Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014 
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from           to      
  
Commission File Number: 001-15491
 
KEMET CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
57-0923789
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681
(Address of principal executive offices, zip code)
 
(864) 963-6300
(Registrant’s telephone number, including area code)
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý  NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ý NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  ý NO
 
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 30, 2014 was 45,402,915.
 


Table of Contents

KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended June 30, 2014
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
 



Table of Contents

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
 

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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
 
 
June 30, 2014
 
March 31, 2014
 
(Unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
58,422

 
$
57,929

Accounts receivable, net
100,551

 
98,947

Inventories, net
189,405

 
187,974

Prepaid expenses and other
41,886

 
36,871

Deferred income taxes
6,664

 
6,695

Current assets of discontinued operations

 
12,160

Total current assets
396,928

 
400,576

Property, plant and equipment, net of accumulated depreciation of $810,224 and $805,687 as of June 30, 2014 and March 31, 2014, respectively
290,572

 
292,648

Goodwill
35,584

 
35,584

Intangible assets, net
36,567

 
37,184

Investment in NEC TOKIN
45,235

 
46,419

Restricted cash
13,210

 
13,512

Deferred income taxes
6,659

 
6,778

Other assets
13,888

 
10,130

Non-current assets of discontinued operations

 
836

Total assets
$
838,643

 
$
843,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
27,410

 
$
7,297

Accounts payable
83,623

 
74,818

Accrued expenses
70,372

 
76,468

Income taxes payable and deferred income taxes
612

 
980

Current liabilities of discontinued operations

 
7,269

Total current liabilities
182,017

 
166,832

Long-term debt, less current portion
376,427

 
391,292

Other non-current obligations
55,978

 
55,864

Deferred income taxes
5,970

 
5,203

Non-current liabilities of discontinued operations

 
2,592

Stockholders’ equity:
 

 
 

Preferred stock, par value $0.10, authorized 10,000 shares, none issued

 

Common stock, par value $0.01, authorized 175,000 shares, issued 46,508 shares at June 30, 2014 and March 31, 2014
465

 
465

Additional paid-in capital
461,216

 
465,027

Retained deficit
(235,278
)
 
(231,738
)
Accumulated other comprehensive income
17,583

 
18,184

Treasury stock, at cost (1,140 and 1,301 shares at June 30, 2014 and March 31, 2014, respectively)
(25,735
)
 
(30,054
)
Total stockholders’ equity
218,251

 
221,884

Total liabilities and stockholders’ equity
$
838,643

 
$
843,667


 See accompanying notes to the unaudited condensed consolidated financial statements.

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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Quarters Ended June 30,
 
2014
 
2013
Net sales
$
212,881

 
$
202,057

Operating costs and expenses:
 

 
 

Cost of sales
179,924

 
183,513

Selling, general and administrative expenses
24,779

 
26,080

Research and development
6,589

 
6,066

Restructuring charges
1,830

 
4,610

Net loss on sales and disposals of assets
365

 

Total operating costs and expenses
213,487

 
220,269

Operating loss
(606
)
 
(18,212
)
Non-operating (income) expense:
 

 
 

Interest income
(3
)
 
(164
)
Interest expense
10,456

 
10,034

Other (income) expense, net
(3,533
)
 
355

Loss from continuing operations before income taxes and equity loss from NEC TOKIN
(7,526
)
 
(28,437
)
Income tax expense
1,282

 
1,816

Loss from continuing operations before equity loss from NEC TOKIN
(8,808
)
 
(30,253
)
Equity loss from NEC TOKIN
(1,675
)
 
(3,377
)
Loss from continuing operations
(10,483
)

(33,630
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $918 and $(236), respectively
6,943

 
(1,510
)
Net loss
$
(3,540
)
 
$
(35,140
)
Net income (loss) per basic share:
 

 
 

Loss from continuing operations
$
(0.23
)
 
$
(0.75
)
Income (loss) from discontinued operations
$
0.15

 
$
(0.03
)
Net loss
$
(0.08
)
 
$
(0.78
)
 
 
 
 
Net income (loss) per diluted share:
 

 
 

Loss from continuing operations
$
(0.23
)
 
$
(0.75
)
Income (loss) from discontinued operations
$
0.15

 
$
(0.03
)
Net loss
$
(0.08
)
 
$
(0.78
)
 
 
 
 
Weighted-average shares outstanding:
 

 
 

Basic
45,274

 
45,022

Diluted
45,274

 
45,022

 
See accompanying notes to the unaudited condensed consolidated financial statements.


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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended June 30,
 
2014
 
2013
Net loss
$
(3,540
)
 
$
(35,140
)
Other comprehensive income (loss):
 

 
 

Foreign currency translation gains (losses)
(1,100
)
 
2,272

Defined benefit pension plans, net of tax impact
60

 
175

Post-retirement plan adjustments
(52
)
 
(70
)
Equity interest in investee’s other comprehensive income (loss)
491

 
(651
)
Other comprehensive income (loss)
(601
)
 
1,726

Total comprehensive loss
$
(4,141
)
 
$
(33,414
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.


