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Kemet Corp (NYSE:KEM)
Q2 2020 Earnings Call
Nov 12, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the KEMET's Second Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to our first speaker today, Richard Vatinelle. Thank you, please go ahead, sir.

Richard Vatinelle -- Vice President and Treasurer

Thank you, Prince, and good morning everyone. This is Richard Vatinelle, Vice President and treasurer. Welcome to KEMET's conference call to discuss the financial results for the second quarter of fiscal year 2020 which concluded on September 30th, 2019.

Joining me today on the call is Bill Lowe, Chief Executive Officer, and Greg Thompson, Executive Vice President and Chief Financial Officer. As a reminder to you, a presentation is available on our website that should help you follow along in the financial portion of the presentation.

Before we begin, we would like to advise you that all statements addressing expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, estimates, believes, plans, intends, projects and indicates. Although they reflect our current expectation, these statements are not guarantees of future performance, and they involve a number of risks, uncertainties and assumptions.

Please refer to our 10-Ks or 10-Qs in our registration filing statements for additional information on the risks and uncertainties.

Now, I will turn the call over to Bill.

William Lowe -- Chief Executive Officer and Director

Thank you, Richard, and good morning, everyone. In addition to reporting our quarterly results, we're also excited to talk this morning about what we believe is the compelling strategy and strategic combination for our shareholders, customers, business partners, and our employees. Yesterday evening, we announced an agreement to be acquired by Yageo, a leading global electronic component company headquartered in Taiwan and listed on the Taiwan Stock Exchange, in an all cash transaction valued at $1.8 billion, which includes the assumption of net debt.

Shareholders of KEMET will receive $27.20 per share in cash which is not subject to a financing contingency. Yageo is similar to KEMET with a complete product portfolio and capabilities on a global scale, including production and sales facilities in Asia, Europe and the Americas. Because of KEMET's and Yageo's complimentary product offerings, the combine company will be an industry leader in the $28 billion to $32 billion passive components industry and serve as a one stop provider of a robust portfolio of polymer, tantalum, ceramic, film and electrolytic capacitors, chip resistors, circuit protection as well as magnetic, sensors & actuators with revenues of approximately $3 billion.

Our Board of Directors conducted a thorough process in evaluating this transaction with outside advisors over a number of months, along with other potential opportunities to enhance value for shareholders. The Board determined entering into this agreement is in the best interest of the company and our stakeholders. First and foremost, this transaction will deliver the certainty of immediate cash to shareholders at a 30-day trading premium of 26% and a 90-day trading premium of 37%. It is also a premium of 14% over our 52-week high.

Second, we are confident this transaction will position KEMET for long-term growth as we enter our second 100 years as a Company, providing quality products and service. Together with Yageo, we will have an enhanced global footprint and be better able to partner with long standing blue-chip customers worldwide through a combined 42 manufacturing plants and 14 dedicated R&D centers, with an increased presence in attractive high growth segments and applications.

This includes consumer electronics as well as in the high-end automotive, industrial, aerospace, telecom and medical sectors. The Yageo team has made it clear their admiration for the KEMET brand and the quality of our operations and our success in capturing increased worldwide demand for customer designed, higher margin electronic components and capacitors and our talented workforce.

Further Yageo and KEMET, each have a proven track record of completing major cross border acquisitions and believe this transaction will generate enhanced value for customers and shareholders of both companies, as well as greater opportunities for employees.

As I stated earlier and is in our joint press release, the transaction is not subject to a financing contingency. Yageo intends to fund the transaction with a combination of cash on hand and committed financing. We would expect to close the transaction in the second half of 2020, subject to customary closing conditions which including KEMET shareholder approval and the receipt of required regulatory approvals in various jurisdictions in which we operate.

Until then, KEMET and Yageo will continue to operate as independent companies. Following the close of the transaction, KEMET will become a wholly owned subsidiary of Yageo. This is an incredible opportunity for our company to capitalize our momentum and provide an enhanced experience, superior service and broader selection of passive component technologies to our customers across the globe. We're excited to take this next step and I'm optimistic as ever about Kemet's future.

Now, let me turn the call over to Greg to go through the numbers on the quarter and then I'll come back to you with some comments on the markets and our business units. We did have a great quarter meeting all of our goals and seeing less of an impact from the slowdown than our competition, with historical margins continuing to improve built by our tireless efforts over the years to embed changes in our structure. Greg?

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Thank you, Bill, and good morning everyone. I'm sure you've had a chance to review our press release this morning, so I will highlight only a few key metrics. I will start my review on Slide 4 and 5 of the webcast slides. Revenue for the second quarter was down 6.3% to $327.4 million compared to Q2 last year of $349.2 million, as we continue our efforts to reduce excess inventory in the distribution channels.

GAAP net income was negative $15.3 million or $0.26 per share loss for the quarter, compared to GAAP net income of $37.1 million or $0.63 per diluted share for the quarter ended September 30, 2018. This decline was driven by one-time items relating to litigation settlements.

