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EX-31.1 - EXHIBIT 31.1 - KEMET CORPfy2018_q4x10kxex311.htm
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EX-23.1 - EXHIBIT 23.1 - KEMET CORPfy2018_q4x10kxex231.htm
EX-32.1 - EXHIBIT 32.1 - KEMET CORPfy2018_q4x10kxex321.htm
EX-32.2 - EXHIBIT 32.2 - KEMET CORPfy2018_q4x10kxex322.htm
EX-21.1 - EXHIBIT 21.1 - KEMET CORPfy2018_q4x10kxex211.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2018
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
(State or other jurisdiction of
incorporation or organization)
 
57-0923789
(I.R.S. Employer
Identification No.)
 
 
 
101 NE 3rd Avenue, Suite 1700, Fort Lauderdale, Florida
(Address of principal executive offices)
 
33301
(Zip Code)
Registrant’s telephone number, including area code: (954) 766-2800
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)                (Name of Exchange on which registered)
Common Stock, par value $0.01                New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated filer ý
 
Accelerated filer o
 
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
 
Smaller reporting company o
 
Emerging growth company o
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.         o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
The aggregate market value of voting common stock held by non-affiliates of the registrant as of September 30, 2017 computed by reference to the closing sale price of the registrant’s common stock was approximately $1,164,758,499.
The number of shares of each class of common stock, $0.01 par value, outstanding as of May 18, 2018 was 56,944,132.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held July 25, 2018 are incorporated by reference into Part III of this report.



Table of Contents
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 









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PART I
ITEM 1.    BUSINESS
Background of Company
KEMET Corporation (“we,” “us,” “our,” “KEMET” and the “Company”), is a global manufacturer of passive electronic components. We first began manufacturing tantalum capacitors in 1958 as a division of Union Carbide Corporation (“UCC”) and became a stand-alone legal entity in 1990 following a management buyout from UCC. In 1992, we publicly issued shares of our common stock. Since then, we have made the following acquisitions:
Business Segment
Fiscal Year
Business
Solid Capacitors Segment (“Solid Capacitors”)
2007
Tantalum Business Unit of EPCOS AG
Film and Electrolytic Segment (“Film and Electrolytic”)
2008
Evox Rifa Group Oyj
Film and Electrolytic
2008
Arcotronics Italia S.p.A.
Film and Electrolytic
2012
Cornell Dubilier Foil, LLC (renamed KEMET Foil Manufacturing, LLC (“KFM”))
Solid Capacitors
2012
Niotan Incorporated (renamed KEMET Blue Powder Corporation (“KBP”))
Corporate
2013
34% economic interest in TOKIN Corporation (“TOKIN”) (1)
Corporate
2016
IntelliData, Inc. (“IntelliData”)
Solid Capacitors and Electro-Magnetic, Sensors, and Actuators Segment ("MSA")
2018
TOKIN (1)
    
______________________________________________________________________________
(1) In fiscal year 2013, our subsidiary, KEMET Electronics Corporation (“KEC”) acquired a 34% economic interest in TOKIN as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of TOKIN outstanding as of such date. The Company accounted for its investment in TOKIN using the equity method for a non-consolidated variable interest entity since KEC did not have the power to direct significant activities of TOKIN. KEMET entered into a Definitive NEC TOKIN Stock Purchase Agreement (the “TOKIN Purchase Agreement”) with NEC Corporation (“NEC”), to acquire all of the outstanding shares of common stock and preferred stock of TOKIN not already held by KEMET. The transaction closed on April 19, 2017 and on that date TOKIN became a 100% indirect owned subsidiary of KEMET.
Through the above acquisitions and organic growth we have expanded our product base to include multilayer ceramic, solid and electrolytic aluminum and film capacitors, and electro-magnetic, sensors, and actuators.
General
We compete in the passive electronic component industry, specifically multilayer ceramic, tantalum, film and aluminum (solid and electrolytic) capacitors, and Electro-Magnetic Compatible ("EMC") devices, sensors, and actuators. Product offerings include surface mount, which are attached directly to the circuit board; leaded capacitors, which are attached to the circuit board using lead wires; and chassis-mount and other pin-through-hole board-mount capacitors, which utilize attachment methods such as screw terminal and snap-in. Capacitors are electronic components that store, filter, and regulate electrical energy and current flow. As an essential passive component used in nearly all circuit boards, capacitors are typically used for coupling, decoupling, filtering, oscillating and wave shaping and are used in communication systems, servers, personal computers, tablets, cellular phones, automotive electronic systems, defense and aerospace systems, consumer electronics, power management systems and many other electronic devices and systems (basically anything that plugs in or has a battery).
Our product line consists of many distinct part configurations distinguished by various attributes, such as dielectric (or insulating) material, configuration, encapsulation, capacitance (at various tolerances), voltage, performance characteristics and packaging. Most of our customers have multiple capacitance requirements, often within each of their products. Our broad product offering allows us to meet the majority of those needs independent of application and end use.
We believe the long-term demand for the various types of capacitors we offer will grow on a regional and global basis due to a variety of factors, including increasing demand for and complexity of electronic products, growing demand for technology in emerging markets and the ongoing development of new solutions for energy generation and conservation. Our customer base includes most of the world’s major electronics original equipment manufacturers (“OEMs”), electronics manufacturing services providers (“EMSs”) and distributors listed below.


4






Major OEMs:
Bosch Group, Cisco Systems Inc., Continental AG, Delphi Technologies PLC, Tesla Inc. and Denso in the automotive segment.
Apple Inc., Western Digital Corporation, Dell Inc., Nintendo and Google LLC in the Computer and consumer segment.
ABB Group, Terumo Corporation, Horiba and Schlumberger in the industrial and alternative energy segment.
Major EMSs:
Flex Ltd, Jabil Circuit Inc., Celestica Inc and Sanmina-SCI Corporation
Major Distributors:
TTI, Inc., Arrow Electronics, Inc. and Avnet, Inc.
Solid Capacitors products are commonly used in conjunction with integrated circuits, and the same circuit may, and frequently does, contain both ceramic and tantalum capacitors. Tantalum capacitors are a popular choice because of their ability for high capacitance in a small volume package. While ceramic capacitors are more cost-effective at lower capacitance values, tantalum capacitors are more cost-effective at higher capacitance values while solid aluminum capacitors can be more effective in special applications.
Film, paper and aluminum electrolytic capacitors can be used to support integrated circuits, but also are used in the field of power electronics to provide energy for applications such as motor starts, power conditioning, electromagnetic interference filtering safety and inverters. Capacitors account for the largest market within the passive component product grouping.
The acquisition of TOKIN (the "TOKIN Acquisition") allowed the Company entry into EMC devices and sensor and actuator markets. The EMC business offers a broad line of electrical noise management products. As circuits become more complex within a device, and the amount of information being communicated between devices increases at a dramatic rate, the quality of electronic signals becomes key to the integrity of the information being communicated. TOKIN EMC products play a key role in maintaining signal integrity across a number of end markets including telecommunications, mobile computing, automotive and general industries. The sensor and actuator business manufactures products that sense and respond to human activity, physical vibration, and electric current. These products are found in home appliances, consumer devices and industrial electrical equipment.
Our Industry
We compete with others that manufacture and distribute capacitors both domestically and globally and our success in the market is influenced by many factors, including price, availability, engineering specifications, quality and breadth of offering, performance characteristics, customer service and geographic location of our manufacturing sites. As in all manufacturing industries, there is ongoing pressure on average unit selling prices for capacitors. To help mitigate this effect, KEMET, as well as many of our larger competitors, have relocated their manufacturing operations to low cost regions and locations in closer proximity to our respective customers.
Because capacitors are a fundamental component of electronic circuits, demand for capacitors tends to reflect the general demand for electronic products, as well as integrated circuits, which, though cyclical, continues to grow. We believe growth in the electronics market and the resulting growth in demand for capacitors will be driven primarily by a number of recent trends which include:
the development of new products and applications, such as alternative and renewable energy systems, hybrid transportation systems, electronic controls for engines and industrial machinery, smart phones and mobile personal computing devices;
the “internet-of-things” products;
the next generation of automotive electronics to support advance driver assistance systems, as well as the connected car;
the increase in the electronic content of existing products, such as home appliances and medical equipment;
consumer desire for mobility and connectivity; and
the enhanced functionality, complexity and convergence of electronic devices that use state-of-the-art microprocessors.

5






The acquisition of TOKIN increases our market opportunity through the EMC devices and sensor and actuator markets.
Markets and Customers
Our products are sold to a variety of OEMs in a broad range of industries including the computer, communications, automotive, military, consumer, industrial and aerospace industries. We also sell products to EMS providers, which serve OEMs in these industries. Electronics distributors are an important channel of distribution in the electronics industry and represent the largest channel through which we sell our capacitors. One electronics distributor, TTI, Inc., accounted for over 10% of our net sales in fiscal years 2018, 2017 and 2016. If our relationship with this customer were to terminate, we would need to determine alternative means of delivering our products to the end-customers served by them. In addition, an aggregate of over 10% of our net sales in fiscal year 2018 were driven by sales to EMS providers for incorporation into Apple Inc. products.
While we are seeing a merging of major segments as connectivity and “internet-of-things” grow, the following table presents an overview of the diverse industries that incorporate our capacitors into their products and the general nature of those products.
Industry
 
Products
Automotive
 
Adaptive cruise control, High intensity discharge headlamps, Light emitting diode electronic modules, Lane departure warning, Camera systems, Audio systems, Tire pressure monitoring, Power train electronics, Instrumentation, Airbag systems, Anti-lock braking and stabilization systems, Hybrid and electric drive vehicles, Electronic engine control modules, Driver comfort controls, Security systems, Radar, Connectivity systems and Advance driver assistance gear
Communications
 
Smart phones, Telephones, Switching equipment, Relays, Base stations, and Wireless infrastructure
Computer-related
 
Personal computers (laptops, tablets, notebooks), Workstations, Servers, Mainframes, Computer peripheral equipment, Power supplies, Solid state drives, and Local area networks
Industrial
 
Electronic controls, Measurement equipment, Instrumentation, Solar and wind energy generation, Down-hole drilling and Medical electronics
Consumer
 
Digital media devices, Game consoles, Televisions, Audio devices, and Global positioning systems
Military/Aerospace
 
Avionics, Radar, Guidance systems, and Satellite communications
Alternative Energy
 
Wind generation systems, Solar generation systems, Geothermal generation systems, Tidal generation systems and Electric drive vehicles
We produce a small percentage of capacitors under military specification standards sold for both military and commercial uses. We do not sell any capacitors directly to the United States government. Certain of our customers purchase capacitors for products in the military and aerospace industries.
It is impracticable to report revenues from external customers for each of the above noted products primarily because approximately 39.2% of our external sales were to electronics distributors for fiscal year 2018.
TOKIN increases our position in the following industries that incorporate EMC devices, sensors, and actuators into their products:
Industry
 
Products
Telecom Infrastructure
 
Switching equipment, Base stations, and Wireless infrastructure
Gaming
 
Consoles, Displays, Power management
Consumer
 
Battery chargers/AC adapters, Power supply, Refrigerators, Inductive cooking and Air conditioning
Automotive
 
Infotainment and Power supply
Medical
 
Test and Diagnostic
Industrial
 
Semiconductor producing equipment and Measurement equipment

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KEMET in the United States
Our corporate headquarters is located in Fort Lauderdale, Florida.
Commodity manufacturing previously located in the United States has been substantially relocated to our lower-cost manufacturing facilities in Mexico, China and Europe. Production remaining in the United States focuses primarily on early-stage manufacturing of new products and other specialty products for which customers are predominantly located in North America.
On February 21, 2012, we completed the acquisition of all of the outstanding shares of Blue Powder, a leading manufacturer of tantalum powders. Blue Powder had been a significant supplier of tantalum powder to KEMET for several years. KBP's principal operating location is in Carson City, Nevada. Over the next several quarters, the Company will modify its vertical integration strategy by relocating its tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant.
To accelerate the pace of innovations, KEMET maintains an Innovation Center for Solid Capacitors near Greenville, South Carolina. The primary objectives of the KEMET Innovation Center are to ensure the flow of new product platforms, material sets, and processes that are expected to keep us at the forefront of our customers’ product designs, while enabling these products to be transferred rapidly to the most appropriate KEMET manufacturing location in the world for low-cost, high-volume production.
KEMET in Mexico
We believe our operations in Mexico are among the most cost efficient in the world, and we expect they will continue to be our primary production facilities supporting North American and European customers for Solid Capacitors. One of the strengths of KEMET Mexico is that it is a local operation, including local management and workers. These facilities are responsible for maintaining KEMET’s tradition of excellence in quality, service, and delivery, while driving costs down. The facilities in Victoria and Matamoros are focused primarily on tantalum capacitors, while the facilities in Monterrey are focused on ceramic capacitors.
KEMET in Asia Pacific
We have a well-established manufacturing, sales and logistics network in Asia to support our customers’ Asian operations. We currently manufacture tantalum and aluminum polymer and electrolytic products in China. In addition, as a result of the acquisition of TOKIN on April 19, 2017, we manufacture electromagnetic compatibility and sensor and actuator products in China, Japan and Vietnam and tantalum capacitors in Thailand and Japan. The vision for KEMET's foreign subsidiaries is for them to be primarily local operations, with local management and workers, to help achieve our objective of being a global company. These facilities are responsible for maintaining our tradition of excellence in quality, service, and delivery, while accelerating cost-reduction efforts and supporting efforts to grow our customer base in Asia. In addition, we operate one innovation center for Solid Capacitors and two innovation centers for MSA in Japan.
KEMET in Europe
We currently have one or more manufacturing locations in each of the following countries: Bulgaria, Finland, Italy, Macedonia, Portugal, and Sweden. In addition, we operate product innovation centers in Italy, Portugal and Sweden. We continue to maintain and enhance our strong European sales and customer service infrastructure, allowing us to continue to meet the local preferences of European customers who remain an important focus for KEMET.
Global Sales and Logistics
KEMET serves the needs of our global customer base through four geographic regions: North America and South America (“Americas”), Europe, the Middle East and Africa (“EMEA”), Asia and the Pacific Rim (“APAC”) and Japan and Korea ("JPKO"). We also have independent sales representatives located in several countries worldwide including: Brazil, Israel, Canada, and the United States.
In our major markets, we market and sell our products primarily through a direct sales force. With a global sales organization that is customer-focused, our direct sales personnel from around the world serve on KEMET Global Account Teams committed to serving any customer location in the world with a dedicated KEMET representative. The traditional sales team is supported by regional Field Application Engineers who are experts in electronic engineering and market all of KEMET’s products by assisting customers with the resolution of capacitor application issues. We believe our direct sales force creates a distinct advantage in the marketplace by enabling us to establish and maintain strong relationships with our customers to efficiently process simple repeat business as well as to consult with customers on new and technically complex custom applications. In addition, where appropriate, we use independent commissioned representatives. This approach requires a blend

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of accountability and responsibility for specific customer locations, guided by an overall account strategy for each customer. Our sales team works with the customers throughout the entire purchasing process, following opportunities as they progress through concept, design, validation and, finally, mass production. In Japan, we market and sell directly and through manufacturers agents, who sell exclusively for KEMET or TOKIN, and do not carry competitor products. These manufacturers agents create unique custom solutions integrating our products which help pull our products though the channel.
Electronics distributors are an important distribution channel in the electronics industry and accounted for 39.2%, 46.8%, and 41.9% of our net sales in fiscal years 2018, 2017 and 2016, respectively. A portion of our net sales to distributors are made under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. In addition, our distributor policy includes inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.
Sales by Geography
In fiscal years 2018 and 2017, net sales by region were as follows (dollars in thousands):
 
 
Fiscal Year 2018
 
 
 
Fiscal Year 2017
 
 
Net Sales
 
% of
Total
 
 
 
Net Sales
 
% of
Total
APAC
 
$
479,987

 
40.0
%
 
APAC
 
$
288,764

 
38.1
%
EMEA
 
277,643

 
23.1
%
 
EMEA
 
237,890

 
31.4
%
Americas
 
259,105

 
21.6
%
 
Americas
 
224,056

 
29.6
%
JPKO
 
183,191

 
15.3
%
 
JPKO
 
7,081

 
0.9
%
Total
 
$
1,199,926

 
 
 
Total
 
$
757,791

 
 
We believe our regional balance of revenues is a benefit to our business. The geographic diversity of our net sales diminishes the impact of regional sales decreases caused by various holiday seasons. The Americas remains the leading region in the world for product design in activity where engagement with OEM design engineers determines product placement independent of the region of the world where the final product is manufactured. Please see Note 7, “Segment and Geographic Information” to our consolidated financial statements.
Inventory and Backlog
Our customers often encounter uncertain or changing demand for their products. They historically order products from us based on their forecast and if demand does not meet their forecasts, they may cancel or reschedule the shipments included in our backlog, in many instances without penalty. Additionally, many of our customers have started to require shorter lead times and “just in time” delivery. Consequently, the twelve month order backlog is not a meaningful trend indicator for us.
The Company is currently at or near sales capacity for many products. Although we manufacture and inventory standardized products, a portion of our products are produced to meet specific customer requirements. Cancellations by customers of orders already in production could have an impact on inventories. Historically, however, cancellations have not been significant.
Competition
The capacitor industry is characterized by, among other factors, a long-term trend toward lower prices, low transportation costs, and few import barriers. Competitive factors influencing the market for our products include: product quality, customer service, technical innovation, pricing, and timely delivery. We believe we compete favorably on the basis of each of these factors.
Our major global competitors in the passive electronic component industry include AVX Corporation, Coilcraft Inc., Elna Co., Ltd., Panasonic Corporation, Littelfuse, Inc., Murata Manufacturing Co., Ltd., Samsung, Taiyo Yuden Co., Ltd., Schaffner Group, TDK-EPC Corporation, WIMA GmbH and Co., KG, Vishay Intertechnology, Inc. (“Vishay”) and 3M Company.
Raw Materials
The principal raw materials used in the manufacture of our products are tantalum powder, tantalum ore, palladium, aluminum, silver, copper, nickel and tin. These materials are considered commodities and are subject to price volatility. Additionally, any delays in obtaining raw materials for our products could hinder our ability to manufacture our products, negatively impacting our competitive position and our relationships with our customers.

