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 September 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 October 29, 2014 was 45,404,915.
 


Table of Contents

KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended September 30, 2014
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 10.1
 
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)
(Unaudited)
 
 
September 30, 2014
 
March 31, 2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
51,576

 
$
57,929

Accounts receivable, net
95,581

 
98,947

Inventories, net
188,833

 
187,974

Prepaid expenses and other
40,229

 
36,871

Deferred income taxes
6,569

 
6,695

Current assets of discontinued operations

 
12,160

Total current assets
382,788

 
400,576

Property, plant and equipment, net of accumulated depreciation of $811,576 and $805,687 as of September 30, 2014 and March 31, 2014, respectively
275,498

 
292,648

Goodwill
35,584

 
35,584

Intangible assets, net
35,377

 
37,184

Investment in NEC TOKIN
48,449

 
46,419

Restricted cash
12,955

 
13,512

Deferred income taxes
6,423

 
6,778

Other assets
20,153

 
10,130

Non-current assets of discontinued operations

 
836

Total assets
$
817,227

 
$
843,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
25,826

 
$
7,297

Accounts payable
72,629

 
74,818

Accrued expenses
66,400

 
76,468

Income taxes payable and deferred income taxes
345

 
980

Current liabilities of discontinued operations

 
7,269

Total current liabilities
165,200

 
166,832

Long-term debt, less current portion
376,256

 
391,292

Other non-current obligations
52,246

 
55,864

Deferred income taxes
8,687

 
5,203

Non-current liabilities of discontinued operations

 
2,592

Stockholders’ equity:
 

 
 

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

 

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

 
465

Additional paid-in capital
461,478

 
465,027

Retained deficit
(228,948
)
 
(231,738
)
Accumulated other comprehensive income
6,935

 
18,184

Treasury stock, at cost (1,103 and 1,301 shares at September 30, 2014 and March 31, 2014, respectively)
(25,092
)
 
(30,054
)
Total stockholders’ equity
214,838

 
221,884

Total liabilities and stockholders’ equity
$
817,227

 
$
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 September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
215,293

 
$
208,449

 
$
428,174

 
$
410,506

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales
169,538

 
177,532

 
349,462

 
361,045

Selling, general and administrative expenses
25,510

 
22,315

 
50,289

 
48,395

Research and development
6,338

 
5,611

 
12,927

 
11,677

Restructuring charges
1,687

 
1,364

 
3,517

 
5,974

Net (gain) loss on sales and disposals of assets
(550
)
 
42

 
(185
)
 
42

Total operating costs and expenses
202,523

 
206,864

 
416,010

 
427,133

Operating income (loss)
12,770

 
1,585

 
12,164

 
(16,627
)
Non-operating (income) expense:
 

 
 

 
 

 
 

Interest income
(3
)
 
(11
)
 
(6
)
 
(175
)
Interest expense
10,287

 
9,908

 
20,743

 
19,942

Other (income) expense, net
(7,595
)
 
946

 
(11,128
)
 
1,301

Income (loss) from continuing operations before income taxes and equity income (loss) from NEC TOKIN
10,081

 
(9,258
)
 
2,555

 
(37,695
)
Income tax expense
2,583

 
1,444

 
3,865

 
3,260

Income (loss) from continuing operations before equity income (loss) from NEC TOKIN
7,498

 
(10,702
)
 
(1,310
)
 
(40,955
)
Equity income (loss) from NEC TOKIN
232

 
(1,243
)
 
(1,443
)
 
(4,620
)
Income (loss) from continuing operations
7,730


(11,945
)

(2,753
)

(45,575
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $1,017, $(124), $1,935 and $(360), respectively
(1,400
)
 
(1,151
)
 
5,543

 
(2,661
)
Net income (loss)
$
6,330

 
$
(13,096
)
 
$
2,790

 
$
(48,236
)
Net income (loss) per basic share:
 

 
 

 
 

 
 

Net income (loss) from continuing operations
$
0.17

 
$
(0.26
)
 
$
(0.06
)
 
$
(1.01
)
Net income (loss) from discontinued operations
$
(0.03
)
 
$
(0.03
)
 
$
0.12

 
$
(0.06
)
Net income (loss)
$
0.14

 
$
(0.29
)
 
$
0.06

 
$
(1.07
)
 