As detailed in our 8-K filed this morning, the Company entered into a settlement agreement with the plaintiffs in the antitrust litigation, originally filed on December 4, 2014, in which KEMET and more than 20 other capacitor manufacturers and subsidiaries are defendants in a purported class action complaint relating to the sale of capacitors in the US.

KEMET has reached a settlement agreement subject to court approval and has agreed to pay an aggregate of $62 million to settlement of the class of plaintiffs. Pursuant to the terms of this settlement agreement, KEMET will pay $10 million within 30 calendar days of the date of the settlement agreement and the remaining amount within 12 months. As part of the settlement agreement, the company did not admit to violating any statute or law any [Technical Issue] any wrongdoing. The Company recorded a total charge for litigation settlements of $63 million in the second quarter.

Non-GAAP adjusted net income was $39.3 million in the second quarter versus $50.8 million in the same quarter last year, a decrease of 22.6% due to lower revenues and much higher tax rate in FY '20, which I'll touch on a bit later. In spite of lower revenues, GAAP gross margin was up significantly compared to last year's second quarter by 220 basis points from $32.5 million to $34.7 million, due to continuing improvements in operational efficiencies in the solid capacitor segment.

GAAP diluted EPS was $0.26 negative compared to $0.63 for the second quarter last year. Non-GAAP diluted EPS was $0.66, down compared to $0.86 in the second quarter last year. Again, this decline was due to the higher income tax rate in fiscal year '20.

Our adjusted EBITDA for the second quarter was up 3.5% to $75 million from $72.5 million in the same quarter last year.

Now on Slide 6, the LTM adjusted EBITDA margins have steadily increased over the last two fiscal years from 17.4% at September 30, 2018 to 23.1% for the period ending September 30, 2019. During our first quarter call, we discussed the structural changes that we have made over the last few years in terms of segmenting the ceramics product line to focus on value-added applications.

With the design and focus, vertically integrating the tantalum business to improve cost and focus on the newer polymer technology and of course acquiring TOKIN to expand our offering and strengthen our balance sheet.

This quarter's results continue to highlight that these structural changes make us a different company today than we were several years ago as we demonstrate continuing, strong, sustainable profitability performance in spite of the slowdown in the electronics industry.

Non-GAAP SG&A expenses came in below our forecast at $42.2 million or 12.9% of revenue compared to Q2 last year of $45.3 million or 13%. Non-GAAP income taxes were $18.7 million at an effective tax rate of 32.2% compared to Q2 last year of $2.2 million at an effective tax rate of 4.1%. As explained in our last earnings call, the increase in the non-GAAP income tax effective rate is due to the release in Q4 of last year, of our US net operating loss valuation allowance and partial valuation allowance in Japan.

This is a result of the significant improvements in our profitability, along with our forecast for continued strong profitability going forward. The further increase in the Company's effective tax rate this quarter and in our projection for next quarter is the result of lower projected earnings for the year, which changes the mix of earnings by tax jurisdiction and increases the impacts from the permanent differences related to the Tax Reform Act provisions.

Turning now to Slide 7; capital expenditures during the second quarter were $36.3 million compared to $37.1 million in the previous quarter. This coming quarter, we expect to spend in the range of $45 million to $55 million for capital expenditures as we continue our planned capacity expansion, focused on ceramics and tantalum polymer to support future customer demand along with investments in our IT infrastructure around the globe.

We expect capital expenditures for the full year ending March 2020 to be in the range of $120 million to $135 million, excluding approximately $45 million to $50 million of customer funded capacity expansion related to the customer capacity agreements which we've discussed over the last couple of earnings calls.

Net inventories increased $12.1 million in the second quarter $268.2 million compared to the previous quarter of $256.1 million due to higher ceramics work in process to support future demand and some opportunistic raw material purchases in our tantalum product line.

Cash on hand was $192.7 million. Our cash balances and accounts receivable DSO were negatively impacted by approximately $10 million by Typhoon Mitag, which caused banking closures throughout Taiwan a few days before quarter end. We do process a significant amount of our cash collections in Asia Pacific through our Taiwan subsidiary. We generated $51.7 million of cash from operating activities during the second quarter.

Turning to Slide 8, net debt stands at $113 million at quarter end, and net debt-to-LTM EBITDA of 0.4 is on Slide 8. This slight increase from the Q1 net debt-to-LTM EBITDA of 0.3 is due mainly to the increase in customer capacity agreement funding between quarters which gets recorded as down the balance sheet as well as the lower cash number, as I explained earlier.

During the second quarter, we made our semi-annual principal payment of approximately $12.7 million on the outstanding TOKIN, and overall, our financial position remains very strong.

Now, I will turn the call back to over to Bill to comment on the business groups.

