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 December 31, 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 January 30, 2015 was 45,428,192.
 


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KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 2014
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 10.1
 
Exhibit 10.2
 
Exhibit 10.3
 
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)
 
 
December 31, 2014
 
March 31, 2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
55,582

 
$
57,929

Accounts receivable, net
92,485

 
98,947

Inventories, net
187,614

 
187,974

Prepaid expenses and other
38,836

 
36,871

Deferred income taxes
6,695

 
6,695

Current assets of discontinued operations

 
12,160

Total current assets
381,212

 
400,576

Property, plant and equipment, net of accumulated depreciation of $816,317 and $805,687 as of December 31, 2014 and March 31, 2014, respectively
264,968

 
292,648

Goodwill
35,584

 
35,584

Intangible assets, net
34,595

 
37,184

Investment in NEC TOKIN
52,168

 
46,419

Restricted cash
2,003

 
13,512

Deferred income taxes
6,691

 
6,778

Other assets
22,523

 
10,130

Non-current assets of discontinued operations

 
836

Total assets
$
799,744

 
$
843,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
12,521

 
$
7,297

Accounts payable
62,132

 
74,818

Accrued expenses
58,611

 
76,468

Income taxes payable and deferred income taxes
396

 
980

Current liabilities of discontinued operations

 
7,269

Total current liabilities
133,660

 
166,832

Long-term debt, less current portion
392,082

 
391,292

Other non-current obligations
49,963

 
55,864

Deferred income taxes
8,131

 
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 December 31, 2014 and March 31, 2014
465

 
465

Additional paid-in capital
462,586

 
465,027

Retained deficit
(226,034
)
 
(231,738
)
Accumulated other comprehensive income
3,857

 
18,184

Treasury stock, at cost (1,080 and 1,301 shares at December 31, 2014 and March 31, 2014, respectively)
(24,966
)
 
(30,054
)
Total stockholders’ equity
215,908

 
221,884

Total liabilities and stockholders’ equity
$
799,744

 
$
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 December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net sales
$
201,310

 
$
207,339

 
$
629,484

 
$
617,845

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales
156,842

 
169,677

 
506,304

 
530,723

Selling, general and administrative expenses
23,374

 
22,431

 
73,663

 
70,826

Research and development
6,303

 
6,027

 
19,230

 
17,703

Restructuring charges
6,063

 
2,194

 
9,580

 
8,168

Write down of long-lived assets

 
3,358

 

 
3,358

Net (gain) loss on sales and disposals of assets
(574
)
 
29

 
(759
)
 
71

Total operating costs and expenses
192,008

 
203,716

 
608,018

 
630,849

Operating income (loss)
9,302

 
3,623

 
21,466

 
(13,004
)
Non-operating (income) expense:
 

 
 

 
 

 
 

Interest income
(5
)
 
(7
)
 
(11
)
 
(182
)
Interest expense
9,938

 
10,349

 
30,681

 
30,291

Other (income) expense, net
(3,701
)
 
(1,351
)
 
(14,829
)
 
(50
)
Income (loss) from continuing operations before income taxes and equity income (loss) from NEC TOKIN
3,070

 
(5,368
)
 
5,625

 
(43,063
)
Income tax expense
1,359

 
1,033

 
5,224

 
4,293

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

 
(6,401
)
 
401

 
(47,356
)
Equity income (loss) from NEC TOKIN
1,367

 
1,657

 
(76
)
 
(2,963
)
Income (loss) from continuing operations
3,078


(4,744
)

325


(50,319
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $41, $67, $1,976 and $(293), respectively
(164
)
 
(1,076
)
 
5,379

 
(3,737
)
Net income (loss)
$
2,914

 
$
(5,820
)
 
$
5,704

 
$
(54,056
)
Net income (loss) per basic share:
 

 
 

 
 

 
 

Net income (loss) from continuing operations
$
0.07

 
$
(0.11
)
 
$
0.01

 
$
(1.12
)
Net income (loss) from discontinued operations
$

 
$
(0.02
)
 
$
0.12

 
$
(0.08
)
Net income (loss)
$
0.07

 
$
(0.13
)
 
$
0.13

 
$
(1.20
)
 
 
 
 
 
 
 
 
Net income (loss) per diluted share:
 

 
 

 
 

 
 

Net income (loss) from continuing operations
$
0.06

 
$
(0.11
)
 
$
0.01

 
$
(1.12
)
Net income (loss) from discontinued operations
$

 
$
(0.02
)
 
$
0.10

 
$
(0.08
)
Net income (loss)
$
0.06

 
$
(0.13
)
 