 
 
 
 
 
 
 
Net income (loss) per diluted share:
 

 
 

 
 

 
 

Net income (loss) from continuing operations
$
0.15

 
$
(0.26
)
 
$
(0.05
)
 
$
(1.01
)
Net income (loss) from discontinued operations
$
(0.03
)
 
$
(0.03
)
 
$
0.11

 
$
(0.06
)
Net income (loss)
$
0.12

 
$
(0.29
)
 
$
0.06

 
$
(1.07
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
45,400

 
45,092

 
45,337

 
45,057

Diluted
52,521

 
45,092

 
52,562

 
45,057


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 September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
6,330

 
$
(13,096
)
 
$
2,790

 
$
(48,236
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation gains (losses)
(13,659
)
 
6,359

 
(14,759
)
 
8,631

Defined benefit pension plans, net of tax impact
81

 
121

 
141


296

Post-retirement plan adjustments
(52
)
 
(61
)
 
(104
)
 
(131
)
Equity interest in NEC TOKIN's other comprehensive income (loss)
2,982

 
(524
)
 
3,473

 
(1,175
)
Other comprehensive income (loss)
(10,648
)
 
5,895

 
(11,249
)
 
7,621

Total comprehensive income (loss)
$
(4,318
)
 
$
(7,201
)
 
$
(8,459
)
 
$
(40,615
)
 
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)
 
 
Six Month Periods Ended September 30,
 
2014
 
2013
Net income (loss)
$
2,790

 
$
(48,236
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Gain on sale of discontinued operations
(5,809
)
 

Net cash provided by (used in) operating activities of discontinued operations
(1,357
)
 
933

Depreciation and amortization
20,974

 
25,590

Equity (income) loss from NEC TOKIN
1,443

 
4,620

Amortization of debt and financing costs
1,332

 
1,959

Stock-based compensation expense
1,952

 
1,628

Long-term receivable write down
59

 
1,444

Change in value of NEC TOKIN options
(10,700
)
 
382

Net (gain) loss on sales and disposals of assets
(185
)
 
42

Pension and other post-retirement benefits
37

 
27

Change in deferred income taxes
2,142

 
(957
)
Change in operating assets
(4,268
)
 
(8,261
)
Change in operating liabilities
(6,341
)
 
(10,932
)
Other
(475
)
 
155

Net cash provided by (used in) operating activities
1,594

 
(31,606
)
Investing activities:
 

 
 

Capital expenditures
(11,975
)
 
(18,337
)
Proceeds from sale of assets
2,451

 

Change in restricted cash
558

 
2,874

Proceeds from sale of discontinued operations
10,125

 

Net cash provided by (used in) investing activities
1,159

 
(15,463
)
Financing activities:
 

 
 

Proceeds from revolving line of credit
14,300

 
21,000

Payments of revolving line of credit
(7,500
)
 

Deferred acquisition payments
(11,597
)
 
(11,452
)
Payments of long-term debt
(3,135
)
 
(1,422
)
Proceeds from exercise of stock options
25

 
57

Net cash provided by (used in) financing activities
(7,907
)
 
8,183

Net increase (decrease) in cash and cash equivalents
(5,154
)
 
(38,886
)
Effect of foreign currency fluctuations on cash
(1,199
)
 
608

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

 
95,978

Cash and cash equivalents at end of fiscal period
$
51,576

 
$
57,700

 
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 and six month periods ended September 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 September 30, 2014, utilized $13.1 million for the purchase of manufacturing equipment. The remaining proceeds of $10.9 million are classified as restricted cash at September 30, 2014.
 
A bank guarantee in the amount of €1.5 million ($1.9 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.

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Accordingly, a deposit was placed with the European bank for €1.7 million ($2.1 million). While the deposit is in KEMET’s name, and KEMET receives all interest earned by this deposit, the deposit is pledged to the European bank, and the bank can use the funds if a valid claim against the bank guarantee is made. 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 September 30, 2014 and March 31, 2014 are as follows (amounts in thousands):
 
Carrying Value September 30,
 
Fair Value September 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)
$
739

 
$
739

 
$
739

 
$

 
$

 
$
714

 
$
714

 
$
714

 
$

 
$

Total debt
402,082

 
414,406

 
372,750

 
41,656

 

 
398,589

 
409,284

 
371,863

 
37,421

 

NEC TOKIN options,
 net (3)
14,300

 
14,300

 

 

 
14,300

 
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 based on the borrowing rate for each respective debt facility.
(3)
See Note 6, Investment in NEC TOKIN, for a description of the NEC TOKIN options.  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. The options have been valued using option pricing methods in a Monte Carlo simulation.