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Tantalum is mined principally in the Democratic Republic of Congo, Australia, Brazil, Canada, Mozambique and Rwanda. As a result of our tantalum vertical integration program which began in fiscal year 2012, we have reduced our exposure to price volatility and supply uncertainty in the tantalum supply chain. A majority of our tantalum needs are now met through our direct sourcing partners of conflict free tantalum ore or tantalum scrap reclaim, which is then processed into the intermediate product potassium heptafluorotantalate (commonly known as K-salt) at our own facility in Mexico or at third party locations, before final processing into tantalum powder at KBP. Price increases for tantalum ore, or for the remaining tantalum powder that we source from third parties, could impact our financial performance as we may not be able to pass all such price increases on to our customers.
Silver and aluminum have generally been available in sufficient quantities, and we believe there are a sufficient number of suppliers from which we can purchase our requirements. An increase in the price of silver and aluminum that we are unable to pass on to our customers, could, however, have an adverse effect on our profitability.
Patents and Trademarks
As of March 31, 2018, we held the following number of patents and trademarks:
 
 
Patents
 
Trademarks
United States
 
313

 
18

Foreign
 
1,006

 
259

Many of our patents and trademarks were obtained as part of the TOKIN acquisition. We believe the success of our business is not materially dependent on the existence or duration of any individual patent, license, or trademark other than the trademarks “KEMET,” “KEMET Charged,” and "TOKIN". Our engineering and research and development staffs have developed and continue to develop proprietary manufacturing processes and equipment designed to enhance our manufacturing facilities and reduce costs.
Research and Development
Research and development expenses were $39.6 million, $27.4 million and $24.6 million for fiscal years 2018, 2017 and 2016, respectively. These amounts include expenditures for product development and the design and development of machinery and equipment for new processes and cost reduction efforts. We continue to invest in new technology to improve product performance and production efficiencies.
Segment Reporting
We are organized into three segments: Solid Capacitors, Film and Electrolytic and Electro-Magnetic, Sensors, and Actuators. Each segment is responsible for the operations of certain manufacturing sites as well as all related research and development efforts. The sales, marketing and corporate functions are shared by each of the segments. See Note 7, “Segment and Geographic Information” to our consolidated financial statements for other information regarding the Company, including net sales, operating income (loss), total assets, and financial information about geographic areas.
Solid Capacitors Segment
Solid Capacitors operates in ten manufacturing sites in the United States, Mexico and Asia and operates innovation centers in the United States and Japan. Solid Capacitors primarily produces tantalum, aluminum, polymer and ceramic capacitors which are sold globally. Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors. Solid Capacitors employs approximately 8,150 employees worldwide. For fiscal years 2018, 2017 and 2016, Solid Capacitors had consolidated net sales of $771.2 million, $575.1 million and $556.3 million, respectively.
We continue to make significant investments in tantalum production within Solid Capacitors and, based on net sales, we believe we are the largest tantalum capacitor manufacturer in the world. We believe we have one of the broadest lines of tantalum product offerings and are one of the leaders in the growing market for high-frequency surface mount tantalum and aluminum polymer capacitors. On February 21, 2012, we acquired KBP which we believe is the largest production facility for tantalum powder in the western hemisphere. The Company continues to streamline its vertical integration strategy and may take actions to improve the cost structure if the anticipated results are advantageous. The Company is in the process of relocating its tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant.
Our tantalum product line is broad product portfolio, industry leading process and materials technology, global manufacturing base and on-time delivery capabilities allow us to serve a wide range of customers in a diverse group of end markets, including computing, telecommunications, consumer, medical, military, automotive and general industries.

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Our ceramic product line offers an extensive line of multilayer ceramic capacitors in a variety of sizes and configurations. We are one of the two leading ceramic capacitor manufacturers headquartered in the United States and among the ten largest manufacturers worldwide.
Our ceramics product line is high temperature and capacitance stable product lines provide us with what we believe to be a significant advantage over many of our competitors, especially in high reliability markets, such as medical, industrial, defense and aerospace. Our other significant end-markets include computing, telecommunications, automotive and general industries.
Film and Electrolytic Segment
Our Film and Electrolytic Segment produces film, paper and wet aluminum electrolytic capacitors. In addition, the segment designs and produce electromagnetic interference filters ("EMI filters"). Film capacitors can be used for applications requiring high power and high voltages. Whereas aluminum electrolytic capacitors can be used for applications requiring high energy at a reasonable price. EMI filters consist of capacitive and inductive elements that reduce electromagnetic disturbance in the frequency range desired. We believe we are one of the world’s largest suppliers of film capacitors and one of the leaders in wet aluminum electrolytic capacitors. Both product families serve industrial and automotive customers, and in particular, the emerging market for alternative energy and electrical vehicles. For fiscal years 2018, 2017, and 2016, our Film and Electrolytic segment had consolidated net sales of $201.7 million, $182.7 million, and $178.5 million, respectively. Our Film and Electrolytic business is concentrated in Europe, and as such, is impacted by the change in the exchange rate for the Euro to the U.S. dollar.
Our Film and Electrolytic Segment primarily serves the industrial and automotive markets. We believe our Film and Electrolytic Segment’s product portfolio, technology and experience allow us to significantly benefit from the continued growth in alternative energy solutions and energy efficiency solutions within both the automotive and industrial markets especially for demanding applications such as humidity, temperature, voltage, etc. We operate ten manufacturing sites throughout Europe and Asia and maintain product innovation centers in Italy, Portugal and Sweden. Our Film and Electrolytic Segment employs approximately 1,750 employees worldwide.
Electro-Magnetic, Sensors, and Actuators Segment
MSA operates in four manufacturing sites throughout Asia and operates a product innovation center in Japan. MSA is a new segment for KEMET in fiscal year 2018 resulting from the acquisition of TOKIN in April 2017. MSA primarily produces EMC materials and devices, piezo materials and actuators and various types of sensors which are sold globally. For the fiscal year 2018, our Electro-Magnetic, Sensors, and Actuators Segment had consolidated net sales of $227.0 million. Our MSA business is concentrated in Japan and Korea. Our MSA segment employs approximately 3,450 employees worldwide.
The EMC device product line offers a broad line of electrical noise management products. As circuits become more complex within a device, and the amount of information being communicated between devices increases at a dramatic rate, the quality of electronic signals becomes key to the integrity of the information being communicated. EMC products play a key role in maintaining signal integrity across a number of end-markets including telecommunications, mobile computing, automotive and general industries.
The sensor and actuator product line manufactures products that sense and respond to human activity, physical vibration, and electric current. These products are found in home appliances, consumer devices industrial electrical equipment. In addition, we manufacture electromechanical actuation devices that are critical to the manufacture of semiconductor devices and the management of industrial and chemical gas flow. Sensors are an important family of devices as the “internet-of-things” continues to permeate everyday life.
Environmental and Regulatory Compliance
We are subject to various North American, European, and Asian national, state, and local environmental laws and regulations relating to the protection of the environment, including those governing the handling and management of certain chemicals and materials used and generated in manufacturing electronic components. Based on the annual costs incurred over the past several years, we do not believe compliance with these laws and regulations will have a material adverse effect on our capital expenditures, earnings, or competitive position. We believe, however, it is reasonably likely the trend in environmental litigation, laws, and regulations will continue to be toward stricter standards. Such changes in the laws and regulations may require us to make additional capital expenditures which, while not currently estimable with certainty, are not presently expected to have a material adverse effect on our financial condition.
We are strongly committed to economic, environmental, and socially sustainable development. As a result of this commitment, in 2008 we adopted the Electronic Industry Citizenship Coalition (“EICC”) Code of Conduct, now titled

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Responsible Business Alliance ("RBA") Code of Conduct. The RBA Code of Conduct is a comprehensive code of conduct that addresses all aspects of corporate responsibility including labor, health and safety, the environment, business ethics, and related management system elements. It outlines standards to ensure working conditions in the electronic industry supply chain are safe, free from slavery and human trafficking, workers are treated with respect and dignity, manufacturing processes are environmentally sustainable and materials are sourced responsibly.
Policies, programs, and procedures implemented throughout KEMET are intended to ensure conformity with legal and regulatory requirements, the content of the RBA Code of Conduct, and customer contractual requirements related to social and environmental responsibility.
We fully support the position of the RBA, the Global e-Sustainability Initiative (“GeSI”), now titled Responsible Minerals Initiative ("RMI") and the Tantalum-Niobium International Study Center (“TIC”) in avoiding the use of conflict minerals which directly or indirectly finance or benefit armed groups in the Democratic Republic of Congo and its adjoining countries, or in any region determined to be a conflict affected and high risk area. This policy and requirement has been communicated to all suppliers of conflict minerals and this policy is communicated publicly on our website. Our tantalum supply base has been and continues to be validated as conformant to the RMI's Responsible Minerals Assurance Program ("RMAP"). We will continue to work through the RMI and TIC towards the goal of greater transparency in the supply chain.
Summary of Activities to Develop a Transparent Supply Chain
We are actively involved in developing a transparent supply chain through our membership in the RMI. We were a member of the EICC/GeSI working group that developed the original Conflict Free Sourcing Progam assessment protocols and participated in the pilot implementation phase of the Organization for Economic Cooperation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. We participate in smelter engagement to increase the number of conflict-free validated smelters globally, the development of due diligence guidance documents and the advancement of the industry adopted conflict minerals reporting template. We will rely on the RMAP independent third party audits to supplement our internal due diligence of conflict mineral suppliers and are monitoring the progress of these audits to ensure our supply chain is conflict free. We fully support section 1502 “Conflict Minerals” of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and are complying with all reporting requirements.
Global Code of Conduct and Mission, Vision and Values
KEMET maintains a Global Code of Conduct (“Code of Conduct”), which became effective August 1, 2010, as well as mission (“Mission”), vision (“Vision”) and values (“Values”) statements along with a set of core values, which became effective in June 2011. KEMET’s Mission is to help make the world a better, safer, more connected place to live. KEMET’s Vision is to be the world’s most trusted partner for innovative component solutions. KEMET’s Values embody the key expectations of how our employees should approach the work they do every day: One KEMET, Unparalleled Customer Experience, Ethics and Integrity, Talent Oriented, No Politics, The Math Must Work and Speed. The Global Code of Conduct and Mission, Vision and Values are applicable to all employees, officers, and directors of the Company. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from a provision of our Code of Conduct, Mission, Vision and Values by posting such information on our website at http://www.kemet.com.
KEMET supports the Kisengo Foundation and certain other charitable endeavors in the Democratic Republic of Congo with periodic monetary donations.  Funds have been used toward building and supporting a new hospital and school as well as the installation of fresh water wells, solar street lighting, infrastructure improvements and a micro-agriculture project.
Employees
We have approximately 14,850 employees as of March 31, 2018 in the following locations:
Asia
7,000

Mexico
5,850

Europe
1,400

United States
600



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The number of employees represented by labor organizations at KEMET locations in each of the following countries is as follows:
Mexico
4,050

Vietnam
1,650

Japan
700

Indonesia
350

Italy
200

Bulgaria
150

Finland
150

Sweden
100

In fiscal year 2018, we did not experience any major work stoppages. Our labor costs in Mexico, Asia and various locations in Europe are denominated in local currencies, and a significant depreciation or appreciation of the United States dollar against the local currencies would increase or decrease our labor costs.
Securities Exchange Act of 1934 (“Exchange Act”) Reports
We maintain an Internet website at the following address: http://www.kemet.com. KEMET makes available on or through our Internet website certain reports and amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act. These include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and beneficial ownership reports on Forms 3, 4 and 5. This information is available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
ITEM 1A.    RISK FACTORS.
This report contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” or other similar expressions and future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of this report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement.
All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. We face risks that are inherent in the businesses and the market places in which we operate. While management believes these forward-looking statements are accurate and reasonable, uncertainties, risks and factors, including those described below, could cause actual results to differ materially from those reflected in the forward-looking statements.
Factors that may cause actual outcomes and results to differ materially from those expressed in, or implied by, these forward-looking statements include, but are not necessarily limited to, the following: (i) adverse economic conditions could impact our ability to realize operating plans if the demand for our products declines, and such conditions could adversely affect our liquidity and ability to continue to operate and could cause a write down of long-lived assets or goodwill; (ii) an increase in the cost or a decrease in the availability of our principal or single-sourced purchased raw materials; (iii) changes in the competitive environment; (iv) uncertainty of the timing of customer product qualifications in heavily regulated industries; (v) economic, political, or regulatory changes in the countries in which we operate; (vi) difficulties, delays, or unexpected costs in completing the restructuring plans; (vii) acquisitions and other strategic transactions expose us to a variety of risks; (viii) acquisition of TOKIN may not achieve all of the anticipated results; (ix) our business could be negatively impacted by increased regulatory scrutiny and litigation; (x) difficulties associated with retaining, attracting, and training effective employees and management; (xi) the need to develop innovative products to maintain customer relationships and offset potential price erosion in older products; (xii) exposure to claims alleging product defects; (xiii) the impact of laws and regulations that apply to our business, including those relating to environmental matters and cyber security; (xiv) the impact of international laws relating to trade, export controls and foreign corrupt practices; (xv) changes impacting international trade and corporate tax provisions related to the global manufacturing and sales of our products may have an adverse effect on our financial condition and results of operations; (xvi) volatility of financial and credit markets affecting our access to capital; (xvii) the need to reduce the total costs of our products to remain competitive; (xviii) potential limitation on the use of net operating losses to offset possible future taxable income; (xix) restrictions in our debt agreements that could limit our flexibility

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in operating our business; (xx) disruption to our information technology systems to function properly or control unauthorized access to our systems may cause business disruptions; (xxi) economic and demographic experience for pension and other post-retirement benefit plans could be less favorable than our assumptions; (xxii) fluctuation in distributor sales could adversely affect our results of operations, (xxiii) earthquakes and other natural disasters could disrupt our operations and have a material adverse effect on our financial condition and results of operations, (xxiv) volatility in our stock price.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and could cause actual results to differ materially from those included, contemplated or implied by the forward-looking statements made in this report, and the reader should not consider the above list of factors to be a complete set of all potential risks or uncertainties.
Adverse economic conditions could impact our ability to realize operating plans if the demand for our products declines; and such conditions could adversely affect our liquidity, ability to continue to operate and could cause the write down of long-lived assets or goodwill.
While our operating plans provide for cash generated from operations to be sufficient to cover our future operating requirements, many factors, including reduced demand for our products, currency exchange rate fluctuations, increased raw material costs, and other adverse market conditions we cannot predict could cause a shortfall in net cash generated from operations. As an example, the electronics industry is a cyclical industry with demand for capacitors reflecting the demand for products in the electronics market. Customers’ requirements for our capacitors fluctuate as a result of changes in general economic activity and other factors affecting the demand for their end-products. During periods of increasing demand for their products, they typically seek to increase their inventory of our products to avoid production bottlenecks. When demand for their products peaks and begins to decline, they may rapidly decrease orders for our products while they use accumulated inventory. Business cycles vary somewhat in different geographical regions, such as Asia, and within customer industries. We are also vulnerable to general economic events beyond our control and our sales and profits may suffer in periods of weak demand.
Our ability to realize operating plans is also dependent upon meeting our payment obligations. If cash generated from operating, investing and financing activities is insufficient to pay for operating requirements and to cover interest payment obligations under debt instruments, planned operating and capital expenditures may need to be reduced.
Additionally, long-lived assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset or group of assets may not be recoverable. Also, goodwill is reviewed for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. In the event the tests show the carrying value of certain long-lived assets is impaired, we would be required to take an impairment charge to earnings under U.S. generally accepted accounting principles. However, such a charge would have no direct effect on our cash. If the economic conditions decline we could incur impairment charges in the future.
An increase in the cost or decrease in the availability of our principal or single-sourced purchased raw materials could adversely affect profitability.
The principal raw materials used in the manufacture of our products are tantalum powder, tantalum ore, palladium, aluminum, silver, copper, nickel and tin. These materials are considered commodities and are subject to price volatility. Additionally, any delays in obtaining raw materials for our products could hinder our ability to manufacture our products, negatively impacting our competitive position and our relationships with our customers.
Tantalum is mined principally in the Democratic Republic of Congo, Australia, Brazil, Canada, Mozambique and Rwanda. As a result of our tantalum vertical integration program which began in fiscal year 2012, we have reduced our exposure to price volatility and supply uncertainty in the tantalum supply chain. A majority of our tantalum needs are now met through our direct sourcing partners of conflict free tantalum ore or tantalum scrap reclaim, which is then processed into the intermediate product potassium heptafluorotantalate (commonly known as K-salt) at our own facility in Mexico or at third party locations, before final processing into tantalum powder at KBP. Price increases for tantalum ore, or for the remaining tantalum powder that we source from third parties, could impact our financial performance as we may not be able to pass all such price increases on to our customers.
Silver and aluminum have generally been available in sufficient quantities, and we believe there are a sufficient number of suppliers from which we can purchase our requirements. An increase in the price of silver and aluminum that we are unable to pass on to our customers, could, however, have an adverse effect on our profitability.

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Changes in the competitive environment could harm our business.
The capacitor business is competitive worldwide, with low transportation costs and few import barriers. Competition is based on factors such as product quality and reliability, availability, customer service, technical innovation, timely delivery and price. The industry has become increasingly consolidated and global in recent years, and our primary U.S. and non-U.S. competitors, some of which are larger than us, have significant financial resources. The greater financial resources of such competitors may enable them to commit larger amounts of capital in response to changing market conditions. Some competitors may also have the ability to use profits from other operations to subsidize losses sustained in their businesses with which we compete. Certain competitors may also develop product or service innovations that could put us at a disadvantage.
Uncertainty of the timing of customer product qualifications in heavily regulated industries could affect the timing of product revenues and profitability arising from these industries.
Our capacitors are incorporated into products used in diverse industries. Certain of these industries, such as military, aerospace and medical, are heavily regulated, with long and sometimes unpredictable product approval and qualification processes. Due to such regulatory compliance issues, there can be no assurances as to the timing of product revenues and profitability arising from our product development and sales efforts in these industries.
We manufacture many capacitors in Europe, Mexico and Asia and economic, political or regulatory changes in any of these regions could adversely affect our profitability.
Our international operations are subject to a number of special risks, in addition to the same risks as our domestic business. These risks include currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, domestic and foreign customs and tariffs, current and changing regulatory regimes, differences in the availability and terms of financing, political instability and potential increases in taxes. These factors could impact our production capability or adversely affect our results of operations or financial condition.
We may experience difficulties, delays or unexpected costs in completing our restructuring plan and may not realize all of the expected benefits from our restructuring plan.
During fiscal year 2018, our restructuring plans focused on making the Company more competitive by relocating production to lower cost locations and eliminating unnecessary costs. Restructuring plans which include personnel reduction costs initiated in fiscal year 2018 are summarized below:
The Solid Capacitors segment is streamlining its vertical integration strategy by relocating its tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant. Severance charges and equipment relocation costs are expected to be recognized over the next seven quarters.
The Film and Electrolytic segment had a voluntary reduction in force in its Italian operations.
We may not realize, in full or in part, the anticipated benefits of the restructuring plan without encountering difficulties, which may include complications in the transfer of production knowledge, loss of key employees and/or customers, the disruption of ongoing business, possible inconsistencies in standards, controls and procedures and potential difficulty in meeting customer demand in the event the market dramatically improves. We are party to collective bargaining agreements in certain jurisdictions in which we operate which could potentially prevent or delay execution of parts of our restructuring plan.
Acquisitions and other strategic transactions expose us to a variety of operational and financial risks.
Our ability to realize the anticipated benefits of acquisitions depends, to a large extent, on our ability to integrate the acquired companies with our own. Our management devotes significant attention and resources to these efforts, which may disrupt the business of each of the companies and, if executed ineffectively, could preclude realization of the full benefits we expect. Failure to realize the anticipated benefits of our acquisitions could cause an interruption of, or a loss of momentum in, the operations of the acquired company. In addition, the efforts required to realize the benefits of our acquisitions may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, the diversion of management’s attention, and may cause our stock price to decline.
Additionally, we may finance acquisitions or future payments with cash from operations, additional indebtedness and/or the issuance of additional securities, any of which may impair the operation of our business or present additional risks, such as reduced liquidity or increased interest expense. Such acquisition financing could result in a decrease of our ratio of earnings to fixed charges. We may also seek to restructure our business in the future by disposing of certain of our assets, which may harm our future operating results, divert significant managerial attention from our operations and/or require us to accept non-cash consideration, the market value of which may fluctuate.

