Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note
1
. Basis of Financial Statement Presentation
The condensed consolidated financial statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended
March 31, 2017
(the “Company’s
2017
Annual Report”).
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation. Net sales and operating results for the
quarter ended
June 30, 2017
are not necessarily indicative of the results to be expected for the full year.
The Company’s significant accounting policies are presented in the Company’s
2017
Annual Report.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.
Recently Issued Accounting Pronouncements
New accounting standards adopted/issued
In March 2017, the
Financial Accounting Standards Board (
“FASB”) issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of Operating income. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented. The Company adopted this guidance in the first quarter of fiscal year 2018; the adoption of this guidance had an immaterial impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other. The update eliminates the requirement to calculate the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. Under the update, the goodwill impairment loss would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date of this update is for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements, however the adoption of this guidance is not expected to have a significant effect on the Company’s consolidated financial position, results of operations, or cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. The update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an
intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires modified retrospective transition method which is a cumulative effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company adopted this guidance as of April 1, 2017 and recorded a cumulative effect adjustment to retained earnings of
$203,000
.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early application is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will have on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance requires either a retrospective or a modified retrospective approach at adoption. Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:
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•
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ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new guidance such that the new provisions will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017 (ASU No. 2015-14 is effective for the Company’s fiscal year that begins on April 1, 2018 and interim periods within that fiscal year).
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•
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ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations (reporting revenue gross versus net).
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•
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ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements.
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•
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ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the implementation guidance in a number of other areas.
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•
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ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
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The effective date of this guidance is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted
, but not before the Company’s fiscal year that began on April 1, 2017 (the original effective date of the ASU). The Company plans to adopt the requirements of the new standard in the first quarter of fiscal year 2019.
The Company has completed the assessment phase, applied the principles of the new standard using the five step method to material customer contracts, and held discussions with key stakeholders and management. The Company is currently finalizing changes to accounting policies and internal controls over financial reporting. Key changes in the ASU that could potentially impact the Company
’
s revenue recognition include certain customer tooling contracts primarily within the original equipment manufacturers (“OEM”) channel and the deferral of incremental costs to fulfill a contract. The Company is currently finalizing the impact of the ASU on the consolidated results of operations, financial position, cash flows and financial statement disclosures.
There are currently no other accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
Fair Value Measurement
The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The first two inputs are considered observable and the last is considered unobservable. The levels of inputs are as follows:
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•
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Level 1—Quoted prices in active markets for identical assets or liabilities.
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•
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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•
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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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Assets and liabilities measured at fair value on a recurring basis as of
June 30, 2017
and
March 31, 2017
are as follows (amounts in thousands):
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Carrying Value June 30,
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Fair Value June 30,
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Fair Value Measurement Using
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Carrying Value March 31,
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Fair Value March 31,
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Fair Value Measurement Using
|
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2017
|
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2017
|
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Level 1
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Level 2 (2)
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Level 3
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2017
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2017
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Level 1
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Level 2 (2)
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Level 3
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Assets (Liabilities):
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Money markets (1)
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$
|
23,425
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$
|
23,425
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$
|
23,425
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$
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—
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$
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—
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$
|
2,055
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$
|
2,055
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$
|
2,055
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|
$
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—
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$
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—
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Total debt
|
(335,145
|
)
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(333,852
|
)
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(328,569
|
)
|
|
(5,283
|
)
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—
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(388,211
|
)
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(385,251
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)
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(353,000
|
)
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(32,251
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)
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—
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TOKIN option,
net (3)
|
—
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—
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—
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—
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—
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(9,900
|
)
|
|
(9,900
|
)
|
|
—
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|
|
—
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|
|
(9,900
|
)
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___________________
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(1)
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Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
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(2)
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The valuation approach used to calculate fair value was a discounted cash flow based on the borrowing rate for each respective debt facility.
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(3)
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See Note
7
, “Investment in TOKIN,” for a description of the TOKIN option, which was canceled on April 19, 2017 pursuant to the terms of the TOKIN purchase agreement. The value of the option depended on the enterprise value of TOKIN and its forecasted EBITDA over the duration of the option. The option was valued using option pricing methods in a Monte Carlo simulation.
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The table below summarizes TOKIN option valuation activity using significant unobservable inputs (Level 3) (amounts in thousands):
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March 31, 2017
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$
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(9,900
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)
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Option cancellation
|
9,900
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June 30, 2017
|
$
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—
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As discussed in Note
7
, “Investment in TOKIN,”on April 19 2017 the TOKIN option was canceled pursuant to the terms of the TOKIN purchase agreement.
Inventories
Inventories are stated at the lower of cost or market. The components of inventories are as follows (amounts in thousands):
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June 30, 2017
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March 31, 2017
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Raw materials and supplies
|
$
|
82,175
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|
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$
|
65,750
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Work in process
|
63,143
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|
47,408
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Finished goods
|
61,580
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|
|
50,738
|
|
|
206,898
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163,896
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Inventory reserves
|
(14,868
|
)
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|
(15,941
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)
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$
|
192,030
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|
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$
|
147,955
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Warrant
As of
June 30, 2017
and
March 31, 2017
,
8.4 million
shares were subject to the warrant (which expires June 30, 2019) held by K Equity, LLC ("K Equity"). On July 20, 2017, the Company filed a registration statement on Form S-3 (the "Form S-3") pursuant to certain rights and obligations under the Company's Restated Registration Rights Agreement with K Equity. The Form S-3 registers the offer and possible resale of up to
8,416,814
shares of our common stock by K Equity. K Financing, LLC ("K Financing") received the Platinum Warrant to purchase
26,848,484
shares of our common stock, subject to certain adjustments, in connection with the entry into the Platinum Credit Facility among us, K Financing and certain of our subsidiaries. K Financing was subsequently merged with and into K Equity. In December 2010, K Equity sold a portion of the Platinum Warrant equal to
10,893,608
shares and in May, 2011, K Equity sold a portion of the Platinum Warrant equal to
7,538,062
shares. The Platinum Warrant is currently immediately exercisable for the remaining
8,416,814
shares at an exercise price of
$1.05
per share. Pursuant to its terms, the Platinum Warrant may be exercised on a net exercise basis or for cash.
Revenue Recognition
The Company ships products to customers based upon firm orders and revenue is recognized when the sales process is complete. This occurs when products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred and collectability is reasonably assured. Based on product availability, customer requirements and customer consent, the Company may ship products earlier than the initial planned ship date. Shipping and handling costs are included in cost of sales.
A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. The Company recognizes revenue when title to the products transfers to the customer.
A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company’s distributor policy includes inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.
KEMET’s SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
Most of the Company’s distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed
6%
of their purchases from the previous fiscal quarter. KEMET estimates future returns based on historical return patterns and records a corresponding allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company’s sales channels.
The establishment of sales allowances is recognized as a component of the line item “Net sales” on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable, net” on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors.
This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company’s estimates.
