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 unless otherwise disclosed, 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 (“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, 2019
(the “Company’s
2019
Annual Report”).
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all intercompany amounts and transactions have been eliminated. Net sales and operating results for the
three months ended
June 30, 2019
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
2019
Annual Report. Refer to the “Change in Accounting Policies” section below for changes in accounting policies since the issuance of the Company's
2019
Annual Report.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with 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.
Change in Accounting Policies
Effective April 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) and Accounting Standards Update (“ASU”) No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing (Hosting) Arrangement that is a Service Contract (“ASU 2018-15”). As a result, the Company changed its accounting policy for leases and for implementation costs related to hosting arrangements. Except as discussed below, there have not been any other changes to the Company's significant accounting policies since the issuance of the Company's 2019 Annual Report.
Leases
ASC 842 requires the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on the Condensed Consolidated Balance Sheets. The Company adopted ASC 842 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to not reassess whether arrangements contained leases, not reassess lease classifications, and not reassess initial direct costs. The adoption of ASC 842 did not impact beginning retained earnings, or the prior year Condensed Consolidated Statements of Operations and Cash Flows.
Under ASC 842, the Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. The Company has elected to not allocate the contract consideration for operating lease contracts with lease and non-lease components, and account for the lease and non-lease components as a single lease component. Operating lease ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make
lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease prepayments, net of lease incentives.
Leases with a lease term of 12 months or less at inception are not recorded on the Condensed Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Condensed Consolidated Statements of Operations. The lease term is determined by assuming the exercise of renewal options that are reasonably certain. As most of the Company's leases do not provide an implicit interest rate, the Company uses its local incremental borrowing rate at the lease commencement date to determine the present value of lease payments.
ROU assets and the short-term and long-term lease liabilities from operating leases are included in “Other assets,” “Accrued expenses,” and “Other non-current obligations,” respectively, in the Condensed Consolidated Balance Sheet. The Company's accounting for finance leases (formerly referred to as capital leases prior to the adoption of ASC 842) remains substantially unchanged. Finance leases are not material to the Company's Condensed Consolidated Financial Statements. Refer to Note
14
,
Leases
, for additional information regarding the Company's leases and related transition adjustments.
Capitalized Software and Cloud-computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted the amendment in the first quarter of fiscal year 2020 and is applying the ASU prospectively to implementation costs incurred after April 1, 2019.
As of
June 30, 2019
, the Company had
$2.2 million
of capitalized implementation costs related to cloud-computing arrangements, net of amortization. These capitalized implementation costs are amortized on a straight-line basis over the expected terms of the hosting arrangements and are amortized in the same line item in the Consolidated Statements of Operations as the expense for fees for the associated hosting arrangements.
Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue under the guidance provided in ASC 606, Revenue from Contracts with Customers (“ASC 606”). Consistent with the terms of ASC 606, the Company records revenue on product sales in the period in which the Company satisfies its performance obligation by transferring control over a product to a customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for transferring products to a customer. The Company has elected the practical expedient under ASC 606-10-32-18 and does not consider the effects of a financing component on the promised amount of consideration because the period between when the Company transfers a product to a customer and when the customer pays for that product is one year or less. As performance obligations are expected to be fulfilled in one year or less, the Company has elected the practical expedient under ASC 606-10-50-14 and has not disclosed information relating to remaining performance obligations.
The Company sells its products to distributors, original equipment manufacturers (“OEM”), and electronic manufacturing services providers (“EMS”), and the sales price may include adjustments for sales discounts, price adjustments, and sales allowances. The Company has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis. The principle forms of these adjustments include:
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•
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Inventory price protection and ship-from stock and debit (“SFSD”) programs,
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•
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Distributor rights of returns,
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•
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Limited assurance warranties
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The Company's inventory price protection and SFSD programs provide 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.
Select distributors have the right to return a certain portion of their purchased inventory to KEMET from the previous fiscal quarter. The Company estimates future returns based on historical return patterns and records a corresponding right of
return asset and refund liability as a component of the line items, “Inventories, net” and “Accrued expenses,” respectively, 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 Company's sales allowances are recognized as a reduction in 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 assurance warranty on products that meet certain specifications to select customers. The warranty coverage period is generally limited to
one year
for United States based customers and a length of time commensurate with regulatory requirements or industry practice outside the United States. A warranty cannot be purchased by the customer separately and, as a result, product warranties are not considered to be separate performance obligations. The Company’s liability under these warranties is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs were
not material
for the
three months ended
June 30, 2019
and
2018
.
Shipping and handling costs are included in cost of sales.
Disaggregation of Revenue
Refer to Note
8
, “
Segment and Geographic Information”
for revenue disaggregated by primary geographical market, sales channel, and major product line.
Contract liabilities
Contract liabilities consist of advance payments from certain customers within the OEM channel for the development of additional production capacity. The current and noncurrent portions of these liabilities are included as a component of the line items, “Accrued expenses” and “Other non-current obligations,” respectively, on the Condensed Consolidated Balance Sheets.
The balance of net contract liabilities consisted of the following at
June 30, 2019
and
March 31, 2019
(amounts in thousands):
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Contract Liabilities
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Classification in Balance Sheet
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June 30, 2019
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March 31, 2019
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Current
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Accrued expenses
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$
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256
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$
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256
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Non-current
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Other non-current obligations
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—
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—
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$
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256
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$
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256
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|
In the
three months ended
June 30, 2019
, the Company did not recognize any revenue related to contract liabilities at
March 31, 2019
. In the
three months ended
June 30, 2018
, the Company recognized revenue of
$0.1 million
related to contract liabilities at
March 31, 2018
. Revenue related to contract liabilities is recorded on the Condensed Consolidated Statements of Operations in the line item, "Net sales."
Contract assets
The Company recognizes an asset from the costs incurred to fulfill a contract if those costs directly relate to an existing or anticipated contract or specific business opportunity, if the costs enhance resources that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered through subsequent sale of product to the customer. The Company has determined that certain direct labor, materials, and allocations of overhead incurred within research and development activities meet the requirements to be capitalized. As most of the Company's contracts and customer specific business opportunities do not include a stated term, the Company amortizes these capitalized costs over the expected product life cycle, which is consistent with the estimated transfer of goods to the customer. Capitalized contract costs were
$1.5 million
and
$1.6 million
at
June 30, 2019
and
March 31, 2019
, respectively. Capitalized contracts costs are recorded on the Condensed Consolidated Balance Sheets in the line item, “Other assets.” Amortization expense related to the contract costs was
$0.2 million
and
$0.2 million
for the
three months ended
June 30, 2019
and
2018
, respectively. There was no impairment loss in relation to the costs capitalized for the
three months ended
June 30, 2019
and 2018. Amortization expense related to contract assets is recorded on the Condensed Consolidated Statements of Operations in the line item "Cost of sales."
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 Condensed 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 levels of 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, 2019
and
March 31, 2019
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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2019
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2019
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Level 1
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Level 2
(3)
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Level 3
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2019
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2019
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Level 1
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Level 2
(3)
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Level 3
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Assets (Liabilities):
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Money markets
(1)(2)
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$
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62,846
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$
|
62,846
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$
|
62,846
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$
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—
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$
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—
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$
|
60,687
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|
$
|
60,687
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$
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60,687
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$
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—
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$
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—
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Derivative assets
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706
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706
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—
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706
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—
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5,141
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5,141
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5,141
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Derivative liabilities
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(3,145
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)
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(3,145
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)
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—
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(3,145
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)
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—
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—
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—
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—
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—
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—
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Total debt
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(312,096
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)
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(322,700
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)
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—
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(322,700
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)
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—
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(294,471
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)
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(303,170
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)
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—
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(303,170
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)
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—
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___________________
(1)
Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2)
Certificates of Deposit of
$34.1 million
and
$32.2 million
that mature in three months or less are included within the balance as of
June 30, 2019
and
March 31, 2019
, respectively.