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Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our business, financial condition and results of operations.
We may not realize the anticipated cross-selling synergies and revenue expansion expected to result from the acquisition of TOKIN and we may experience difficulties in integrating TOKIN’s business which may adversely affect our financial performance.
There can be no assurance we will realize the anticipated operating synergies, tax benefits and revenue expansion from the acquisition of TOKIN or we will not experience difficulties in integrating the operations of TOKIN with our operations. For example, the integration of TOKIN will require the experience and expertise of certain of our key managers and key managers of TOKIN. There can be no assurance, however, that these managers will remain with us for the time period necessary to successfully integrate the operations of TOKIN with our operations. In addition, the acquisition of TOKIN may present significant challenges for our management due to the increased time and resources required to properly integrate our management, employees, information systems, accounting controls, personnel and administrative functions with those of TOKIN and to manage the combined company on a going forward basis. There can be no assurance we will be able to successfully integrate and streamline overlapping functions or, if successfully accomplished, that such integration will not be more costly to accomplish than presently contemplated or that we will not encounter difficulties in managing the combined company due to its increased size and scope. Furthermore, expansions or acquisitions into new geographic markets and services may require us to comply with new and unfamiliar legal and regulatory requirements, which could impose substantial obligations on us and our management, cause us to expend additional time and resources and increase our exposure to penalties or fines for non-compliance with such requirements.
Furthermore, there can be no assurance that, as a combined company, we will continue to maintain all of the supplier and customer relationships we and TOKIN maintained as separate companies. As a combined company, we may encounter difficulties managing relationships with our suppliers and our customers due to our increased size and scope and to the increased number of relationships we will have with suppliers and customers.
We are currently subject to increased regulatory scrutiny and litigation that may negatively impact our business.
The growth of our Company and our expansion into a variety of new products expose us to a variety of new regulatory issues, and we have experienced increased regulatory scrutiny as we have grown. We are subject to various federal, foreign and state laws, including antitrust laws, violations of which can involve civil or criminal sanctions. Furthermore, as a result of our acquisition of TOKIN, we assumed all liabilities assessed against TOKIN that may arise as a result of litigation to which TOKIN is a party. Beginning in March 2014, TOKIN and certain of its subsidiaries have 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, and TOKIN has subsequently received significant fines from the United States Department of Justice, the European Union and the Taiwan Fair Trade Commission arising out of their respective investigations. Given our leading position within several segments of the capacitor industry and our acquisition of TOKIN on April 19, 2017, these investigations have exposed us to civil litigation costs and could interfere with our ability to meet certain business objectives. As of March 31, 2018, TOKIN’s accrual for antitrust and civil litigation totaled $76.7 million. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations, civil litigation and claims. However, the actual outcomes could differ from what has been accrued.
Various purported antitrust class actions as described in “Item 3. Legal Proceedings,” have been filed in United States district courts and Canada alleging collusion and restraint of trade in capacitors by the named defendants, including KEMET Corporation, KEC and TOKIN.
Except for the TOKIN accrual described above, the Company has not recorded any accrual concerning these antitrust class action suits.

The impact of these and other investigations could have a material adverse effect on our financial position, liquidity and results of operations.


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If we are unable to attract, train or retain key employees, management or a highly skilled and diverse workforce, it could have a negative impact on our business, financial condition or results of operations.
Our success depends upon the continued contributions of our executive officers and certain other employees, many of whom have many years of experience with us and would be extremely difficult to replace. We must also attract and retain experienced and highly skilled engineering, sales and marketing and managerial personnel. Competition for qualified personnel is intense in our industry, and we may not be successful in hiring and retaining these people. If we lost the services of our executive officers or our other highly qualified and experienced employees or cannot attract and retain other qualified personnel, our business could suffer through less effective management due to loss of accumulated knowledge of our business or through less successful products due to a reduced ability to design, manufacture and market our products.
We must continue to develop innovative products to maintain relationships with our customers and to offset potential price erosion in older products.
While most of the fundamental technologies used in the passive components industry have been available for a long time, the market is nonetheless characterized by rapid changes in product designs and technological advances allowing for better performance, smaller size and/or lower cost. New applications are frequently found for existing technologies, and new technologies occasionally replace existing technologies for some applications or open up new business opportunities in other areas of application. We believe successful innovation is critical for maintaining profitability in order to offset potential erosion of selling prices for existing products and to ensure the flow of new products and robust manufacturing processes that will keep us at the forefront of our customers’ product designs. Non-customized commodity products are especially vulnerable to price pressure, but customized products have also experienced price pressure in recent years. Developing and marketing new products requires start-up costs that may not be recouped if these products or production techniques are not successful. There are numerous risks inherent in product development, including the risks we will be unable to anticipate the direction of technological change or we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands. If this occurs, we could lose customers and experience adverse effects on our results of operations.
We may be exposed to claims alleging product defects.
Our business exposes us to claims alleging product defects or nonconformance with product specifications. We may be held liable for, or incur costs related to, such claims if any of our products, or products in which our products are incorporated, are found to have caused end market product application failures, product recalls, property damage or personal injury. Provisions in our customer and distributor agreements are designed to limit our exposure to potential material product defect claims, including warranty, indemnification, waiver and limitation of liability provisions, but such provisions may not be effective under the laws of some jurisdictions. If we cannot successfully defend ourselves against product defect claims, we may incur substantial liabilities. Regardless of the merits or eventual outcome, defect claims could entail substantial expense and require the time and attention of key management personnel.
Our insurance program may not be adequate to cover all liabilities arising out of product defect claims and, at any time, insurance coverage may not be available on commercially reasonable terms or at all. If liability coverage is insufficient, a product defect claim could result in liability to us, which could materially and adversely affect our results of operations or financial condition. Even if we have adequate insurance coverage, product defect claims or recalls could result in negative publicity or force us to devote significant time and attention to those matters.
Various laws and regulations that apply to our business, including those relating to conflict minerals and environmental matters, could limit our ability to operate as we are currently and could result in additional costs.
We are subject to various laws and regulations of national, state and local authorities in the countries in which we operate regarding a wide variety of matters, including conflict minerals, environmental, employment, land use, antitrust, and others that affect the day-to-day operations of our business. The liabilities and requirements associated with the laws and regulations that affect us may be costly and time-consuming. There can be no assurance we have been or will be at all times in compliance with such applicable laws and regulations. Failure to comply may result in the assessment of administrative, civil and criminal penalties, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting our operations. If we are pursued for sanctions, costs or liabilities in respect of these matters, our operations and, as a result, our profitability could be materially and adversely affected.
The SEC requires issuers for whom tantalum, tin, tungsten and gold are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by such person to disclose annually whether any of those minerals originated in the Democratic Republic of Congo or an adjoining country. As defined by the SEC, tantalum, tin, tungsten and gold are commonly referred to as “conflict minerals” or “3TG”. If an issuer’s conflict minerals originated in those countries, the rule requires the issuer to submit a report to the Commission that includes a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody. We use tantalum, tin and, to a lesser degree, other of the

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3TG minerals in our production processes and in our products. We have exercised due diligence on the source and chain of custody during the reporting period and, as required under the rule, have disclosed a description of these measures and certain of our findings in a special disclosure on Form SD. Disclosure in accordance with the rule may cause changes to the pricing of 3TG minerals, which could adversely affect our profitability.  In addition, it is possible some of our disclosures pursuant to the rule related to our inquiries and supply chain custody diligence could cause reputational harm and cause the company to lose customers or sales.
In addition, we are subject to a variety of U.S. federal, state and local, as well as foreign, environmental laws and regulations relating, among other things, to wastewater discharge, air emissions, handling of hazardous materials, disposal of solid and hazardous wastes, and remediation of soil and groundwater contamination. We use a number of chemicals or similar substances and generate waste that are considered hazardous. We are required to hold environmental permits to conduct many of our operations. Violations of environmental laws and regulations could result in substantial fines, penalties, and other sanctions. Changes in environmental laws or regulations (or in their enforcement) affecting or limiting, for example, our chemical uses, certain of our manufacturing processes, or our disposal practices, could restrict our ability to operate as we are currently operating or impose additional costs. In addition, we may experience releases of certain chemicals or discover existing contamination, which could cause us to incur material cleanup costs or other damages.
Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable export control laws and regulations of the United States and other countries. United States laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and the trade and trade sanctions laws and regulations administered by the Office of the United States Trade Representative (“OFTR”) and the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). The import and export of our products from each of our United States and international manufacturing facilities and distribution hubs are subject to international trade agreements, the modification or repeal of which could impact our business. We must comply with the requirements of OFTR and non-U.S. trade representative offices in order to benefit from existing trade agreements. EAR restricts the export of dual-use products and technical data to certain countries, while ITAR restricts the export of defense products, technical data and defense services. The U.S. government agencies responsible for administering EAR and ITAR have significant discretion in the interpretation and enforcement of these regulations. We also cannot provide services to certain countries subject to United States trade sanctions unless we first obtain the necessary authorizations from OFAC. In addition, we are subject to the Foreign Corrupt Practices Act and other anti-bribery laws that, generally, bar bribes or unreasonable gifts to foreign governments or officials.
Violations of these laws or regulations could result in significant additional sanctions including fines, more onerous compliance requirements, more extensive debarments from export privileges, loss of authorizations needed to conduct aspects of our international business and criminal penalties and may harm our ability to enter contracts with customers who have contracts with the U.S. government. A violation of the laws or the regulations enumerated above could materially adversely affect our business, financial condition and results of operations.
Changes impacting international trade and corporate tax provisions related to the global manufacturing and sales of our products may have an adverse effect on our financial condition and results of operations.
A significant portion of our business activities are conducted in foreign countries, including Mexico and China. Our business benefits from free trade agreements such as the North American Free Trade Agreement (“NAFTA”) and we also rely on various U.S. corporate tax provisions related to international commerce as we build, market and sell our products globally. Changes in trade treaties and corporate tax policy could impact U.S. trade relations with other countries such as Mexico, and adversely affect our financial condition and results of operations.
Volatility of financial and credit markets could affect our access to capital.
Uncertainty in the global financial and credit markets could impact our ability to implement new financial arrangements or to modify our existing financial arrangements. An inability to obtain new financing or to further modify existing financing could adversely impact the execution of our restructuring plans and delay the realization of the expected cost reductions. Our ability to generate adequate liquidity will depend on our ability to execute our operating plans and to manage costs in light of developing economic conditions. An unanticipated decrease in sales, or other factors that would cause the actual outcome of our plans to differ from expectations, could create a shortfall in cash available to fund our liquidity needs. Being unable to access new capital, experiencing a shortfall in cash from operations to fund our liquidity needs and the failure to implement an initiative to offset the shortfall in cash would likely have a material adverse effect on our business.

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We must consistently reduce the total costs of our products to remain competitive.
Our industry is intensely competitive and prices for existing commodity products tend to decrease steadily over their life cycle. There is substantial and continuing pressure from customers to reduce the total cost of capacitors. To remain competitive, we must achieve continuous cost reductions through process and product improvements.
We must also be in a position to minimize our customers’ shipping and inventory financing costs and to meet their other goals for rationalization of supply and production. Our growth and the profit margins of our products will suffer if our competitors are more successful in reducing the total cost to customers of their products than we are. We must also continue to introduce new products that offer performance advantages over our existing products and can thereby achieve premium prices, offsetting the price declines in our more mature products.
Our use of net operating losses to offset possible future taxable income could be limited by ownership changes.
In addition to the general limitations on the carryback and carryforward of net operating losses under Section 172 of the Internal Revenue Code (the “Code”), Section 382 of the Code imposes further limitations on the utilization of net operating losses by a corporation following ownership changes which result in more than a 50 percentage point change in ownership of a corporation within a three-year period. If Section 382 applies, the post-ownership change utilization of our net operating losses may be subject to limitation for federal income tax purposes related to regular and alternative minimum tax. The application of Section 382 of the Code now or in the future could limit a substantial part of our future utilization of available net operating losses. Such limitation could require us to pay substantial additional income taxes and adversely affect our liquidity and financial position.
We do not believe we have experienced an ownership change to date. However, the Section 382 rules are complex and there is no assurance our view is correct. For example, the issuance of a warrant (the “Platinum Warrant”) in May 2009 to K Financing, LLC (“K Financing”), in connection with the entry into a credit facility (the “Platinum Credit Facility”) with K Financing, may be deemed to have resulted in an “ownership change” for purposes of Section 382 of the Code. If such an ownership change is deemed to have occurred, the amount of our post-ownership change taxable income that could be offset by our pre-ownership change net operating loss carryforwards would be severely limited. While we believe the issuance of the Platinum Warrant did not result in an ownership change for purposes of Section 382 of the Code, there is no assurance our view will be unchallenged.
Even if we have not experienced an ownership change to date, we could experience an ownership change in the near future if there are certain significant purchases of our common stock or other events outside our control.
Our debt agreements contain restrictions that could limit our flexibility in operating our business.
Our debt agreements contain various covenants that, subject to exceptions, may limit our ability to, among other things: incur additional indebtedness; create liens on assets; make capital expenditures; engage in mergers, consolidations, liquidations and dissolutions; sell assets (including pursuant to sale leaseback transactions); pay dividends and distributions on or repurchase capital stock; make investments (including acquisitions), loans, or advances; prepay certain junior indebtedness; engage in certain transactions with affiliates; enter into restrictive agreements; amend material agreements governing certain junior indebtedness; and change lines of business. The agreement governing our revolving credit facility also includes a fixed charge coverage ratio covenant that we must satisfy if an event of default occurs or in the event we do not meet certain excess availability requirements under our revolving credit facility. Our ability to comply with this covenant is dependent on our future performance, which may be subject to many factors, some of which are beyond our control.
If our information technology systems fail to function properly it may cause business disruptions.
As a global company we depend on our information technology systems to support our business. Any inability to successfully manage the procurement, development, implementation, execution or maintenance of our information systems, including matters related to system and data security, reliability, compliance or performance could have an adverse effect on our business including our results of operation and timeliness of financial reporting.
In the ordinary course of business, we collect and store sensitive data and information, including our proprietary and regulated business information, as well as personally identifiable information about our employees, in addition to other information upon which our business processes rely. Our information systems, like those of other companies, are susceptible to malicious damage, intrusions and outages due to, among other events, viruses, breaches of security, natural disasters, power loss or telecommunications failures. We have taken steps to maintain adequate data security and address these risks and uncertainties by implementing security technologies, internal controls, network and data center resiliency and recovery processes. The Company is continuously working to install new, and upgrade its existing, information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to ensure that the Company is protected,

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to the greatest extent possible, against cyber risks and security breaches. However, any operational failure could lead to the loss or disclosure of confidential and other important information which could have the following implications: loss of intellectual property, significant remediation costs, disruption to key business operations and diversion of management’s attention and key informational technology resources.     
If economic and demographic experience for pension and other post-retirement benefit plans are less favorable than our assumptions (e.g., discount rates or return on investments), then it may affect our financial condition and results
of operations.

The measurement of our obligations, costs, and liabilities associated with benefits pursuant to our pension and other post-retirement benefit plans requires that we estimate the present value of projected future payments to all participants. We use many assumptions in calculating these estimates, including assumptions related to discount rates, return on investments on designated plan assets, and demographic experience (e.g. mortality and retirement rates). To the extent actual results are less favorable than our assumptions, there could be a substantial adverse impact on our financial condition and results of operations. For instance, significant decreases in market interest rates could lead to increases in annual pension expense. Further, decreases in the value of plan assets could lead to an increased use of cash for plan contributions. For discussion of our assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Item 7 and Note 9 to the consolidated financial statements.

Sales to distribution channel customers may fluctuate and adversely affect our results of operations.
From time-to-time, if end customer demand decreases, our sales to distributors also decrease while the distributors reduce their inventory levels. In addition, a single customer, a distributor, accounted for over 10% of our net sales in fiscal years 2018, 2017 and 2016. If our relationship with this customer were to terminate, we would need to determine alternative means of delivering our products to the end-customers served by it.
Earthquakes and other natural disasters could disrupt our operations and have a material adverse effect on our financial condition and results of operations.

Several of our facilities in Japan are located in regions that could be subject to earthquakes and other natural disasters. Our production facilities located in Japan are in areas with above average seismic activity and some have been affected by other natural disasters such as tsunami. If any of our facilities in Japan or elsewhere were to experience a catastrophic earthquake or other natural disaster, such event could disrupt our operations, delay production, shipments, and revenue, and result in large expenses to repair or replace the facility or facilities. While KEMET has property insurance to partially reimburse it for losses caused by windstorm and earth movement, such insurance would not cover all possible losses. In addition, our existing disaster recovery and business continuity plans (including those relating to our information technology systems) may not be fully responsive to, or minimize losses associated with, catastrophic events.
Our stock price can be volatile.
The market price for our common stock has been volatile historically. Our stock price may be significantly affected by factors including those described elsewhere in "Part 1, Item 1A. Risk Factors," as well as the following:
general market and economic conditions;
quarterly fluctuations in our operating results compared to market expectations;
investors' perceptions of the electronic component industry;
changes in financial estimates by us or securities analysts and recommendations by securities analysts;
the composition of our stockholders, particularly the presence of "short sellers" trading our stock; and
a decline in our credit rating.
ITEM 1B.    UNRESOLVED STAFF COMMENTS.
None.

19






ITEM 2.    PROPERTIES.
We are headquartered in Fort Lauderdale, Florida, and, as of March 31, 2018, we had 24 manufacturing plants located in North America, Europe and Asia. Our manufacturing and research facilities include approximately 4.8 million square feet of floor space and use proprietary manufacturing processes and equipment.
Our facilities in Mexico operate under the Maquiladora program. In general, a company that operates under this program is afforded certain duty and tax preferences and incentives on products brought into the United States. Our manufacturing standards, including compliance with worker safety laws and regulations, are essentially identical in North America, Europe and Asia. Our operations in Mexico, Europe and Asia, similar to our United States operations, have won numerous quality, environmental and safety awards.
We believe substantially all of our property and equipment is in good condition, and overall, we have sufficient capacity to meet our current and projected manufacturing and distribution needs.    The following table provides certain information regarding our principal facilities:
Location
 
Square
Footage
(in thousands)
 
Type of
Interest
 
Description of Use
Fort Lauderdale, Florida, U.S.A
 
21

 
Leased
 
Headquarters (1)
Simpsonville, South Carolina, U.S.A.
 