The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to
one year
, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than
1.0%
for the
quarters ended
June 30, 2017
and
2016
. The Company recognizes warranty costs when they are both probable and reasonably estimable.
Note
2
. Acquisitions
Sale of Electromagnetic Business and Acquisition of Remaining Interest in TOKIN
Since February 1, 2013, KEMET, through its wholly-owned subsidiary, KEMET Electronics Corporation (“KEC”), has held a
34%
economic interest in TOKIN Corporation (“TOKIN”), as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of TOKIN outstanding as of such date. TOKIN was established in Japan in 1938 and is engaged in production and distribution of tantalum capacitors, transmitting communication devices, magnetic devices, piezoelectric devices and sensors. TOKIN has
six
manufacturing locations throughout Asia and was previously operated as a joint venture with NEC Corporation (“NEC”).
On April 14, 2017, TOKIN closed on the sale of its electro-mechanical devices (“EMD”) business to NTJ Holdings 1 Ltd. (“NTJ”), a special purpose entity that is owned by funds managed or operated by Japan Industrial Partners, Inc. (“JIP”), pursuant to a master sale and purchase agreement (the “EMD Master Sale and Purchase Agreement”) previously entered into between TOKIN, NTJ and JIP (“Sale of EMD”). The initial selling price for EMD was
JPY 48.2 billion
, or approximately
$431.0 million
, using the March 31, 2017 exchange rate of
111.823
Japanese Yen to 1.00 U.S. Dollar, and is subject to certain working capital adjustments pursuant to the EMD Master Sale and Purchase Agreement. At the closing of the Sale of EMD, TOKIN used a portion of the sale proceeds to repay debt related to a shareholder loan from NEC. The TOKIN historical balance sheet was adjusted to reflect the removal of net assets sold and other items directly impacted by the Sale of EMD. Additionally, due to KEMET’s
34%
equity interest in TOKIN held as of the closing, adjustments have been made to reflect KEMET’s accounting for the Sale of EMD in accordance with the equity method of accounting.
On April 19, 2017, pursuant to a definitive TOKIN stock purchase agreement (the “TOKIN Purchase Agreement”) dated February 23, 2017 between KEC and NEC, KEC completed its acquisition, subject to final purchase price adjustment, of the remaining
66%
economic interest in TOKIN, and as a result TOKIN is now a
100%
owned indirect subsidiary of KEMET (the “TOKIN Acquisition”). Under the terms of the TOKIN Purchase Agreement, KEC paid NEC
JPY 16.2 billion
, or approximately
$148.6 million
(using the April 19, 2017 exchange rate of
109.007
Japanese Yen to 1.00 U.S. Dollar), for all of the outstanding shares of TOKIN it did not already own. The preliminary purchase price was comprised of
JPY 6 billion
, or approximately
$55.0 million
(using the April 19, 2017 exchange rate of
109.007
Japanese Yen to 1.00 U.S. Dollar) plus
JPY 10.2 billion
, or approximately
$93.6 million
, which represented one-half of the estimated excess net cash proceeds (“Excess Cash”) from the sale of TOKIN’s EMD business. The Excess Cash is subject to working capital adjustments pursuant to the EMD Master Sale and Purchase Agreement.
The Company believes the acquisition of TOKIN will expand KEMET’s geographic presence, combining KEMET’s presence in the western hemisphere and TOKIN’s excellent position in Asia to enhance customer reach and create an entrance into Japan for KEMET. The Company believes TOKIN’s product portfolio is a strong complement to KEMET’s existing product portfolio. KEMET believes the combination creates a leader in the combined polymer and tantalum capacitors market. The acquisition also enhances KEMET’s product diversification with entry into Electro-Magnetic Compatible ("EMC") and sensors. With the increased scale, the Company anticipates optimizing costs through competitive raw materials sourcing and maximizing operating efficiencies. The acquisition is also expected to be accretive to earnings with improvement in Adjusted EBITDA and cash flow. Effective for the quarter ended June 30, 2017, TOKIN’s tantalum capacitor business will be included within KEMET’s Solid Capacitors reportable segment and the remainder of TOKIN’s business will form a new reportable segment for KEMET, Electro-magnetic, Sensors & Actuators (“MSA”).
The following table shows the preliminary components of the acquisition price; the excess cash value may change upon finalization of working capital adjustments for the Sale of EMD (amounts in thousands):
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Upfront cash consideration (1)
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$
|
148,614
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Acquisition payable (2)
|
5,088
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Indemnity asset (3)
|
8,500
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Less: Put option (4)
|
(9,900
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)
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Net consideration transferred
|
$
|
152,302
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(1)
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The upfront cash payment comprises
JPY 6.0 billion
plus one half of Excess Cash in an amount of approximately
JPY 10.2 billion
, approximately
$55.0 million
and
$93.6 million
, respectively.
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(2)
|
Current estimate of the additional amount due to NEC Corporation upon the settlement of the adjusted purchase price for the EMD sale.
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(3)
|
Pursuant to the Stock Purchase Agreement (defined in Note
14
, “
Concentrations of Risks
,”) between KEMET and NEC, NEC was required to indemnify TOKIN and/or KEC for any breaches by TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement. NEC’s aggregate liability for indemnification claims was limited to
$25.0 million
. Prior to the acquisition, KEMET's equity method investment balance included an
$8.5 million
indemnification asset pursuant to this indemnification arrangement. In connection with the TOKIN Acquisition, NEC was released from its indemnification obligations to KEMET without an exchange of consideration; as such, this amount of released obligation is included as purchase consideration by KEMET.
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(4)
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Pursuant to the option agreement, dated as of March 12, 2012, by and among NEC and KEMET (the “Option Agreement”), from April 1, 2015 through May 31, 2018, NEC had the right to require KEC to purchase all outstanding capital stock of TOKIN (the “Put Option”). The fair value of the Put Option of
$9.9 million
was reflected as a liability on KEMET’s balance sheet prior to KEMET
’
s acquisition of the remaining
66%
economic interest in TOKIN. The Put Option was canceled, pursuant to the terms of the TOKIN Purchase Agreement with no exchange of consideration between NEC and KEMET. Accordingly, the fair value of the Put Option reduces the amount of consideration paid to acquire NEC’s equity in TOKIN.
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In accordance with ASC 805, KEMET’s previously held
34%
equity interest in TOKIN and the assets acquired and the liabilities assumed have been measured at their fair values based on various preliminary estimates. The preliminary acquisition-date fair value of KEMET’s previously held
34%
equity interest in TOKIN is approximately
$207.8 million
.