$
0.11

 
$
(1.20
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
45,407

 
45,120

 
45,360

 
45,078

Diluted
52,228

 
45,120

 
52,549

 
45,078


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 December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
2,914

 
$
(5,820
)
 
$
5,704

 
$
(54,056
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation gains (losses)
(5,743
)
 
3,879

 
(20,502
)
 
12,510

Defined benefit pension plans, net of tax impact
86

 
106

 
227


402

Post-retirement plan adjustments
(36
)
 
(81
)
 
(140
)
 
(212
)
Equity interest in NEC TOKIN's other comprehensive income (loss)
2,615

 
1,113

 
6,088

 
(62
)
Other comprehensive income (loss)
(3,078
)
 
5,017

 
(14,327
)
 
12,638

Total comprehensive income (loss)
$
(164
)
 
$
(803
)
 
$
(8,623
)
 
$
(41,418
)
 
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)
 
 
Nine Month Periods Ended December 31,
 
2014
 
2013
Net income (loss)
$
5,704

 
$
(54,056
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Gain on sale of discontinued operations
(5,644
)
 

Net cash provided by (used in) operating activities of discontinued operations
(679
)
 
461

Depreciation and amortization
30,694

 
37,352

Equity (income) loss from NEC TOKIN
76

 
2,963

Amortization of debt and financing costs
1,706

 
2,817

(Gain) loss on early extinguishment of debt
(1,003
)
 

Stock-based compensation expense
3,185

 
2,330

Long-term receivable write down
27

 
1,484

Change in value of NEC TOKIN options
(13,200
)
 
(1,334
)
Net (gain) loss on sales and disposals of assets
(759
)
 
71

Pension and other post-retirement benefits
87

 
24

Write down of long-lived assets

 
3,358

Change in deferred income taxes
1,276

 
(2,496
)
Change in operating assets
(208
)
 
8,579

Change in operating liabilities
(24,732
)
 
(28,296
)
Other
200

 
431

Net cash provided by (used in) operating activities
(3,270
)
 
(26,312
)
Investing activities:
 

 
 

Capital expenditures
(17,474
)
 
(24,993
)
Proceeds from sale of assets
4,540

 

Change in restricted cash
11,509

 
3,532

Proceeds from sale of discontinued operations
9,564

 

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

 
(21,461
)
Financing activities:
 

 
 

Proceeds from revolving line of credit
42,340

 
21,000

Payments on revolving line of credit
(14,342
)
 

Deferred acquisition payments
(11,899
)
 
(11,703
)
Payments on long-term debt
(21,733
)
 
(2,858
)
Proceeds from exercise of stock options
24

 
86

Net cash provided by (used in) financing activities
(5,610
)
 
6,525

Net increase (decrease) in cash and cash equivalents
(741
)
 
(41,248
)
Effect of foreign currency fluctuations on cash
(1,606
)
 
864

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

 
95,978

Cash and cash equivalents at end of fiscal period
$
55,582

 
$
55,594

 
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 nine month periods ended December 31, 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 issued Accounting Standards Update 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 repaid the outstanding balance of the original equipment manufacturer (“OEM”) Advance Payment (as defined in Note 3, Debt) and removed the restriction on cash related to the Advance Payment during the third quarter ended December 31, 2014.
 
A bank guarantee in the amount of €1.5 million ($1.8 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 ($2.0 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 December 31, 2014 and March 31, 2014 are as follows (amounts in thousands):
 
Carrying Value December 31,
 
Fair Value December 31,
 
Fair Value Measurement Using
 
Carrying Value March 31,
 
Fair Value March 31,
 
Fair Value Measurement Using
 
2014
 
2014
 
Level 1
 
Level 2 (2)
 
Level 3
 
2014
 
2014
 
Level 1
 
Level 2 (2)
 
Level 3
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
738

 
$
738

 
$
738

 
$

 
$

 
$
714

 
$
714

 
$
714

 
$

 
$

Total debt
404,603

 
403,086

 
362,100

 
40,986

 

 
398,589

 
409,284

 
371,863

 
37,421

 

NEC TOKIN options,
 net (3)
16,800

 
16,800

 

 

 
16,800

 
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
13,200

December 31, 2014
$
16,800

 

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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):
 
December 31, 2014
 
March 31, 2014
Raw materials and supplies
$
89,924

 
$
90,968

Work in process
52,981

 
61,310

Finished goods
64,300

 
62,522

 
207,205

 
214,800

Inventory reserves (1)
(19,591
)
 
(26,826
)
 
$
187,614

 
$
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. In the quarter ended December 31, 2014, the Company scrapped $1.8 million of fully reserved finished goods inventory to reclaim and recycle the tantalum raw material contained therein.
 