382

 
Owned
 
Innovation Center, Advanced Tantalum Manufacturing
Solid Capacitor Segment
 
 
 
 
 
 
Matamoros, Mexico 
 
286

 
Owned
 
Manufacturing
Monterrey, Mexico (2)
 
532

 
Owned
 
Manufacturing
Suzhou, China (2)
 
353

 
Leased
 
Manufacturing
Ciudad Victoria, Mexico
 
265

 
Owned
 
Manufacturing
Carson City, Nevada U.S.A. 
 
87

 
Owned
 
Manufacturing
Nyuzen, Toyama Japan (3)
 
209

 
Owned
 
Manufacturing and Innovation Center
Chachoengsao, Thailand (3)
 
140

 
Owned
 
Manufacturing
Film and Electrolytic Segment
 
 
 
 
 
 
Evora, Portugal
 
233

 
Owned
 
Manufacturing and Innovation Center
Skopje, Macedonia
 
126

 
Owned
 
Manufacturing
Granna, Sweden
 
132

 
Owned
 
Manufacturing
Suomussalmi, Finland
 
56

 
Leased
 
Manufacturing
Batam, Indonesia (4)
 
86

 
(4) 
 
(4) 
Kyustendil, Bulgaria (4)
 
83

 
(4) 
 
(4) 
Pontecchio, Italy
 
226

 
Owned
 
Manufacturing and Innovation Center
Anting, China (5)
 
73

 
(5) 
 
(5) 
Farjestaden, Sweden
 
28

 
Leased
 
Manufacturing and Innovation Center
Electro-Magnetic, Sensors, and Actuators Segment (3)
 
 
 
 
 
 
Shiroishi, Miyagi Japan
 
524

 
Owned
 
Manufacturing and Innovation Center
Sendai, Miyagi Japan
 
377

 
Owned
 
Manufacturing and Innovation Center
Bien Hoa City Dong Nai Province, Vietnam
 
174

 
Owned
 
Manufacturing
Xiamen, China
 
432

 
Owned
 
Manufacturing
_______________________________________________________________________________
(1) Beginning in FY 2018 and concluding in FY 2019, we moved headquarter functions from Simpsonville, South Carolina to Fort Lauderdale, Florida.
(2) Includes two manufacturing facilities.
(3) New properties added during fiscal year 2018 related to the acquisition of TOKIN on April 19, 2017.
(4) Includes one owned manufacturing facility and one leased warehouse facility.
(5) Includes one owned manufacturing facility and one leased manufacturing and innovation center.

20






ITEM 3.    LEGAL PROCEEDINGS.
We or our subsidiaries may at any one time be parties to lawsuits arising out of our respective operations, including workers’ compensation or work place safety cases, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to us, we do not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on our financial condition or results of operations.
As previously reported, KEMET and KEC, along with more than 20 other capacitor manufacturers and subsidiaries (including TOKIN, as described below), are defendants in a purported antitrust class action complaint, In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD, filed on December 4, 2014 with the United States District Court, Northern District of California (the “U.S. Class Action Complaint”). The complaint alleges a violation of Section 1 of the Sherman Act, for which it seeks injunctive and equitable relief and money damages. The complaint is currently nearing the end of the factual discovery phase. In addition, KEMET and KEC, along with more than 20 other capacitor manufacturers and subsidiaries, have been named as defendants in two suits by plaintiffs who have chosen not to participate in the U.S. Class Action Complaint (collectively with the U.S. Class Action Complaint, the “U.S. Complaints”): AASI Beneficiaries’ Trust v. AVX Corporation, et al., filed on August 29, 2016 in the United States District Court, Southern District of Florida, and Benchmark Electronics, Inc., et al. v. AVX Corporation, et al., filed on April 18, 2017 in the United States District Court, Southern District of Texas. KEMET and KEC, along with more than 20 other capacitor manufacturers and subsidiaries, were also named as defendants in a complaint filed on January 9, 2018, Digi-Key Corporation v. AVX Corporation et. al., in the Norther District of California. The AASI, Benchmark and Digi-Key complaints allege generally the same violations as the U.S. Class Action Complaint.
In addition, as previously reported, KEMET and KEC, along with certain other capacitor manufacturers and subsidiaries (including TOKIN), were named as defendants in several additional suits that were filed in Canada (collectively, the “Canadian Complaints”): Badashmin v. Panasonic Corporation, et al., filed August 6, 2014 in the Superior Court, Province of Quebec, District of Montreal; Herard v. Panasonic Corporation, et al., filed August 6, 2014 in the Superior Court, Province of Quebec, District of Montreal; Cygnus Electronics Corporation v. Panasonic Corporation, et al., filed August 6, 2014 in the Superior Court of Justice, Province of Ontario; LeClaire v. Panasonic Corporation, et al., filed August 6, 2014 in the Superior Court, Province of Quebec, District of Montreal; Taylor v Panasonic Corporation, et al., filed August 11, 2014 in the Superior Court of Justice, Province of Ontario; Ramsay v. Panasonic Corporation, et al., filed August 14, 2014 in the Supreme Court, Province of British Columbia; Martin v. Panasonic Corporation, et al., filed September 25, 2014 in the Superior Court, Province of Quebec, District of Montreal; Parikh v. Panasonic Corporation, et al., filed October 3, 2014 in the Superior Court of Justice, Province of Ontario; Fraser v. Panasonic Corporation, et al., filed October 3, 2014 in the Court of Queen’s Bench, Province of Saskatchewan; Pickering v. Panasonic Corporation, et al., filed October 6, 2014 in the Supreme Court, Province of British Columbia; McPherson v Panasonic Corporation et al., filed on November 6, 2014 in the Court of Queen’s Bench, Province of Manitoba; and Allott v AVX Corporation, et al., filed on May 13, 2016 in the Superior Court of Justice, Province of Ontario. The Canadian Complaints generally allege the same unlawful acts as in the U.S. Complaints, assert claims under Canada’s Competition Act as well as various civil and common law causes of action, and seek injunctive and equitable relief and money damages.
Except for the TOKIN accrual described below and certain attorneys’ fees, the Company has not recorded any accrual concerning the U.S. Complaints and the Canadian Complaints.
In July 2013, TOKIN was named as one of eight defendants in two purported U.S. class action antitrust lawsuits (In Re: Lithium Ion Batteries Antitrust Litigation, 13-MD-02420-YGR, United States District Court, Northern District of California) (the “Battery Class Action Suits”) regarding the sale of lithium ion batteries brought on behalf of direct product purchasers and indirect product purchasers. On May 16, 2018, the Court granted final approval to a settlement agreement by which, in consideration of the release of TOKIN and its subsidiaries from claims asserted in the Battery Class Action Suits, TOKIN agreed to pay $4.95 million to the settlement class of direct product purchasers. TOKIN paid the settlement amount on January 18, 2018. On March 2, 2018, TOKIN entered into a settlement agreement, which, subject to court approval, provides for the release of TOKIN and its subsidiaries from claims asserted in the Battery Class Action Suits, in consideration of which, TOKIN agreed to pay $2.0 million to the settlement class of indirect product purchasers.
Beginning in March 2014, TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan, South Korea, Taiwan, Singapore and Brazil concerning alleged anti-competitive activities within the capacitor industry. 
On September 2, 2015, the United States Department of Justice announced a plea agreement with TOKIN in which TOKIN agreed to plead guilty to a one-count felony charge of unreasonable restraint of interstate and foreign trade and commerce in violation of Section 1 of the Sherman Act, and to pay a criminal fine of $13.8 million. The plea agreement was approved by the United States District Court, Northern District of California, on January 21, 2016. The fine is payable over 5

21






years in six installments of $2.3 million each, plus accrued interest. The first three payments were made in February 2016, January 2017 and January 2018. The next payment is due in January 2019.
On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that TOKIN would be fined 1,218.2 million New Taiwan dollars (“NTD”) (approximately U.S. $41.8 million) for violations of the Taiwan Fair Trade Act. Subsequently, the TFTC indicated the fine would be reduced to NTD 609.1 million (approximately U.S. $20.9 million). In February 2016, TOKIN commenced an administrative suit in Taiwan, challenging the validity of the amount of the fine.
On March 29, 2016, the Japan Fair Trade Commission published an order by which TOKIN was fined ¥127.2 million (approximately U.S. $1.2 million) for violation of the Japanese Antimonopoly Act. Payment of the fine was made on October 31, 2016.
On July 15, 2016, TOKIN entered into definitive settlement agreements in two antitrust suits filed with the United States District Court, Northern District of California as In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD (the “Capacitor Class Action Suits”). Pursuant to the terms of the settlement, in consideration of the release of TOKIN and its subsidiaries (including TOKIN America, Inc.) from claims asserted in the Capacitor Class Action Suits, TOKIN will pay an aggregate $37.3 million to a settlement class of direct purchasers of capacitors and a settlement class of indirect purchasers of capacitors. Each of the respective class payments is payable in five installments, two of which were paid on or before the respective due dates of July 29, 2016 and 2017 and the third of which was paid on May 15, 2018. The fourth installments are due by May 15, 2019 and the final payments are due by December 31, 2019.
On July 27, 2016, Brazil’s Administrative Council for Economic Defense approved a cease and desist agreement with TOKIN in which TOKIN made a financial contribution of Brazilian Real 601 thousand (approximately U.S. $0.2 million) to Brazil’s Fund for Defense of Diffuse Rights.
On March 21, 2018, the European Commission announced a decision by which TOKIN was fined €8.8 million directly (approximately $10.9 million) and €5.0 million (approximately $6.2 million) jointly and severally with NEC Corporation, for violation of the competition laws of the European Union. The fines are payable by June 28, 2018.
The remaining governmental investigations are continuing at various stages. As of March 31, 2018, TOKIN’s accrual for antitrust and civil litigation claims totaled $76.7 million which is stated in the following line items; “Account payable” ($7.7 million), “Accrued expenses” ($33.7 million) and “Other non-current obligations” ($35.3 million) on the Consolidated Balance Sheets. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations, civil litigation and claims. However, the actual outcomes could differ from what has been accrued. Additionally, under the terms of the TOKIN Purchase Agreement, KEMET will be responsible for defending all suits brought against TOKIN, paying all expenses and satisfying all judgments to the extent incurred by or rendered against TOKIN arising out of or related the capacitor antitrust investigations and related litigation described above.
ITEM 4.    MINE SAFTETY DISCLOSURES.
Not applicable.

22






ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, business experience, positions and offices held and period served in such positions or offices for each of the executive officers and certain key employees of the Company are listed below. There are no family relationships among our executive officers and directors or any other arrangement or understanding pursuant to which any person was selected as an officer.
Name
 
Age
 
Position
 
Years with
Company
Per-Olof Lööf
 
67

 
Chief Executive Officer and Director
 
13

William M. Lowe, Jr. 
 
64

 
Executive Vice President and Chief Financial Officer
 
10

Charles C. Meeks, Jr. 
 
56

 
Executive Vice President, Solid Capacitors
 
34

Shigenori (Sean) Oyama
 
61

 
Executive Vice President, Magnetics, Sensors, and Actuators
 
36

R. James Assaf
 
58

 
Senior Vice President, General Counsel and Secretary
 
10

Claudio Lollini
 
38

 
Senior Vice President of Global Sales and Marketing
 
13

Stefano Vetralla
 
55

 
Senior Vice President and Chief Human Resources Officer
 
10

Susan B. Barkal
 
55

 
Senior Vice President Quality, Chief Compliance Officer and Chief of Staff
 
18

Dr. Phillip M. Lessner
 
59

 
Senior Vice President and Chief Technology Officer
 
22

Andreas Meier
 
50

 
Senior Vice President, Film and Electrolytic
 
20

Michael L. Raynor
 
52

 
Vice President and Corporate Controller
 
11

Richard J. Vatinelle
 
54

 
Vice President and Treasurer
 
5

Robert S. Willoughby
 
57

 
Senior Vice President, Ceramic Product Line
 
32


Executive Officers
Per-Olof Lööf, Chief Executive Officer and Director, was named such in April 2005. Mr. Lööf was previously the Managing Partner of QuanStar Group, LLC, a management consulting firm and had served in such capacity since December 2003. Prior thereto, he served as Chief Executive Officer of Sensormatic Electronics Corporation and in various management roles with Andersen Consulting, Digital Equipment Corporation, AT&T and NCR. Mr. Lööf also serves on several charity boards including the Boca Raton Regional Hospital and the International Centre for Missing and Exploited Children. He received a “civilekonom examen” degree in economics and business administration from the Stockholm School of Economics.
William M. Lowe, Jr., Executive Vice President and Chief Financial Officer, was named such in July 2008. Mr. Lowe was previously the Vice President, Chief Operating Officer and Chief Financial Officer of Unifi, Inc., a producer and processor of textured synthetic yarns from January 2004 to October 2007. Prior to holding that position, he was Executive Vice President and Chief Financial Officer for Metaldyne, an automotive components manufacturer. He also held various financial management positions with ArvinMeritor, Inc., a premier global supplier of integrated automotive components. He received his B.S. degree in business administration with a major in accounting from Tri-State University and is a Certified Public Accountant in the state of Ohio.
Charles C. Meeks, Jr., Executive Vice President, Solid Capacitors, was named such in May 2013. He joined KEMET in December 1983 in the position of Process Engineer, and has held various positions of increased responsibility including the positions of Plant Manager and Director of Operations, Ceramic Product Line. He was named Vice President, Ceramic Product Line in June 2005, Senior Vice President, Ceramic Product Line in October 2007, Senior Vice President, Ceramic and Film and Electrolytics in March 2010 and Executive Vice President Ceramic and Film and Electrolytics in May 2011 prior to his appointment to his current position. In addition, since January 2000, Mr. Meeks has served as President of Top Notch Inc., a private company that offers stress management therapy services. Mr. Meeks received a Masters of Business Administration degree and a Bachelor of Science degree in Ceramic Engineering from Clemson University.
Shigenori (Sean) Oyama, Executive Vice President, Magnetics, Sensors, and Actuators, was named such in July 2017 after the Company's acquisition of TOKIN. Mr. Oyama joined TOKIN in 1982. He moved to California in 1989 and held various management roles in Field Application Engineering, Sales and Marketing at TOKIN America Inc. Mr. Oyama returned to TOKIN Japan and was appointed General Manager of Product Marketing for Energy Devices in 2003, General Manager and Vice President for the EMC Division in 2005, Senior Vice President of all Business Groups in 2010, followed by his appointment to President of TOKIN in 2012. Mr. Oyama holds a Bachelor's degree in Electrical Engineering from Tohoku University.

23






R. James Assaf, Senior Vice President, General Counsel and Secretary, was named such in February 2014. Mr. Assaf joined KEMET as Vice President, General Counsel in March 2008, and was appointed Vice President, General Counsel and Secretary in July 2008 prior to his appointment to his current position. Before joining KEMET, Mr. Assaf served as General Manager for InkSure Inc., a start-up seller of product authentication solutions. He had also previously held several positions with Sensormatic Electronics Corporation, including Associate General Counsel and Director of Business Development, Mergers and Acquisitions. Prior to Sensormatic, Mr. Assaf served as an Associate Attorney with the international law firm Squire Sanders and Dempsey. Mr. Assaf received his Bachelor of Arts degree from Kenyon College and his Juris Doctor degree from Case Western Reserve University School of Law.
Claudio Lollini, Senior Vice President of Global Sales and Marketing, was named such in July 2015. He joined KEMET in October 2007 through the Company’s acquisition of Arcotronics Italia S.p.A., where he served as Manager, Sales - Greater China. Mr. Lollini was appointed Director of Product Management for Film and Electrolytic in January 2009, Director of Sales Taiwan in June 2012, and Vice President, Sales - Asia Pacific in May 2013 prior to his appointment to his current position. Mr. Lollini holds a Bachelor of Science degree in Engineering Management from the University of Bologna and a Master of Business Administration from the Kellogg School of Management, and is a 2011 graduate of the KEMET Leadership Forum.
Stefano Vetralla, Senior Vice President and Chief Human Resources Officer, was named such in July 2015. He joined KEMET in May 2008 as Director - HR, Film and Electrolytic Business Group. Mr. Vetralla was appointed Director - HR, Global Sales and Film and Electrolytic Business Group in January 2011; Senior Director HR, Global Sales and Film and Electrolytic Business Group in January 2012; Senior Director - HR, Field in September 2012; Vice President - Global HR Operations in September 2013; and Vice President - Global HR and Chief Human Resources Officer in May 2014 prior to his current appointment. Prior to KEMET, he held Human Resources positions of increasing responsibility in international corporations including Hewlett-Packard Company, 3Com Corporation and Telindus /Belgacom. Mr. Vetralla holds a Law Degree from the State University of Milan and is a 2011 graduate of the KEMET Leadership Forum.
Other Key Employees
Susan B. Barkal, Senior Vice President Quality, Chief Compliance Officer and Chief of Staff, was named such in February 2014. Ms. Barkal joined KEMET in November 1999, and has served as Quality Manager for the Tantalum Business Group (now a part of Solid Capacitors), Technical Product Manager for all Tantalum product lines and Director of Tantalum Product Management. Ms. Barkal was appointed Vice President of Quality and Chief Compliance Officer in December 2008 prior to her appointment to her current position. Ms. Barkal holds a Bachelor of Science degree in Chemical Engineering from Clarkson University, a Master of Science degree in Mechanical Engineering from California Polytechnic University and is a 2007 graduate of the KEMET Leadership Forum.
Dr. Philip M. Lessner, Senior Vice President and Chief Technology Officer, was named such in February 2014. He joined KEMET in March 1996 as a Technical Associate in the Tantalum Technology Group. He has held several positions of increasing responsibility in the Technology and Product Management areas including Senior Technical Associate, Director Tantalum Technology, Director Technical Marketing Services and Vice President Tantalum Technology. Dr. Lessner was named Vice President, Chief Technology Officer and Chief Scientist in December 2006, Senior Vice President, Chief Technology Officer and Chief Scientist in May 2011 and Senior Vice President and Chief Technology and Marketing Officer in November 2012 prior to his appointment to his current position. Dr. Lessner received a PhD in Chemical Engineering from the University of California, Berkeley and a Bachelor of Engineering in Chemical Engineering from Cooper Union.
Andreas Meier, Senior Vice President-Film and Electrolytic, was named such in May 2016. Mr. Meier joined KEMET in January 1998 and has held several positions of increasing responsibility in the Sales and Product Management areas. Mr. Meier was named Vice President - Product Management, Film and Electrolytics in January, 2010 and Vice President, Sales - EMEA in December, 2012 prior to his appointment to his current position. Mr. Meier holds a degree in Electronic Engineering from the University of Paderborn in Germany.
Michael L. Raynor, Vice President and Corporate Controller, was named such in November 2012. Mr. Raynor joined the Company in July 2007 as the Assistant Corporate Controller; in November of 2008 Mr. Raynor was named Director of Financial Planning and Analysis prior to his appointment to his current position. Prior to joining KEMET, Mr. Raynor held various controller level positions with distribution and manufacturing companies. Mr. Raynor received a Bachelor of Arts degree in Economics and a Masters of Accounting from the University of North Carolina at Chapel Hill, is a Certified Public Accountant in the state of North Carolina and is a 2015 graduate of the KEMET Leadership Forum.
Richard J. Vatinelle, Vice President and Treasurer, was named such in March 2014. Mr. Vatinelle joined the Company in November 2012 as Controller - Tantalum Business Group. Prior to joining KEMET, Mr. Vatinelle served for two years as Regional Controller - Latin America for Leo Pharma A/S, a global manufacturer of pharmaceutical products. From 2007 to

24






2009 he served as Director of Finance, Policies and Reporting, for Stiefel Laboratories, a pharmaceutical company specialized in dermatology. Mr. Vatinelle’s career in finance includes eight years with Conagra Foods Inc., where he held various international finance roles, and eleven years with Banque Sudameris, an international banking group where he began his career. Mr. Vatinelle holds a Bachelor of Science degree in Finance and International Management from Georgetown University and is a 2015 graduate of the KEMET Leadership Forum.
Robert S. Willoughby, Senior Vice President-Ceramic Product Line, was named such in May 2016. He joined KEMET in December 1985 and has held positions of increasing responsibility within Diagnostic, Quality, New Product and Process Engineering. Mr. Willoughby served as Director - Ceramic Operations from July 2007 until March 2010; served as Vice President of Operations - Film and Electrolytic Business Unit from March 2010 until May 2013; served as Vice President, Film and Electrolytic Business Group from May 2013 through December 2014; and served as Senior Vice President-Film and Electrolytic Business Group from January 2015 through April 2016. Mr. Willoughby was named Senior Vice President-Global Supply Chain in May 2016, prior to his appointment to his current position. He holds a Bachelor of Science degree in Industrial Engineering from Clemson University and is a 2007 graduate of the KEMET Leadership Forum.