The following table presents the preliminary allocations of the aggregate purchase price based on the estimated fair values of the assets and liabilities (amounts in thousands):
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Fair Value
|
Cash
|
$
|
315,743
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|
Accounts Receivable
|
79,295
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|
Inventory
|
35,310
|
|
Other current assets
|
20,899
|
|
Property, Plant and equipment
|
159,597
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Intangible assets (1)
|
35,452
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Equity method investments
|
12,795
|
|
Other assets
|
8,533
|
|
Current portion of long term debt
|
(3,225
|
)
|
Accounts payable
|
(81,642
|
)
|
Accrued expenses
|
(46,276
|
)
|
Other non-current obligations
|
(103,486
|
)
|
Deferred income taxes
|
(9,713
|
)
|
Total net assets acquired
|
$
|
423,282
|
|
|
|
(1)
|
Comprised of trade name for
$8.1 million
and products and relationships of
$25.2 million
. TOKIN’s technology, products, and relationships were valued as a grouped, composite intangible asset due to the Company’s products being dependent on the existing technology, which enabled a product portfolio that customers found appealing in selecting and designing electronic components for purchase. The trade names were valued based on the relief from royalty method and and have indefinite remaining useful lives. The products and relationships were valued on the excess earnings method and are amortized over
10 years
.
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Additionally, there were
$0.4 million
of acquisition-related costs, which were all recognized as an expense in the line item “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Operations
The above allocation of purchase price has been prepared based on preliminary estimates, the final amounts recorded may differ materially from the information presented herein. These estimates are subject to change pending further review of the acquired business. The following components of the initial valuation are still preliminary: deferred income taxes, accounts receivable reserves, inventory obsolescence, equity method investments, products and relationships, property plant and equipment for some locations and management continues to reassess the bargain gain in accordance with ASC 805. A change in the fair value of assets acquired or liabilities assumed in the merger from those preliminary valuations presented above would result in a corresponding change in the amount of bargain purchase gain, that resulted from the merger in a business combination when the fair value of net assets acquired exceeds the sum of consideration transferred and the fair value of the acquirer’s previously held interest in the acquiree. The gain is recognized immediately in earnings in accordance with U.S. GAAP. The following table reflects the preliminary bargain purchase gain resulting from the TOKIN Acquisition (amounts in thousands):
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Net consideration transferred
|
$
|
152,302
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Preliminary fair value of KEMET
’
s previously held equity interest in TOKIN
|
207,823
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|
Less: Preliminary fair value of net assets acquired
|
(423,282
|
)
|
Bargain purchase gain
|
$
|
(63,157
|
)
|
The gain is included in the line item “Acquisition gains” in the 2017 Condensed Consolidated Statements of Operations.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and TOKIN as though the acquisition and the sale of EMD had occurred as of April 1, 2016. The pro forma amounts presented are not
necessarily indicative of either the actual consolidated results had the acquisition occurred as of April 1, 2016, or of future consolidated operating results (amounts in thousands, except per share data):
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Quarters Ended June 30,
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|
2017(1)
|
|
2016(2)
|
Pro forma revenues
|
291,474
|
|
|
257,509
|
|
Pro forma net income (loss) from continuing operations available to common stockholders
|
14,231
|
|
|
253,609
|
|
Pro forma earnings per common share - basic
|
0.30
|
|
|
5.47
|
|
Pro forma earnings per common share - diluted
|
0.25
|
|
|
4.87
|
|
Pro forma common shares - basic
|
47,381
|
|
|
46,349
|
|
Pro forma common shares - diluted
|
57,731
|
|
|
52,097
|
|
|
|
(1)
|
The net income for the quarter ended June 30, 2017 excludes the following: 34% of the preliminary gain on sale of the EMD business of
$75.2 million
, the preliminary gain related to the fair value of KEMET
’
s previous
34%
interest in TOKIN of
$72.4 million
, and the preliminary bargain gain on the acquisition of TOKIN of
$63.2 million
.
|
|
|
(2)
|
The net income for the quarter ended June 30, 2016 includes the following:
34%
of the preliminary gain on sale of the EMD business of
$123.1 million
(which includes the release of a valuation allowance that was recorded in the fourth quarter of fiscal year 2017 and the use of the deferred tax asset which was recorded in the first quarter of fiscal year 2018), the preliminary gain related to the fair value of KEMET
’
s previous
34%
interest in TOKIN of
$72.4 million
, and the preliminary bargain gain on the acquisition of TOKIN of
$61.3 million
.
|
Note
3
. Debt
A summary of debt is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
March 31,
2017
|
Term Loan Credit Agreement (1)
|
$
|
330,005
|
|
|
$
|
—
|
|
10.5% Senior Notes, net (2)
|
—
|
|
|
352,472
|
|
Revolving line of credit
|
—
|
|
|
33,881
|
|
Other (3)
|
5,140
|
|
|
1,858
|
|
Total debt
|
335,145
|
|
|
388,211
|
|
Current maturities
|
(20,376
|
)
|
|
(2,000
|
)
|
Total long-term debt
|
$
|
314,769
|
|
|
$
|
386,211
|
|
|
|
(1)
|
As noted in Note 1, “Basis of Financial Statements Presentation,” ASU No. 2015-03, Interest - Imputation of Interest, was adopted as of April 1, 2016. As such, debt issuance cost, if any, is included within the respective debt balance. Amounts shown are net of discount and debt issuance costs of
$15.0 million
and
zero
as of
June 30, 2017
and
March 31, 2017
, respectively which reduce the Term Loan Credit Agreement (as defined herein) balance.
|
|
|
(2)
|
Amounts shown are net of premium and debt issuance costs of
zero
and
$0.5 million
as of
June 30, 2017
and
March 31, 2017
, respectively which reduce the
10.5%
Senior Notes balance.
|
|
|
(3)
|
The amount shown is net of discount of
$0.5 million
as of both
June 30, 2017
and
March 31, 2017
.
|
The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the
quarters ended
June 30, 2017
and
2016
, consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Contractual interest expense
|
$
|
10,425
|
|
|
$
|
9,710
|
|
Capitalized interest
|
(8
|
)
|
|
(52
|
)
|
Amortization of debt issuance costs
|
167
|
|
|
348
|
|
Amortization of debt (premium) discount
|
266
|
|
|
(199
|
)
|
Imputed interest on acquisition-related obligations
|
27
|
|
|
41
|
|
Interest expense on capital lease
|
83
|
|
|
75
|
|
Total interest expense
|
$
|
10,960
|
|
|
$
|
9,923
|
|
10.5% Senior Notes
On April 28, 2017, the Company repurchased and retired the full outstanding balance of
$353.0 million
of its
10.5%
Senior Notes due May 1, 2018 (the “
10.5%
Senior Notes”). The Company had interest payable related to the
10.5%
Senior Notes included in the line item “Accrued expenses” on its Condensed Consolidated balance sheets of
zero
and
$15.4 million
as of
June 30, 2017
and
March 31, 2017
, respectively.
Term Loan Credit Agreement
On April 28, 2017, KEMET entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among the Company, KEC (together with the Company, the “Borrowers”), Bank of America, N.A. as the Administrative Agent and Collateral Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and bookrunner and various other lenders thereto from time to time.
