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AVX CORP - 10-K/A - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview AVX Corporation is a leading worldwide manufacturer and supplier of a broad line of passive electronic components and interconnect products. Electronic components and connector products manufactured or resold by AVX are used in virtually all types of electronic products, including those in telecommunications, automotive, transportation, energy harvesting, consumer electronics, military/aerospace, medical, computer, and industrial markets. We have five main product groups: Ceramic Components, Tantalum Components, Advanced Components, Interconnect Products, and Kyocera Electronic Devices. These product lines are organized into three reportable segments: Passive Components, Interconnect, and KED Resale. Consolidated revenues for the fiscal year ended March 31, 2014 were $1,442.6 million with net income of $127.0 million compared to consolidated revenues of $1,414.4 million with a net loss of $64.3 million for the fiscal year ended March 31, 2013. During fiscal 2014 we saw an increase in volumes across most of the markets we serve, primarily in automotive, aerospace, networking and component sales related to higher end smart phones and tablet devices, compared to fiscal 2013. This trend reflected an improved global demand for commercial and consumer electronic products and our customers' efforts to bring inventory levels in line with demand. Our electronic distributor customers generally increased their level of inventory throughout the fiscal year to meet increased demand. Overall sales prices for our commodity component products declined during 2013 as lower immediate delivery demand in the marketplace led to increased sales price pressure compared to the prior year. Gross margins improved slightly when compared to the prior year, primarily attributable to an improved product mix of higher added value components coupled with a lower proportion of commodity and KED Resale products partially offset by lower selling prices. We continued to proactively take actions to improve our production efficiencies and tightly control our spending to help offset utility and material cost increases and unfavorable sales price pressure. In fiscal 2014, we used $70.6 million of cash to fund operating activities. We used cash generated from operations to pay $246 million of environmental liabilities and other general working capital requirements. In addition, to enhance shareholder value, we repurchased shares of our common stock and paid increased dividends during fiscal year 2014. Our financial position remains strong with $899 million of cash, cash equivalents, and securities investments and no borrowings as of March 31, 2014. We remain committed to investing in new products and improvements to our production processes as well as continued investment in research, development, and engineering in order to provide our customers with new generations of passive component and interconnect product solutions. We are currently producing more sophisticated electronic component parts necessitated by the breadth and increase in functionality of the electronic devices and increased electronic content in products such as smart phones, tablets, ultrabooks, netbooks, automobiles, and renewable energy products that are manufactured by our customers. As a result, we have continued our focus on value-added advanced products and interconnect solutions to serve this expanding market. We are also focused on controlling and reducing costs to accommodate market forces and offset rising costs of energy and materials. We do this by investing in automated manufacturing technologies, enhancing manufacturing materials and efficiencies, and rationalizing our production capabilities around the world. We believe that these strategies will enable us to adapt quickly and benefit as market conditions change and provide shareholder value. In addition, we may, from time to time, consider strategic acquisitions of other companies or businesses in order to expand our product offerings or otherwise improve our market position. We evaluate potential acquisitions in order to position ourselves to take advantage of profitable growth opportunities. 24 -------------------------------------------------------------------------------- Outlook Near-Term: With continuing uncertain global geopolitical and economic conditions, it is difficult to quantify expectations for fiscal 2015. 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. Kyocera gave notice to AVX in February, 2014 of its intent, effective April 1, 2015 to market its connector products in Asia using Kyocera's sales force rather than continuing to have AVX resell such products in Asia. Sales of Kyocera connector products in Asia were approximately $44 million with operating profit of approximately $3 million for the fiscal year ended March 31, 2014. For more information regarding AVX's relationship with Kyocera, see "Relationship with Kyocera and Related Transactions" below. Long-Term: Although there is uncertainty and caution 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. Results of Operations Year Ended March 31, 2014 compared to Year Ended March 31, 2013 Net sales for the fiscal year ended March 31, 2014 were $1,442.6 million compared to $1,414.4 million for the fiscal year ended March 31, 2013. The table below represents product group revenues for the fiscal years ended March 31, 2012, 2013, and 2014. Fiscal Year Ended March 31, Sales revenue (in thousands) 2012 2013 2014 Ceramic Components $ 179,984 $ 173,315 $ 193,978 Tantalum Components 393,468 330,209 394,119 Advanced Components 378,843 346,543 357,900 Total Passive Components 952,295 850,067 945,997 KDP and KCD Resale 410,419 377,707 293,048 KCP Resale Connectors 54,765 61,809 64,680 Total KED Resale 465,184 439,516 357,728 Interconnect 127,775 124,817 138,879 Total Revenue $ 1,545,254 $ 1,414,400 $ 1,442,604 25 -------------------------------------------------------------------------------- Passive Component sales were $946.0 million for the fiscal year ended March 31, 2014 compared to $850.1 million during the fiscal year ended March 31, 2013. The sales increase in Passive Components reflects the demand increase for electronics across global markets as customers increased inventory levels in response to increased spending by consumers and manufacturers when compared to last year, particularly in the automotive sector and component sales related to higher-end smart phones, tablet devices and telecommunications hardware. The impact of the Asia Tantalum acquisition, which was completed in February 2013, accounted for $52.6 million of increased sales of our tantalum products. The increase in sales of Ceramic Components reflects a higher volume of unit sales resulting partially from an increase in the sale of higher capacitance components compared to the prior fiscal year, partially offset by lower selling prices. KDP and KCD Resale sales were $293.0 million for the fiscal year ended March 31, 2014 compared to $377.7 million during the fiscal year ended March 31, 2013. When compared to the prior year, the decrease during the fiscal year ended March 31, 2014 is primarily attributable to lower sales to telecommunications