Warrant
 
As of December 31, 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 less

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than 1.0% for the quarters and nine month periods ended December 31, 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 ("Film and Electrolytic”) completed the sale of its machinery division in April 2014, which resulted in a gain of $5.6 million on the sale of the business (after income tax expense) offset by a loss from machinery operations of $0.3 million during the nine month period ended December 31, 2014 resulting in net income from discontinued operations of $5.4 million.

Net sales and operating income (loss) from the Company’s discontinued operation for the quarters and nine month periods ended December 31, 2014 and 2013 were (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net sales
$

 
$
1,711

 
$
104

 
$
6,668

Operating income (loss)

 
(1,009
)
 
(265
)
 
(4,030
)

Note 3. Debt
 
A summary of debt is as follows (amounts in thousands):
 
December 31,
2014
 
March 31,
2014
10.5% Senior Notes, net of premium of $2,634 and $3,144 as of December 31, 2014 and March 31, 2014, respectively
$
357,634

 
$
358,144

Advanced payment from OEM, net of discount of $323 as of March 31, 2014

 
20,095

Revolving line of credit
46,448

 
18,449

Other
521

 
1,901

Total debt
404,603

 
398,589

Current maturities
(12,521
)
 
(7,297
)
Total long-term debt
$
392,082

 
$
391,292


The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters and nine month periods ended December 31, 2014 and 2013, consists of the following (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Contractual interest expense
$
9,566

 
$
9,491

 
$
28,975

 
$
27,474

Amortization of debt issuance costs
267

 
426

 
1,132

 
1,278

Amortization of debt (premium) discount
(108
)
 
14

 
(234
)
 
118

Imputed interest on acquisition-related obligations
163

 
418

 
672

 
1,421

Interest expense on capital lease
50

 

 
136

 

Total interest expense
$
9,938

 
$
10,349

 
$
30,681

 
$
30,291

 
Revolving Line of Credit
 
On December 19, 2014, KEMET Electronics Corporation (“KEC”), KEMET Foil Manufacturing, LLC, KEMET Blue Powder Corporation, The Forest Electric Company (collectively, the “U.S. Borrowers”) and KEMET Electronics Marketing (S) Pte Ltd. (the “Singapore Borrower”), the financial institutions party thereto (collectively, the “Lenders”) and Bank of America, N.A., as agent for the Lenders (the “Agent”) entered into an amendment to the Loan and Security Agreement dated September 30, 2010, as amended, which prior to the amendment provided a $50.0 million revolving line of credit. Under the terms of the amendment, the revolving credit facility has increased to $60.0 million, with an accordion feature permitting the U.S.

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Borrowers to increase commitments under the facility by an aggregate principal amount up to $15 million (for a total facility of $75 million), subject to terms and documentation acceptable to the Agent and/or the Lenders. The expiration date of the facility has been extended to December 19, 2019. The principal features of the Amendment include the following:
A decrease in the applicable margins under the U.S. facility to a range of 2.00% to 2.50% for LIBOR advances and 1.00% to 1.50% for base rate advances, and under the Singapore facility to a range of 2.25% to 2.75% for LIBOR advances and 1.25% to 1.75% for base rate advances.
A decrease to 1.0 to 1.0 in the Fixed Charge Coverage Ratio as defined in the existing Loan and Security Agreement, which must be maintained as of the last day of each fiscal quarter ending immediately prior to or during any period in which any of the following occurs and is continuing until none of the following occurs for a period of forty-five consecutive days: (i) an event of default, (ii) aggregate availability under the facility is less than the greater of 12.5% of the Facility or $7.5 million or (iii) U.S. availability under the facility is less than $3.8 million.
 
For the nine month period ended December 31, 2014, the Company borrowed $42.3 million, of which $14.3 million was repaid during the period. As of December 31, 2014 the Company had outstanding borrowings of $46.4 million under the revolving line of credit, of which $29.4 million was borrowed under the U.S. facility at a rate of 4.75% (Base Rate, as defined in the Loan and Security Agreement, plus 1.50%) with no specific repayment date (Base Rate borrowing can be repaid at any time prior to the expiration of the facility), and $17.0 million borrowed under the Singapore facility at a rate of 3.00% (London Interbank Offer Rate (“LIBOR”) plus 2.75% based upon the fixed charge coverage ratio of KEMET Corporation and its subsidiaries on a consolidated basis). The $17.0 million borrowed under the Singapore facility is comprised of a $12.0 million borrowing with a term of 90 days and total interest and principal payable at maturity, on February 23, 2015, and a $5.0 million borrowing with a term of 30 days for which total interest and principal were paid on January 29, 2015 at maturity. These were the only borrowings under the revolving line of credit, and as of December 31, 2014, the Company's available borrowing capacity under the Loan and Security Agreement was $3.3 million. Subsequent to December 31, 2014, $7.5 million of the U.S. facility borrowing was repaid.