William Lowe -- Chief Executive Officer and Director

Thanks, Greg. And so, turning to our business groups, and starting with Solid Capacitors. Solid Capacitor revenue was up, was what -- sorry, $1.8 million lower or down 0.8% versus the same quarter last fiscal year. So looking at the two Solid Capacitor business product lines, the revenue for the ceramic product line actually increased $21.1 million or 24.1% versus the same quarter the previous year.

The ceramic revenue increased in each channel and increased in each region, as compared to the same quarter a year ago. These increases were driven by product mix and a favorable MLCC pricing. Growth versus the same quarter a year ago was broad based across almost all ceramic segments.

Our focus segments led the growth, which includes automotive, industrial, defense and aerospace, medical and energy. Our focus for future growth in our ceramic product segment continues to be development design-in and supply of ceramic capacitors requiring high performance, reliability based on more robust designs and materials.

Many of these require larger sizes to handle higher current and voltage and power requirements. As compared to the global MLCC market, our ceramic revenue has remained at a high level as compared to the global MLCC market which has experienced about a 23% reduction from the peak quarter in September 2018, based upon the World Cap reporting.

We've said previously that we are insulated but not immune from the global market dynamics because of our product focus and our business model. However, we are forecasting reduced ceramic revenue for the upcoming quarter due to general global market conditions that remain sluggish and specifically demand that is somewhat stagnant or are declining in the automotive and industrial markets because of tariffs and other global market economic factors.

We also plan on reducing ceramic's inventory within our distribution network this quarter by shipping in lower volumes than our distribution partners will ship to their customers to help balance out the inventory in the channel.

Given the global market conditions, we believe this is the right thing to do. Lastly, the December quarter is a seasonally low quarter for automotive and historically, we typically observe a reduction and the December quarter of 6% to 10% related to automotive, except in years where demand might be accelerating.

Revenue for the tantalum product line decreased $22.9 million or 15.5% versus the same quarter last fiscal year. The decline in revenue was driven primarily by weakness in the distribution and OEM channels for our legacy MnO2 products, with MnO2 declining approximately $15.7 million or 50%. Polymer revenue declined only $8 million or about 8% impacted primarily by the distribution channel and Telecom segment softness in EMS.

Revenue for our Specialty Tantalum Products increased slightly almost about $1 million year-over-year, driven by the strength in the military and medical segments. Our focus for future growth in the tantalum product segment remains on new product development, design-in success for applications requiring higher frequency, harsh environments, limited board space and enhanced audio quality. These application requirements cross many end segments including tablet PC, telecom, automotive, industrial and cloud.

SCB -- the Solid Capacity Business group gross margin increased to 44.4% or 420 basis points higher versus the same quarter last fiscal year. This improvement was driven by product mix optimization, favorable pricing for MLCCs and favorable manufacturing performance as a result of continued focus on recurring cost-out initiatives, yield improvement and alignment of our manufacturing cost structure with lower volumes. Backlog in tantalum is stable with normalized lead times. Backlog in ceramics is approximately seven months with more normalized lead times for lower CV products, but still constrained in many high CV large case sizes. We continue to add capacity to support this demand.

Our Film & Electrolytic business revenue was $41.8 million. That's $8.8 million lower than the same quarter in fiscal 2019. Revenue slowed across distribution and OEM channels during the second quarter, mostly in the EMEA, which is Europe and APAC regions, driven by softening automotive market.

Gross margin was 5% compared to 12.4% in the same quarter in the fiscal year 2019. Decreasing volumes in the automotive market and a shift in product mix contributed to the lower margin in the second quarter.

For Magnetics, Sensors & Actuators Group revenue for the quarter came in at $52 million, which was $11.2 million lower than the same quarter in fiscal 2019. Gross margin came in at 14.9%, which was a decrease of 530 basis points year-over-year. The decrease was mainly driven by lower demand for EMI flex suppression sheets primarily related to a slowdown in the smartphone markets.

We are experiencing a continued slowdown in demand for piezo actuator products used in the semiconductor production equipment, consistent with the overall semiconductor market situation, as well as specific consumer-related markets. In addition, we are subject to the year-over-year slowdown in the global server market.

On the positive side, we continue to see strength and upward momentum in our metal wire business for the medical catheter guidewire market. Additionally, we continue to see nice growth as well for the distribution channels we developed and placed more new products in the channel to position and grow our MSA longtail business, particularly Phase 1 and 2 of our new choke coil series which was recently released to the distribution channel and is expected to expand the business for the foreseeable future. I'm pleased with the pipeline of projects we have in place for the future periods as we expand MSA's reach well beyond Japan.

Looking at the channel now, for the distribution channel, POA generated about $131 million in revenue, which was down 12% compared to the first quarter 2020. POS for the quarter came in at $163 million, which was essentially flat to the prior quarter and this POS to POA alignment drove the channel inventory down just slightly.

Before I turn the call back to Greg for our upcoming forecast, let me comment on what we see in the various market segments. We forecast global light vehicle sales to contract approximately 5% to 6% year-on-year, but we continue to see increases in content of electronic components. We are forecasting moderate growth in this segment for this year and we remain convinced that the content in automotive and mobility in general will continue to grow.

