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, these Condensed Consolidated Financial Statements should 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 and six months ended September 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 instead to 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 15, Leases, for additional information regarding the Company's leases and related transition adjustments.
Capitalized Software and Hosting Arrangements
In August 2018, the Financial Accounting Standards Board 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 September 30, 2019, the Company had $4.5 million of capitalized implementation costs related to hosting 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 Condensed 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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Inventory price protection and ship-from stock and debit (“SFSD”) programs,
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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 and six months ended September 30, 2019 and 2018.
Shipping and handling costs are included in cost of sales.
Disaggregation of Revenue
Refer to Note 9, “Reportable Segment and Geographic Information” for revenue disaggregated by primary geographical market, sales channel, and major product line.
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 $1.7 million and $1.6 million at September 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 $0.1 million and $0.3 million for the three and six months ended September 30, 2019 respectively, and $0.2 million and $0.4 million for the three and six months ended September 30, 2018, respectively. There was no impairment loss in relation to the costs capitalized for the three and six months ended September 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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Level 1—Quoted prices in active markets for identical assets or liabilities.
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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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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 September 30, 2019 and March 31, 2019 are as follows (amounts in thousands):
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Carrying Value September 30,
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Fair Value September 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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47,736
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$
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47,736
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$
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47,736
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$
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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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$
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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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—
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—
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—
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—
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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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(6,591
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)
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(6,591
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)
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—
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(6,591
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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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(305,593
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)
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(314,108
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)
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—
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(314,108
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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 $18.7 million and $32.2 million that mature in three months or less are included within the balance as of September 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 largest deferred tax asset consists of net operating loss carryforwards (“NOL”). The measurement of NOLs requires careful evaluation of prior transactions in the Company's stock, and the application of judgment and interpretation on both the nature of the holder and the underlying transaction resulting in changes to the holders. Based on management's evaluation, there has not been a historical change in control that would have limited the availability of NOL carryforwards. The Company periodically evaluates its NOLs and other 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. 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. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. It is reasonably possible that upon examination, tax authorities could propose adjustments to prior positions based on differences in judgments and interpretations, which could result in a significant increase to the Company's unrecognized tax liability balance if adjustments were to be assessed.
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. 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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September 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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107,743
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$
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97,119
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Work in process
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89,267
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71,374
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Finished goods
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91,072
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88,175
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Subtotal
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288,082
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256,668
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Inventory reserves
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(19,862
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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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268,220
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$
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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. Acquisitions
Novasentis Inc. ("Novasentis")
On July 1, 2019, the Company acquired the remaining 72.1% interest in Novasentis for a preliminary purchase price of $2.7 million. Prior to July 2019, the Company owned 27.9% of Novasentis, a leading developer of film-based haptic actuators, and accounted for its investment using the equity method of accounting.
We believe Novasentis' haptic actuator technology that we have acquired will provide unique flexibility, which will enable it to be incorporated into a wide variety of wearables and virtual/augmented reality applications to provide a variety of tactile sensations.
Note 3. Debt
A summary of debt is as follows (amounts in thousands):
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September 30,
2019
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March 31,
2019
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TOKIN Term Loan Facility (1)
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$
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271,733
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$
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276,808
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Customer Advances (2)
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27,604
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11,270
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Other (3)
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6,256
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6,393
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Total debt
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305,593
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294,471
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Current maturities
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(29,164
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)
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(28,430
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)
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Total long-term debt
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$
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276,429
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$
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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 $8.4 million and $8.7 million at September 30, 2019 and March 31, 2019, respectively.
(2) Amount shown is net of discount of $7.3 million and $2.1 million at September 30, 2019, and March 31, 2019, respectively.
(3) Amounts are shown net of discounts of $0.5 million and $0.6 million at September 30, 2019 and March 31, 2019, respectively.
The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2019 and 2018, consists of the following (amounts in thousands):
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Three Months Ended September 30,
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Six Months Ended September 30,
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2019
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2018
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2019
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2018
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Contractual interest expense
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$
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1,791
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$
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6,896
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$
|
3,531
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$
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13,741
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Capitalized interest
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(108
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)
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|
(56
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)
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(213
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)
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(120
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)
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Amortization of debt issuance costs
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99
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93
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226
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|
209
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Amortization of debt (premium) discount
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921
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|
299
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1,688
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|
397
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Imputed interest on acquisition-related obligations
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—
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14
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—
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29
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Interest expense on finance leases
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48
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41
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|
64
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|
67
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Total interest expense
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$
|
2,751
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$
|
7,287
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$
|
5,296
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$
|
14,323
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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 were $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 $12.7 million using the exchange rate as of September 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 September 30, 2019 was 0.13%.
The Term Loans mature on September 30, 2024. KEMET Corporation 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 Corporation, 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 September 30, 2019, and the Company’s available borrowing capacity under the revolving line of credit was $60.1 million as of September 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 over an expected period of 18 to 24 months from the effective date of the respective 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 September 30, 2019, the Company has received a total of $35.0 million in Advances. Since the debt is non-interest bearing, the Company has recorded debt discounts on the Advances. These discounts will be amortized over the expected life of the Advances through interest expense. During the six months ended September 30, 2019, the Company had $19.9 million in capital expenditures related to the Customer Capacity Agreements.
As of September 30, 2019, the Company had $0.6 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 is being repaid through semi-annual payments on August 1 and February 1 of each year. Repayments started in August 2019 and are 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 2019 and was extended to September 2020. The loan agreement automatically renews for successive one year periods 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
March 31, 2019
|
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Indefinite Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
15,356
|
|
|
$
|
—
|
|
|
$
|
15,356
|
|
|
$
|
15,151
|
|
|
$
|
—
|
|
|
$
|
15,151
|
|
|
In-process research and development (1)
|
|
3,279
|
|
|
—
|
|
|
3,279
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total indefinite lived intangibles
|
|
18,635
|
|
|
—
|
|
|
18,635
|
|
|
15,151
|
|
|
—
|
|
|
15,151
|
|
|
Amortizing Intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and acquired technology (3 - 18 years)
|
|
27,755
|
|
|
(12,847
|
)
|
|
14,908
|
|
|
26,662
|
|
|
(12,046
|
)
|
|
14,616
|
|
|
Customer relationships (10 - 21 years)
|
|
38,073
|
|
|
(15,258
|
)
|
|
22,815
|
|
|
37,850
|
|
|
(13,868
|
)
|
|
23,982
|
|
|
Other
|
|
205
|
|
|
(205
|
)
|
|
—
|
|
|
214
|
|
|
(214
|
)
|
|
—
|
|
|
Total amortizing intangibles
|
|
66,033
|
|
|
(28,310
|
)
|
|
37,723
|
|
|
64,726
|
|
|
(26,128
|
)
|
|
38,598
|
|
|
Total intangible assets
|
|
$
|
84,668
|
|
|
$
|
(28,310
|
)
|
|
$
|
56,358
|
|
|
$
|
79,877
|
|
|
$
|
(26,128
|
)
|
|
$
|
53,749
|
|
_________________
(1) In-process research and development relates to haptic actuator products under development and expected to be commercialized in the future. In-process research and development was capitalized upon the acquisition of Novasentis. Refer to Note 2, “Acquisitions” for more details on the Novasentis acquisition.
