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EX-32.2 - EXHIBIT 32.2 - KEMET CORPkem-fy170630xex322.htm
EX-99.2 - EXHIBIT 99.2 - KEMET CORPkemfy170630ex992.htm
EX-99.1 - EXHIBIT 99.1 - KEMET CORPkemfy170630ex991.htm
EX-32.1 - EXHIBIT 32.1 - KEMET CORPkem-fy170630xex321.htm
EX-31.2 - EXHIBIT 31.2 - KEMET CORPkem-fy170630xex312.htm
EX-31.1 - EXHIBIT 31.1 - KEMET CORPkem-fy170630xex311.htm
EX-10.2 - EXHIBIT 10.2 - KEMET CORPkem-fy170630xex102.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 June 30, 2016 
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 July 29, 2016 was 46,237,429.
 



KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended June 30, 2016
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 10.1
 
Exhibit 10.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 99.1
 
Exhibit 99.2
 
Exhibit 101
 




PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
(Unaudited)
 
 
June 30, 2016
 
March 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
52,938

 
$
65,004

Accounts receivable, net
89,085

 
93,168

Inventories, net
167,916

 
168,879

Prepaid expenses and other
30,925

 
25,496

Total current assets
340,864

 
352,547

Property, plant and equipment, net of accumulated depreciation of $816,331 and $815,338 as of June 30, 2016 and March 31, 2016, respectively
231,688

 
241,839

Goodwill
40,294

 
40,294

Intangible assets, net
32,613

 
33,301

Investment in NEC TOKIN
15,172

 
20,334

Deferred income taxes
7,605

 
8,397

Other assets
2,744

 
3,068

Total assets
$
670,980

 
$
699,780

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$

 
$
2,000

Accounts payable
66,825

 
70,981

Accrued expenses
41,898

 
50,320

Income taxes payable
216

 
453

Total current liabilities
108,939

 
123,754

Long-term debt, less current portion
385,968

 
385,833

Other non-current obligations
84,694

 
74,892

Deferred income taxes
2,984

 
2,820

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 June 30, 2016 and March 31, 2016
465

 
465

Additional paid-in capital
444,772

 
452,821

Retained deficit
(311,845
)
 
(299,510
)
Accumulated other comprehensive income
(43,939
)
 
(31,425
)
Treasury stock, at cost (271 and 611 shares at June 30, 2016 and March 31, 2016, respectively)
(1,058
)
 
(9,870
)
Total stockholders’ equity
88,395

 
112,481

Total liabilities and stockholders’ equity
$
670,980

 
$
699,780


 See accompanying notes to the unaudited condensed consolidated financial statements.

3


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited) 
 
Quarters Ended June 30,
 
2016
 
2015
Net sales
$
184,935

 
$
187,590

Operating costs and expenses:
 

 
 

Cost of sales
142,412

 
147,877

Selling, general and administrative expenses
25,914

 
30,430

Research and development
6,932

 
6,274

Restructuring charges
688

 
1,824

Net (gain) loss on sales and disposals of assets
91

 
(58
)
Total operating costs and expenses
176,037

 
186,347

Operating income (loss)
8,898

 
1,243

Non-operating (income) expense:
 

 
 

Interest income
(3
)
 
(3
)
Interest expense
9,923

 
10,013

Change in value of NEC TOKIN option
12,000

 
29,200

Other (income) expense, net
(2,394
)
 
916

Income (loss) from continuing operations before income taxes and equity income (loss) from NEC TOKIN
(10,628
)
 
(38,883
)
Income tax expense (benefit)
1,800

 
(248
)
Income (loss) from continuing operations before equity income (loss) from NEC TOKIN
(12,428
)
 
(38,635
)
Equity income (loss) from NEC TOKIN
223

 
1,585

Net income (loss)
$
(12,205
)
 
$
(37,050
)
 
 
 
 
Net income (loss) per basic and diluted share
$
(0.26
)
 
$
(0.81
)
 
 
 
 
Weighted-average shares outstanding:
 

 
 

Basic
46,349

 
45,552

Diluted
46,349

 
45,552


See accompanying notes to the unaudited condensed consolidated financial statements.

4


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended June 30,
 
2016
 
2015
Net income (loss)
$
(12,205
)
 
$
(37,050
)
Other comprehensive income (loss):
 


 
Foreign currency translation gains (losses)
(6,386
)
 
5,865

Defined benefit pension plans, net of tax impact
163

 
167

Post-retirement plan adjustments
(42
)
 
(40
)
Equity interest in NEC TOKIN's other comprehensive income (loss)
(5,384
)
 
(932
)
Foreign exchange contracts
(865
)
 
(2,947
)
Other comprehensive income (loss)
(12,514
)
 
2,113

Total comprehensive income (loss)
$
(24,719
)
 
$
(34,937
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.


