in the last earnings call, and Per mentioned earlier today, we expect capital expenditures for the full year ending March 2018 to be in the $50 million to $60 million range. We finished the quarter with a cash balance of $253.7 million, quite a bit ahead of our forecast. During the quarter, we paid $4.3 million towards reducing our term loan in accordance with our amortization schedule and our expectations for ending cash balance at December 31 is in the range of $265 million to $275 million even though we'll see a ramp up in CapEx spending moving towards the end of the fiscal year. Our total debt now stands at $331.8 million versus $388.2 million from the beginning of the fiscal year. The adjusted EBITDA margin trend continues to increase and increased to 16.6% from 9.4%, 10 quarters ago. Additionally, LTM adjusted EBITDA margins have increased steadily from 13.3% to 15.3% since September of 2016 as noted on Slide 7.

I would also like to mention that during this past quarter K Equity exercised it warrants. Using a shelf registration, the company issued shares equal to the amount of the warrants exercised. I know there was some confusion about this transaction, but we've been reporting the warrants in our diluted share count number for calculating our earnings per share now for about 7 years with disclosures in our 10-Ks and 10-Qs. The company did receive approximately $8.8 million as a result of this transaction, which represented the exercise price of the warrants. There are no more warrants outstanding at this time. Our basic outstanding shares are now [approximately 56.6 million shares] and fully diluted approximately 59 million shares. So now very little difference between basic and diluted shares going forward.

Lastly, as a reminder, we also have sizable NOLs or net operating losses. These are often overlooked assets on the balance sheet. We currently project it will have approximately $283 million of NOLs in the United States and $117 million of NOLs to use in Japan at fiscal year-end. Now I'll turn the call back over to Per.

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Per-Olof Loof, KEMET Corporation - CEO & Director [5]

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Thank you, Bill and turning to our business groups. The Solid Capacitor group revenue as compared to prior year increased $9.2 million or approximately 5.1% or $191.3 million. Total revenue increase is partly due to a full quarter of TOKIN capacitor revenue as well as continued strength in the distribution and EMS channels. On a pro forma basis, on an apples-to-apples basis, if you like, it grew $3.3 million or 1.8%. Gross margin in the second quarter was approximately 34.7%, an improvement of [40 basis points] over the prior quarter. Order rates continue to be robust and we are still experiencing this robustness in the first month of Q3. We expect revenue to be strong, but as I said, we do anticipate a typical seasonal slowdown as we approach the holiday season the last 2 weeks in December.

Our Film and Electrolytic group revenue was $47.9 million, which is slightly above prior quarter. Gross margin was 7.7% compared to 10.4% in the previous quarter. This decrease is a result of operational inefficiencies and not product demand. We are addressing these inefficiencies of course and expect both revenue and margins to improve some more in this quarter.

For the magnetic sensors and actuators business group, this was a very good quarter. Revenue, gross margin, operating income all increased from the first quarter. Major factors that contributed to revenue growth and higher margins are flex suppressor sheets for smartphones, antenna units for portable game machines and Piezo actuators for semiconductor equipment. Demand for inductors for automotive and Piezo transducers for fish finders continue to remain both stable and strong. Revenue increased to $62.3 million which is a 40.6% increase over the prior quarter. Gross margin came in at 24%, up from Q1 based on a favorable product mix. Book-to-bill ratio at the end of the quarter was 1. This was impacted by a manufacturing equipment sales plan for Q1 but shipped in Q2. Excluding those manufacturing equipment sales, the book-to-bill is [breakeven].

Now to the regions. Europe closed with $66.5 million, which is higher than expected. Unlike normal seasonality in Europe, we did not see weaknesses as automotive, industrial and distribution continued to show strong demand, even during the summer. It was a good quarter for Asia, revenue closed at $128.5 million, an increase of 19.7% versus the prior quarter. The market in Asia is positive and bookings from automotive and computing segments remain strong. POS shipments closed at $50.8 million, up 12% versus the prior quarter. A sizable portion of POS growth came from new customers in China and Taiwan as we continued to expand our customer base there with a focus on magnetic sensors and actuators and specialty products.

