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AVX > SEC Filings for AVX > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for AVX CORP


7-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position made in this Quarterly Report on Form 10-Q are forward-looking. The forward-looking information may include, among other information, statements concerning our outlook for fiscal year 2014, overall volume and pricing trends, cost reduction and acquisition strategies and their anticipated results, and expectations for research and development and capital expenditures. There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Forward-looking statements reflect management's expectations and are inherently uncertain. The forward-looking information and statements in this report are subject to risks and uncertainties, including those discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, that could cause actual results to differ materially from those expressed in or implied by the information or statements herein. Forward-looking statements should be read in context with, and with the understanding of, the various other disclosures concerning the Company and its business made elsewhere in this quarterly report as well as other public reports filed by the Company with the SEC. You should not place undue reliance on any forward-looking statements as a prediction of actual results or developments.

Any forward-looking statements by the Company are intended to speak only as of the date thereof. We do not intend to update or revise any forward-looking statement contained in this quarterly report to reflect new events or circumstances unless and to the extent required by applicable law. All forward-looking statements contained in this quarterly report constitute "forward-looking statements" within the meaning of Section 21E of the United States Securities Exchange Act of 1934 and, to the extent it may be applicable by way of incorporation of statements contained in this quarterly report by reference or otherwise, Section 27A of the United States Securities Act of 1933, each of which establishes a safe-harbor from private actions for forward-looking statements as defined in those statutes.

Critical Accounting Policies and Estimates

"Management's Discussion and Analysis of Financial Condition and Results of Operations" is based upon our unaudited Consolidated Financial Statements and Notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to investment securities, revenue recognition, inventories, property and equipment, goodwill, intangible assets, income taxes, and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

We have identified the accounting policies and estimates that are critical to our business operations and understanding the Company's results of operations. Those policies and estimates can be found in Note 1, "Summary of Significant Accounting Policies", of the Notes to Consolidated Financial Statements and in "Critical Accounting Policies and Estimates", in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 and in Note 1, "Critical Accounting Policies and Estimates", in the Notes to Consolidated Financial Statements in this Form 10-Q. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2013. During the three and six month periods ended September 30, 2013, there were no significant changes to any critical accounting policies, judgments involved in applying those policies, or the methodology used in determining estimates with respect to those related to investment securities, revenue recognition, inventories, goodwill, intangible assets, property and equipment, income taxes, and contingencies.


Business Overview

AVX is a leading worldwide manufacturer and supplier of a broad line of passive electronic components. Virtually all types of electronic devices use our passive component products to store, filter, or regulate electric energy. We also manufacture and supply high-quality electronic connectors and interconnect systems for use in electronic products.

We have manufacturing, sales, and distribution facilities located throughout the world, which are divided into three main geographic regions: the Americas, Asia, and Europe. AVX is organized into five main product groups with three reportable segments: Passive Components, KED Resale, and Interconnect. The Passive Components segment consists primarily of surface mount and leaded ceramic capacitors, RF thick and thin film components, surface mount and leaded tantalum capacitors, surface mount and leaded film capacitors, ceramic and film power capacitors, super capacitors, EMI filters (bolt in and surface mount), thick and thin film packages of multiple passive integrated components, varistors, thermistors, inductors, and resistive products. The KED Resale segment consists primarily of ceramic capacitors, frequency control devices, SAW devices, sensor products, RF modules, actuators, acoustic devices, and connectors produced by Kyocera and resold by AVX. The Interconnect segment consists of automotive, telecom, and memory connectors manufactured by AVX Interconnect and KCP Resale connector products.

Our customers are multi-national original equipment manufacturers, or OEMs, independent electronic component distributors, and electronic manufacturing service providers, or EMSs. We market our products through our own direct sales force and independent manufacturers' representatives, based upon market characteristics and demands. We coordinate our sales, marketing, and manufacturing organizations by strategic customer account and globally by region.