For the three months ended September 30, 2019 and 2018, amortization related to intangibles was $1.2 million and $1.1 million, respectively, consisting of amortization related to patents and acquired technology of $0.4 million each period and amortization related to customer relationships of $0.8 million each period. For the six months ended September 30, 2019 and 2018, amortization related to intangibles was $2.3 million, consisting of amortization related to patents and acquired technology of $0.8 million and $0.7 million, respectively, and amortization related to customer relationships of $1.5 million and $1.6 million, respectively.
The weighted-average useful life for patents and acquired technology was 15.3 years and 15.8 years as of September 30, 2019 and March 31, 2019, respectively, and 12.2 years and 12.3 years for customer relationships as of September 30, 2019 and March 31, 2019, respectively. Estimated amortization of intangible assets for each of the next five
fiscal years is $4.9 million, and thereafter, amortization will total $13.4 million. Estimated amortization of patents and acquired technology for each of the next five fiscal years is $1.8 million, and thereafter, amortization will total $6.0 million. Estimated amortization of customer relationships for each of the next five fiscal years is $3.1 million, and thereafter, amortization will total $7.4 million.
There were no changes to the carrying amount of goodwill during the three months ended September 30, 2019. The Company’s goodwill balance was $40.3 million at September 30, 2019 and March 31, 2019.
Note 5. 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 as of September 30, 2019 are summarized below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected to be incurred
|
|
Incurred during quarter ended September 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
|
|
|
$
|
118
|
|
$
|
55
|
|
|
$
|
566
|
|
$
|
2,860
|
|
|
Axial electrolytic production relocation from Granna to Evora
|
Film and Electrolytic
|
729
|
|
4,242
|
|
|
46
|
|
638
|
|
|
719
|
|
4,242
|
|
|
MnO2 product line headcount reduction
|
Solid Capacitors
|
2,948
|
|
—
|
|
|
1,320
|
|
—
|
|
|
2,948
|
|
—
|
|
__________________
(1) Total expected relocation and exit costs is less than cumulative relocation and exit costs incurred to date due to the expected recovery of costs related to the sale of tantalum that is expected to be reclaimed (“tantalum reclaim”) as part of the plant exit activities.
A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the three and six months ended September 30, 2019 and 2018, is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Personnel reduction costs
|
$
|
2,396
|
|
|
$
|
—
|
|
|
$
|
3,625
|
|
|
$
|
(84
|
)
|
|
Relocation and exit costs
|
524
|
|
|
—
|
|
|
1,503
|
|
|
(12
|
)
|
|
Restructuring charges
|
$
|
2,920
|
|
|
$
|
—
|
|
|
$
|
5,128
|
|
|
$
|
(96
|
)
|
Three Months Ended September 30, 2019
The Company incurred $2.9 million in restructuring charges in the three months ended September 30, 2019 comprised of $2.4 million in personnel reduction costs and $0.5 million in relocation and exit costs.
The personnel reduction costs of $2.4 million were primarily due to $1.3 million in severance charges related to headcount reductions in the Solid Capacitors reportable segment due to a decline in MnO2 sales, $0.7 million in corporate severance charges related to headcount reductions in TOKIN Japan, and $0.2 million in severance charges related to personnel reductions resulting from a reorganization of Film and Electrolytic's management structure.
The relocation and exit costs of $0.5 million primarily related to $0.6 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.
Six Months Ended September 30, 2019
The Company incurred $5.1 million in restructuring charges in the six months ended September 30, 2019 comprised of $3.6 million in personnel reduction costs and $1.5 million in relocation and exit costs.
The personnel reduction costs of $3.6 million were primarily due to $1.4 million in severance charges related to headcount reductions in the Solid Capacitors reportable segment due to a decline in MnO2 sales, $0.7 million in severance charges resulting from the closing of the Granna, Sweden manufacturing plant as axial electrolytic production was moved to the plant in Evora, Portugal, $0.7 million in corporate severance charges related to headcount reductions in TOKIN Japan, $0.6 million in severance charges resulting from the closing of the tantalum powder facility in Carson City, Nevada, and
$0.2 million in severance costs related to personnel reductions resulting from a reorganization of Film and Electrolytic's management structure.