(3)
Derivative assets and liabilities fair value was determined by using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data. Where applicable, these models discount future cash flow amounts using market-based observable inputs, including interest rate yield curves, and forward and spot prices for currencies. For total debt, the valuation approach used to calculate fair value was a discounted cash flow based on the current market rate.
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The Company periodically evaluates its net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. For interim reporting purposes, the Company records income taxes based on the expected annual effective income tax rate, taking into consideration global forecasted tax results and the effect of discrete tax events. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. All deferred tax assets are reported as noncurrent in the Condensed Consolidated Balance Sheets.
Inventories
Inventories are stated at the lower of cost or net realizable value. The components of inventories are as follows (amounts in thousands):
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June 30, 2019
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March 31, 2019
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Raw materials and supplies
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$
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104,160
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$
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97,119
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Work in process
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83,856
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71,374
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Finished goods
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86,766
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88,175
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Subtotal
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274,782
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256,668
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Inventory reserves
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(18,642
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)
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(15,539
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)
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Inventories, net
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$
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256,140
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$
|
241,129
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Recently Issued Accounting Pronouncements
There are currently no 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.
Note
2
. Debt
A summary of debt is as follows (amounts in thousands):
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June 30,
2019
|
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March 31,
2019
|
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TOKIN Term Loan Facility
(1)
|
284,623
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276,808
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Customer Advances
(2)
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20,906
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11,270
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Other
(3)
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6,567
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6,393
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Total debt
|
312,096
|
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294,471
|
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|
Current maturities
|
(29,225
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)
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(28,430
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)
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Total long-term debt
|
$
|
282,871
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$
|
266,041
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_________________
(1)
Amount shown is net of discount, bank issuance costs, and other indirect issuance costs of
$8.9 million
and
$8.7 million
at
June 30, 2019
and
March 31, 2019
, respectively.
(2)
Amount shown is net of discount of
$5.0 million
and
$2.1 million
at
June 30, 2019
, and
March 31, 2019
, respectively.
(3)
Amounts are shown net of discounts of
$0.6 million
at
June 30, 2019
and
March 31, 2019
, respectively.
The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the
three months ended
June 30, 2019
and
2018
, consists of the following (amounts in thousands):
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Three Months Ended June 30,
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2019
|
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2018
|
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Contractual interest expense
|
$
|
1,740
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|
$
|
6,845
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Capitalized interest
|
(105
|
)
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|
(64
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)
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Amortization of debt issuance costs
|
127
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|
116
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Amortization of debt (premium) discount
|
767
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|
98
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Imputed interest on acquisition-related obligations
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—
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15
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Interest expense on finance leases
|
16
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26
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Total interest expense
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$
|
2,545
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$
|
7,036
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TOKIN Term Loan Facility
On October 29, 2018, the Company entered into a
JPY 33.0 billion
Term Loan Agreement (the “TOKIN Term Loan Facility”) by and among TOKIN Corporation (“TOKIN”), the lenders party thereto (the “Lenders”) and Sumitomo Mitsui Trust Bank, Limited in its capacity as agent (the “Agent”), arranger and Lender. Funding for the TOKIN Term Loan Facility occurred on November 7, 2018. The proceeds, which were net of an arrangement fee withheld from the funding amount, were
JPY 32.1 billion
, or approximately
$283.9 million
using the exchange rate as of November 7, 2018. Net of the arrangement fee, bank issuance costs, and other indirect issuance costs, the Company's net proceeds from the TOKIN Term Loan Facility was
$281.8 million
.
The proceeds from the TOKIN Term Loan Facility were used by TOKIN to make intercompany loans (the “Intercompany Loans”) to the Company. The proceeds of the Intercompany Loans, along with other cash on hand, were used by the Company to prepay in full the outstanding amounts under the Company's previous term loan of
$323.4 million
and a prepayment premium of
1.0%
, or
$3.2 million
.
The TOKIN Term Loan Facility consists of (i) a
JPY 16.5 billion
(approximately
$146.0 million
using the exchange rate as of November 7, 2018) Term Loan A tranche (the “Term Loan A”) and (ii) a
JPY 16.5 billion
(approximately
$146.0 million
using the exchange rate as of November 7, 2018) Term Loan B tranche (the “Term Loan B” and, together with the Term Loan A, collectively, the “Term Loans”). Principal payments under Term Loan A are required semi-annually, in the amount of
JPY 1.4 billion
(approximately
$12.8 million
using the exchange rate as of
June 30, 2019
), while the principal of Term Loan B is due in one payment at maturity. At each reporting period, the carrying value of the loan is translated from Japanese Yen to U.S. Dollars using the spot exchange rate as of the end of the reporting period.
Interest payments are due semi-annually on the Term Loans, with the interest rate based on a margin over the six-month Japanese TIBOR. The applicable margin for Term Loan A is
2.00%
and for Term Loan B is
2.25%
. Japanese TIBOR at
June 30, 2019
was
0.13%
. Interest payable related to the TOKIN Term Loan Facility included in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets was
$1.7 million
as of
June 30, 2019
.
The Term Loans mature on September 30, 2024. KEMET and certain subsidiaries of TOKIN provided guarantees of the obligations under the Term Loans, which also are secured by certain assets, properties and equity interests of TOKIN and its material subsidiaries. The Term Loans contain customary covenants applicable to both the Company and to TOKIN, including maintenance of a consolidated leverage ratio, the absence of two consecutive years of consolidated operating losses and the maintenance of certain required levels of consolidated net assets. The TOKIN Term Loan Facility agreement also contains customary events of default. The Company may prepay the Term Loans at any time, subject to certain notice requirements and reimbursement of loan breakage costs.
Revolving Line of Credit
In connection with the closing of the TOKIN Term Loan Facility on October 29, 2018, the Company entered into Amendment No. 10 to the Loan and Security Agreement, Waiver and Consent (the “Revolver Amendment”), by and among KEMET, KEMET Electronics Corporation (“KEC”), the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., a national banking association, as agent for the lenders. The Revolver Amendment provides the Company with, among other things, increased flexibility for certain restricted payments (including dividends), and also released certain pledges that allowed the Company to obtain the TOKIN Term Loan Facility in order to pay in full the Company's prior term loan. The revolving line of credit has a facility amount of up to
$75.0 million
, which is based on factors including outstanding eligible accounts receivable, inventory, and equipment collateral. There were
no
borrowings under the revolving line of credit during the quarter ended
June 30, 2019
, and the Company’s available borrowing capacity under the Loan and Security Agreement was
$62.5 million
as of
June 30, 2019
.
Customer Advances
In September, November, and February of fiscal year 2019, the Company entered into three agreements with different customers (the “Customers”) pursuant to which the Customers agreed to make advances (collectively, the “Advances”) to the Company in an aggregate amount of up to
$72.0 million
(collectively, the “Customer Capacity Agreements”). The Company is using these Advances to fund the purchase of production equipment and to make other investments and improvements in its business and operations (the “Investments”) to increase overall capacity to produce various electronic components of the type and part as may be sold by the Company to the Customers from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advances. The Advances from the Customers are being made in quarterly installments (“Installments”) over an expected period of 18 to 24 months from the effective date of the Customer Capacity Agreements
.
The Advances will be repaid beginning on the date that production from the Investments is sufficient to meet the Company's obligations under the agreements with the Customers. Repayments will be made on a quarterly basis as determined by calculations that generally consider the number of components purchased by the Customers during the quarter. Repayments based on the calculations will continue until either the Advances are repaid in full, or December 31, 2038 for all three Customers. The Company has a quarterly repayment cap in the agreement with each of the Customers and is not required to make any quarterly repayments to the Customers that in the aggregate exceeds $1.8 million. If the Customers do not purchase a number of components that would require full repayment of the Advances by December 31, 2038, then the Advances shall be deemed repaid in full. Additionally, if the Customers do not purchase a number of components that would require a payment on the Advances for a period of 16 consecutive quarters, the Advances shall be deemed repaid in full
.
As of
June 30, 2019
,
the Company has received a total of
$26.0 million
in Advances from these Customers. Since the debt is non-interest bearing, the Company has recorded debt discounts on the Advances
.