5


KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended June 30,
 
2016
 
2015
Net income (loss)
$
(12,205
)
 
$
(37,050
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
9,436

 
9,917

Equity (income) loss from NEC TOKIN
(223
)
 
(1,585
)
Non-cash debt and financing costs
190

 
220

Stock-based compensation expense
1,228

 
1,279

Change in value of NEC TOKIN option
12,000

 
29,200

Net (gain) loss on sales and disposals of assets
91

 
(58
)
Pension and other post-retirement benefits
709

 
127

Change in deferred income taxes
1,294

 
(934
)
Change in operating assets
(2,357
)
 
(20,201
)
Change in operating liabilities
(13,088
)
 
(2,673
)
Other
(111
)
 
234

Net cash provided by (used in) operating activities
(3,036
)
 
(21,524
)
Investing activities:
 

 
 

Capital expenditures
(6,167
)
 
(5,773
)
Acquisitions, net of cash received

 
(2,892
)
Net cash provided by (used in) investing activities
(6,167
)
 
(8,665
)
Financing activities:
 

 
 

Proceeds from revolving line of credit

 
8,000

Payments on revolving line of credit

 
(2,500
)
Payments on long-term debt
(1,870
)
 
(481
)
Purchase of treasury stock
(595
)
 
(544
)
Net cash provided by (used in) financing activities
(2,465
)
 
4,475

Net increase (decrease) in cash and cash equivalents
(11,668
)
 
(25,714
)
Effect of foreign currency fluctuations on cash
(398
)
 
411

Cash and cash equivalents at beginning of fiscal period
65,004

 
56,362

Cash and cash equivalents at end of fiscal period
$
52,938

 
$
31,059

 
See accompanying notes to the unaudited condensed consolidated financial statements.


6


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, 2016 (the “Company’s 2016 Annual Report”).
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to current year presentation.  Net sales and operating results for the quarter ended June 30, 2016 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 2016 Annual Report.
 
Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
 
The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.
 
Recently Issued Accounting Pronouncements
 
New accounting standards adopted/issued
 
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation-Stock Compensation. This guidance changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits and Deficiencies, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early application is permitted, and KEMET adopted ASU No. 2016-09 as of April 1, 2016. The Company elected to discontinue estimating forfeitures that are expected to occur and recorded a cumulative effect adjustment to retained earnings for $130,000 as of April 1, 2016. There was no cumulative adjustment related to the excess tax benefits as the Company did not have an additional paid in capital pool of excess tax benefits. The adoption did not have a significant impact to the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early application is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will have on the Company's consolidated financial statements.

In 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

7


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 was effective for interim and annual reporting periods beginning April 1, 2016. The adoption of ASU 2015-11 did not materially impact the Company's 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. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs associated with line-of-credit arrangements that were not specifically addressed in ASU 2015-03. ASU 2015-15 states that entities may elect to continue to treat debt issuance costs associated with lines of credit as an asset, consistent with current treatment. The Company adopted these ASUs in the first quarter of 2017. The ASUs did not impact the Company's results of operations or liquidity. The balance sheet as of March 31, 2016 has been adjusted to reflect retrospective application of the new accounting guidance as follows (amounts in thousands):

 
As Previously Reported
 
Retrospective Adjustment
 
As Adjusted
Other assets
$
5,832

 
$
(2,764
)
 
$
3,068

Total assets
702,544

 
(2,764
)
 
699,780

Long-term debt, less current portion
388,597

 
(2,764
)
 
385,833

Total liabilities and stockholders' equity
702,544

 
(2,764
)
 
699,780


In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern. The new guidance 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. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter; early application is permitted. 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 requires either a retrospective or a modified retrospective approach at adoption. Early adoption is permitted, but not before Company's fiscal year that begins on April 1, 2017 (the original effective date of the ASU). Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:
ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new guidance such that the new provisions will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017 (ASU No. 2015-14 is effective for the Company's fiscal year that begins on April 1, 2018 and interim periods within that fiscal year).
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations (reporting revenue gross versus net).
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements.
ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the implementation guidance in a number of other areas.

The Company is currently in the process of assessing the impact the adoption of the new revenue standards will have on its consolidated financial statements and related disclosures, as well as the available transition methods.

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.


8


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.
 
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and March 31, 2016 are as follows (amounts in thousands):
 
Carrying Value June 30,
 
Fair Value June 30,
 
Fair Value Measurement Using
 
Carrying Value March 31,
 
Fair Value March 31,
 
Fair Value Measurement Using
 
2016
 
2016
 
Level 1
 
Level 2 (2)
 
Level 3
 
2016
 
2016
 
Level 1
 
Level 2 (2)
 
Level 3
Assets (Liabilities):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
739

 
$
739

 
$
739

 
$

 
$

 
$
738

 
$
738

 
$
738

 
$

 
$

Total debt
(385,968
)
 
(366,533
)
 
(337,115
)
 
(29,418
)
 

 
(387,833
)
 
(284,261
)
 
(254,713
)
 
(29,548
)
 

NEC TOKIN option,
 net (3)
(32,600
)
 
(32,600
)
 

 

 
(32,600
)
 
(20,600
)
 
(20,600
)
 

 

 
(20,600
)
___________________
(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 5, Investment in NEC TOKIN, for a description of the NEC TOKIN option.  The value of the option depends on the enterprise value of NEC TOKIN Corporation and its forecasted EBITDA over the duration of the option. The option has 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, 2016
$
(20,600
)
Change in value of NEC TOKIN option
(12,000
)
June 30, 2016
$
(32,600
)
 
Inventories
 
Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):
 
June 30, 2016
 
March 31, 2016
Raw materials and supplies
$
78,936

 
$
80,289

Work in process
48,478

 
46,631

Finished goods
55,697

 
58,060

 
183,111

 
184,980

Inventory reserves
(15,195
)
 
(16,101
)
 
$
167,916

 
$
168,879


 

9


Warrant
 
As of June 30, 2016 and March 31, 2016, 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. Based on product availability, customer requirements and customer consent, the Company may ship products earlier than the initial planned ship date. Shipping and handling costs are included in cost of sales.