The relocation and exit costs of $1.5 million primarily related to $1.9 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. Relocation and exit costs were benefited by a $0.5 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 and six months ended September 30, 2019 and 2018 is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
Personnel
Reductions
|
|
Relocation and Exit Costs
|
|
Personnel
Reductions
|
|
Relocation and Exit Costs
|
|
Beginning of period
|
$
|
1,789
|
|
|
$
|
325
|
|
|
$
|
4,170
|
|
|
$
|
317
|
|
|
Costs charged to expense
|
2,396
|
|
|
524
|
|
|
—
|
|
|
—
|
|
|
Costs paid or settled
|
(2,661
|
)
|
|
(523
|
)
|
|
(1,313
|
)
|
|
—
|
|
|
Change in foreign exchange
|
(9
|
)
|
|
(1
|
)
|
|
(20
|
)
|
|
(7
|
)
|
|
End of period
|
$
|
1,515
|
|
|
$
|
325
|
|
|
$
|
2,837
|
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2019
|
|
Six Months Ended September 30, 2018
|
|
|
Personnel
Reductions
|
|
Relocation and Exit Costs
|
|
Personnel
Reductions
|
|
Relocation and Exit Costs
|
|
Beginning of period
|
$
|
1,865
|
|
|
$
|
316
|
|
|
$
|
9,629
|
|
|
$
|
330
|
|
|
Costs charged to expense
|
3,625
|
|
|
1,503
|
|
|
(79
|
)
|
|
—
|
|
|
Costs paid or settled
|
(3,976
|
)
|
|
(1,502
|
)
|
|
(6,449
|
)
|
|
—
|
|
|
Change in foreign exchange
|
1
|
|
|
8
|
|
|
(264
|
)
|
|
(20
|
)
|
|
End of period
|
$
|
1,515
|
|
|
$
|
325
|
|
|
$
|
2,837
|
|
|
$
|
310
|
|
Note 6. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Changes in Accumulated Other Comprehensive Income (“AOCI”) for the three and six months ended September 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)
|
|
Balance at June 30, 2019
|
$
|
(11,171
|
)
|
|
$
|
756
|
|
|
$
|
(15,594
|
)
|
|
$
|
274
|
|
|
$
|
(5,432
|
)
|
|
$
|
(957
|
)
|
|
$
|
(32,124
|
)
|
|
Other comprehensive income (loss) before reclassifications (3) (4)
|
(5,340
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,918
|
)
|
|
—
|
|
|
(11,258
|
)
|
|
Amounts reclassified out of AOCI
|
(2,626
|
)
|
|
(37
|
)
|
|
162
|
|
|
—
|
|
|
1,765
|
|
|
45
|
|
|
(691
|
)
|
|
Other comprehensive income (loss)
|
(7,966
|
)
|
|
(37
|
)
|
|
162
|
|
|
—
|
|
|
(4,153
|
)
|
|
45
|
|
|
(11,949
|
)
|
|
Balance at September 30, 2019
|
$
|
(19,137
|
)
|
|
$
|
719
|
|
|
$
|
(15,432
|
)
|
|
$
|
274
|
|
|
$
|
(9,585
|
)
|
|
$
|
(912
|
)
|
|
$
|
(44,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Balance at June 30, 2018
|
$
|
(14,488
|
)
|
|
$
|
840
|
|
|
$
|
(14,792
|
)
|
|
$
|
274
|
|
|
$
|
(3,284
|
)
|
|
$
|
—
|
|
|
$
|
(31,450
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(3,149
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
4,099
|
|
|
—
|
|
|
944
|
|
|
Amounts reclassified out of AOCI
|
—
|
|
|
(39
|
)
|
|
248
|
|
|
—
|
|
|
1,089
|
|
|
—
|
|
|
1,298
|
|
|
Other comprehensive income (loss)
|
(3,149
|
)
|
|
(39
|
)
|
|
248
|
|
|
(6
|
)
|
|
5,188
|
|
|
—
|
|
|
2,242
|
|
|
Balance at September 30, 2018
|
$
|
(17,637
|
)
|
|
$
|
801
|
|
|
$
|
(14,544
|
)
|
|
$
|
268
|
|
|
$
|
1,904
|
|
|
$
|
—
|
|
|
$
|
(29,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Balance at March 31, 2019
|
$
|
(14,350
|
)
|
|
$
|
793
|
|
|
$
|
(15,758
|
)
|
|
$
|
274
|
|
|
$
|
566
|
|
|
$
|
(2,249
|
)
|
|
$
|
(30,724
|
)
|
|
Other comprehensive income (loss) before reclassifications (3) (4)
|
494
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,622
|
)
|
|
(346
|
)
|
|
(7,474
|
)
|
|
Amounts reclassified out of AOCI
|
(5,281
|
)
|
|
(74
|
)
|
|
326
|
|
|
—
|
|
|
(2,529
|
)
|
|
1,683
|
|
|
(5,875
|
)
|
|
Other comprehensive income (loss)
|
(4,787
|
)
|
|
(74
|
)
|
|
326
|
|
|
—
|
|
|
(10,151
|
)
|
|
1,337
|
|
|
(13,349
|
)
|
|
Balance at September 30, 2019
|
$
|
(19,137
|
)
|
|
$
|
719
|
|
|
$
|
(15,432
|
)
|
|
$
|
274
|
|
|
$
|
(9,585
|
)
|
|
$
|
(912
|
)
|
|
$
|
(44,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Balance at March 31, 2018
|
$
|
9,715
|
|
|
$
|
879
|
|
|
$
|
(14,831
|
)
|
|
$
|
285
|
|
|
$
|
1,154
|
|
|
$
|
—
|
|
|
$
|
(2,798
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(27,352
|
)
|
|
—
|
|
|
—
|
|
|
(17
|
)
|
|
304
|
|
|
—
|
|
|
(27,065
|
)
|
|
Amounts reclassified out of AOCI
|
—
|
|
|
(78
|
)
|
|
287
|
|
|
—
|
|
|
446
|
|
|
—
|
|
|
655
|
|
|
Other comprehensive income (loss)
|
(27,352
|
)
|
|
(78
|
)
|
|
287
|
|
|
(17
|
)
|
|
750
|
|
|
—
|
|
|
(26,410
|
)
|
|
Balance at September 30, 2018
|
$
|
(17,637
|
)
|
|
$
|
801
|
|
|
$
|
(14,544
|
)
|
|
$
|
268
|
|
|
$
|
1,904
|
|
|
$
|
—
|
|
|
$
|
(29,208
|
)
|
_________________
(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 and six months ended September 30, 2019 and 2018.
(2) Ending balance is net of tax of $2.4 million and $2.2 million as of September 30, 2019 and 2018, respectively.
(3) Foreign currency translation, net of tax for the three and six months ended September 30, 2019 includes gains of $4.6 million and $2.6 million, respectively, related to a derivative instrument accounted for as a net investment hedge. Refer to Note 14, Derivatives, for further information.
(4) Cash flow hedges, net of tax for the three and six months ended September 30, 2019 includes losses of $4.4 million and $11.4 million which were excluded from the assessment of hedge effectiveness.
