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EX-32.1 - EXHIBIT 32.1 - KEMET CORPkem-fy161231xex321.htm
EX-31.2 - EXHIBIT 31.2 - KEMET CORPkem-fy161231xex312.htm
EX-32.2 - EXHIBIT 32.2 - KEMET CORPkem-fy161231xex322.htm
EX-31.1 - EXHIBIT 31.1 - KEMET CORPkem-fy161231xex311.htm

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015 
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from           to      
  
Commission File Number: 001-15491
 
KEMET CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
57-0923789
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681
(Address of principal executive offices, zip code)
 
(864) 963-6300
(Registrant’s telephone number, including area code)
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý  NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ý NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  ý NO
 
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of January 29, 2016 was 45,859,263.
 



KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 2015
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
 




PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
 

3


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
(Unaudited)
 
 
December 31, 2015
 
March 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
43,158

 
$
56,362

Accounts receivable, net
89,285

 
90,857

Inventories, net
175,078

 
171,843

Prepaid expenses and other
31,051

 
41,503

Deferred income taxes
9,734

 
10,762

Total current assets
348,306

 
371,327

Property, plant and equipment, net of accumulated depreciation of $810,373 and $804,286 as of December 31, 2015 and March 31, 2015, respectively
236,347

 
249,641

Goodwill
40,294

 
35,584

Intangible assets, net
33,571

 
33,282

Investment in NEC TOKIN
35,795

 
45,016

Deferred income taxes
4,398

 
5,111

Other assets
8,264

 
12,831

Total assets
$
706,975

 
$
752,792

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
5,000

 
$
962

Accounts payable
63,665

 
69,785

Accrued expenses
44,529

 
60,456

Income taxes payable and deferred income taxes
856

 
1,017

Total current liabilities
114,050

 
132,220

Long-term debt, less current portion
389,887

 
390,409

Other non-current obligations
70,921

 
57,131

Deferred income taxes
7,707

 
8,350

Stockholders’ equity:
 

 
 

Preferred stock, par value $0.01, authorized 10,000 shares, none issued

 

Common stock, par value $0.01, authorized 175,000 shares, issued 46,508 shares at December 31, 2015 and March 31, 2015
465

 
465

Additional paid-in capital
452,764

 
461,191

Retained deficit
(284,337
)
 
(245,881
)
Accumulated other comprehensive income
(33,687
)
 
(28,796
)
Treasury stock, at cost (648 and 1,056 shares at December 31, 2015 and March 31, 2015, respectively)
(10,795
)
 
(22,297
)
Total stockholders’ equity
124,410

 
164,682

Total liabilities and stockholders’ equity
$
706,975

 
$
752,792


 See accompanying notes to the unaudited condensed consolidated financial statements.

4


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited) 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net sales
$
177,184

 
$
201,310

 
$
550,897

 
$
629,484

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales
138,436

 
156,842

 
429,630

 
506,304

Selling, general and administrative expenses
22,278

 
23,374

 
75,656

 
73,663

Research and development
6,134

 
6,303

 
18,560

 
19,230

Restructuring charges
1,714

 
6,063

 
3,561

 
9,580

Net (gain) loss on sales and disposals of assets
129

 
(574
)
 
(233
)
 
(759
)
Total operating costs and expenses
168,691

 
192,008

 
527,174

 
608,018

Operating income (loss)
8,493

 
9,302

 
23,723

 
21,466

Non-operating (income) expense:
 

 
 

 
 

 
 

Interest income
(4
)
 
(5
)
 
(10
)
 
(11
)
Interest expense
9,852

 
9,938

 
29,676

 
30,681

Change in value of NEC TOKIN options
(700
)
 
(2,500
)
 
26,300

 
(13,200
)
Other (income) expense, net
(1,320
)
 
(1,201
)
 
(2,495
)
 
(1,629
)
Income (loss) from continuing operations before income taxes and equity income (loss) from NEC TOKIN
665

 
3,070

 
(29,748
)
 
5,625

Income tax expense (benefit)
2,760

 
1,359

 
3,950

 
5,224

Income (loss) from continuing operations before equity income (loss) from NEC TOKIN
(2,095
)
 
1,711

 
(33,698
)
 
401

Equity income (loss) from NEC TOKIN
(6,505
)
 
1,367

 
(4,758
)
 
(76
)
Income (loss) from continuing operations
(8,600
)

3,078


(38,456
)

325

Income (loss) from discontinued operations, net of income tax expense (benefit) of $0, $41, $0 and $1,976 respectively

 
(164
)
 

 
5,379

Net income (loss)
$
(8,600
)
 
$
2,914

 
$
(38,456
)
 
$
5,704

Net income (loss) per basic share:
 

 
 

 
 

 
 

Net income (loss) from continuing operations
$
(0.19
)
 
$
0.07

 
$
(0.84
)
 
$
0.01

Net income (loss) from discontinued operations
$

 
$

 
$

 
$
0.12

Net income (loss)
$
(0.19
)
 
$
0.07

 
$
(0.84
)
 
$
0.13

 
 
 
 
 
 
 
 
Net income (loss) per diluted share:
 

 
 

 
 

 
 

Net income (loss) from continuing operations
$
(0.19
)
 
$
0.06

 
$
(0.84
)
 
$
0.01

Net income (loss) from discontinued operations
$

 
$

 
$

 
$
0.10

Net income (loss)
$
(0.19
)
 
$
0.06

 
$
(0.84
)
 
$
0.11

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
46,081

 
45,407

 
45,953

 
45,360

Diluted
46,081

 
52,228

 
45,953

 
52,549


See accompanying notes to the unaudited condensed consolidated financial statements.

5


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(8,600
)
 
$
2,914

 
$
(38,456
)
 
$
5,704

Other comprehensive income (loss):
 

 
 
 
 

 
 
Foreign currency translation gains (losses)
(6,121
)
 
(5,743
)
 
(4,722
)
 
(20,502
)
Defined benefit pension plans, net of tax impact
6,910

 
86

 
7,322

 
227

Post-retirement plan adjustments
96

 
(36
)
 
17

 
(140
)
Equity interest in NEC TOKIN's other comprehensive income (loss)
143

 
2,615

 
(4,463
)
 
6,088

Foreign exchange contracts
672

 

 
(3,045
)
 

Other comprehensive income (loss)
1,700

 
(3,078
)
 
(4,891
)
 
(14,327
)
Total comprehensive income (loss)
$
(6,900
)
 
$
(164
)
 
$
(43,347
)
 
$
(8,623
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.