A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. The Company recognizes revenue when title to the products transfers to the customer.
    
A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company's distributor policy includes inventory price protection and "ship-from-stock and debit" ("SFSD") programs common in the industry.
    
KEMET's SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
    
Most of the Company's distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed 6% of their purchases from the previous fiscal quarter. KEMET estimates future returns based on historical return patterns and records a corresponding allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company's sales channels.
    
The establishment of sales allowances is recognized as a component of the line item "Net sales" on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company's estimates.

The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1.0% for the quarters ended June 30, 2016 and 2015. The Company recognizes warranty costs when they are both probable and reasonably estimable.


10


Note 2. Debt
 
A summary of debt is as follows (amounts in thousands):
 
June 30,
2016
 
March 31,
2016
10.5% Senior Notes, net (1)
$
352,087

 
$
353,952

Revolving line of credit
33,881

 
33,881

Total debt
385,968

 
387,833

Current maturities

 
(2,000
)
Total long-term debt
$
385,968

 
$
385,833


(1) As noted in Note 1, "Basis of Financial Statements Presentation", ASU No. 2015-03, Interest - Imputation of Interest, was adopted as of April 1, 2016. As such, debt issuance cost, if any, is included within the respective debt balance. Amounts shown are net of premium and debt issuance costs of $0.9 million and $1.0 million as of June 30, 2016 and March 31, 2016, respectively which reduce the 10.5% Senior Notes balance.

The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters ended June 30, 2016 and 2015, consists of the following (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
Contractual interest expense
$
9,710

 
$
9,746

Capitalized interest
(52
)
 

Amortization of debt issuance costs
348

 
348

Amortization of debt (premium) discount
(199
)
 
(181
)
Imputed interest on acquisition-related obligations
41

 
53

Interest expense on capital lease
75

 
47

Total interest expense
$
9,923

 
$
10,013


Revolving Line of Credit

On May 2, 2016, 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”), was amended and, as a result, the revolving credit facility has increased to $65.0 million. The Company had the following activity for the three-month period ended June 30, 2016 and resulting balances under the revolving line of credit (amounts in thousands, excluding percentages):

 
March 31,
2016
 
Three-Month Period Ended June 30, 2016
 
June 30,
2016
 
Outstanding Borrowings
 
Additional Borrowings
 
Repayments
 
Outstanding Borrowings
 
Rate (1) (2)
 
Due Date
U.S. Facility
$
19,881

 
$

 
$

 
$
19,881

 
4.750
%
 
December 19, 2019
Singapore Facility
 
 
 
 
 
 
 
 
 
 
 
Singapore Borrowing 1 (3)
12,000

 

 

 
12,000

 
3.250
%
 
August 22, 2016
Singapore Borrowing 2 (3)
2,000

 

 

 
2,000

 
3.250
%
 
October 11, 2016
Total Facilities
$
33,881

 
$

 
$

 
$
33,881

 
 
 
 

______________________________________________________________________________
(1) For U.S. borrowings, Base Rate plus 1.50%, as defined in the Loan and Security Agreement.
(2) For Singapore borrowings, London Interbank Offer Rate ("LIBOR"), plus a spread of 2.50% as of June 30, 2016.

11


(3) The Company has the intent and ability to extend the due date on the Singapore borrowings.

As of June 30, 2016, 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 $31.1 million. The borrowing capacity has increased primarily due to a $5.0 million increase in the credit facility noted above.

10.5% Senior Notes
 
On May 10, 2016, the Company repurchased and retired $2.0 million of its 10.5% Senior Notes due May 1, 2018 (the "10.5% Senior Notes"). As of June 30, 2016 and March 31, 2016, the Company had outstanding $353.0 million and $355.0 million, respectively in aggregate principal amount of the Company’s 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 and $15.5 million as of June 30, 2016 and March 31, 2016, respectively.

Note 3. 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 ended June 30, 2016 and 2015, is as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
Personnel reduction costs
$
647

 
$
1,544

Manufacturing and sales office relocation costs
$
41

 
$
280

Restructuring charges
$
688

 
$
1,824


Quarter Ended June 30, 2016

The Company incurred $0.7 million in restructuring charges in the quarter ended June 30, 2016 comprised of $0.6 million in personnel reduction costs and $41 thousand in manufacturing relocation costs.