25






PART II
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Common Stock of the Company
Our common stock trades on the NYSE under the ticker symbol “KEM” (NYSE: KEM). We had 100 stockholders of record as of May 18, 2018. The following table represents the high and low sale prices of our common stock for the periods indicated:
 
 
Fiscal Year 2018
 
Fiscal Year 2017
Quarter
 
High
 
Low
 
High
 
Low
First
 
$
14.92

 
$
10.70

 
$
2.98

 
$
1.76

Second
 
24.64

 
12.65

 
3.62

 
2.66

Third
 
27.35

 
13.73

 
6.99

 
3.45

Fourth
 
21.28

 
15.07

 
12.65

 
5.78

Dividend Policy
We have not declared or paid any cash dividends on our common stock since our initial public offering in October 1992. Any future determination to pay dividends will be at the discretion of our Board and will depend upon, among other factors, the capital requirements, operating results, and our financial condition. In addition, under the terms of the Term Loan Credit Agreement (as hereinafter defined) entered into during fiscal year 2018, we are restricted from paying cash dividends in an amount greater than $4.0 million in the aggregate per year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

26






PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return for the past five fiscal years, beginning on March 31, 2013, with the Russell 3000 and a peer group (the “Peer Group”) comprised of certain companies which manufacture capacitors and with which we generally compete. The Peer Group is comprised of AVX Corporation, Littelfuse, Inc. and Vishay Intertechnology, Inc.

chart-620af7571f729153ef5a03.jpg
*$100 invested on 3/31/13 in stock or index, including reinvestment of dividends
RETURNS
Years Ending March 31,
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
KEMET Corporation
 
$
100.00

 
$
92.96

 
$
66.24

 
$
30.88

 
$
192.00

 
$
290.08

Russell 3000
 
100.00

 
112.16

 
134.87

 
148.70

 
145.21

 
168.03

Peer Group
 
100.00

 
120.42

 
126.46

 
138.42

 
184.01

 
234.84


Unregistered Sales of Equity Securities
We did not sell any of our equity securities during fiscal year 2018 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).




27






Repurchase of Equity Securities
The following table provides information relating to our purchase of shares of our common stock during the quarter ended March 31, 2018 (amounts in thousands, except per share price):

Periods
(a) Total Number of Shares Purchased (1)
(b) Average Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
(d) Maximum Number of Shares that may yet be Purchased Under the Plan or Programs (2)
January 1 to January 31, 2018
4

$
19.73



February 1 to February 28, 2018




March 1 to March 31, 2018
10

18.13



Total for Quarter Ended March 31, 2018
14

$
18.62

 
 
_______________________________________________________________________________
(1) Represents shares withheld by the Company upon vesting of restricted stock to pay taxes due. The Company does not currently have a publicly announced share repurchase plan or program.
(2) The Company does not currently have a publicly announced share repurchase plan or program.
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by stockholders and equity compensation plans that were not approved by stockholders as of March 31, 2018:
 
 
(a)
 
(b)
 
(c)
Plan category
 
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants,
and rights
 
Weighted-average
exercise
price of
outstanding
options,
warrants,
and rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
Equity compensation plans approved by stockholders
 
2,965,739 (1)

 
$
6.36

 
4,452,819

Equity compensation plans not approved by stockholders
 

 

 

Total
 
2,965,739

 
$
6.36

 
4,452,819

_______________________________________________________________________________
(1) Includes 811,260 shares subject to outstanding LTIP Awards (time-based), 172,989 shares subject to outstanding LTIP Awards (performance-based) and 1,751,073 outstanding non-vested restricted shares of Common Stock; the weighted-average exercise price does not take into account these shares as they have no exercise price.

28






ITEM 6.    SELECTED FINANCIAL DATA.
The following table summarizes our selected historical consolidated financial information for each of the last five years. The selected financial information under the captions “Income Statement Data,” “Per Share Data,” “Balance Sheet Data,” and “Other Data” shown below has been derived from our audited consolidated financial statements. This table should be read in conjunction with other consolidated financial information of KEMET, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, included elsewhere herein. The data set forth below may not be indicative of our future financial condition or results of operations (see Item 1A, “Risk Factors”) (amounts in thousands except per share amounts):
 
 
Fiscal Years Ended March 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,199,926

 
$
757,791

 
$
734,823

 
$
823,192

 
$
833,666

Operating income (loss) (1)
 
113,303

 
35,796

 
33,833

 
23,832

 
(16,878
)
Interest income
 
(809
)
 
(24
)
 
(14
)
 
(15
)
 
(195
)
Interest expense
 
32,882

 
39,755

 
39,605

 
40,701

 
40,962

Income (loss) from continuing operations
 
254,529

 
47,989

 
(53,629
)
 
(19,522
)
 
(64,869
)
Income (loss) from discontinued operations, net of income tax expense (benefit)
 

 

 

 
5,379

 
(3,634
)
Net income (loss)
 
254,529

 
47,989

 
(53,629
)
 
(14,143
)
 
(68,503
)
Per Share Data:
 
 
 
 
 
 
 
 
 
 
Net income (loss) per basic share:
 
 

 
 

 
 

 
 
 
 
Income (loss) from continuing operations
 
$
4.82

 
$
1.03

 
$
(1.17
)
 
$
(0.43
)
 
$
(1.44
)
Income (loss) from discontinued operations, net of income tax expense (benefit)
 
$

 
$

 
$

 
$
0.12

 
$
(0.08
)
Net income (loss)
 
$
4.82

 
$
1.03

 
$
(1.17
)
 
$
(0.31
)
 
$
(1.52
)
Net income (loss) per diluted share:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
4.34

 
$
0.87

 
$
(1.17
)
 
$
(0.43
)
 
$
(1.44
)
Income (loss) from discontinued operations, net of income tax expense (benefit)
 
$

 
$

 
$

 
$
0.12

 
$
(0.08
)
Net income (loss)
 
$
4.34

 
$
0.87

 
$
(1.17
)
 
$
(0.31
)
 
$
(1.52
)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total assets (2)
 
$
1,218,269

 
$
734,325

 
$
699,780

 
$
742,604

 
$
836,193

Working capital
 
391,552

 
248,896

 
228,793

 
228,478

 
227,070

Long-term debt, less current portion (2) (3)
 
304,083

 
386,211

 
385,833

 
386,320

 
385,877

Other non-current obligations
 
151,736

 
60,131

 
74,892

 
57,131

 
55,864

Stockholders’ equity
 
462,963

 
154,472

 
112,481

 
164,682

 
221,884

Other Data:
 
 
 
 
 
 
 
 
 
 
Cash flow provided by (used in) operating activities
 
$
120,860

 
$
71,667

 
$
32,365

 
$
24,402

 
$
(6,746
)
Capital expenditures
 
65,004

 
25,617

 
20,469

 
22,232

 
32,147

Research and development (1)
 
39,619

 
27,398

 
24,613

 
25,513

 
24,188

_______________________________________________________________________________
(1) Fiscal years 2014 through 2017 adjusted due to the adoption of ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU No. 2017-07").
(2) Fiscal years 2014 through 2016 have been restated due to the retroactive adoption of ASU. No 2015-03, Interest - Imputation of Interest (Subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs.
(3) In fiscal year 2018, the 10.5% Senior Notes were repurchased and retired in full and the Company entered into a Term Loan Credit Agreement for $345.0 million.

29






ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows, and financial condition for the three fiscal years ended March 31, 2018, 2017, and 2016. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and related notes appearing elsewhere in this report. The discussions in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Our actual future results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the Item 1A, “Risk Factors” and, from time to time, in our other filings with the Securities and Exchange Commission.
Our Competitive Strengths
We believe that our Company benefits from the following competitive strengths:
Strong Customer Relationships    
We have a large and diverse customer base. We believe that our emphasis on quality control and our performance history establishes loyalty with OEMs, EMSs and distributors. Our customer base includes most of the world’s major electronics OEMs (including Alcatel-Lucent USA, Inc., Bosch Group, Cisco Systems, Inc., Continental AG, Dell Inc., HP Inc., International Business Machines Corporation, Motorola Solutions, L.M. Ericsson, Delphi Technologies PLC, Siemens AG and TRW Automotive), EMSs (including Celestica Inc., Flextronics International LTD, Jabil Circuit, Inc. and Sanmina-SCI Corporation) and distributors (including TTI, Inc., Arrow Electronics, Inc. and Avnet, Inc.). Our strong, extensive and efficient worldwide distribution network is one of our differentiating factors. We believe our ability to provide innovative and flexible service offerings, superior customer support and focus on speed-to-market results in a more rewarding customer experience, earning us a high degree of customer loyalty.
Breadth of Our Diversified Product Offering and Markets    
We believe that we have the most complete line of primary capacitor types spanning a full spectrum of dielectric materials including tantalum, multilayer ceramic, solid and electrolytic aluminum and film capacitors. As discussed below, our acquisition of (and previous private label partnership with) TOKIN, has expanded our product offerings and markets. As a result, we believe we can satisfy virtually all of our customers’ capacitance needs, thereby strengthening our position as their supplier of choice. In addition, through our acquisition of TOKIN, we have products to assist in the management of electronic noise within a device and in communications between devices, as well as products that can sense and respond to human activity, physical vibration, and electric current. We sell our products into a wide range of end-markets, including computing, industrial, telecommunications, transportation, consumer, defense and healthcare across all geographical regions. No single end market industry accounted for more than 30% of net sales; although, one customer, an electronics distributor, accounted for more than 10% of our net sales in fiscal year 2018. No single end-use direct customer accounted for more than 5% of our net sales in fiscal year 2018. We believe that well-balanced product, geographic and customer diversification helps us mitigate some of the negative financial impact through economic cycles.
Leading Market Positions and Operating Scale    
Based on net sales, we believe that we are the largest manufacturer of tantalum capacitors in the world and one of the largest manufacturers of direct current film capacitors in the world and have a substantial market position in the specialty ceramic and custom wet aluminum electrolytic markets. As discussed below, our acquisition of (and previous private label partnership with) TOKIN allows us to achieve true scale in operations to manage raw materials sourcing as well as maximize efficiencies. We believe that our leading market positions and operating scale allow us to realize production efficiencies, leverage economies of scale and capitalize on growth opportunities in the global capacitor market.
Strong Presence in Specialty Products    
We engage in design collaboration with our customers in order to meet their specific needs and provide them with customized products satisfying their engineering specifications. Whether at the concept or design stage, KEMET provides engineering tools and samples to our customers to enable them to make the best product selections. KEMET’s Field Application Engineers (experts in electrical circuits) and Technical Product Managers (experts in product applications) assist our Sales team as they navigate the product selection process with our customers. During fiscal years 2018 and 2017, respectively, specialty products accounted for 41.8% and 40.7% of our revenue. By allocating an increasing portion of our management resources and research and development (“R&D”) investment particularly through our acquisition of (and previous partnership with) TOKIN to specialty products, we have established ourselves as one of the leading innovators in this

30






fast growing, emerging segment of the market, including healthcare, renewable energy, telecommunication infrastructure and oil and gas.
Low-Cost and Strategic Locations    
We believe our manufacturing plants located in China, Thailand, Vietnam, Mexico, Bulgaria, and Macedonia provide some of the lowest cost production facilities in the industry. Many of our key customers relocated or added production facilities to Asia, particularly China. We believe our manufacturing production footprint is essential to best meet our customers demands, production needs, and total value proposition.
Our Brand    
Founded by Union Carbide in 1919 as KEMET Laboratories, we believe that we have established a reputation as a high quality, efficient and affordable partner that sets our customers’ needs as the top priority. This has allowed us to successfully attract loyal clientele and enabled us to expand our operations and market share over the past few years. We believe our commitment to addressing the needs of the industry in which we operate has differentiated us from our competitors. In addition to our traditional reputation of being the “Easy-To-Buy-From” company by providing excellent customer service and on-time delivery, we have now evolved to being the “Easy-To-Design-In” company with the addition of technical resources like KEMET’s online Engineering Center and capacitor selection simulation tools.
Our People    
We believe that we have successfully developed a unique corporate culture based on innovation, customer focus and commitment. We have a strong, highly experienced and committed team in each of our markets. Many of our professionals have developed unparalleled experience in building leadership positions in new markets, as well as successfully integrating acquisitions. Our 22 member senior management team has an average of 17 years of experience with us and an average of 26 years of experience in the manufacturing industry.
Business Strategy
Our strategy is to use our position as a leading, high-quality manufacturer of electronic components and materials to capitalize on the increasingly demanding requirements of our customers. Key elements of our strategy include:
One KEMET Campaign.    
We continue to focus on improving our commercial and technological capabilities through various initiatives that all fall under our One KEMET campaign. The One KEMET campaign aims to ensure that we, as a company, are focused on the same goals and working with the same processes and systems to ensure consistent quality and service that allow us to provide our customers with the technologies they require at a competitive “total cost of ownership.” This effort was launched to ensure that, as we continue to grow, we not only remain grounded in our core principles but that we also use those principles, operating procedures and systems as the foundation from which to expand. These initiatives include our Lean and Six Sigma culture evolution, our global customer accounts management program and our evolution toward a philosophy of being “easy to design-in.”
Develop Our Significant Customer Relationships and Industry Presence.    
We continue to focus on our responsiveness to our customers’ needs and requirements by making order entry and fulfillment easier, faster, more flexible and more reliable for our customers. This will be accomplished by focusing on building products around customers’ needs and by giving decision-making authority to customer-facing personnel and by providing purpose-built systems and processes.
Leverage Our Technological Competence and Expand Our Leadership in Specialty Products    
We continue to leverage our technological competence and our acquisition of (and previous partnership with) TOKIN, by introducing new products in a timely and cost-efficient manner. This allows us to generate an increasing portion of our sales from new and customized solutions that meet our customers’ varied and evolving capacitor needs as well as to improve our financial performance. We believe that by continuing to build on our strength in the higher growth and higher margin specialty segments of the capacitor market, we will be well-positioned to achieve our long-term growth objectives while also improving our profitability. During fiscal year 2018, excluding TOKIN, we introduced 42,719 new products of which 1,078 were first to market, and specialty products accounted for 41.8% of our revenue over this period.

31






Further Expand Our Broad Capacitance Capabilities    
We identify ourselves as the "Electronic Components" company and strive to be the supplier of choice for all our customers' capacitance needs across the full spectrum of dielectric materials including tantalum, multilayer ceramic, solid and electrolytic aluminum, film and paper. While we believe we have the most complete line of capacitor technologies across these primary capacitor types, we intend to continue to research and pursue additional capacitance technologies and solutions in order to maximize the breadth of our product offerings. As discussed below, through our acquisition of (and previous partnership with) TOKIN we have further expanded our product offerings to electric double layer capacitors, electro-magnetic devices, sensors, and actuators.
Selectively Target Complementary Acquisitions and Equity Investments    
As strategic opportunities are identified, we will evaluate and possibly pursue them if they would enable us to enhance our competitive position and expand our market presence. Our strategy is to acquire complementary capacitor and other related businesses allowing us to leverage our business model, potentially including those involved in other passive components that are synergistic with our customers’ technologies and our current product offerings. For example, in fiscal year 2012, we acquired KBP, which has allowed us to vertically integrate certain manufacturing processes within Solid Capacitors. Further, as described below, we recently acquired TOKIN, a manufacturer of tantalum capacitors and electro-magnetic devices.
In fiscal year 2018, we entered into a Joint Venture Agreement for the formation of KEMET Jianghai Electronic Components Co. Ltd., a limited liability company located in Nantong, China with Jianghai (Nantong) Film Capacitor Co., Ltd, a subsidiary of Nantong Jianghai Capacitor Co. Ltd ("Jianghai"). KEMET Jianghai Electronic Components will manufacture axial electrolytic capacitors and (H)EV Film DC brick capacitors, for distribution through the KEMET and Jianghai sales channels.
Also during fiscal year 2018, the Company invested in Novasentis' Series-D round of funding. Novasentis makes the world's thinnest, electro mechanical polymer based actuators that provide rich haptic feedback for a variety of applications, including augmented/virtual reality and wearables. Novasentis will supply its "smart" film and KEMET will apply its expertise in manufacturing film capacitors to the development and commercial production of the actuators.
Promote the KEMET Brand Globally    
We are focused on promoting the KEMET brand globally by highlighting the high-quality and high reliability of our products and our superior customer service. We will continue to market our products to new and existing customers around the world in order to expand our business. We continue to be recognized by our customers as a leading global supplier. For example, in calendar years 2016 and 2017, we received the “Global Operations Excellence Award” from TTI, Inc.   
Global Sales & Marketing Strategy    
Our motto “Think Global, Act Local” describes our approach to sales and marketing. Each of our four sales regions (Americas, EMEA, JPKO and APAC) have account managers, field application engineers and strategic marketing managers. In addition, we also have local customer and quality-control support in each region. This organizational structure allows us to respond to the needs of our customers on a timely basis and in their native language. The regions are managed locally and report to a senior manager who is on the KEMET Leadership Team. Furthermore, this organizational structure ensures the efficient communication of our global goals and strategies and allows us to serve the language, cultural and other region-specific needs of our customers.
TOKIN

Through our acquisition of TOKIN and previous cross licensing agreement and Amended and Restated Private Label Agreement with TOKIN, we have expanded product offerings and markets for both KEMET and TOKIN. KEMET’s strong presence in the western hemisphere and TOKIN's excellent position in Japan and Asia significantly enhanced our customer reach. Through TOKIN we believe we can achieve true scale in operations allowing us to manage raw materials sourcing as well as maximize efficiencies and best practices in manufacturing and product development. We believe that the international management team of KEMET and TOKIN has allowed us to be more sensitive and aware of region-specific business needs compared to our competitors. Combining our R&D capabilities and university relationships allows us to be on the forefront of new developments and technological advancements in the capacitor industry. Leveraging R&D investment in both Japan and the U.S. enables KEMET to diversify beyond capacitors in the passives market as a result of the TOKIN acquisition (and previous partnership).