Our backlog and channel sales POS both reflect this with positive trends year-on-year. Demand in the Industrial segment has also been impacted by the general slowdown in major economies, but we are still seeing pockets of growth, driven by the accelerated investment and enhancement in factory and warehouse automation and our direct and POS sales of this segment for the quarter decreased in the low-single-digits year-on-year.

Our business in the defense and aerospace markets continue to be robust as demonstrated by another quarter of growth in both our direct and distribution channels and we forecast this growth to continue into next year. In the Telecom segment, we continue to observe soft conditions in legacy solutions and applications and a gradual ramp up in infrastructure and applications that support 5G rollout.

We remain focused on the design and efforts as we expand our product offering into 5G solutions across all of our product groups. In the computing segment, which for us includes devices that support cloud solutions as well as personal computing, we believe we have seen the bottom of the cycle. We see encouraging signs in the traditional server space as well as design wins with customers developing servers for Edge computing and enterprise level solid-state drives.

Demand in the mature notebook and desktop PC market has improved year-on-year and we anticipate this to continue into next year. On our last earnings call, I shared with you the introduction of METCOM, a Metal Composite Power Inductor line of products. This quarter, we announced the expansion of our KC-Link capacitor series with industry-leading offerings for fast switching, wide band gap semiconductor applications which are forecasted to grow significantly over the next few years.

Our KC-Link components will allow designers to increase power efficiency and density in applications such as 5G telecommunication base stations and onboard electric vehicles.

Now, I will turn the call back to Greg to discuss our outlook.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Thank you, Bill. In our outlook, we expect our third quarter sales to be in the range of $285 million to $300 million, down approximately 8% to 13% from the quarter ended September 30, 2019. The lower revenue number reflects the distribution channel impact which Bill discussed earlier.

That said, we believe our gross margin will continue to be strong and reflect the positive impact from our structural changes as we expect non-GAAP gross margins to remain between 30% and 32.5%. SG&A expenses should be $43 million to $45 million and R&D expenses in the range of $12.5 million to $13.5 million. Our global effective tax rate is expected to be around 35% to 39% for the third quarter.

Now, I will turn this back to Bill for some closing comments.

William Lowe -- Chief Executive Officer and Director

Thank you, Greg. As noted by Greg's forecast, we expect to continue to maintain our margins at historical levels. And while we're not immune to the slow down as I said earlier, in some of those end markets and the inventory distribution channel, our expectation is to continue to perform better than our competition on both the top line results as well as margins.

As I said in my opening remarks, by combining with Yageo Corporation, KEMET is set to begin another exciting 100 years in our journey to make the world a better, safer, and more connected place to live. I believe our commitment to innovation and serving customers around the globe is profoundly unique. The unique culture of this Company will endure, and along with the quality of our products, will continue to make us a leading supplier of electronic components.

Yesterday's announcement is an important acknowledgment of how the services and products we provide sustain international demand of technological excellence.

Now, we'll open up the call for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Craig Ellis from B. Riley, FBR. Your line is now open.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the question, gentlemen. And congratulations, both on the announced merger with Yageo and the strong financial results in the quarter. Bill, I wanted to start off just by following up on one of the comments you made in the prepared remarks around the Yageo transaction and some of the other things that the executive team and Board looked at, I think you said that you looked at other opportunities beyond the Yageo transaction. Can you provide more color on what those were and why you ultimately decided to move toward Yageo?

William Lowe -- Chief Executive Officer and Director

What we can say today is that I can kind of repeat what I said, well the Board did go through a thorough process of course with outside advisors for a number of months and of course that included multiple advisors and fairness opinions, etc. All that will be -- all the steps that the Board went through will be in our proxy statement that will be filed -- preliminary proxy statement that will be filed, probably early January. That's required as a part of that proxy process. So we'll lay all that out and it'd be very clear what the full process was that the board went through over a number of months. I will say, to come to this conclusion.

Craig Ellis -- B. Riley FBR -- Analyst

Great. And then, as a follow-up, just on the approval point related to the Yageo transaction, can you identify which major geographies will require approval? And in particular, I think our clients will be interested in whether China is needed or not. So if you could speak to that too.

William Lowe -- Chief Executive Officer and Director

Yeah, China will be needed. We're both in China we will be in...

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Yeah, it's a number of locations, Greg, that will...

William Lowe -- Chief Executive Officer and Director

Probably about -- probably around four locations including China would be about my guess.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Yeah. As well as in the US, you would expect the CFIUS approval is also required.

William Lowe -- Chief Executive Officer and Director

That's correct.