T
hese discounts will be amortized
over the expected life of the Advances through interest expense.
During the
three months ended June 30, 2019
, the Company had
$7.7 million
in capital expenditures related to the Customer Capacity Agreements.
As of
June 30, 2019
, the Company had
$2.6 million
in cash that was restricted to be used to fund these Investments. Restricted cash is recorded within “Prepaid expenses and other current assets” in the Condensed Consolidated Balance Sheets.
Other Debt
In January 2017, KEMET Electronics Portugal, S.A. (“KEP”), a wholly owned subsidiary, entered into a program with the Portuguese government where KEP is eligible to receive interest free loans if purchases of fixed assets meet certain approved terms within the program. In January 2017, KEP received the first part of an interest free loan in the amount of
EUR 2.2 million
(or
$2.5 million
). In July 2017, KEP received the second part of the loan in the amount of
EUR 0.3 million
(or
$0.3 million
). The loan has a maturity date of February 1, 2025. The loan will be repaid through semi-annual payments on August 1 and February 1 of each year beginning on August 1, 2019. The repayments will be in the amount of
EUR 0.2 million
(or
$0.2 million
).
In February 2019, KEP received a second interest free loan from the Portuguese government in the amount of
EUR 0.9 million
, (or
$1.1 million
). The loan has a maturity date of September 1, 2026 and will be repaid through semi-annual payments on March 1 and September 1 of each year beginning on March 1, 2021. The repayments will be in the amount of
EUR 0.1 million
(or
$0.1 million
).
Since the KEP debt is non-interest bearing, the Company has recorded debt discounts on these loans. These discounts are being amortized over the life of the loans through interest expense. If certain conditions are met by KEP, such as increased headcount at its facility in Evora, Portugal, increased revenue, and increased gross value added, a portion of these loans could be forgiven.
TOKIN has a short term borrowing pursuant to an agreement with The 77 Bank Limited, located in Japan, in the amount of
350.0 million
Yen (or
$3.2 million
), at an interest rate of
0.53%
(Japanese TIBOR plus 40 basis points). The loan was originally due in September 2018 and was extended to September 2019. The loan agreement automatically renews for successive one year periods if both parties choose not to terminate or modify it.
Note
3
. Goodwill and Intangible Assets
The following table highlights the Company’s intangible assets (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Indefinite Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
15,375
|
|
|
$
|
—
|
|
|
$
|
15,375
|
|
|
$
|
15,151
|
|
|
$
|
—
|
|
|
$
|
15,151
|
|
|
Amortizing Intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents (10 - 18 years)
|
|
26,662
|
|
|
(12,401
|
)
|
|
14,261
|
|
|
26,662
|
|
|
(12,046
|
)
|
|
14,616
|
|
|
Customer relationships (10 - 21 years)
|
|
38,714
|
|
|
(14,902
|
)
|
|
23,812
|
|
|
37,850
|
|
|
(13,868
|
)
|
|
23,982
|
|
|
Other
|
|
215
|
|
|
(215
|
)
|
|
—
|
|
|
214
|
|
|
(214
|
)
|
|
—
|
|
|
Total amortizing intangibles
|
|
65,591
|
|
|
(27,518
|
)
|
|
38,073
|
|
|
64,726
|
|
|
(26,128
|
)
|
|
38,598
|
|
|
Total intangible assets
|
|
$
|
80,966
|
|
|
$
|
(27,518
|
)
|
|
$
|
53,448
|
|
|
$
|
79,877
|
|
|
$
|
(26,128
|
)
|
|
$
|
53,749
|
|
For each of the
three months ended
June 30, 2019
and
2018
, amortization related to intangibles was
$1.1 million
, consisting of amortization related to patents of
$0.3 million
and amortization related to customer relationships of
$0.8 million
.
The weighted-average useful life for patents was
15.8 years
as of
June 30, 2019
and
March 31, 2019
, respectively, and
12.3 years
for customer relationships as of
June 30, 2019
and
March 31, 2019
, respectively. Estimated amortization of intangible assets for each of the next five fiscal years is
$4.5 million
, and thereafter, amortization will total
$15.7 million
. Estimated amortization of patents for each of the next five fiscal years is
$1.4 million
, and thereafter, amortization will total
$7.2 million
. Estimated amortization of customer relationships for each of the next five fiscal years is
$3.1 million
, and thereafter, amortization will total
$8.5 million
.
There were no changes to the carrying amount of goodwill during the
three months ended
June 30, 2019
. The Company’s goodwill balance was
$40.3 million
at
June 30, 2019
and
March 31, 2019
.
Note
4
. Restructuring Charges
The Company has implemented restructuring plans, which include programs to increase competitiveness by removing excess capacity, relocating production to lower cost locations, and eliminating unnecessary costs throughout the Company. Significant restructuring plans in progress or recently completed as of
June 30, 2019
are summarized below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected to be incurred
|
|
Incurred during quarter ended June 30, 2019
|
|
Cumulative incurred to date
|
|
Restructuring Plan
|
Segment
|
Personnel Reduction Costs
|
Relocation & Exit Costs
|
|
Personnel Reduction Costs
|
Relocation & Exit Costs
|
|
Personnel Reduction Costs
|
Relocation & Exit Costs
|
|
Tantalum powder facility relocation
(1)
|
Solid Capacitors
|
897
|
|
2,098
|
|
|
448
|
|
(552
|
)
|
|
448
|
|
2,805
|
|
|
Axial electrolytic production relocation from Granna to Evora
|
Film and Electrolytic
|
673
|
|
3,964
|
|
|
673
|
|
1,308
|
|
|
673
|
|
3,603
|
|
|
Reorganization of MnO2 product line
|
Solid Capacitors
|
3,128
|
|
—
|
|
|
43
|
|
—
|
|
|
1,628
|
|
—
|
|
__________________
(1)
The current quarter credit for manufacturing relocation and exit costs is due to the recovery of costs related to the sale of tantalum that has been reclaimed (“tantalum reclaim”) as part of the plant exit activities. Tantalum reclaim in future periods is expected to further reduce the cumulative incurred costs.
A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the
three months ended
June 30, 2019
and
2018
, is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Personnel reduction costs
|
$
|
1,229
|
|
|
$
|
(84
|
)
|
|
Relocation and exit costs
|
979
|
|
|
(12
|
)
|
|
Restructuring charges
|
$
|
2,208
|
|
|
$
|
(96
|
)
|
Three Months Ended
June 30, 2019
The Company incurred
$2.2 million
in restructuring charges in the three months ended
June 30, 2019
comprised of
$1.2 million
in personnel reduction costs and
$1.0 million
in manufacturing relocation and exit costs.
The personnel reduction costs of
$1.2 million
were primarily due to
$0.7 million
in costs in the Film and Electrolytic segment related to severance charges resulting from the closing of the Granna, Sweden manufacturing plant as axial electrolytic production is being moved to the plant in Evora, Portugal and
$0.5 million
in costs in the Solid Capacitors segment related to severance charges resulting from the closing of the tantalum powder facility in Carson City, Nevada as tantalum powder production is moving to the plant in Matamoros, Mexico.
The manufacturing relocation and exit costs of
$1.0 million
primarily related to
$1.3 million
in costs resulting from the relocation of axial electrolytic production equipment from the Company's plant in Granna, Sweden to its plant in Evora, Portugal. Manufacturing relocation and exit costs were benefited by a
$0.6 million
credit from tantalum reclaim.