Note 7. Changes in Stockholders' Equity
Changes in Stockholders' Equity for the three and six months ended September 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 June 30, 2019
|
|
58,018
|
|
|
$
|
580
|
|
|
$
|
466,704
|
|
|
$
|
241,635
|
|
|
$
|
(32,124
|
)
|
|
$
|
676,795
|
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,260
|
)
|
|
—
|
|
|
(15,260
|
)
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,949
|
)
|
|
(11,949
|
)
|
|
Cash dividends ($0.05 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,903
|
)
|
|
—
|
|
|
(2,903
|
)
|
|
Issuance of shares
|
|
49
|
|
|
1
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
4,146
|
|
|
—
|
|
|
—
|
|
|
4,146
|
|
|
Balance at September 30, 2019
|
|
58,067
|
|
|
$
|
581
|
|
|
$
|
470,937
|
|
|
$
|
223,472
|
|
|
$
|
(44,073
|
)
|
|
$
|
650,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings
(Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’
Equity
|
|
Balance at June 30, 2018
|
|
57,347
|
|
|
$
|
573
|
|
|
$
|
461,261
|
|
|
$
|
38,590
|
|
|
$
|
(31,450
|
)
|
|
$
|
468,974
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,141
|
|
|
—
|
|
|
37,141
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,242
|
|
|
2,242
|
|
|
Issuance of shares
|
|
89
|
|
|
1
|
|
|
(204
|
)
|
|
—
|
|
|
—
|
|
|
(203
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
4,417
|
|
|
—
|
|
|
—
|
|
|
4,417
|
|
|
Balance at September 30, 2018
|
|
57,436
|
|
|
$
|
574
|
|
|
$
|
465,474
|
|
|
$
|
75,731
|
|
|
$
|
(29,208
|
)
|
|
$
|
512,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,080
|
|
|
—
|
|
|
25,080
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,349
|
)
|
|
(13,349
|
)
|
|
Cash dividends ($0.10 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,803
|
)
|
|
—
|
|
|
(5,803
|
)
|
|
Issuance of shares
|
|
245
|
|
|
3
|
|
|
(1,300
|
)
|
|
—
|
|
|
—
|
|
|
(1,297
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
6,871
|
|
|
—
|
|
|
—
|
|
|
6,871
|
|
|
Balance at September 30, 2019
|
|
58,067
|
|
|
$
|
581
|
|
|
$
|
470,937
|
|
|
$
|
223,472
|
|
|
$
|
(44,073
|
)
|
|
$
|
650,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,361
|
|
|
—
|
|
|
72,361
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26,410
|
)
|
|
(26,410
|
)
|
|
Issuance of shares
|
|
795
|
|
|
8
|
|
|
(5,740
|
)
|
|
—
|
|
|
—
|
|
|
(5,732
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
8,477
|
|
|
—
|
|
|
—
|
|
|
8,477
|
|
|
Balance at September 30, 2018
|
|
57,436
|
|
|
$
|
574
|
|
|
$
|
465,474
|
|
|
$
|
75,731
|
|
|
$
|
(29,208
|
)
|
|
$
|
512,571
|
|
Note 8. Equity Method Investments
The following table provides a reconciliation of equity method investments to the Company's Condensed Consolidated Balance Sheets (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
March 31, 2019
|
|
Nippon Yttrium Co., Ltd ("NYC")
|
|
$
|
8,115
|
|
|
$
|
8,215
|
|
|
NT Sales Co., Ltd ("NTS")
|
|
1,350
|
|
|
1,218
|
|
|
Novasentis
|
|
—
|
|
|
977
|
|
|
KEMET Jianghai Electronics Components Co., Ltd (“KEMET Jianghai”)
|
|
4,208
|
|
|
2,515
|
|
|
|
|
$
|
13,673
|
|
|
$
|
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 Condensed 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. 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 $8.1 million and $8.2 million as of September 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 September 30, 2019, a significant portion of NTS' sales were TOKIN’s products. The carrying amount of the Company's equity investment in NTS was $1.4 million and $1.2 million as of September 30, 2019 and March 31, 2019, respectively.
Summarized transactions between KEMET and NTS were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
KEMET's sales to NTS
|
|
$
|
13,151
|
|
|
$
|
12,389
|
|
|
$
|
24,580
|
|
|
$
|
24,597
|
|
|
NTS' sales to KEMET
|
|
303
|
|
|
383
|
|
|
607
|
|
|
771
|
|
Novasentis
During fiscal year 2018, KEMET invested in Novasentis, a leading developer of film-based haptic actuators and accounted for its investment using the equity method of accounting. In July 2019, the Company purchased the remaining ownership interests in Novasentis and it became a wholly owned subsidiary. Refer to Note 2, “Acquisitions” for further information. The carrying amount of the Company's equity investment in Novasentis was $1.0 million as of March 31, 2019.
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 September 30, 2019 and March 31, 2019, the carrying amount of the Company's equity investment in KEMET Jianghai was $4.2 million and $2.5 million, respectively.
Note 9. 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 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 MnO2) 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 maintains 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 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 and six months ended September 30, 2019 and 2018 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
|
MSA
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
Asia and the Pacific Rim ("APAC")
|
$
|
107,538
|
|
|
$
|
11,283
|
|
|
$
|
13,907
|
|
|
$
|
132,728
|
|
|
Europe, the Middle East, and Africa ("EMEA")
|
45,786
|
|
|
23,091
|
|
|
786
|
|
|
69,663
|
|
|
North and South America ("Americas")
|
69,766
|
|
|
7,155
|
|
|
2,783
|
|
|
79,704
|
|
|
Japan and Korea ("JPKO")
|
10,543
|
|
|
275
|
|
|
34,484
|
|
|
45,302
|
|
|
|
$
|
233,633
|
|
|
$
|
41,804
|
|
|
$
|
51,960
|
|
|
$
|
327,397
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel
|
|
|
|
|
|
|
|
|
OEM
|
$
|
79,936
|
|
|
$
|
16,396
|
|
|
$
|
48,727
|
|
|
$
|
145,059
|