and computer manufacturers as they changed design specifications and managed supply chain inventory levels in response to consumer demand trends and new product introduction cycles. Total connector sales, including AVX Interconnect products and KCP Resale Connectors, were $203.6 million in the fiscal year ended March 31, 2014 compared to $186.6 million during the fiscal year ended March 31, 2013. This increase was primarily attributable to an increased demand in the automotive sector reflective of the increased electronic content in today's automobiles. Our sales to independent electronic distributors represented 42.1% of total net sales for the fiscal year ended March 31, 2014, compared to 38.8% for fiscal year ended March 31, 2013. Overall, distributor activity increased when compared to the same period in the prior year reflective of their end customer demand improvements. Our sales to distributor customers may involve specific ship and debit and stock rotation programs for which sales allowances are recorded as reductions in sales. Such allowance charges increased to $40.7 million, or 6.7% of gross sales to distributor customers, for the fiscal year ended March 31, 2014 compared to $34.3 million, or 6.3% of gross sales to distributor customers, for the fiscal year ended March 31, 2013, reflecting increased pricing pressure in the marketplace. Applications under such programs for fiscal years ended March 31, 2014 and 2013 were approximately $38.3 million and $33.9 million, respectively. Geographically, compared to the fiscal year ended March 31, 2013, sales increased in the Americas and Europe while Asia saw a slight decrease. The Asian market sales reflect the lower KED Resale product sales in the telecommunications markets. Sales in Asia decreased to 45.7% of total sales while sales in the Americas increased to 28.0% and sales in Europe increased to 26.3% of total sales, respectively. This compares to 47.5%, 27.6%, and 24.9% of total sales for the Asian, American, and European regions in the prior year, respectively. As a result of the strength of the U.S. dollar against certain foreign currencies, sales for the year ended March 31, 2014 were unfavorably impacted by approximately $22.3 million when compared to the prior year. Gross profit margin in the fiscal year ended March 31, 2014 increased to 19.3% of sales, or $278.8 million, compared to a gross profit margin of 18.6% of sales, or $263.8 million, in the fiscal year ended March 31, 2013. This overall increase is primarily attributable to an improved product mix of higher margin components coupled with a lower proportion of commodity and KED Resale products partially offset by lower selling prices. When compared to the prior fiscal year, costs were favorably impacted by approximately $40.0 million due to the strength of the U.S. dollar against certain foreign currencies. Selling, general, and administrative expenses for the fiscal year ended March 31, 2014 were $119.7 million, or 8.3% of net sales, compared to $117.4 million, or 8.3% of net sales, for the fiscal year ended March 31, 2013. The overall increase in selling, general and administrative expenses reflects the impact of higher sales volumes when compared to prior year. Research, development, and engineering expenditures, which encompass the personnel and related expenses devoted to developing new products and maintaining existing products, processes, and technical innovations, were approximately $26.2 million and $30.5 million in fiscal 2014 and 2013, respectively. Research and development costs included therein increased in fiscal 2014 to $10.5 million compared to $7.2 million in fiscal 2013. Engineering expenses decreased $7.6 million to $15.7 million in fiscal 2014 compared to $23.3 million in fiscal 2013 as we decreased activity related to production moves when compared to the prior year. Profit (loss) from operations for the fiscal year ended March 31, 2014 increased $279.0 million to $159.2 million compared to $(119.8) million for the fiscal year ended March 31, 2013. This increase is a result of the factors above, and the recognition of a $266.3 million environmental charge in 2013 related to remediation issues at the New Bedford Harbor Superfund Site in Massachusetts. See Note 12 to our consolidated financial statements elsewhere herein and "Environmental Matters" in Item 1 for further discussion related to this environmental charge. 26 -------------------------------------------------------------------------------- Other income decreased $2.3 million to $4.2 million in fiscal 2014 compared to $6.5 million in fiscal 2013. This decrease is primarily attributable to lower interest income resulting from lower effective interest rates and a decrease in the balance of our cash and investments. The effective tax rate for the fiscal year ended March 31, 2014 was 22.2% compared to an effective tax rate of 43.2% for the fiscal year ended March 31, 2013. The lower effective rate for fiscal 2014 is primarily due to a favorable impact of approximately $6.6 million relating to the release of certain reserves for uncertain tax positions due to the expiration of tax periods allowed for the audit of certain prior year income tax returns and one-time adjustments of approximately $4.5 million related to prior period income tax accruals. Excluding such discrete items recorded during the fiscal year, the effective tax rate would have been 29.9%. For fiscal 2013, the higher effective rate is primarily due to the effects of the environmental charge recognized in fiscal 2013 related to the New Bedford Harbor Superfund Site in Massachusetts and the loss of a U.S. federal tax deduction for fiscal 2013 due to annual taxable income limitations. Excluding such discrete items recorded during the fiscal year, the effective tax rate would have been 30.6%. As a result of the factors discussed above, net income for the fiscal year ended March 31, 2014 was $127.0 million compared to a net loss of $(64.3) million for the fiscal year ended March 31, 2013. Year Ended March 31, 2013 Compared to Year Ended March 31, 2012 Net sales for the fiscal year ended March 31, 2013 were $1,414.4 million compared to $1,545.3 million for the fiscal year ended March 31, 2012. The table below represents product group revenues for the fiscal years ended March 31, 2011, 2012, and 2013. Fiscal Year Ended March 31, Sales revenue (in thousands) 2011 2012 2013 Ceramic Components $ 211,998 $ 179,984 $ 173,315 Tantalum Components 419,792 393,468 330,209 Advanced Components 410,110 378,843 346,543 Total Passive Components 1,041,900 952,295 850,067 KDP and KKC Resale 440,050 410,419 377,707 KEC Resale Connectors 66,088 54,765 61,809 Total KED Resale 506,138 465,184 439,516 Interconnect 105,138 127,775 124,817 Total Revenue $ 1,653,176 $ 1,545,254 $ 1,414,400 Passive Component sales were $850.1 million for the fiscal year ended March 31, 2013 compared to $952.3 million during the fiscal year ended March 31, 2012. The sales decrease in Passive Components reflects the overall weaker demand for electronics across global markets as customers remained cautious and reduced or limited inventory levels in response to decreased spending by consumers and manufacturers when compared to prior year. Funding for global "green energy" products also decreased