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Executives

William Lowe - Executive Vice President and Chief Financial Officer

Per-Olof Loof - Chief Executive Officer and Director

Analysts

Wamsi Mohan - Bank of America Merrill Lynch

Hamed Khorsand - BWS Financial

Anthony Kure - KeyBanc

Matt Sheerin - Stifel Nicolaus

Marco Rodriguez - Stonegate Securities

Chelsea Shi - UBS

Ana Goshko - Bank of America Merrill Lynch

Tony Venturino - Federated Investors

Kemet Corporation (KEM) F3Q13 (Qtr End 12/31/2013) Earnings Call January 31, 2013 9:00 AM ET

Operator

At this time, I would like to welcome everyone to the Kemet's third quarter for fiscal year 2013 conference call. (Operator Instructions) Mr. Bill Lowe, you may begin your conference.

William Lowe

Good morning, everyone, and welcome to Kemet's conference call to discuss our financial results for the third quarter for the fiscal year 2013. This is Bill Lowe, Executive Vice President and CFO; and on the call with today is Per Loof, our Chief Executive Officer. We are speaking with you today from Tokyo, Japan. For us, it is a very late Thursday evening, so konbanwa to our friends listening from Japan.

And as a reminder to all of you, our presentation is available on our website to enable you to follow along with the financial portion of our presentation this morning. Please go to kemet.com and click on the Investor Relations tab in the top right portion of our home page. Once there, please click on the third quarter conference call link. That will bring up a few slides that we will call to your attention to as we're covering those topics.

Before we begin, we would like to advise you that all statements that address expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, plans, intends, projects and indicates. Although they reflect our current expectations, these statements are not guarantees of future performance but involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks, 10-Qs, and recent registration statement or filings for additional information on risks and uncertainties.

Before I turn the call over to Per, I would like to mention that the company will be presenting at the Stifel Nicolaus Technology Conference in San Francisco, California, on February 6, at 3:50 PM Pacific Standard Time. A press release with the details was released on Tuesday, January 29.

Now, I'll turn the call over to Per.

Per-Olof Loof

Thank you, Bill, and good morning, everyone. As Bill said, as he introduced the call, we are in Tokyo, because we did finally obtain regulatory approval from the E.U., Japan and finally China, to enter into an agreement with NEC, whereby Kemet obtains a 34% ownership of NEC Tokin, and the agreement will be signed tomorrow, February 1, here in Tokyo.

The signing of the agreement is just the beginning. I'm here with several of my Kemet colleagues to meet with NEC Tokin's management team, to lay out our path forward. These are truly exciting times for our company, and I believe that tomorrow will be a landmark day for all Kemet's stakeholders, customers, employees and investors alike.

We are focused on growth, and the joint venture integration of NEC Tokin and Kemet is certainly a pivotal part of our strategy. With tomorrow's signing, we'll begin a three-step process to review the details of the acquisition.

And the first step, Kemet and NEC Tokin enter into a joint venture that has Kemet paying NEC $50 million for 34% interest in NEC Tokin, and a majority of Kemet representation on the NEC Tokin Board of Directors, and I will serve as Board Chairman.

I am sure you're aware by now that Kemet has the option to later increase our equity ownership stake to 49% for an additional $50 million, and then the third and final transaction to acquire the remaining 51%, giving us a 100% economic ownership, which will rebate from the multi-dollar NT's performance based on a trailing 12 months EBITDA. We may also elect to simply just jump to the final step of 100% ownership to recall option window that begins in August 2014.

Tomorrow truly starts a new chapter in the history of our company. NEC Tokin is more than capacitors. In fact approximately 40% of its business is capacitors. The rest of the business comprise of electromagnetic components and noise suppression sheets, transformers, coils, et cetera; and electromechanical devices such as automotive and signal relays at about 11% of their business; EMC at 35%. And also piezoelectric device actuated from translators and access devices. Piezoelectric device is about 7% of their revenue and access device is about 5%.

So what this means is that we are truly transitioning from a global manufacturer of capacitors to a global manufacture of electronic component solution. This opens many new opportunities for Kemet by cross-selling products and solutions across our expanding customer base as well as entering the design process sooner across many applications. All of this translates for selling more component solutions to more customers, that's good for our investors as well as for Kemet and NEC Tokin employees.