|
|
Distributor
|
109,277
|
|
|
18,960
|
|
|
2,559
|
|
|
130,796
|
|
|
EMS
|
44,420
|
|
|
6,448
|
|
|
674
|
|
|
51,542
|
|
|
|
$
|
233,633
|
|
|
$
|
41,804
|
|
|
$
|
51,960
|
|
|
$
|
327,397
|
|
|
|
|
|
|
|
|
|
|
|
Major product lines
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
$
|
125,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
125,106
|
|
|
Ceramics
|
108,527
|
|
|
—
|
|
|
—
|
|
|
108,527
|
|
|
Film and Electrolytic
|
—
|
|
|
41,804
|
|
|
—
|
|
|
41,804
|
|
|
MSA
|
—
|
|
|
—
|
|
|
51,960
|
|
|
51,960
|
|
|
|
$
|
233,633
|
|
|
$
|
41,804
|
|
|
$
|
51,960
|
|
|
$
|
327,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
|
MSA
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
APAC
|
$
|
106,535
|
|
|
$
|
12,709
|
|
|
$
|
19,144
|
|
|
$
|
138,388
|
|
|
EMEA
|
46,073
|
|
|
30,831
|
|
|
828
|
|
|
77,732
|
|
|
Americas
|
73,345
|
|
|
6,844
|
|
|
2,100
|
|
|
82,289
|
|
|
JPKO
|
9,520
|
|
|
244
|
|
|
41,060
|
|
|
50,824
|
|
|
|
$
|
235,473
|
|
|
$
|
50,628
|
|
|
$
|
63,132
|
|
|
$
|
349,233
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel
|
|
|
|
|
|
|
|
|
OEM
|
$
|
74,550
|
|
|
$
|
20,095
|
|
|
$
|
59,387
|
|
|
$
|
154,032
|
|
|
Distributor
|
116,947
|
|
|
24,762
|
|
|
2,707
|
|
|
144,416
|
|
|
EMS
|
43,976
|
|
|
5,771
|
|
|
1,038
|
|
|
50,785
|
|
|
|
$
|
235,473
|
|
|
$
|
50,628
|
|
|
$
|
63,132
|
|
|
$
|
349,233
|
|
|
|
|
|
|
|
|
|
|
|
Major product lines
|
|
|
|
|
|
|
|
|
Tantalum
|
$
|
148,054
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
148,054
|
|
|
Ceramics
|
87,419
|
|
|
—
|
|
|
—
|
|
|
87,419
|
|
|
Film and Electrolytic
|
—
|
|
|
50,628
|
|
|
—
|
|
|
50,628
|
|
|
MSA
|
—
|
|
|
—
|
|
|
63,132
|
|
|
63,132
|
|
|
|
$
|
235,473
|
|
|
$
|
50,628
|
|
|
$
|
63,132
|
|
|
$
|
349,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2019
|
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
|
MSA
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
APAC
|
$
|
210,837
|
|
|
$
|
22,227
|
|
|
$
|
27,428
|
|
|
$
|
260,492
|
|
|
EMEA
|
98,869
|
|
|
50,883
|
|
|
1,617
|
|
|
151,369
|
|
|
Americas
|
152,595
|
|
|
14,950
|
|
|
5,509
|
|
|
173,054
|
|
|
JPKO
|
19,539
|
|
|
453
|
|
|
67,732
|
|
|
87,724
|
|
|
|
$
|
481,840
|
|
|
$
|
88,513
|
|
|
$
|
102,286
|
|
|
$
|
672,639
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel
|
|
|
|
|
|
|
|
|
OEM
|
$
|
157,640
|
|
|
$
|
34,923
|
|
|
$
|
95,699
|
|
|
$
|
288,262
|
|
|
Distributor
|
232,505
|
|
|
41,287
|
|
|
5,123
|
|
|
278,915
|
|
|
EMS
|
91,695
|
|
|
12,303
|
|
|
1,464
|
|
|
105,462
|
|
|
|
$
|
481,840
|
|
|
$
|
88,513
|
|
|
$
|
102,286
|
|
|
$
|
672,639
|
|
|
|
|
|
|
|
|
|
|
|
Major product lines
|
|
|
|
|
|
|
|
|
|
|
Tantalum
|
$
|
257,492
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257,492
|
|
|
Ceramics
|
224,348
|
|
|
—
|
|
|
—
|
|
|
224,348
|
|
|
Film and Electrolytic
|
—
|
|
|
88,513
|
|
|
—
|
|
|
88,513
|
|
|
MSA
|
—
|
|
|
—
|
|
|
102,286
|
|
|
102,286
|
|
|
|
$
|
481,840
|
|
|
$
|
88,513
|
|
|
$
|
102,286
|
|
|
$
|
672,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2018
|
|
|
Solid Capacitors
|
|
Film and Electrolytic
|
|
MSA
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
APAC
|
$
|
206,907
|
|
|
$
|
28,297
|
|
|
$
|
36,143
|
|
|
$
|
271,347
|
|
|
EMEA
|
87,538
|
|
|
63,439
|
|
|
1,403
|
|
|
152,380
|
|
|
Americas
|
136,449
|
|
|
13,493
|
|
|
4,498
|
|
|
154,440
|
|
|
JPKO
|
18,400
|
|
|
354
|
|
|
79,928
|
|
|
98,682
|
|
|
|
$
|
449,294
|
|
|
$
|
105,583
|
|
|
$
|
121,972
|
|
|
$
|
676,849
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel
|
|
|
|
|
|
|
|
|
OEM
|
$
|
144,938
|
|
|
$
|
42,536
|
|
|
$
|
115,487
|
|
|
$
|
302,961
|
|
|
Distributor
|
224,580
|
|
|
51,330
|
|
|
5,192
|
|
|
281,102
|
|
|
EMS
|
79,776
|
|
|
11,717
|
|
|
1,293
|
|
|
92,786
|
|
|
|
$
|
449,294
|
|
|
$
|
105,583
|
|
|
$
|
121,972
|
|
|
$
|
676,849
|
|
|
|
|
|
|
|
|
|
|
|
Major product lines
|
|
|
|
|
|
|
|
|
Tantalum
|
$
|
282,367
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
282,367
|
|
|
Ceramics
|
166,927
|
|
|
—
|
|
|
—
|
|
|
166,927
|
|
|
Film and Electrolytic
|
—
|
|
|
105,583
|
|
|
—
|
|
|
105,583
|
|
|
MSA
|
—
|
|
|
—
|
|
|
121,972
|
|
|
121,972
|
|
|
|
$
|
449,294
|
|
|
$
|
105,583
|
|
|
$
|
121,972
|
|
|
$
|
676,849
|
|
The following table reflects each segment’s operating income (loss), depreciation and amortization expenses, and restructuring charges for the three and six months ended September 30, 2019 and 2018 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
$
|
93,376
|
|
|
$
|
84,686
|
|
|
$
|
196,062
|
|
|
$
|
154,351
|
|
|
Film and Electrolytic
|
(1,072
|
)
|
|
4,236
|
|
|
(3,951
|
)
|
|
5,303
|
|
|
MSA
|
4,435
|
|
|
7,132
|
|
|
8,093
|
|
|
13,187
|
|
|
Corporate
|
(47,649
|
)
|
|
(46,054
|
)
|
|
(92,714
|
)
|
|
(87,665
|
)
|
|
|
$
|
49,090
|
|
|
$
|
50,000
|
|
|
$
|
107,490
|
|
|
$
|
85,176
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
$
|
7,967
|
|
|
$
|
7,353
|
|
|
$
|
15,759
|
|
|
$
|
14,535
|
|
|
Film and Electrolytic
|
2,246
|
|
|
2,198
|
|
|
4,537
|
|
|
4,818
|
|
|
MSA
|
1,948
|
|
|
1,153
|
|
|
3,458
|
|
|
2,657
|
|
|
Corporate
|
2,956
|
|
|
1,841
|
|
|
5,622
|
|
|
3,632
|
|
|
|
$
|
15,117
|
|
|
$
|
12,545
|
|
|
$
|
29,376
|
|
|
$
|
25,642
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
Solid Capacitors
|
$
|
1,493
|
|
|
$
|
—
|
|
|
$
|
1,614
|
|
|
$
|
(18
|
)
|
|
Film and Electrolytic
|
867
|
|
|
—
|
|
|
2,915
|
|
|
1
|
|
|
MSA
|
170
|
|
|
—
|
|
|
170
|
|
|
—
|
|
|
Corporate
|
390
|
|
|
—
|
|
|
429
|
|
|
(79
|
)
|
|
|
$
|
2,920
|
|
|
$
|
—
|
|
|
$
|
5,128
|
|
|
$
|
(96
|
)
|