compared to prior year, which primarily impacted the Advanced Components product lines. The decrease in sales of Tantalum Components was the result of lower sales unit volume in addition to lower average selling prices reflective of increased market competition and reduced concerns about product availability. Compared to the same period in the prior year, we saw lower sales in most of the markets we serve, with the exception of automotive, aerospace, networking, and component sales related to higher end smart phones and tablet devices. KDP and KCD Resale sales were $377.7 million for the fiscal year ended March 31, 2013 compared to $410.4 million during the fiscal year ended March 31, 2012. When compared to the same period in the prior year, the decrease during the fiscal year ended March 31, 2013 is primarily attributable to a decrease in unit sales volume, particularly in the Asian and European regions due to lower demand for such circuit and crystal devices in the telecommunications and consumers markets. Total connector sales, including AVX Interconnect products and KCP Resale Connectors, were $186.6 million in the fiscal year ended March 31, 2013 compared to $182.5 million during the fiscal year ended March 31, 2012. This increase was primarily attributable to an increased demand in the automotive sector reflective of the increased electronic content in today's automobiles. 27 -------------------------------------------------------------------------------- Our sales to independent electronic distributors represented 38.8% of total net sales for the fiscal year ended March 31, 2013, compared to 38.0% for fiscal year ended March 31, 2012. Overall distributor inventories declined when compared to the same period in the prior year. This was primarily a result of continued uncertainty in the global markets and cautious inventory management by our distributors. Our sales to distributor customers may involve specific ship and debit and stock rotation programs for which sales allowances are recorded as reductions in sales. Such allowance charges increased to $34.3 million, or 6.3% of gross sales to distributor customers, for the fiscal year ended March 31, 2013 compared to $29.6 million, or 4.8% of gross sales to distributor customers, for the fiscal year ended March 31, 2012, reflecting the increased pricing pressure resulting from lower demand in the marketplace. Applications under such programs for fiscal years ended March 31, 2013 and 2012 were approximately $33.9 million and $28.8 million, respectively. Geographically, compared to the fiscal year ended March 31, 2012, sales decreased in all regions, tracking the overall global macroeconomic conditions. Sales in the Asian market increased to 47.5% of total sales while sales in the Americas decreased to 27.6% and sales in Europe decreased to 24.9% of total sales, respectively. This compares to 44.9%, 27.8%, and 27.3% of total sales for the Asian, American, and European regions in the prior year, respectively. As a result of the strength of the U.S. dollar against certain foreign currencies, sales for the year ended March 31, 2013 were unfavorably impacted by approximately $24.5 million when compared to the prior year. Gross profit margin in the fiscal year ended March 31, 2013 decreased to 18.6% of sales or $263.8 million compared to a gross profit margin of 25.4% of sales or $392.0 million in the fiscal year ended March 31, 2012. This overall decrease is primarily attributable to lower sales and lower selling prices, particularly for Passive Components products, reflective of the weaker demand in the global marketplace and resulting market pricing pressure. In addition, lower production and higher energy and material costs negatively impacted margins when compared to the prior year. These higher costs were partially offset by our emphasis on spending controls and cost reductions in light of the weaker global demand for electronic component parts. When compared to the prior fiscal year, costs were favorably impacted by approximately $23.3 million due to the strength of the U.S. dollar against certain foreign currencies. Selling, general, and administrative expenses for the fiscal year ended March 31, 2013 were $117.4 million, or 8.3% of net sales, compared to $116.4 million, or 7.5% of net sales, for the fiscal year ended March 31, 2012. The overall increase in selling, general and administrative expenses as a percentage of sales reflects the impact of lower sales volumes when compared to the prior year. Research, development, and engineering expenditures, which encompass the personnel and related expenses devoted to developing new products and maintaining existing products, processes, and technical innovations, were approximately $30.5 million and $26.3 million in fiscal 2013 and 2012, respectively. Research and development costs included therein decreased in fiscal 2013 to $7.2 million compared to $7.7 million in fiscal 2012. Engineering expenses increased to $23.3 million in fiscal 2013 compared to $18.6 million in fiscal 2012. Profit (loss) from operations for the fiscal year ended March 31, 2013 decreased $295.4 million to $(119.8) million compared to $175.6 million for the fiscal year ended March 31, 2012. This decrease is a result of the factors above, and the recognition of a $266.3 million environmental charge in 2013 related to remediation issues at the New Bedford Harbor Superfund Site in Massachusetts. During the fiscal year ended March 31, 2012 we recognized a $100.0 million charge for remediation issues related to the New Bedford Harbor Superfund Site. See Note 12 to our consolidated financial statements elsewhere herein and "Environmental Matters" in Item 1 for further discussion related to these environmental charges. Other income increased $2.1 million to $6.5 million in fiscal 2013 compared to $4.4 million in fiscal 2012. This increase is attributable to higher net foreign currency gains, partially offset by an increase in interest expense resulting from accrued interest associated with the proposed settlement of the New Bedford Harbor Superfund Site remediation issues referred to above. The effective tax rate for the fiscal year ended March 31, 2013 was 43.2% compared to an effective tax rate of 15.1% for the fiscal year ended March 31, 2012. This higher effective tax rate is primarily due to one-time income tax benefits primarily attributable to the utilization of U.S foreign tax credits relating to our South American and European operations recognized in fiscal 2012. The change in the effective tax rate was also attributable to the tax benefit related to the New Bedford Harbor environmental charges recognized during each period. Excluding the one-time income tax benefits and the tax benefit related to the environmental charges, the effective tax rate for the fiscal year ended March 31, 2013 was 30.6% compared to 27.2% for the fiscal year ended March 31, 2012. As a result of the factors discussed above, net income (loss) for the fiscal year ended March 31, 2013 was a net loss of $(64.3) million compared to net income of $152.8 million for the fiscal year ended March 31, 2012. 