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KEMET KEM reported fourth-quarter fiscal 2019 adjusted earnings of $1.05 that beat the Zacks Consensus Estimate by 9 cents and surged 138.6% year over year.

Net sales increased 11.9% year over year to $355.8 million and beat the consensus mark of $340 million.

In terms of channel, both Original Equipment Manufacturers (OEMs) and distributors accounted for 42% of sales each. Electronics Manufacturing Services (EMS) providers accounted for 16% of sales.

Top-Line Details

Solid Capacitors (69.7% of net sales) sales jumped 22.2% from the year-ago quarter to $247.9 million.

Ceramic sales surged 45.3% to $110.7 million and accounted for 44.6% of solid capacitor sales compared with 37.6% in the year-ago quarter.

Kemet Corporation Price, Consensus and EPS Surprise

Kemet Corporation Price, Consensus and EPS Surprise

Kemet Corporation price-consensus-eps-surprise-chart | Kemet Corporation Quote

As witnessed in the reported quarter, Ceramic sales are benefiting from product introductions. Improved product mix, pricing and volume from capacity expansion were major growth drivers. Moreover, strong demand from end-markets like automotive, industrial and defense & aerospace drove growth.

Notably, KEMET is focused on developing and selling specialty, value-added ceramic products that have the ability to withstand high temperature, current, vibration and voltage. Moreover, roughly 60% of the company's ceramic product volume is sold into the growing automotive market.

Tantalum capacitor sales increased 8.3% to $137.2 million and accounted for 55.4% of solid capacitor sales, much lower than 62.4% in the year-ago quarter.

Tantalum's year-over-year growth was driven by strong demand for polymer products. These products are gaining traction as they are suitable for applications that involve higher frequencies, harsh environments, limited board space and enhanced audio quality requirements.

Moreover, KEMET's growth initiatives related to tablet, PC, telecom, cloud and automotive end-markets also drove tantalum sales.

Film and Electrolytic (14.2% of net sales) declined 8.3% year over year to $50.5 million. Weakness in Asia-Pacific region hurt sales.

Electro-Magnetic, Sensors, and Actuators (MSA) sales (16.1% of net sales) fell 4.7% to $57.4 million. Sluggish sales of flex suppression sheets that are sold to the smartphone market and lower demand for an antenna product related to gaming consoles negatively impacted sales in the reported quarter.

Operating Details

KEMET's fourth-quarter fiscal 2019 adjusted gross profit surged 38.4% to $123.9 million. Gross margin expanded 670 basis points (bps) to 34.8% driven by strong top-line growth and operational efficiencies.

Solid Capacitors segment gross margins expanded 640 bps to 42%. The growth was driven by higher revenues, product mix optimization, favorable pricing for Multilayer Ceramic Capacitors (MLCCs) and improving manufacturing efficiency.

Film and Electrolytic segment gross margin expanded 220 bps due to stringent cost control. The segment's profitability is driven by KEMET's focus on keeping costs lower and improving operating efficiency at manufacturing. In this regard, it is notable that the company is shutting down the Granna manufacturing facility for electrolytic capacitors in Sweden.

Adjusted selling, general and administrative expenses (SG&A) increased 8.8% year over year to $47.6 million due to higher consulting fees related to the adoption of Sarbanes-Oxley controls in the initial year of the acquired TOKIN businesses. Relocation of sales offices and personnel also drove SG&A higher.

Research and development expenses (R&D) were $11.6 million, up 11% year over year.

Adjusted operating income rallied 82.8% to $64.8 million in the reported quarter. Operating margin expanded 710 bps to 18.2%.

Segment wise, Solid Capacitors operating income surged 54.1% to $98.7 million. However, Film and Electrolytic reported operating loss of $0.5 million, wider than a loss of $0.3 million reported in the year-ago quarter.

Electro-Magnetic, Sensors, and Actuators (MSA) posted operating profit of $3.6 million against loss of $2.4 million in the year-ago quarter.

Outlook

For first-quarter fiscal 2020, KEMET expects revenues between $338 million and $348 million, up approximately 3.2% to 6.2% on a year-over-year basis. The Zacks Consensus Estimate is currently pegged at $341.9 million, indicating 4.4% growth from the year-ago quarter reported figure.

Non-GAAP adjusted gross margin is expected in the range of 33.5%-35%.

While non-GAAP SG&A expenses are anticipated between $44 million and $46 million, R&D expenses will be approximately in the range of $12-$13 million.

KEMET expects capital expenditure between $20 million and $30 million excluding roughly $45-$50 million of capacity expansion related to the customer capacity agreements that are funded by customers.

KEMET stated that adoption of its polymer product is strong in the automotive market due to growing demand for radar systems related to ADAS. Moreover, the company is winning contracts from European automotive OEMs due to the magnetic product line from the MSA business group.

Further, electrification of transportation is a key catalyst. KEMET expects increasing electrification to drive demand for its products including ceramic automotive grade, film and electrolytic and polymer automotive grade capacitors. Notably, revenues from one electric vehicle (EV) maker are expected to grow 100% year over year in fiscal 2020.

KEMET is also benefiting from increasing demand for its products from fields like industrial and green energy including wind and solar.

Over the next five years, KEMET expects net sales CAGR of at least 5%. Top-line growth through acquisitions is expected to see a CAGR of 5% by the end of the fifth year. The company also expects to develop a disciplined capital allocation strategy to enhance shareholder value and return.

Zacks Rank & Stocks to Consider

KEMET currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same industry include Universal Display OLED , OSI Systems OSIS and Fabrinet FN . While Universal Display and OSI Systems sport a Zacks Rank #1 (Strong Buy), Fabrinet carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Long-term earnings growth rate for Universal Display, OSI Systems and Fabrinet is 30%, 12.5% and 13%, respectively.

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