6


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
 
Nine Month Periods Ended December 31,
 
2015
 
2014
Net income (loss)
$
(38,456
)
 
$
5,704

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Gain on sale of discontinued operations

 
(5,644
)
Net cash provided by (used in) operating activities of discontinued operations

 
(679
)
Depreciation and amortization
28,856

 
30,694

Equity (income) loss from NEC TOKIN
4,758

 
76

Non-cash debt and financing costs
649

 
1,570

(Gain) loss on early extinguishment of debt

 
(1,003
)
Stock-based compensation expense
3,761

 
3,184

Long-term receivable write down
24

 
27

Change in value of NEC TOKIN options
26,300

 
(13,200
)
Net (gain) loss on sales and disposals of assets
(233
)
 
(759
)
Pension and other post-retirement benefits
652

 
87

Change in deferred income taxes
735

 
1,276

Change in operating assets
4,762

 
(208
)
Change in operating liabilities
(32,891
)
 
(24,732
)
Other
526

 
337

Net cash provided by (used in) operating activities
(557
)
 
(3,270
)
Investing activities:
 

 
 

Capital expenditures
(14,120
)
 
(17,474
)
Acquisitions, net of cash received
(2,892
)
 

Proceeds from sale of assets
898

 
4,540

Change in restricted cash

 
11,509

Proceeds from sale of discontinued operations

 
9,564

Net cash provided by (used in) investing activities
(16,114
)
 
8,139

Financing activities:
 

 
 

Proceeds from revolving line of credit
10,000

 
42,340

Payments on revolving line of credit
(5,500
)
 
(14,342
)
Deferred acquisition payments

 
(11,899
)
Payments on long-term debt
(481
)
 
(21,733
)
Purchase of treasury stock
(691
)
 

Proceeds from exercise of stock options

 
24

Net cash provided by (used in) financing activities
3,328

 
(5,610
)
Net increase (decrease) in cash and cash equivalents
(13,343
)
 
(741
)
Effect of foreign currency fluctuations on cash
139

 
(1,606
)
Cash and cash equivalents at beginning of fiscal period
56,362

 
57,929

Cash and cash equivalents at end of fiscal period
$
43,158

 
$
55,582

 
See accompanying notes to the unaudited condensed consolidated financial statements.


7


Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1. Basis of Financial Statement Presentation
 
The condensed consolidated financial statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2015 (the “Company’s 2015 Annual Report”).
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to current year presentation.  Net sales and operating results for the quarter and nine month periods ended December 31, 2015 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 2015 Annual Report.
 
Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
 
The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.
 
Recently Issued Accounting Pronouncements
 
New accounting standards adopted/issued
 
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Balance Sheet Classification of Deferred Taxes. The ASU requires all deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. The classification change for all deferred taxes as non-current simplifies entities’ processes as it eliminates the need to separately identify the net current and net non-current deferred tax asset or liability in each jurisdiction and allocate valuation allowances. ASU 2015-17 will be effective for interim and annual reporting periods beginning April 1, 2017. Early application is permitted.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The ASU requires that an acquirer recognize adjustments to provisional amounts recognized in a business combination in the reporting period in which the adjustment amounts are determined. It also requires disclosure of the adjustment recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 eliminates the requirement to retrospectively revise comparative information for prior periods. ASU 2015-16 will be effective for interim and annual reporting periods beginning April 1, 2016. Early application is permitted. Upon adoption, the Company will apply the new standard to measurement period adjustments related to business acquisitions.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The ASU requires an entity that uses first-in, first-out or average cost to measure its inventory at the lower of cost or net realizable value. Net

8


realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for interim and annual reporting periods beginning April 1, 2017. Early application is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-11 on its operating results and financial position.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct reduction from the face amount of the note. The ASU is effective for the Company for interim and annual periods beginning April 1, 2016.  Early adoption is permitted. The ASU will require the Company to reclassify its capitalized debt issuance costs currently recorded as assets on the consolidated condensed balance sheets. The ASU will have no effect on the Company's results of operations or liquidity.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern. The new guidance is effective for the Company's fiscal year that begins on April 1, 2017 and interim periods within that fiscal year and requires management to assess if there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim period. If conditions or events give rise to substantial doubt, disclosures are required. This new guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance is effective for the Company's fiscal year that begins on April 1, 2018 and interim periods within that fiscal year and requires either a retrospective or a modified retrospective approach to adoption. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures, as well as the available transition methods. Early adoption is permitted, but not before Company's fiscal year that begins on April 1, 2017 (the original effective date of the ASU). We are currently in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.

There are currently no other accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
 
Restricted Cash 

A bank guarantee in the amount of €1.5 million ($1.6 million) was issued by a European bank on behalf of the Company in August 2006 in conjunction with the establishment of a Value-Added Tax (“VAT”) registration in The Netherlands. Accordingly, a deposit was placed with the European bank for €1.7 million ($1.8 million). While the deposit is in KEMET’s name, and KEMET receives all interest earned by this deposit, the deposit is pledged to the European bank, and the bank can use the funds if a valid claim against the bank guarantee is made. Restricted cash is included in the line item "Other assets" on the Condensed Consolidated Balance Sheets.
 
Fair Value Measurement
 
The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
 
The first two inputs are considered observable and the last is considered unobservable. The levels of inputs are as follows:
 
Level 1—Quoted prices in active markets for identical assets or liabilities.

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.

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.
 

9


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and March 31, 2015 are as follows (amounts in thousands):
 
Carrying Value December 31,
 
Fair Value December 31,
 
Fair Value Measurement Using
 
Carrying Value March 31,
 
Fair Value March 31,
 
Fair Value Measurement Using
 
2015
 
2015
 
Level 1
 
Level 2 (2)
 
Level 3
 
2015
 
2015
 
Level 1
 
Level 2 (2)
 
Level 3
Assets (Liabilities):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
738

 
$
738

 
$
738

 
$

 
$

 
$
738

 
$
738

 
$
738

 
$

 
$

Total debt
(394,887
)
 
(342,487
)
 
(308,850
)
 
(33,637
)
 

 
(391,371
)
 
(391,283
)
 
(362,988
)
 
(28,295
)
 

NEC TOKIN options,
 net (3)
(20,600
)
 
(20,600
)
 

 

 
(20,600
)
 
5,700

 
5,700

 

 

 
5,700

___________________
(1)
Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2)
The valuation approach used to calculate fair value was a discounted cash flow based on the borrowing rate for each respective debt facility.
(3)
See Note 6, Investment in NEC TOKIN, for a description of the NEC TOKIN options (of which the call options expired in the first quarter of fiscal year 2016).  The value of the options depend on the enterprise value of NEC TOKIN Corporation and its forecasted EBITDA over the duration of the options. The options have been valued using option pricing methods in a Monte Carlo simulation.