28 -------------------------------------------------------------------------------- Financial Condition Liquidity and Capital Resources Our liquidity needs arise primarily from working capital requirements, dividends, capital expenditures, and acquisitions. Historically, we have satisfied our liquidity requirements through funds from operations and investment income from cash and investments in securities. As of March 31, 2014, we had a current ratio of 10.9 to 1, $899.3 million of cash, cash equivalents, and investments in securities, $2,047.7 million of stockholders' equity and no borrowings. As of March 31, 2014, we had cash, cash equivalents, and short-term and long-term investments in securities of $899.3 million, of which $632.4 million was held outside the U.S. Liquidity is subject to many factors, such as normal business operations as well as general economic, financial, competitive, legislative, and regulatory factors that are beyond our control. Cash balances generated and held in foreign locations are used for on-going working capital, capital expenditure needs, and to support acquisitions. These balances are currently expected to be permanently reinvested outside the U.S. If these funds were needed for general corporate purposes in the U.S., we would incur significant income taxes to repatriate to the U.S. cash held in foreign locations. In addition, local government regulations may restrict our ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit our ability to pursue our intended business strategies. Net cash used in operating activities was $70.6 million for the fiscal year ended March 31, 2014, compared to cash provided by operations of $194.8 million for the fiscal year ended March 31, 2013 and $148.4 million for the fiscal year ended March 31, 2012. During the fiscal year, we made two installment payments with respect to the settlement, approved by the United States District court on September 19, 2013, with the EPA and the Commonwealth of Massachusetts related to the Harbor. October 18, 2013, we paid the initial settlement installment of $133.4 million, plus accrued interest. We prepaid a second settlement installment of $110.8 million, plus accrued interest on the remaining settlement amount on March 26, 2014. Purchases of property and equipment totaled $26.8 million in fiscal 2014, $43.7 million in fiscal 2013, and $49.2 million in fiscal 2012. Expenditures primarily related to expanding the production capabilities of the passive component and interconnect product lines, expanding production capacity in lower cost regions, as well as the implementation of improved manufacturing processes. We continue to make strategic capital investments in our advanced and specialty passive component and interconnect products and expect to incur capital expenditures of approximately $30 million in fiscal 2015. The actual amount of capital expenditures will depend upon the outlook for end market demand. On February 6, 2013, we acquired Asia Tantalum for a net of $81.2 million in cash. Asia Tantalum designs, develops, manufactures and markets tantalum electronic components. Asia Tantalum's products are used in a broad range of commercial applications. The acquisition enhances our leadership position in the passive electronic component industry and provides further opportunities for expansion in the Asian region and tantalum manufacturing efficiencies. The majority of our funding is internally generated through operations and investment income from cash, cash equivalents, and investments in securities. We have assessed the condition of the current global credit markets on our current business and believe that, based on our financial condition as of March 31, 2014, cash on hand and cash expected to be generated from operating activities and investment income from cash, cash equivalents, and investments in securities will be sufficient to satisfy our anticipated financing needs for working capital, capital expenditures, environmental clean-up costs, pension plan funding, research, development, and engineering expenses, and dividend payments or stock repurchases to be made during the upcoming year. While changes in customer demand have an impact on our future cash requirements, changes in those requirements are mitigated by our ability to adjust manufacturing capabilities to meet increases or decreases in customer demand. We do not anticipate any significant changes in our ability to generate cash flows or meet our liquidity needs in the foreseeable future. In fiscal 2012, 2013, and 2014, dividends of $44.2 million, $50.8 million, and $60.3 million, respectively, were paid to stockholders. On October 17, 2007, the Board of Directors of the Company authorized the repurchase of 5,000,000 shares of our common stock. As of March 31, 2014, there were 4,709,389 shares that may yet be repurchased under this program. We purchased 625,068 shares at a cost of $8.4 million during fiscal 2012, 983,608 shares at a cost of $10.6 million during fiscal 2013, and 799,066 shares at a cost of $10.3 million during fiscal 2014. The repurchased shares are held as treasury stock and are available for general corporate purposes. 29 -------------------------------------------------------------------------------- At March 31, 2014, we had contractual obligations for the acquisition or construction of plant and equipment aggregating approximately $9.2 million. We make contributions to our U.S. and international defined benefit plans as required under various pension funding regulations. Contributions are based on a percentage of pensionable wages or requirements necessary to satisfy funding obligations. We made contributions of $9.1 million to our international defined benefit plans during the fiscal year ended March 31, 2014 and estimate that we will make contributions of approximately $9.2 million during the fiscal year ending March 31, 2015. We have unfunded actuarially computed pension liabilities of approximately $18.8 million related to these defined benefit pension plans as of March 31, 2014. We are a lessee under longterm operating leases primarily for office space, plant, and equipment. Future minimum lease commitments under noncancelable operating leases as of March 31, 2014, were approximately $28.8 million. From time to time we enter into delivery contracts with selected suppliers for certain metals used in our production processes. The delivery contracts represent routine purchase orders for delivery within three months and payment is due upon receipt. We are involved in disputes, warranty, and legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings, we believe, based upon our review with legal counsel, that none of these proceedings will have a material impact on our financial position, results of operations, comprehensive income (loss), or cash flows. However, we cannot be certain if the eventual outcome and any adverse result in these or other matters that may arise from time to time may harm our financial position, results of operations, comprehensive income (loss), or cash flows. We have been identified by the United States Environmental Protection Agency ("EPA"), state governmental agencies or other private parties as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or equivalent state or local laws for clean-up and response costs associated with certain sites at which remediation is required with respect to prior contamination. Because CERCLA or such state statutes