The personnel reduction costs of $0.6 million consist of $0.3 million for overhead reductions in Sweden, $0.2 million related to manufacturing headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines to lower cost regions, and $0.1 million related to the consolidation of certain Solid Capacitor manufacturing in Matamoros, Mexico.

The manufacturing relocation costs of $41 thousand consists of transfers of Film and Electrolytic production lines to lower cost regions.

Quarter Ended June 30, 2015

The Company incurred $1.8 million in restructuring charges in the quarter ended June 30, 2015 comprised of $1.5 million of personnel reduction costs and $0.3 million in manufacturing relocation costs.

The personnel reduction costs of $1.5 million consist of the following: $0.6 million related a headcount reduction in Suzhou, China for the Film & Electrolytic production line transfer from Suzhou, China to Anting, China, $0.5 million for planned headcount reductions in Europe (primarily Landsberg, Germany), $0.2 million for headcount reductions in Matamoros, Mexico related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico, and $0.2 million for headcount reductions related to the outsourcing of the Company's information technology function and overhead reductions in North America and Europe.
    
The Company also incurred $0.3 million of manufacturing relocation costs for transfers of Film and Electrolytic production lines.

12



Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters ended June 30, 2016 and 2015 are as follows (amounts in thousands):
 
Quarter Ended June 30, 2016
 
Quarter Ended June 30, 2015
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
976

 
$

 
$
7,239

 
$

Costs charged to expense
647

 
41

 
1,544

 
280

Costs paid or settled
(523
)
 
(41
)
 
(2,439
)
 
(280
)
Change in foreign exchange
(21
)
 

 
212

 

End of period
$
1,079

 
$

 
$
6,556

 
$


Note 4. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the quarters ended June 30, 2016 and 2015 include the following components (amounts in thousands):
 
Foreign Currency
Translation (1)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at March 31, 2016
$
(10,272
)
 
$
1,114

 
$
(15,161
)
 
$
(6,739
)
 
$
(367
)
 
$
(31,425
)
Other comprehensive income (loss) before reclassifications
(6,386
)
 

 

 
(5,384
)
 
(2,618
)
 
(14,388
)
Amounts reclassified out of AOCI

 
(42
)
 
163

 

 
1,753

 
1,874

Other comprehensive income (loss)
(6,386
)
 
(42
)
 
163

 
(5,384
)
 
(865
)
 
(12,514
)
Balance at June 30, 2016
$
(16,658
)
 
$
1,072

 
$
(14,998
)
 
$
(12,123
)
 
$
(1,232
)
 
$
(43,939
)
 
 
Foreign Currency
Translation
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at March 31, 2015
$
(12,132
)
 
$
1,159

 
$
(20,363
)
 
$
1,537

 
$
1,003

 
$
(28,796
)
Other comprehensive income (loss) before reclassifications
5,865

 

 

 
(932
)
 
(3,512
)
 
1,421

Amounts reclassified out of AOCI

 
(40
)
 
167

 

 
565

 
692

Other comprehensive income (loss)
5,865

 
(40
)
 
167

 
(932
)
 
(2,947
)
 
2,113

Balance at June 30, 2015
(6,267
)
 
$
1,119

 
$
(20,196
)
 
$
605

 
$
(1,944
)
 
$
(26,683
)

(1)
Due primarily to the Company’s valuation allowance on deferred tax assets, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during the quarter ended June 30, 2016.
(2)
Ending balance is net of tax of $2.0 million and $2.3 million as of June 30, 2016 and June 30, 2015, respectively.



13


Note 5. 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.

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 the option to fair value and in the quarter ended June 30, 2016 recognized a $12.0 million loss, which was included on the line item “Change in value of the NEC TOKIN option” in the Condensed Consolidated Statement of Operations. The line item "Other non-current obligations" on the Condensed Consolidated Balance Sheets includes $32.6 million and $20.6 million as of June 30, 2016 and March 31, 2016, respectively, related to the respective fair value of the Put Option.

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

14


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):
 
June 30,
2016
 
March 31,
2016
Current assets
$
247,713

 
$
240,427

Non-current assets
263,824

 
260,614

Current liabilities
178,451

 
179,360

Non-current liabilities
364,926

 
335,500


 
Quarters Ended June 30,
 
2016
 
2015
Sales
$
120,510

 
$
114,734

Gross profit
26,546

 
24,668

Net income (loss)
2,350

 
5,255


A reconciliation between NEC TOKIN's net income (loss) and KEC's equity investment income (loss) follows (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
NEC TOKIN net income (loss)
$
2,350

 
$
5,255

KEC's economic interest %
34
%
 
34
%
Equity income (loss) from NEC TOKIN before adjustments
799

 
1,787

 


 


Adjustments:


 


Amortization and depreciation
(544
)
 
(136
)
Inventory profit elimination
(32
)
 
(66
)
Equity income (loss) from NEC TOKIN
$
223

 
$
1,585

    
A reconciliation between NEC TOKIN's net assets and KEC's investment in NEC TOKIN balance follows (amounts in thousands):
 
June 30,
2016
 
March 31,
2016
Investment in NEC TOKIN
$
15,172

 
$
20,334

Purchase price accounting basis adjustments:
 
 
 
Property, plant and equipment (1)
3,598

 
3,365

Technology (1)
(10,676
)
 
(10,134
)
Long-term debt (1)
(1,910
)
 
(1,975
)
Goodwill
(8,262
)
 
(7,555
)
Indemnity asset for legal investigation
(8,500
)
 
(8,500
)
Inventory profit elimination (2)
403

 
371

Other
(651
)
 
(604
)
KEC's 34% economic interest in NEC TOKIN's net assets
$
(10,826
)
 
$
(4,698
)
(1) Amortized over the estimated lives.
(2) Adjusted each period for any activity.