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, and subsequently, during December 2014, at our discretion, we opted to repay the Advanced Payment primarily using the revolving line of credit and the letter of credit was simultaneously released. In fiscal year 2014, the Company issued two letters of credit for €1.1 million ($1.3 million) and €0.7 million ($0.8 million) related to the construction of the new manufacturing location in Italy which were released during February 2014 and April 2014, respectively. Outstanding letters of credit would 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”) to be repaid in full by June 2015 using monthly payments 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 or $2.0 million per month if various conditions are met.  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. During December 2014, the outstanding balance due on the Advanced Payment was repaid primarily using the revolving line of credit and the letter of credit was simultaneously released.
 
10.5% Senior Notes
 
As of December 31, 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 $6.2 million and $15.5 million as of December 31, 2014 and March 31, 2014, respectively.

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.


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A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters and nine month periods ended December 31, 2014 and 2013, is as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Manufacturing relocation costs
$
174

 
$
1,037

 
$
2,397

 
$
2,060

Personnel reduction costs
5,889

 
1,157

 
7,183

 
6,108

Total restructuring charges
$
6,063

 
$
2,194

 
$
9,580

 
$
8,168


Quarter Ended December 31, 2014

The Company incurred $6.1 million in restructuring charges in the quarter ended December 31, 2014 including $5.9 million of personnel reduction costs due to the following: $2.7 million related to a restructuring plan initiated in Italy whereby the Company will reduce the non-manufacturing labor headcount by 50 employees, $0.5 million related to an expansion of the Cassia Integrazione Guadagni Straordinaria (“CIGS”) plan, $0.9 million related to headcount reductions taken as the Company begins to outsource its information technology function, and $0.5 million for global reduction of overhead. In addition, the Company incurred $0.8 million related to the planned headcount reductions in Europe (primarily in Landsberg, Germany) as the Company relocates production to lower cost regions and $0.5 million related to the relocation of certain Solid Capacitor business group ("Solid Capacitor") manufacturing from Matamoros, Mexico to Victoria, Mexico. The total expected costs for these relocations are $6.5 million ($4.4 million related to Film and Electrolytic and $2.1 million related to Solid Capacitors) and the relocations are expected to be complete in the second quarter of fiscal year 2016. The Company also incurred $0.2 million of manufacturing relocation costs primarily due to the relocation of equipment to Suzhou, China and Skopje, Macedonia.

Nine month period ended December 31, 2014

The Company incurred $9.6 million in restructuring charges in the nine month period ended December 31, 2014 including $7.2 million of personnel reduction costs. The personnel reduction costs were due to the following: $2.7 million related to a restructuring plan initiated in Italy whereby the Company will reduce the non-manufacturing labor headcount by 50 employees, $0.5 million related to an expansion of the CIGS plan, $0.9 million related to headcount reductions taken as the Company begins to outsource its information technology function, and $0.5 million for global reduction of overhead. In addition, the Company incurred $2.0 million related to planned headcount reductions in Europe (primarily in Landsberg, Germany) as the Company relocates production to lower cost regions and $0.6 million related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico. The total expected costs for these relocations are $6.5 million ($4.4 million related to Film and Electrolytic and $2.1 million related to Solid Capacitors) and the relocations are expected to be complete in the second quarter of fiscal year 2016. The $2.4 million relocation costs included $1.1 million for the relocation of equipment to Suzhou, China and Skopje, Macedonia and $1.3 million due to the shut-down of the Tantalum production line in Evora, Portugal.

For the fiscal year 2015, the expense related to CIGS is as a result of an agreement with the labor union which allowed the Company to place up to 65 employees, on a rotational basis, on the CIGS plan in order 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. The Company estimates that 65 employees will participate in the program.

Quarter Ended December 31, 2013

The Company incurred $2.2 million in restructuring charges in the quarter ended December 31, 2013 including $1.2 million of personnel reduction costs which is primarily comprised of $0.9 million related to a headcount reduction of 31 employees due to the consolidation of manufacturing facilities in Italy. The Company also incurred manufacturing relocation costs of $1.0 million for the consolidation of manufacturing operations within Italy.




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Table of Contents


Nine month period ended December 31, 2013
 
The Company incurred $8.2 million in restructuring charges in the nine month period ended December 31, 2013 including $6.1 million related to personnel reduction costs which is primarily comprised of the following: $1.9 million related to the closure of a portion of the Company's 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, $0.9 million related to a headcount reduction of 31 employees due to the consolidation of manufacturing facilities in Italy, $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 the CIGs plan which in fiscal year 2014 covered up to 170 employees. 