But first things first, let's take a look at our current business. Our third quarter of fiscal year 2013 saw net sales just over $200 million, which was in our forecasted range. However, our adjusted EBITDA for the quarter was $18 million, which is an increase of almost $2 million over the prior quarter, and generated both from operating margins that increased to 18% from 16.3% over the prior quarter and a reduction in SG&A expenses. And this with revenues that were $16 million lower than the previous quarter.

Before going to detail on the business unit level, I will turn the call over to Bill to review our financials for the quarter.

William Lowe

Thanks, Per, and good morning again, everyone. I'll begin on Slide 4 if you happen to be following along on the slide deck that's on our website. Net sales of $200.3 million were down 7.2% over the prior quarter of September 2012, up $215.9 million, which fell right in the middle of our range that we projected of 4% and 9% decline.

Our non-GAAP gross margin as a percentage of sales increased to 18% compared to 16.3% and represents four consecutive quarters that we have increased our gross margins. It should be abundantly clear that our efforts to reduce our fixed cost across the entire business has taken hold as margins increase even as revenue has declined during the challenging economic times.

Our GAAP loss reflected for the quarter on Slide 3 was $0.32 per basic and diluted share. Our non-GAAP loss, which is reconciled on Slide 7, was $0.05 per basic and diluted share. Adjusted EBITDA for the quarter was $17.9 million, up from $16.3 million in the prior quarter ended September 30.

Again, turning now back to Slide 5, our adjusted non-GAAP SG&A expenses were $23.1 million and that was in line with our forecasted SG&A for the quarter. We expect to see continued reduction in SG&A in our fourth quarter with an additional $300,000 to $500,000 reduction in expense.

On Slide 11, capital expenditures for the quarter were $8 million, down from our forecasted range $11 million to $13 million. And we would expect capital expenditures for March quarter to be very similar in the range of $7 million to $9 million. Our bank revolver does continue to remain undrawn at this time and cash in the bank at December 31 was $163.7 million, including restricted cash.

I'll make one additional comment on the balance sheet, before turning over the call back to Per. We did receive the funds from the OEM contract and it is included in the balance sheet of portion both to long-term debt and the short-term debt. Since the amount is not carrying interest component, we will be imputing interest expenses each quarter as we go forward.

Looking forward to the next quarter, we see a revenue picture that is more or less flat to the December quarter. There are, however, several positive signs in the order book, but it's too early to tell the new longer-term trend. We also expect to see improvement in our working capital metrics as we balance our inventories with the current revenue rate and the effect of vertical integrating our tantalum supply chain flattens out.

Now, I'll turn the call back over to Per.

Per-Olof Loof

Thank you, Bill. Let's take a look at our business results by our three business groups, ceramics, tantalum, and film and electrolytic; as well as our three sales regions, Americas, Europe and Asia.

I'll start with film and electrolytic. The revenue in Q3 was $50.5 million, down approximately 5.7% versus Q2. The decline was primarily driven by continued softness in the film business in Europe. Gross margins continued to be depressed with lower volumes negatively impacted fixed cost absorption. Our focus on overall cost reduction and specifically the restructuring effort continues in the business. The new order rate was relatively flat versus Q2.

In our ceramics business, Q3 revenue was down 3.4% over the previous quarter to $51.3 million. Gross margin results remained strong at 36.3%, which is largely driven by operational cost improvements as well as regional and product mix effects.

On the tantalum side of the business, we ended Q3 at $98.5 million, down 10% versus the previous quarter, reflecting a slowdown specifically in our European market and in our distribution channel in Asia. Gross margin as a percentage of net sales improved to 17.9% from 16.3% in the quarter before.

And demand in the EMS channel remained relatively stable. And our automotive, telecom and industrial segments remained at normal seasonal levels. We saw the correction in the channel servicing our computer segments as inventory suggest to a different end-product mix, such as more tablets, ultrabooks, the Windows 8 PCs, et cetera.

In the EMEA region the revenues for Q3 were $66.1 million, which represents a decline of 6.5% over the previous quarter. The European automotive market remains reasonably stable, while the industrial market remains cautious with capital spending.

In the Asia-Pacific region, component sales for Q3 were $72.1 million, down 13% quarter-over-quarter. We see flat demand from telecom infrastructure and power management. However, notebook, industrial and green energies are still soft due to government policy and the worldwide economic slowdown.