The Term Loan Credit Agreement provides for a
$345 million
term loan facility. In addition, the Borrowers may request incremental term loan commitments in an aggregate amount not to exceed
$50 million
(together with the initial
$345 million
term loan, the “Term Loans”). The proceeds were used, together with cash on hand, to fund the redemption of all of KEMET’s outstanding
10.5%
Senior Notes, which were also called for redemption on April 28, 2017. The Term Loans were made with an original issue discount of 300 basis points. At the Company’s election, the Term Loans may be made as either Base Rate Term Loans or LIBO Rate Term Loans (each as defined in the Term Loan Credit Agreement). The applicable margin for term loans is
5.0%
for Base Rate Term Loans and
6.0%
for LIBO Rate Term Loans. All LIBO Rate Term Loans are subject to a pre-margin floor of
1.00%
. The Term Loan Credit Agreement contains customary covenants and events of default.
The Company also entered into the Term Loan Security Agreement dated as of April 28, 2017 (the “Security Agreement”), by and among the Company, KEC and certain other subsidiaries of the Company and Bank of America, N.A., as collateral agent, pursuant to which the Company’s obligations under the Term Loan Credit Agreement are secured by a pledge of
65%
of the outstanding voting stock of certain first-tier subsidiaries organized in Italy, Japan, Mexico and Singapore, and a second lien pledge on the collateral securing KEMET’s revolving credit facility. The obligations of the Company under the Term Loan Credit Agreement are guaranteed by certain of its subsidiaries, including KRC Trade Corporation, KEMET Services Corporation, KEMET Blue Powder Corporation and The Forest Electric Company. The Term Loans mature April 28, 2024, and may be extended in accordance with the Term Loan Credit Agreement. The Company may prepay loans under the Term Loan Credit Agreement at any time, subject to certain notice requirements and certain prepayment premiums during the first two years. On a quarterly basis the Company must repay
1.25%
of the aggregate principal amount of the initial
$345 million
term loan, or
$4.3 million
, beginning September 29, 2017.
The Company had interest payable related to the Term Loan Security Agreement included in the line item “Accrued expenses” on its Condensed Consolidated balance sheets of
$4.1 million
and
zero
as of
June 30, 2017
and
March 31, 2017
, respectively.
Revolving Line of Credit
In connection with the closing of the new Term Loan Credit Agreement, KEC also entered into Amendment No. 9 to Loan and Security Agreement, Waiver and Consent, dated as of April 28, 2017, by and among KEC, the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., as agent for the lenders (the “Loan Amendment”). The Loan Amendment increases the facility amount to
$75.0 million
and provides KEC with lower applicable interest rate margins and the ability to complete the refinancing. As part of the overall refinancing, KEC also repaid all amounts outstanding under the Loan Amendment.
As of
June 30, 2017
, there were
no
borrowings under the revolving line of credit, and the Company’s available borrowing capacity, which is based on factors including outstanding eligible accounts receivable, inventory and equipment collateral, under the Loan and Security Agreement was
$68.3 million
.
Other Debt
In January 2017, KEMET
’
s wholly-owned subsidiary, KEMET Electronics Portugal, S.A., received an interest free loan from the Portuguese Government in the amount of
EUR 2.2 million
(or
$2.5 million
) to be used for fixed asset purchases. The loan has a total term of
eight years
ending February 1, 2025. The loan will be repaid through semi-annual payments in the amount of
EUR 185 thousand
(or
$211 thousand
) beginning on August 1, 2019. Since the debt is non-interest bearing, we have created a debt discount in the amount of
EUR 0.5 million
(or
$0.6 million
) with an offsetting reduction to fixed assets. This discount will be amortized over the life of the loan through interest expense. If certain conditions are met such as increased headcount, increased revenue and increased gross value added, a portion of the loan could be forgiven during fiscal year 2020.
In September 2016, TOKIN received a short term borrowing pursuant to an overdraft agreement with the 77 Bank of Miyagi, Japan, in the amount of
350 million
yen (or
$3.1 million
), at an interest rate of
0.53%
(JBA TIBOR + 40 basis points). The loan is due September 2017, and the loan agreement automatically renews if both parties choose not to terminate or modify it.
Note
4
. Goodwill and Intangible Assets
The following table highlights the Company’s intangible assets (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
March 31, 2017
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
Indefinite Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
15,068
|
|
|
$
|
—
|
|
|
$
|
7,207
|
|
|
$
|
—
|
|
Amortizing Intangibles:
|
|
|
|
|
|
|
|
|
Purchased technology, customer relationships and patents (2 - 21 years)
|
|
68,681
|
|
|
19,966
|
|
|
39,527
|
|
|
16,953
|
|
|
|
$
|
83,749
|
|
|
$
|
19,966
|
|
|
$
|
46,734
|
|
|
$
|
16,953
|
|
For the
quarters ended
June 30, 2017
and
March 31, 2017
amortization related to intangibles was
$0.9 million
and
$0.5 million
, respectively. The weighted-average useful life of amortized intangibles was
14.0 years
and
16.6 years
in the
quarters ended
June 30, 2017
and
March 31, 2017
, respectively. The weighted-average period prior to the next renewal for patents was
0.25 years
years and
0.5 years
in the
quarters ended
June 30, 2017
and
March 31, 2017
, respectively. Estimated amortization of intangible assets for each of the next five fiscal years is
$3.5 million
and, thereafter, amortization will total
$31.3 million
.
The changes in the carrying amount of goodwill for the
three-month period ended June 30, 2017
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
Gross balance as of March 31, 2017
|
|
|
|
|
|
|
Goodwill
|
|
$
|
4,710
|
|
|
$
|
35,584
|
|
|
$
|
1,092
|
|
Accumulated impairment losses
|
|
—
|
|
|
—
|
|
|
(1,092
|
)
|
Net balance as of March 31, 2017
|
|
$
|
4,710
|
|
|
$
|
35,584
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impairment charges
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Gross balance as of June 30, 2017
|
|
|
|
|
|
|
Goodwill
|
|
$
|
4,710
|
|
|
$
|
35,584
|
|
|
$
|
1,092
|
|
Accumulated impairment losses
|
|
—
|
|
|
—
|
|
|
(1,092
|
)
|
Net balance as of June 30, 2017
|
|
$
|
4,710
|
|
|
$
|
35,584
|
|
|
$
|
—
|
|
The Company’s goodwill balance was
$40.3 million
at
June 30, 2017
and
March 31, 2017
. There was
no
goodwill related to the MSA segment.
Note
5
. Restructuring Charges
KEMET’s restructuring plans are focused on making the Company more competitive by reducing excess capacity, relocating production to lower cost locations and eliminating unnecessary costs throughout the Company.
A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the
quarters ended
June 30, 2017
and
2016
, is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Personnel reduction costs
|
$
|
238
|
|
|
$
|
647
|
|
Relocation and exit costs
|
1,375
|
|
|
41
|
|
Restructuring charges
|
$
|
1,613
|
|
|
$
|
688
|
|
Quarter Ended June 30, 2017
The Company incurred
$1.6 million
in restructuring charges in the quarter ended
June 30, 2017
including
$0.2 million
in personnel reduction costs and
$1.4 million
in manufacturing relocation and exit costs.