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
three months ended
June 30, 2019
and
2018
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
Personnel
Reductions
|
|
Manufacturing
Relocations
|
|
Personnel
Reductions
|
|
Manufacturing
Relocations
|
|
Beginning of period
|
$
|
1,865
|
|
|
$
|
316
|
|
|
$
|
9,629
|
|
|
$
|
330
|
|
|
Costs charged to expense
|
1,229
|
|
|
979
|
|
|
(84
|
)
|
|
(12
|
)
|
|
Costs paid or settled
|
(1,315
|
)
|
|
(979
|
)
|
|
(5,131
|
)
|
|
12
|
|
|
Change in foreign exchange
|
10
|
|
|
9
|
|
|
(244
|
)
|
|
(13
|
)
|
|
End of period
|
$
|
1,789
|
|
|
$
|
325
|
|
|
$
|
4,170
|
|
|
$
|
317
|
|
Note
5
. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Changes in AOCI for the
three months ended
June 30, 2019
and
2018
include the following components (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation, net of Tax
(1)
|
|
Post-Retirement
Benefit Plan Adjustments, net of Tax
|
|
Defined
Benefit
Pension
Plans,
net of Tax
(2)
|
|
Ownership Share of
Equity Method
Investees’ Other
Comprehensive
Income (Loss), net of Tax
|
|
Cash Flow Hedges, net of Tax
|
|
Excluded Component of Fair Value Hedges, net of Tax
|
|
Net Accumulated
Other
Comprehensive
Income (Loss), net of Tax
|
|
Balance at March 31, 2019
|
$
|
(14,350
|
)
|
|
$
|
793
|
|
|
$
|
(15,758
|
)
|
|
$
|
274
|
|
|
$
|
566
|
|
|
$
|
(2,249
|
)
|
|
$
|
(30,724
|
)
|
|
Other comprehensive income (loss) before reclassifications
(3) (4)
|
5,834
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,704
|
)
|
|
(346
|
)
|
|
3,784
|
|
|
Amounts reclassified out of AOCI
|
(2,655
|
)
|
|
(37
|
)
|
|
164
|
|
|
—
|
|
|
(4,294
|
)
|
|
1,638
|
|
|
(5,184
|
)
|
|
Other comprehensive income (loss)
|
3,179
|
|
|
(37
|
)
|
|
164
|
|
|
—
|
|
|
(5,998
|
)
|
|
1,292
|
|
|
(1,400
|
)
|
|
Balance at June 30, 2019
|
$
|
(11,171
|
)
|
|
$
|
756
|
|
|
$
|
(15,594
|
)
|
|
$
|
274
|
|
|
$
|
(5,432
|
)
|
|
$
|
(957
|
)
|
|
$
|
(32,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation, net of Tax
(1)
|
|
Post-Retirement
Benefit Plan Adjustments, net of Tax
|
|
Defined
Benefit
Pension
Plans,
net of Tax
(2)
|
|
Ownership Share of
Equity Method
Investees’ Other
Comprehensive
Income (Loss), net of Tax
|
|
Cash Flow Hedges, net of Tax
|
|
Excluded Component of Fair Value Hedges, net of Tax
|
|
Net Accumulated
Other
Comprehensive
Income (Loss), net of Tax
|
|
Balance at March 31, 2018
|
$
|
9,715
|
|
|
$
|
879
|
|
|
$
|
(14,831
|
)
|
|
$
|
285
|
|
|
$
|
1,154
|
|
|
$
|
—
|
|
|
$
|
(2,798
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(24,203
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
(3,795
|
)
|
|
—
|
|
|
(28,009
|
)
|
|
Amounts reclassified out of AOCI
|
—
|
|
|
(39
|
)
|
|
39
|
|
|
—
|
|
|
(643
|
)
|
|
—
|
|
|
(643
|
)
|
|
Other comprehensive income (loss)
|
(24,203
|
)
|
|
(39
|
)
|
|
39
|
|
|
(11
|
)
|
|
(4,438
|
)
|
|
—
|
|
|
(28,652
|
)
|
|
Balance at June 30, 2018
|
$
|
(14,488
|
)
|
|
$
|
840
|
|
|
$
|
(14,792
|
)
|
|
$
|
274
|
|
|
$
|
(3,284
|
)
|
|
$
|
—
|
|
|
$
|
(31,450
|
)
|
_________________
(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
three months ended
June 30, 2019
and
2018
.
(2)
Ending balance is net of tax of
$2.4 million
and
$2.3 million
as of
June 30, 2019
and
2018
, respectively.
(3)
Foreign currency translation, net of tax for the three months ended
June 30, 2019
includes losses of
$2.0 million
related to a derivative instrument accounted for as a net investment hedge. Refer to Note
13
, Derivatives, for further information.
(4)
Cash flow hedges, net of tax for the three months ended
June 30, 2019
includes losses of
$6.9 million
which were excluded from the assessment of hedge effectiveness.
Note
6
. Changes in Stockholders' Equity
Changes in Stockholders' Equity for the
three months ended
June 30, 2019
and
2018
include the following components (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings
(Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’
Equity
|
|
Balance at March 31, 2019
|
|
57,822
|
|
|
$
|
578
|
|
|
$
|
465,366
|
|
|
$
|
204,195
|
|
|
$
|
(30,724
|
)
|
|
$
|
639,415
|
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,340
|
|
|
—
|
|
|
40,340
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,400
|
)
|
|
(1,400
|
)
|
|
Cash dividends ($0.05 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,900
|
)
|
|
—
|
|
|
(2,900
|
)
|
|
Issuance of shares
|
|
196
|
|
|
2
|
|
|
(1,387
|
)
|
|
—
|
|
|
—
|
|
|
(1,385
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
2,725
|
|
|
—
|
|
|
—
|
|
|
2,725
|
|
|
Balance at June 30, 2019
|
|
58,018
|
|
|
$
|
580
|
|
|
$
|
466,704
|
|
|
$
|
241,635
|
|
|
$
|
(32,124
|
)
|
|
$
|
676,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings
(Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’
Equity
|
|
Balance at March 31, 2018
|
|
56,641
|
|
|
$
|
566
|
|
|
$
|
462,737
|
|
|
$
|
3,370
|
|
|
$
|
(2,798
|
)
|
|
$
|
463,875
|
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,220
|
|
|
—
|
|
|
35,220
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,652
|
)
|
|
(28,652
|
)
|
|
Issuance of shares
|
|
706
|
|
|
7
|
|
|
(5,536
|
)
|
|
—
|
|
|
—
|
|
|
(5,529
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
4,060
|
|
|
—
|
|
|
—
|
|
|
4,060
|
|
|
Balance at June 30, 2018
|
|
57,347
|
|
|
$
|
573
|
|
|
$
|
461,261
|
|
|
$
|
38,590
|
|
|
$
|
(31,450
|
)
|
|
$
|
468,974
|
|
Note
7
. Equity Method Investments
The following table provides a reconciliation of equity method investments to the Company's Condensed Consolidated Balance Sheets (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
Nippon Yttrium Co., Ltd ("NYC")
|
|
$
|
7,884
|
|
|
$
|
8,215
|
|
|
NT Sales Co., Ltd ("NTS")
|
|
1,258
|
|
|
1,218
|
|
|
Novasentis Inc. (“Novasentis”)
|
|
671
|
|
|
977
|
|
|
KEMET Jianghai Electronics Components Co., Ltd (“KEMET Jianghai”)
|
|
4,425
|
|
|
2,515
|
|
|
|
|
$
|
14,238
|
|
|
$
|
12,925
|
|
Under the equity method, the Company's share of profits and losses and impairment charges on investments in affiliates are included in “Equity income (loss) from equity method investments” in the Consolidated Statements of Operations.
TOKIN's Joint Ventures - NYC and NTS
NYC was established in 1966 by TOKIN (previously Tohoku Metal Industries Co., Ltd.) and Mitsui Mining and Smelting Co., Ltd (“Mitsui”). NYC was established to commercialize yttrium oxides and the Company owns
30%
of NYC's stock. The carrying amount of the Company's equity investment in NYC was
$7.9 million
and
$8.2 million
as of
June 30, 2019
and
March 31, 2019
, respectively.
NTS was established in 2004 by TOKIN, however subsequent to its formation, TOKIN sold
67%
of its stock. NTS provides world-class electronic devices by utilizing global procurement networks and the Company owns
33%
of NTS' stock. During the quarter ended
June 30, 2019
, a significant portion of NTS' sales were TOKIN’s products. The carrying amount of the Company's equity investment in NTS was
$1.3 million
and
$1.2 million
as of
June 30, 2019
and
March 31, 2019
, respectively.