Craig Ellis -- B. Riley FBR -- Analyst

Sure. And then moving on, just to the financial guidance, Greg, what I wanted to do is understand in the revenue range that you provided, the $385 million to $300 million, how much impact is there from distribution inventory reduction versus the quarter that was just reported and how long would you expect distribution inventory reduction to play out? Do you think you get it all behind you in this current quarter or is this going to be a multi-quarter effort to get inventory to the target level of the company?

Gregory Thompson -- Executive Vice President and Chief Financial Officer

So Craig, it's $285 million to $300 million is our revenue guidance, I thought you said maybe I couldn't -- I didn't understand your first number and I would say the majority of that decline is related to the distribution inventory impact. It came down, there was a slight decline, as Bill mentioned, but not as much as we think is required. Also geographically in Europe, we see some overall slowdown.

And automotive, while we've seen content increases, that is some slowness that we see. Relative to your specific question about the timing, I think it's too early to tell, but we, it feels to us like it's probably more like a couple of quarters, not just this quarter that we would see slowness, but we'll see how it all develops this quarter and hopefully get the distribution inventories down to a healthy level where we would like to see recognized and we made some impact on that in this quarter, but not as much as we think is needed, given what we see for the end demand right now.

William Lowe -- Chief Executive Officer and Director

And I'm going to circle back to your previous question, I believe, I don't have it in front of you, but I believe an 8-K was filed this morning that has the list of countries that will -- that we need approval, of course. So I would just ask you to check the 8-Ks that have been filed pre this morning.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Yeah, it has been filed.

Craig Ellis -- B. Riley FBR -- Analyst

Yeah, thanks for that. And then Greg, a follow-up on the answer you provided. As you've looked at the trailing five quarter revenue range and issue, look at the signals that you're getting from your customers, acknowledging that there is meaningful inventory reduction going on in the current quarter and potentially for another quarter or two. Where do you think the natural level of underlying demand are consumption is for your products, where in that trailing five quarter range which you peg underlying consumption insensitive.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

That's a tough one Craig. There is a lot of puts and takes in there. I think we've seen a lot of interest with our new products, pricing has been very stable throughout that -- throughout that period. I think the guidance that we are looking at that we've given you for the second quarter, we would hope with all those movements in pricing and some volume increases along with the additional volume we have coming on. We should be looking up -- we should be looking up from there. But as I've said earlier, it remains to be seen how this will all play out through the distribution channel and how much progress we'll make in our, in the third quarter relating to it.

William Lowe -- Chief Executive Officer and Director

I think we'll still see corrections happened in our fourth fiscal quarter in the distribution channel. I don't think we're going to be any substantially different than what you might have heard on the rest of the industry. It's probably the beginning of our fiscal year in April before we've -- I think it's probably settled out a bit.

Craig Ellis -- B. Riley FBR -- Analyst

That's fair. And then guys lastly from me before I hop in the queue. You're keeping gross margin at a historically high level. So congratulations on all the structural gains. If we have a multi-quarter period of inventory reduction, is it possible to sustain these levels or how do we assess the gives and takes with things you can do on the continuous improvement, cost reduction side versus some of the volume headwinds that are out there.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Yeah, you know -- again lot of the things that we've done are really kind of embedded in the margin, the yield improvements, and while we may have less revenue here or there as a result of slowdown or a distribution channel correction. Those structural changes are embedded in the margins and that's what's helping to keep them up. And we continue -- of course of the business groups continue to look for ways to improve margin. So our expectation is a stake in that range for the margins even as we're seeing corrections in channel over the next couple of quarters.

Craig Ellis -- B. Riley FBR -- Analyst

Congratulations on that, and again, on the transaction. Good luck, guys.

William Lowe -- Chief Executive Officer and Director

Thank you.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Thanks, Craig.

Operator

Your next question comes from Matt Sheerin from Stifel. Your line is now open.

Matt Sheerin -- Stifel -- Analyst

Yes, thank you, and good morning guys. So I just wanted to go back to the transaction -- the acquisition particularly on valuation, if you look at the valuation even with the number scrubbed here, we are taking a step down due to the correction as everyone else has seen.

I mean you're still looking at sort of 6.5, 7 times EBITDA. And given the fact that you've really transformed the Company, set it up it's in a much better position than past cycles, particularly with the product mix, the supply chain integration, the balance sheet. I'm just wondering why the Board felt that that was sort of a fair valuation at this juncture given that we're -- you're basically sort of the bottom of this cycle.

William Lowe -- Chief Executive Officer and Director

Well, Matt, unfortunately I have to go back and repeat a little bit what I said earlier on the first questions because all the detail that the Board has gone through over quite a number of months will be all laid out in the proxy statement that we filed right -- probably right after the first of the year.

And I think it'd be unfair to try to pick and choose various comments that were related to the full process that the Board went through here. And I think it -- I think I would say wait until that comes out, and I think then -- you along with everyone else will have a full picture of everything that the Board did over the course of a number of months to reach this conclusion.

