Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015 
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from           to      
  
Commission File Number: 001-15491
 
KEMET CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
57-0923789
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681
(Address of principal executive offices, zip code)
 
(864) 963-6300
(Registrant’s telephone number, including area code)
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý  NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ý NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  ý NO
 
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 30, 2015 was 45,776,566.
 


Table of Contents

KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended June 30, 2015
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 4.1
 
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)
 
 
June 30, 2015
 
March 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
31,059

 
$
56,362

Accounts receivable, net
96,068

 
90,857

Inventories, net
183,484

 
171,843

Prepaid expenses and other
45,957

 
41,503

Deferred income taxes
9,382

 
10,762

Total current assets
365,950

 
371,327

Property, plant and equipment, net of accumulated depreciation of $813,954 and $804,286 as of June 30, 2015 and March 31, 2015, respectively
250,681

 
249,641

Goodwill
40,294

 
35,584

Intangible assets, net
34,859

 
33,282

Investment in NEC TOKIN
45,668

 
45,016

Restricted cash
1,846

 
1,775

Deferred income taxes
5,489

 
5,111

Other assets
5,008

 
11,056

Total assets
$
749,795

 
$
752,792

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
6,000

 
$
962

Accounts payable
76,805

 
69,785

Accrued expenses
56,531

 
60,456

Income taxes payable and deferred income taxes
21

 
1,017

Total current liabilities
139,357

 
132,220

Long-term debt, less current portion
390,261

 
390,409

Other non-current obligations
82,290

 
57,131

Deferred income taxes
7,362

 
8,350

Stockholders’ equity:
 

 
 

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

 

Common stock, par value $0.01, authorized 175,000 shares, issued 46,508 shares at June 30, 2015 and March 31, 2015
465

 
465

Additional paid-in capital
453,143

 
461,191

Retained deficit
(282,931
)
 
(245,881
)
Accumulated other comprehensive income
(26,683
)
 
(28,796
)
Treasury stock, at cost (785 and 1,057 shares at June 30, 2015 and March 31, 2015, respectively)
(13,469
)
 
(22,297
)
Total stockholders’ equity
130,525

 
164,682

Total liabilities and stockholders’ equity
$
749,795

 
$
752,792


 See accompanying notes to the unaudited condensed consolidated financial statements.

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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited) 
 
Quarters Ended June 30,
 
2015
 
2014
Net sales
$
187,590

 
$
212,881

Operating costs and expenses:
 

 
 

Cost of sales
147,877

 
179,924

Selling, general and administrative expenses
30,430

 
24,779

Research and development
6,274

 
6,589

Restructuring charges
1,824

 
1,830

Net (gain) loss on sales and disposals of assets
(58
)
 
365

Total operating costs and expenses
186,347

 
213,487

Operating income (loss)
1,243

 
(606
)
Non-operating (income) expense:
 

 
 

Interest income
(3
)
 
(3
)
Interest expense
10,013

 
10,456

Change in value of NEC TOKIN options
29,200

 
(4,100
)
Other (income) expense, net
916

 
567

Income (loss) from continuing operations before income taxes and equity income (loss) from NEC TOKIN
(38,883
)
 
(7,526
)
Income tax expense (benefit)
(248
)
 
1,282

Income (loss) from continuing operations before equity income (loss) from NEC TOKIN
(38,635
)
 
(8,808
)
Equity income (loss) from NEC TOKIN
1,585

 
(1,675
)
Income (loss) from continuing operations
(37,050
)

(10,483
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $0 and $918, respectively

 
6,943

Net income (loss)
$
(37,050
)
 
$
(3,540
)
Net income (loss) per basic and diluted share:
 

 
 

Net income (loss) from continuing operations
$
(0.81
)
 
$
(0.23
)
Net income (loss) from discontinued operations
$

 
$
0.15

Net income (loss)
$
(0.81
)
 
$
(0.08
)
 
 
 
 
Weighted-average shares outstanding:
 

 
 

Basic
45,552

 
45,274

Diluted
45,552

 
45,274


See accompanying notes to the unaudited condensed consolidated financial statements.

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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended June 30,
 
2015
 
2014
Net income (loss)
$
(37,050
)
 
$
(3,540
)
Other comprehensive income (loss):
 

 
 

Foreign currency translation gains (losses)
5,865

 
(1,100
)
Defined benefit pension plans, net of tax impact
167

 
60

Post-retirement plan adjustments
(40
)
 
(52
)
Foreign exchange contracts
(2,947
)
 

Equity interest in NEC TOKIN's other comprehensive income (loss)
(932
)
 
491

Other comprehensive income (loss)
2,113

 
(601
)
Total comprehensive income (loss)
$
(34,937
)
 
$
(4,141
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.