In addition to these personnel reduction costs, the Company incurred manufacturing relocation costs of $2.1 million due to the consolidation of manufacturing facilities within Italy and relocation of manufacturing equipment to Evora, Portugal Skopje, Macedonia and Mexico.

Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters and nine month periods ended December 31, 2014 and 2013 are as follows (amounts in thousands):
 
Quarter Ended December 31, 2014
 
Quarter Ended December 31, 2013
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
3,026

 
$

 
$
5,271

 
$

Costs charged to expense
5,889

 
174

 
1,157

 
1,037

Costs paid or settled
(1,982
)
 
(174
)
 
(1,313
)
 
(1,037
)
Change in foreign exchange
(207
)
 

 
94

 

End of period
$
6,726

 
$

 
$
5,209

 
$


 
Nine Month Period Ended December 31, 2014
 
Nine Month Period Ended December 31, 2013
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
6,217

 
$

 
$
13,509

 
$
567

Costs charged to expense
$
7,183

 
$
2,397

 
$
6,108

 
$
2,060

Costs paid or settled
$
(6,169
)
 
$
(2,397
)
 
$
(14,830
)
 
$
(2,627
)
Change in foreign exchange
$
(505
)
 
$

 
$
422

 
$

End of period
$
6,726

 
$

 
$
5,209

 
$



















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Note 5. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the quarters ended December 31, 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 September 30, 2014
$
8,576

 
$
(7,245
)
 
$
1,360

 
$
4,244

 
$
6,935

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

 

 
2,615

 
(3,128
)
Amounts reclassified out of AOCI

 
86

 
(36
)
 

 
50

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

 
(36
)
 
2,615

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

 
$
(7,159
)
 
$
1,324

 
$
6,859

 
$
3,857

 
 
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 September 30, 2013
$
22,169

 
$
(7,366
)
 
$
1,687

 
$
(1,175
)
 
$
15,315

Other comprehensive income (loss) before reclassifications
3,879

 

 

 
1,113

 
4,992

Amounts reclassified out of AOCI

 
106

 
(81
)
 

 
25

Other comprehensive income (loss)
3,879

 
106

 
(81
)
 
1,113

 
5,017

Balance at December 31, 2013
26,048

 
$
(7,260
)
 
$
1,606

 
$
(62
)
 
$
20,332


Changes in Accumulated Other Comprehensive Income (Loss) for the nine month periods ended December 31, 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
(20,502
)
 

 

 
6,088

 
(14,414
)
Amounts reclassified out of AOCI

 
227

 
(140
)
 

 
87

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

 
(140
)
 
6,088

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

 
$
(7,159
)
 
$
1,324

 
$
6,859

 
$
3,857

 

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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 March 31, 2013
$
13,538

 
$
(7,662
)
 
$
1,818

 

 
$
7,694

Other comprehensive income (loss) before reclassifications
12,510

 

 

 
(62
)
 
12,448

Amounts reclassified out of AOCI

 
402

 
(212
)
 

 
190

Other comprehensive income (loss)
12,510

 
402

 
(212
)
 
(62
)
 
12,638

Balance at December 31, 2013
$
26,048

 
$
(7,260
)
 
$
1,606

 
$
(62
)
 
$
20,332

 

(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 nine month periods ended December 31, 2014 and 2013.
(2)
Ending balance is net of tax of $2.2 million and $2.3 million as of December 31, 2014 and December 31, 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 and 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, 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 First Call Option notice, but not before April 1, 2015, KEC may also exercise a second option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. 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

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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 nine month periods ended December 31, 2014 recognized a $2.5 million and $13.2 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 $16.8 million and $3.6 million, respectively as of December 31, 2014 and March 31, 2014 related to the options.
 
Summarized financial information for NEC TOKIN follows (amounts in thousands):
 
December 31,
2014
 
March 31,
2014
Current assets
$
224,428

 
$
245,709

Non-current assets
280,381

 
302,161

Current liabilities
116,110

 
120,929

Non-current liabilities
299,788

 
360,908


 
Three Months Ended 
 December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Sales
$
119,841

 
$
129,639

 
$
371,926

 
$
387,905

Gross profit
26,162

 
24,879

 
79,227

 
68,748

Net income (loss)
5,628

 
23,228

 
4,928

 
11,286


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

 
Three Months Ended 
 December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
NEC TOKIN net income (loss)
5,628