authorize joint and several liability, the EPA or state regulatory authorities could seek to recover all clean-up costs from any one of the PRPs at a site despite the involvement of other PRPs. At certain sites, financially responsible PRPs other than AVX also are, or have been, involved in site investigation and clean-up activities. We believe that liability resulting from these sites will be apportioned between AVX and other PRPs. To resolve our liability at the sites at which we have been named a PRP, we have entered into various administrative orders and consent decrees with federal and state regulatory agencies governing the timing and nature of investigation and remediation. As is customary, the orders and decrees regarding sites where the PRPs are not themselves implementing the chosen remedy contain provisions allowing the EPA to reopen the agreement and seek additional amounts from settling PRPs in the event that certain contingencies occur, such as the discovery of significant new information about site conditions. In 1991, in connection with a consent decree, we paid $66.0 million, plus interest, toward the environmental conditions at, and remediation of, New Bedford Harbor in the Commonwealth of Massachusetts ("the harbor") in settlement with the United States and the Commonwealth of Massachusetts, subject to reopener provisions, including a reopener if certain remediation costs for the site exceed $130.5 million. On April 18, 2012, the EPA issued a Unilateral Administrative Order ("UAO") directing us to perform certain remedial actions for the harbor clean-up pursuant to the reopener provisions. On October 10, 2012, the EPA, the United States, and the Commonwealth of Massachusetts and AVX announced that they had reached a financial settlement with respect to the EPA's ongoing clean-up of the harbor. That agreement is contained in a Supplemental Consent Decree that modifies certain provisions of the 1992 Consent Decree, including elimination of the governments' right to invoke the clean-up reopener provisions in the future. Under the terms of the settlement, AVX was obligated to pay $366,250, plus interest computed from August 1, 2012, in three installments over a two-year period for use by the EPA and the Commonwealth to complete the clean-up of the harbor. The settlement also required the EPA to withdraw the UAO, which was done. The United States District Court approved the settlement and entered the Supplemental CD on September 19, 2013. On October 18, 2013, we paid the initial settlement installment of $133.4 million, plus accrued interest on the entire settlement amount through that date. On March 26, 2014, we prepaid a second settlement installment of $110.8 million, plus accrued interest on the remaining settlement amount through that date. 30 -------------------------------------------------------------------------------- There is a class action pending with respect to property adjacent to our Myrtle Beach, South Carolina factory claiming property values have been negatively impacted by alleged migration of certain pollutants from our property. We intend to defend vigorously the claims asserted in this lawsuit. At this stage of the litigation, there has not been a determination as to the nature of the liability or the amount, if any, of damages. Based on our estimate of potential outcomes, we have accrued $1.0 million with respect to this case as of March 31, 2014. On March 1, 2010, AVX was named as a third party defendant in a case filed in Massachusetts Superior Court captioned DaRosa v. City of New Bedford. This case relates to a former disposal site in the City of New Bedford located at Parker Street. The City asserts that AVX, among others, contributed to that site. We intend to defend vigorously the claims that have been asserted in this lawsuit. In light of the foregoing, we are not able to estimate any amount of loss or range of loss. No accrual for costs has been recorded and the potential impact of this case on our financial position, results of operations, comprehensive income (loss), and cash flows cannot be determined at this time. AVX has received a demand for approximately $11.0 million, from the City of New Bedford arising from contamination at the City's New Bedford Railyard. AVX believes it has meritorious defenses and intends to defend vigorously the demand. In light of the foregoing, we are not able to estimate any amount of loss or range of loss. No accrual for costs has been recorded and the potential impact of this demand on our financial position, results of operations, comprehensive income (loss), and cash flows cannot be determined at this time. During fiscal 2014, AVX was named as a defendant in a patent infringement case filed in the United States District Court for the District of Delaware captioned Greatbatch, Inc. v. AVX Corporation. This case alleges that certain AVX products infringe on one or more of six Greatbatch patents. We intend to defend vigorously the claims that have been asserted in this lawsuit. In light of the foregoing, we are not able to estimate any amount of loss or range of loss. No accrual for costs has been recorded and the potential impact of this case on our financial position, results of operations, comprehensive income (loss) and cash flows cannot be determined at this time. We also operate on other sites that may have potential future environmental issues as a result of activities at sites during AVX's long history of manufacturing operations or prior to the start of operations by AVX. Even though we may have rights of indemnity for such environmental matters at certain sites, regulatory agencies in those jurisdictions may require us to address such issues. Once it becomes probable that we will incur costs in connection with remediation of a site and such costs can be reasonably estimated, we establish reserves or adjust our reserves for our projected share of these costs. We are involved in disputes, warranty, and legal proceedings arising in the normal course of business. While we cannot predict the outcome of these disputes and proceedings, management believes, based upon a review with legal counsel, that none of these proceedings will have a material impact on our financial position, results of operations, comprehensive income (loss), or cash flows. Disclosures about Contractual Obligations and Commitments The Company has the following contractual obligations and commitments as of March 31, 2014 as noted below. FY 2016 - FY 2018 - Contractual Obligations (in thousands) Total FY 2015 FY 2017 FY 2019 Thereafter Operating Leases $ 28,799 $ 6,119 $ 9,358 $ 7,971 $ 5,351 Plant and Equipment $ 9,214 $ 9,032 $ 180 $ 2 $ - As discussed in Note 8 to our consolidated financial statements elsewhere herein, the amount of unrecognized tax benefits recorded in our balance sheet at March 31, 2014 was $8.1 million. We are unable to reasonably estimate in which future periods these amounts will be ultimately settled. During the fiscal year ended March 31, 2014, we made contributions of $4.7 million to Company sponsored retirement savings plans. Our contributions are partially based on employee contributions as a percentage of their salaries. Certain contributions by the Company are discretionary and are determined by the Board of Directors each year. We expect that our contributions for the year ending March 31, 2015 will be approximately the same as in fiscal 2014. 