We sell our products to customers in a broad array of industries, such as telecommunications, information technology hardware, automotive electronics, medical devices and instrumentation, industrial instrumentation, defense and aerospace electronic systems, and consumer electronics.

Results of Operations - Three Months Ended September 30, 2013 and 2012

Our net income for the quarter ended September 30, 2013 was $28.8 million, or $0.17 per share, compared to net income of $28.0 million, or $0.17 per share, for the quarter ended September 30, 2012.

(in thousands, except per share data) Three Months Ended September 30,

                                            2012                 2013
Net sales                              $       360,823      $       375,785
Gross profit                                    68,925               71,525
Operating income (loss)                         39,255               41,365
Net income (loss)                               28,037               28,816
Diluted earnings (loss) per share      $          0.17      $          0.17

Net sales in the three months ended September 30, 2013 increased $15.0 million, or 4.1%, to $375.8 million compared to $360.8 million in the three months ended September 30, 2012. This increase is primarily a result of the incremental sales attributable to our acquisition of the Tantalum Components Division of Nichicon Corporation ("Asia Tantalum"), which was acquired in February of 2013. Compared to the same period last year, supply chain inventory levels appear to have remained steady as product manufacturers managed purchases in light of consistent end-market demand and economic uncertainty. Overall sales prices for our commodity components declined moderately this quarter when compared to the same quarter in the prior year resulting from increased competitive pricing pressure.


The table below represents product group revenues for the quarters ended September 30, 2012 and September 30, 2013.

Sales Revenue               Three Months Ended September 30,
$(000's)                       2012                 2013
Ceramic Components        $        43,529      $        47,635
Tantalum Components                84,388              103,265
Advanced Components                86,366               88,212
Total Passive Components          214,283              239,113
KDP and KCD Resale                101,010               84,854
KCP Resale                         15,759               17,835
Total KED Resale                  116,769              102,689
AVX Interconnect                   29,771               33,983
Total Revenue             $       360,823      $       375,785

Passive Component sales increased $24.8 million, or 11.6%, to $239.1 million in the three months ended September 30, 2013 from $214.3 million during the same quarter last year, as consistent demand in many of the markets that we serve, particularly in the automotive sector. The sales increase in Passive Components reflects the overall increased unit demand for electronics across global markets as customers introduced new end-market products. The impact of the Asia Tantalum acquisition, which was completed in February of 2013, accounted for $15.8 million of the increased sales of our tantalum products. The increase in sales of Ceramic Components reflects a higher volume of unit sales resulting from an increase in the sale of higher capacitance components compared to the same quarter last year, partially offset by lower selling prices.

KDP and KCD Resale sales decreased $16.2 million, or 16.0%, to $84.9 million in the three months ended September 30, 2013 compared to $101.0 million during the same period last year. When compared to the same period last year, the decrease during the quarter ended September 30, 2013 is primarily attributable to lower sales to the telecommunications and computer manufacturers as they changed design specifications and managed inventory levels in response to demand and new product introduction cycles.

Total connector sales, including AVX Interconnect manufactured and KCP Resale connectors, increased $6.3 million, or 13.8%, to $51.8 million in the three months ended September 30, 2013 compared to $45.5 million during the same period last year. This increase was primarily attributable to stronger demand in the automotive sector reflective of the increased electronic content in today's automobiles.

Our sales to independent electronic distributor customers represented 40.7% of total sales for the three months ended September 30, 2013, compared to 38.7% for the three months ended September 30, 2012. Overall, distributor activity increased 9.6% when compared to the same period last year. This increase is reflective of their customer demand improvements and the low inventory levels maintained by distributors in the prior year. Our sales to distributor customers involve specific ship and debit and stock rotation programs for which sales allowances are recorded as reductions in sales. Such allowance charges were $11.0 million, or 7.2% of gross sales to distributor customers, for the three months ended September 30, 2013 and $7.9 million, or 5.7% of gross sales to distributor customers, for the three months ended September 30, 2012. This increase in activity is reflective of the competitive market conditions and resulting increased sales pricing pressure when compared to the same period last year. Applications under such programs for the quarters ended September 30, 2013 and 2012 were approximately $11.1 million and $8.4 million, respectively.