Matt Sheerin -- Stifel -- Analyst

Fair enough. Could you tell us whether is this something that the Board initiated or you had some interest from the outsiders, and then you got into sort of a full mode of vetting other suitors? Is that how that happen, I'm just trying to figure out timing of it.

William Lowe -- Chief Executive Officer and Director

That is correct. We were approached earlier in this calendar year. And then, as you know, as a result of that, when that occurs, the Board, under the fiduciary responsibilities are basically required to start a process, which the Board did. So yes, we were approached. We did not actively go out seeking.

Matt Sheerin -- Stifel -- Analyst

Okay, clear enough. And then just on the -- some of the regulatory issues particularly your exposure to military aerospace, some of the industrial markets, have you vetted that just to make sure that there aren't any specific challenges or hurdles that you might have to overcome?

William Lowe -- Chief Executive Officer and Director

We, as Greg mentioned, we do have to file for CFIUS approval. We're not expecting that to be a particular issue, but we do have to file for that approval. That will -- that could take six, seven months to get that through. We do -- one time or the other will have various components that are considered to be ITAR related but not on a consistent basis. So it's not a -- it shouldn't be a major material issue to deal with. So that filing will occur. Our expectations are that we will work through that.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

And Matt, as you might imagine, we have a number of advisors that has helped us assess all that to deal with these kind of issues all the time and all those kinds of things that you've mentioned and other similar to it have been looked at -- looked at very, very closely.

Matt Sheerin -- Stifel -- Analyst

I'm sure. And on the -- you said that the deal is expected to close in the second half of '20. Is that your fiscal ' 20 or calendar '20?

William Lowe -- Chief Executive Officer and Director

Calendar ' 20.

Matt Sheerin -- Stifel -- Analyst

Calendar ' 20. Okay, and just lastly [Speech Overlap]

William Lowe -- Chief Executive Officer and Director

[Speech Overlap] the jurisdictions will somewhat dictate that, right. Okay.

Matt Sheerin -- Stifel -- Analyst

Understood. And then, you talked about the capacitors, the tantalum versus the ceramic. Could you give us the percentage breakdown ceramic versus tantalum?

William Lowe -- Chief Executive Officer and Director

On the revenue?

Matt Sheerin -- Stifel -- Analyst

Yes.

William Lowe -- Chief Executive Officer and Director

Hang on. So for the second quarter, tantalum was -- and this is on the web slides, I believe.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Yes.

William Lowe -- Chief Executive Officer and Director

Tantalum is 38% of revenues -- of total revenues and ceramics was 33% of total revenues. MSA was -- for the others, MSA 16%, F&A was 13%.

Matt Sheerin -- Stifel -- Analyst

Okay. Okay, all right, well thank you very much.

William Lowe -- Chief Executive Officer and Director

Thank you, Matt.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Thanks, Matt.

Operator

Next question comes from Marco Rodriguez from Stonegate Capital. Your line is now open.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Good morning, guys. Thank you for taking my questions. Hey, good morning, just wanted to kind of follow-up just a little bit here on the acquisition. Maybe if you can talk a little bit more about CFIUS approval. When do you expect to file that submission, if you will?

William Lowe -- Chief Executive Officer and Director

I believe it's relatively soon. I can't give you a specific date, but I think that's one of the first filings that will probably occur over the next 60 days and then it will be, as I said, the process there could take six to seven months just as a part of that process. But I think that's one of the first ones that gets filed fairly quickly.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got you. And then, can you maybe talk a little bit about the approval you will need in China for this transaction.

William Lowe -- Chief Executive Officer and Director

Well, it's a standard antitrust filing. We both do business there. They have -- they have facilities there. We have facilities there. Again, just broadly, not knowing -- not to isolate China, but broadly, we are not expecting any particular issues in any particular jurisdiction. I think we just have to work through the timing of the regulatory approvals of the various countries to get the process through.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. And then in terms of the charge taken here for the legal settlement on the antitrust, can you maybe just kind of walk a little bit through that. It's a fairly large dollar figure. I think that might be one of the higher ones compared to what you've done in the past in regard to the antitrust?

William Lowe -- Chief Executive Officer and Director

It is. It is, well, in total, of course, over time, the TOKIN accrual for antitrust liabilities was substantially higher than that, well over a hundred-some-odd-million, about $110 million, I think. So on an -- but on an individual basis, you'd be correct that that is one of the higher ones.

I can't really comment on anything more than what we've said in our formal comments about the about that settlement, other than the fact that as -- just to repeat, as Greg said, from a payments perspective, from a cash flow perspective, we'll be paying $10 million fairly soon here in the next 30 days, the balance of it to be paid within 12 months, most likely toward the end of the 12 months, for the remaining $52 million.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. And is that remaining $52 million, is that inside of accrued expenses on the balance sheet or is there some place else?

William Lowe -- Chief Executive Officer and Director

It will not be inside accrued expenses as of this quarter, it will be inside the accrued liabilities.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got you. And then just coming -- turning to the overall business itself and the movements. I was wondering maybe you could comment a little bit about what you've seen thus far this quarter, just as far as cadences of demand for product and things of that nature; from a general perspective.