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

Change in value of NEC TOKIN options
10,700

September 30, 2014
$
14,300

 

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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):
 
September 30, 2014
 
March 31, 2014
Raw materials and supplies
$
89,416

 
$
90,968

Work in process
58,363

 
61,310

Finished goods
62,358

 
62,522

 
210,137

 
214,800

Inventory reserves (1)
(21,304
)
 
(26,826
)
 
$
188,833

 
$
187,974

___________________
(1)
During the quarter 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 of inventory and the related reserve was written off.
 
Warrant
 
As of September 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 return patterns and records a corresponding allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case -by-case basis to certain customers in each of the Company's sales' channels.
The establishment of sales allowances is recognized as a component of the line item "Net sales" on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company's estimates.
The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were

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approximately 1.0% for the quarters and six month periods ended September 30, 2014 and 2013. The Company recognizes warranty costs when they are both probable and reasonably estimable.
 
Note 2. Discontinued Operations
The Film and Electrolytic business group completed the sale of its machinery division in April, 2014, which, subject to closing adjustments, resulted in a gain of $5.8 million on the sale of the business (after income tax expense) offset by a loss from machinery operations of $0.3 million during the six month period ended September 30, 2014 resulting in net income from discontinued operations of $5.5 million.

Net sales and operating income (loss) from the Company’s discontinued operation for the quarters and six month periods ended September 30, 2014 and 2013 were (amounts in thousands):
 
Quarters Ended September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$

 
$
4,291

 
$
104

 
$
4,957

Operating income (loss)
165

 
(1,275
)
 
(266
)
 
(3,021
)

Note 3. Debt
 
A summary of debt is as follows (amounts in thousands):
 
September 30,
2014
 
March 31,
2014
10.5% Senior Notes, net of premium of $2,807 and $3,144 as of September 30, 2014 and March 31, 2014, respectively
$
357,807

 
$
358,144

Advanced payment from OEM, net of discount of $111 and $323 as of September 30, 2014 and March 31, 2014, respectively
18,486

 
20,095

Revolving line of credit
25,249

 
18,449

Other
540

 
1,901

Total debt
402,082

 
398,589

Current maturities
(25,826
)
 
(7,297
)
Total long-term debt
$
376,256

 
$
391,292


The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters and six month periods ended September 30, 2014 and 2013, consists of the following (amounts in thousands):
 
Quarters Ended September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Contractual interest expense
$
9,659

 
$
8,963

 
$
19,411

 
$
17,983

Amortization of debt issuance costs
426

 
426

 
852

 
852

Amortization of debt (premium) discount
(78
)
 
42

 
(126
)
 
104

Imputed interest on acquisition related obligations
235

 
477

 
522

 
1,003

Interest expense on capital lease
45

 

 
84

 

Total interest expense
$
10,287

 
$
9,908

 
$
20,743

 
$
19,942

 
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”). Pursuant to an amendment to the Loan and Security Agreement entered into on April 30, 2014, the facilities expire on December 31, 2015.

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As of September 30, 2014 the Company had outstanding borrowings of $25.2 million under the revolving line of credit, of which $13.2 million was borrowed under the U.S. facility at a rate of 5.25% (Base Rate, as defined in the Loan and Security Agreement, plus 2.25%) with no specific repayment date (Base Rate borrowing can be repaid at any time prior to the expiration of the facility), and $12.0 million borrowed under the Singapore facility at a rate of 3.50% (London Interbank Offer Rate (“LIBOR”) plus 3.25% based upon the fixed charge coverage ratio of KEMET Corporation and its subsidiaries on a consolidated basis).  The term of this borrowing was originally 31 days with total interest and principal payable at maturity, on October 28, 2013, however, it has been extended periodically and is currently due on November 23, 2014. For the six month period ended September 30, 2014, the Company borrowed an additional $14.3 million, of which $7.5 million was repaid during the period.  These were the only borrowings under the revolving line of credit, and as of September 30, 2014, the Company's available borrowing capacity under the Loan and Security Agreement was $0.3 million (after the $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 $16.0 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 ($1.4 million) and €0.7 million ($0.9 million) related to the construction of the new manufacturing location in Italy which were canceled during February 2014 and April 2014, respectively. Outstanding letters of credit reduce 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 September 30, 2014 and March 31, 2014, the Company had $18.6 million and $20.4 million, respectively, outstanding under this agreement.  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 September 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 item “Accrued expenses” on its Condensed Consolidated balance sheets of $15.5 million as of September 30, 2014 and March 31, 2014.