32






Recent Developments and Trends
TOKIN
Between February 1, 2013 and April 19, 2017, KEMET, through its wholly-owned subsidiary, KEMET Electronics Corporation (“KEC”), held a 34% economic interest in TOKIN Corporation (“TOKIN”) pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among KEC, TOKIN and NEC Corporation (“NEC”), as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of TOKIN outstanding as of such date. TOKIN was established in Japan in 1938 and is engaged in production and distribution of tantalum capacitors, transmitting communication devices, magnetic devices, piezoelectric devices and sensors. TOKIN has six manufacturing locations throughout Asia and was previously operating as a joint venture with NEC.     
On April 14, 2017, TOKIN closed on the sale of its electro-mechanical devices ("EMD") business to NTJ Holdings 1 Ltd. (“NTJ”), a special purpose entity that is owned by funds managed or operated by Japan Industrial Partners, Inc. ("JIP"), pursuant to a master sale and purchase agreement (the “EMD Master Sale and Purchase Agreement”) previously entered into between TOKIN, NTJ, and JIP ("Sale of EMD"). The initial selling price for EMD was JPY 48.2 billion, or approximately $431.0 million (using the March 31, 2017 exchange rate of 111.823 Japanese Yen to 1.00 U.S. Dollar) and was subject to certain working capital adjustments. In the third quarter of fiscal year 2018, the selling price was adjusted by JPY 1.1 billion or approximately $10.1 million (using the December 31, 2017 exchange rate of 112.574 Japanese Yen to 1.00 U.S. Dollar) related to working capital and other adjustments in accordance with the EMD Master Sale and Purchase Agreement. At the closing of the Sale of EMD, TOKIN used a portion of the sale proceeds to repay debt related to a shareholder loan from NEC. The TOKIN historical balance sheet was adjusted to reflect the removal of net assets sold and other items directly impacted by the Sale of EMD. Additionally, due to KEMET's 34% equity interest in TOKIN held as of the closing, adjustments have been made to reflect KEMET's accounting for the Sale of EMD in accordance with the equity method of accounting.
On April 19, 2017, pursuant to the TOKIN Purchase Agreement dated February 23, 2017 between KEC and NEC, KEC completed its acquisition, subject to the final purchase price adjustment, of the remaining 66% economic interest in TOKIN, and as a result TOKIN is now a 100% owned indirect subsidiary of KEMET. Under the terms of the TOKIN Purchase Agreement, KEC paid NEC JPY 16.2 billion, or approximately $148.6 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), for all of the outstanding shares of TOKIN it did not already own. The preliminary purchase price was comprised of JPY 6.0 billion, or approximately $55.0 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar) plus JPY 10.2 billion, or approximately $93.6 million, which represented one-half of the estimated excess net cash proceeds (“Excess Cash”) from the Sale of EMD. The acquisition price was subject to working capital adjustments pursuant to the EMD Master Sale and Purchase Agreement. As a result of these working capital adjustments, the acquisition price was increased by JPY 0.3 billion, or approximately $3.0 million (using the September 30, 2017 exchange rate of 112.502 Japanese Yen to 1.00 U.S. Dollar) in the second quarter of fiscal year 2018. No additional working capital adjustments were recorded in the remainder of fiscal year 2018.
As part of the TOKIN Acquisition, KEMET recorded acquisition gains totaling $130.9 million consisting of the following: a gain of $68.7 million to mark its 34% interest in TOKIN to fair value and a $62.2 million gain on the acquisition of TOKIN for the year ended March 31, 2018.
We believe the acquisition of TOKIN has expanded KEMET’s geographic presence, combining KEMET’s presence in the western hemisphere and TOKIN’s excellent position in Asia to enhance customer reach and create an entrance into Japan for KEMET. We believe TOKIN’s product portfolio is a strong complement to KEMET’s existing product portfolio. We believe the combination creates a leader in the combined polymer and tantalum capacitors market. The acquisition also enhances KEMET’s product diversification with entry into EMC devices, as well as sensors and actuators. With the increased scale, the Company anticipates optimizing costs through competitive raw materials sourcing and maximizing operating efficiencies. The acquisition was accretive to earnings with improvement in Net income, Adjusted EBITDA, and cash flow.

33






The following table shows the components of the acquisition price (amounts in thousands):
Upfront cash consideration (1)
$
148,614

Excess cash payment (2)
3,144

Indemnity asset (3)
8,500

Less: Put option (4)
(9,900
)
Net consideration transferred
$
150,358

_______________________________________________________________________________
(1) The upfront cash payment is comprised of JPY 6.0 billion plus one half of Excess Cash in an amount of approximately JPY 10.2 billion, approximately $55.0 million and $93.6 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), respectively.
(2) Current estimate of the additional amount due to NEC Corporation upon the settlement of the adjusted purchase price for the EMD sale.
(3) Pursuant to the Stock Purchase Agreement between KEMET and NEC, NEC was required to indemnify TOKIN and/or KEC for any breaches by TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement. NEC’s aggregate liability for indemnification claims was limited to $25.0 million. Prior to the acquisition, KEMET's equity method investment balance included an $8.5 million indemnification asset pursuant to this indemnification arrangement. In connection with the TOKIN Acquisition, NEC was released from its indemnification obligations to KEMET without an exchange of consideration; as such, this amount of released obligation is included as purchase consideration by KEMET.
(4) Pursuant to the option agreement, dated as of March 12, 2012, by and among NEC and KEMET (the “Option Agreement”), from April 1, 2015 through May 31, 2018, NEC had the right to require KEC to purchase all outstanding capital stock of TOKIN (the “Put Option”). The fair value of the Put Option of $9.9 million was reflected as a liability on KEMET’s balance sheet prior to KEMET’s acquisition of the remaining 66% economic interest in TOKIN. The Put Option was canceled, pursuant to the terms of the TOKIN Purchase Agreement with no exchange of consideration between NEC and KEMET. Accordingly, the fair value of the Put Option reduces the amount of consideration paid to acquire NEC’s equity in TOKIN.

The following table reflects the bargain purchase gain resulting from the TOKIN Acquisition (amounts in thousands):

Net consideration transferred
$
150,358

Fair value of KEMETs previously held equity interest in TOKIN (1)
204,112

Less: fair value of net assets acquired
(416,629
)
Bargain purchase gain
$
(62,159
)
_______________________________________________________________________________
(1) Value based in the 34% of the enterprise value determined under the discounted cash flow method.

In performing acquisition accounting procedures, we engaged an internationally recognized independent valuation firm to assist in the valuation of identifiable net assets acquired.  We also performed an extensive review for any unrecorded assets, liabilities, and contingencies.  After identifying and valuing acquired assets and liabilities, we concluded recording a bargain purchase gain was appropriate and required under ASC 805-30-25-2.  We believe the bargain purchase gain resulted from (1) NEC seeking repayment of its receivables due from TOKIN pursuant to TOKIN’s January 25, 2013 Loan Agreement with NEC of JPY 25.4 billion, or approximately $233.2 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), which the sale transaction achieved, and for which TOKIN did not have the resources to pay prior to the transaction; and, (2) a predetermined purchase price which, other than certain customary working capital adjustments, was  not subject to amendment irrespective of the amount of proceeds resulting from the sale of TOKIN’s EMD business, which was a precondition to our acquisition of TOKIN.  The bargain purchase gain is recognized in the line item “Acquisition (gain) loss” in the Consolidated Statements of Operations.

See Note 2, "Acquisitions" for further discussion on the TOKIN acquisition.

(Gain) Loss on Write down and Disposal of long-lived assets:
During fiscal year 2018, we recorded a net gain on disposal of long-lived assets of $1.0 million, which was comprised of $1.2 million in net gains on the write-down and disposal and long-lived assets offset by $0.2 million in impairment charges. The net gains on the sale and disposal of long-lived assets are primarily related to the sale of equipment, land, and buildings from KFM, which was shut down in fiscal year 2017. On March 13, 2018, the Company sold KFM's land and building to a third party for a gross sales price of $3.6 million. The net proceeds realized by the Company were approximately $3.4 million after payment of $0.2 million in closing costs. The Company realized a gain on the sale of the land and buildings of approximately $1.9 million during the year ended March 31, 2018 as a result of the sale. In addition, the Company sold KFM's equipment for a $1.4 million gain. These gains were partially offset by MSA's loss on disposals of assets of $1.3 million primarily related to equipment and buildings used for discontinued products and Solid Capacitors recorded a loss of approximately $0.6 million related to the relocation of its K-Salt operations from a leased facility to its existing Matamoros, Mexico facility. See Note 8, "(Gain) loss on write down and disposal of long-lived assets" for further discussion.

34






Restructuring
KEMET incurred severance charges across various overhead functions in its Simpsonville, South Carolina office as these functions were relocated to the new corporate headquarters in Fort Lauderdale, Florida. The relocation was substantially complete by March 31, 2018. Within the TOKIN legacy group, KEMET took a reduction in force across various operational and overhead functions. The reduction is expected to result in savings of approximately $6.5 million in fiscal year 2019, increasing to $9.2 million per year in fiscal year 2020 and fiscal year 2021. Expected completion is December 31, 2018.
Solid Capacitors is streamlining its vertical integration strategy by relocating its tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant. The relocation is expected to result in operating cost savings of approximately $0.8 million, $2.3 million, and $3.1 million in fiscal years 2019, 2020, and 2021, respectively. Severance charges and equipment relocation costs are expected to be recognized over the next seven quarters.
Film and Electrolytic took a voluntary reduction in force in its Italian operations. Cost savings are expected to begin in March 2018 and are expected to be approximately $1.0 million beginning in fiscal year 2019, $2.0 million in fiscal year 2020 and growing to $2.4 million in fiscal year 2021.
These restructuring plans are summarized in the table below (amounts in thousands):
 
 
Total expected to be incurred
 
Incurred during year ended March 31, 2018
 
Cumulative incurred to date
Restructuring Plan (1)
Segment
Personnel Reduction Costs
Relocation & Exit Costs
 
Personnel Reduction Costs
Relocation & Exit Costs
 
Personnel Reduction Costs
Relocation & Exit Costs
US overhead function relocation to Fort Lauderdale, FL
Corporate
$
2,734

$
909

 
$
2,734

$
909

 
$
2,734

$
909

TOKIN operational & overhead function reduction in force
MSA, Corporate, & Solid Capacitors (2)
4,397


 
4,397


 
4,397


Tantalum powder facility relocation
Solid Capacitors
897

2,098

 


 


Italian operations reduction in force
Film and Electrolytic
5,243


 
5,243


 
5,243


___________________________________________
(1) Restructuring charges presented exclude $0.2 million in other miscellaneous personnel charges. These expenses are included in the Consolidated Statements of Operations line item "Restructuring charges."
(2) Personnel reduction costs are comprised of $3.3 million, $0.9 million, and $0.1 million within the MSA, Corporate, and Solid Capacitor segments, respectively.

Long-term debt
On April 28, 2017, KEMET entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among the Company, KEC (together with the Company, the “Borrowers”), Bank of America, N.A. as the Administrative Agent and Collateral Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and bookrunner, and various lenders party thereto from time to time. The Term Loan Credit Agreement provides for a $345.0 million term loan facility. In addition, the Borrowers may request incremental term loan commitments in an aggregate amount not to exceed $50.0 million (together with the initial $345.0 million term loan, the “Term Loans”). The proceeds were used, together with cash on hand, to fund the redemption of all of KEMET’s outstanding 10.5% Senior Notes, which were called for redemption on April 28, 2017. The Term Loans were issued at a price of 97.0% (with an original issue discount of 300 basis points). At the Company’s election, the Term Loans may be made as either Base Rate Term Loans or LIBO Rate Term Loans (each as defined in the Term Loan Credit Agreement). The applicable margin for term loans is 5.0% for Base Rate Term Loans and 6.0% for LIBO Rate Term Loans. All LIBO Rate Term Loans are subject to a pre-margin floor of 1.00%. The Term Loan Credit Agreement contains customary covenants and events of default. The Company also entered into the Term Loan Security Agreement dated April 28, 2017 (the “Security Agreement”), among the Company, KEC, certain other subsidiaries of the Company, and Bank of America, N.A., as collateral agent, pursuant to which the Company’s obligations under the Term Loan Credit Agreement are secured by a pledge of 65.0% of the outstanding voting stock of certain first-tier subsidiaries organized in Italy, Japan, Mexico and Singapore, and a second lien pledge on the collateral securing KEMET’s revolving credit facility. The obligations of the Company under the Term Loan Credit Agreement are guaranteed by certain of its subsidiaries, including KRC Trade Corporation, KEMET Services Corporation, KBP and The Forest Electric Company. The Term Loans mature April 28, 2024, and may be extended in accordance with the Term Loan Credit Agreement. The Company may prepay loans under the Term Loan Credit Agreement at any time, subject to certain notice requirements and certain prepayment premiums during the first

35






two years. On a quarterly basis the Company must repay 1.25% of the aggregate principle amount on the initial $345.0 million term loan, or $4.3 million; payments began on September 29, 2017.
In connection with the closing of the new Term Loan Credit Agreement, KEC also entered into Amendment No. 9 to Loan and Security Agreement, Waiver and Consent, dated as of April 28, 2017, by and among KEC, the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., as agent for the lenders (the “Loan Amendment”). The Loan Amendment increased the facility to $75.0 million and provided KEC with lower applicable interest rate margins and the ability to complete the refinancing of the 10.5% Senior Notes. As part of the overall refinancing, KEC repaid all amounts outstanding under the Loan Amendment.

Subsequent Events
Amended and Restated Employment Agreement
On April 18, 2018, the Company amended and restated the employment agreement with the Company's Chief Executive Officer. The unvested Restricted Stock Units previously granted to him on June 29, 2015 and September 6, 2017, totaling 175,000 and 100,000 shares respectively, immediately became vested. The modification of the award terms did not result in any incremental compensation cost. However, total compensation cost of $1.7 million will be accelerated and recognized during the three-month period ending June 30, 2018.

Off-Balance Sheet Arrangements
As of March 31, 2018, other than operating lease commitments as described in Note 15, “Commitments and Contingencies”, we are not a party to any off-balance sheet financing arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our accounting policies are summarized in Note 1, “Organization and Significant Accounting Policies” to the consolidated financial statements. The following identifies a number of policies which require significant judgments and estimates, or are otherwise deemed critical to our financial statements.
Our estimates and assumptions are based on historical data and other assumptions that we believe 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.
Our judgments are based on our 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 consolidated financial statements. Readers should understand that actual future results could differ from these estimates, assumptions, and judgments.
A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (i.e., 1%, 10%, etc.) are included to allow readers of this Annual Report on Form 10-K to understand a general cause and effect of changes in the estimates and do not represent our predictions of variability. For these estimates, it should be noted that future events rarely develop exactly as forecast, and estimates require regular review and adjustment. We believe the following critical accounting policies contain the most significant judgments and estimates used in the preparation of the consolidated financial statements:
REVENUE RECOGNITION.    We ship 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, KEMET 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. We recognize revenue when title to the products transfers to the customer.

36






A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. Our distributor policy includes inventory price protection and SFSD programs common in the industry. The price protection policy protects the value of the distributors’ inventory in the event we reduce our published selling price to distributors. This program allows the distributor to debit us for the difference between our list price and the lower authorized price for specific parts. We establish price protection reserves on specific parts residing in distributors’ inventories in the period that the price protection is formally authorized by KEMET.
KEMET’s SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a case-by-case pre-approved 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, apply only to a specific customer, part, specified special price amount, specified quantity, and is 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.  We believe this methodology enables us to make reliable estimates of future adjustments under the SFSD program.   If the historical SFSD run rates used in our calculation changed by 1% in fiscal year 2018, net sales would be impacted by $0.9 million.
The establishment of these reserves is recognized as a component of the line item “Net sales” on the Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable” on the 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 our estimates.
INVENTORIES.    Inventories are valued at the lower of cost or net realizable value. For most of the inventory, cost is determined under the first-in, first-out method. For tool crib, a component of our raw material inventory, cost is determined under the average cost method. The valuation of inventories requires us to make estimates. We also must assess the prices at which we believe the finished goods inventory can be sold compared to its cost. A sharp decrease in demand could adversely impact earnings as the reserve estimates could increase.
PENSION AND POST-RETIREMENT BENEFITS.    Our management, with the assistance of actuarial firms, performs actuarial valuations of the fair values of our pension and post-retirement plans’ benefit obligations. We make certain assumptions that have a significant effect on the calculated fair value of the obligations such as the:
discount rate—used to arrive at the net present value of the obligation; and
salary increases—used to calculate the impact future pay increases will have on post-retirement obligations.
We understand that these assumptions directly impact the actuarial valuation of the obligations recorded on the Consolidated Balance Sheets and the income or expense that flows through the Consolidated Statements of Operations.
We base our assumptions on either historical or market data that we consider reasonable. Variations in these assumptions could have a significant effect on the amounts reported in Consolidated Balance Sheets and the Consolidated Statements of Operations. The most critical assumption relates to the discount rate. A 25 basis point increase or decrease in the weighted average discount rate would result in changes to the projected benefit obligation of ($4.4) million and $4.9 million, respectively.
GOODWILL AND LONG-LIVED ASSETS.    Goodwill, which represents the excess of purchase price over fair value of net assets acquired, and intangible assets with indefinite useful lives are tested for impairment at least on an annual basis. We perform our impairment test during the fourth quarter of each fiscal year and when otherwise warranted.
We evaluate our goodwill on a reporting unit basis. This requires us to estimate the fair value of the reporting units based on the future net cash flows expected to be generated. The impairment test involves a comparison of the fair value of each reporting unit, with the corresponding carrying amounts. If the reporting unit’s carrying amount exceeds its fair value, then an indication exists that the reporting unit’s goodwill may be impaired. The impairment to be recognized is measured by the amount by which the carrying value of the reporting unit’s goodwill being measured exceeds its implied fair value. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the sum of the amounts assigned to identified net assets. As a result, the implied fair value of goodwill is generally the residual amount that results from subtracting the value of net assets including all tangible assets and identified intangible assets from the fair value of the reporting unit’s fair value. We determine the fair value of our reporting units using an income-based, discounted cash flow (“DCF”) analysis, and market-based approaches (Guideline Publicly Traded Company Method and Guideline Transaction Method) which examine transactions in the marketplace involving the sale of the stocks of similar publicly-owned companies, or the sale of entire companies engaged in operations similar to KEMET. In addition to the above described reporting unit valuation techniques, our