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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended June 30,
 
2014
 
2013
Net loss
$
(3,540
)
 
$
(35,140
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Gain on sale of discontinued operations
(7,374
)
 

Net cash used in operating activities of discontinued operations
(905
)
 
(2,845
)
Depreciation and amortization
10,797

 
13,639

Equity loss from NEC TOKIN
1,675

 
3,377

Amortization of debt discount and debt issuance costs
665

 
1,014

Stock-based compensation expense
994

 
969

Long-term receivable write down
59

 
1,444

Change in value of NEC TOKIN options
(4,100
)
 

Net loss on sales and disposals of assets
365

 

Pension and other post-retirement benefits
8

 
(42
)
Change in deferred income taxes
156

 
(241
)
Change in operating assets
(6,887
)
 
(12,108
)
Change in operating liabilities
(2,974
)
 
2,613

Other
(1,084
)
 
(311
)
Net cash used in operating activities
(12,145
)
 
(27,631
)
Investing activities:
 

 
 

Capital expenditures
(5,182
)
 
(15,481
)
Proceeds from sale of assets
2,446

 

Change in restricted cash
302

 
1,591

Proceeds from sale of discontinued operations
10,125

 

Net cash provided by (used in) investing activities
7,691

 
(13,890
)
Financing activities:
 

 
 

Proceeds from revolving line of credit
7,500

 

Deferred acquisition payments
(296
)
 
(1,204
)
Payments of long-term debt
(2,205
)
 
(306
)
Proceeds from exercise of stock options
11

 
19

Net cash provided by (used in) financing activities
5,010

 
(1,491
)
Net increase (decrease) in cash and cash equivalents
556

 
(43,012
)
Effect of foreign currency fluctuations on cash
(63
)
 
189

Cash and cash equivalents at beginning of fiscal period
57,929

 
95,978

Cash and cash equivalents at end of fiscal period
$
58,422

 
$
53,155

 
See accompanying notes to the unaudited condensed consolidated financial statements.


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Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1. Basis of Financial Statement Presentation
 
The condensed consolidated financial statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2014 (the “Company’s 2014 Annual Report”).
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to current year presentation.  Net sales and operating results for the quarter ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
 
The Company’s significant accounting policies are presented in the Company’s 2014 Annual Report.
 
Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
 
The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.
 
Recently Issued Accounting Pronouncements
 
New accounting standards adopted
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance is effective for the Company's fiscal year that begins on April 1, 2017 and interim periods within that fiscal year and requires either a retrospective or a modified retrospective approach to adoption. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures, as well as the available transition methods. Early adoption is prohibited. 

There are currently no other accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
 
Restricted Cash
 
As discussed in Note 3, Debt, the Company received a $24.0 million prepayment from an original equipment manufacturer (“OEM”) and, through June 30, 2014, utilized $13.0 million for the purchase of manufacturing equipment. The remaining proceeds of $11.0 million are classified as restricted cash at June 30, 2014.
 
A bank guarantee in the amount of €1.5 million ($2.0 million) was issued by a European bank on behalf of the Company in August 2006 in conjunction with the establishment of a Value-Added Tax (“VAT”) registration in The Netherlands. Accordingly, a deposit was placed with the European bank for €1.7 million ($2.3 million). While the deposit is in KEMET’s

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name, and KEMET receives all interest earned by this deposit, the deposit is pledged to the European bank, and the bank can use the funds if a valid claim against the bank guarantee is made. The bank guarantee will remain valid until it is discharged by the beneficiary.
 
Fair Value Measurement
 
The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
 
The first two inputs are considered observable and the last is considered unobservable. The levels of inputs are as follows:
 
Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and March 31, 2014 are as follows (amounts in thousands):
 
Carrying Value June 30,
 
Fair Value June 30,
 
Fair Value Measurement Using
 
Carrying Value March 31,
 
Fair Value March 31,
 
Fair Value Measurement Using
 
2014
 
2014
 
Level 1
 
Level 2 (2)
 
Level 3
 
2014
 
2014
 
Level 1
 
Level 2 (2)
 
Level 3
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
725

 
$
725

 
$
725

 
$

 
$

 
$
714

 
$
714

 
$
714

 
$

 
$

Total debt
403,837

 
416,847

 
375,413

 
41,434

 

 
398,589

 
409,284

 
371,863

 
37,421

 

NEC TOKIN options,
 net (3)
7,700

 
7,700

 

 

 
7,700

 
3,600

 
3,600

 

 

 
3,600

___________________
(1)
Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2)
The valuation approach used to calculate fair value was a discounted cash flow for each respective debt facility.
(3)
See Note 6, Investment in NEC TOKIN, for a description of the NEC TOKIN options.  The value of the options is interrelated and depends
on the enterprise value of NEC TOKIN Corporation and its forecasted EBITDA over the duration of the instruments. Therefore, the options have been valued using option pricing methods in a Monte Carlo simulation.

The table below summarizes NEC TOKIN option valuation activity using significant unobservable inputs (Level 3) (amounts in thousand):
March 31, 2014
$
3,600

Change in value of NEC TOKIN options
4,100

June 30, 2014
$
7,700

 

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Inventories
 
Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):
 
June 30, 2014
 
March 31, 2014
Raw materials and supplies
$
90,524

 
$
90,968

Work in process
57,768

 
61,310

Finished goods
62,594

 
62,522

 
210,886

 
214,800

Inventory reserves (1)
(21,481
)
 
(26,826
)
 
$
189,405

 
$
187,974

___________________
(1)
During the three month period ended June 30, 2013, the Company recorded a $3.9 million reserve for inventory held by a third party. In the quarter ended June 30, 2014 this $3.9 million was written off.
 
Warrant
 
As of June 30, 2014 and March 31, 2014, 8.4 million shares were subject to the warrant held by K Equity, LLC.
 
Revenue Recognition
 
The Company ships products to customers based upon firm orders and revenue is recognized when the sales process is complete. This occurs when products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred and collectability is reasonably assured. Shipping and handling costs are included in cost of sales.
A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. The Company recognizes revenue when title to the products transfers to the customer.
A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company's distributor policy includes inventory price protection and "ship-from-stock and debit" ("SFSD") programs common in the industry.
KEMET's SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative and apply only to a specific customer, part, specified special price amount, specified quantity, and 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.
Most of the Company's distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed 6% of their purchases from the previous fiscal quarter. KEMET estimates future returns based on historical patterns of the distributors and records an allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates.
The establishment of sales allowances is recognized as a component of the line item "Net sales" on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company's estimates.
The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were 1.0% or less for the quarters ended June 30, 2014 and 2013. The Company recognizes warranty costs when they are both probable and reasonably estimable.
 