Geographically, compared to the same period last year, sales increased in Europe, Asia and the Americas tracked the overall macroeconomic conditions in these regions. Sales in the Asian market decreased to 47.9% of total sales while sales in the Americas and Europe increased to 28.0% and 24.2% of total sales, respectively. This compares to 49.3%, 26.6%, and 24.1% of total sales for the Asian, American, and European regions in the same period last year, respectively. The movement of the U.S. dollar against certain foreign currencies resulted in an unfavorable impact on sales of approximately $7.8 million when compared to the same period last year.


Gross profit in the three months ended September 30, 2013 was 19.0% of sales, or $71.5 million, compared to a gross profit margin of 19.1%, or $68.9 million, in the three months ended September 30, 2012. This moderate decrease is primarily attributable to lower selling prices reflective of competitive pricing pressure in the global marketplace partially offset by a higher mix of value added components. We continue to focus on spending controls and cost reductions in light of the global demand for electronic components. Costs due to currency movement of the U.S. dollar against certain foreign currencies were favorably impacted in the current quarter by approximately $14.7 million when compared to the same quarter last year.

Selling, general and administrative expenses in the three months ended September 30, 2013 were $30.2 million, or 8.0% of net sales, compared to $29.7 million, or 8.2% of net sales, in the three months ended September 30, 2012. The overall increase in selling, general and administrative expenses is primarily due to higher selling expenses resulting from the increased level of sales.

As a result of the factors set forth above, income from operations was $41.4 million in the three months ended September 30, 2013 compared to $39.3 million in the three months ended September 30, 2012.

Our effective tax rate for the three months ended September 30, 2013 was 31.0% compared to 31.3% for the three months ended September 30, 2012.

As a result of the factors discussed above, net income for the three month period ended September 30, 2013 was $28.8 million compared to $28.0 million for the same three month period last year.

Results of Operations - Six Months Ended September 30, 2013 and 2012

Our net income for the six month period ended September 30, 2013 was $56.5 million, or $0.33 per share, compared to net loss of $(108.7) million, or $(0.64) per share, for the six month period ended September 30, 2012. The net loss for the six month period ended September 30, 2012 includes an environmental charge of $266.3 million related to environmental issues at the New Bedford Harbor Superfund site in Massachusetts discussed under "Liquidity and Capital Resources" below and in Note 8 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

(in thousands, except per share data) Six Months Ended September 30,

                                                 2012                2013
     Net sales                              $       713,977      $     745,163
     Gross profit                                   137,882            139,796
     Operating income (loss)                       (187,732)            80,600
     Net income (loss)                             (108,747)            56,473
     Diluted earnings (loss) per share      $         (0.64)     $        0.33

Net sales in the six months ended September 30, 2013 increased $31.2 million, or 4.4%, to $745.2 million compared to $714.0 million in the six months ended September 30, 2012. This increase is primarily a result of the incremental sales attributable to our acquisition of the Tantalum Components Division of Nichicon Corporation ("Asia Tantalum"), which was completed in February of 2013. Compared to the same period last year, supply chain inventory levels appear to have remained steady as product manufacturers managed purchases in light of consistent end-market demand and economic uncertainty. Overall sales prices for our commodity components declined moderately over the six month period when compared to the same six month period in the prior year resulting from increased competitive pricing pressure.


The table below represents product group revenues for the six month periods ended September 30, 2012 and September 30, 2013.