Revenue in the Americas region finished flat with Q3 at $62.2 million, as end-demand remain muted due to continued global economic uncertainties. The automotive and commercial aerospace segments continue to be bright spots, and we expect this momentum to continue in calendar '13.

The inventory levels in our distribution channels fell slightly as the U.S. continues to hold up well. We continue to stay focus on increasing our specialty product revenue, which resulted in nice share gains in our ceramic and tantalum business in calendar year 2012.

Let's have a look at our performance my market segment. On a percentage of revenue basis, the telecom segment was slightly down to 19%, computers at 15% and consumer at 9%. It remained stable and on a percentage basis. Automotive at 20% was also stable, while industrial increased to 25% compared to last quarter. Both medical and defense were stable at 5% and 7% respectively.

In closing, the book-to-bill for Q3 was slightly below, thus we consumed some backlog. However, after the holidays, we've seen an increase in order activity and the backlog has started to build again. We are cautiously optimistic that this trend will continue. However, it is too early to predict, how sustainable this trend really is.

We are extremely pleased with our cost savings strategies across the board. The savings are real as demonstrated by increase in margins even as demand continues to slide on the topline. We are working each and everyday to bring our net income breakeven slightly below, positioning us for greater financial results, both at current level and substantial returns when the cycle turns up once again, and we all know it will turn, it always does.

The deal with NEC Tokin moves us from a global manufacturer of capacitors to a global manufactures of electronics component solutions. We believe that this transaction will ultimately be transformational for Kemet and will provide opportunities for employees of the both companies and financial return for investors.

It does come with many challenges, as all combinations do, but we are confident in the Kemet team and in NEC Tokin team, working together to meet those challenges head-on to create a global company that is greater than the sum of parts, financially strong, innovative and leader in the electronics industry. We are looking forward for this journey.

And this concludes our prepared remarks. And we'll be happy to respond to any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Wamsi Mohan with Bank of America Merrill Lynch.

Wamsi Mohan - Bank of America Merrill Lynch

Your gross margins were clearly a lot better than your expectations and what people had modeled in. How much would you attribute to mix versus benefits from vertical integration? And can you help us, what dollar amount of benefits from vertical integration you expect next quarter?

William Lowe

Wamsi, I think when we look at, I mean certainly I think we would say that we benefited a bit in the mix and the ceramics margins were higher than they have been trending. We more or less indicated, we think that a number that we think will be around 30 or 33ish kind of number will go higher quarter. But I think the rest of it would be all the impact of the cost reduction strategies that we've implemented coming through the system. And they continue each quarter, there's a little more each quarter that comes on the timeline that we outlined in prior calls.

Per-Olof Loof

And as you know, there's a lot of integration that started now in effect, but even if we produce the powder in one quarter, because of those inventory, we'll see the benefit the following quarter. But we are seeing that happening. And as Bill said, the other cost saving activities, we're implementing across the board that also having an effect. So mix a little bit, but the majority of the better performance really comes from these strategic activities we're doing.

William Lowe

If the volumes, of course it's volume sensitive, Wamsi, so if the volumes in tantalum are similar to the volumes in Q3 then we would see approximately the same savings in the following quarter. So it's all matter of volume that runs through the system.

Wamsi Mohan - Bank of America Merrill Lynch

And then, now that you have approval for Tokin, can you help us with where revenues and margins are for Tokin maybe in the last quarter, are we expecting this to be a positive contributor in March or will it take a little longer?

William Lowe

Well, we're actually closing and signing tomorrow as Per said, so that's a bit premature. And just as a matter of information though for everyone on the phone, under SEC guidelines of course, we'll be required within 75 days to file historical financial statements for NEC Tokin on a U.S. GAAP basis. And so you should be looking for those that will be coming, of course under the timeline that we'll require to file on.

So there will be information, we put out there as required. And then of course on a quarterly basis, the information that we're required to report, we'll provide as well. So little premature, Wamsi, but we'll get there.

Operator

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial

Just a couple of questions here, one on the F&E side, is there anything else you could do as far as trying to get the operations to improve there or is it purely just waiting to get the business environment to get better?

Per-Olof Loof

Well, I think it's a question of getting the business environment better. I think we're seeing some improvements as we speak. And we talked about the improved order activity that we've seen in this quarter, and clearly we're seeing that early in the F&E base as well. So you could expect revenue activities to increase and how that benefits to that business as we continue.