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Note 2. Discontinued Operations
The Film and Electrolytic Business group completed the sale of its Machinery division in April, 2014, which resulted in a $7.4 million net gain on sale of the business (after income tax expense) offset by a loss from machinery operations of $0.4 million during the first quarter of fiscal year 2015 resulting in a net gain on discontinued operations of $6.9 million.

Net sales and net operating loss from the Company’s discontinued operation for the quarters ended June 30, 2014 and 2013 were (amounts in thousands):
 
Quarters Ended June 30,
 
2014
 
2013
Net sales
$
104

 
$
666

Operating loss
(431
)
 
(1,746
)

Note 3. Debt
 
A summary of debt is as follows (amounts in thousands):
 
June 30,
2014
 
March 31,
2014
10.5% Senior Notes, net of premium of $2,977 and $3,144 as of June 30, 2014
 and March 31, 2014, respectively
$
357,977

 
$
358,144

Advanced payment from OEM, net of discount of $203 and $323 as of June 30, 2014
 and March 31, 2014, respectively
19,324

 
20,095

Revolving line of credit
25,949

 
18,449

Other
587

 
1,901

Total debt
403,837

 
398,589

Current maturities
(27,410
)
 
(7,297
)
Total long-term debt
$
376,427

 
$
391,292


The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters ended June 30, 2014 and 2013, consists of the following (amounts in thousands):
 
Quarters Ended June 30,
 
2014
 
2013
Contractual interest expense
$
9,752

 
$
9,021

Amortization of debt issuance costs
425

 
425

Amortization of debt (premium) discount
(47
)
 
62

Imputed interest on acquisition related obligations
287

 
526

Interest expense on capital lease
39

 

Total interest expense
$
10,456

 
$
10,034

 
Revolving Line of Credit
 
KEMET Electronics Corporation (“KEC”) and KEMET Electronics Marketing (S) Pte Ltd. (“KEMET Singapore”) (each a “Borrower” and, collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Loan and Security Agreement”) which provides a $50.0 million revolving line of credit.  A portion of the U.S. and Singapore facilities can be used to issue letters of credit (“Letters of Credit”).
 
On September 24, 2013, the Company borrowed $9.0 million from the revolving line of credit at a rate of 5.75% (Base Rate, as defined in the Loan and Security Agreement, plus 2.5%).  As this is a base rate borrowing, there is not a specific repayment date and the amount can be repaid at any time prior to the expiration of the facility.  On September 27, 2013, the Company borrowed an additional $12.0 million from the revolving line of credit at a rate of 4.0% (London Interbank Offer Rate (“LIBOR”) plus 3.75% based upon the fixed charge coverage ratio of KEMET Corporation and its subsidiaries on a consolidated basis).  The term on this borrowing was originally 31 days with total interest and principal payable at maturity on

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October 28, 2013, however, it has been extended monthly and is currently due on August 26, 2014.  On June 27, 2014, the Company borrowed an additional $7.5 million, which was repaid subsequent to June 30, 2014.  These were the only borrowings under the revolving line of credit and $25.9 million remained outstanding as of June 30, 2014 after the Company made repayments totaling $2.6 million. As of June 30, 2014, the Company's available borrowing capacity under the Loan and Security Agreement was $0.6 million (after $16.0 million used for letters of credit as described below).

As described below in the section titled "Advanced Payment from OEM", a standby letter of credit for $16 million was delivered to the OEM on October 8, 2012. In fiscal year 2014, the Company issued two letters of credit for €1.1 million ($1.5 million) and €0.7 million ($0.9 million) related to the construction of the new manufacturing location in Italy which were canceled in February 2014 and April 2014, respectively. Outstanding letters of credit reduced the Company's availability under the Loan and Security Agreement.
 
Advanced Payment from OEM
 
On August 28, 2012, the Company entered into and amended an agreement (the “Agreement”) with an OEM, pursuant to which the OEM agreed to advance the Company $24.0 million (the “Advance Payment”).  As of June 30, 2014 and March 31, 2014, the Company had $19.5 million and $20.4 million, respectively, outstanding due to the OEM.  On a monthly basis starting in June 2013, the Company began repaying the OEM an amount equal to a percentage of the aggregate purchase price of the capacitors sold to the OEM the preceding month, not to exceed $1.0 million per month.  Pursuant to the terms of the Agreement, the percentage of the aggregate purchase price of capacitors sold to the OEM used to repay the Advance Payment will double, not to exceed $2.0 million per month, in the event that (1) the OEM provides evidence that the price charged by KEMET for a particular capacitor during any prior quarter was equal to or greater than 110% of the price paid by the OEM or its affiliates for a third-party part qualified for the same product, and shipping in volume during such period; and,(2) agreement cannot be reached between the OEM and the Company for a price adjustment during the current quarter which would bring KEMET’s price within 110% of the third-party price.  In June 2015, the outstanding balance, if any, is due in full.  Pursuant to the terms of the Agreement, the Company delivered to the OEM an irrevocable standby Letter of Credit in the amount of $16.0 million on October 8, 2012; and, on October 22, 2012, the Company received the Advance Payment from the OEM.
 