 
23,228

 
4,928

 
11,286

KEMET's equity ownership %
34
%
 
34
%
 
34
%
 
34
%
Equity income (loss) from NEC TOKIN before Adjustments
1,914

 
7,898

 
1,676

 
3,837

 


 


 
 
 
 
Adjustments:


 


 
 
 
 
Amortization and depreciation
(547
)
 
(243
)
 
(1,752
)
 
(1,056
)
Gain on sale of long-lived assets

 
(5,998
)
 

 
(5,998
)
Inventory valuation

 

 

 
254

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

 
$
1,657

 
$
(76
)
 
$
(2,963
)
    
    

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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):
 
December 31,
2014
 
March 31,
2014
Investment in NEC TOKIN
$
52,168

 
$
46,419

Purchase price accounting basis adjustment:
 
 
 
Property, plant and equipment
7,022

 
7,325

Technology
(15,082
)
 
(16,261
)
Long-term debt
(4,028
)
 
(4,754
)
Goodwill
(9,326
)
 
(9,326
)
Inventory Profit Elimination
264

 

Other
(788
)
 
(952
)
KEMET's 34% economic interest of NEC TOKIN's net assets
$
30,230

 
$
22,451


The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of December 31, 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 nine month periods ended December 31, 2014, KEMET recorded sales of $3.7 million and $9.6 million, respectively, to NEC TOKIN and as of December 31, 2014 and March 31, 2014, KEMET's accounts receivable from NEC TOKIN were $2.2 million and $2.0 million, respectively. KEMET's accounts payable to NEC TOKIN were $0.4 million and $0.1 million as of December 31, 2014 and March 31, 2014, respectively. 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 December 31, 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 in July 2014, NEC TOKIN and its subsidiary, NEC TOKIN America, Inc., have been named, along with more than 20 other capacitor manufacturers and subsidiaries, as defendants in purported antitrust class action suits 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 eight manufacturing sites in the United States, Mexico and China, Solid Capacitors primarily produces tantalum, aluminum, polymer and ceramic capacitors which are sold globally.  Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors and has a product innovation center in the United States.
 
Film and Electrolytic
 
Operating in thirteen 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.
 


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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 and nine month periods ended December 31, 2014 and 2013 (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net sales:
 

 
 

 
 

 
 

Solid Capacitors
$
152,785

 
$
156,082

 
$
475,594

 
$
463,197

Film and Electrolytic
48,525

 
51,257

 
153,890

 
154,648

 
$
201,310

 
$
207,339

 
$
629,484

 
$
617,845

Operating income (loss) (1):
 

 
 

 
 

 
 

Solid Capacitors
$
38,103

 
$
27,616

 
$
106,221

 
$
65,795

Film and Electrolytic
(5,137
)
 
(2,374
)
 
(12,127
)
 
(10,888
)
Corporate
(23,664
)
 
(21,619
)
 
(72,628
)
 
(67,911
)
 
$
9,302

 
$
3,623

 
$
21,466

 
$
(13,004
)
Depreciation and amortization expense:
 

 
 

 
 

 
 

Solid Capacitors
$
5,013

 
$
6,798

 
$
15,955

 
$
21,409

Film and Electrolytic
3,321

 
3,360

 
10,339

 
10,960

Corporate
1,385

 
1,601

 
4,400

 
4,983

 
$
9,719

 
$
11,759

 
$
30,694

 
$
37,352

 
__________________

(1)    Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Restructuring charges:
 

 
 

 
 

 
 

Solid Capacitors
$
496

 
$
91

 
$
1,895

 
$
3,235

Film and Electrolytic
4,496

 
2,100

 
6,485

 
4,573

Corporate
1,071

 
3

 
1,200

 
360

 
$
6,063

 
$
2,194

 
$
9,580

 
$
8,168

___________________
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Sales by region:
 

 
 

 
 

 
 

North and South America (“Americas”)
$
63,703

 
$
67,875

 
$
201,853

 
$
192,625

Europe, Middle East, Africa (“EMEA”)
67,356

 
68,026

 
214,491

 
209,183

Asia and Pacific Rim (“APAC”)
70,251

 
71,438

 
213,140

 
216,037

 
$
201,310

 
$
207,339

 
$
629,484

 
$
617,845

 

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Table of Contents

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

 
 

Solid Capacitors
$
478,614

 
$
479,377

Film and Electrolytic
238,193

 
287,861

Corporate
82,937

 
76,429

 
$
799,744

 
$
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 December 31, 2014 and 2013 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended December 31,
 
Quarters Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net service cost
$
338

 
$
332

 
$

 
$

Interest cost
478

 
428

 
9

 
6

Expected return on net assets
(124
)
 