And then of course, the restructuring activities are continuing full steam and then it takes a while for that to have a full impact. But by the end of this calendar we should basically be done with all of the activities that we have planned. And they're actually going pretty much as scheduled. And clearly, it would be nice to see the markets behaving a little better in terms of the industrial segment, where we are heavy in this business. But as I said also, the book-to-bill in this quarter for that segment is pretty promising right now.

Hamed Khorsand - BWS Financial

And then as far as your commentary goes about the inflow of orders lately, is that in a specific area or is that across all your products?

William Lowe

It is actually across all products, it's across all areas and it's across all channels, which is interesting. So we would expect it to be more in one channel and another, and there are some variations of course, but clearly there is an influx in orders now, which frankly has surprised us somewhat, but it was all strong.

So I am not saying that the book-to-bill, as you were saying now is going to hold, but the revenues are holding well relative to prior quarters so far in the quarter and book-to-bill is positive. And the discussions we have with our distribution partners is relatively positive. So what I'm saying that we're going to see a huge effect of this, this quarter, but it clearly at this time that orders are returning.

Hamed Khorsand - BWS Financial

And then last question, Bill, the restricted cash in the balance sheet related to the NEC Tokin deal?

William Lowe

No, it's not. It's related to the OEM, received cash last October. It's set aside for specific use for capital expenditures related to that contract.

Operator

Our next question comes from the line of Anthony Kure with KeyBanc.

Anthony Kure - KeyBanc

Bill, I just wanted to review and make sure I got what you said about the revenue expectations for the March quarter here. Did you say, they were going to be flat or what was the comment?

William Lowe

That was the comment. It would be more or less flat, as both Per and I said we've seen encouraging signs early in the quarter, but too early to call it. So we're basically holding the flat revenue quarter for our recorded quarter three.

Anthony Kure - KeyBanc

And then based on that, first, just to clarify that, what is the normal seasonality for the March quarter? Would you say it varies by any stretch?

William Lowe

Per will answer this better than I can, but the last several years, seasonality has not really had an impact one way or the other it seems.

Per-Olof Loof

Typically it would be down. I mean there is a huge event in Asia.

William Lowe

We have the Chinese New Year that happens in February.

Per-Olof Loof

And that takes a whole week out of activity basically in Asia, and that's a big part of our business. But typically you would see a down from Q3, but I don't know what typical is anymore to that.

William Lowe

The quarters from a seasonality standpoint really have not behaved where they had historical years prior to say 2008.

Anthony Kure - KeyBanc

And then I guess another clarification, you said SG&A, you are expecting to be down. Could you just repeat that, I didn't quite catch that?

William Lowe

I said down a little bit more $300,000 to $500,000 quarter-over-quarter.

Anthony Kure - KeyBanc

So that's versus the level that you recorded.

William Lowe

Recorded for Q3, yes.

Anthony Kure - KeyBanc

And then as I look at the gross margin expectations then for what's factored into, should it be similar to where you were in the December quarter?

William Lowe

Probably more or less. It's all that has to the two Wamsi's first question. Mix was pretty strong. Good strong mix in this the ceramics business, which drove that, so all-in-all. So we think somewhere in the range, I mean nothing really comes out exactly the same, but in that range we would expect it to be.

Anthony Kure - KeyBanc

I guess, just going down the P&L, one last question on R&D expense. Where should I shake out for the March quarter also?

William Lowe

It's probably similar to Q3.

Operator

Your next question comes from the line of Matt Sheerin with Stifel Nicolaus

Matt Sheerin - Stifel Nicolaus

Just a question regarding distribution. I am not sure I got what the distribution trend was in this quarter in terms of revenue as a percentage of sales? And what was the book-to-bill in distribution?

Per-Olof Loof

The revenue in distribution was pretty stable quarter-over-quarter and the book-to-bill was actually down a bit and overall for business, but we actually, as I said, we consumed a bit of inventory and a bit of backlog in the quarter. But POS held up pretty well. And what I said, what we're seeing now is some encouraging signs in terms of the order activity.

It's a little to early in the quarter to call it, but its pretty much across the board, it's in distribution, it's in OEM and it's in all the regions and all the product lines. So I think we're seeing some encouraging signs on the order book and we were consuming backlog and now we are building backlog again. So even as we are selling or delivering more product now than we were at same period last quarter.

Matt Sheerin - Stifel Nicolaus

Are you reluctant to give a specific number, because you're only looking at three or four weeks here?