Summarized transactions between KEMET and NTS were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
KEMET's sales to NTS
|
|
$
|
11,537
|
|
|
$
|
12,208
|
|
|
NTS' sales to KEMET
|
|
307
|
|
|
388
|
|
Investment in Novasentis
During fiscal year 2018, KEMET invested in the Series-D round of funding of Novasentis, a leading developer of film-based haptic actuators. Novasentis produces the world’s thinnest electro mechanical polymer-based actuators that provide rich haptic feedback for a variety of applications, including AR/VR and Wearables. Novasentis supplies its “smart” film and KEMET applies its expertise in manufacturing film capacitors to the development and commercial production of the actuators. The Company's ownership percentage in Novasentis is
27.9%
and it has 1 of 3 seats on Novasentis’ board of directors. Additionally, KEMET has an exclusive manufacturing supply agreement with Novasentis, whereby Novasentis will purchase goods exclusively from KEMET and KEMET shall manufacture and sell goods exclusively to Novasentis.
While the Company determined that Novasentis is a variable interest entity, the Company concluded that it is not the primary beneficiary of Novasentis. Accordingly, the Company accounts for its investment in Novasentis under the equity method of accounting.
The carrying amount of the Company's equity investment in Novasentis was
$0.7 million
and
$1.0 million
as of
June 30, 2019
and
March 31, 2019
, respectively. Subsequent to
June 30, 2019
, the Company purchased the remaining ownership interests in Novasentis and it became a wholly owned subsidiary of the Company.
KEMET Jianghai Joint Venture
On January 29, 2018, KEC entered into a joint venture agreement (the “Agreement”) with Jianghai (Nantong) Film Capacitor Co., Ltd (“Jianghai Film”), a subsidiary of Nantong Jianghai Capacitor Co., Ltd (“Jianghai”) for the formation of KEMET Jianghai Electronic Components Co. Ltd., a limited liability company located in Nantong, China. KEMET Jianghai was officially formed on May 16, 2018 to manufacture axial electrolytic capacitors and (H)EV Film DC brick capacitors, for distribution through the KEMET and Jianghai Film sales channels. During fiscal year 2019 the Company signed an amendment to the Agreement with Jianghai Film to expand the scope of KEMET Jianghai to also produce solid aluminum capacitors and aluminum electrolytic capacitors. The Company's ownership percentage is
50.0%
and the Company and Jianghai Film are equally represented on the joint venture’s board of directors.
The Company's initial capital contribution to KEMET Jianghai was made during the second quarter of fiscal year 2019, and the Company accounts for its investment using the equity method due to the related nature of operations and its ability to influence the joint venture's decisions. As of
June 30, 2019
, the carrying amount of the Company's equity investment in KEMET Jianghai was
$4.4 million
.
Note
8
. Reportable Segment and Geographic Information
The Company is organized into
three
reportable segments: Solid Capacitors, Film and Electrolytic, and Electro-magnetic, Sensors & Actuators (“MSA”) based primarily on product lines.
The reportable segments are responsible for their respective manufacturing sites as well as their research and development (“R&D”) efforts. The Company does not allocate corporate indirect selling, general and administrative (“SG&A”) or shared R&D expenses to the segments.
Solid Capacitors
Solid Capacitors operates in
ten
manufacturing sites in the United States, Mexico and Asia, and operates innovation centers in the United States and Japan. Solid Capacitors primarily produces tantalum (polymer, aluminum, and Mn02) and ceramic capacitors, which are sold globally. Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors.
Film and Electrolytic
Film and Electrolytic operates in
eight
manufacturing sites throughout Europe and Asia, and maintain product innovation centers in Italy, Portugal, and Sweden. Film and Electrolytic primarily produces film, paper, and wet aluminum electrolytic capacitors, which are sold globally. In addition, the Film and Electrolytic reportable segment designs and produces electromagnetic interference filters.
MSA
MSA operates in
four
sites throughout Asia and operates a product innovation center in Japan. MSA primarily produces Electro-magnetic compatible (“EMC”) materials and devices, piezo materials and actuators, and various types of sensors, which are sold globally.
In the following tables, revenue is disaggregated by primary geographical market, sales channel, and major product lines. The tables also include reconciliations of the disaggregated revenue with the reportable segments for the
three months ended
June 30, 2019
and
2018
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
|
MSA
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
Asia and the Pacific Rim ("APAC")
|
$
|
103,299
|
|
|
$
|
10,943
|
|
|
$
|
13,522
|
|
|
$
|
127,764
|
|
|
Europe, the Middle East, and Africa ("EMEA")
|
53,084
|
|
|
27,793
|
|
|
829
|
|
|
81,706
|
|
|
North and South America ("Americas")
|
82,829
|
|
|
7,794
|
|
|
2,727
|
|
|
93,350
|
|
|
Japan and Korea ("JPKO")
|
8,995
|
|
|
179
|
|
|
33,248
|
|
|
42,422
|
|
|
|
$
|
248,207
|
|
|
$
|
46,709
|
|
|
$
|
50,326
|
|
|
$
|
345,242
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel
|
|
|
|
|
|
|
|
|
OEM
|
$
|
77,704
|
|
|
$
|
18,527
|
|
|
$
|
46,972
|
|
|
$
|
143,203
|
|
|
Distributor
|
123,229
|
|
|
22,326
|
|
|
2,564
|
|
|
148,119
|
|
|
EMS
|
47,274
|
|
|
5,856
|
|
|
790
|
|
|
53,920
|
|
|
|
$
|
248,207
|
|
|
$
|
46,709
|
|
|
$
|
50,326
|
|
|
$
|
345,242
|
|
|
|
|
|
|
|
|
|
|
|
Major product lines
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
$
|
132,386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
132,386
|
|
|
Ceramics
|
115,821
|
|
|
—
|
|
|
—
|
|
|
115,821
|
|
|
Film and Electrolytic
|
—
|
|
|
46,709
|
|
|
—
|
|
|
46,709
|
|
|
MSA
|
—
|
|
|
—
|
|
|
50,326
|
|
|
50,326
|
|
|
|
$
|
248,207
|
|
|
$
|
46,709
|
|
|
$
|
50,326
|
|
|
$
|
345,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
|
MSA
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
APAC
|
$
|
100,370
|
|
|
$
|
15,589
|
|
|
$
|
17,000
|
|
|
$
|
132,959
|
|
|
EMEA
|
41,466
|
|
|
32,607
|
|
|
575
|
|
|
74,648
|
|
|
Americas
|
63,105
|
|
|
6,649
|
|
|
2,397
|
|
|
72,151
|
|
|
JPKO
|
8,880
|
|
|
110
|
|
|
38,868
|
|
|
47,858
|
|
|
|
$
|
213,821
|
|
|
$
|
54,955
|
|
|
$
|
58,840
|
|
|
$
|
327,616
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel
|
|
|
|
|
|
|
|
|
OEM
|
$
|
70,388
|
|
|
$
|
22,441
|
|
|
$
|
56,100
|
|
|
$
|
148,929
|
|
|
Distributor
|
107,634
|
|
|
26,568
|
|
|
2,484
|
|
|
136,686
|
|
|
EMS
|
35,799
|
|
|
5,946
|
|
|
256
|
|
|
42,001
|
|
|
|
$
|
213,821
|
|
|
$
|
54,955
|
|
|
$
|
58,840
|
|
|
$
|
327,616
|
|
|
|
|
|
|
|
|
|
|
|
Major product lines
|
|
|
|
|
|
|
|
|
Tantalum
|
$
|
134,313
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,313
|
|
|
Ceramics
|
79,508
|
|
|
—
|
|
|
—
|
|
|
79,508
|
|
|
Film and Electrolytic
|
—
|
|
|
54,955
|
|
|
—
|
|
|
54,955
|
|
|
MSA
|
—
|
|
|
—
|
|
|
58,840
|
|
|
58,840
|
|
|
|
$
|
213,821
|
|
|
$
|
54,955
|
|
|
$
|
58,840
|
|
|
$
|
327,616
|
|
The following table reflects each segment’s operating income (loss), depreciation and amortization expenses, and restructuring charges for the
three months ended
June 30, 2019
and
2018
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Operating income (loss):
|
|
|
|
|
|
|
Solid Capacitors
|
$
|
102,686
|
|
|
$
|
69,665
|
|
|
Film and Electrolytic
|
(2,879
|
)
|
|
1,067
|
|
|
MSA
|
3,658
|
|
|
6,055
|
|
|
Corporate
|
(45,065
|
)
|
|
(41,611
|
)
|
|
|
$
|
58,400
|
|
|
$
|
35,176
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
Solid Capacitors
|
$
|
7,792
|
|
|
$
|
7,182
|
|
|
Film and Electrolytic
|
2,291
|
|
|
2,620
|
|
|
MSA
|
1,510
|
|
|
1,504
|
|
|
Corporate
|
2,666
|
|
|
1,791
|
|
|
|
$
|
14,259
|
|
|
$
|
13,097
|
|
|
Restructuring charges:
|
|
|
|
|
Solid Capacitors
|
121
|
|
|
(18
|
)
|
|
Film and Electrolytic
|
2,048
|
|
|
1
|
|
|
MSA
|
—
|
|
|
—
|
|
|
Corporate
|
39
|
|
|
(79
|
)
|
|
|
$
|
2,208
|
|
|
$
|
(96
|
)
|
Note
9
. Defined Benefit Pension and Other Postretirement Benefit Plans
The Company sponsors
twelve
defined benefit pension plans:
six
in Europe,
one
in Singapore,
two
in Mexico,
two
in Japan, and
one
in Thailand. The Company funds the pension liabilities in accordance with laws and regulations applicable to those plans.