The table below summarizes NEC TOKIN option valuation activity using significant unobservable inputs (Level 3) (amounts in thousands):
March 31, 2015
$
5,700

Change in value of NEC TOKIN options
(26,300
)
December 31, 2015
$
(20,600
)
 
Inventories
 
Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):
 
December 31, 2015
 
March 31, 2015
Raw materials and supplies
$
81,953

 
$
83,372

Work in process
50,437

 
52,759

Finished goods
59,673

 
53,211

 
192,063

 
189,342

Inventory reserves
(16,985
)
 
(17,499
)
 
$
175,078

 
$
171,843


 
Warrant
 
As of December 31, 2015 and March 31, 2015, 8.4 million shares were subject to the warrant (which expires June 30, 2019) held by K Equity, LLC.
 
Revenue Recognition
 
The Company ships products to customers based upon firm orders and revenue is recognized when the sales process is complete. This occurs when products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred and collectability is reasonably assured. Shipping and handling costs are included in cost of sales. The Company recognizes revenue when title to the products transfers to the customer.
    
A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company's distributor policy includes inventory price protection and "ship-from-stock and debit" ("SFSD") programs common in the industry.
    
KEMET's SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote

10


from their local KEMET sales representative and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
    
Most of the Company's distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed 6% of their purchases from the previous fiscal quarter. KEMET estimates future returns based on historical return patterns and records a corresponding allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company's sales channels.
    
The establishment of sales allowances is recognized as a component of the line item "Net sales" on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company's estimates.

The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1.0% for the quarters and nine month periods ended December 31, 2015 and 2014. The Company recognizes warranty costs when they are both probable and reasonably estimable.

Note 2. Discontinued Operations

The Film and Electrolytic business group ("Film and Electrolytic”) completed the sale of its machinery division in April 2014, which resulted in a gain of $5.6 million on the sale of the business (after income tax expense) partially offset by a loss from machinery operations of $0.3 million during the nine month period ended December 31, 2014 resulting in net income from discontinued operations of $5.4 million.

Net sales and operating income (loss) from the Company’s discontinued operation for the quarters and nine month periods ended December 31, 2015 and 2014 were (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net sales
$

 
$

 
$

 
$
104

Operating income (loss)

 

 

 
(266
)

Note 3. Debt
 
A summary of debt is as follows (amounts in thousands):
 
December 31,
2015
 
March 31,
2015
10.5% Senior Notes, net of premium of $1,906 and $2,461 as of December 31, 2015 and March 31, 2015, respectively
$
356,906

 
$
357,461

Revolving line of credit
37,981

 
33,448

Other

 
462

Total debt
394,887

 
391,371

Current maturities
(5,000
)
 
(962
)
Total long-term debt
$
389,887

 
$
390,409



11


The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters and nine month periods ended December 31, 2015 and 2014, consists of the following (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Contractual interest expense
$
9,761

 
$
9,648

 
$
29,332

 
$
29,212

Capitalized interest
(163
)

(82
)

(439
)

(237
)
Amortization of debt issuance costs
348

 
267

 
1,044

 
1,132

Amortization of debt (premium) discount
(188
)
 
(108
)
 
(554
)
 
(234
)
Imputed interest on acquisition-related obligations
52

 
163

 
159

 
672

Interest expense on capital lease
42

 
50

 
134

 
136

Total interest expense
$
9,852

 
$
9,938

 
$
29,676

 
$
30,681


Revolving Line of Credit

The Company had the following activity for the nine month period ended December 31, 2015 and resulting balances under the revolving line of credit (amounts in millions, excluding percentages):

 
March 31,
2015
 
Nine Month Period Ended December 31, 2015
 
December 31,
2015
 
Outstanding Borrowings
 
Additional Borrowings
 
Repayments
 
Outstanding Borrowings
 
Rate (1) (2)
 
Due Date
U.S. Facility (3)
$
21.5

 
$
8.0

 
$
5.5

 
$
24.0

 
4.750
%
 
December 19, 2019
Singapore Facility
 
 
 
 
 
 
 
 
 
 
 
Singapore Borrowing 1 (4)
12.0

 

 

 
12.0

 
3.000
%
 
February 22, 2016
Singapore Borrowing 2 (4)

 
2.0

 

 
2.0

 
3.125
%
 
April 11, 2016
Total Facilities
$
33.5

 
$
10.0

 
$
5.5

 
$
38.0

 
 
 
 

______________________________________________________________________________
(1) For U.S. borrowings, Base Rate plus 1.50%, as defined in the Loan and Security Agreement dated September 30, 2010, as amended, by and among KEMET Electronics Corporation ("KEC"), KEMET Electronics Marketing (S) Pte. Ltd., KEMET Foil Manufacturing, LLC (“KEMET Foil”), KEMET Blue Powder Corporation (“KEMET Blue Powder”), The Forest Electric Company and the financial institutions party thereto (the “Loan and Security Agreement”).
(2) For Singapore borrowings, London Interbank Offer Rate ("LIBOR"), plus a spread of 2.50% as of December 31, 2015.
(3) The Company plans to repay a portion of the U.S. Facility within a year and has classified $5.0 million as current portion of long-term debt as of December 31, 2015.
(4) The Company has the intent and ability to extend the due date on the Singapore borrowings beyond one year.

As of December 31, 2015, these were the only borrowings under the revolving line of credit, and the Company's available borrowing capacity under the Loan and Security Agreement was $22.0 million. The borrowing capacity has increased due to an improvement in the fixed charged coverage ratio and an increase in the eligible accounts receivable collateral.