(110
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
81

 
79

 
(36
)
 
(65
)
Prior service cost
4

 
1

 

 

Total net periodic benefit (income) costs
$
777

 
$
730

 
$
(27
)
 
$
(59
)

The components of net periodic benefit costs relating to the Company’s pension and other postretirement benefit plans are as follows for the nine month periods ended December 31, 2014 and 2013 (amounts in thousands):
 
Pension
 
Postretirement Benefit Plans
 
Nine Month Periods Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net service cost
$
1,014

 
$
994

 
$

 
$

Interest cost
1,435

 
1,284

 
21

 
17

Expected return on net assets
(371
)
 
(328
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
213

 
235

 
(140
)
 
(195
)
Prior service cost
13

 
3

 

 

Total net periodic benefit (income) costs
$
2,304

 
$
2,188

 
$
(119
)
 
$
(178
)

In fiscal year 2015, the Company expects to contribute up to $1.6 million to the pension plans, $0.8 million of which has been contributed as of December 31, 2014.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred.
 







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Table of Contents

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 December 31, 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 four years and expire ten years from the grant date. The Company grants restricted stock units to members of the Board of Directors, the Chief Executive Officer and key management. Once vested and settled, restricted stock units are converted into restricted stock. For members of the Board of Directors and senior personnel, such restricted stock cannot be sold until 90 days after termination of service with the Company, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods.
 
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover two year periods and are primarily based upon the achievement of an Adjusted EBITDA target for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or restricted stock units, or a combination of both as determined by the Company’s Board of Directors. The 2013/2014 LTIP, 2014/2015 LTIP 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.

On August 1, 2014, the Company granted 70,000 shares of restricted stock units to members of the Board of Directors. The restricted stock units had a grant date fair value of $4.90 and vest on July 23, 2015. On December 1, 2014, the Company granted 535,000 restricted stock units to certain executives and 167,500 restricted stock units to employees under the Key Manager Stock Program. The restricted stock units had a grant date fair value of $4.00 and vest within three to four years from the grant date.

Restricted stock activity for the nine month periods ended December 31, 2014 is as follows (amounts in thousands except fair value):
 
Shares
 
Weighted-
average
Fair Value on
Grant Date
Non-vested restricted stock at March 31, 2014
308
 
$
6.62

Granted
820
 
4.16

Vested
(112)
 
4.43

Forfeited
(18)
 
9.19

Non-vested restricted stock at December 31, 2014
998
 
4.80

 

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Table of Contents

The compensation expense associated with stock-based compensation for the quarters ended December 31, 2014 and 2013 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended December 31, 2014
 
Quarter Ended December 31, 2013
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
36

 
$
66

 
$
322

 
$
95

 
$
47

 
$
136

Selling, general and administrative expenses
69

 
230

 
409

 
67

 
200

 
126

Research and development
3

 
1

 
96

 
(19
)
 

 
50

Total
$
108

 
$
297

 
$
827

 
$
143

 
$
247

 
$
312


The compensation expense associated with stock-based compensation for the nine month periods ended December 31, 2014 and 2013 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Nine Month Period Ended December 31, 2014
 
Nine Month Period Ended December 31, 2013
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
205

 
$
110

 
$
797

 
$
368

 
$
80

 
$
374

Selling, general and administrative expenses
270

 
474

 
1,059

 
351

 
505

 
509

Research and development
12

 
1

 
257

 

 

 
143

Total
$
487

 
$
585

 
$
2,113

 
$
719

 
$
585

 
$
1,026

  
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 nine month periods ended December 31, 2014, and 2013. Approximately six thousand and thirty-five thousand stock options were exercised in the nine month periods ended December 31, 2014 and 2013, respectively.

Note 10. Income Taxes
 
During the quarter ended December 31, 2014, the Company incurred $1.4 million of income tax expense which is comprised of $0.8 million related to income taxes for foreign operations and $0.6 million of income tax expense related to an uncertain tax position in a foreign jurisdiction. Income tax expense for the nine month period ended December 31, 2014 was $5.2 million which is comprised of $4.3 million related to income taxes for foreign operations, $0.8 million of income tax expense related to an uncertain tax position in a foreign jurisdiction and $0.1 million of state income tax expense. In addition, the Company incurred $0.1 million income tax expense for the quarter ended December 31, 2014 and $2.0 million of income tax expense for the nine month period ended December 31, 2014 related to the income (loss) from discontinued operations. 