37






goodwill impairment assessment also considers our aggregate fair value based upon the value of our outstanding shares of common stock.
Our goodwill balance of $40.3 million is comprised of $35.6 million related to KBP, which is within the Tantalum product line of the Solid Capacitors segment, and $4.7 million related to IntelliData, which is a corporate asset. As part of our annual impairment testing, we determine the fair value of the relevant reporting unit(s) using an income-based, DCF analysis for KBP at the Tantalum product line level, and an internal rate of return analysis for IntelliData.
Significant assumptions used in the DCF analysis are:
the discount rate based on the weighted average cost of capital (“WACC”),
estimated sales growth rates, and
the estimated market price and production cost for tantalum products
Our WACC is determined through market comparisons combined with small stock and equity risk premiums. Tantalum’s sales growth rates are estimated through KEMET’s three-year strategic plan.
Long-lived assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or group of assets may not be recoverable. A long-lived asset classified as held for sale is initially measured and reported at the lower of its carrying amount or fair value less cost to sell.
Long-lived assets to be disposed of other than by sale are classified as held and used until the long-lived asset is disposed of.
Tests for the recoverability of a long-lived asset to be held and used are performed by comparing the carrying amount of the long-lived asset to the sum of the estimated future undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, we use future projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. These assumptions include, among other estimates, periods of operation and projections of sales and cost of sales. Changes in any of these estimates could have a material effect on the estimated future undiscounted cash flows expected to be generated by the asset. If it is determined that the book value of a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value. The fair value is calculated as the discounted cash flows of the underlying assets.
We evaluate the value of our other indefinite-lived intangible assets (trademarks) using an income-based, relief from royalty analysis.
The Company completed its impairment test on goodwill and intangible assets with indefinite useful lives as of January 1, 2018 and concluded that goodwill and indefinite-lived assets were not impaired nor were they at risk of failing step one of the impairment test as the fair value of each of the assets exceeds the carrying value by more than 10%. The type of events that could result in a future goodwill impairment could include an increase of over 100 basis points in the Company's derived weighted-average cost of capital, which could be driven by stock price volatility, increases in government or corporate bond market rates, or other factors. A one percent increase or decrease in the discount rate used in the goodwill and indefinite-lived assets valuation would have resulted in changes in fair value in the following amounts, and would not have resulted in an impairment charge:
 
 
 
 
Discount Rate Sensitivity, in millions
 
 
Fair Value in Excess of Carrying Value, %
 
+1%
 
-1%
Goodwill - KBP
 
108.0
%
 
$
(36.0
)
 
$
45.0

Trademarks
 
1,674.0
%
 
(9.6
)
 
11.3

Goodwill - IntelliData
 
49.0
%
 
(0.9
)
 
1.1

INCOME TAXES.    Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual effective tax rate reflected in our consolidated financial statements is different from that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Income taxes are accounted for under

38






the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.
We believe that it is more likely than not that a portion of the deferred tax assets in various jurisdictions will not be realized, based on the scheduled reversal of deferred tax liabilities, the recent history of cumulative losses, and the insufficient evidence of projected future taxable income to overcome the loss history. We have provided a valuation allowance related to any benefits from income taxes resulting from the application of a statutory tax rate to the deferred tax assets. We continue to have net deferred tax assets (future tax benefits) in several jurisdictions which we expect to realize, assuming, based on certain estimates and assumptions, sufficient taxable income can be generated to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional tax expense. The amount of future income required for the Company to realize its net deferred tax assets is $51.3 million.
Differences between the provision for income taxes on earnings from continuing operations and the amount computed using the U.S. Federal statutory income tax rate are primarily due to the changes in the U.S. and foreign valuation allowances, the non-taxable gain from the bargain purchase, taxable foreign source income, and differences due to U.S. tax law changes.
The accounting rules require that we recognize, in our financial statements, the impact of a tax position, if that position is “more likely than not” of not being sustained on audit, based on the technical merits of the position. Any accruals for estimated interest and penalties would be recorded as a component of income tax expense.
To the extent that the provision for income taxes changed by 1% of income before income taxes, consolidated net income would change by $1.9 million in fiscal year 2018.

39






Results of Operations
Historically, revenues and earnings may or may not be representative of future operating results due to various economic and other factors. The following table sets forth the Consolidated Statements of Operations for the periods indicated (amounts in thousands):
 
 
Fiscal Years Ended March 31,
 
 
2018
 
2017
 
2016
Net sales
 
$
1,199,926

 
$
757,791

 
$
734,823

Operating costs and expenses:
 
 
 
 
 
 
Cost of sales (1)
 
859,533

 
570,864

 
571,011

Selling, general and administrative expenses (1)
 
173,620

 
107,658

 
100,813

Research and development (1)
 
39,619

 
27,398

 
24,613

Restructuring charges
 
14,843

 
5,404

 
4,178

(Gain) loss on write down and disposal of long-lived assets
 
(992
)
 
10,671

 
375

Total operating costs and expenses
 
1,086,623

 
721,995

 
700,990

Operating income (loss) (1)
 
113,303

 
35,796

 
33,833

Non-operating (income) expense:
 
 
 
 
 
 
Interest income
 
(809
)
 
(24
)
 
(14
)
Interest expense
 
32,882

 
39,755

 
39,605

Acquisition (gain) loss
 
(130,880
)
 

 

Change in value of TOKIN options
 

 
(10,700
)
 
26,300

Other (income) expense, net (1)
 
24,592

 
(3,871
)
 
(841
)
Income (loss) before income taxes and equity income (loss) from equity method investments
 
187,518

 
10,636

 
(31,217
)
Income tax expense (benefit)
 
9,181

 
4,290

 
6,006

Income (loss) before equity income (loss) from equity method investments
 
178,337

 
6,346

 
(37,223
)
Equity income (loss) from equity method investments
 
76,192

 
41,643

 
(16,406
)
Net income (loss)
 
$
254,529

 
$
47,989

 
$
(53,629
)
______________________________________________________________________________
(1) Fiscal years ending March 31, 2017 and 2016 adjusted due to the adoption of ASU No. 2017-07.

Consolidated Comparison of Fiscal Year 2018 to Fiscal Year 2017
Net Sales
Net sales of $1.2 billion in fiscal year 2018 increased 58.3% from $757.8 million in fiscal year 2017. Solid Capacitor and Film and Electrolytic sales increased by $196.1 million and $19.0 million, respectively, and net sales for our new segment MSA were $227.0 million. Prior to the TOKIN acquisition on April 19, 2017, the Company did not have any MSA sales.
The increase in Solid Capacitors net sales was primarily driven by the addition of net sales of $133.8 million resulting from the TOKIN acquisition and an increase in net sales to the legacy products distributor channel of $81.7 million. To a lesser degree, an increase in legacy Ceramic products' net sales in the EMS channel across all regions and in the OEM channel in the EMEA and APAC regions also contributed to the increase in Solid Capacitors net sales. These increases were partially offset by a decrease in net sales in the OEM channel for legacy Tantalum products across all regions. In addition, Solid Capacitors net sales was favorably impacted by $6.1 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
The increase in Film and Electrolytic net sales was driven by an increase in net sales in the distributor channel across the APAC and EMEA regions of $13.7 million, and to a lesser degree, an increase in sales in the OEM channel of the EMEA region and the EMS channel across the Americas, EMEA, and APAC regions. These increases were partially offset by a decrease in net sales in the OEM channel across the Americas, APAC, and JPKO regions. In addition, there was a favorable impact of $7.6 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.

40






In fiscal years 2018 and 2017, net sales by region were as follows (dollars in thousands):
 
 
Fiscal Year 2018
 
 
 
Fiscal Year 2017
 
 
Net Sales
 
% of
Total
 
 
 
Net Sales
 
% of
Total
APAC
 
$
479,987

 
40.0
%
 
APAC
 
$
288,764

 
38.1
%
EMEA
 
277,643

 
23.1
%
 
EMEA
 
237,890

 
31.4
%
Americas
 
259,105

 
21.6
%
 
Americas
 
224,056

 
29.6
%
JPKO
 
183,191

 
15.3
%
 
JPKO
 
7,081

 
0.9
%
Total
 
$
442,296

 
 
 
Total
 
$
231,137

 
 
In fiscal years 2018 and 2017, the percentages of net sales by channel to total net sales were as follows (dollars in thousands):
 
 
Fiscal Year 2018
 
 
 
Fiscal Year 2017
 
 
Net Sales
 
% of Total
 
 
 
Net Sales
 
% of Total
OEM
 
$
563,240

 
46.9
%
 
OEM
 
$
246,850

 
32.6
%
Distributors
 
470,324

 
39.2
%
 
Distributors
 
354,639

 
46.8
%
EMS
 
166,362

 
13.9
%
 
EMS
 
156,302

 
20.6
%
Total
 
$
636,686

 
 
 
Total
 
$
510,941

 
 

Gross Margin
Gross margin for the fiscal year ended March 31, 2018 of $340.4 million (28.4% of net sales) increased $153.5 million or 82.1% from $186.9 million (24.7% of net sales) in the prior fiscal year. Gross margin as a percentage of net sales improved 370 basis points. Solid Capacitors gross margin increased $100.4 million, or 57.5% due to an increase in net sales, cost improvements in vertical integration, favorable foreign currency impact to manufacturing costs, and manufacturing process improvements resulting from annual cost reduction activities as well as our acquisition with TOKIN. TOKIN contributed $47.0 million to Solid Capacitors gross margin in fiscal year 2018. Film and Electrolytic gross margin increased $3.8 million, or 30.3% due to an increase in net sales, as well as the benefit of completed restructuring activities. MSA gross margin was $49.3 million for the fiscal year ended March 31, 2018.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses of $173.6 million (14.5% of net sales) for fiscal year 2018 increased $66.0 million, or 61.3% compared to $107.7 million (14.2% of net sales) for fiscal year 2017. The increase was primarily attributable to $41.9 million in SG&A expenses incurred by TOKIN for the fiscal year ended March 31, 2018. In addition, the increase was related to $15.7 million in increased payroll-related expenses and benefits, a $9.1 million increase in office related expenses and rent, a $4.1 million increase in professional fees and a $2.4 million increase in travel related expenses. These increases were partially offset by a $7.0 million decrease in ERP integration and technology transition costs and a $0.4 million decrease in legal expenses.
Research and Development
R&D expenses of $39.6 million (3.3% of net sales) for fiscal year 2018 increased $12.2 million or 44.6% compared to $27.4 million (3.6% of net sales). The increase was primarily related to $10.1 million in R&D expenses incurred by TOKIN for fiscal year 2018 and $2.2 million in increased payroll-related expenses.

41






(Gain) Loss on Write Down and Disposal of Long-Lived Assets
In fiscal year 2018 the Company recorded a net gain on write down and disposal of long-lived assets of $1.0 million, which was comprised of $1.2 million in net gains on the sale and disposal of long-lived assets offset by $0.2 million in impairment charges. The net gains on the sale and disposal of long-lived assets and impairment charges are recorded on the Consolidated Statement of Operations line item "(Gain) loss on write down and disposal of long-lived assets." The net gains on the sale and disposal of long-lived assets are primarily related to the sale of equipment, land, and buildings from KFM, which was shut down in fiscal year 2017. On March 13, 2018, the Company sold KFM's land and buildings to a third party for a gross sales price of $3.6 million. The net proceeds realized by the Company were approximately $3.4 million after payment of $0.2 million in closing costs. The Company realized a gain on the sale of the land and buildings of approximately $1.9 million during the year ended March 31, 2018. In addition, the Company sold KFM's equipment for a $1.4 million gain. These gains were partially offset by MSA's loss on disposals of assets of $1.3 million primarily related to equipment and buildings used for discontinued products and Solid Capacitors' loss of approximately $0.6 million related to the relocation of its K-Salt operations from a leased facility to its existing Matamoros, Mexico facility.
In fiscal year 2017, the Company recorded a net loss on write down and disposal of long-lived assets of $10.7 million, which was comprised of $0.4 million in net losses on the sale and disposal of long-lived assets and $10.3 million in impairment charges. Film and Electrolytic incurred impairment charges totaling $8.2 million ($0.18 per basic share and $0.15 per diluted share). The impairment charges consisted of the following two actions.
On August 31, 2016, KEMET Electronics Corporation, a wholly-owned subsidiary of KEMET made the decision to shut-down operations of its wholly-owned subsidiary, KFM. Operations at KFM’s Knoxville, Tennessee plant ceased as of October 31, 2016. KFM supplied formed foil to the Company’s Film and Electrolytic Business Group, as well as to certain third party customers. The Company recorded impairment charges related to KFM totaling $4.1 million comprised of $3.0 million for the write down of property plant and equipment and $1.1 million for the write down of intangible assets. In addition, the Company accrued severance charges and restructuring costs described in Note 4, “Restructuring.”
The Company also recorded impairment charges of $4.1 million related to a decline in real estate market conditions surrounding its vacated Sasso Marconi, Italy manufacturing facility. KEMET used a capitalization of income method to estimate fair value taking into account the surface area of the property, the lease price per unit of surface area, and a weighted average cost of capital.
In fiscal year 2017, Solid Capacitors incurred impairment charges totaling $2.1 million ($0.04 per basic share and $0.04 per diluted share) related to the relocation of our leased K-salt facility to our existing Matamoros, Mexico facility. In addition, the Company accrued severance charges described in Note 4 “Restructuring” and incurred equipment relocation costs of approximately $0.6 million during fiscal year 2017.
Restructuring Charges
Restructuring charges of $14.8 million in fiscal year 2018 increased $9.4 million or 174.7% from $5.4 million in fiscal year 2017.
Restructuring charges in the fiscal year ended March 31, 2018 included $12.6 million of personnel reduction costs and $2.3 million of relocation costs. The personnel reduction costs of $12.6 million are due to $5.2 million related to a voluntary reduction in force in the Film and Electrolytic segment's Italian operations; $4.4 million related to a headcount reduction in the TOKIN legacy group across various internal and operational functions; $2.7 million in severance charges across various overhead functions in the Simpsonville, South Carolina office as these functions were relocated to the Company's new corporate headquarters in Fort Lauderdale, Florida; and $0.2 million in headcount reductions related to a European sales reorganization.
The manufacturing relocation costs of $2.3 million include $0.9 million in lease termination penalties related to the relocation of global marketing, finance and accounting, and information technology functions to the Company's Fort Lauderdale office, $0.8 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant, $0.4 million in exit costs related to the shut-down of operations for KFM, and $0.1 million related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.     
Restructuring charges in the fiscal year ended March 31, 2017 included $2.2 million related to personnel reduction costs and $3.2 million of relocation costs. The personnel reduction costs correspond with the following: $0.3 million related to the consolidation of certain Solid Capacitor manufacturing in Matamoros, Mexico; $0.4 million for headcount reductions related to the shut-down of operations for KFM in Knoxville, Tennessee; $0.3 million related to headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines and laboratories to lower cost regions; $0.3 million for overhead reductions in Sweden; $0.3 million in U.S. headcount reductions related to the

42






relocation of global marketing functions to the Company’s Fort Lauderdale, Florida office; $0.3 million in headcount reductions related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico; $0.2 million in overhead reductions for the relocation of R&D operations from Weymouth, England to Evora, Portugal; and $0.1 million in manufacturing headcount reductions related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant.
The manufacturing relocation costs of $3.2 million include $1.9 million in expenses related to contract termination costs related to the shut-down of operations for KFM; $0.6 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant; $0.6 million for transfers of Film and Electrolytic production lines and R&D functions to lower cost regions; and $0.1 million related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.
Operating Income (Loss)
Operating income for fiscal year 2018 of $113.3 million increased $77.5 million compared to operating income of $35.8 million in fiscal year 2017. The improvement was primarily due to a $153.5 million increase in gross margin and a $11.7 million favorable impact from (gain) loss on write down and disposal of long-lived assets. These improvements to operating income were partially offset by a $66.0 million increase in SG&A expenses, a $12.2 million increase in R&D expenses, and a $9.4 million increase in restructuring charges.
Non-Operating (Income) Expense, net
Non-operating income, was $74.2 million in fiscal year 2018 compared to a net expense of $25.2 million in fiscal year 2017. The $99.4 million increase was primarily due to a $130.9 million gain on acquisition in fiscal 2018 and a $7.7 million decrease in net interest and amortization expense under the new Term Loan and Credit Agreement for fiscal year 2018 as compared to net interest and amortization expense under the Senior Notes in fiscal year 2017. Partially offsetting these favorable changes were the following unfavorable changes: a $16.9 million net unfavorable change in foreign currency exchange gain/(loss), which was primarily due to the change in the value of the Chinese Yuan Renminbi, Euro, Great Britain Pound, Thai Baht, and Japanese Yen, compared to the U.S. dollar; a $10.7 million change in value related to the TOKIN Option recorded in fiscal year 2017 compared to no gain/loss in fiscal year 2018; $11.3 million in antitrust litigation fines recorded in fiscal year 2018, $1.1 million in integration expenses incurred by TOKIN in fiscal year 2018, and $0.6 million in net other operating expenses.
Income Taxes
The income tax expense of $9.2 million in fiscal year 2018 increased $4.9 million compared to an income tax expense of $4.3 million in fiscal year 2017. The change was primarily driven by income tax expense from foreign operations. Of the $4.9 million increase, $3.3 million relates to income tax expense from operations of newly acquired subsidiaries. Fiscal year 2018 income tax expense is comprised of $9.8 million in foreign income tax expense and a $0.6 million U.S. federal income tax benefit. The U.S. federal benefit of $0.6 million includes an estimated $0.8 million tax benefit resulting from the Tax Cuts and Jobs Act of 2017.
Equity Income (Loss) from Equity Method Investments
In fiscal year 2018, we incurred equity income related to our equity method investments of $76.2 million compared to $41.6 million in fiscal year 2017. The increase was primarily due to equity income of $84.2 million related to our 34% economic interest in TOKIN for the 19 day period ended April 19, 2017, which included the gain on the sale of the EMD business. The increase was also due to $0.8 million and $0.4 million of income from TOKIN's equity method investments, Nippon Yttrium Co., Ltd ("NYC") and NT Sales Co., Ltd ("NTS"), respectively. Partially offsetting these favorable items was a $9.0 million removal of the balance of the cost basis of the portion of equity investment related to the EMD division which was established at the time of initial acquisition of 34% of TOKIN, as well as $0.1 million of loss from our joint venture with Novasentis.