Note 10. 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 September 30, 2019 and March 31, 2019 consist of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Benefits
|
|
|
|
September 30, 2019
|
|
March 31, 2019
|
|
September 30, 2019
|
|
March 31, 2019
|
|
Prepaid expenses and other current assets
|
|
$
|
949
|
|
|
$
|
670
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses
|
|
(2,758
|
)
|
|
(2,753
|
)
|
|
(50
|
)
|
|
(50
|
)
|
|
Other non-current obligations
|
|
(82,723
|
)
|
|
(82,455
|
)
|
|
(245
|
)
|
|
(262
|
)
|
|
Net amount recognized, end of period
|
|
$
|
(84,532
|
)
|
|
$
|
(84,538
|
)
|
|
$
|
(295
|
)
|
|
$
|
(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 September 30, 2019 and 2018 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Benefits
|
|
|
Three Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net service cost
|
$
|
1,245
|
|
|
$
|
1,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
462
|
|
|
478
|
|
|
2
|
|
|
3
|
|
|
Expected return on net assets
|
(482
|
)
|
|
(531
|
)
|
|
—
|
|
|
—
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
113
|
|
|
107
|
|
|
(37
|
)
|
|
(39
|
)
|
|
Prior service cost
|
21
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit cost (credit)
|
$
|
1,359
|
|
|
$
|
1,310
|
|
|
$
|
(35
|
)
|
|
$
|
(36
|
)
|
The components of net periodic benefit (income) costs relating to the Company’s pension and other post-retirement benefit plans for the six months ended September 30, 2019 and 2018 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Benefits
|
|
|
Six Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net service cost
|
$
|
2,495
|
|
|
$
|
2,466
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
924
|
|
|
956
|
|
|
5
|
|
|
6
|
|
|
Expected return on net assets
|
(955
|
)
|
|
(1,062
|
)
|
|
—
|
|
|
—
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
226
|
|
|
214
|
|
|
(74
|
)
|
|
(77
|
)
|
|
Prior service cost
|
42
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit cost (credit)
|
$
|
2,732
|
|
|
$
|
2,620
|
|
|
$
|
(69
|
)
|
|
$
|
(71
|
)
|
All of the amounts in the tables above, other than net 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, $2.6 million of which has been contributed as of September 30, 2019. For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred.
Note 11. Stock-Based Compensation
As of September 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 the following:
|
|
|
|
•
|
stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code (the Internal Revenue 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 non-employee 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 then 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 $18.15 per share that vest as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Shares
|
|
May 18, 2020
|
66
|
|
|
May 18, 2021
|
140
|
|
|
May 18, 2022
|
142
|
|
|
Total RSUs granted (1)
|
348
|
|
__________________
(1) RSUs granted include time-based and performance-based RSUs. Therefore, the granted performance-based RSUs included 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, that vested during the six months ended September 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 six months ended September 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
|
409
|
|
|
18.39
|
|
|
Vested
|
(365
|
)
|
|
10.87
|
|
|
Forfeited
|
(10
|
)
|
|
15.73
|
|
|
Non-vested RSUs at September 30, 2019
|
1,449
|
|
|
$
|
17.18
|
|
The expense associated with stock-based compensation for the three months ended September 30, 2019 and 2018 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
Stock
Options
|
|
RSUs
|
|
LTIPs
|
|
Stock
Options
|
|
RSUs
|
|
LTIPs
|
|
Cost of sales
|
$
|
—
|
|
|
$
|
495
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
351
|
|
|
$
|
335
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
2,175
|
|
|
872
|
|
|
—
|
|
|
2,807
|
|
|
840
|
|
|
Research and development
|
—
|
|
|
35
|
|
|
82
|
|
|
—
|
|
|
17
|
|
|
67
|
|
|
Total
|
$
|
—
|
|
|
$
|
2,705
|
|
|
$
|
1,441
|
|
|
$
|
—
|
|
|
$
|
3,175
|
|
|
$
|
1,242
|
|
The expense associated with stock-based compensation for the six months ended September 30, 2019 and 2018 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2019
|
|
Six Months Ended September 30, 2018
|
|
|
Stock
Options
|
|
Restricted
Stock
|
|
LTIPs
|
|
Stock
Options
|
|
Restricted
Stock
|
|
LTIPs
|
|
Cost of sales
|
$
|
—
|
|
|
$
|
985
|
|
|
$
|
871
|
|
|
$
|
—
|
|
|
$
|
701
|
|
|
$
|
574
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
3,179
|
|
|
1,603
|
|
|
—
|
|
|
5,688
|
|
|
1,361
|
|
|
Research and development
|
—
|
|
|
70
|
|
|
163
|
|
|
—
|
|
|
32
|
|
|
121
|
|
|
Total
|
$
|
—
|
|
|
$
|
4,234
|
|
|
$
|
2,637
|
|
|
$
|
—
|
|
|
$
|
6,421
|
|
|
$
|
2,056
|
|
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 six months ended September 30, 2019, and 2018. There were 27,667 stock options exercised in the six months ended September 30, 2019 and 71,300 stock options were exercised in the six months ended September 30, 2018.
Note 12. Income Taxes
During the three months ended September 30, 2019, the Company recognized $1.7 million of income tax expense, comprised of $3.0 million of income tax expense related to foreign operations, $1.5 million of federal income tax benefit, and $0.2 million of state income tax expense. During the six months ended September 30, 2019, the Company recognized $18.5 million of income tax expense, comprised of $8.7 million of income tax expense related to foreign operations, $9.5 million of federal income tax expense, and $0.3 million of state income tax expense.