William Lowe -- Chief Executive Officer and Director

Well, I think in Greg's outlook, when we talked about the quarter with -- well we're pulling back some, although that -- the percentage quarter-over-quarter or sequentially, our sales will be down less than what we're seeing and hearing in some of our competitors and others in the industry, but it's still -- part of that is the inventory correction and distribution related not just to some of those smaller case ceramics, but in the MNO2 product which fortunately for us, one of the reasons that I think our slowdown is a little bit less is that we are predominant -- our revenue in tantalum predominantly today is coming from polymer, not the MNO2 product.

So about 70% or so of our or more of our revenue today on a quarterly basis is polymer, not MNO2, that helps us some, but there is -- there is a general slowdown as well that's affecting some of the polymer. So it's just -- it's a mix of that and it's both, we see some of that in the smaller case size some of the -- for us, I mean we do nothing but large case size, but our smaller of the large case has got normal lead times today, a little more pricing pressure there than it's been in the past because of the slowdown in the smartphone market, which gives the other manufacturers of small case ceramics an opportunity to continue to spread out a bit, because they've got the capacity to do that. So that's just you put all that together and we're seeing that 8 -- and I think the forecast was 8% to 13% down on revenue sequentially which, again, from an industry standpoint is on the low end of revenue change quarter-to-quarter.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. And last question here. On the automotive side of the business, the end market there for you guys. I was just wondering maybe you might be able to share any sort of comments that you may have had with customers or your partners. Obviously, you guys have made it well known that the content aspects are increasing, which should definitely benefit you guys over the long run. But just wondering, what sort of comments and what sort of things you've been hearing as far as that overall market that demand outlook for like maybe the next six to 12 months? Thanks.

William Lowe -- Chief Executive Officer and Director

Well, I think in my formal remarks, I think we are thinking it's going to -- all the data we see as well as comments from, to your point, from our customer's points to kind of a 5% to 6% decline in volume -- our unit volume in the automotive sector at the moment. It's -- for us, it's somewhat offset by additional content, but not 100% offset by content at this point. So there is little mitigating factor of additional content, but we think it's a five, at the moment, it appears like it looks like 5% to 6% unit volume decrease year-over-year is what, we're seeing and also hearing at the same time.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Right. And so, is that general comment around just next quarter or is that sort of a sustained level?

William Lowe -- Chief Executive Officer and Director

No, we think that's -- we see that -- at the moment, that's kind of over the next six to nine months, from -- actually from an automotive sector standpoint.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. Understood. Thanks guys. Appreciate the time.

William Lowe -- Chief Executive Officer and Director

Thank you.

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Thanks Marco.

Operator

Your next question comes from John Lopez from Vertical Group. Your line is now open.

John Lopez -- Vertical Group -- Analyst

Hi, thanks so much. I have a couple of quick ones on your ceramics business if you don't mind. The first one is, could you just parse the calendar third quarter, this is the first time your ceramics businesses declined in I don't know 2.5 years to 3 years measured quarter-to-quarter. Could you just parse out that decline in units versus prices?

Gregory Thompson -- Executive Vice President and Chief Financial Officer

It would be primarily -- so our pricing is holding firm. Now we do have in terms of overall prices, there is some mix difference. So as we -- as we continue to work down the distribution channel, distribution tends to be higher prices than OEM and EMS. So that is a component of it, but the largest would be -- would be volume adjustments.

William Lowe -- Chief Executive Officer and Director

Yeah. And mostly in this and not in the high -- not in the -- we're still somewhat maxed out on our high CV large case ceramics. And we're still looking for the -- getting some equipment in that will free up some additional capacity based on our expansion. So where we're seeing the softness is on the smaller for us our -- what we'll consider smaller case size for us in the commercial -- in the commercial chip side. So we're still running fairly full -- we're not just fairly full; we're running full on the high CV side with longer lead times still with lead times 8 to 30 weeks depending on the particular dielectric or case size in high CV and fairly normal lead times 8 to 14 weeks on the low CV. So low CV commercial Chips is where we're seeing a lot of, a lot of the softness.

John Lopez -- Vertical Group -- Analyst

Got you. And sorry, just on that topic, can you remind me, my recollection is that automotive comprises a pretty sizable portion of your ceramics business, is that still the case. Can you just give the ballpark on kind of what auto as a percentage of your ceramics business is.

William Lowe -- Chief Executive Officer and Director

Yes. I think we -- yeah, it's around 65%, somewhere in that range.

John Lopez -- Vertical Group -- Analyst

And have you given the rough split, just distribution versus OEM with your ceramics business?

William Lowe -- Chief Executive Officer and Director

We don't really -- it's probably pretty close to what the rest of the business is. Our overall distribution channel splits are right around a 40% number.

John Lopez -- Vertical Group -- Analyst

Got you.