10.5% Senior Notes
 
As of December 31, 2015 and March 31, 2015, the Company had outstanding $355 million in aggregate principal amount of the Company’s 10.5% Senior Notes due May 1, 2018 (the “10.5% Senior Notes”).  The Company had interest payable related to the 10.5% Senior Notes included in the line item “Accrued expenses” on its Condensed Consolidated balance sheets of $6.2 million as of December 31, 2015 and March 31, 2015.


12


Note 4. Restructuring Charges
 
KEMET's various restructuring plans to make the Company more competitive by reducing excess capacity, relocating production to lower cost locations and eliminating unnecessary costs throughout the Company are nearing completion.

A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters and nine month periods ended December 31, 2015 and 2014, is as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Personnel reduction costs
$
795

 
$
5,889

 
$
1,905

 
$
7,183

Manufacturing relocation costs
$
919

 
$
174

 
$
1,656

 
$
2,397

Total restructuring charges
$
1,714

 
$
6,063

 
$
3,561

 
$
9,580


Quarter Ended December 31, 2015

The Company incurred $1.7 million in restructuring charges in the quarter ended December 31, 2015 including $0.8 million in personnel reduction costs and $0.9 million in manufacturing relocation costs.

The personnel reduction costs of $0.8 million are due primarily to $0.5 million related to the consolidation of certain Solid Capacitor manufacturing in Victoria, Mexico, $0.1 million for headcount reductions in Matamoros, Mexico related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico, and $0.1 million for overhead reductions in North America and Europe.

The manufacturing relocation costs of $0.9 million are due primarily to $0.9 million related to transfers of Film and Electrolytic production lines to lower cost regions.

Nine Month Period Ended December 31, 2015

The Company incurred $3.6 million in restructuring charges in the nine month period ended December 31, 2015 including $1.9 million of personnel reduction costs and $1.7 million of manufacturing relocation costs.

The personnel reduction costs of $1.9 million are comprised of the following: $0.6 million related to a headcount reduction in Suzhou, China for the Film & Electrolytic production line transfer from Suzhou, China to Anting, China, $0.9 million for headcount reductions in Matamoros, Mexico related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico, $0.5 million related to the consolidation of certain Solid Capacitor manufacturing in Victoria, Mexico, $0.4 million for planned headcount reductions in Europe (primarily Landsberg, Germany) and $0.6 million for headcount reductions related to the outsourcing of the Company's information technology function and overhead reductions in North America and Europe. These personnel reduction costs were partially offset by a $1.2 million reversal of a severance accrual in Italy. The Company originally recorded the accrual in the third quarter of fiscal year 2015 corresponding with a plan to reduce headcount by 50 employees.  Under the plan, 24 employees were terminated. However, due to unexpected workforce attrition combined with achieving other cost reduction goals, the Company decided not to complete the remaining headcount reduction.  Consequently, the Company reversed the remaining accrual during the second quarter of fiscal year 2016.

The Company also incurred $1.7 million of manufacturing relocation costs primarily for transfers of Film and Electrolytic production lines to lower cost regions.

Quarter Ended December 31, 2014

The Company incurred $6.1 million in restructuring charges in the quarter ended December 31, 2014 including $5.9 million of personnel reduction costs due to the following: $4.0 million related to headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines to lower cost regions, $1.4 million for outsourcing of the Company's information technology function and overhead reductions in North America and Europe, and $0.5 million related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico. The Company also incurred $0.2 million of manufacturing relocation costs primarily due to the relocation of equipment to Suzhou, China and Skopje, Macedonia.

13



Nine Month Period Ended December 31, 2014
    
The Company incurred $9.6 million in restructuring charges in the nine month period ended December 31, 2014 including $7.2 million of personnel reduction costs due to the following: $5.2 million related to headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines to lower cost regions, $1.4 million for outsourcing of the Company's information technology function and overhead reductions in North America and Europe, and $0.6 million related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico. The remaining $2.4 million of manufacturing relocation costs was comprised of $1.1 million related to the relocation of equipment to Suzhou, China and Skopje, Macedonia and $1.3 million due to the shut-down of the Tantalum production line in Evora, Portugal.

Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters and nine month periods ended December 31, 2015 and 2014 are as follows (amounts in thousands):
 
Quarter Ended December 31, 2015
 
Quarter Ended December 31, 2014
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
2,279

 
$

 
$
3,026

 
$

Costs charged to expense
795

 
919

 
5,889

 
174

Costs paid or settled
(1,209
)
 
(919
)
 
(1,982
)
 
(174
)
Change in foreign exchange
(43
)
 

 
(207
)
 

End of period
$
1,822

 
$

 
$
6,726

 
$


 
Nine Month Period Ended December 31, 2015
 
Nine Month Period Ended December 31, 2014
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
7,239

 
$

 
$
6,217

 
$

Costs charged to expense
1,905

 
1,656

 
7,183

 
2,397

Costs paid or settled
(7,492
)
 
(1,656
)
 
(6,169
)
 
(2,397
)
Change in foreign exchange
170

 

 
(505
)
 

End of period
$
1,822

 
$

 
$
6,726

 
$


Note 5. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the quarters ended December 31, 2015 and 2014 include the following components (amounts in thousands):
 
Foreign Currency
Translation (1)
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at September 30, 2015
$
(10,733
)
 
$
(19,951
)
 
$
1,080

 
$
(3,069
)
 
$
(2,714
)
 
$
(35,387
)
Other comprehensive income (loss) before reclassifications
(6,121
)
 
6,663

 

 
143

 
(1,096
)
 
(411
)
Amounts reclassified out of AOCI

 
247

 
96

 

 
1,768

 
2,111

Other comprehensive income (loss)
(6,121
)
 
6,910

 
96

 
143

 
672

 
1,700

Balance at December 31, 2015
$
(16,854
)
 
$
(13,041
)
 
$
1,176

 
$
(2,926
)
 
$
(2,042
)
 
$
(33,687
)

14


 
 
Foreign Currency
Translation (3)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at September 30, 2014
$
8,576

 
$
(7,245
)
 
$
1,360

 
$
4,244

 
$

 
$
6,935

Other comprehensive income (loss) before reclassifications
(5,743
)
 

 

 
2,615

 

 
(3,128
)
Amounts reclassified out of AOCI

 
86

 
(36
)
 

 

 
50

Other comprehensive income (loss)
(5,743
)
 
86

 
(36
)
 
2,615

 

 
(3,078
)
Balance at December 31, 2014
2,833

 
$
(7,159
)
 