The OEM may demand repayment of the entire balance outstanding or draw upon the Letter of Credit if any of the following events occur while the Agreement is still in effect: (i) the Company commits a material breach of the Agreement, the statement of work or the master purchase agreement between the OEM and the Company; (ii) the Company’s credit rating issued by Standard & Poor’s Financial Services LLC or its successor or Moody’s Investors Services, Inc. or its successors drops below CCC+ or Caa1, respectively; (iii) the Company’s cash balance on the last day of any fiscal quarter is less than $60.0 million; (iv) the Letter of Credit has been terminated without being replaced prior to repayment of the Advance Payment amount; (v) the Company or substantially all of its assets are sold to a party other than a subsidiary of the Company; (vi) all or substantially all of the assets of a subsidiary of the Company, or any of the shares of such subsidiary, are sold, whose assets are used to develop and produce the Goods; (vii) the Company or any subsidiary which accounts for 20% or more of the Company’s consolidated total assets (“Company Entity”) applies for judicial or extra judicial settlement with its creditors, makes an assignment for the benefit of its creditors, voluntarily files for bankruptcy or has a receiver or trustee in bankruptcy appointed by reason of its insolvency, or in the event of an involuntary bankruptcy action, liquidation proceeding, dissolution or similar proceeding is filed against a Company Entity and not dismissed within sixty (60) days.  To the Company’s best knowledge and belief, none of these triggers have been met including maintaining a minimum cash balance since the Company's cash balance (including restricted cash under the OEM agreement) exceeds the $60.0 million threshold.

10.5% Senior Notes
 
As of June 30, 2014 and March 31, 2014, the Company had outstanding $355.0 million in aggregate principal amount of the Company’s 10.5% Senior Notes due May 1, 2018 (the “10.5% Senior Notes”).  The Company had interest payable related to the 10.5% Senior Notes included in the line “Accrued expenses” on its Condensed Consolidated balance sheets of $6.2 million and $15.5 million at June 30, 2014 and March 31, 2014, respectively.

Note 4. Restructuring Charges
 
The Company is in the process of a restructuring plan to make the Company more competitive by removing excess capacity, relocating production to lower cost locations, and eliminating unnecessary costs throughout the Company.

A summary of the expenses aggregated on the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters ended June 30, 2014 and 2013, is as follows (amounts in thousands):

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Table of Contents

 
Quarters Ended June 30,
 
2014
 
2013
Manufacturing relocation costs
$
1,684

 
$
475

Personnel reduction costs
146

 
4,135

Total restructuring charges
$
1,830

 
$
4,610


Quarter Ended June 30, 2014

The Company incurred $1.8 million in restructuring charges in the quarter ended June 30, 2014 including $0.1 million of personnel reduction costs due to a reduction in overhead in Europe and $1.7 million of manufacturing relocation costs primarily due to the shut-down of the Tantalum production line in Evora, Portugal.

Quarter Ended June 30, 2013
 
The Company incurred $4.6 million in restructuring charges in the quarter ended June 30, 2013 including $4.1 million related to personnel reduction costs which is primarily comprised of the following: $1.9 million related to the closure of a portion of our innovation center in the U.S., $1.1 million related to the reduction of the solid capacitor production workforce in Mexico, $0.7 million related to the Company’s initiative to reduce overhead and $0.4 million related to an additional Cassia Integrazione Guadagni Straordinaria (“CIGS”) plan in Italy.  The additional expense related to CIGS is as a result of an agreement with the labor union which allowed the Company to place up to 170 employees, on a rotation basis, on the CIGS plan to save labor costs. CIGS is a temporary plan to save labor costs whereby a company may temporarily “lay off” employees while the government continues to pay their wages for a maximum of 12 months during the program. The employees who are in CIGS are not working, but are still employed by the Company. Only employees that are not classified as management or executive level personnel can participate in the CIGS program and upon termination of the plan, the affected employees return to work.

In addition to these personnel reduction costs, the Company incurred manufacturing relocation costs of $0.5 million due to the consolidation of manufacturing facilities within Italy and relocation of manufacturing equipment to Evora, Portugal.

Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters ended June 30, 2014 and 2013 are as follows (amounts in thousands):
 
Quarter Ended June 30, 2014
 
Quarter Ended June 30, 2013
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
6,217

 
$

 
$
13,509

 
$
567

Costs charged to expense
146

 
1,684

 
4,135

 
475

Costs paid or settled
(2,924
)
 
(1,684
)
 
(8,869
)
 
(1,042
)
Change in foreign exchange
(55
)
 

 
172

 

End of period
$
3,384

 
$

 
$
8,947

 
$















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Table of Contents

Note 5. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) for the quarters ended June 30, 2014 and 2013 include the following components (amounts in thousands):
 
Foreign Currency
Translation (1)
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at March 31, 2014
$
23,335

 
$
(7,386
)
 
$
1,464

 
$
771

 
$
18,184

Other comprehensive income (loss) before reclassifications
(1,100
)
 

 

 
491

 
(609
)
Amounts reclassified out of AOCI

 
60

 
(52
)
 

 
8

Other comprehensive income (loss)
(1,100
)
 
60

 
(52
)
 
491

 
(601
)
Balance at June 30, 2014
$
22,235

 
$
(7,326
)
 
$
1,412

 
$
1,262

 
$
17,583

 
 
Foreign Currency
Translation (1)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at March 31, 2013
$
13,538

 
$
(7,662
)
 
$
1,818

 
$

 
$
7,694

Other comprehensive income (loss) before reclassifications
2,272

 

 

 
(651
)
 
1,621

Amounts reclassified out of AOCI

 
175

 
(70
)
 

 
105

Other comprehensive income (loss)
2,272

 
175

 
(70
)
 
(651
)
 
1,726

Balance at June 30, 2013
15,810

 
$
(7,487
)
 
$
1,748

 
$
(651
)
 
$
9,420

___________________
(1)
Due primarily to the Company’s permanent re-investment assertion relating to foreign earnings, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during three month periods ended June 30, 2014 and 2013.
(2)
Ending balance is net of tax of $2.2 million and $2.3 million as of June 30, 2014 and June 30, 2013, respectively.