The personnel reduction costs of
$0.2 million
are due to
U.S. headcount reductions related to the relocation of global marketing, finance and accounting, and information technology functions to the Company’s Fort Lauderdale, Florida office
.
The manufacturing relocation and exit costs of
$1.4 million
primarily consist of
$0.9 million
in
lease termination penalties related to the relocation of global marketing, finance and accounting, and information technology functions to the Company’s Fort Lauderdale, Florida office
,
$0.2 million
in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant
,
$0.2 million
in exit costs related to the shut-down of operations for KEMET Foil Manufacturing, LLC (“KFM”) in Knoxville, Tennessee
, and
$0.1 million
related to the
transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico
.
Quarter Ended June 30, 2016
The Company incurred
$0.7 million
in restructuring charges in the quarter ended
June 30, 2016
including
$0.6 million
in personnel reduction costs and
$41 thousand
in manufacturing relocation and exit costs.
The personnel reduction costs of
$0.6 million
consist of
$0.3 million
for overhead reductions in Sweden,
$0.2 million
related to manufacturing headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines to lower cost regions, and
$0.1 million
related to the consolidation of certain Solid Capacitor manufacturing in Matamoros, Mexico.
The manufacturing relocation and exit costs of
$41 thousand
consist of transfers of Film and Electrolytic production lines to lower cost regions.
Reconciliation of Restructuring Liability
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the
quarters ended
June 30, 2017
and
2016
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2017
|
|
Quarter Ended June 30, 2016
|
|
Personnel
Reductions
|
|
Manufacturing
Relocations
|
|
Personnel
Reductions
|
|
Manufacturing
Relocations
|
Beginning of period
|
$
|
999
|
|
|
$
|
406
|
|
|
$
|
976
|
|
|
$
|
—
|
|
TOKIN opening balance
|
$
|
—
|
|
|
314
|
|
|
—
|
|
|
—
|
|
Costs charged to expense
|
238
|
|
|
1,375
|
|
|
647
|
|
|
41
|
|
Costs paid or settled
|
(457
|
)
|
|
(1,781
|
)
|
|
(523
|
)
|
|
(41
|
)
|
Change in foreign exchange
|
18
|
|
|
—
|
|
|
(21
|
)
|
|
—
|
|
End of period
|
$
|
798
|
|
|
$
|
314
|
|
|
$
|
1,079
|
|
|
$
|
—
|
|
Note
6
. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) for the quarters ended
June 30, 2017
and
2016
include the following components (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation (1)
|
|
Post-Retirement
Benefit Plan Adjustments
|
|
Defined Benefit
Pension Plans,
Net of Tax (2)
|
|
Ownership Share of
Equity Method
Investees’ Other
Comprehensive
Income (Loss)
|
|
Foreign Exchange Contracts
|
|
Net Accumulated
Other
Comprehensive
Income (Loss)
|
Balance at March 31, 2017
|
$
|
(25,556
|
)
|
|
$
|
1,134
|
|
|
$
|
(14,998
|
)
|
|
$
|
(5,299
|
)
|
|
$
|
2,907
|
|
|
$
|
(41,812
|
)
|
Other comprehensive income (loss) before reclassifications
|
4,138
|
|
|
—
|
|
|
—
|
|
|
5,573
|
|
|
(107
|
)
|
|
9,604
|
|
Amounts reclassified out of AOCI
|
—
|
|
|
(47
|
)
|
|
144
|
|
|
—
|
|
|
1,059
|
|
|
1,156
|
|
Other comprehensive income (loss)
|
4,138
|
|
|
(47
|
)
|
|
144
|
|
|
5,573
|
|
|
952
|
|
|
10,760
|
|
Balance at June 30, 2017
|
$
|
(21,418
|
)
|
|
$
|
1,087
|
|
|
$
|
(14,854
|
)
|
|
$
|
274
|
|
|
$
|
3,859
|
|
|
$
|
(31,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation (1)
|
|
Post-Retirement
Benefit Plan Adjustments
|
|
Defined Benefit
Pension Plans,
Net of Tax (2)
|
|
Ownership Share of
Equity Method
Investees’ Other
Comprehensive
Income (Loss)
|
|
Foreign Exchange Contracts
|
|
Net Accumulated
Other
Comprehensive
Income (Loss)
|
Balance at March 31, 2016
|
$
|
(10,272
|
)
|
|
$
|
1,114
|
|
|
$
|
(15,161
|
)
|
|
$
|
(6,739
|
)
|
|
$
|
(367
|
)
|
|
$
|
(31,425
|
)
|
Other comprehensive income (loss) before reclassifications
|
(6,386
|
)
|
|
—
|
|
|
—
|
|
|
(5,384
|
)
|
|
(2,618
|
)
|
|
(14,388
|
)
|
Amounts reclassified out of AOCI
|
—
|
|
|
(42
|
)
|
|
163
|
|
|
—
|
|
|
1,753
|
|
|
1,874
|
|
Other comprehensive income (loss)
|
(6,386
|
)
|
|
(42
|
)
|
|
163
|
|
|
(5,384
|
)
|
|
(865
|
)
|
|
(12,514
|
)
|
Balance at June 30, 2016
|
$
|
(16,658
|
)
|
|
$
|
1,072
|
|
|
$
|
(14,998
|
)
|
|
$
|
(12,123
|
)
|
|
$
|
(1,232
|
)
|
|
$
|
(43,939
|
)
|
|
|
(1)
|
Due primarily to the Company’s valuation allowance on deferred tax assets, there were
no
significant deferred tax effects associated with the cumulative currency translation gains and losses during the
quarter ended
June 30, 2017
and
2016
.
|
|
|
(2)
|
Ending balance is net of tax of
$2.7 million
and
$2.0 million
as of
June 30, 2017
and
June 30, 2016
, respectively.
|
Note
7
. Investment in TOKIN
Under the Option Agreement between KEC and NEC, from April 1, 2015 through May 31, 2018, NEC could have required KEC to purchase all outstanding capital stock of TOKIN from its stockholders, primarily NEC (the “Put Option”), provided that KEC’s payment of the Put Option price was permitted under the
10.5%
Senior Notes and Loan and Security Agreement. On April 19, 2017, the Company acquired the remaining 66% economic interest in TOKIN and TOKIN became a 100% owned subsidiary of KEMET. See Note
2
, “Acquisitions”, for additional information. Pursuant to the TOKIN Purchase Agreement, the Put Option was canceled. The line item “Other non-current obligations” on the Condensed Consolidated Balance Sheets included
$9.9 million
as of
March 31, 2017
related to the fair value of the Put Option.