Per-Olof Loof

To be really honest with you, it will be misleading to put the number out.

Matt Sheerin - Stifel Nicolaus

And also that really low base and I am sure orders in the month of December were very weak, and then all of a sudden picked up, right?

William Lowe

Compared to the sales of January, which is actually as I said better than October. But the absolute numbers, it would be a misleading from that standpoint.

Matt Sheerin - Stifel Nicolaus

That's fair. I'm just trying to get a sense of where do you think with distribution at 42% in September, so it's probably in that neighborhood this quarter?

William Lowe

It's around that neighborhood this quarter.

Matt Sheerin - Stifel Nicolaus

So obviously any kind of inventory refresh or a confidence from distribution would be a positive. And I'm just trying to get a sense do you expect to see that?

Per-Olof Loof

Matt, you know this business really well. And hopefully we're going to see a nice increase in book-to-bill. It will come from distribution efforts.

Matt Sheerin - Stifel Nicolaus

And also on the ceramics business, it looked like the mix helped you and certainly still holding up well there. On tantalum I'm assuming that that gross margin increase came from the vertical integration and the savings you're seeing on the material side. Bill how much of that is left incrementally on a dollar?

William Lowe

Again I had said earlier that that volume is sensitive. What we've said if you go back to our original statements, it's over $10 million savings per quarter compared to the say the first quarter of this fiscal year, was at the run rates and a revenue level of the $110 million kind of revenue levels, which relates to X-number of pounds. So we aren't running at that level.

I think I answered Tony, saying that we would probably see from a benefit standpoint relatively flat benefit between Q3 and Q4 assuming that the volumes are similar. We will see more benefit certainly as we see volumes rise and we could see a little more benefit even at flat volume, but primarily it's going to be volume sensitive to get up to the full $10 million.

Per-Olof Loof

From just a pounds perspective, we did grow our production quite, but less than in December in that number and just taking the December time period, it's going to be additional improvement.

William Lowe

When I mentioned working capital from a standpoint that as we've now reached that level, what Per is referring to, we're able to change the mix of how much or we're using through the pipeline versus how much powder we're buying on the outside. And so we're starting to see our inventory levels come down in tantalum as that balances out once we've now gotten our pipeline full.

Per-Olof Loof

Even if we could, we're going to make sure that we buy a fortune net positive from current vendors.

William Lowe

We've said that in the past, we will continue to powder as certain amount of our needs going forward.

Matt Sheerin - Stifel Nicolaus

I also had also had a question on your telecom segment, which you said was down a little bit. I know that smartphones and handsets are within that segment. Could you parse that out? Was the infrastructure side of the business weaker? Or did you see any sort of order cuts on the handset side late in the quarter?

Per-Olof Loof

Our handsets business is very, very small. So we can't really comment on that because it doesn't really affect us. Our communication business, it's really in the infrastructure side. And that held up pretty decently, actually in the quarter. It was down the little bit, but I think you have to take in the December month into effect as well, but our handsets side is almost nothing.

Matt Sheerin - Stifel Nicolaus

So it's mostly your mobility focus then is on tablets, and that's in the computer segment, right?

Per-Olof Loof

Yes, the computer segment.

Operator

Your next question comes from the line of Marco Rodriguez with Stonegate Securities.

Marco Rodriguez - Stonegate Securities

Most of my questions have been asked and answered. I just had a real quick follow-up in regard to the previous question on the tantalum gross margins. Just making sure, I heard you and understood correctly. So the vertical integration at first the cost reductions there, that's all done. And now it's just a function of volume going forward. Did I hear that correctly?

William Lowe

Is not done in the sense that we've seen the benefits. We haven't seen the majority of the benefit yet, because, we're just sort are coming up to the production levels we have planned in the December. That wasn't there in November. It wasn't there of course, in October. And even so, because of the fact that it goes into inventory, the P&L benefits, cash benefits will happen, immediately the P&L benefits will be recorded delay. So you're going to see more the benefit for this investment as we go forward.

Per-Olof Loof

And I think if it rolls more into as we get into Q1 next year. We're getting benefits now, but I think as we layer on top of where we are, we will be probably more into the Q1 and then in the Q4.

Marco Rodriguez - Stonegate Securities

And so assuming the volumes remain relatively flat here until like just to say Q1 of the next fiscal year. Where do you see that gross margin kind of moving and trending with these improvements?