Note 6. Investment in NEC TOKIN
 
On March 12, 2012, KEMET Electronics Corporation (“KEC”), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) to acquire 51% of the common stock (representing a 34% economic interest) of NEC TOKIN Corporation (“NEC TOKIN”), a manufacturer of tantalum capacitors, electro-magnetic, electro-mechanical and access devices, (the “Initial Purchase”) from NEC Corporation (“NEC”) of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the “Initial Closing”). The Company accounts for its investment using the equity method in a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN.
 
In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with NEC TOKIN and NEC, which provides for restrictions on transfers of NEC TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of NEC TOKIN held by it, certain management services to be provided to NEC TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. KEC holds four of seven NEC TOKIN director positions. However, NEC has significant board rights.
 
Concurrent with execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC whereby KEC may purchase additional shares of NEC TOKIN common stock from NEC TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of NEC TOKIN’s common stock (the “First Call Option”) by providing notice of the First

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Table of Contents

Call Option between the Initial Closing and August 31, 2014. Upon providing such notice, but not before August 1, 2014, KEC may also exercise an option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. From August 1, 2014 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC. However, NEC may only exercise this right (the “Put Option”) from August 1, 2014 through April 1, 2016 if NEC TOKIN achieves certain financial performance measures. The purchase price for the Put Option will be based on the greater of six times LTM EBITDA less previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC as of the date the Put Option is exercised. The purchase price for the Put Option is reduced by the amount of NEC TOKIN’s debt obligation to NEC which KEC will assume. The determination of the purchase price will be modified in the event there is a disagreement between NEC and KEC under the Stockholders’ Agreement. In the event the Put Option is exercised, NEC will be required to maintain in place the outstanding debt obligation owed by NEC TOKIN to NEC.  The Company has marked these options to fair value and in the quarter ended June 30, 2014 recognized a $4.1 million gain which was included on the line item “Other (income) expense, net” in the Condensed Consolidated Statement of Operations. The value included for the options in the line item “Other assets” on the Condensed Consolidated Balance Sheets as of June 30, 2014, is $7.7 million.
 
Summarized financial information for NEC TOKIN follows (amounts in thousands):
 
June 30,
2014
 
March 31,
2014
Current assets
$
239,025

 
$
245,709

Non-current assets
311,389

 
302,161

Current liabilities
128,076

 
120,929

Non-current liabilities
358,014

 
360,908


 
Quarters Ended June 30,
 
2014
 
2013
Sales
$
122,408

 
$
123,192

Gross profit
26,678

 
18,300

Net loss
(3,154
)
 
(8,729
)
 
A reconciliation between NEC TOKIN's net loss and KEMET's equity investment loss follows (amounts in thousands):

 
Quarters Ended June 30,
 
2014
 
2013
NEC TOKIN net loss
(3,154
)
 
(8,729
)
KEMET's equity ownership %
34
%
 
34
%
Equity loss from NEC TOKIN before Adjustments
(1,072
)
 
(2,968
)
 
 
 
 
Adjustments:
 
 
 
Amortization and depreciation
(603
)
 
(409
)
Equity loss from NEC TOKIN
$
(1,675
)
 
$
(3,377
)
    
    

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Table of Contents

A reconciliation between NEC TOKIN's net assets and KEMET's investment in NEC TOKIN balance follows (amounts in thousands):
 
June 30,
2014
 
March 31,
2014
Investment in NEC TOKIN
$
45,235

 
$
46,419

Purchase price accounting basis adjustment:
 
 
 
Property, plant and equipment
7,220

 
7,325

Technology
(15,855
)
 
(16,261
)
Long-term debt
(4,504
)
 
(4,754
)
Goodwill
(9,326
)
 
(9,326
)
Other
(901
)
 
(952
)
KEMET's 34% economic interest of NEC TOKIN's net assets
$
21,869

 
$
22,451


The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of June 30, 2014, KEC’s maximum loss exposure as a result of its investments in NEC TOKIN is limited to the aggregate of the carrying value of the investment and any accounts receivable balance due from NEC TOKIN.  For the quarter ended June 30, 2014, KEMET recorded sales of $1.9 million to NEC TOKIN and as of June 30, 2014, KEMET's accounts receivable from NEC TOKIN was $1.6 million.  In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement with NEC TOKIN to provide services for which KEC would be reimbursed.  As of June 30, 2014, KEMET’s receivable balance under this agreement was $0.6 million.
In March and April, 2014, NEC TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan and South Korea concerning alleged anti-competitive activities within the capacitor industry.  The investigations are at an early stage.  As of this date, except for legal expenses, NEC TOKIN has not recorded an accrual as a result of the investigations.

Note 7. Segment and Geographic Information
 
The Company is organized into two business groups: Solid Capacitors and Film and Electrolytic.  The business groups are responsible for their respective manufacturing sites as well as their respective research and development efforts. Consistent with management reporting, the Company does not allocate indirect Selling, general and administrative (“SG&A”) and Research and development (“R&D”) expenses to the business groups. 
 
Solid Capacitors
 
Operating in nine manufacturing sites in the United States, Mexico, China and Portugal, Solid Capacitors primarily produces tantalum, aluminum, polymer and ceramic capacitors which are sold globally.  Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors and has a product innovation center in the United States.
 
Film and Electrolytic
 
Operating in twelve manufacturing sites throughout Europe, Asia, and the United States, Film and Electrolytic primarily produces film, paper, and electrolytic capacitors which are sold globally. Film and Electrolytic also manufactures etched foils utilized as a core component in the manufacture of electrolytic capacitors. In addition, this business group has product innovation centers in the United Kingdom, Italy, Germany and Sweden.
 