$
1,324

 
$
6,859

 
$

 
$
3,857


Changes in AOCI for the nine month periods ended December 31, 2015 and 2014 include the following components (amounts in thousands):
 
Foreign Currency
Translation (1)
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at March 31, 2015
$
(12,132
)
 
$
(20,363
)
 
$
1,159

 
$
1,537

 
$
1,003

 
$
(28,796
)
Other comprehensive income (loss) before reclassifications
(4,722
)
 
6,663

 

 
(4,463
)
 
(6,289
)
 
(8,811
)
Amounts reclassified out of AOCI

 
659

 
17

 

 
3,244

 
3,920

Other comprehensive income (loss)
(4,722
)
 
7,322

 
17

 
(4,463
)
 
(3,045
)
 
(4,891
)
Balance at December 31, 2015
$
(16,854
)
 
$
(13,041
)
 
$
1,176

 
$
(2,926
)
 
$
(2,042
)
 
$
(33,687
)
 
 
Foreign Currency
Translation (3)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at March 31, 2014
$
23,335

 
$
(7,386
)
 
$
1,464

 
$
771

 
$

 
$
18,184

Other comprehensive income (loss) before reclassifications
(20,502
)
 

 

 
6,088

 

 
(14,414
)
Amounts reclassified out of AOCI

 
227

 
(140
)
 

 

 
87

Other comprehensive income (loss)
(20,502
)
 
227

 
(140
)
 
6,088

 

 
(14,327
)
Balance at December 31, 2014
2,833

 
$
(7,159
)
 
$
1,324

 
$
6,859

 
$

 
$
3,857


(1)
Due primarily to the Company’s valuation allowance on deferred tax assets, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during the quarter and nine month periods ended December 31, 2015.
(2)
Ending balance is net of tax of $2.2 million as of December 31, 2015 and December 31, 2014.
(3)
Due primarily to the Company’s permanent re-investment assertion relating to foreign earnings, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during the quarter and nine month periods ended December 31, 2014. Subsequent to fiscal year 2014, the Company no longer asserts permanent re-investment of foreign earnings.


15


Note 6. Investment in NEC TOKIN
 
On March 12, 2012, KEC, a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with NEC TOKIN Corporation ("NEC TOKIN"), a manufacturer of tantalum capacitors, electro-magnetic, electro-mechanical and access devices, to acquire 51% of the common stock of NEC TOKIN (which represented a 34% economic interest, as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of outstanding common and convertible preferred shares of NEC TOKIN as of such date) (the "Initial Purchase") from NEC Corporation ("NEC") of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the “Initial Closing”). The Company accounts for its investment in NEC TOKIN using the equity method for a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN. The Company believes that the NEC TOKIN convertible preferred stock represents in-substance common stock of NEC TOKIN and, as a result, its method of calculating KEC’s economic basis in NEC TOKIN is the appropriate basis on which to recognize its share of the earnings or loss of NEC TOKIN.
 
In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with NEC TOKIN and NEC, which provides for restrictions on transfers of NEC TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of NEC TOKIN held by it, certain management services to be provided to NEC TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. KEC holds four of seven NEC TOKIN director positions. However, NEC has significant board rights.
 
Concurrent with execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC, which was amended on August 29, 2014, whereby KEC had the right to purchase additional shares of NEC TOKIN common stock from NEC TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of NEC TOKIN’s common stock (the “First Call Option”) by providing notice of the First Call Option between the Initial Closing and April 30, 2015. Upon providing such First Call Option notice, but not before April 1, 2015, KEC could also have exercised a second option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. The First and Second Call Options expired on April 30, 2015 without being exercised.

From April 1, 2015 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC (the "Put Option"), provided that KEC's payment of the Put Option price is permitted under the 10.5% Senior Notes and Loan and Security Agreement. However, in the event that KEC issues new debt securities principally to refinance its outstanding 10.5% senior notes due 2018 and its currently outstanding credit agreement, including amounts to pay related fees and expenses and to use for general corporate purposes (“Refinancing Notes”), prior to NEC’s delivery of its notification of exercise of the Put Option, then the earliest date NEC may exercise the Put Option is automatically extended to the day immediately following the final scheduled maturity date of such Refinancing Notes, or in the event such Refinancing Notes are redeemed in full prior to such final scheduled maturity date, then on the day immediately following the date of such full redemption, but in any event beginning no later than November 1, 2019. If not previously exercised, the Put Option will expire on October 31, 2023.

The purchase price for the Put Option will be based on the greater of six times LTM EBITDA less previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC as of the date the Put Option is exercised. The purchase price for the Put Option is reduced by the amount of NEC TOKIN’s debt obligation to NEC which KEC will assume. The determination of the purchase price could be modified in the event there is a disagreement between NEC and KEC under the Stockholders’ Agreement.

The Company has marked these options to fair value and in the quarter and nine month periods ended December 31, 2015 recognized a $0.7 million gain and a $26.3 million loss, respectively, which was included on the line item “Change in value of the NEC TOKIN options” in the Condensed Consolidated Statement of Operations. The line item "Other non-current obligations" on the Condensed Consolidated Balance Sheets includes $20.6 million as of December 31, 2015 and the line item “Other assets” on the Condensed Consolidated Balance Sheets includes $5.7 million as of March 31, 2015, related to the respective fair value of the options. The option's valuation changed to a liability position during the nine month period ended December 31, 2015 due to the expiration of the First and Second Call Options on April 30, 2015 without being exercised.


16


KEC's total investment in NEC TOKIN including the net call derivative described above on February 1, 2013, the closing date of the acquisition, was $54.5 million which includes $50 million cash consideration plus approximately $4.5 million in transaction expenses (fees for legal, accounting, due diligence, investment banking and various other services necessary to complete the transactions). The Company has made an allocation of the aggregate purchase price, which was based upon estimates that the Company believes are reasonable.
 
Summarized financial information for NEC TOKIN follows (amounts in thousands):
 
December 31,
2015
 
March 31,
2015
Current assets
$
227,489

 
$
223,495

Non-current assets
255,509

 
273,785

Current liabilities
153,103

 
143,523

Non-current liabilities
296,759

 
296,873


 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Sales
$
111,594

 
$
119,841

 
$
343,686

 
$
371,926

Gross profit
24,610

 
26,162

 
74,333

 
79,227

Net income (loss) (1)
(17,867
)
 
5,628

 
(10,606
)
 
4,928


______________________________________________________________________________
(1) The significant changes between the periods were due to the additional accrual of anti-trust litigation loss recorded during the quarter ended December 31, 2015 see discussion below.