31 -------------------------------------------------------------------------------- During the fiscal year ended March 31, 2014 we made contributions of $9.1 million to our international defined benefit plans. Contributions are based on a percentage of pensionable wages or requirements necessary to satisfy funding obligations. We expect to make contributions of approximately $9.2 million for our international defined benefit plans for the fiscal year ending March 31, 2015. From time to time we enter into delivery contracts with selected suppliers for certain metals used in our production processes. The delivery contracts represent routine purchase orders for delivery within three months and payment is due upon receipt. As of March 31, 2014, we had no material outstanding purchase commitments. Critical Accounting Policies and Estimates "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based upon our consolidated financial statements and the 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, judgments, and assumptions 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 revenue recognition, warranties, inventories, pensions, income taxes, and contingencies. Management bases its estimates, judgments, and assumptions 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. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, there can be no assurance that actual results will not differ from these estimates and assumptions. On an ongoing basis, we evaluate our accounting policies and disclosure practices. In management's opinion, the critical accounting policies and estimates, as defined below, are more complex in nature and require a higher degree of judgment than the remainder of our accounting policies described in Note 1 to our consolidated financial statements elsewhere herein. Revenue Recognition All of our products are built to specification and tested by us or our suppliers for adherence to such specification before shipment to customers. We ship products to customers based upon firm orders. Shipping and handling costs are included in cost of sales. We recognize revenue when the sales process is complete. This occurs when products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred, and collectability is reasonably assured. Estimates used in determining sales allowance programs described below are subject to the volatilities of the market place. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to our estimates. Accordingly, there can be no assurance that actual results will not differ from those estimates. Returns Sales revenue and cost of sales reported in the income statement are reduced to reflect estimated returns. We record an estimated sales allowance for returns at the time of sale based on historical trends, current pricing and volume information, other market specific information, and input from sales, marketing, and other key management personnel. The amount accrued reflects the return of value of the customer's inventory. These procedures require the exercise of significant judgments. We believe that these procedures enable us to make reliable estimates of future returns. Our actual results have historically approximated our estimates. When the product is returned and verified, the customer is given credit against their accounts receivable. Distribution Programs A portion of our sales are to independent electronic component distributors, which are subject to various distributor sales programs. We report provisions for distributor allowances in connection with such sales programs as a reduction in revenue and report distributor allowances in the balance sheet as a reduction in accounts receivable. For the distribution programs described below, we do not track the individual units that we record against specific products sold from distributor inventories, which would allow us to directly compare revenue reduction for credits recorded during any period with credits ultimately awarded in respect of products sold during that period. Nevertheless, we believe that we have an adequate basis to assess the reasonableness and reliability of our estimates for each program. 32 -------------------------------------------------------------------------------- Distributor Stock Rotation Program Stock rotation is a program whereby distributors are allowed to return for credit qualified inventory, semi-annually, equal to a certain percentage, primarily limited to 5% of the previous six months net sales. We record an estimated sales allowance for stock rotation at the time of sale based on a percentage of distributor sales using historical trends, current pricing and volume information, other market specific information, and input from sales, marketing, and other key management personnel. These procedures require the exercise of significant judgment. We believe that these procedures enable us to make reliable estimates of future returns under the stock rotation program. Our actual results have historically approximated our estimates. When the product is returned and verified, the distributor is given credit against their accounts receivable. Distributor Ship-from-Stock and Debit Program Ship-from-Stock and Debit ("ship and debit") is a program designed to assist distributor customers in meeting competitive prices in the marketplace on sales to their end customers. Ship and debit programs require a request from the distributor for a pricing adjustment for a specific part for a sale to the distributor's end customer from the distributor's stock. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to their customer. At the time we record sales to the distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. We record an estimated sales allowance based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing, and other key management personnel. These procedures require the exercise of significant judgment. We believe that these procedures enable us to make reliable estimates of future credits under the ship and debit program. Our actual results have historically approximated our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. Special Incentive Programs We may offer special incentive discounts based on amount of product ordered or shipped. At the time we record sales under these agreements, we provide an allowance for the discounts on the sales for which the customer is eligible to take. The customer then debits us for the authorized discount amount. Inventories We determine the cost of raw materials, work in process, and finished goods inventories by the first-in, first-out ("FIFO") method. Manufactured inventory costs include material, labor, and manufacturing overhead. Inventories are valued at the lower of cost or market (net realizable value). We value inventory at its market value where there is evidence that the utility of goods will be less than cost and that such write-down should occur in the current period. Accordingly, at the end of each period, we evaluate our inventory and adjust to net realizable value the carrying value and excess quantities. We review and adjust the carrying value of our inventories based on historical usage, customer forecasts received from marketing and sales personnel, customer backlog, certain date code restrictions, technology changes, demand increases and decreases, market directional shifts, and obsolescence and aging. Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our tax assets and liabilities in each of the jurisdictions in which we operate. This process involves management estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities that are included within our consolidated balance sheets. We assess the likelihood that our deferred tax assets will be recoverable based on all available evidence, both positive and negative. To the extent we believe that recovery is not more likely than not, we establish a valuation allowance. We have recorded valuation allowances due to uncertainties related to our ability to realize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward before they expire. The valuation allowance is based on our estimates of future taxable income over the periods that our deferred tax assets will be recoverable. We continue to evaluate countries where we have a valuation allowance on our deferred tax assets due to historical operating losses and when such positive evidence outweighs negative evidence we will release such valuation allowance as appropriate. 33 -------------------------------------------------------------------------------- We also record a provision for certain international, federal, and state tax contingencies based on the likelihood of obligation, when needed. In the normal course of business, we are subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges may result in adjustments of the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. Further, during the ordinary course of business, other changing facts and circumstances may impact our ability to utilize tax benefits as well as the estimated taxes to be paid in future periods. We believe that any potential tax exposures have been sufficiently provided for in the consolidated financial statements. In the event that actual results differ from these estimates, we may need to adjust tax accounts and related payments, which could materially impact our financial condition and results of operations. We account for uncertainty in income taxes recognized in our financial statements. We recognize in our financial statements the impact of a tax position, if that position would "more likely than not" be sustained on audit, based on the technical merits of the position. Accruals for estimated interest and penalties are recorded as a component of interest expense. We record deferred tax liabilities for temporary differences associated with deductions for foreign branch losses claimed by us in our U.S. income tax returns, as these deductions are subject to recapture provisions in the U.S. income tax code. When the recapture period expires for these deductions, the liabilities are removed and the tax benefit is recognized in the income tax provision. Pension Assumptions Pension benefit obligations and the related effects on operations are calculated using actuarial models. Two critical assumptions, discount rate and expected rate of return on plan assets, are important elements of plan expense and/or liability measurement. We evaluate these assumptions at least annually. The discount rate enables us to state expected future cash flows at a present value on the measurement date. To determine the discount rate, we apply the expected cash flows from each individual pension plan to specific yield curves at the plan's measurement date and determine a level equivalent yield that may be unique to each plan. A lower discount rate increases the present value of benefit obligations and increases pension expense. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. Other assumptions involve demographic factors such as retirement, mortality, and turnover. These assumptions are evaluated periodically and are updated to reflect our experience. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. In such cases, the differences between actual results and actuarial assumptions are amortized over future periods. Environmental Matters We are subject to federal, state, and local laws and regulations concerning the environment in the United States and to the environmental laws and regulations of the other countries in which we operate. Based on our periodic review of the operating policies and practices at all of our facilities, we believe that our operations are currently in substantial compliance, in all material respects, with all applicable environmental laws and regulations. Regarding sites identified by the EPA at which remediation is required, our ultimate liability in connection with environmental claims will depend on many factors, including our volumetric share of non-environmentally safe waste, the total cost of remediation, and the financial viability of other companies having liability. Additionally, we operate on sites that may have potential future environmental issues as a result of activities at sites during the long history of manufacturing operations by AVX or its corporate predecessor or prior to the start of operations by AVX. Even though we may have rights of indemnity for such environmental matters at certain sites, regulatory agencies in those jurisdictions may require us to address such issues. We recognize liabilities for environmental exposures when analysis indicates that is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. When a range of loss can be estimated, we accrue the most likely amount. In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. Amounts recorded are reviewed periodically and adjusted to reflect additional legal and technical information that becomes available. The uncertainties about the status of laws, regulations, regulatory actions, technology, and information related to individual sites make it difficult to develop an estimate of the reasonably possible aggregate environmental remediation exposure, therefore these costs could differ from our current estimates. Our environmental reserves are not discounted and do not reflect any possible future insurance recoveries, which are not expected to be significant, but do reflect a reasonable estimate of cost sharing at multiple party sites or indemnification of our liability by a third party. 