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.
The balance sheet classifications and carrying amounts of the Company's pension and other post-retirement benefit plans at
June 30, 2019
and March 31, 2019 consist of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Benefits
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
June 30, 2019
|
|
March 31, 2019
|
|
Prepaid expenses and other current assets
|
|
$
|
815
|
|
|
$
|
670
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses
|
|
(2,806
|
)
|
|
(2,753
|
)
|
|
(50
|
)
|
|
(50
|
)
|
|
Other non-current obligations
|
|
(84,617
|
)
|
|
(82,455
|
)
|
|
(291
|
)
|
|
(262
|
)
|
|
Net amount recognized, end of period
|
|
$
|
(86,608
|
)
|
|
$
|
(84,538
|
)
|
|
$
|
(341
|
)
|
|
$
|
(312
|
)
|
The components of net periodic benefit (income) costs relating to the Company’s pension and other post-retirement benefit plans for the
three months ended
June 30, 2019
and
2018
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Benefits
|
|
|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net service cost
|
$
|
1,250
|
|
|
$
|
1,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
462
|
|
|
478
|
|
|
2
|
|
|
3
|
|
|
Expected return on net assets
|
(470
|
)
|
|
(531
|
)
|
|
—
|
|
|
—
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
113
|
|
|
107
|
|
|
(37
|
)
|
|
(39
|
)
|
|
Prior service cost
|
21
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit cost (credit)
|
$
|
1,376
|
|
|
$
|
1,310
|
|
|
$
|
(35
|
)
|
|
$
|
(36
|
)
|
All of the amounts in the tables above, other than service cost, were recorded in the line item "Other (income) expense, net" in our Condensed Consolidated Statements of Operations. In fiscal year
2020
, the Company expects to contribute up to
$5.1 million
to the pension plans,
$0.9 million
of which has been contributed as of
June 30, 2019
. 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, 2019
, the KEMET Corporation Omnibus Incentive Plan (the “Incentive Plan”) is the only plan utilized by the Company to issue equity-based awards to executives and key employees.
The Incentive Plan has authorized, in the aggregate, 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 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
one
to
three
years and expire
ten years
from the grant date.
Restricted Stock Units (“RSUs”) and Long-term Incentive Plans (“LTIP”)
Time-based RSUs vest over
three years
, except for RSUs granted to members of the Board of Directors (the “Board”), which vest immediately. The Company grants RSUs to members of the Board, the Chief Executive Officer and key members of management. Once vested and settled, RSUs are converted into stock. For members of the Board and key members of management, such 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 the Company has approved annual LTIPs, 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. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. The 2017/2018 LTIP, 2018/2019 LTIP, 2019/2020 LTIP and 2020/2021 LTIP also awarded time-based RSUs which vest over the course of
three years
from the anniversary of the grant date and are not subject to a performance metric. Any related liability (for the cash portion of the LTIP) is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any RSU commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.
On May 18, 2019, the Company granted RSUs under the 2020/2021 LTIP with a grant date fair value of
$17.43
that vest as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Shares
|
|
May 18, 2020
|
66
|
|
|
May 18, 2021
|
141
|
|
|
May 18, 2022
|
144
|
|
|
Total RSUs granted
(1)
|
351
|
|
__________________
(1)
RSUs granted include a performance component. Therefore, the granted RSUs shown above are an estimate based upon current performance expectations. The final number of RSUs granted depends on the achievement of performance metrics.
The following is the vesting schedule of RSUs under each respective LTIP, which vested during the
three months ended
June 30, 2019
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019/2020
|
|
2018/2019
|
|
2017/2018
|
|
Time-based award vested
|
|
53
|
|
|
58
|
|
|
156
|
|
|
Performance-based award vested
|
|
—
|
|
|
—
|
|
|
—
|
|
RSU activity, including performance-based and time-based LTIP activity, for the
three months ended
June 30, 2019
is as follows (amounts in thousands except fair value):
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
average
Fair Value on
Grant Date
|
|
Non-vested RSUs at March 31, 2019
|
1,415
|
|
|
$
|
15.19
|
|
|
Granted
|
351
|
|
|
17.43
|
|
|
Vested
|
(267
|
)
|
|
7.92
|
|
|
Forfeited
|
(8
|
)
|
|
15.32
|
|
|
Non-vested RSUs at June 30, 2019
|
1,491
|
|
|
$
|
17.02
|
|
The compensation expense associated with stock-based compensation for the
three months ended
June 30, 2019
and
2018
is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
Stock
Options
|
|
RSUs
|
|
LTIPs
|
|
Stock
Options
|
|
RSUs
|
|
LTIPs
|
|
Cost of sales
|
$
|
—
|
|
|
$
|
490
|
|
|
$
|
384
|
|
|
$
|
—
|
|
|
$
|
351
|
|
|
$
|
238
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
1,005
|
|
|
730
|
|
|
—
|
|
|
2,881
|
|
|
521
|
|
|
Research and development
|
—
|
|
|
34
|
|
|
82
|
|
|
—
|
|
|
16
|
|
|
53
|
|
|
Total
|
$
|
—
|
|
|
$
|
1,529
|
|
|
$
|
1,196
|
|
|
$
|
—
|
|
|
$
|
3,248
|
|
|
$
|
812
|
|
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 for the
three months ended
June 30, 2019
, and
2018
. There were
16,667
stock options exercised in the
three months ended
June 30, 2019
and
44,100
stock options were exercised in the
three months ended
June 30, 2018
.
Note
11
. Income Taxes
During the
three months ended
June 30, 2019
, the Company recognized
$16.8 million
of income tax expense, comprised of
$5.7 million
of income tax expense related to foreign operations,
$11.0 million
of federal income tax expense, and
$0.1 million
of state income tax expense.
During the
three months ended
June 30, 2018
, the Company recognized
$4.6 million
of income tax expense, comprised of
$4.7 million
of income tax expense related to foreign operations,
$0.2 million
of federal income tax expense, and
$0.3 million
of state income tax benefit. The
$4.7 million
of income tax expense related to foreign operations included a
$0.9 million
benefit related to the settlement of an uncertain tax position.