William Lowe

It's got to move up.

Per-Olof Loof

Yes, it's going to move up, and like we're going to give you a specific number but it will continually increase.

Marco Rodriguez - Stonegate Securities

And then another quick clarification with ceramic business, obviously mix helped quite a bit there, did I hear you say correctly that you're targeting kind of 33% gross margin in that area?

William Lowe

What we've said is that on an average quarter with our average mix, we think that 33% number is pretty good for ceramics. If we can exceed that we will try to exceed that of course, but I think that expectation is at higher than 33% will be a bit difficult to obtain every quarter.

Per-Olof Loof

But it's a mix issue that's driven by more specialty sales relative to the overall business and that helps the margins significantly.

William Lowe

And when we have a quarter, we've been successful in increasing that ratio we'll see a benefit hitting the margins.

Marco Rodriguez - Stonegate Securities

And what was the specialty revenue as a percent of sales?

Per-Olof Loof

I don't think we've provided that in the past.

William Lowe

We typically don't provide that mix, actually.

Operator

Your next question comes from the line of Amitabh Passi with UBS.

Chelsea Shi - UBS

This is actually Chelsea Shi for Amitabh. Maybe could you quickly remind us what's the cash commitment for NEC TOKIN, is that still like around $50 million to $60 million for March quarter?

William Lowe

The cash commitment for this first portion which is 34% economic ownership is $50 million.

Chelsea Shi - UBS

Will that be paid out in the March quarter?

Per-Olof Loof

We're closing as we said we're going pay out $50 million tomorrow morning.

Chelsea Shi - UBS

Another one is I think some other asked about it, maybe just a follow-up a little bit, do you have a sense of the typical liner IT in terms of book-to-bill in the March quarter like February typically weaker than January? And what turns up in the March, any sense about that?

William Lowe

Are you asking about the trend within the quarter of book-to-bill on a historical basis?

Chelsea Shi - UBS

Yes, on a historical basis. So just trying to make a sense?

Per-Olof Loof

Typically the order activity would start later in the quarter than what we've seen this quarter. Those are depending on when Chinese New Year happens, but typically we would not see order activity coming back so soon after Christmas, and not across all the regions. And we would expect the booking activities, the order intake activity to start to happen later in the quarter than what we've seen this quarter. As Bill said, typical is the word we don't really use much anymore, but if I were to use that description this is just little atypical.

Chelsea Shi - UBS

Do you know what's really driving the stronger than expected book-to-bill at this point, any detail around that?

William Lowe

I think what's driving, it is I think people are seeing the business picking up and I think in the distribution channel, that's when you see that the rest is holding up and I think that's what driving it. At the end of course our business depends on the end user demand, and if you look at the semis, and how they are doing and what they are saying I think you're going to see that the demand is picking up a little bit and I think that's what's driving it.

Chelsea Shi - UBS

And then really quick on the account payable days, what would you see at the normal level going forward? Will that be like 30 level or should be about 40?

William Lowe

I think it probably will be, what we have been, somewhere around that 37, 38 days is very typical for us. I would say that's part of going up.

Operator

Your next question comes from the line of Ana Goshko with the Bank of America Merrill Lynch.

Ana Goshko - Bank of America Merrill Lynch

Just a couple one, cash flow and cash, I guess, just on the working capital, I think you addressed that in a couple of different ways in your comments, but its been a big use year-to-date, materially been I think the driver of the negative cash from operations fiscal year-to-date. So I just wanted a sense of you talked about there being improvements eminent, but do you feel that that kind of swing backwards, and start being a source of cash, now that the cash from operations level.

And then secondly just on your kind of cash uses outlook for the next maybe like five quarters through fiscal '14, so you clearly are going to spend the $50 million for the TOKIN stake, but you also had deferred payments from the incentives, so just wondering how those will be rolling out over the next five quarters where you are on those?

William Lowe

Let me address your working capital question first. I was referring specifically to inventory, which I do expect to be reduced from the third quarter levels. It's primarily reflected more in the channel business group as the vertical integration aspects flatten out, and I'm referring to having enough in the pipeline that's it relatively stable in that standpoint.

So I'm not even expecting improvement in inventory levels to come down. To your point, we have increased inventory even as revenue was falling slightly as a result of that. We expect inventories to come back in line with the revenue levels over Q4.

Per-Olof Loof

I think it's important to realize we're building up the vertical integration channel. We've had to increase our channel inventory as we've built up that supply chain.