During the three months ended September 30, 2018, the Company recognized $2.0 million of income tax expense, solely comprised of $2.0 million of income tax expense related to foreign operations. The $2.0 million of income tax expense related to foreign operations included a $1.2 million benefit related to the final settlement of an uncertain tax position. During the six months ended September 30, 2018, the Company recognized $6.6 million of income tax expense, comprised of $6.7 million of income tax expense related to foreign operations and $0.2 million of federal income tax expense, offset by $0.3 million of state income tax benefit. The $6.7 million of income tax expense related to foreign operations included a $0.3 million expense 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 impact of certain nondeductible items, 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 13. 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 net income (loss) per basic and diluted share (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(15,260
|
)
|
|
$
|
37,141
|
|
|
$
|
25,080
|
|
|
$
|
72,361
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
58,528
|
|
|
57,799
|
|
|
58,440
|
|
|
57,570
|
|
|
Assumed conversion of employee stock grants
|
—
|
|
|
1,398
|
|
|
735
|
|
|
1,549
|
|
|
Diluted
|
58,528
|
|
|
59,197
|
|
|
59,175
|
|
|
59,119
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share
|
$
|
(0.26
|
)
|
|
$
|
0.64
|
|
|
$
|
0.43
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
$
|
(0.26
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
$
|
1.22
|
|
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 14. 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 September 30, 2019 and March 31, 2019 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
|
|
|
September 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
|
|
—
|
|
|
567
|
|
|
567
|
|
|
564
|
|
|
645
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
Other non-current obligations
|
|
$
|
5,319
|
|
|
$
|
—
|
|
|
$
|
5,319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign exchange contracts
|
|
Accrued expenses
|
|
1,272
|
|
|
567
|
|
|
1,839
|
|
|
—
|
|
|
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 30.3 billion or $267.6 million at September 30, 2019 and JPY 31.6 billion or $279.7 million at March 31, 2019.
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 15 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 $105.2 million and $74.3 million as of September 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 30.3 billion, or $276.4 million as of September 30, 2019.
Hedging Strategy Impact on Statements of Operations
The following tables present gain and loss activity for the three and six months ended September 30, 2019 and 2018 for derivative instruments designated as hedges (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 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 (2)
|
|
Net Investment
|
|
Other income (expense), net
|
|
$
|
4,631
|
|
|
$
|
2,626
|
|
|
$
|
—
|
|
|
Cross-currency swaps (3)
|
|
Cash Flow
|
|
Other income (expense), net
|
|
(5,108
|
)
|
|
(2,933
|
)
|
|
—
|
|
|
Foreign exchange contracts (4)
|
|
Cash Flow
|
|
Cost of sales
|
|
(810
|
)
|
|
1,168
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 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
|
|
$
|
4,099
|
|
|
$
|
(1,089
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 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
|
|
2,625
|
|
|
5,281
|
|
|
—
|
|
|
Cross-currency swaps (3)
|
|
Cash Flow
|
|
Other income (expense), net
|
|
(7,339
|
)
|
|
976
|
|
|
—
|
|
|
Foreign exchange contracts (4)
|
|
Cash Flow
|
|
Cost of sales
|
|
(283
|
)
|
|
1,553
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 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
|
|
$
|
304
|
|
|
$
|
(446
|
)
|
|
$
|
—
|
|
_________________
(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 September 30, 2019, the amount reclassified to income from AOCI includes $0.7 million in losses related to the effective portion of the hedges and $2.2 million in losses related to amortization of the excluded components. For the six months ended September 30, 2019, the amount reclassified to income from AOCI includes $4.0 million in gains related to the effective portion of the hedges and $3.0 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 September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
|
Cost of sales
|
|
Other income (expense), net
|
|
Cost of sales
|
|
Other income (expense), net
|
|
Total income (expense) in Statements of Operations
|
|
$
|
(213,727
|
)
|
|
$
|
1,915
|
|
|
$
|
(235,668
|
)
|
|
$
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedging impact
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps:
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income (2)
|
|
—
|
|
|
(2,933
|
)
|
|
—
|
|
|
—
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income (3)
|
|
1,168
|
|
|
—
|
|
|
(1,089
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2019
|
|
Six Months Ended September 30, 2018
|
|
|
|
Cost of sales
|
|
Other income (expense), net
|
|
Cost of sales
|
|
Other income (expense), net
|
|
Total income (expense) in Statements of Operations
|
|
$
|
(437,341
|
)
|
|
$
|
2,641
|
|
|
$
|
(468,463
|
)
|
|
$
|
11,642
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
—
|
|
|
976
|
|
|
—
|
|
|
—
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income (3)
|
|
1,553
|
|
|
—
|
|
|
(446
|
)
|
|
—
|
|
_________________
(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 $8.3 million are expected to be reclassified from AOCI into income within the next 12 months.
(3) Net losses of $0.2 million are expected to be reclassified from AOCI into income within the next 12 months.
Note 15. 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 2029.
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 and six month periods ended September 30, 2019 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Six Months Ended September 30, 2019
|
|
Operating lease expense
|
|
|
|
|
Operating lease cost
|
$
|
2,641
|
|
|
$
|
5,045
|
|
|
Variable lease cost and other, net (1)
|
277
|
|
|
554
|
|
|
Short-term lease cost
|
3
|
|
|
3
|
|
|
Sublease income
|
(27
|
)
|
|
(27
|
)
|
|
Finance lease expense
|
|
|
|
|
Amortization of right-of-use assets
|
343
|
|
|
594
|
|
|
Interest
|
48
|
|
|
64
|
|
|
Total lease expense
|
$
|
3,285
|
|
|
$
|
6,233
|
|
__________________
(1) Predominantly includes common area maintenance and parking expenses.
Supplemental balance sheet information related to operating and finance leases as of September 30, 2019 is as follows (amounts in thousands, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
September 30, 2019
|
|
Lease assets
|
|
|
|
Operating lease ROU assets
|
Other assets
|
$
|
29,453
|
|
|
Finance lease ROU assets (1)
|
Property, plant and equipment, net of accumulated depreciation
|
2,735
|
|
|
|
|
$
|
32,188
|
|
|
|
|
|
|
Lease liabilities
|
|
|
|
Current operating lease liabilities
|
Accrued expenses
|
$
|
7,825
|
|
|
Current finance lease liabilities
|
Accrued expenses
|
1,091
|
|
|
Non-current operating lease liabilities
|
Other non-current obligations
|
21,797
|
|
|
Non-current finance lease liabilities
|
Other non-current obligations
|
1,567
|
|
|
|
|
$
|
32,280
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
Operating leases
|
|
6.44 years
|
|
|
Finance leases
|
|
3.08 years
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
4.79
|
%
|
|
Finance leases
|
|
5.48
|
%
|
_________________
(1) Finance lease ROU assets are shown net of accumulated depreciation of $3.5 million.