The effective tax rates differ from income taxes recorded using a statutory rate largely due to the relative mix in earnings and losses in various tax jurisdictions, the usage of the net operating losses, and reversal of associated valuation allowances previously recorded on the deferred tax assets.
Note
12
. Basic and Diluted Net Income Per Common Share
Basic earnings per share calculation is based on the weighted-average number of common shares outstanding. Diluted earnings per share calculation is based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options and RSUs.
The following table presents basic earnings per share (“EPS”) and diluted EPS (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
$
|
40,340
|
|
|
$
|
35,220
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
Basic
|
58,350
|
|
|
57,339
|
|
|
Assumed conversion of employee stock grants
|
705
|
|
|
1,699
|
|
|
Diluted
|
59,055
|
|
|
59,038
|
|
|
|
|
|
|
|
Net income per basic share
|
$
|
0.69
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
Net income per diluted share
|
$
|
0.68
|
|
|
$
|
0.60
|
|
There were no common stock equivalents that could potentially dilute net income 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.
Note
13
. Derivatives
Certain of the Company’s foreign operations expose the Company to fluctuations in currency exchange rates. These fluctuations may impact the value of the Company’s cash payments, assets, and liabilities in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value of certain obligations and its net investment in its TOKIN subsidiary in terms of its functional currency, the U.S. dollar. The Company’s primary exposure to foreign currency exchange rate risk relates to (i) intercompany financings with TOKIN, (ii) its net investment in TOKIN, and (iii) certain operating expenses at the Company’s Mexican facilities.
The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not utilize derivatives for speculative or other purposes other than currency risk management. The use of derivative financial instruments carries certain risks, including the risk that any counterparty to a contractual arrangement may not be able to perform under the agreement. To mitigate this risk, historically the Company has only entered into derivative financial instruments with a counterparty that is a major financial institution with a high credit rating. The Company does not anticipate that the counterparty will fail to meet its obligations.
Each derivative instrument that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged, and the Company monitors each instrument for effectiveness on a quarterly basis. 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.
Changes in fair value of all its derivative instruments are reported in earnings or in AOCI, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction. The Company records all derivative financial instruments on its Condensed Consolidated Balance Sheets at fair value. Certain of the derivative
instruments are subject to master netting agreements and are presented in the Condensed Consolidated Balance Sheets on a net basis. If the Company were to account for the asset and liability balances of those derivative 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 table below.
The balance sheet classifications and fair value of derivative instruments designated as hedges as of
June 30, 2019
and
March 31, 2019
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
|
|
Balance Sheet Location
|
|
As Presented
|
|
Offset
|
|
Gross
|
|
As Presented
|
|
Offset
|
|
Gross
|
|
Derivative Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,577
|
|
|
$
|
—
|
|
|
$
|
4,577
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current assets
|
|
706
|
|
|
633
|
|
|
1,339
|
|
|
564
|
|
|
645
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
Other non-current obligations
|
|
$
|
3,145
|
|
|
$
|
—
|
|
|
$
|
3,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign exchange contracts
|
|
Accrued expenses
|
|
—
|
|
|
633
|
|
|
633
|
|
|
—
|
|
|
645
|
|
|
645
|
|
Fair Value Hedging Strategy
The Company entered into two cross-currency swaps designated as fair value hedges on November 7, 2018 to hedge the foreign currency risk on the Intercompany Loans. These agreements were contracts to exchange floating-rate payments in one currency with floating-rate payments in another currency. Changes in the fair value of these cross-currency swaps due to changes in foreign currency exchange rates were recognized in earnings upon the recognition of the change in the fair value of the hedged intercompany financings. The notional value of these contracts was
JPY 31.6 billion
or
$279.7 million
at
March 31, 2019
.
The Company terminated these contracts with the counterparty on May 28, 2019, and received proceeds of
$6.5 million
for the combined fair value of these contracts at the time of termination.
Hedges of Net Investments in Foreign Operations Strategy
The Company entered into a cross-currency swap designated as a net investment hedge on November 7, 2018 to hedge the JPY currency exposure of the Company’s net investment in TOKIN. This agreement is a contract to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. Changes in the fair value of this swap are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments. In assessing the effectiveness of this hedge, the Company uses a method based on changes in spot rates to measure the impact of the foreign currency exchange rate fluctuations on both its foreign subsidiary net investment and the related swap. Under this method, changes in the fair value of the hedging instrument other than those due to changes in the spot rate are initially recorded in AOCI as a translation adjustment, and then are amortized into other (income) expense, net in the Condensed Consolidated Statement of Operations using a systematic and rational method over the instrument’s term. Changes in the fair value associated with the effective portion (i.e. those changes due to the spot rate) are recorded in AOCI as a translation adjustment and are released and recognized in earnings only upon the sale or liquidation of the hedged net investment. The terms of this cross-currency swap are as follows:
|
|
|
|
•
|
An amortizing cross-currency swap with an initial notional value of
JPY 33.0 billion
. The notional amount is amortized by approximately
JPY 1.4 billion
every six months and matures on September 30, 2024. Interest payments are made by the Company in JPY on March 31 and September 30 of each year based on the JPY notional value and a fixed rate of
2.61%
. The Company receives interest in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of
6.25%
.
|
The notional value of this contract was
JPY 31.6 billion
or
$279.7 million
at
June 30, 2019
and
March 31, 2019
, respectively.
Cash Flow Hedging Strategy
Foreign Exchange Contracts
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 fifteen 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.
Unrealized gains and losses associated with the change in fair value of the foreign exchange contracts 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 Condensed Consolidated Statement of Operations. When the hedged item affects income, gains or losses are reclassified from AOCI to the Condensed Consolidated Statement of Operations as Cost of Sales for foreign exchange contracts to purchase such foreign currency. The notional value of outstanding Peso contracts was
$100.7 million
and
$74.3 million
as of
June 30, 2019
and
March 31, 2019
, respectively.
Cross-Currency Swaps
On May 28, 2019, the Company entered into two cross-currency swaps designated as cash flow hedges to hedge the foreign currency risk on the principal payments on the Intercompany Loans. These agreements are contracts to exchange floating-rate payments in one currency with fixed-rate payments in another currency. The Company uses these cross-currency swaps to hedge the changes in cash flows on the Intercompany Loans due to changes in foreign currency exchange rates. For this hedging program, the Company records the remeasurement of the Intercompany Loans due to changes in foreign currency exchange rates each period. Changes in the fair value of these cross-currency swaps are initially recorded in AOCI each period with an immediate reclassification into earnings for the change in fair value attributable to the fluctuations in foreign currency exchanges. The Company excludes the change in the fair value of these cross-currency swaps due to changes in interest rates from the assessment of hedge effectiveness. Changes in fair value of the swaps associated with changes in interest rates are initially recorded as a component of AOCI and recognized into other (income) expense, net in the Consolidated Statement of Operations using a systematic and rational method over the instrument’s term. The terms of the two cross-currency swaps designated as cash flow hedges are as follows:
|
|
|
|
•
|
An amortizing cross-currency swap with an initial notional value of
JPY 15.1 billion
. The notional value is amortized by approximately
JPY 1.4 billion
every six months and matures on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus
2.00%
. Interest payments are made in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of
4.88%
.
|
|
|
|
|
•
|
A non-amortizing cross-currency swap with a notional value of
JPY 16.5 billion
maturing on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus
2.25%
. Interest payments are made in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of
5.26%
.
|
The notional value of these contracts were
JPY 31.6 billion
, or
$288.9 million
as of
June 30, 2019
.