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Note 4. Restructuring Charges
 
The Company is in the process of various restructuring plans 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 in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters and six month periods ended September 30, 2014 and 2013, is as follows (amounts in thousands):
 
Quarters Ended September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Manufacturing relocation costs
$
539

 
$
548

 
$
2,223

 
$
1,023

Personnel reduction costs
1,148

 
816

 
1,294

 
4,951

Total restructuring charges
$
1,687

 
$
1,364

 
$
3,517

 
$
5,974


Quarter Ended September 30, 2014

The Company incurred $1.7 million in restructuring charges in the quarter ended September 30, 2014 including $1.1 million of personnel reduction costs due to planned headcount reductions in Europe (primarily Landsberg, Germany) as we move production to lower cost regions and $0.5 million of manufacturing relocation costs primarily due to the relocation of equipment from Landsberg, Germany to Suzhou, China and Pontecchio, Italy along with costs associated with the shut-down of the Tantalum production line in Evora, Portugal.

Six month period ended September 30, 2014

The Company incurred $3.5 million in restructuring charges in the six month period ended September 30, 2014 including $1.3 million of personnel reduction costs. The personnel reductions were caused by planned headcount reductions in Europe (primarily Landsberg, Germany) ($1.0 million) and a global reduction of overhead ($0.3 million). The remaining $2.2 million included $0.7 million for manufacturing relocation costs primarily due to the relocation of equipment from Landsberg, Germany to Suzhou, China and Pontecchio, Italy and consolidation of manufacturing facilities within Italy and $1.3 million due to the shut-down of the Tantalum production line in Evora, Portugal.

Quarter Ended September 30, 2013

The Company incurred $1.4 million in restructuring charges in the quarter ended September 30, 2013 including $0.8 million of personnel reduction costs which is comprised of $0.3 million in termination benefits associated with converting the Weymouth, United Kingdom manufacturing facility into a technology center and $0.5 million related to the Company’s initiative to reduce overhead. The Company also incurred manufacturing relocation costs of $0.5 million for the consolidation of manufacturing operations within Italy and relocation of equipment to Evora, Portugal and Skopje, Macedonia.

Six month period ended September 30, 2013
 
The Company incurred $6.0 million in restructuring charges in the six month period ended September 30, 2013 including $5.0 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., $1.2 million related to the reduction of the solid capacitor production workforce in Mexico, $1.1 million related to the Company’s initiative to reduce overhead, $0.4 million in termination benefits associated with converting the Weymouth, United Kingdom manufacturing facility into a technology center and $0.4 million related to Cassia Integrazione Guadagni Straordinaria (“CIGS”) plan in Italy.  The 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.


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In addition to these personnel reduction costs, the Company incurred manufacturing relocation costs of $1.0 million due to the consolidation of manufacturing facilities within Italy and relocation of manufacturing equipment to Evora, Portugal and Skopje, Macedonia.

Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters and six month periods ended September 30, 2014 and 2013 are as follows (amounts in thousands):
 
Quarter Ended September 30, 2014
 
Quarter Ended September 30, 2013
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
3,384

 
$

 
$
8,947

 
$

Costs charged to expense
1,148

 
539

 
816

 
548

Costs paid or settled
(1,264
)
 
(539
)
 
(4,648
)
 
(548
)
Change in foreign exchange
(241
)
 

 
155

 

End of period
$
3,027

 
$

 
$
5,270

 
$


 
Six Month Period Ended September 30, 2014
 
Six Month Period Ended September 30, 2013
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
6,217