Sales Revenue               Six Months Ended September 30,
$(000's)                       2012                2013
Ceramic Components        $       84,222      $       94,586
Tantalum Components              166,923             199,182
Advanced Components              176,960             178,106
Total Passive Components         428,105             471,874
KDP and KCD Resale               193,881             174,901
KCP Resale                        29,191              31,103
Total KED Resale                 223,072             206,004
AVX Interconnect                  62,800              67,285
Total Revenue             $      713,977      $      745,163

Passive Component sales increased $43.8 million, or 10.2%, to $471.9 million in the six months ended September 30, 2013 from $428.1 million during the same period last year, as we saw increases in many of the markets that we serve, particularly in the automotive sector and component sales related to higher-end smart phones and tablet devices. The sales increase in Passive Components reflects the overall improving demand for electronics across global markets as customers managed inventory levels in response to overall spending by consumers and manufacturers when compared to the same quarter last year. The impact of the Asia Tantalum acquisition, which was completed in February of 2013, accounted for $28.5 million of increased sales of our tantalum products. The increase in sales of Ceramic Components reflects a higher volume of unit sales resulting from an increase in the sale of higher capacitance components compared to the same quarter last year, partially offset by lower selling prices.

KDP and KCD Resale sales decreased $19.0 million, or 9.8%, to $174.9 million in the six months ended September 30, 2013 compared to $193.9 million during the same period last year. When compared to the same period last year, the decrease during the six months ended September 30, 2013 is primarily attributable to lower sales to the telecommunications and computer manufacurers as they changed design specifications and managed inventory levels in response to demand and new product introduction cycles.

Total connector sales, including AVX Interconnect manufactured and KCP Resale connectors, increased $6.4 million, or 7.0%, to $98.4 million in the six months ended September 30, 2013 compared to $92.0 million during the same period last year. This increase was primarily attributable to stronger demand in the automotive sector reflective of the increased electronic content in today's automobiles.

Our sales to independent electronic distributor customers represented 39.6% of total sales for the six months ended September 30, 2013, compared to 38.8% for the six months ended September 30, 2012. Overall, distributor activity increased 6.7% when compared to the same period last year. This increase is reflective of their customer demand improvements and the low inventory levels maintained by distributors in the prior year. Our sales to distributor customers involve specific ship and debit and stock rotation programs for which sales allowances are recorded as reductions in sales. Such allowance charges were $21.2 million, or 7.2% of gross sales to distributor customers, for the six months ended September 30, 2013 and $17.1 million, or 6.2% of gross sales to distributor customers, for the six months ended September 30, 2012. This increase in activity is reflective of the competitive market conditions and resulting increased sales pricing pressure when compared to the same period last year. Applications under such programs for the six month periods ended September 30, 2013 and 2012 were approximately $20.5 million and $16.9 million, respectively.


Geographically, compared to the same period last year, sales increased in all regions tracking the overall global macroeconomic conditions. Sales in the Asian market decreased to 47.5% of total sales while sales in the Americas and Europe increased to 27.7% and 24.8% of total sales, respectively. This compares to 47.8%, 27.5%, and 24.7% of total sales for the Asian, American, and European regions in the same period last year, respectively. The movement of the U.S. dollar against certain foreign currencies resulted in an unfavorable impact on sales of approximately $18.2 million when compared to the same period last year.

Gross profit in the six months ended September 30, 2013 was 18.8% of sales, or $139.8 million, compared to a gross profit margin of 19.3%, or $137.9 million, in the six months ended September 30, 2012. This overall decrease is primarily attributable to slightly lower selling prices reflective of competitive pricing pressure in the global marketplace. We continue to focus on spending controls and cost reductions in light of the global demand for electronic component parts. Costs due to currency movement of the U.S. dollar against certain foreign currencies were favorably impacted in the current period by approximately $29.0 million when compared to the same quarter last year.

Selling, general and administrative expenses in the six months ended September 30, 2013 were $59.2 million, or 7.9% of net sales, compared to $59.4 million, or 8.3% of net sales, in the six months ended September 30, 2012. The overall decrease in selling, general and administrative expenses is primarily due to lower legal and professional fees and other general expenses, partially offset by higher ammortization and depreciation in addition to higher selling expenses resulting from the increased level of sales when compared to the same period last year.