A reconciliation between NEC TOKIN's net income (loss) and KEC's equity investment income (loss) follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
NEC TOKIN net income (loss)
$
(17,867
)
 
$
5,628

 
(10,606
)
 
4,928

KEC's economic interest %
34
%
 
34
%
 
34
%
 
34
%
Equity income (loss) from NEC TOKIN before adjustments
(6,075
)
 
1,914

 
(3,606
)
 
1,676

 


 


 
 
 
 
Adjustments:


 


 
 
 
 
Amortization and depreciation
(494
)
 
(547
)
 
(1,118
)
 
(1,752
)
Inventory profit elimination
64

 

 
(34
)
 

Equity income (loss) from NEC TOKIN
$
(6,505
)
 
$
1,367

 
$
(4,758
)
 
$
(76
)
    

17


A reconciliation between NEC TOKIN's net assets and KEC's investment in NEC TOKIN balance follows (amounts in thousands):
 
December 31,
2015
 
March 31,
2015
Investment in NEC TOKIN
$
35,795

 
$
45,016

Purchase price accounting basis adjustments:
 
 
 
Property, plant and equipment (1)
3,210

 
3,334

Technology (1)
(9,802
)
 
(10,889
)
Long-term debt (1)
(2,056
)
 
(2,707
)
Goodwill
(7,050
)
 
(7,082
)
Indemnity asset for legal investigation
(8,500
)
 
(8,500
)
Inventory profit elimination (2)
242

 
208

Other
(572
)
 
(39
)
KEC's 34% economic interest in NEC TOKIN's net assets
$
11,267

 
$
19,341

(1) Amortized over the estimated lives .
(2) Adjusted each period for any activity.

As of December 31, 2015, KEC’s maximum loss exposure as a result of its investments in NEC TOKIN is limited to the aggregate of the carrying value of the investment and any accounts receivable balance due from NEC TOKIN. 
 
Summarized transactions between KEC and NEC TOKIN are as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
KEC's sales to NEC TOKIN
$
5,020

 
$
3,736

 
$
14,350

 
$
9,624

NEC TOKIN's sales to KEMET
1,157

 
1,077

 
4,747

 
2,194


 
December 31,
2015
 
March 31,
2015
Accounts receivable
$
3,591

 
$
3,344

Accounts payable
408

 
765

Management service agreement receivable (1)
609

 
572


(1) In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement with NEC TOKIN to provide services for which KEC is being reimbursed.

Beginning in March 2014, NEC TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan, South Korea Taiwan, Singapore and Brazil concerning alleged anti-competitive activities within the capacitor industry.  The investigations are continuing at various stages. In addition, beginning in July 2014, NEC TOKIN and its subsidiary, NEC TOKIN America, Inc., have been named, along with more than 20 other capacitor manufacturers and subsidiaries, as defendants in purported antitrust class action suits by direct and indirect purchasers in the United States and Canada. As of March 31, 2015, NEC TOKIN recorded an accrual for approximately $30.0 million based on its estimation of losses likely to result from certain of the investigations. Pursuant to the Stock Purchase Agreement, NEC is required to indemnify NEC TOKIN and/or KEC for any breaches by NEC TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement.  NEC’s aggregate liability for indemnification claims is limited to $25.0 million. Accordingly, KEMET, under equity method accounting, has established an indemnity asset in the amount of $8.5 million (based upon our 34% economic interest in NEC TOKIN). However, pursuant to the Stock Purchase Agreement, claims arising out of fraud or criminal conduct are not limited by the $25.0 million indemnification cap, and for such claims the claimant retains all remedies available in equity or at law. 

On September 2, 2015, the United States Department of Justice announced a plea agreement with NEC TOKIN in which NEC TOKIN agreed to plead guilty to a one-count felony charge of unreasonable restraint of interstate and foreign trade

18


and commerce in violation of Section 1 of the Sherman Act, and to pay a criminal fine of $13.8 million. The plea agreement was approved by the United States District Court, Northern District of California, on January 21, 2016. The fine is payable over five years in six installments of $2.3 million each, plus accrued interest, with the first payment due within 30 days of the court approval.

On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that NEC TOKIN would be fined NT$1,218.2 million for violations of the Taiwan Fair Trade Act. Subsequently, the TFTC has indicated the fine will be reduced to NT$609.1 million (approximately U.S. $18.6 million). Under Taiwan law, validity of fine amounts can be contested via an administrative litigation process.

As of December 31, 2015, NEC TOKIN estimated a range of total losses and determined $49.5 million is the best estimate of losses which may result from the ongoing investigations. However, the actual outcome of these investigations could differ from what has been accrued. In addition, NEC TOKIN cannot estimate total losses which may result from the civil litigation. During the quarter ended December 31, 2015, NEC TOKIN increased the estimated accrual to $49.5 million. Included in the line item "Equity income (loss) from NEC TOKIN" on the Condensed Consolidated Statements of Operations is KEMET's share of this legal accrual based upon its 34% economic interest in NEC TOKIN.

Note 7. Acquisitions

IntelliData
 
On April 1, 2015, KEMET purchased 100% of the stock of IntelliData, Inc. "IntelliData", a Greenwood Village, Colorado-based developer of digital solutions supporting discovery, decision support, and the sales and marketing of electronic components. IntelliData had been a key vendor of KEMET for over 15 years and had provided critical software and support to allow the Company's sales team and customers to use real-time part number search and competitor cross references based on complex capacitor-specific specifications. The primary reason for the purchase of IntelliData was to gain more control over the direction of future iterations of the software and its functionality and to protect this critical link in the sales process from any potential unfavorable changes in IntelliData's business model in the future. The purchase price was $6.0 million plus an additional $0.1 million per a post-acquisition amendment for a total purchase price of $6.1 million, as amended. KEMET paid $3.0 million at closing, $0.1 million on June 3, 2015, and $3.0 million on January 4, 2016 per the amended agreement. The Company recorded goodwill of $4.7 million and amortizable intangibles of $1.8 million. The allocation of the purchase price to specific assets and liabilities was based on the relative fair value of all assets and liabilities. Factors contributing to the purchase price, which resulted in the goodwill, include the knowledge and expertise of the trained workforce as well as various trademarks. Pro forma results are not presented because the acquisition was not material to the consolidated financial statements.