 
$

 
$
13,509

 
$
567

Costs charged to expense
$
1,294

 
$
2,223

 
$
4,951

 
$
1,023

Costs paid or settled
$
(4,187
)
 
$
(2,223
)
 
$
(13,517
)
 
$
(1,590
)
Change in foreign exchange
$
(297
)
 
$

 
$
327

 
$

End of period
$
3,027

 
$

 
$
5,270

 
$


Note 5. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the quarters ended September 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 June 30, 2014
$
22,235

 
$
(7,326
)
 
$
1,412

 
$
1,262

 
$
17,583

Other comprehensive income (loss) before reclassifications
(13,659
)
 

 

 
2,982

 
(10,677
)
Amounts reclassified out of AOCI

 
81

 
(52
)
 

 
29

Other comprehensive income (loss)
(13,659
)
 
81

 
(52
)
 
2,982

 
(10,648
)
Balance at September 30, 2014
$
8,576

 
$
(7,245
)
 
$
1,360

 
$
4,244

 
$
6,935

 

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Table of Contents

 
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 June 30, 2013
$
15,810

 
$
(7,487
)
 
$
1,748

 
$
(651
)
 
$
9,420

Other comprehensive income (loss) before reclassifications
6,359

 

 

 
(524
)
 
5,835

Amounts reclassified out of AOCI

 
121

 
(61
)
 

 
60

Other comprehensive income (loss)
6,359

 
121

 
(61
)
 
(524
)
 
5,895

Balance at September 30, 2013
22,169

 
$
(7,366
)
 
$
1,687

 
$
(1,175
)
 
$
15,315


Changes in Accumulated Other Comprehensive Income (Loss) for the six month periods ended September 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
(14,759
)
 

 

 
3,473

 
(11,286
)
Amounts reclassified out of AOCI

 
141

 
(104
)
 

 
37

Other comprehensive income (loss)
(14,759
)
 
141

 
(104
)
 
3,473

 
(11,249
)
Balance at September 30, 2014
$
8,576

 
$
(7,245
)
 
$
1,360

 
$
4,244

 
$
6,935

 
 
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
8,631

 

 

 
(1,175
)
 
7,456

Amounts reclassified out of AOCI

 
296

 
(131
)
 

 
165

Other comprehensive income (loss)
8,631

 
296

 
(131
)
 
(1,175
)
 
7,621

Balance at September 30, 2013
$
22,169

 
$
(7,366
)
 
$
1,687

 
$
(1,175
)
 
$
15,315

 

(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 the quarters and six month periods ended September 30, 2014 and 2013.
(2)
Ending balance is net of tax of $2.2 million and $2.3 million as of September 30, 2014 and September 30, 2013, respectively.

Note 6. Investment in NEC TOKIN
 
On March 12, 2012, KEC, a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) 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

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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, which was amended on August 29, 2014, 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 Call Option between the Initial Closing and April 30, 2015. Upon providing such notice, but not before April 1, 2015, 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 April 1, 2015 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC (the "Put Option"). However, in the event that KEC issues new debt securities principally to refinance its outstanding 10.5% senior notes due 2018 and its currently outstanding credit agreement, including amounts to pay related fees and expenses and to use for general corporate purposes (“Refinancing Notes”), prior to NEC’s delivery of its notification of exercise of the Put Option, then the earliest date NEC may exercise the Put Option is automatically extended to the day immediately following the final scheduled maturity date of such Refinancing Notes, or in the event such Refinancing Notes are redeemed in full prior to such final scheduled maturity date, then on the day immediately following the date of such full redemption, but in any event beginning no later than November 1, 2019. If not previously exercised, the Put Option will expire on October 31, 2023.

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

The Company has marked these options to fair value and in the quarter and six month periods ended September 30, 2014 recognized a $6.6 million and $10.7 million gain, respectively, which was included on the line item “Other (income) expense, net” in the Condensed Consolidated Statement of Operations. The line item “Other assets” on the Condensed Consolidated Balance Sheets includes $14.3 million and $3.6 million, respectively as of September 30, 2014 and March 31, 2014 related to the options.
 
