Kemet Electronics Corp. and tantalum powder supplier Cabot Corp. last week settled their eight-month-old lawsuit, with Kemet agreeing to accept shipments of the raw material that it had earlier said it did not need.
Under the terms of the settlement, Kemet will accept a $32.5 million tantalum powder delivery, less than half of the $77 million it had originally agreed to take as part of a three-year supply deal. In return for the smaller delivery, Kemet extended its supply agreement with Boston-based Cabot through the end of 2006 and will pay prices that are higher than current market rates.
The deal settled a legal dispute between the companies in which Cabot, which supplies half the world's tantalum powder, sued Kemet in April for failing to honor its supply contract. In October, a Massachusetts Superior Court ruled in Cabot's favor, dismissing Kemet's counterclaim of unfair and deceptive trade practices.
The minimum amount of the modified contract totals $121 million, which calls for Kemet to receive $22 million of tantalum powder and wire next year and pro-rated amounts thereafter. The original contract called for Kemet to receive $65 million in powder next year.
"We think this is a good agreement for us," said John Warner, a spokesman for the Greenville, S.C., company.
At first glance, Warner's assertion seems to hold weight. Kemet, struggling for profitability in a weak market, is able initially to spend less on the powder, which is used in the manufacture of capacitors.
But there's a catch.
Kemet estimates that its commitment under the extended supply agreement will force it to spend $42 million more than the current market rate for the powder. To reflect the inventory cost differential, Kemet will incur a $44 million nonrecurring charge in its December fiscal quarter that also includes an unrelated $2 million loss from selling excess palladium.
Warner said that the tantalum powder prices under the amended contract, while higher than market levels, were lower than those in the original agreement. He said that despite a glut of tantalum powder, Kemet agreed to the higher price as a safeguard to guarantee access to a stable source of the material once the market improves.
"We had a meeting with a major electronics supplier Friday who wanted to avert tantalum supply problems," Warn-er said, referring to the powder shortages several years ago that caused Kemet and two rival capacitor suppliers AVX Corp., Myrtle Beach, S.C., and Vishay Intertechnology Inc., Malvern, Pa. to sign long-term supply deals.
For observers on the outside, however, the resolution appears to be more a means to quickly end a lawsuit with a powerful supplier than a decision fraught with strategic significance.
"Kemet didn't need any more tantalum powder," said Shawn Severson, an analyst at Raymond James & Associates Inc., Tampa, Fla. "It was just a matter of how it was going to work through its contract."
AVX and Vishay have also engaged in legal wrangling with Cabot over their tantalum powder contracts. Vishay settled its dispute in June by extending one of its supply agreements through the end of 2006. The minimum value of the contracts was estimated at $425 million.
A suit AVX filed against Cabot in August is in litigation, though AVX is still receiving tantalum powder shipments, a Cabot spokesman said.