The following table presents the allocations of the aggregate purchase price based on the estimated fair values of the assets and liabilities (amounts in thousands):

 
Fair Value
Cash
$
233

Accounts receivable
10

Other current assets
6

Property, plant and equipment
3

Goodwill
4,710

Intangible assets
1,820

Current liabilities
(9
)
Deferred income taxes
(648
)
Total net assets acquired
$
6,125

    

19


Note 8. Goodwill and Intangible Assets

The following table highlights the Company's intangible assets (amounts in thousands):

 
 
December 31, 2015
 
March 31, 2015
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Accumulated
Amortization
Indefinite Lived Intangible Assets:
 
 
 
 
 
 
 
 
Trademarks
 
$
7,206

 
$

 
$
7,207

 
$

Amortizing Intangibles:
 
 
 
 
 
 
 
 
Purchased technology, customer relationships and patents (3 - 18 years)
 
42,477

 
16,112

 
40,489

 
14,414

 
 
$
49,683

 
$
16,112

 
$
47,696

 
$
14,414



The changes in the carrying amount of goodwill for the nine month period ended December 31, 2015 are as follows (amounts in thousands):
 
 
Corporate (1)
 
Solid Capacitors
 
Film and Electrolytic
Gross balance as of March 31, 2015
 
 
 
 
 
 
Goodwill
 
$

 
$
35,584

 
$
1,092

Accumulated impairment losses
 

 

 
(1,092
)
Net balance as of March 31, 2015
 
$

 
$
35,584


$

 
 
 
 
 
 
 
Goodwill acquired during the year
 
$
4,710

 
$

 
$

Impairment charges
 
$

 
$

 
$

 
 
 
 
 
 
 
Gross balance as of December 31, 2015
 
 
 
 
 
 
Goodwill
 
$
4,710

 
$
35,584


$
1,092

Accumulated impairment losses
 

 


(1,092
)
Net balance as of December 31, 2015
 
$
4,710

 
$
35,584


$


(1) Corporate goodwill established as a result of the IntelliData acquisition on April 1, 2015.


The Company's goodwill balances as of December 31, 2015 and March 31, 2015 were $40.3 million and $35.6 million, respectively. The Company completed its annual impairment test on goodwill and intangible assets with indefinite useful lives as of January 1, 2015 and concluded that goodwill and indefinite-lived assets were not impaired. The Company has initiated the analysis for the January 1, 2016 evaluation which will be completed in March 2016.Due to an indicator of possible impairment related to a decline in our stock price, the Company completed an interim impairment test on goodwill and indefinite-lived intangible assets as of December 31, 2015. Consistent with the policy described in the 2015 Form 10-K, the Company performed Step 1 of the goodwill impairment test using a discounted cash flow analysis to estimate the fair value of the reporting unit. As part of our goodwill impairment test, the Company conducted a review of the Company’s reporting units. Recognizing that KEMET Blue Powder is now fully integrated as the primary supplier of tantalum powder to the tantalum business product line and almost entirely reliant on other facilities within the tantalum product line as both suppliers and customers, the Company used the tantalum product line as the reporting unit for goodwill impairment evaluation purposes. The Company also evaluated the indefinite-lived intangible assets, including trademarks with a carrying value of $7.2 million, associated with the reporting unit for impairment as of December 31, 2015 and concluded goodwill and indefinite-lived assets were not impaired nor were they at risk of failing step 1 of the impairment test as the ratios of fair value of the assets to carrying value were 1.7:1 and 9.6:1 for goodwill and trademarks, respectively. A one percent increase or decrease in the discount rate used in the goodwill valuation would have resulted in changes in the tantalum product line fair value of $(51.5) million and $65.2 million, respectively, and a one percent increase or decrease in the discount rate used in the indefinite-lived

20


assets valuation would have resulted in changes in the trademark fair value of $(7.9) million and $10.0 million, respectively. Neither would have resulted in an impairment charge.

Note 9. Segment and Geographic Information
 
The Company is organized into two business groups: Solid Capacitors and Film and Electrolytic.  The business groups are responsible for their respective manufacturing sites as well as their respective research and development efforts. The Company does not allocate indirect Selling, general and administrative (“SG&A”) or shared Research and development (“R&D”) expenses to the business groups. 
 
Solid Capacitors
 
Operating in nine manufacturing sites in the United States, Mexico and China, Solid Capacitors primarily produces tantalum, aluminum, polymer and ceramic capacitors which are sold globally.  Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors and has a product innovation center in the United States.
 
Film and Electrolytic
 
Operating in ten manufacturing sites throughout Europe, Asia, and the United States, Film and Electrolytic primarily produces film, paper, and electrolytic capacitors which are sold globally. Film and Electrolytic also manufactures etched foils utilized as a core component in the manufacture of electrolytic capacitors. In addition, this business group has product innovation centers in the United Kingdom, Italy, Germany and Sweden.
 
The following table reflects each business group’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the quarters and nine month periods ended December 31, 2015 and 2014 (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net sales:
 

 
 

 
 

 
 

Solid Capacitors
$
135,300

 
$
152,785

 
$
416,261

 
475,594

Film and Electrolytic
41,884

 
48,525

 
134,636

 
153,890

 
$
177,184

 
$
201,310

 
$
550,897

 
$
629,484

Operating income (loss) (1):
 

 
 

 
 

 
 

Solid Capacitors
$
31,359

 
$
38,103

 
$
95,371

 
$
106,223

Film and Electrolytic
(1,770
)
 
(5,137
)
 
1,159

 
(12,130
)
Corporate
(21,096
)
 
(23,664
)
 
(72,807
)
 
(72,627
)
 
$
8,493

 
$
9,302

 
$
23,723

 
$
21,466

Depreciation and amortization expense:
 

 
 

 
 

 
 

Solid Capacitors
$
5,293

 
$
5,014

 
$
16,227

 
$
15,955

Film and Electrolytic
3,031

 
3,321

 
8,901

 
10,339

Corporate
1,350

 
1,385

 
3,728

 
4,400

 
$
9,674

 
$
9,720

 
$
28,856

 
$
30,694

 
__________________

(1)    Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):

21


 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Restructuring charges:
 