During the quarter ended December 31, 2013, the Company incurred $1.0 million of income tax expense which was comprised of $1.3 million related to income taxes for foreign operations and $0.3 million tax benefit related to the release of uncertain tax positions in a foreign jurisdiction. Income tax expense for the nine month period ended December 31, 2013 was $4.3 million, comprised of $4.3 million related to income taxes for foreign operations, $0.1 million of state income tax expense and $0.1 million income tax benefit related to uncertain tax positions in a foreign jurisdiction. In addition, the Company incurred $0.1 million income tax expense for the quarter ended December 31, 2013 and $0.3 million of income tax benefit for the nine month period ended December 31, 2013 related to the income (loss) from discontinued operations. 
  
There is no U.S. federal income tax benefit from the quarters and nine month periods ended December 31, 2014 and 2013 due to a valuation allowance recorded on deferred tax assets. 


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Table of Contents

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 December 31,
 
Nine Month Periods Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Numerator:
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
3,078

 
$
(4,744
)
 
$
325

 
$
(50,319
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $41, $67, $1,976 and $(293), respectively
(164
)
 
(1,076
)
 
5,379

 
(3,737
)
Net income (loss)
$
2,914

 
$
(5,820
)
 
$
5,704

 
$
(54,056
)
Denominator:
 

 
 

 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 
 
 
Basic
45,407

 
45,120

 
45,360

 
45,078

Assumed conversion of employee stock grants
493

 

 
550

 

Assumed conversion of warrants
6,328

 

 
6,639

 

Diluted
52,228

 
45,120

 
52,549

 
45,078

Net income (loss) per basic share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.07

 
$
(0.11
)
 
$
0.01

 
$
(1.12
)
Income (loss) from discontinued operations
$

 
$
(0.02
)
 
$
0.12

 
$
(0.08
)
Net income (loss)
$
0.07

 
$
(0.13
)
 
$
0.13

 
$
(1.20
)
 
 
 
 
 
 
 
 
Net income (loss) per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.06

 
$
(0.11
)
 
$
0.01

 
$
(1.12
)
Income (loss) from discontinued operations
$

 
$
(0.02
)
 
$
0.10

 
$
(0.08
)
Net income (loss)
$
0.06

 
$
(0.13
)
 
$
0.11

 
$
(1.20
)
 
Common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Assumed conversion of employee stock grants
1,433

 
1,777

 
1,012

 
1,800

Assumed conversion of warrants

 
6,822

 

 
6,646

 
Note 12. Write Down of Long-Lived Assets
In fiscal year 2013, the Company initiated a restructuring plan for its Evora, Portugal manufacturing operations. As a part of ongoing restructuring activities, the Company has relocated certain Tantalum manufacturing operations from the Evora, Portugal facility to a manufacturing facility in Mexico and the remaining Tantalum equipment in Portugal will be disposed. During the third quarter of fiscal year 2014, Solid Capacitors incurred impairment charges totaling $2.8 million due to a decrease in forecasted units manufactured in Portugal because production was relocated to Mexico sooner than originally planned. The Company used an income approach to estimate the fair value of the assets to be disposed. In addition, during the third quarter of fiscal year 2014, the Company incurred impairment charges totaling $0.6 million related to the Film and Electrolytic which were related to idle manufacturing equipment in a manufacturing facility in Italy. The impairment charges are recorded on the Condensed Consolidated Statements of Operations line item “Write down of long-lived assets” in the nine month period ended December 31, 2013.


23

Table of Contents

Note 13. Concentrations of Risks
 
The Company sells to customers globally and, as the Company generally does not require collateral from its customers, on a monthly basis the Company evaluates customer account balances in order to assess the Company’s financial risks of collection.  One customer, TTI, Inc., an electronics distributor, accounted for over 10% of the Company’s net sales in the quarters and nine month periods ended December 31, 2014 and 2013.  There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable as of December 31, 2014 and March 31, 2014.
 
Electronics distributors are an important distribution channel in the electronics industry and accounted for 44% of the Company’s net sales in each of the nine month periods ended December 31, 2014 and 2013.  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 14. 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):


24

Table of Contents

Condensed Consolidating Balance Sheet
December 31, 2014
(Unaudited)

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

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
640

 
$
29,936

 
$
25,006

 
$

 
$
55,582

Accounts receivable, net

 
38,148

 
54,337

 

 
92,485

Intercompany receivable
320,682

 
413,279

 
202,659

 
(936,620
)
 

Inventories, net

 
127,906

 
59,708

 

 
187,614

Prepaid expenses and other
3,146

 
15,684

 
22,947

 
(2,941
)
 
38,836

Deferred income taxes

 
2,314

 
4,381

 

 
6,695

Total current assets
324,468

 
627,267

 
369,038

 
(939,561
)
 
381,212

Property and equipment, net
305

 
100,025

 
164,638

 

 
264,968

Goodwill