Hedging Strategy Impact on Statements of Operations
The following tables present gain and loss activity for the
three months ended
June 30, 2019
and
2018
for derivative instruments designated as hedges (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Derivative Instrument
|
|
Hedge Designation
|
|
Location of Gain (Loss) Recognized in Statements of Operations
|
|
Recognized in AOCI
|
|
Reclassified from AOCI to Income
|
|
Recorded Directly to Income
|
|
Cross-currency swaps
(1)
|
|
Fair Value
|
|
Other income/expense, net
|
|
$
|
(346
|
)
|
|
$
|
(1,622
|
)
|
|
$
|
3,337
|
|
|
Cross-currency swaps
(2)
|
|
Net Investment
|
|
Other income/expense, net
|
|
(2,006
|
)
|
|
2,655
|
|
|
—
|
|
|
Cross-currency swaps
(3)
|
|
Cash Flow
|
|
Other income/expense, net
|
|
(2,231
|
)
|
|
3,909
|
|
|
—
|
|
|
Foreign exchange contracts
(4)
|
|
Cash Flow
|
|
Cost of sales
|
|
527
|
|
|
385
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30, 2018
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Derivative Instrument
|
|
Hedge Designation
|
|
Location of Gain (Loss) Recognized in Statements of Operations
|
|
Recognized in AOCI
|
|
Reclassified from AOCI to Income
|
|
Recorded Directly to Income
|
|
Foreign exchange contracts
(4)
|
|
Cash Flow
|
|
Cost of sales
|
|
(3,795
|
)
|
|
643
|
|
|
—
|
|
_________________
(1)
Amounts recognized in AOCI represent the change in the fair value of the derivative instruments related to the excluded components. Amounts reclassified from AOCI to income represent amortization of excluded components based upon the instruments' periodic coupons. Amounts recorded directly to income represent the change in the fair value of the derivative instruments related to the effective portion of the qualifying hedge.
(2)
Amounts recognized in AOCI represent the total change in the fair value of the derivative instrument. Amounts recorded to AOCI are recorded within foreign currency translation. Amounts reclassified from AOCI to income represent amortization of excluded components based on the instrument's periodic coupon.
(3)
Amounts recognized in AOCI represent the total change in the fair value of the derivative instruments. Amounts reclassified from AOCI to income represent the change in the fair value of the derivative instruments related of the effective portion of the qualifying hedges, as well as amortization of the excluded components based upon the instruments' periodic coupons. For the three months ended
June 30, 2019
, the amount reclassified to income from AOCI includes
$4.7 million
in gains related to the effective portion of the hedges and
$0.8 million
in losses related to amortization of the excluded components.
(4)
Amounts recognized in AOCI represent the total change in the fair value of the derivative instruments. Amounts reclassified from AOCI to income represent the change in the fair value of the derivative instruments pertaining to the settlement of the qualifying hedged item (effective portion).
The following tables present the total amount of each income and expense line item presented in the Condensed Statements of Operations in which the results of fair value and cash flow hedges are recorded and the effects of those hedging strategies on income (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
|
Cost of sales
|
|
Other income (expense), net
|
|
Cost of sales
|
|
Other income (expense), net
|
|
Total income (expense) in Statements of Operations
|
|
$
|
(223,614
|
)
|
|
$
|
726
|
|
|
$
|
(232,795
|
)
|
|
$
|
11,371
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedging impact
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps:
|
|
|
|
|
|
|
|
|
|
Gain (loss) on hedged item
|
|
—
|
|
|
(3,337
|
)
|
|
—
|
|
|
—
|
|
|
Gain (loss) on derivative instrument
(1)
|
|
—
|
|
|
1,715
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedging impact
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps:
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
(2)
|
|
—
|
|
|
3,909
|
|
|
—
|
|
|
—
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
(3)
|
|
385
|
|
|
—
|
|
|
643
|
|
|
—
|
|
_________________
(1)
Amounts recognized in income includes the change in the fair value of the derivative instruments related to the effective portion of the qualifying hedges and amortization of the excluded components.
(2)
Net losses of
$8.5 million
are expected to be reclassified from AOCI into income within the next 12 months.
(3)
Net gains of
$1.5 million
are expected to be reclassified from AOCI into income within the next 12 months.
Note
14
. Leases
The Company’s operating leases are primarily for distribution facilities, and sales and administrative offices. These operating leases have lease periods expiring between
2019
and
2061
.
The Company’s finance leases are primarily for vehicles and certain network equipment. These leases expire between
2019
and
2024
. Many leases require the Company to pay certain executory costs (taxes, insurance, and maintenance) and contain renewal and purchase options. The Company does not assume renewals in the determination of the lease term unless renewals are deemed to be reasonably assured at lease commencement. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expense for the
three months ended
June 30, 2019
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Operating lease expense
|
$
|
2,404
|
|
|
Variable lease expense and other, net
(1)
|
277
|
|
|
Short-term lease expense
|
—
|
|
|
Finance lease expense
|
|
|
Amortization of right-of-use assets
|
251
|
|
|
Interest
|
16
|
|
|
Total lease expense
|
$
|
2,948
|
|
__________________
(1)
Predominantly includes common area maintenance and parking expenses.
Supplemental balance sheet information related to operating and finance leases as of
June 30, 2019
is as follows (amounts in thousands, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
June 30, 2019
|
|
Lease assets
|
|
|
|
Operating lease ROU assets
|
Other assets
|
$
|
32,169
|
|
|
Finance lease ROU assets
(1)
|
Property, plant and equipment, net of accumulated depreciation
|
2,297
|
|
|
|
|
$
|
34,466
|
|
|
|
|
|
|
Lease liabilities
|
|
|
|
Current operating lease liabilities
|
Accrued expenses
|
$
|
8,061
|
|
|
Current finance lease liabilities
|
Accrued expenses
|
1,000
|
|
|
Non-current operating lease liabilities
|
Other non-current obligations
|
23,646
|
|
|
Non-current finance lease liabilities
|
Other non-current obligations
|
1,328
|
|
|
|
|
$
|
34,035
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
Operating leases
|
|
6.43 years
|
|
|
Finance leases
|
|
2.59 years
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
4.72
|
%
|
|
Finance leases
|
|
5.63
|
%
|
_________________
(1)
Finance lease ROU assets are shown net of accumulated depreciation of
$4.5 million
.
Supplemental cash flow information related to leases for the
three months ended
June 30, 2019
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows used for operating leases
|
$
|
2,922
|
|
|
Operating cash flows used for finance leases
|
30
|
|
|
Financing cash flows used for finance leases
|
367
|
|
|
|
$
|
3,319
|
|
|
|
|
|
Lease liabilities arising from obtaining ROU assets
|
|
|
Operating leases
|
$
|
1,975
|
|
|
Finance leases
|
405
|
|
|
|
$
|
2,380
|
|
Maturities of operating and finance lease liabilities as of
June 30, 2019
were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending March 31,
|
Operating Lease Liabilities
|
|
Finance Lease Liabilities
|
|
2020 (nine months ending March 31, 2020)
|
$
|
7,026
|
|
|
$
|
893
|
|
|
2021
|
7,546
|
|
|
834
|
|
|
2022
|
4,431
|
|
|
513
|
|
|
2023
|
4,035
|
|
|
225
|
|
|
2024
|
3,426
|
|
|
42
|
|
|
Thereafter
|
11,501
|
|
|
8
|
|
|
Total undiscounted cash flows
|
$
|
37,965
|
|
|
$
|
2,515
|
|
|
Less imputed interest
|
(6,258
|
)
|
|
(187
|
)
|
|
Present value of lease liabilities
|
$
|
31,707
|
|
|
$
|
2,328
|
|
Note
15
. Concentrations of Risks
The Company sells to customers globally. Credit evaluations of its customers’ financial condition are performed periodically, and the Company generally does not require collateral from its customers. There were no customers’ accounts receivable balances exceeding 10% of gross accounts receivable at
June 30, 2019
or
March 31, 2019
.
Consistent with industry practice, the Company utilizes electronics distributors for a large percentage of its sales. Electronics distributors are an effective means to distribute the products to end-users and they accounted for
42.9%
and
41.7%
of the Company's net sales for the three months ended
June 30, 2019
and
2018
, respectively.
One
of the Company's customers, TTI, Inc., an electronics distributor, accounted for over
10%
of the Company’s net sales for the
three months ended
June 30, 2019
and
2018
.
Note
16
. Subsequent Events
The Company has evaluated events from
June 30, 2019
through the date the financial statements were issued and there have not been any subsequent events that require disclosure.