The combined Q2 revenues for Japan/Korea, our fourth region, closed at $44.7 million, an increase of 26.5% versus the prior quarter. The book-to-bill ratio remained positive with automotive, gaming, personal computing, medical and semiconductor manufacturing equipment market segments leading that way. In the Americas, revenue was $61.6 million, down by 4.6% compared to the prior quarters due to some programs still in progress. POS was stronger than expected at $41.4 million, which is up 3% over the previous quarter. The strong book-to-bill in the Americas continues and while all channels are positive, the strongest channels are distribution and OEM.

Let's have a look at our performance by market segment. On a percentage of revenue basis, the industrial segment shows an increase at 27%. Consumer, computer, defense and medical segments remained stable at 15%, 21%, 4% and 5% respectively. The telecommunications and automotive segment at 14%, slightly down compared to last quarter. You can find these percentages on slide 11 in the deck. All of our key segments continue to show growth. In automotive, we're experiencing 2 major trends: a general digitalization of new vehicles as well as very intensive design-in activity for new HEV, EV platforms and we believe, we KEMET very well positioned to take full advantage of both of these trends.

The computer and consumer segments were essentially flat with storage and processing power driving increased server demand and actually a general rebound in personal notebooks. Thanks for the TOKIN acquisition, we now have a higher presence in the gaming industry, mostly out of Japan, which is also on a rise. The Industrial segment is positive, this is mostly driven by China and a reinvigorated economic situation in Europe, which remains our main market for this segment. Telecom continues to show a general weakness among European players, while we and they wait for the 5G investments to kick in. We are however expecting that to be driven mainly out of China. Finally, we also expect the positive increase in business in the military and aerospace sectors thanks to a general higher design and product action activity both in the U.S. and in Europe.

Now, let me turn to the forecast for the next quarter. But before I do, let me say just a few words regarding our book-to-bill. As I said in my opening comments, order rates are higher than this time in Q2. Book-to-bill at end Q2 September 30 was [1.15, book-to-bill today is 1.30] and this is across all businesses. At the end of the quarter September 30, the book-to-bill for ceramics was [1.20, F&E 1.22, tantalum 1.07 and MSA 1.0]. I don't want to emphasize today's numbers too much as they are really high. We don't expect all of this to turn into revenue this quarter partly because we expect the build slowdown with many of our customers as we approach Christmas. Furthermore, and in some cases, we don't have the capacity and orders are further out. We expect the seasonal slowdown in the summer to rebound in Q4 and we do have the backlog for it.

We anticipate revenue from Q3 to be in the range of $288 million to $300 million. We expect the product mix to be slightly less favorable this quarter for a variety of reasons such as customers production schedules et cetera. We expect consolidated gross margins in the range of 26.5% to 27.5% and this really [stems] for a good quarter and even a stronger Q4. As always, thanks to our hard working people who make the extra effort every day to improve our performance and enhance our customers' experience. Operator, this concludes our prepared comments and I'll be happy to respond to any questions.

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Questions and Answers

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Operator [1]

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[Operator instruction] Our first question comes from Josh Nichols with B.Riley.

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Michael Joshua Nichols, B. Riley & Co., LLC, Research Division - Senior Analyst [2]

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Strong quarter and good to see such strong demand across all the business units and the very healthy cash generation here. What are you seeing you're expanding a little bit for capacity. How do you see ASP declines playing out over the next couple of quarters as some supply comes online, do you think -- is that really just to fill some extended lead times or how should we think about that?