William Lowe -- Chief Executive Officer and Director

You know and it -- because it varies quarter-to-quarter, but it won't be substantially different within ceramics.

John Lopez -- Vertical Group -- Analyst

Got you. And sorry, just thinking about that same dynamic between your calendar third quarter and your calendar fourth, I know you haven't given explicit guidance between the two segments, but if we assume kind of an average decline relative to your total guidance in ceramics, is that more of the same, like mostly units or is there some pricing that's coming into the December quarter?

William Lowe -- Chief Executive Officer and Director

You know the only thing I'll say about the pricing and without giving specific dollar comments is that we typically negotiate our OEM contracts in the fourth calendar quarter. So in the quarter that we're in, we're in the process of doing those negotiations and those prices go into effect for OEM in -- somewhere in that first calendar quarter of next year. Not necessarily, January 1st; some do but basically within that quarter.

So we're in the process of negotiations now. So I'm not really going to comment on where pricing will go calendar year versus calendar year, but that's in process. Again, the high CV product is still in very high demand and we are still tapped out on that at the moment, while we're trying to get more equipment into to expand that. So it's different than the commercial chip for the cell, the smartphones etc. that we don't. If you recall, we don't sell into the smartphone market at KEMET.

John Lopez -- Vertical Group -- Analyst

Sure. No, that's all super helpful. And I apologize, I'm not asking for sort of how the negotiations are going. I guess my question was just, as you think about the trends in the December quarter relative to September, it sounded like September was mostly units, not much pricing measured sequentially. Is it sort of that same mix into the December quarter?

William Lowe -- Chief Executive Officer and Director

Yes, I think it's probably the same. I think we're looking at the same type of mix here. I don't think the mix will be substantially different.

John Lopez -- Vertical Group -- Analyst

Okay. Sorry, just two more quick ones. Just at a high level, you referenced this tightness in high CV multiple times and it's been a trend. At the same time, my understanding is, high CVs generally in automotive, not as a rule, but there is more sort of high cap high CV in automotive than other places. And if you look at some of your international peers, there are some new factories that are coming online late this year or early next that appear to be sort of automotive focused. And so I suppose my question for you here is, how comfortable are you with this supply demand situation in high CV, as you look out over, say 12 to 18 months?

William Lowe -- Chief Executive Officer and Director

I think we're -- I guess the fact that we are not slowing our expansion down should be a signal that says we still expect it to be very robust in the high CV market, especially in automotive. And you're right, there is some other capacity coming on. There is also capacity coming off. The competitors who announced and now it's been a year and a half ago now that they were going to -- go end of life on a number of products are still actively doing that and just they've slowed the process down. Only because this is not just my comment, I don't know that their -- I don't sit in their room, so I don't know what they're actually doing.

But they are running, they want to -- if that was me, I'd be running -- wanting to run my factory as full as I can. And I think so therefore, as the small case size has pulled back because of the smartphone market.

They're continuing to run more large case size rather than extract themselves as quick as they said they would originally. So our expectation is, and they continue to say to the customers that they're going to go end of life on those products. And so there are still products that will be pulled out of the market or components pulled out of the market by those competitors that will have -- someone will have to fill that need; the need is not going away.

So we see that dynamic as something that's unusual. That's in addition to whatever the market trends are with the needs for the automotive segment. So that's what we're looking at the moment.

John Lopez -- Vertical Group -- Analyst

Got you, very helpful. My last question for you here, I apologize. f I just kind of look at your ceramics business now you're like a $100 million give or take. Your asking rate now is on the ceramics business is like $100 million give or take. You guys actually appear like you have some relatively relevant, I guess is the right term there crossover at least like end market-wise and I know your end market splits are across all your businesses. But as far as my question is, as you look across those two businesses on the ceramic side, is there a significant amount of crossover? And if so, kind of how -- what's the plan to sort of handle that?

William Lowe -- Chief Executive Officer and Director

Well, first of all, we're competitors and of course this is day one. We just announced the transaction. I think, I'm sure that there'll be more commentary coming from Yageo as the time progresses. But I'm not going to comment on that today, on day one of the announcement.

John Lopez -- Vertical Group -- Analyst

No, that makes sense. Thank you so much for all the questions. I really appreciate it.

William Lowe -- Chief Executive Officer and Director

Yeah, thank you.

Operator

[Operator Instructions]

William Lowe -- Chief Executive Officer and Director

Okay. If there is no other questions, operator, then I think we can we can close the call and thank everyone for their attendance this morning and we look forward to discussing further with you at our next earnings call in next year. Thank you.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Richard Vatinelle -- Vice President and Treasurer

William Lowe -- Chief Executive Officer and Director

Gregory Thompson -- Executive Vice President and Chief Financial Officer

Craig Ellis -- B. Riley FBR -- Analyst

Matt Sheerin -- Stifel -- Analyst

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

John Lopez -- Vertical Group -- Analyst

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