Summarized financial information for TOKIN follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
19 Day Period Ended April 19,
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Sales
|
$
|
23,649
|
|
|
$
|
120,510
|
|
Gross profit
|
6,647
|
|
|
26,546
|
|
Net income (loss) (1)
|
247,786
|
|
|
2,350
|
|
|
|
(1)
|
The significant change between the periods was due to the gain from the Sale of EMD that occurred on April 14, 2017; see the discussion in Note 2, “Acquisitions” for more information.
|
A reconciliation between TOKIN’s net income (loss) and KEC’s equity investment income (loss) follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
19 Day Period Ended April 19,
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
TOKIN net income (loss)
|
$
|
247,786
|
|
|
$
|
2,350
|
|
KEC’s economic interest %
|
34
|
%
|
|
34
|
%
|
Equity income (loss) from TOKIN before adjustments
|
84,247
|
|
|
799
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
Amortization and depreciation
|
(113
|
)
|
|
(544
|
)
|
Removal of EMD memo accounts
|
(8,981
|
)
|
|
—
|
|
Inventory profit elimination
|
24
|
|
|
(32
|
)
|
Equity income (loss) from TOKIN
|
$
|
75,177
|
|
|
$
|
223
|
|
Acquired equity method investment income (loss)
|
$
|
240
|
|
|
$
|
—
|
|
Equity income (loss) from equity method investments
|
$
|
75,417
|
|
|
$
|
223
|
|
Summarized transactions between KEC and TOKIN are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
19 Day Period Ended April 19,
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
KEC’s sales to TOKIN
|
$
|
727
|
|
|
$
|
3,147
|
|
TOKIN’s sales to KEMET
|
356
|
|
|
1,872
|
|
Note
8
. Segment and Geographic Information
The Company is organized into
three
segments: Solid Capacitors, Film and Electrolytic and Electro-magnetic, Sensors & Actuators (“MSA”). In prior periods we reported two reportable segments, Solid Capacitors, Film and Electrolytic. However, effective for the quarter ended June 30, 2017 and in connection with the TOKIN acquisition, TOKIN
’
s tantalum capacitor business will be included within KEMET
’
s Solid Capacitors reportable segment and the remainder of TOKIN
’
s business will form a new reportable segment for KEMET, MSA.
The segments are responsible for their respective manufacturing sites as well as their respective research and development efforts. The Company does not allocate indirect selling, general and administrative (“SG&A”) or shared Research and development (“R&D”) expenses to the segments.
Solid Capacitors
Operating in
ten
manufacturing sites in the United States, Mexico and Asia, and innovation centers in the United States and Japan. Solid Capacitors primarily produces tantalum, aluminum polymer, and ceramic capacitors which are sold globally. Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors.
Film and Electrolytic
Operating in
nine
manufacturing sites throughout Europe and Asia, Film and Electrolytic primarily produces film, paper, and electrolytic capacitors which are sold globally. In addition, this segment has product innovation centers in Portugal, Italy and Sweden.
MSA
Operating in
four
manufacturing sites throughout Asia, MSA primarily produces electro magnet compatibilities related materials and components, Piezo materials and actuators and various type of sensors which are sold globally. In addition, this segment has product innovation centers in Sendai, Japan.
The following table reflects each segment’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the
quarters ended
June 30, 2017
and
2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
|
|
Solid Capacitors
|
$
|
182,119
|
|
|
$
|
141,944
|
|
Film and Electrolytic
|
48,010
|
|
|
42,991
|
|
MSA
|
43,871
|
|
|
—
|
|
|
$
|
274,000
|
|
|
$
|
184,935
|
|
Operating income (loss) (1):
|
|
|
|
|
|
Solid Capacitors
|
$
|
54,892
|
|
|
$
|
35,267
|
|
Film and Electrolytic
|
2,440
|
|
|
(1,413
|
)
|
MSA
|
8,055
|
|
|
—
|
|
Corporate
|
(37,603
|
)
|
|
(24,556
|
)
|
|
$
|
27,784
|
|
|
$
|
9,298
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
Solid Capacitors
|
$
|
7,051
|
|
|
$
|
5,418
|
|
Film and Electrolytic
|
2,556
|
|
|
2,715
|
|
MSA
|
714
|
|
|
—
|
|
Corporate
|
1,922
|
|
|
1,303
|
|
|
$
|
12,243
|
|
|
$
|
9,436
|
|
__________________
|
|
(1)
|
Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Restructuring charges:
|
|
|
|
|
|
Solid Capacitors
|
$
|
304
|
|
|
$
|
136
|
|
Film and Electrolytic
|
161
|
|
|
549
|
|
MSA
|
—
|
|
|
—
|
|
Corporate
|
1,148
|
|
|
3
|
|
|
$
|
1,613
|
|
|
$
|
688
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Sales by region:
|
|
|
|
|
|
North and South America (“Americas”)
|
$
|
64,663
|
|
|
$
|
55,101
|
|
Europe, Middle East, Africa (“EMEA”)
|
66,548
|
|
|
60,486
|
|
Japan and Korea (“JPKO”)
|
35,500
|
|
|
—
|
|
Asia and Pacific Rim (“APAC”)
|
107,289
|
|
|
69,348
|
|
|
$
|
274,000
|
|
|
$
|
184,935
|
|
Note
9
. Defined Benefit Pension and Other Postretirement Benefit Plans
The Company sponsors
six
defined benefit pension plans in Europe,
one
plan in Singapore,
two
plans in Mexico, and
one
plan in Japan. In addition, the Company maintains two frozen post-retirement benefit plans in the United States: health care and life insurance benefits for certain retired United States employees who reached retirement age while working for the Company. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is non-contributory. Finally, the Company sponsors one other post-retirement benefit plan in Japan. Costs recognized for benefit plans are recorded using estimated amounts which may change as actual costs for the fiscal year are determined.
The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended
June 30, 2017
and
2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Post-retirement Benefit Plan
|
|
Quarters Ended June 30,
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net service cost (1)
|
$
|
1,321
|
|
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
426
|
|
|
358
|
|
|
3
|
|
|
4
|
|
Expected return on net assets
|
(505
|
)
|
|
(94
|
)
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
90
|
|
|
115
|
|
|
(47
|
)
|
|
(42
|
)
|
Prior service cost
|
20
|
|
|
21
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit (income) costs
|
$
|
1,352
|
|
|
$
|
747
|
|
|
$
|
(44
|
)
|
|
$
|
(38
|
)
|
|
|
(1)
|
The table reflects changes required by ASU No. 2017-07, as described in Note
1
, “Basis of Financial Statement Presentation.”
|
In fiscal year
2018
, the Company expects to contribute up to
$3.3 million
to the pension plans,
$0.2 million
of which has been contributed as of
June 30, 2017
. For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred.
Note
10
. Stock-based Compensation
As of
June 30, 2017
, the KEMET Corporation Omnibus Incentive Plan (the “2011 Incentive Plan”), which amended and restated the KEMET Corporation 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan, approved by the Company’s stockholders on August 2, 2017, is the only plan the Company has to issue equity based awards to executives and key employees. The Incentive Plan is an amendment and restatement of the 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan. Upon adoption of the Incentive Plan, no further awards were permitted to be granted under the Company’s prior plans, including the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, and the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”).