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Per-Olof Loof, KEMET Corporation - CEO & Director [3]

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We are in electronics, so we kind of expect prices to go sort of in the downward trend and we've said always that if we can have a price reduction of [about 0.5 point or less than 1], that's something we can always deal with. What we're seeing now is of course a stabilization of prices as a result of the demand situation and we trying to be very careful and not raise our prices too much. That always comes back to bite us if we do that too much. So we are staying stable, but clearly there is a demand increase across all businesses and across all segments and that tends to show itself in more stable prices and that's kind of where we're thinking right now, but of course as capacity comes on, that picture may change slightly, but it seems to me that there's going to be a while before that capacity kicks in. So we may enjoy this stable pricing environment for still sometime.

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Michael Joshua Nichols, B. Riley & Co., LLC, Research Division - Senior Analyst [4]

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Thank you. That's, that's very helpful. And then good to see the company's executing on these cost synergies following the TOKIN acquisition, but you have talked a little bit more on this call about, you see a number revenue synergies as well, could you dive into that a little bit more as far as where the opportunities lie?

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Per-Olof Loof, KEMET Corporation - CEO & Director [5]

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Well, just comment on your cost comment there. Clearly, the time to take care of your cost scenario is during the good times. So we're doing that. In terms of the synergies for pricing, as I said, we have very little customer overlap. There's one notable exception, but even with that particular customer, very little product overlap. So that tells me that there are strong synergies -- strong opportunities for cross-selling opportunities from a product perspective or from a customer perspective, and of course, the same is true relative to the markets we serve. The former TOKIN or the TOKIN business is very Japan-centric. Not only is a lot of their business in Japan, specifically, but a lot of the business in Asia is actually driven out of by Japanese companies. So we see a tremendous opportunity for their capability in Europe and Asia. If I take the total TOKIN business only 5% of their revenues is in Europe and the U.S. So you just think about that. We've done some PLP work during the joint venture times and we actually touched 30,000 customers, small volumes with the TOKIN products across the globe. So this is going to take some time because designing of course go in cycles, but we do believe that our opportunity to serve our current KEMET customers with TOKIN capabilities is very strong and vice versa and clearly TOKIN has a very strong capability with Japanese car manufacturers and I would suffice that if it's good enough for Lexus, it probably is good enough for Mercedes too.

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Michael Joshua Nichols, B. Riley & Co., LLC, Research Division - Senior Analyst [6]

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Thanks and then last question, I know from over the last quarter or 2, you've talked about potentially looking into doing some M&A possibly in the Asia-Pacific region. Is that still something that you're seeing as an intriguing idea and some good opportunities out there to expand and enhance scale?

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Per-Olof Loof, KEMET Corporation - CEO & Director [7]

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I think we have now -- we took a long time to get this transaction completed and we talked about it for many, many years and I think many, many folks kind of didn't believe it was going to happen maybe but it now happened and has transformed our company quite a bit, both from a product and customer capability and geography capability perspective, but also from a balance sheet perspective and we now have the wherewithal to be a bit more aggressive in some areas. We will take it slowly and carefully to make sure that we get the right targets, but clearly we are looking for continued revenue growth in the business and part of that will come from acquisitions and the way I look at acquisitions is really it's acquiring technology with the revenue stream and that's sort of the approach we want to take and I think given where the world economy is going, I think addressing that through acquisitions in the Asian region is probably not a bad idea.

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Operator [8]

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Our next question comes from Matt Sheerin with Stifel.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [9]

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Can you hear me?

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Per-Olof Loof, KEMET Corporation - CEO & Director [10]

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Yes, we can hear you, fine.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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Yes, could you go over the book-to-bill numbers again?

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Per-Olof Loof, KEMET Corporation - CEO & Director [12]

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Yes, the book-to-bill numbers. These are the book-to-bill numbers at September 30 right and those are the one, there were 1.15 for the total company end of quarter. Today it's 1.30, but let me talk about the Q2 numbers. Ceramics was 1.20, F&E 1.22, tantalum 1.07, and MSA 1. That makes up the 1.15. Now, today the book-to-bill is higher and as I said if I look at order intake today compared to the same day a quarter ago, its 16.6% higher.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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Okay and what -- do you have a backlog number?