15


As of June 30, 2016, 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, any accounts receivable balance due from NEC TOKIN and obligations in the Put Option. 
 
Summarized transactions between KEC and NEC TOKIN are as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
KEC's sales to NEC TOKIN
$
3,147

 
$
4,855

NEC TOKIN's sales to KEMET
1,872

 
1,478


 
June 30,
2016
 
March 31,
2016
Accounts receivable
$
2,072

 
$
5,220

Accounts payable
1,250

 
1,019

Management service agreement receivable (1)
693

 
748

(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. 

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 and commerce in violation of Section 1 of the Sherman Act, and to pay a criminal fine of $13.8 million. The plea agreement was approved by the United States District Court, Northern District of California, on January 21, 2016. The fine is payable over five years in six installments of $2.3 million each, plus accrued interest. The first payment was made in February 2016 and the next payment is due in February 2017.

On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that NEC TOKIN would be fined 1,218.2 million New Taiwan dollars ("NTD") (approximately U.S. $37.7 million) for violations of the Taiwan Fair Trade Act. Subsequently, the TFTC has indicated the fine may be reduced to NTD609.1 million (approximately U.S. $18.9 million). In February, 2016, NEC TOKIN commenced an administrative suit in Taiwan, challenging the validity of the amount of the fine.

On March 29, 2016, the Japan Fair Trade Commission published an order by which NEC TOKIN was fined ¥127.2 million (approximately U.S. $1.2 million) for violation of the Japanese Antimonopoly Act. Payment of the fine is due by October 31, 2016.
    
The remaining governmental investigations are continuing at various stages.

On May 2, 2016, NEC TOKIN reached a preliminary settlement in two antitrust suits pending in the United States District Court, Northern District of California as In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD (the “Class Action Suits”). Pursuant to the terms of the settlement, in consideration of the release of NEC TOKIN and its subsidiaries (including NEC TOKIN America, Inc.) from claims asserted in the Class Action Suits, NEC TOKIN will pay an aggregate $37.3 million to a settlement class of direct purchasers of capacitors and a settlement class of indirect purchasers of capacitors. The preliminary settlement was followed by definitive settlement agreements as of July 15, 2016, with the same terms as the preliminary settlement except that the initial installment payment to each class plaintiff is to be made on July 29, 2016, while the terms of the subsequent payments are not changed from the ones of the preliminary settlement, i.e., due each year thereafter for three years, and a final, fifth payment due by December 31, 2019. Both settlements are subject to court approval.

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

16


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.

As of June 30, 2016, NEC TOKIN's accrual for antitrust and civil litigation totaled $81.5 million. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations and civil litigation. However, the actual outcomes could differ from what has been accrued.

Note 6. 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 ended June 30, 2016 and 2015 (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
Net sales:
 

 
 

Solid Capacitors
$
141,944

 
$
139,677

Film and Electrolytic
42,991

 
47,913

 
$
184,935

 
$
187,590

Operating income (loss) (1):
 

 
 

Solid Capacitors
$
35,079

 
$
30,033

Film and Electrolytic
(1,467
)
 
712

Corporate
(24,714
)
 
(29,502
)
 
$
8,898

 
$
1,243

Depreciation and amortization expense:
 

 
 

Solid Capacitors
$
5,418

 
$
5,756

Film and Electrolytic
2,715

 
2,942

Corporate
1,303

 
1,219

 
$
9,436

 
$
9,917

 
__________________


17


(1)    Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
Restructuring charges:
 

 
 

Solid Capacitors
$
136

 
$
232

Film and Electrolytic
549

 
1,286

Corporate
3

 
306

 
$
688

 
$
1,824

___________________
 
Quarters Ended June 30,
 
2016
 
2015
Sales by region:
 

 
 

North and South America (“Americas”)
$
55,101

 
$
56,034

Europe, Middle East, Africa (“EMEA”)
60,486

 
61,557

Asia and Pacific Rim (“APAC”)
69,348

 
69,999

 
$
184,935

 
$
187,590

 
Note 7.  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.

The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended June 30, 2016 and 2015 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended June 30,
 
Quarters Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net service cost
$
347

 
$
717

 
$

 
$

Interest cost
358

 
338

 
4

 
6

Expected return on net assets
(94
)
 
(105
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
115

 
197

 
(42
)
 
(40
)
Prior service cost
21

 
15

 

 

Total net periodic benefit (income) costs
$
747

 
$
1,162

 
$
(38
)
 
$
(34
)

In fiscal year 2017, the Company expects to contribute up to $1.7 million to the pension plans, $0.3 million of which has been contributed as of June 30, 2016.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred. 