34 -------------------------------------------------------------------------------- Recent Accounting Pronouncements In July 2012, the FASB issued ASU 2012-02, which is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of impairment of indefinite-lived intangibles assets to determine whether it should perform a detailed annual impairment test to support the value of indefinite-lived intangible assets. The ASU is effective for fiscal years, and interim periods within those years beginning, after September 15, 2012, with early adoption permitted. We adopted the ASU effective April 1, 2013. The adoption did not have any material impact on our consolidated financial statements. In February 2013, the FASB issued ASU 2013-02, which is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. Among other things, an entity is required to present, either parenthetically on the face of the financial statements or in the notes thereto, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by such reclassifications. The standard is effective for annual periods, and interim periods within those periods, beginning after December 15, 2012. We adopted the ASU effective April 1, 2013. The adoption did not have a material impact on our financial statements, as the ASU increases disclosure requirements but does not affect the recognition or measurement of amounts in the financial statements. In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This topic provides guidance on whether an unrecognized tax benefit should be presented as a reduction to a deferred tax asset or as a separate liability. This topic is for annual and interim periods beginning after December 15, 2013, with early adoption allowed. Adoption of this guidance is not expected to have a significant impact on the determination or reporting of the Company's financial results. In April 2014, the FASB issued changes to the criteria for determining which disposals are required to be presented as discontinued operations. The changes require a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results when any of the following occurs: (i) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale, (ii) the component of an entity or group or components of an entity is disposed of by sale, or (iii) the component of an entity or group of components of an entity is disposed of other than by sale. The amendments apply on a prospective basis to disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years, with early adoption permitted. The implementation of the amended accounting guidance on January 1, 2015 is not expected to have a material impact on our consolidated financial statements. Relationship with Kyocera and Related Transactions Kyocera is the majority stockholder of AVX. As of May 12, 2014, Kyocera owned beneficially and of record 121,800,000 shares of common stock, representing approximately 72% of our outstanding shares. From January 1990 through August 15, 1995, AVX was wholly owned by Kyocera. On August 15, 1995, Kyocera sold 22.9%, or 39,300,000 shares of AVX's common stock, and AVX sold an additional 4,400,000 shares of common stock, in a public offering. In February 2000, Kyocera sold an additional 10,500,000 shares of its AVX common stock. Our business includes transactions with Kyocera. Such transactions involve the purchase of resale inventories, raw materials, supplies and equipment, the sale of products for resale, raw materials, supplies and equipment, the payment of dividends, subcontracting activities, and commissions. See Note 14 to our consolidated financial statements elsewhere herein for more information on the related party transactions. Kyocera gave notice to AVX in February, 2014 of its intent, effective April 1, 2015 to market its connector products in Asia using Kyocera's sales force rather than continuing to have AVX resell such products in Asia. Sales of Kyocera connector products in Asia were approximately $44 million with operating profit of approximately $3 million for the fiscal year ended March 31, 2014. One principal strategic advantage for AVX is our ability to produce a broad product offering to our customers. The inclusion of products manufactured by Kyocera in that product offering is a significant component of this advantage. In addition, the exchange of information with Kyocera relating to the development and manufacture of multi-layer ceramic capacitors and various other ceramic products benefits AVX. An adverse change in our relationship with Kyocera could have a negative impact on our results of operations. AVX and Kyocera have executed several agreements that govern the foregoing transactions and which are described below. 35 -------------------------------------------------------------------------------- The Special Advisory Committee of our Board, comprised of our independent directors (currently Messrs. Stach, DeCenzo, and Christiansen), reviews and approves any significant agreements between AVX and Kyocera and any significant transactions between AVX and Kyocera not covered by such agreements. The committee is also responsible for reviewing and approving any agreements and transactions between AVX and any other related party that are or may be within the scope of applicable rules, regulations and guidance of the New York Stock Exchange and Item 404 of Regulation S-K, if they arise. The Special Advisory Committee operates under a written charter which sets forth the policies and procedures for such approvals. In approving any such agreement or transaction pursuant to those procedures, the Special Advisory Committee must determine that, in its judgment, the terms thereof are equivalent to those to which an independent unrelated party would agree at arm's-length or are otherwise in the best interests of the Company and its stockholders generally. Each of the agreements described below contains provisions requiring that the terms of any transaction under such agreement be equivalent to those to which an independent unrelated party would agree at arm's-length. Products Supply and Distribution Agreement. Pursuant to the Products Supply and Distribution Agreement (the "Distribution Agreement") (i) AVX will act as the non-exclusive distributor of certain Kyocera-manufactured products to certain customers in certain territories outside of Japan and (ii) Kyocera will act as the non-exclusive distributor of certain AVX-manufactured products within Japan. The Distribution Agreement has a term of one year, with automatic one-year renewals, subject to the right of termination by either party at the end of the then current term upon at least three months prior written notice. Disclosure and Option to License Agreement. Pursuant to the Disclosure and Option to License Agreement (the "License Agreement"), AVX and Kyocera exchange confidential information relating to the development and manufacture of multi-layered ceramic capacitors and various other ceramic products, as well as the license of technologies in certain circumstances. The License Agreement has a term of one year with automatic one-year renewals, subject to the right of termination by either party at the end of the then current term upon at least six months prior written notice. Materials Supply Agreement. Pursuant to the Materials Supply Agreement (the "Supply Agreement"), AVX and Kyocera will, from time to time, supply the other party with certain raw and semi-processed materials used in the manufacture of capacitors and other electronic components. The Supply Agreement has a term of one year, with automatic one-year renewals, subject to the right of termination by either party at the end of the then current term upon at least six months prior written notice. Machinery and Equipment Purchase Agreement. Pursuant to the Machinery and Equipment Purchase Agreement (the "Machinery Purchase Agreement"), AVX and Kyocera will, from time to time, design and manufacture for the other party certain equipment and machinery of a proprietary and confidential nature used in the manufacture of capacitors and other electronic components. The Machinery Purchase Agreement has a term of one year, with automatic one-year renewals, subject to the right of termination by either party at the end of the then current term upon at least six months prior written notice. |