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Per-Olof Loof, KEMET Corporation - CEO & Director [14]

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We don't give you a backlog number, but clearly we expect the backlog at the end of this quarter to be very strong. We are keeping our production lines going. We expect that many of our manufacturing customers will actually close their plants during the last couple of weeks of the quarter, so we won't ship, but we will build and therefore we'll have the backlog for shipments in Q4 and we've had conversations with some of our European disti partners and they are now saying they are going to keep their warehouses open even during the Christmas period. So we'll see what happens here, but we're looking at seasonality and what we've learned from history and therefore we are being a little bit more balanced in terms of what we think the revenue is going to be for this quarter, but we're building the product and we have the orders, so we'll ship it in Q4.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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And what was the distribution book-to-bill, if you have that relative to the OEM book-to-bill?

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Per-Olof Loof, KEMET Corporation - CEO & Director [16]

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Yes, the distribution book-to-bill was like 1.35. So higher than the rest, but not ridiculous relative to POS. So we are still feeling and as you know, Matt, we talked about this and I know you've asked us this many times, we are making sure that our distribution business is balanced. We have no intention on putting stuff on the shelves that's not going to ship. So we're looking at POS levels and making sure that whatever we ship into the disti channel is balanced relative to their sales. And month on hand is stable, so we don't see an issue this or next quarter. It's kind of as I said, little difficult to gauge what's going to happen 6 to 9 months out, but now we think the disti business is strong and they want a lot of products for sure.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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And I think you said distribution sales were up 12% or so quarter-on-quarter, is that right POS?

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Per-Olof Loof, KEMET Corporation - CEO & Director [18]

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Yes, that's right.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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Yes, okay and could you tell us what the general lead time trends are in the products and the tantalum and MLCCs where there's been tight supply. Has that changed at all?

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Per-Olof Loof, KEMET Corporation - CEO & Director [20]

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It's still tight supply. Still lead times are out and not -- they are not coming in yet.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [21]

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And what range, like 20 weeks or so still?

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Per-Olof Loof, KEMET Corporation - CEO & Director [22]

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Sure. 20 weeks. Sometimes more.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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And at what point do you expect to have -- at what point and I know you've got strong demand and underlying demand is strong, but at what point do you think that lead times will come into more normal levels as you bring capacity on?

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Per-Olof Loof, KEMET Corporation - CEO & Director [24]

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It's going to take a while to bring that capacity on us. We have now in many of our production lines, run the efficiency game to a point where there's no more efficiency to be gained. And therefore now there is a heavy equipment that has to be implemented and installed and qualified, so that's going to take a while. That's a 9 to 12 months game. And we're starting now to make sure we have the products that customers want, 9 to 12 months out, but I think unless something happens that we can't see or a major macro event of some sort, I believe the underlying macro trends that we see points to strong demand for the next 6 to 9 months for sure. Beyond that, it's a little difficult to gauge.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [25]

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Okay. And the antitrust issues relative to TOKIN and the fines by various jurisdictions, I know there's a few that are outstanding. Any update there?

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Per-Olof Loof, KEMET Corporation - CEO & Director [26]

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Well, we did actually --

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William M. Lowe, KEMET Corporation - Executive VP & CFO [27]

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We increased the accrual little bit this quarter for one of the jurisdictions. Other than that, no further update, we've not received -- we still have not received word from the 2 jurisdictions that we're waiting on. So there's been no additional official change from that. We did add some to the accrual maybe around $7 million I think in total between the battery litigation and that in total to the accrual.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [28]

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What's your total accrual?

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William M. Lowe, KEMET Corporation - Executive VP & CFO [29]

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The total accrual today sits at around $80 million, $81 million, $82 million at this point.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [30]

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Okay and those 2 jurisdictions you are waiting for is the European Union, right and another one?