Note 8. Stock-based Compensation
 
As of June 30, 2016, the 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan (the “2011 Incentive Plan”), approved by the Company’s stockholders in 2014, is the only plan the Company has to issue equity based awards to executives and key employees. Upon adoption of the 2011 Incentive Plan, no further awards were permitted to be granted under the Company’s prior plans, including the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, and the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”).


18


The 2011 Incentive Plan authorized the grant of up to 7.4 million shares of the Company's Common Stock, comprised of 6.6 million shares under the 2011 Incentive Plan and 0.8 million shares remaining from the Prior Plans and authorizes the Company to provide equity-based compensation in the form of:
stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code;
stock appreciation rights;
restricted stock and restricted stock units ("RSUs");
other share-based awards; and,
performance awards.

Options issued under these plans vest within one to three years and expire ten years from the grant date. The Company grants RSUs to members of the Board of Directors, the Chief Executive Officer and key management. Once vested and settled, RSUs are converted into restricted stock. For members of the Board of Directors and senior personnel, such restricted stock cannot be sold until 90 days after termination of service with the Company, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods.
 
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover two year periods and are primarily based upon the achievement of an Adjusted EBITDA range for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or RSUs, or a combination of both as determined by the Company’s Board of Directors. The 2013/2014 LTIP, 2014/2015 LTIP, 2015/2016 LTIP, 2016/2017 LTIP, and 2017/2018 LTIP also awarded RSUs which vest over the course of three years from the anniversary of the establishment of the plan and are not subject to a performance metric. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. Any related liability is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any restricted stock unit commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.

On May 18, 2016, the Company granted RSUs under the 2017/2018 LTIP with a grant date fair value of $2.46 that vests as follows (amounts in thousands):
 
Shares
May 18, 2017
202

May 18, 2018
202

May 18, 2019
209

Total shares granted
613


The following is the vesting schedule of RSUs under each respective LTIP, which vested during the three-month period ended June 30, 2016 (shares in thousands):
 
 
2016/2017
 
2015/2016
 
2014/2015
Time-based award vested
 
178

 
111

 
118

Performance-based award vested
 

 
103

 
73


Restricted stock activity, excluding the LTIP activity discussed above, for the three-month period ended June 30, 2016 is as follows (amounts in thousands except fair value):
 
Shares
 
Weighted-
average
Fair Value on
Grant Date
Non-vested restricted stock at March 31, 2016
1,430

 
$
3.51

Granted

 

Vested

 

Forfeited

 

Non-vested restricted stock at June 30, 2016
1,430

 
$
3.51


19


 
The compensation expense associated with stock-based compensation for the quarters ended June 30, 2016 and 2015 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended June 30, 2016
 
Quarter Ended June 30, 2015
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
9

 
$
192

 
$
183

 
$
34

 
$
151

 
$
228

Selling, general and administrative expenses
10

 
347

 
427

 
42

 
343

 
458

Research and development

 
6

 
54

 
1

 
5

 
17

Total
$
19

 
$
545

 
$
664

 
$
77

 
$
499

 
$
703


In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Net income (loss) for the quarters ended June 30, 2016, and 2015. No stock options were exercised in the three-month periods ended June 30, 2016 and June 30, 2015.

Note 9. Income Taxes
 
During the quarter ended June 30, 2016, the Company recognized $1.8 million of income tax expense from continuing operations which is comprised of $1.8 million of income tax expense related to foreign operations.

During the quarter ended June 30, 2015, the Company incurred $0.2 million of income tax benefit which is comprised of $0.6 million federal income tax benefit due to the reduction in the U.S. valuation allowance associated with the acquisition of IntelliData, Inc., $0.3 million income tax expense from continuing foreign operations and $0.1 million of state income tax expense.
  
There was no U.S. federal income tax benefit from net operating losses for the quarter ended June 30, 2016 and 2015 due to a valuation allowance recorded on deferred tax assets. 

Note 10. Basic and Diluted Net Income (Loss) Per Common Share
 
The following table presents basic earnings per share ("EPS") and diluted EPS (amounts in thousands, except per share data):
 
Quarters Ended June 30,
 
2016
 
2015
Numerator:
 

 
 

Net income (loss)
$
(12,205
)
 
$
(37,050
)
Denominator:
 

 
 

Weighted-average shares outstanding:
 

 
 

Basic
46,349

 
45,552

Assumed conversion of employee stock grants

 

Assumed conversion of warrants

 

Diluted
46,349

 
45,552

 
 
 
 
Net income (loss) per basic and diluted share
$
(0.26
)
 
$
(0.81
)
 

20


Common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2016
 
2015
Assumed conversion of employee stock grants
2,330

 
2,303

Assumed conversion of warrants
4,853

 
6,015


Note 11: Derivatives
In fiscal year 2015, the Company began using certain derivative instruments (i.e., foreign exchange contracts) to reduce exposure to the volatility of foreign currencies impacting revenues and the costs of its products.
Certain operating expenses at the Company's Mexican facilities are paid in Mexican pesos. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than twelve months, to buy Mexican pesos for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. There were $34.1 million in peso contracts (notional value) outstanding at June 30, 2016.
The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.
The Company records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a net basis, since they are subject to master netting agreements. However, if the Company were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a gross basis, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current net presentation to the gross amounts as detailed in the following table.
The balance sheet classifications and fair value of derivative instruments as of June 30, 2016 are as follows (amounts in thousands):
 