Supplemental cash flow information related to leases for the three and six month periods ended September 30, 2019 is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Six Months Ended September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows used for operating leases
|
$
|
2,610
|
|
|
$
|
5,532
|
|
|
Operating cash flows used for finance leases
|
43
|
|
|
73
|
|
|
Financing cash flows used for finance leases
|
378
|
|
|
745
|
|
|
|
$
|
3,031
|
|
|
$
|
6,350
|
|
|
|
|
|
|
|
Lease liabilities arising from obtaining ROU assets
|
|
|
|
|
Operating leases
|
$
|
159
|
|
|
$
|
2,134
|
|
|
Finance leases
|
773
|
|
|
1,178
|
|
|
|
$
|
932
|
|
|
$
|
3,312
|
|
Maturities of operating and finance lease liabilities as of September 30, 2019 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending March 31,
|
Operating Lease Liabilities
|
|
Finance Lease Liabilities
|
|
2020 (six months ending March 31, 2020)
|
$
|
4,785
|
|
|
$
|
704
|
|
|
2021
|
7,592
|
|
|
973
|
|
|
2022
|
4,377
|
|
|
616
|
|
|
2023
|
3,957
|
|
|
362
|
|
|
2024
|
3,362
|
|
|
95
|
|
|
Thereafter
|
11,440
|
|
|
137
|
|
|
Total undiscounted cash flows
|
$
|
35,513
|
|
|
$
|
2,887
|
|
|
Less imputed interest
|
(5,883
|
)
|
|
(228
|
)
|
|
Present value of lease liabilities
|
$
|
29,630
|
|
|
$
|
2,659
|
|
Note 16. 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. One of the Company's customers, Satori Electric., LTD., an electronics distributor, accounted for over 10.0% of gross accounts receivable at September 30, 2019. Due to Typhoon Mitag impacting East Asia in late September 2019, payments from Satori Electric., LTD., were temporarily delayed to October 1, 2019 due to bank closures during the typhoon. The Company collected approximately 40.0% of its September 30, 2019 outstanding accounts receivable balance from Satori Electric., LTD. on October 1, 2019. If that amount had been collected on September 30, 2019, the customer would not have accounted for over 10.0% of the Company's gross accounts receivable as of September 30, 2019. There were no customers' accounts receivable balances exceeding 10.0% of gross accounts receivable at 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 40.0% and 41.4% of the Company's net sales for the three months ended September 30, 2019 and 2018, respectively, and 41.4% and 41.5% for the six months ended September 30, 2019 and 2018, respectively. One of the Company's customers, TTI, Inc., an electronics distributor, accounted for over 10.0% of the Company’s net sales for the three and six months ended September 30, 2019 and 2018.
Legal Update
As previously reported, KEMET and KEC, along with more than 20 other capacitor manufacturers and subsidiaries (including TOKIN, as reported in “Item 3. Legal Proceedings” of our Form 10-K for the year ended March 31, 2019, are defendants in a purported antitrust class action complaint, In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD, filed on December 4, 2014 with the United States District Court, Northern District of California (the "U.S. Class Action Complaint”). The complaint alleges a violation of Section 1 of the Sherman Act, for which it seeks injunctive and equitable
relief and money damages. On November 8, 2019 KEMET and KEC entered into a settlement agreement (the “Settlement Agreement”) with the plaintiffs in the U.S. Class Action Complaint by which, in consideration for the release of KEMET, KEC, and their affiliates from all claims relating in any way to the conduct alleged in the U.S. Class Action Complaint and from claims which could have been asserted in the U.S. Class Action Complaint to the extent they relate to the sale of capacitors in the United States, KEMET agreed to pay an aggregate of $62.0 million to the settlement class of plaintiffs. The Settlement Agreement is subject to court approval. Pursuant to the terms of the Settlement Agreement, $10.0 million will be paid by KEMET into an escrow account within 30 calendar days of the date of the Settlement Agreement and the remaining amount will be paid by KEMET within 12 months of the date of the Settlement Agreement. Under the terms of the Settlement Agreement KEMET and KEC did not admit to any violation of any statute or law or any liability or wrongdoing.
The Company recognized the $62.0 million expense in the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2019 in the line item, Antitrust class action settlements and regulatory costs. The payable is included in the line item, Accrued expenses, in the Condensed Consolidated Balance Sheets as of September 30, 2019.
Note 17. Subsequent Events
On November 11, 2019, the Company entered into an agreement and plan of merger (the “Agreement”) pursuant to which Yageo Corporation (“Yageo”) will acquire all of the Company’s outstanding shares of common stock for $27.20 per share, subject to the satisfaction (or waiver of) specified conditions (the “Merger”). The consummation of the Merger is subject to customary conditions, including the approval by the Company’s stockholders. Certain further conditions include: (a) obtaining antitrust and other regulatory approvals in the United States and certain other jurisdictions (including, among others, China and Taiwan), (b) absence of any applicable restraining order or injunction prohibiting the Merger, (c) receipt of approval from the Committee on Foreign Investment in the United States (“CFIUS”), (d) obtaining foreign investment approval by the Investment Commission, Ministry of Economic Affairs, Taiwan, (e) the approval of Yageo’s stockholders, if required by applicable law and (f) in the case of Yageo’s obligations to complete the Merger, there not having been any “material adverse effect” (as customarily defined) on the Company. Upon consummation of the Merger, the Company would be a fully owned subsidiary of Yageo.
The Agreement is subject to termination if the Merger is not consummated within twelve months, subject to an automatic extension for a period of ninety days, for the purpose of obtaining certain antitrust clearances. The Agreement also contains certain other termination rights and provides that, upon termination of the Agreement under specified circumstances, including Yageo’s decision to terminate the Agreement if there is a change in the Board’s recommendation to adopt the Merger or a termination of the Agreement by the Company to enter into an agreement for a “superior proposal,” the Company will pay Yageo a cash termination fee of $63.8 million. The Agreement additionally provides that, upon termination of the Agreement under specified circumstances, including a failure to obtain CFIUS approval, Yageo will pay the Company a cash termination fee of $65.4 million. If Yageo fails to obtain approval by Yageo’s stockholders, if such approval is required by applicable law, Yageo will pay the Company a cash termination fee of $49.1 million. If Yageo fails to obtain debt financing upon the satisfaction of all conditions to closing, the Company may, within 30 days of termination, elect to receive a cash termination fee of $63.8 million.