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William M. Lowe, KEMET Corporation - Executive VP & CFO [31]

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Yes. South Korea and the European Union. And we're also waiting to get word whether or not there will be a reduction in the liability associated with Taiwan. So we're hopeful that actually we will have the ability to reduce the accrual for what comes out of Taiwan, but of course we don't have that notification yet either.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [32]

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Okay and then I'm just I mean ex that accrual you still have obviously a lot of cash. Any plans to do anything with that any time soon? I know you talked about M&A. Anything else with the debt or any other plans?

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Per-Olof Loof, KEMET Corporation - CEO & Director [33]

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We are reducing our debt on a quarterly basis by $4.5 million or so and we'll see what we're going to do, but I think we want to use our cash carefully and we want to see how we want to deploy that to increase capacity somewhat. So we are, as we said, increasing our CapEx spending a little bit and then we are going to look to see if there are any M&A activities that we can engage in and then once we have all that assessed, we'll look to see what we're going to do about that, but as you know we have, we don't want to do anything for the last -- for the first 12 months for sure with the debt. So we'll see what we'll do. So that's sort of a longer term conversation I think.

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William M. Lowe, KEMET Corporation - Executive VP & CFO [34]

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And just to add to Per's comment about the first 12 months, there is 2% hard call, so we'd have a premium of 2% to do something in the first 12 months. So we're happy reducing it at the rate of the amortization schedule which as Per says about $4.5 million a quarter. So that's what you'll see us doing on the debt I think for the short-term and then just continue with Per's comments on the other issues.

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Per-Olof Loof, KEMET Corporation - CEO & Director [35]

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I think, Matt, if you look at our performance and if this continues, which we fully expect it to do, our rates should be a bit lower than what they are today.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [36]

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It makes sense. Okay. Thanks so much for your time.

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Operator [37]

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(Operator Instructions) Our next question comes from Marco Rodriguez with Stonegate Capital.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [38]

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Couple of quick kind of follow-ups here. Just wanted to kind of maybe talk a little bit more about the potential M&A landscape for you guys. If you could maybe talk a little bit, Per, about what you guys are seeing there as far as the number of opportunities and what sort of the valuation levels look like to you guys?

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Per-Olof Loof, KEMET Corporation - CEO & Director [39]

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It's a little too early to talk about that. So I rather refrain from saying anything else than I've already said.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [40]

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Got you, fair. Then maybe if you could talk a little bit about the cross-selling opportunities. I know you've talked about that for a little bit a while here in terms of the acquisition with NEC TOKIN. Can you maybe talk a little bit more as far as how you have gone about reorganizing the sales force and what sort of strategic initiatives have you put into place to kind of get that moving?

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Per-Olof Loof, KEMET Corporation - CEO & Director [41]

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Well, organizationally we are done with the sales force reorganization globally. So basically the -- we have deployed product management capability from the magnetic sensors and actuators folks both in Europe and in the U.S. to supplement the sales effort and the salespeople, the TOKIN salespeople or former TOKIN salespeople, I should say, in the U.S. and Europe are now fully integrated in the U.S and the European sales organizations. When it comes to Asia, which was the more complex. Asia ex-Japan, I should say and Korea, that organization is now fully integrated into one sales force. So the former TOKIN sales folks are now part of the combined KEMET sales force in Asia run from Shanghai of course. When it comes to -- and we will go-to-market in those 3 regions under the KEMET trade name. When it comes to Japan and Korea, we will go-to-market as TOKIN and that business will be run from Japan and of course KEMET didn't have any salespeople in Japan, so that was sort of easy. We had some sales effort in Korea of course and that has now been integrated into the TOKIN sales organization in Korea. So the teams are now in place. The leaders are identified and conversations are ongoing in terms of how we can maximize this and clearly one of the things we need to do is to educate the former TOKIN folks about the KEMET capabilities and educate the former just -- KEMET folks about the TOKIN capability. So that activity is ongoing as we speak and we see as I said, plenty of cross-selling opportunities as we move forward.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [42]

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Got you. That's helpful. And when do you think you should start to see some sort of meaningful improvements being driven by the cross-selling opportunities?