 
Fair Value of Derivative Instruments
 
 
June 30, 2016
Balance Sheet Presentation
 
As Presented (1)
 
Offset
 
Gross
Prepaid and other current assets
 
$

 
$
(38
)
 
$
(38
)
Accrued expenses
 
1,232

 
38

 
1,270

______________________________________________________________________________
(1) Fair Value measured using Level 2 inputs by adjusting the market spot rate by forward points, based on the date of the contract. The spot rates and forward points used are based on an average rate from an actively traded market.
The impact on the Consolidated Statement of Operations for the three-month period ended June 30, 2016 is as follows (amounts in thousands):
Impact of Foreign Exchange Contracts on Condensed Consolidated Statement of Operations
Statement Caption
 
Three-Month Period Ended June 30, 2016
Net Sales
 
$

Operating costs and expenses:
 
 
Cost of sales
 
$
(1,753
)
Total operating costs and expenses
 
$
(1,753
)
Operating income (loss)
 
$
(1,753
)
Unrealized gains and losses associated with the change in value of these financial instruments are recorded in AOCI. Changes in the derivatives' fair values are deferred and recorded as a component of AOCI until the underlying transaction is settled and recorded to the income statement. When the hedged item affects income, gains or losses are reclassified from AOCI

21


to the Consolidated Statement of Operations as Cost of sales for foreign exchange contracts to purchase such foreign currency. Any ineffectiveness, if material, in the Company's hedging relationships is recognized immediately as a loss, within the same income statement accounts as described above; to date, there has been no ineffectiveness. Changes in derivative balances impact the line items "Prepaid and other assets" and "Accrued Expenses" on the Consolidated Balance Sheets and Statements of Cash Flows.

Note 12. Concentrations of Risks
 
The Company sells to customers globally and, as the Company generally does not require collateral from its customers, on a monthly basis the Company evaluates customer account balances in order to assess the Company’s financial risks of collection.  One customer, TTI, Inc., an electronics distributor, accounted for over 10% of the Company’s net sales in the quarters ended June 30, 2016 and 2015.  There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable as of June 30, 2016 and March 31, 2016.
 
Electronics distributors are an important distribution channel in the electronics industry and accounted for 46% and 43% of the Company’s net sales in the three-month periods ended June 30, 2016 and 2015, respectively.  As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand and/or adjust their inventory stocking levels. 

Note 13. Condensed Consolidating Financial Statements
 
The 10.5% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company’s 100% owned domestic subsidiaries (“Guarantor Subsidiaries”) and secured by a first priority lien on 51% of the capital stock of certain of our foreign restricted subsidiaries (“Non-Guarantor Subsidiaries”).  The Company’s Guarantor Subsidiaries and Non-Guarantor Subsidiaries are not consistent with the Company’s business groups or geographic operations; accordingly, this basis of presentation is not intended to present the Company’s financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. The Company is required to present condensed consolidating financial information in order for the subsidiary guarantors of the Company’s public debt to be exempt from reporting under the Securities Exchange Act of 1934, as amended.

 Condensed consolidating financial statements for the Company’s Guarantor Subsidiaries and Non-Guarantor Subsidiaries are presented in the following tables (amounts in thousands):


22


Condensed Consolidating Balance Sheet
June 30, 2016
(Unaudited)

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
640

 
$
22,573

 
$
29,725

 
$

 
$
52,938

Accounts receivable, net

 
33,716

 
55,369

 

 
89,085

Intercompany receivable
30,994

 
169,569

 
160,801

 
(361,364
)
 

Inventories, net

 
110,132

 
57,784

 

 
167,916

Prepaid expenses and other
3,325

 
16,833

 
13,731

 
(2,964
)
 
30,925

Deferred income taxes

 

 

 

 

Total current assets
34,959

 
352,823

 
317,410

 
(364,328
)
 
340,864

Property and equipment, net
244

 
90,226

 
141,218

 

 
231,688

Goodwill

 
40,294

 

 

 
40,294

Intangible assets, net

 
26,861

 
5,752

 

 
32,613

Investment in NEC TOKIN

 
15,172

 

 

 
15,172

Investments in subsidiaries
369,627

 
427,702

 
93,359

 
(890,688
)
 

Deferred income taxes

 
768

 
6,837

 

 
7,605

Other assets

 
2,144

 
600

 

 
2,744

Long-term intercompany receivable
65,822

 
40,397

 
1,089

 
(107,308
)
 

Total assets
$
470,652

 
$
996,387

 
$
566,265

 
$
(1,362,324
)
 
$
670,980

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$

 
$

 
$

 
$

Accounts payable
67

 
34,863

 
31,895

 

 
66,825

Intercompany payable
22,783

 
272,840

 
65,741

 
(361,364
)
 