The Incentive Plan authorized the grant of up to
12.2 million
shares of the Company’s Common Stock, comprised of
11.4 million
shares under the Incentive Plan and
0.8 million
shares remaining from the Prior Plans and authorizes the Company to provide equity-based compensation in the form of:
|
|
•
|
stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code;
|
|
|
•
|
stock appreciation rights;
|
|
|
•
|
restricted stock and restricted stock units (“RSUs”);
|
|
|
•
|
other share-based awards; and,
|
Except as described below, options issued under these plans vest within
two
to
three
years and expire
ten
years from the grant date. Restricted stock and RSUs issued under these plans vest over
three
to
four
years, except for RSUs granted to members of the Board of Directors, which vest within
one
year, and performance-based RSUs, which vest over a
one
-year period following achievement of two-year performance targets. The Company grants RSUs to members of the Board of Directors, the Chief Executive Officer and key management. Once vested and settled, RSUs are converted into restricted stock. For members of the Board of Directors and senior personnel, such restricted stock cannot be sold until
90
days after termination of service with the Company, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods.
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover
two
year periods and are primarily based upon the achievement of an Adjusted EBITDA range for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or RSUs, or a combination of both as determined by the Company’s Board of Directors. The 2015/2016 LTIP, 2016/2017 LTIP, 2017/2018 LTIP, and 2018/2019 LTIP also awarded RSUs which vest over the course of
three
years from the anniversary of the establishment of the plan and are not subject to a performance metric. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. Any related liability is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any restricted stock unit commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.
On May 18, 2017, the Company granted RSUs under the 2018/2019 LTIP with a grant date fair value of
$13.41
that vests as follows (amounts in thousands):
|
|
|
|
|
Shares
|
May 18, 2018
|
65
|
|
May 18, 2019
|
65
|
|
May 18, 2020
|
67
|
|
Total shares granted
|
197
|
|
The following is the vesting schedule of RSUs under each respective LTIP, which vested during the
three-month period ended
June 30, 2017
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2017/2018
|
|
2016/2017
|
|
2015/2016
|
Time-based award vested
|
|
198
|
|
|
176
|
|
|
113
|
|
Performance-based award vested
|
|
—
|
|
|
173
|
|
|
102
|
|
Restricted stock activity, excluding the LTIP activity discussed above, for the
three-month period ended
June 30, 2017
is as follows (amounts in thousands except fair value):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
average
Fair Value on
Grant Date
|
Non-vested restricted stock at March 31, 2017
|
1,382
|
|
|
$
|
4.00
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(50
|
)
|
|
9.09
|
|
Forfeited
|
(21
|
)
|
|
4.11
|
|
Non-vested restricted stock at June 30, 2017
|
1,311
|
|
|
$
|
3.81
|
|
The compensation expense associated with stock-based compensation for the quarters ended
June 30, 2017
and
2016
is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2017
|
|
Quarter Ended June 30, 2016
|
|
Stock
Options
|
|
Restricted
Stock
|
|
LTIPs
|
|
Stock
Options
|
|
Restricted
Stock
|
|
LTIPs
|
Cost of sales
|
$
|
—
|
|
|
$
|
164
|
|
|
$
|
146
|
|
|
$
|
9
|
|
|
$
|
192
|
|
|
$
|
183
|
|
Selling, general and administrative expenses
|
—
|
|
|
357
|
|
|
388
|
|
|
10
|
|
|
347
|
|
|
428
|
|
Research and development
|
—
|
|
|
9
|
|
|
37
|
|
|
—
|
|
|
5
|
|
|
54
|
|
Total
|
$
|
—
|
|
|
$
|
530
|
|
|
$
|
571
|
|
|
$
|
19
|
|
|
$
|
544
|
|
|
$
|
665
|
|
In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Net income (loss) for the
quarters ended
June 30, 2017
, and
2016
.
361,000
stock options were exercised in the
three-month periods ended
June 30, 2017
and
no
stock options were exercised in the
three-month periods ended
June 30, 2016
.
Note
11
. Income Taxes
During the quarter ended
June 30, 2017
, the Company recognized
$1.2 million
of income tax expense, comprised of
$1.1 million
of income tax expense related to foreign operations and
$0.1 million
of state income tax expense.
During the
quarter ended June 30, 2016
, the Company recognized
$1.8 million
of income tax expense from continuing operations, comprised of
$1.8 million
of income tax related to foreign operations.
There was
no
U.S. federal income tax benefit from net operating losses for the
quarter ended
June 30, 2017
and
2016
due to a valuation allowance recorded on deferred tax assets.
Note
12
. Basic and Diluted Net Income (Loss) Per Common Share
The following table presents basic earnings per share (“EPS”) and diluted EPS (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
220,606
|
|
|
$
|
(12,205
|
)
|
Denominator:
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
47,381
|
|
|
46,349
|
|
Assumed conversion of employee stock grants
|
2,631
|
|
|
—
|
|
Assumed conversion of warrants
|
7,719
|
|
|
—
|
|
Diluted
|
57,731
|
|
|
46,349
|
|
|
|
|
|
Net income (loss) per basic share
|
$
|
4.66
|
|
|
$
|
(0.26
|
)
|
|
|
|
|
Net income (loss) per diluted share
|
$
|
3.82
|
|
|
$
|
(0.26
|
)
|
Common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Quarters Ended June 30,
|
|
2017
|
|
2016
|
Assumed conversion of employee stock grants
|
133
|
|
|
2,330
|
|
Assumed conversion of warrants
|
—
|
|
|
4,853
|
|
Note
13
: Derivatives
In fiscal year 2015, the Company began using certain derivative instruments (i.e., foreign exchange contracts) to reduce exposure to the volatility of foreign currencies impacting revenues and the costs of its products.
Certain operating expenses at the Company’s Mexican facilities are paid in Mexican Pesos. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than twelve months, to buy Mexican Pesos for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. There were
$42.7 million
and
$49.1 million
in Peso contracts (notional value) outstanding at
June 30, 2017
and
March 31, 2017
, respectively.
The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.
The Company records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a net basis, since they are subject to master netting agreements. However, if the Company were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a gross basis, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current net presentation to the gross amounts as detailed in the following table.