16

Table of Contents

The following table reflects each business group’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the quarters ended June 30, 2014 and 2013 (amounts in thousands):
 
Quarters Ended June 30,
 
2014
 
2013
Net sales:
 

 
 

Solid Capacitors
$
159,790

 
$
149,401

Film and Electrolytic
53,091

 
52,656

 
$
212,881

 
$
202,057

Operating income (loss) (1):
 

 
 

Solid Capacitors
$
29,734

 
$
12,792

Film and Electrolytic
(6,047
)
 
(6,302
)
Unallocated operating expenses
(24,293
)
 
(24,702
)
 
$
(606
)
 
$
(18,212
)
Depreciation and amortization expense:
 

 
 

Solid Capacitors
$
5,478

 
$
7,310

Film and Electrolytic
3,817

 
4,415

Corporate
1,502

 
1,914

 
$
10,797

 
$
13,639

 
___________________

(1)
Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
 
 
Quarters Ended June 30,
 
2014
 
2013
Restructuring charges:
 

 
 

Solid Capacitors
$
1,230

 
$
3,045

Film and Electrolytic
489

 
1,410

Corporate
111

 
155

 
$
1,830

 
$
4,610

___________________

 
Quarters Ended June 30,
 
2014
 
2013
Sales by region:
 

 
 

North and South America (“Americas”)
$
65,982

 
$
59,353

Europe, Middle East, Africa (“EMEA”)
77,205

 
72,991

Asia and Pacific Rim (“APAC”)
69,694

 
69,713

 
$
212,881

 
$
202,057

 
The following table reflects each business group’s total assets as of June 30, 2014 and March 31, 2014 (amounts in thousands):
 
June 30, 2014
 
March 31, 2014
Total assets:
 

 
 

Solid Capacitors
$
486,406

 
$
479,377

Film and Electrolytic
273,654

 
287,861

Corporate
78,583

 
76,429

 
$
838,643

 
$
843,667

 

17

Table of Contents

Note 8.  Defined Benefit Pension and Other Postretirement Benefit Plans
 
The Company sponsors six defined benefit pension plans in Europe, one plan in Singapore and two plans in Mexico.  In addition, the Company sponsors a post-retirement plan in the United States.  Costs recognized for benefit plans are recorded using estimated amounts which may change as actual costs for the fiscal year are determined.

The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended June 30, 2014 and 2013 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended June 30,
 
Quarters Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net service cost
$
338

 
$
331

 
$

 
$

Interest cost
478

 
428

 
6

 
5

Expected return on net assets
(124
)
 
(109
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
74

 
78

 
(52
)
 
(70
)
Prior service cost
4

 
1

 

 

Total net periodic benefit (income) costs
$
770

 
$
729

 
$
(46
)
 
$
(65
)
 
In fiscal year 2015, the Company expects to contribute up to $1.6 million to the pension plans, $0.3 million of which has been contributed as of June 30, 2014.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred.
 
Note 9. Stock-based Compensation
 
The Company’s stock-based compensation plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests. At June 30, 2014, the Company had four stock option plans that reserved shares of common stock for issuance to executives and key employees: the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”) and the 2011 Omnibus Equity Incentive Plan (as amended by the 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan) (the “2011 Incentive Plan”).  The 2011 Incentive Plan authorizes the Company to provide equity-based compensation in the form of: (1) stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code; (2) stock appreciation rights; (3) restricted stock and restricted stock units; (4) other share-based awards; and, (5) performance awards. Options issued under these plans vest within one to three years and expire ten years from the grant date. The Company grants restricted stock units to members of the Board of Directors, the Chief Executive Officer and a limited group of executives. Once vested and settled, restricted stock units are converted into restricted stock and cannot be sold until 90 days after the Chief Executive Officer, the executive or the member of the Board of Directors, as applicable, resigns from his or her position, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods.
 
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover two year periods and are primarily based upon the achievement of an Adjusted EBITDA target for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or restricted stock units, or a combination of both as determined by the Company’s Board of Directors. The 2013/2014 LTIP, 2014/2015 LTIP and 2015/2016 LTIP also awarded restricted stock units which vest over the course of three years from the anniversary of the establishment of the plan and are not subject to a performance metric. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. Any related liability is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any restricted stock unit commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.
 

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Table of Contents

The compensation expense associated with stock-based compensation for the quarters ended June 30, 2014 and 2013 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended June 30, 2014
 
Quarter Ended June 30, 2013
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
108

 
$
21

 
$
217

 
$
138

 
$
63

 
$
114

Selling, general and administrative expenses
115

 
178

 
289

 
148

 
233

 
214

Research and development
5

 

 
61

 
10

 

 
49

Total
$
228

 
$
199

 
$
567

 
$
296

 
$
296

 
$
377

 
In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Net loss for the quarters ended June 30, 2014, and 2013. Approximately three thousand and six thousand stock options were exercised in the quarters ended June 30, 2014 and 2013, respectively.

Note 10. Income Taxes
 
During the quarter ended June 30, 2014, the Company incurred $1.3 million of income tax expense which is related to income taxes for continuing foreign operations. In addition, the Company incurred $0.9 million of income tax expense related to the gain on sale of discontinued operations. 

During the quarter ended June 30, 2013, the Company incurred $1.8 million of income tax expense which was comprised of $1.7 million related to income taxes for foreign operations and $0.1 million of state income tax expense.  
 
There is no U.S. federal income tax benefit from the quarters ended June 30, 2014 and 2013 due to a valuation allowance recorded on deferred tax assets. 