 
 

 
 

 
 

Solid Capacitors
$
754

 
$
496

 
$
1,556

 
$
1,895

Film and Electrolytic
987

 
4,496

 
1,524

 
6,485

Corporate
(27
)
 
1,071

 
481

 
1,200

 
$
1,714

 
$
6,063

 
$
3,561

 
$
9,580

___________________
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Sales by region:
 

 
 

 
 

 
 

North and South America (“Americas”)
$
56,411

 
$
63,703

 
$
170,525

 
$
201,852

Europe, Middle East, Africa (“EMEA”)
52,453

 
67,356

 
173,468

 
214,491

Asia and Pacific Rim (“APAC”)
68,320

 
70,251

 
206,904

 
213,141

 
$
177,184

 
$
201,310

 
$
550,897

 
$
629,484


The following table reflects each business group’s total assets as of December 31, 2015 and March 31, 2015 (amounts in thousands):
 
December 31, 2015
 
March 31, 2015
Total assets:
 

 
 

Solid Capacitors
$
425,031

 
$
469,823

Film and Electrolytic
226,606

 
218,858

Corporate
55,338

 
64,111

 
$
706,975

 
$
752,792

 

Note 10.  Defined Benefit Pension and Other Postretirement Benefit Plans
 
The Company sponsors six defined benefit pension plans in Europe, one plan in Singapore and two plans in Mexico.  In addition, the Company sponsors a post-retirement plan in the United States.  Costs recognized for benefit plans are recorded using estimated amounts which may change as actual costs for the fiscal year are determined. In the third quarter ended December 31, 2015, the Company recognized a curtailment as a result of headcount reductions taken as we converted our Landsberg, Germany facility to an innovation center. The curtailment resulted in a $6.7 million decrease in "Other non-current obligations" on the Condensed Consolidated Balance Sheet with the offset in line item "Accumulated other comprehensive income (loss)" on the Condensed Consolidated Balance Sheet.

The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended December 31, 2015 and 2014 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended December 31,
 
Quarters Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net service cost
$
404

 
$
338

 
$

 
$

Interest cost
338

 
478

 
3

 
9

Expected return on net assets
(105
)
 
(124
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
197

 
81

 
(64
)
 
(36
)
Prior service cost
15

 
4

 

 

Total net periodic benefit (income) costs
$
849

 
$
777

 
$
(61
)
 
$
(27
)


22


The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the nine month periods ended December 31, 2015 and 2014 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Nine Month Periods Ended December 31,
 
Nine Month Periods Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net service cost
$
1,514

 
$
1,014

 
$

 
$

Interest cost
1,013

 
1,435

 
14

 
21

Expected return on net assets
(315
)
 
(371
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
591

 
213

 
(143
)
 
(140
)
Prior service cost
44

 
13

 

 

Total net periodic benefit (income) costs
$
2,847

 
$
2,304

 
$
(129
)
 
$
(119
)
    
In fiscal year 2016, the Company expects to contribute up to $1.5 million to the pension plans, $0.9 million of which has been contributed as of December 31, 2015.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred. 

Note 11. Stock-based Compensation
 
The Company’s stock-based compensation plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests. At December 31, 2015, the Company had four stock option plans that reserved shares of common stock for issuance to executives and key employees: the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”) and the 2011 Omnibus Equity Incentive Plan (as amended by the 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan) (the “2011 Incentive Plan”).  Upon adoption and approval of the 2011 Incentive Plan, no further awards were permitted to be granted under the Company's prior plans. The 2011 Incentive Plan authorizes the Company to provide equity-based compensation in the form of: (1) stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code; (2) stock appreciation rights; (3) restricted stock and restricted stock units; (4) other share-based awards; and (5) performance awards. Options issued under these plans vest within one to four years and expire ten years from the grant date. The Company grants restricted stock units to members of the Board of Directors, the Chief Executive Officer and key management. Once vested and settled, restricted stock units are converted into restricted stock. For members of the Board of Directors and senior personnel, such restricted stock cannot be sold until 90 days after termination of service with the Company, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods.
 
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover two year periods and are primarily based upon the achievement of an Adjusted EBITDA target for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or restricted stock units, or a combination of both as determined by the Company’s Board of Directors. The 2013/2014 LTIP, 2014/2015 LTIP, 2015/2016 LTIP, and 2016/2017 LTIP also awarded restricted stock units which vest over the course of three years from the anniversary of the establishment of the plan and are not subject to a performance metric. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. Any related liability is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any restricted stock unit commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.

On June 29, 2015, the Company granted 250,000 shares of restricted stock units ("RSUs") to the Chief Executive Officer. The restricted stock units have a grant date fair value of $2.92 and vest as follows: 35,000 RSUs on March 31, 2017, 40,000 RSUs on March 31, 2018, and the balance of 175,000 RSUs on March 31, 2019. On July 30, 2015, the Company granted 100,000 shares of restricted stock units to a top executive. The RSUs have a grant date fair value of $2.22 and vest as follows: 33,000 RSUs on July 30, 2016, 33,000 RSUs on July 30, 2017, and 34,000 RSUs on July 30, 2018. On July 30, 2015, the Company granted 70,000 shares of restricted stock units to the Board of Directors. The RSUs have a grant date fair value of $2.22 and vest on July 30, 2016. On December 1, 2015, the Company granted 328,500 shares of restricted stock units to certain members of management. The RSUs have a grant date fair value of $2.83 and vest as follows: 108,405 RSUs on December 1, 2016, 108,405 RSUs on December 1, 2017, and 111,690 RSUs on December 1, 2018.


23


Restricted stock activity for the nine month period ended December 31, 2015 is as follows (amounts in thousands except fair value):
 
Shares
 
Weighted-
average
Fair Value on
Grant Date
Non-vested restricted stock at March 31, 2015
1,000

 
$
4.57

Granted
749

 
2.72

Vested
247

 
4.37

Forfeited
9

 
6.10

Non-vested restricted stock at December 31, 2015
1,493

 
3.67

 
The compensation expense associated with stock-based compensation for the quarters ended December 31, 2015 and 2014 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended December 31, 2015
 
Quarter Ended December 31, 2014
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
11

 
$
130

 
$
127

 
$
36

 
$
66

 
$
322

Selling, general and administrative expenses
11

 
340

 
474

 
69

 
230

 
409

Research and development
1