William Lowe

Essentially, our buying did not double, but buying ore and powder from outside that will be used or consumed during that same period. To your point, yes we have some deferred payments that you're referring, that you are recalling, is that we have payments under our Niotan acquisition. Those payments are $10 million every six months. There will be a payment in February, and then another $10 million payment six months later, and two more payments beyond that for paying off the final $40 million that we owe for that acquisition.

It does not carry an interest charge. There is an interest on that deferred payment as well. And then of course, the other cash usage will just be whatever CapEx that we'll spend for the next fiscal year looking forward for the next four quarters beyond the forecast I gave you for this fourth quarter, which will be around $8 million. We've not yet forecasted the CapEx for next year. We'll probably do that on our next call. It will probably not be less than what we spent in fiscal '13 and we'll give you that specific numbers as we enter into our last quarter conference call.

Per-Olof Loof

As we finish off, many of our restructuring activities also mostly goes away.

Ana Goshko - Bank of America Merrill Lynch

So just as for expectation, so we've been used to seeing a very high cash balance for the last couple of quarters because you've been really sitting on cash that is meant for your strategic investment, so when I take the restricted cash out which is from that OEM, nearly about $138 million at quarter end, but we really have $60 million of payments for the strategic investments coming eminently, I think in February right. So you're really going to be more like $70 million to $80 million cash balances as where we should really sort of expect to see you kind of going forward?

William Lowe

After the change in working capital and cash flow generated through the quarter, yes. Let me just take off the Q3 number, your math is correct.

Ana Goshko - Bank of America Merrill Lynch

And then are you comfortable with that balance? Is there like a target that you have in mind?

William Lowe

Yes, we're comfortable at that balance. We of course intend to accumulate more cash going forward. Our efforts to lower our breakeven point at a net income level continues, and if revenue stay at this level, we expect to continue look to find cost reduction measures that will make us not just cash flow positive but net income positive and EPS positive going forward.

Operator

Your next question comes from the line of Tony Venturino with Federated Investors.

Tony Venturino - Federated Investors

Two quick questions. One was kind of already asked and answered but we'll try it a little different way. At first, earlier this week, I was on a call with a semiconductor company and they were talking specifically about their distribution channel saying that their inventory in the distribution channel had decreased from their historical levels, but that the distis were kind of getting more used to operating at lower levels. I'm just wondering if you can comment on that, if you're seeing the same thing, specifically as it relate to a re-stocker or refresher. Do you think that that's going to happen or are they more comfortable now operating with leaner inventories.

Per-Olof Loof

I wouldn't view our business the way my colleagues would admit we did it that you just referred to. I think we're seeing this is being more confident and they've seeing the inventories coming down, and I don't think they are changing their model relative to what they keep in stock. I think our business is a little different from the semi business in that perspective.

Tony Venturino - Federated Investors

So then periodically there could be a restock?

William Lowe

Yes, I mean, that's absolutely correct. I think as the inventories are coming down and the levels are down, they will clearly aim to ensure that they had products on the shelf.

Tony Venturino - Federated Investors

And then the other question, kind of asked earlier but the strength in the orders, can you maybe categorize that for us a little differently in terms of, is it driven by new products or it is just overall general demand? And is that demand maybe of a function of pent up demand because nobody was spending last quarter. I'm just trying to get a sense of what's really driving this as this maybe just kind of a near-term phenomena and that things are going to flatten out or if there is something specifically at the longer term that you're seeing.

William Lowe

I think it's a combination of both really. I think it's a combination of new products that we are coming out with. And also I think and building confidence in terms of what people see in the end markets. As well, I think as we looked through the numbers now, there seems to be a positive trend line. As we said on the call in our prepared remarks and also in when I was answering somebody a question, so it's a little early in the quarter to call out for the victory lap here, but at least so far in the quarter the trend line is positive. I also said that we were consuming inventory and the backlog in last quarter and we are now building backlog again.

Per-Olof Loof

Operator, we have time for just one more question. We actually do have another commitment this evening, and so we have time for one more question.

Operator

There are no further questions.

Per-Olof Loof

Thank you very much for listening to our call and for interest in our company. And for us, tomorrow morning, it's going to be an existing day. We've been working on this transaction actually since October 2009, believe it or not. So it's good to see that it now can get started. So thank you all very much, and have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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