Summarized financial information for NEC TOKIN follows (amounts in thousands):
 
September 30,
2014
 
March 31,
2014
Current assets
$
232,991

 
$
245,709

Non-current assets
292,440

 
302,161

Current liabilities
123,962

 
120,929

Non-current liabilities
325,877

 
360,908



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Table of Contents

 
Three Months Ended 
 September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Sales
$
129,677

 
$
135,074

 
$
252,085

 
$
258,266

Gross profit
26,387

 
25,569

 
53,065

 
43,869

Net income (loss)
2,454

 
(3,213
)
 
(700
)
 
(11,942
)

A reconciliation between NEC TOKIN's net loss and KEMET's equity investment loss follows (amounts in thousands):

 
Three Months Ended 
 September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
NEC TOKIN net income (loss)
2,454

 
(3,213
)
 
(700
)
 
(11,942
)
KEMET's equity ownership %
34
%
 
34
%
 
34
%
 
34
%
Equity income (loss) from NEC TOKIN before Adjustments
834

 
(1,092
)
 
(238
)
 
(4,060
)
 


 


 
 
 
 
Adjustments:


 


 
 
 
 
Amortization and depreciation
(602
)
 
(405
)
 
(1,205
)
 
(814
)
Inventory valuation

 
254

 

 
254

Equity income (loss) from NEC TOKIN
$
232

 
$
(1,243
)
 
$
(1,443
)
 
$
(4,620
)
    
A reconciliation between NEC TOKIN's net assets and KEMET's investment in NEC TOKIN balance follows (amounts in thousands):
 
September 30,
2014
 
March 31,
2014
Investment in NEC TOKIN
$
48,449

 
$
46,419

Purchase price accounting basis adjustment:
 
 
 
Property, plant and equipment
7,116

 
7,325

Technology
(15,450
)
 
(16,261
)
Long-term debt
(4,254
)
 
(4,754
)
Goodwill
(9,326
)
 
(9,326
)
Other
(834
)
 
(952
)
KEMET's 34% economic interest of NEC TOKIN's net assets
$
25,701

 
$
22,451


The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of September 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 and six month periods ended September 30, 2014, KEMET recorded sales of $4.0 million and $5.9 million, respectively, to NEC TOKIN and as of September 30, 2014 and March 31, 2014, KEMET's accounts receivable from NEC TOKIN was $1.8 million and $2.0 million, respectively. And KEMET's accounts payable to NEC TOKIN was $0.1 million as of September 30, 2014 and March 31, 2014. 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 September 30, 2014 and March 31, 2014, KEC’s receivable balance under this agreement was $0.5 million and $0.7 million, respectively.
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.  Subsequently, NEC TOKIN has also communicated with government authorities regarding related investigations in Taiwan and Singapore. The investigations are continuing at various stages.  In addition, beginning July 2014, NEC TOKIN and its subsidiary, NEC TOKIN America, Inc., have been named, along with more than 20 other capacitor manufacturers and subsidiaries, as defendants in purported antitrust

17

Table of Contents

class action suits in the United States and Canada. As of this date, except for legal expenses, NEC TOKIN has not recorded an accrual as a result of the investigations and civil litigation.

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

 
 

 
 

 
 

Solid Capacitors
$
163,019

 
$
157,714

 
$
322,809

 
$
307,115

Film and Electrolytic
52,274

 
50,735

 
105,365

 
103,391

 
$
215,293

 
$
208,449

 
$
428,174

 
$
410,506

Operating income (loss) (1):
 

 
 

 
 

 
 

Solid Capacitors
$
38,386

 
$
25,386

 
$
68,120

 
$
38,178

Film and Electrolytic
(917
)
 
(2,211
)
 
(6,993
)
 
(8,513
)
Unallocated operating expenses
(24,699
)
 
(21,590
)
 
(48,963
)
 
(46,292
)
 
$
12,770

 
$
1,585

 
$
12,164

 
$
(16,627
)
Depreciation and amortization expense:
 

 
 

 
 

 
 

Solid Capacitors
$
5,463

 
$
7,302

 
$
10,941

 
$
14,612

Film and Electrolytic
3,201

 
3,183

 
7,018

 
7,598

Corporate
1,513

 
1,466

 
3,015

 
3,380

 
$
10,177

 
$
11,951

 
$
20,974

 
$
25,590

 
___________________


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Table of Contents

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

 
 

 
 

 
 