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Per-Olof Loof, KEMET Corporation - CEO & Director [43]

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I think we are seeing some already, but of course some are design-in driven, so it's going to take a little time, but you're going to see those opportunities happening over time. And if you take a very long perspective, I think those cross-selling opportunities should be quite sizable.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [44]

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Got you. And I apologize, on your prepared remarks you talked about some capacity constraints in the December quarter to the kind of negatively influence or negatively reflect your ability to recognize some revenues. Did I hear that correctly? And if so, can you talk a little bit about which areas you're seeing those capacity constraints in?

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Per-Olof Loof, KEMET Corporation - CEO & Director [45]

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Well, we have capacity constraints in many of our businesses right now. What I'm saying is the order levels if we could deliver, we could have more revenue this quarter, but in some cases that's not possible due to capacity constraints. So there is -- on one hand, we have capacity constraints, on the other hand we see or we kind of from an historical perspective, if we look at what happens towards the end of December, manufacturing plants will close and we'll see how much of that will happen this year and that's really why we are being a little cautious on the revenue for this quarter. Do we have the orders to ship more? Yes, we do.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [46]

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Got you. And can you talk a little bit about where you're going to be adding the additional capacity to first or are there specific areas that you need to get that up and running or is it broad-based?

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Per-Olof Loof, KEMET Corporation - CEO & Director [47]

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Its broad-based. We need more capacity in sensors and actuators. We need more capacity in polymer -- tantalum polymer. We need more capacity in our MLCC capabilities and we need more capability on the brick film side and [electrolytics] side as well. So this is broad-based.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [48]

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Got you. And just from kind of a timing perspective, if I heard you correctly to a prior question and answer, you said it's about a 9 to 12 month period for that capacity to kind of come up and start generating revenue for you guys and I believe you started talking about adding the additional capacity last quarter. So we're really talking about a Q1, Q2 fiscal '19 where all that starts to come on?

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Per-Olof Loof, KEMET Corporation - CEO & Director [49]

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Probably more Q2 actually. Well, I think we can see some of this happening maybe late Q1, but more in Q2.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [50]

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Got you. And real quick, just kind of a housekeeping item here, just taking a look at your P&L and the U.S. GAAP net income to non-GAAP net income, you've got legal expenses and fines for antitrust at $10.3 million and you call out a specific number on your SG&A or your operating side that I think it was at about a couple of million. Where is the additional dollars? Is that down in the other income area?

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William M. Lowe, KEMET Corporation - Executive VP & CFO [51]

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There is -- I think in addition to that, there is probably the stock-based compensation that's going to be another larger item. Antitrust fines were about $8 million. There was a couple of million dollars in legal fees related to antitrust, that equals the $10 million plus. So the accrual that I mentioned to that, Matt, asked -- I think Matt asked the question earlier relates to the $7.9 million of antitrust fees. The next largest item really is stock-based compensation -- the non-cash stock-based compensation and then some restructuring charges. Those are the main items on there.

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Operator [52]

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There are no further questions at this time. I will hand the call back over to management for any additional remarks.

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Per-Olof Loof, KEMET Corporation - CEO & Director [53]

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Okay, thank you very much. We were very pleased with the quarter and we're seeing continued strong demand, which is nice to see and we are continuously focused on execution and making sure that we can deliver a nice experience for our customers. And we appreciate you being on the call today and we wish you a great rest of the day. Thank you all.

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William M. Lowe, KEMET Corporation - Executive VP & CFO [54]

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Thank you.

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Operator [55]

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Ladies and gentlemen, this will conclude today's conference call. You may now disconnect your lines.