Note 11. Basic and Diluted Net Loss Per Common Share
 
The following table presents basic EPS and diluted EPS (amounts in thousands, except per share data):
 
Quarters Ended June 30,
 
2014
 
2013
Numerator:
 

 
 

Loss from continuing operations
$
(10,483
)
 
$
(33,630
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $918 and $(236), respectively
6,943

 
(1,510
)
Net loss
$
(3,540
)
 
$
(35,140
)
Denominator:
 

 
 

Weighted-average shares outstanding:
 

 
 

Basic
45,274

 
45,022

Assumed conversion of employee stock grants

 

Assumed conversion of warrants

 

Diluted
45,274

 
45,022

Net income (loss) per basic share:
 
 
 
Loss from continuing operations
$
(0.23
)
 
$
(0.75
)
Income (loss) from discontinued operations
$
0.15

 
$
(0.03
)
Net loss
$
(0.08
)
 
$
(0.78
)
 
 
 
 
Net income (loss) per diluted share:
 
 
 
Loss from continuing operations
$
(0.23
)
 
$
(0.75
)
Income (loss) from discontinued operations
$
0.15

 
$
(0.03
)
Net loss
$
(0.08
)
 
$
(0.78
)

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Table of Contents

 
Common stock equivalents that could potentially dilute net loss per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2014
 
2013
Assumed conversion of employee stock grants
1,568

 
1,987

Assumed conversion of warrants
6,824

 
6,687

 
Note 12. Concentrations of Risks
 
The Company sells to customers globally and, as the Company generally does not require collateral from its customers, on a monthly basis the Company evaluates customer account balances in order to assess the Company’s financial risks of collection.  One customer accounted for over 10% of the Company’s net sales in the quarters ended June 30, 2014 and 2013.  There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable at June 30, 2014 and March 31, 2014.
 
Electronics distributors are an important distribution channel in the electronics industry and accounted for 47% and 46% of the Company’s net sales in the three month periods ended June 30, 2014 and 2013, respectively.  As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand or adjust their inventory stocking levels. 

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

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


20

Table of Contents

Condensed Consolidating Balance Sheet
June 30, 2014
(Unaudited)

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

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
627

 
$
27,149

 
$
30,646

 
$

 
$
58,422

Accounts receivable, net

 
46,591

 
53,960

 

 
100,551

Intercompany receivable
319,335

 
358,102

 
228,417

 
(905,854
)
 

Inventories, net

 
124,865

 
64,540

 

 
189,405

Prepaid expenses and other
3,145

 
18,705

 
22,977

 
(2,941
)
 
41,886

Deferred income taxes

 
1,620

 
5,044

 

 
6,664

Total current assets
323,107

 
577,032

 
405,584

 
(908,795
)
 
396,928

Property and equipment, net
318

 
104,543

 
185,711

 

 
290,572

Goodwill

 
35,584

 

 

 
35,584

Intangible assets, net

 
28,034

 
8,533

 

 
36,567

Investment in NEC TOKIN

 
45,235

 

 

 
45,235

Investments in subsidiaries
409,255

 
424,313

 
30,285

 
(863,853
)
 

Restricted cash

 
13,210

 

 

 
13,210

Deferred income taxes

 
990

 
5,669

 

 
6,659

Other assets
5,084

 
7,874

 
930

 

 
13,888

Long-term intercompany receivable
80,976

 
63,643

 
2,800

 
(147,419
)
 

Total assets
$
818,740

 
$
1,300,458

 
$
639,512

 
$
(1,920,067
)
 
$
838,643

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$
19,324

 
$
7,500

 
$
586

 
$

 
$
27,410

Accounts payable
228

 
45,577

 
37,818

 

 
83,623

Intercompany payable
197,230

 
595,650

 
112,974

 
(905,854
)
 

Accrued expenses
25,729

 
14,294

 
30,349

 

 
70,372

Income taxes payable and deferred income taxes

 
2,909

 
644

 
(2,941
)
 
612

Total current liabilities
242,511

 
665,930

 
182,371

 
(908,795
)
 
182,017

Long-term debt, less current portion
357,978

 
6,449

 
12,000

 

 
376,427

Other non-current obligations

 
5,071

 
50,907

 

 
55,978

Deferred income taxes

 
3,855

 
2,115

 

 
5,970

Long-term intercompany payable

 
80,976

 
66,443

 
(147,419
)
 

Stockholders’ equity
218,251

 
538,177

 
325,676

 
(863,853
)
 
218,251

Total liabilities and stockholders’ equity
$
818,740

 
$
1,300,458

 
$
639,512

 
$
(1,920,067
)
 
$
838,643



21

Table of Contents

Condensed Consolidating Balance Sheet (1)
March 31, 2014
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
616

 
$
22,200

 
$
35,113

 
$

 
$
57,929

Accounts receivable, net

 
49,462

 
49,485

 

 
98,947

Intercompany receivable
318,582

 
329,211

 
203,018

 
(850,811
)
 

Inventories, net

 
119,340

 
68,634

 

 
187,974

Prepaid expenses and other
3,146

 
15,286

 
21,380

 
(2,941
)
 
36,871

Deferred income taxes

 
1,022

 
5,673

 

 
6,695

Current assets of discontinued operations

 

 
12,160

 

 
12,160

Total current assets
322,344

 
536,521

 
395,463

 
(853,752
)
 
400,576

Property and equipment, net
329

 
104,874

 
187,445

 

 
292,648

Goodwill

 
35,584

 

 

 
35,584

Intangible assets, net

 
28,380

 
8,804

 

 
37,184

Investment in NEC TOKIN

 
46,419

 

 

 
46,419

Investments in subsidiaries
402,090

 
424,386

 
30,285

 
(856,761
)
 

Restricted cash

 
13,512

 

 