Solid Capacitors
$
169

 
$
99

 
$
1,399

 
$
3,145

Film and Electrolytic
1,500

 
1,062

 
1,989

 
2,472

Corporate
18

 
203

 
129

 
357

 
$
1,687

 
$
1,364

 
$
3,517

 
$
5,974

___________________
 
Quarters Ended September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Sales by region:
 

 
 

 
 

 
 

North and South America (“Americas”)
$
72,167

 
$
65,398

 
$
138,150

 
$
124,751

Europe, Middle East, Africa (“EMEA”)
69,930

 
68,166

 
147,135

 
141,157

Asia and Pacific Rim (“APAC”)
73,196

 
74,885

 
142,889

 
144,598

 
$
215,293

 
$
208,449

 
$
428,174

 
$
410,506

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

 
 

Solid Capacitors
$
475,009

 
$
479,377

Film and Electrolytic
254,396

 
287,861

Corporate
87,822

 
76,429

 
$
817,227

 
$
843,667

 
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 September 30, 2014 and 2013 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended September 30,
 
Quarters Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net service cost
$
338

 
$
332

 
$

 
$

Interest cost
478

 
428

 
6

 
7

Expected return on net assets
(124
)
 
(110
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
76

 
79

 
(52
)
 
(61
)
Prior service cost
5

 
1

 

 

Total net periodic benefit (income) costs
$
773

 
$
730

 
$
(46
)
 
$
(54
)
 

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Table of Contents

The components of net periodic benefit costs relating to the Company’s pension and other postretirement benefit plans are as follows for the six month periods ended September 30, 2014 and 2013 (amounts in thousands):
 
Pension
 
Postretirement Benefit Plans
 
Six Month Periods Ended September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net service cost
$
676

 
$
663

 
$

 
$

Interest cost
957

 
856

 
12

 
12

Expected return on net assets
(247
)
 
(219
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
132

 
157

 
(104
)
 
(131
)
Prior service cost
9

 
2

 

 

Net curtailment and settlement gain on benefit plans

 

 

 

Total net periodic benefit (income) costs
$
1,527

 
$
1,459

 
$
(92
)
 
$
(119
)

In fiscal year 2015, the Company expects to contribute up to $1.6 million to the pension plans, $0.5 million of which has been contributed as of September 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 September 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”).  Upon adoption and approval of the 2011 Incentive Plan, no further awards were permitted to be granted under the Company's prior plans. The 2011 Incentive Plan authorizes the Company to provide equity-based compensation in the form of: (1) stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code; (2) stock appreciation rights; (3) restricted stock and restricted stock units; (4) other share-based awards; and (5) performance awards. Options issued under these plans vest within one to 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 termination of service with the Company, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods.
 
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover two year periods and are primarily based upon the achievement of an Adjusted EBITDA target for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or restricted stock units, or a combination of both as determined by the Company’s Board of Directors. The 2013/2014 LTIP, 2014/2015 LTIP 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 September 30, 2014 and 2013 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended September 30, 2014
 
Quarter Ended September 30, 2013
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
61

 
$
21

 
$
276

 
$
135

 
$
(31
)
 
$
124

Selling, general and administrative expenses
86

 
66

 
344

 
137

 
72

 
169

Research and development
5

 

 
99

 
9

 

 
44

Total
$
152

 
$
87

 
$
719

 
$
281

 
$
41

 
$
337


The compensation expense associated with stock-based compensation for the six month periods ended September 30, 2014 and 2013 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Six Month Period Ended September 30, 2014
 
Six Month Period Ended September 30, 2013
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
169

 
$
44

 
$
492

 
$
273

 
$
32

 
$
238

Selling, general and administrative expenses
201

 
244

 
632

 
284

 
305

 
383

Research and development
9

 

 
161

 
20

 

 
93

Total
$
379

 
$
288

 
$
1,285

 
$
577

 
$
337

 
$
714

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

Note 10. Income Taxes
 
During the quarter ended September 30, 2014, the Company incurred $2.6 million of income tax expense which is related to income taxes for continuing foreign operations. Income tax expense for the six month period ended September 30, 2014 was $3.9 million related to income taxes for continuing foreign operations. In addition, the Company incurred $1.0 million income tax expense for the quarter ended September 30, 2014 and $1.9 million of income tax expense for the six month period ended September 30, 2014 related to the income (loss) from discontinued operations. 