Accrued expenses
7,320

 
13,042

 
21,536

 

 
41,898

Income taxes payable

 
2,988

 
192

 
(2,964
)
 
216

Total current liabilities
30,170

 
323,733

 
119,364

 
(364,328
)
 
108,939

Long-term debt, less current portion
352,087

 
19,881

 
14,000

 

 
385,968

Other non-current obligations

 
37,296

 
47,398

 

 
84,694

Deferred income taxes

 
2,242

 
742

 

 
2,984

Long-term intercompany payable

 
65,822

 
41,486

 
(107,308
)
 

Stockholders’ equity
88,395

 
547,413

 
343,275

 
(890,688
)
 
88,395

Total liabilities and stockholders’ equity
$
470,652

 
$
996,387

 
$
566,265

 
$
(1,362,324
)
 
$
670,980



23


Condensed Consolidating Balance Sheet (1)
March 31, 2016
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
640

 
$
36,209

 
$
28,155

 
$

 
$
65,004

Accounts receivable, net

 
41,025

 
52,143

 

 
93,168

Intercompany receivable
30,210

 
132,523

 
170,224

 
(332,957
)
 

Inventories, net

 
113,289

 
55,590

 

 
168,879

Prepaid expenses and other
3,325

 
12,161

 
12,974

 
(2,964
)
 
25,496

Total current assets
34,175

 
335,207

 
319,086

 
(335,921
)
 
352,547

Property and equipment, net
255

 
93,936

 
147,648

 

 
241,839

Goodwill

 
40,294

 

 

 
40,294

Intangible assets, net

 
27,252

 
6,049

 

 
33,301

Investment in NEC TOKIN

 
20,334

 

 

 
20,334

Investments in subsidiaries
382,108

 
429,723

 
93,359

 
(905,190
)
 

Deferred income taxes

 
800

 
7,597

 

 
8,397

Other assets

 
2,452

 
616

 

 
3,068

Long-term intercompany receivable
67,500

 
41,428

 
1,088

 
(110,016
)
 

Total assets
$
484,038

 
$
991,426

 
$
575,443

 
$
(1,351,127
)
 
$
699,780

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$
2,000

 
$

 
$

 
$

 
$
2,000

Accounts payable
20

 
34,618

 
36,343

 

 
70,981

Intercompany payable
280

 
275,498

 
57,179

 
(332,957
)
 

Accrued expenses
17,305

 
11,807

 
21,208

 

 
50,320

Income taxes payable

 
2,983

 
434

 
(2,964
)
 
453

Total current liabilities
19,605

 
324,906

 
115,164

 
(335,921
)
 
123,754

Long-term debt, less current portion
351,952

 
19,881

 
14,000

 

 
385,833

Other non-current obligations

 
25,797

 
49,095

 

 
74,892

Deferred income taxes

 
2,242

 
578

 

 
2,820

Long-term intercompany payable

 
67,500

 
42,516

 
(110,016
)
 

Stockholders’ equity
112,481

 
551,100

 
354,090

 
(905,190
)
 
112,481

Total liabilities and stockholders’ equity
$
484,038

 
$
991,426

 
$
575,443

 
$
(1,351,127
)
 
$
699,780


(1) Derived from audited financial statements.

24


Condensed Consolidating Statement of Operations
For the Quarter Ended June 30, 2016
(Unaudited)

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
Net sales
$

 
$
213,513

 
$
170,550

 
$
(199,128
)
 
$
184,935

Operating costs and expenses:
 

 
 

 
 

 
 

 
 

Cost of sales
277

 
167,103

 
161,230

 
(186,198
)
 
142,412

Selling, general and administrative expenses
10,145

 
17,489

 
11,210

 
(12,930
)
 
25,914

Research and development
65

 
4,375

 
2,492

 

 
6,932

Restructuring charges

 
139

 
549

 

 
688

Net (gain) loss on sales and disposals of assets

 
388

 
(297
)
 

 
91

Total operating costs and expenses
10,487

 
189,494

 
175,184

 
(199,128
)
 
176,037

Operating income (loss)
(10,487
)
 
24,019

 
(4,634
)
 

 
8,898

Non-operating (income) expense:
 
 
 
 
 
 
 
 
 
Interest income

 
3

 
(6
)
 

 
(3
)
Interest expense
9,423

 
399

 
101

 

 
9,923

Change in value of NEC TOKIN option

 
12,000

 

 

 
12,000

Other (income) expense, net
(9,350
)
 
9,416

 
(2,460
)
 

 
(2,394
)
Equity in earnings of subsidiaries
1,645

 

 

 
(1,645
)
 

Income (loss) from continuing operations before income taxes and equity income (loss) from NEC TOKIN
(12,205
)
 
2,201

 
(2,269
)
 
1,645

 
(10,628
)
Income tax expense (benefit)

 
38

 
1,762

 

 
1,800

Income (loss) from continuing operations before equity income (loss) from NEC TOKIN
(12,205
)
 
2,163

 
(4,031
)
 
1,645

 
(12,428
)
Equity income (loss) from NEC TOKIN

 
223