The balance sheet classifications and fair value of derivative instruments as of
June 30, 2017
and March 31, 2017 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments (1)
|
|
|
June 30, 2017
|
|
March 31, 2017
|
Balance Sheet Presentation
|
|
As Presented (1)
|
|
Offset
|
|
Gross
|
|
As Presented (1)
|
|
Offset
|
|
Gross
|
Prepaid and other current assets
|
|
$
|
3,859
|
|
|
$
|
—
|
|
|
$
|
3,859
|
|
|
$
|
2,907
|
|
|
$
|
40
|
|
|
$
|
2,947
|
|
Accrued expenses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40
|
)
|
|
(40
|
)
|
|
|
$
|
3,859
|
|
|
$
|
—
|
|
|
$
|
3,859
|
|
|
$
|
2,907
|
|
|
$
|
—
|
|
|
$
|
2,907
|
|
______________________________________________________________________________
|
|
(1)
|
Fair Value measured using Level 2 inputs by adjusting the market spot rate by forward points, based on the date of the contract. The spot rates and forward points used are based on an average rate from an actively traded market.
|
The impact on the Consolidated Statement of Operations for the
quarters ended
June 30, 2017
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Impact of Foreign Exchange Contracts on Condensed Consolidated Statement of Operations
|
Statement Caption
|
|
Quarter Ended June 30, 2017
|
|
Quarter Ended June 30, 2016
|
Net Sales
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating costs and expenses:
|
|
|
|
|
Cost of sales
|
|
(1,059
|
)
|
|
(1,753
|
)
|
Total operating costs and expenses
|
|
(1,059
|
)
|
|
(1,753
|
)
|
Operating income (loss)
|
|
$
|
(1,059
|
)
|
|
$
|
(1,753
|
)
|
Unrealized gains and losses associated with the change in value of these financial instruments are recorded in AOCI. Changes in the derivatives’ fair values are deferred and recorded as a component of AOCI until the underlying transaction is settled and recorded to the income statement. When the hedged item affects income, gains or losses are reclassified from AOCI to the Consolidated Statement of Operations as Cost of sales for foreign exchange contracts to purchase such foreign currency. Any ineffectiveness, if material, in the Company’s hedging relationships is recognized immediately as a loss, within the same income statement accounts as described above; to date, there has been no ineffectiveness. Changes in derivative balances impact the line items “Prepaid and other assets” and “Accrued expenses” on the Consolidated Balance Sheets and Statements of Cash Flows.
Note
14
. Concentrations of Risks
The Company sells to customers globally and, as the Company generally does not require collateral from its customers, on a monthly basis the Company evaluates customer account balances in order to assess the Company’s financial risks of collection.
One
customer, TTI, Inc., an electronics distributor, accounted for over
10%
of the Company’s net sales in the
quarters ended
June 30, 2017
and
2016
. There were
no
accounts receivable balances from any customer exceeding
10%
of gross accounts receivable as of
June 30, 2017
and
March 31, 2017
.
Electronics distributors are an important distribution channel in the electronics industry and accounted for
42%
and
46%
of the Company’s net sales in the
three-month periods ended June 30, 2017
and
2016
, respectively. As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand and/or adjust their inventory stocking levels.
In July 2013, TOKIN was named as one of eight defendants in two purported U.S. class action antitrust lawsuits (In Re: Lithium Ion Batteries Antitrust Litigation, 13-MD-02420-YGR, United States District Court, Northern District of California) regarding the sale of lithium ion batteries brought on behalf of direct product purchasers and indirect product purchasers. On April 12, 2017, motions to approve class certification on behalf of the direct product purchasers and indirect product purchasers plaintiffs were denied by the Court; plaintiffs were given leave to amend. Discovery in the actions is scheduled to be completed by December 29, 2017, and summary judgment motions are due by January 16, 2018. All of the other defendants have settled with the direct product purchasers plaintiffs, and four of the defendants have settled with the indirect product purchasers plaintiffs.
Beginning in March 2014, TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan, South Korea, Taiwan, Singapore and Brazil concerning alleged anti-competitive activities within the capacitor industry.
On September 2, 2015, the United States Department of Justice announced a plea agreement with TOKIN in which TOKIN agreed to plead guilty to a one-count felony charge of unreasonable restraint of interstate and foreign trade and commerce in violation of Section 1 of the Sherman Act, and to pay a criminal fine of
$13.8 million
. The plea agreement was approved by the United States District Court, Northern District of California, on January 21, 2016. The fine is payable over
five years
in
six
installments of
$2.3 million
each, plus accrued interest. The first and second payments were made in February 2016 and January 2017, respectively, while the next payment is due in January 2018.
On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that TOKIN would be fined
1,218.2 million
New Taiwan dollars (“NTD”) (approximately U.S.
$40.0 million
) for violations of the Taiwan Fair Trade Act. Subsequently, the TFTC has reduced the fine to
NTD609.1 million
(approximately U.S.
$20.0 million
). In February 2016, TOKIN commenced an administrative suit in Taiwan, challenging the validity of the amount of the fine.
On March 29, 2016, the Japan Fair Trade Commission published an order by which TOKIN was fined ¥
127.2 million
(approximately U.S.
$1.1 million
) for violation of the Japanese Antimonopoly Act. Payment of the fine was made on October 31, 2016.
On July 27, 2016, Brazil’s Administrative Council for Economic Defense approved a cease and desist agreement with TOKIN in which TOKIN made a financial contribution of Brazilian Real
0.6 million
(approximately U.S.
$0.2 million
) to Brazil’s Fund for Defense of Diffuse Rights.
On May 2, 2016, TOKIN reached a preliminary settlement, followed by definitive settlement agreements on July 15, 2016 which are subject to court approval, in
two
antitrust suits filed with the United States District Court, Northern District of California as In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD (the “Class Action Suits”), which was approved by the court on April 6, 2017 (for the purported direct purchaser plaintiffs), or is subject to court approval (for the purported indirect purchaser plantiffs). Pursuant to the terms of the settlement, in consideration of the release of TOKIN and its subsidiaries (including TOKIN America, Inc.) from claims asserted in the Class Action Suits, TOKIN will pay an aggregate
$37.3 million
to a settlement class of direct purchasers of capacitors and a settlement class of indirect purchasers of capacitors. Each of the respective class payments is payable in
five
installments, the first of which became due on July 29, 2016, the next
three
of which are due each year thereafter on the anniversary of the initial payment, and the final payment is due by December 31, 2019. TOKIN has paid the initial installment payments into the two plaintiff classes’ respective escrow accounts.
Pursuant to the Stock Purchase Agreement, NEC was required to indemnify TOKIN and/or KEC for any breaches by TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement. NEC’s aggregate liability for indemnification claims was limited to
$25.0 million
. Accordingly, KEMET, under equity method accounting, established an indemnity asset in the amount of
$8.5 million
(based upon its
34%
economic interest in TOKIN). Under the
TOKIN Purchase Agreement for acquisition of the remaining 66% of TOKIN this indemnity was released, and as of April 19, 2017, the indemnity asset was removed.
The remaining governmental investigations are continuing at various stages. As of
June 30, 2017
, TOKIN’s accrual for antitrust and civil litigation claims totaled
$73.5 million
which is stated in the following line items, “Account payable” (
$7.3 million
), “Accrued expenses” (
$29.9 million
) and “Other non-current obligations” (
$36.3 million
) on the Condensed Consolidated Balance Sheets. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations, civil litigation and claims. However, the actual outcomes could differ from what has been accrued. Additionally, under the terms of the TOKIN Purchase Agreement, TOKIN will be responsible for defending all suits, paying all expenses and satisfying all judgments to the extent arising out of or related the capacitor antitrust investigations and related litigation described above.