During the quarter ended September 30, 2013, the Company incurred $1.4 million of income tax expense which was comprised of $1.3 million related to income taxes for continuing foreign operations and $0.1 million of state income tax expense. Income tax expense for the six month period ended September 30, 2013 was $3.3 million, comprised of $3.2 million related to income taxes for foreign operations and $0.1 million of state income tax expense. In addition, the Company incurred $0.1 million income tax benefit for the quarter ended September 30, 2013 and $0.4 million of income tax benefit for the six month period ended September 30, 2013 related to the income (loss) from discontinued operations. 
  
There is no U.S. federal income tax benefit from the quarters and six month periods ended September 30, 2014 and 2013 due to a valuation allowance recorded on deferred tax assets. 


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

 
 

 
 
 
 
Income (loss) from continuing operations
$
7,730

 
$
(11,945
)
 
$
(2,753
)
 
$
(45,575
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $1,017, $(124), $1,935 and $(360), respectively
(1,400
)
 
(1,151
)
 
5,543

 
(2,661
)
Net income (loss)
$
6,330

 
$
(13,096
)
 
$
2,790

 
$
(48,236
)
Denominator:
 

 
 

 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 
 
 
Basic
45,400

 
45,092

 
45,337

 
45,057

Assumed conversion of employee stock grants
430

 

 
463

 

Assumed conversion of warrants
6,691

 

 
6,762

 

Diluted
52,521

 
45,092

 
52,562

 
45,057

Net income (loss) per basic share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.17

 
$
(0.26
)
 
$
(0.06
)
 
$
(1.01
)
Income (loss) from discontinued operations
$
(0.03
)
 
$
(0.03
)
 
$
0.12

 
$
(0.06
)
Net income (loss)
$
0.14

 
$
(0.29
)
 
$
0.06

 
$
(1.07
)
 
 
 
 
 
 
 
 
Net income (loss) per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.15

 
$
(0.26
)
 
$
(0.05
)
 
$
(1.01
)
Income (loss) from discontinued operations
$
(0.03
)
 
$
(0.03
)
 
$
0.11

 
$
(0.06
)
Net income (loss)
$
0.12

 
$
(0.29
)
 
$
0.06

 
$
(1.07
)
 
Common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
 
Quarters Ended September 30,
 
Six Month Periods Ended September 30,
 
2014
 
2013
 
2014
 
2013
Assumed conversion of employee stock grants
1,001

 
2,234

 
1,030

 
1,941

Assumed conversion of warrants

 
6,371

 

 
6,540

 
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 and six month periods ended September 30, 2014 and 2013.  There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable as of September 30, 2014 and March 31, 2014.
 
Electronics distributors are an important distribution channel in the electronics industry and accounted for 44% and 43% of the Company’s net sales in the six month periods ended September 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. 

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Table of Contents


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):


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Table of Contents

Condensed Consolidating Balance Sheet
September 30, 2014
(Unaudited)

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

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
641

 
$
29,984

 
$
20,951

 
$

 
$
51,576

Accounts receivable, net

 
41,010

 
54,571

 

 
95,581

Intercompany receivable
320,305

 
348,367

 
217,971

 
(886,643
)
 

Inventories, net

 
127,232

 
61,601

 

 
188,833

Prepaid expenses and other
3,145

 
16,610

 
23,415

 
(2,941
)
 
40,229

Deferred income taxes

 
1,957

 
4,612

 

 
6,569

Total current assets
324,091

 
565,160

 
383,121

 
(889,584
)
 
382,788

Property and equipment, net
316

 
101,498

 
173,684

 

 
275,498

Goodwill

 
35,584

 

 

 
35,584

Intangible assets, net

 
27,688

 
7,689

 

 
35,377

Investment in NEC TOKIN

 
48,449

 

 

 
48,449

Investments in subsidiaries
421,754

 
424,312

 
30,285

 
(876,351
)
 

Restricted cash

 
12,955

 

 

 
12,955

Deferred income taxes

 
969

 
5,454

 

 
6,423

Other assets
4,750

 
14,486

 
917

 

 
20,153

Long-term intercompany receivable
74,603

 
58,634

 
2,800

 
(136,037
)
 

Total assets
$
825,514

 
$
1,289,735

 
$
603,950

 
$
(1,901,972
)