Income (loss) from operations was $80.6 million in the six months ended September 30, 2013 compared to $(187.7) million in the six months ended September 30, 2012. This increase is a result of the factors set forth above and the recognition of a $266.3 million charge related to remediation issues at the New Bedford Harbor Superfund site in Massachusetts during the six months ended September 30, 2012.

The effective tax rate the six month period ended September 30, 2013 was 31.0%, compared to 41.0%, for the same period last year. The change in effective tax rate is primarily attributable to the tax benefit related to the New Bedford Harbor environmental charge recognized during the six month period ended September 30, 2012. Exclusive of this item, the effective tax rate for the six month period ended September 30, 2012 would have been approximately 29.6%.
The increase in the effective tax rate compared to the prior year effective tax rate excluding the tax benefit related to the environmental charge is due to projected profits in various different tax rate jurisdictions when compared to the same period in the prior year.

As a result of the factors discussed above, net income (loss) for the six month period ended September 30, 2013 was $56.5 million compared to $(108.7) million for the same six month period last year.

Outlook

Near-Term:

With uncertain global geopolitical and economic conditions, it is difficult to quantify expectations for the remainder of fiscal 2014. Near-term results for us will depend on the impact of the overall global geopolitical and economic conditions and their impact on telecommunications, information technology hardware, automotive, consumer electronics, and other electronic markets.
Looking ahead, visibility is low and forecasting is a challenge in this uncertain and volatile market. We expect to see typical pricing pressure in the markets we serve due to competitive activity. In response to anticipated market conditions, we expect to continue to focus on cost management and product line rationalization to maximize earnings potential. We also continue to focus on process improvements and enhanced production capabilities in conjunction with our focus on the sales of value-added electronic components to support today's advanced electronic devices. If current global geopolitical and economic conditions worsen, the overall impact on our customers as well as end user demand for electronic products could have a significant adverse impact on our near-term results.


Long-Term:

Although there is uncertainty in the near-term market as a result of the current global geopolitical and economic conditions, we continue to see opportunities for long-term growth and profitability improvement due to: (a) a projected increase in the long-term worldwide demand for more sophisticated electronic devices, which require electronic components such as the ones we sell, (b) cost reductions and improvements in our production processes, and (c) opportunities for growth in our Advanced Component and Interconnect product lines due to advances in component design and our production capabilities. We have fostered our financial health and the strength of our balance sheet. We remain confident that our strategies will enable our continued long-term success.

Liquidity and Capital Resources

Liquidity needs arise primarily from working capital requirements, dividend payments, capital expenditures, and acquisitions. Historically, we have satisfied our liquidity requirements through funds from operations and investment income from cash, cash equivalents, and investments in securities. As of September 30, 2013, we had a current ratio of 4.4 to 1, $1,094.5 million of cash, cash equivalents, and short-term and long-term investments in securities, $2,011.6 million of stockholders' equity, and no debt.

Net cash provided by operating activities was $74.6 million in the six months ended September 30, 2013 compared to $94.6 million of cash provided by operating activities in the six months ended September 30, 2012. The decrease in operating cash flow compared to the same period last year was primarily a result of higher inventory levels and other increased working capital requirements resulting from the higher volume of sales and related production.

Purchases of property and equipment were $12.4 million in the six month period ended September 30, 2013 compared to $23.9 million in the six month period ended September 30, 2012. Expenditures in the prior year were primarily made in connection with the expansion of interconnect manufacturing operations in the Czech Republic. We continue to make strategic investments in our advanced passive component and interconnect product lines and expect to incur capital expenditures of approximately $30 million in fiscal 2014. The actual amount of capital expenditures will depend upon the outlook for electronic component demand.

. . .

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