43






Segment Comparison of Fiscal Year 2018 to Fiscal Year 2017
The following table sets forth the operating income (loss) for each of our business segments for the fiscal years 2018 and 2017. The table also sets forth each of the segments’ net sales as a percentage of total net sales and total operating income (loss) as a percentage of total net sales (amounts in thousands, except percentages):
 
 
For the Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
Amount
 
% to Total
Sales
 
Amount
 
% to Total
Sales
Net sales
 
 
 
 
 
 
 
 
Solid Capacitors
 
$
771,240

 
64.3
%
 
$
575,110

 
75.9
%
Film and Electrolytic
 
201,722

 
16.8
%
 
182,681

 
24.1
%
MSA
 
226,964

 
18.9
%
 

 
%
Total
 
$
1,199,926

 
100.0
%
 
$
757,791

 
100.0
%
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
 
Solid Capacitors (1)
 
$
234,473

 
 

 
$
147,662

 
 

Film and Electrolytic (1)
 
4,073

 
 

 
(8,200
)
 
 

MSA
 
15,694

 
 
 

 
 
Corporate (1)
 
(140,937
)
 
 

 
(103,666
)
 
 

Total
 
$
113,303

 
9.4
%
 
$
35,796

 
4.7
%
_______________________________________________
(1) Fiscal year ending March 31, 2017 adjusted due to the adoption of ASU No. 2017-07.

Solid Capacitors
The table below sets forth net sales, operating income (loss) and operating income (loss) as a percentage of net sales for Solid Capacitors for fiscal years 2018 and 2017 (amounts in thousands, except percentages):
 
 
For the Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
Amount
 
% to Net
Sales
 
Amount
 
% to Net
Sales
Tantalum product line net sales
 
$
495,114

 
 
 
$
342,184

 
 
Ceramic product line net sales
 
276,126

 
 
 
232,926

 
 
Solid Capacitors net sales
 
771,240

 
 

 
575,110

 
 

Solid Capacitors operating income (loss)
 
234,473

 
30.4
%
 
147,662

 
25.7
%
Net Sales
Solid Capacitors net sales of $771.2 million in fiscal year 2018 increased $196.1 million or 34.1% from $575.1 million in fiscal year 2017. Tantalum product line net sales of $495.1 million in fiscal year 2018 increased $152.9 million or 44.7% from $342.2 million in fiscal year 2017. Ceramic product line net sales of $276.1 million in fiscal year 2018 increased $43.2 million or 18.5% from $232.9 million in fiscal year 2017.
The overall increase in Solid Capacitors net sales was primarily driven by the addition of net sales of $133.8 million resulting from the TOKIN acquisition and an increase in net sales to the legacy products distributor channel across all regions of $81.7 million, consisting of $48.0 million from Tantalum products and $33.7 million from Ceramic products.
To a lesser degree, an increase in legacy Ceramic products' net sales in the EMS channel across all regions and in the OEM channel in the EMEA and APAC regions also contributed to the increase in Solid Capacitors net sales. These increases were partially offset by a decrease in net sales in the OEM channel for legacy Tantalum products across all regions. In addition, Solid Capacitors net sales was favorably impacted by $6.1 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.

44






Segment Operating Income (Loss)
Segment operating income of $234.5 million for fiscal year 2018 increased $86.8 million or 58.8% from $147.7 million for fiscal year 2017. The increase in segment operating income was primarily attributable to an increase in gross margin of $100.4 million. TOKIN contributed $47.0 million in additional gross margin in fiscal year 2018. Legacy KEMET gross margin increased $53.3 million, or 30.6%, primarily driven by an increase in net sales, cost improvements in vertical integration, favorable foreign currency impact to manufacturing costs, and manufacturing process improvements resulting from cost reduction activities. In addition, there was a $1.6 million improvement in (gain) loss on write down and disposal of long-lived assets. Partially offsetting these improvements were a $10.5 million increase in SG&A and a $5.0 million increase in R&D expenses. TOKIN accounted for $10.2 million of the increase in SG&A expenses and $4.1 million of the increase in R&D expenses.
Film and Electrolytic
The table below sets forth net sales, operating income (loss) and operating income (loss) as a percentage of net sales for Film and Electrolytic for the fiscal years 2018 and 2017 (amounts in thousands, except percentages):
 
 
For the Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
Amount
 
% to Net
Sales
 
Amount
 
% to Net
Sales
Net sales
 
$
201,722

 
 

 
$
182,681

 
 

Segment operating income (loss)
 
4,073

 
2.0
%
 
(8,200
)
 
(4.5
)%
Net Sales
Film and Electrolytic net sales of $201.7 million in fiscal year 2018 increased $19.0 million or 10.4% from $182.7 million in fiscal year 2017. The increase in net sales was primarily driven by an increase in net sales in the distributor channel across the APAC and EMEA regions of $13.7 million, and to a lesser degree an increase in sales in the OEM channel of the EMEA region and the EMS channel across the Americas, EMEA, and APAC regions. In addition, there was a favorable impact of $7.6 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
Segment Operating Income (Loss)
Segment operating income of $4.1 million in fiscal year 2018 increased $12.3 million from $8.2 million of segment operating loss in fiscal year 2017. The increase was primarily attributable to a $3.8 million increase in gross margin driven by higher net sales, as well as the benefit of the completed restructuring activities. The increase was also attributed to an $11.7 million improvement in (gain) loss on write down and disposal of long-lived assets. These improvements were partially offset by a $2.1 million increase in restructuring expenses, a $0.7 million increase in S&G expenses, and a $0.4 million increase in R&D expenses.
Electro-Magnetic, Sensors, and Actuators
The following table sets forth net sales, operating income (loss), and operating income (loss) as a percentage of net sales for our MSA segment in fiscal year 2018 (amounts in thousands, except percentages). MSA is a new segment which is comprised of EMC materials and devices, piezo materials and actuators and various types of sensors acquired in connection with the TOKIN acquisition on April 19, 2017:
 
 
For the Fiscal Years Ended
 
 
March 31, 2018
 
 
Amount
 
% to Net
Sales
Net sales
 
$
226,964

 
 

Segment operating income (loss)
 
15,694

 
6.9
%
Net Sales
MSA had net sales of $227.0 million in fiscal year 2018, with all sales coming from the newly acquired TOKIN business. MSA net sales consisted of $215.4 million in the OEM channel, $11.0 million in the distributor channel, and $0.6 million in the EMS channel.

45






Segment Operating Income (Loss)
Segment operating income was $15.7 million in fiscal year 2018, with all the activity coming from the newly acquired TOKIN business. MSA had a gross margin of $49.3 million, SG&A expenses of $22.5 million, R&D expenses of $6.5 million, restructuring expenses of $3.3 million, and other operating expenses of $1.3 million.
Consolidated Comparison of Fiscal Year 2017 to Fiscal Year 2016
Net sales
Net sales of $757.8 million for fiscal year 2017 increased 3.1% from $734.8 million for fiscal year 2016. Solid Capacitor and Film and Electrolytic sales increased by $18.8 million and $4.2 million, respectively. The overall Solid Capacitors net sales increase was primarily driven by an increase in net sales to the APAC and EMEA distribution channel driven by increases in volume, which offset typical market price erosion.
The overall Film and Electrolytic net sales increase was driven by an increase in net sales in the Distributor channel through all regions. This increase was partially offset by a decrease in net sales in the OEM channel for the Americas and EMEA region, primarily related to increased sales in the prior year in anticipation of the relocation of our manufacturing line from Germany to Macedonia. A portion of the OEM declines were offset by an increase in APAC due to increased sales to a customer that relocated from EMEA. In addition, there was an unfavorable impact of $0.5 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
In fiscal years 2017 and 2016, net sales by region were as follows (dollars in thousands):
 
 
Fiscal Year 2017
 
 
 
Fiscal Year 2016
 
 
Net Sales
 
% of Total
 
 
 
Net Sales
 
% of Total
Americas
 
$
224,056

 
29.6
%
 
Americas
 
$
225,676

 
30.7
%
APAC
 
288,764

 
38.1
%
 
APAC
 
266,814

 
36.3
%
EMEA
 
237,890

 
31.4
%
 
EMEA
 
233,313

 
31.8
%
JPKO
 
7,081

 
0.9
%
 
JPKO
 
9,020

 
1.2
%
Total
 
$
757,791

 
 
 
Total
 
$
734,823

 
 
In fiscal years 2017 and 2016, the percentages of net sales by channel to total net sales were as follows:
 
 
Fiscal Year 2017
 
 
 
Fiscal Year 2016
 
 
Net Sales
 
% of Total
 
 
 
Net Sales
 
% of Total
Distributors
 
$
354,639

 
46.8
%
 
Distributors
 
$
308,105

 
41.9
%
EMS
 
156,302

 
20.6
%
 
EMS
 
155,548

 
21.2
%
OEM
 
246,850

 
32.6
%
 
OEM
 
271,170

 
36.9
%
Total
 
$
757,791

 
 
 
Total
 
$
734,823

 
 
Gross Margin
Gross margin for the fiscal year ended March 31, 2017 of $186.9 million (24.7% of net sales) increased $23.1 million or 14.1% from $163.8 million (22.3% of net sales) in the prior fiscal year. Gross margin as a percentage of net sales improved 250 basis points. The primary contributor to the increase was an increase in Solid Capacitor gross margin of $20.4 million due to an increase in net sales, cost improvements in vertical integration, favorable foreign currency impact to manufacturing costs, and manufacturing process improvements resulting from annual cost reduction activities as well as our partnership with TOKIN. In addition, Film and Electrolytic's gross margin improved $2.7 million due the increase in net sales as well as cost reductions achieved through headcount reductions, manufacturing relocations, operating efficiencies and actions taken to reduce raw material costs across all plants.
SG&A
SG&A expenses of $107.7 million (14.2% of net sales) for fiscal year 2017 increased $7.0 million or 7.0% compared to $100.6 million (13.7% of net sales) for fiscal year 2016. The increase consisted primarily of the following items: a $6.0 million increase in payroll, commissions, and related expenses and benefits; a $1.4 million increase in ERP integration and technology transition costs; a $1.0 million increase in consulting and contractor expenses; and a $0.4 million increase in professional fees. Partially offsetting these increases was a $0.9 million decrease related to the change in the allocation of IT

46






resources and other costs between SG&A and cost of goods sold; a $0.4 million decrease in legal expenses related to ongoing antitrust lawsuits; and a $0.5 million decrease in travel and training expenses.
Research and Development
R&D expenses of $27.4 million (3.6% of net sales) for fiscal year 2017 increased $2.8 million or 11.3% compared to $24.6 million (3.3% of net sales) for fiscal year 2016 due to additional projects within the Tantalum product line related to demand from customers for new part types.
(Gain) Loss on Write Down and Disposal of Long-Lived Assets
During fiscal year 2017, the Company recorded a net loss on write down and disposal of long-lived assets of $10.7 million, which was comprised of $0.4 million in net losses on the sale and disposal of long-lived assets and $10.3 million in impairment charges. Film and Electrolytic incurred impairment charges totaling $8.2 million ($0.18 per basic share and $0.15 per diluted share). The net losses on the sale and disposal of long-lived assets and impairment charges are recorded on the Consolidated Statement of Operations line item "(Gain) loss on write down and disposal of long-lived assets." The impairment charges consisted of the following two actions.
On August 31, 2016, KEMET Electronics Corporation, a wholly-owned subsidiary of KEMET made the decision to shut-down operations of its wholly-owned subsidiary, KFM. Operations at KFM’s Knoxville, Tennessee plant ceased as of October 31, 2016. KFM supplied formed foil to the Company’s Film and Electrolytic segment, as well as to certain third party customers. The Company anticipates that Film and Electrolytic will achieve raw material cost savings by purchasing its formed foil from suppliers that have the advantage of lower utility costs. The Company recorded impairment charges related to KFM totaling $4.1 million comprised of $3.0 million for the write down of property plant and equipment and $1.1 million for the write down of intangible assets. In addition, the Company accrued severance charges and restructuring costs described in Note 4, “Restructuring.”
The Company also recorded impairment charges of $4.1 million related to a decline in real estate market conditions surrounding its vacated Sasso Marconi, Italy manufacturing facility. KEMET used a capitalization of income method to estimate fair value taking into account the surface area of the property, the lease price per unit of surface area, and a weighted average cost of capital.
In fiscal year 2017, Solid Capacitors incurred impairment charges totaling $2.1 million ($0.04 per basic share and $0.04 per diluted share) related to the relocation of our leased K-salt facility to our existing Matamoros, Mexico facility. In addition, the Company accrued severance charges described in Note 4 “Restructuring” and incurred equipment relocation costs of approximately $0.6 million during fiscal year 2017.
During fiscal year 2016, the Company recorded a net loss on write down and disposal of long-lived asset of $0.4 million, which was a result of net losses on the sale and disposal of long-lived assets. There were no impairment charges in fiscal year 2016.
Restructuring Charges
Restructuring charges of $5.4 million in fiscal year 2017 increased $1.2 million or 29.3% from $4.2 million in fiscal year 2016.
Restructuring charges in the fiscal year ended March 31, 2017 included $2.2 million related to personnel reduction costs and $3.2 million of relocation costs. The personnel reduction costs correspond with the following: $0.3 million related to the consolidation of certain Solid Capacitor manufacturing in Matamoros, Mexico; $0.4 million for headcount reductions related to the shut-down of operations for KFM in Knoxville, Tennessee; $0.3 million related to headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines and laboratories to lower cost regions; $0.3 million for overhead reductions in Sweden; $0.3 million in U.S. headcount reductions related to the relocation of global marketing functions to the Company’s Fort Lauderdale, Florida office; $0.3 million in headcount reductions related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico; $0.2 million in overhead reductions for the relocation of R&D operations from Weymouth, England to Evora, Portugal; and $0.1 million in manufacturing headcount reductions related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant.
The manufacturing relocation costs of $3.2 million include $1.9 million in expenses related to contract termination costs related to the shut-down of operations for KFM; $0.6 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant; $0.6 million for transfers of Film and Electrolytic production lines and R&D functions to lower cost regions; and $0.1 million related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.

47






Restructuring charges in the fiscal year ended March 31, 2016 included $1.8 million related to personnel reduction costs and $2.4 million of relocation costs. The personnel reduction costs were primarily comprised of the following: $0.9 million for headcount reductions in Matamoros, Mexico related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico, $0.6 million related to a headcount reduction in Suzhou, China for the Film and Electrolytic production line transfer from Suzhou, China to Anting, China, $0.5 million related to the consolidation of certain Solid Capacitor manufacturing in Victoria, Mexico, $0.5 million for headcount reductions related to the outsourcing of the Company's information technology function and overhead reductions in North America and Europe, and $0.3 million for headcount reductions in Europe (primarily Landsberg, Germany). These personnel reduction costs were partially offset by a $1.0 million credit to expense in Italy due to the partial reversal of a severance accrual. 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 manufacturing relocation costs of $2.4 million include $1.1 million for the Landsberg, Germany shut-down including relocating equipment to Pontecchio, Italy and Skopje, Macedonia; $0.4 million for the relocation of certain Solid Capacitor manufacturing equipment in Victoria, Mexico; $0.4 million for the exit of Film and Electrolytic manufacturing from Suzhou, China; and $0.5 million for other costs related to shut-downs in Europe, North America, and Asia.
Operating Income (Loss)
Operating income for fiscal year 2017 of $35.8 million improved $1.8 million compared to operating income of $34.0 million in fiscal year 2016. The improvement was primarily due a $23.1 million increase in gross margin. These improvements were partially offset by a $10.3 million increase in net loss on write down and disposal of long-lived assets, a $7.0 million increase in SG&A expenses, a $2.8 million increase in R&D expenses, and a $1.2 million increase in restructuring charges.
Non-Operating (Income) Expense, net
Non-operating (income) expense, net was a net expense of $25.2 million in fiscal year 2017 compared to a net expense of $65.2 million in fiscal year 2016. The $40.1 million decrease was primarily attributable to a $10.7 million increase in the value of the TOKIN options recognized in fiscal year 2017 compared to a $26.3 million decrease in fiscal year 2016, which was primarily attributable to the expiration of KEMET's call option and from the TOKIN antitrust and civil litigation. In addition, we incurred a $3.8 million foreign exchange gain in fiscal year 2017 compared to a $3.0 million foreign exchange gain in fiscal year 2016, and received $0.4 million in insurance proceeds in fiscal year 2017.
Income Taxes
The income tax expense of $4.3 million in fiscal year 2017 decreased $1.7 million compared to an income tax expense of $6.0 million in fiscal year 2016. The change was primarily driven by tax law changes in foreign jurisdictions and an inflation adjustment for the Mexican Peso. Fiscal year 2017 income tax expense was comprised of $4.3 million in foreign income tax expense. No U.S. federal income tax benefit was recognized for the U.S. taxable loss for fiscal year 2017 due to a valuation allowance provided for U.S. net operating losses.
Equity Income (Loss) from Equity Method Investments
In fiscal year 2017, we incurred an equity gain related to our 34% economic interest in TOKIN of $41.6 million compared to a loss of $16.4 million in fiscal year 2016. The change was primarily comprised of the following: a $41.0 million reversal of a deferred tax valuation allowance due to the gain on the sale of the EMD business to be recognized in fiscal year 2018, a $12.0 million decrease in additional charge of antitrust and civil litigation fines and a $6.4 million increase in gross margin (including a $3.9 million favorable impact from foreign currency exchange fluctuation) during fiscal year 2017 compared to fiscal year 2016. The actual improvement in gross margin excluding foreign currency exchange impact was driven primarily by sales mix improvement, improvements in manufacturing efficiencies and reduction of fixed costs. Partially offsetting these favorable items was a $0.5 million unfavorable change in the foreign currency translation gains (losses). In addition, there was a $1.0 million favorable legal settlement in Hong Kong for fiscal year 2016 and no similar activity in fiscal year 2017.

48






Segment Comparison of Fiscal Year 2017 to Fiscal Year 2016
The following table sets forth the operating income (loss) for each of our business segments for the fiscal years 2017 and 2016. The table also sets forth each of the segments’ net sales as a percentage of total net sales and the operating income (loss) components as a percentage of total net sales (amounts in thousands, except percentages):
 
 
For the Fiscal Years Ended
 
 
March 31, 2017
 
March 31, 2016
 
 
Amount
 
% to Total
Sales
 
Amount
 
% to Total
Sales
Net sales
 
 
 
 
 
 
 
 
Solid Capacitors
 
$
575,110

 
75.9
%
 
$
556,303

 
75.7
%
Film and Electrolytic
 
182,681

 
24.1
%
 
178,520

 
24.3
%
Total
 
$
757,791

 
100.0
%
 
$
734,823

 
100.0
%
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
 
Solid Capacitors (1)
 
$
147,662

 
 
 
$
130,574

 
 
Film and Electrolytic (1)
 
(8,200
)
 
 
 
137

 
 
Corporate (1)
 
(103,666
)
 
 
 
(96,707