 
13,512

Deferred income taxes

 
1,010

 
5,768

 

 
6,778

Other assets
5,415

 
3,895

 
820

 

 
10,130

Non-current assets of discontinued operations

 

 
836

 

 
836

Long-term intercompany receivable
81,746

 
60,663

 
2,801

 
(145,210
)
 

Total assets
$
811,924

 
$
1,255,244

 
$
632,222

 
$
(1,855,723
)
 
$
843,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$
5,988

 
$

 
$
1,309

 
$

 
$
7,297

Accounts payable
84

 
36,579

 
38,155

 

 
74,818

Intercompany payable
176,624

 
570,535

 
103,652

 
(850,811
)
 

Accrued expenses
34,236

 
13,698

 
28,534

 

 
76,468

Income taxes payable and deferred income taxes

 
2,909

 
1,012

 
(2,941
)
 
980

Current liabilities of discontinued operations

 

 
7,269

 

 
7,269

Total current liabilities
216,932

 
623,721

 
179,931

 
(853,752
)
 
166,832

Long-term debt, less current portion
372,251

 
6,449

 
12,592

 

 
391,292

Other non-current obligations
857

 
3,311

 
51,696

 

 
55,864

Deferred income taxes

 
3,258

 
1,945

 

 
5,203

Non-current liabilities of discontinued operations

 

 
2,592

 

 
2,592

Long-term intercompany payable

 
81,747

 
63,463

 
(145,210
)
 

Stockholders’ equity
221,884

 
536,758

 
320,003

 
(856,761
)
 
221,884

Total liabilities and stockholders’ equity
$
811,924

 
$
1,255,244

 
$
632,222

 
$
(1,855,723
)
 
$
843,667


(1) Derived from audited financial statements.

22

Table of Contents

Condensed Consolidating Statement of Operations
For the Quarter Ended June 30, 2014
(Unaudited) 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
Net sales
$
54

 
$
255,576

 
$
201,219

 
$
(243,968
)
 
$
212,881

Operating costs and expenses:
 

 
 

 
 

 
 

 
 

Cost of sales
464

 
222,672

 
184,907

 
(228,119
)
 
179,924

Selling, general and administrative expenses
11,089

 
17,153

 
12,386

 
(15,849
)
 
24,779

Research and development
66

 
4,349

 
2,174

 

 
6,589

Restructuring charges

 
371

 
1,459

 

 
1,830

Net loss on sales and disposals of assets

 
188

 
177

 

 
365

Total operating costs and expenses
11,619

 
244,733

 
201,103

 
(243,968
)
 
213,487

Operating income (loss)
(11,565
)
 
10,843

 
116

 

 
(606
)
Interest income

 


 
(3
)
 


 
(3
)
Interest expense
9,799

 
400

 
257

 


 
10,456

Other (income) expense, net
(10,827
)
 
7,444

 
(150
)
 

 
(3,533
)
Equity in earnings of subsidiaries
(6,997
)
 

 

 
6,997

 

Income (loss) from continuing operations before income taxes and equity loss from NEC TOKIN
(3,540
)
 
2,999

 
12

 
(6,997
)
 
(7,526
)
Income tax expense

 
23

 
1,259

 

 
1,282

Income (loss) from continuing operations before equity income from NEC TOKIN
(3,540
)
 
2,976

 
(1,247
)
 
(6,997
)
 
(8,808
)
Equity loss from NEC TOKIN

 
(1,675
)
 

 

 
(1,675
)
Income (loss) from continuing operations
(3,540
)
 
1,301

 
(1,247
)
 
(6,997
)
 
(10,483
)
Income (loss) from discontinued operations

 
(488
)
 
7,431

 

 
6,943

Net income (loss)
$
(3,540
)
 
$
813

 
$
6,184

 
$
(6,997
)
 
$
(3,540
)
 
Condensed Consolidating Statements of Comprehensive Income (Loss)
Quarter Ended June 30, 2014
(Unaudited) 
Comprehensive income (loss)
$
(4,310
)
 
$
1,419

 
$
5,747

 
$
(6,997
)
 
$
(4,141
)


23

Table of Contents

Condensed Consolidating Statement of Operations
For the Quarter Ended June 30, 2013
(Unaudited)  
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
Net sales
$
19

 
$
237,323

 
$
206,945

 
$
(242,230
)
 
$
202,057

Operating costs and expenses:
 

 
 

 
 

 
 

 
 

Cost of sales
392

 
227,048

 
188,169

 
(232,096
)
 
183,513

Selling, general and administrative expenses
10,611

 
12,057

 
13,546

 
(10,134
)
 
26,080

Research and development
90

 
4,275

 
1,701

 

 
6,066

Restructuring charges

 
1,934

 
2,676

 

 
4,610

Net (gain) loss on sales and disposals of assets

 
6

 
(6
)
 

 

Total operating costs and expenses
11,093

 
245,320

 
206,086

 
(242,230
)
 
220,269

Operating income (loss)
(11,074
)
 
(7,997
)
 
859

 

 
(18,212
)
Interest income
(8
)
 
(3
)
 
(153
)
 

 
(164
)
Interest expense
10,129

 
252

 
(347
)
 

 
10,034

Other (income) expense, net
(10,060
)
 
10,802

 
(387
)
 

 
355

Equity in earnings of subsidiaries
23,995

 

 

 
(23,995
)
 

Income (loss) from continuing operations before income taxes
(35,130
)
 
(19,048
)
 
1,746

 
23,995

 
(28,437
)
Income tax expense

 
55

 
1,761

 

 
1,816

Income (loss) from continuing operations before equity loss from NEC TOKIN
(35,130
)
 
(19,103
)
 
(15
)
 
23,995

 
(30,253
)
Equity loss from NEC TOKIN