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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended June 30,
 
2015
 
2014
Net income (loss)
$
(37,050
)
 
$
(3,540
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Gain on sale of discontinued operations

 
(7,374
)
Net cash provided by (used in) operating activities of discontinued operations

 
(905
)
Depreciation and amortization
9,917

 
10,797

Equity (income) loss from NEC TOKIN
(1,585
)
 
1,675

Amortization of debt and financing costs
220

 
665

Stock-based compensation expense
1,279

 
994

Long-term receivable write down

 
59

Change in value of NEC TOKIN options
29,200

 
(4,100
)
Net (gain) loss on sales and disposals of assets
(58
)
 
365

Pension and other post-retirement benefits
127

 
8

Change in deferred income taxes
(934
)
 
156

Change in operating assets
(20,201
)
 
(6,887
)
Change in operating liabilities
(2,673
)
 
(2,974
)
Other
234

 
(1,084
)
Net cash provided by (used in) operating activities
(21,524
)
 
(12,145
)
Investing activities:
 

 
 

Capital expenditures
(5,773
)
 
(5,182
)
Acquisitions, net of cash received
(2,892
)
 

Proceeds from sale of assets

 
2,446

Change in restricted cash

 
302

Proceeds from sale of discontinued operations

 
10,125

Net cash provided by (used in) investing activities
(8,665
)
 
7,691

Financing activities:
 

 
 

Proceeds from revolving line of credit
8,000

 
7,500

Payments on revolving line of credit
(2,500
)
 

Deferred acquisition payments

 
(296
)
Payments on long-term debt
(481
)
 
(2,205
)
Purchase of treasury stock
(544
)
 

Proceeds from exercise of stock options

 
11

Net cash provided by (used in) financing activities
4,475

 
5,010

Net increase (decrease) in cash and cash equivalents
(25,714
)
 
556

Effect of foreign currency fluctuations on cash
411

 
(63
)
Cash and cash equivalents at beginning of fiscal period
56,362

 
57,929

Cash and cash equivalents at end of fiscal period
$
31,059

 
$
58,422

 
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, 2015 (the “Company’s 2015 Annual Report”).
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to current year presentation.  Net sales and operating results for the quarter ended June 30, 2015 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 2015 Annual Report.
 
Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
 
The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.
 
Recently Issued Accounting Pronouncements
 
New accounting standards adopted/issued
 
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct reduction from the face amount of the note. The ASU is effective for the Company for interim and annual periods beginning after April 1, 2016.  Early adoption is permitted. The ASU will require the Company to reclassify its capitalized debt issuance costs currently recorded as assets on the consolidated condensed balance sheets. The ASU will have no effect on the Company's results of operations or liquidity.

In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")2014-15, Presentation of Financial Statements-Going Concern. 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 management to assess if there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim period. If conditions or events give rise to substantial doubt, disclosures are required. This new guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

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, 2018 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

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as the available transition methods. Early adoption is permitted, but not before Company's fiscal year that begins on April 1, 2017 (the original effective date of the ASU). We are currently in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.

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 

A bank guarantee in the amount of €1.5 million ($1.7 million) was issued by a European bank on behalf of the Company in August 2006 in conjunction with the establishment of a Value-Added Tax (“VAT”) registration in The Netherlands. Accordingly, a deposit was placed with the European bank for €1.7 million ($1.8 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 June 30, 2015 and March 31, 2015 are as follows (amounts in thousands):
 
Carrying Value June 30,
 
Fair Value June 30,
 
Fair Value Measurement Using
 
Carrying Value March 31,
 
Fair Value March 31,
 
Fair Value Measurement Using
 
2015
 
2015
 
Level 1
 
Level 2 (2)
 
Level 3
 
2015
 
2015
 
Level 1
 
Level 2 (2)
 
Level 3
Assets (Liabilities):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
738

 
$
738

 
$
738

 
$

 
$

 
$
738

 
$
738

 
$
738

 
$

 
$

Total debt
(396,261
)
 
(390,240
)
 
(356,775
)
 
(33,465
)
 

 
(391,371
)
 
(391,283
)
 
(362,988
)
 
(28,295
)
 

NEC TOKIN options,
 net (3)
(23,500
)
 
(23,500
)
 

 

 
(23,500
)
 
5,700

 
5,700

 

 

 
5,700

___________________
(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.


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The table below summarizes NEC TOKIN option valuation activity using significant unobservable inputs (Level 3) (amounts in thousands):
March 31, 2015
$
5,700

Change in value of NEC TOKIN options
(29,200
)
June 30, 2015
$
(23,500
)
 
Inventories
 
Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):
 
June 30, 2015
 
March 31, 2015
Raw materials and supplies
$
90,308

 
$
83,372

Work in process
53,657

 
52,759

Finished goods
56,505

 
53,211

 
200,470

 
189,342

Inventory reserves
(16,986
)
 
(17,499
)
 
$
183,484

 
$
171,843


 
Warrant
 
As of June 30, 2015 and March 31, 2015, 8.4 million shares were subject to the warrant (which expires June 30, 2019) held by K Equity, LLC.
 
Revenue Recognition
 
The Company ships products to customers based upon firm orders and revenue is recognized when the sales process is complete. This occurs when products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred and collectability is reasonably assured. Shipping and handling costs are included in cost of sales.
A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. The Company recognizes revenue when title to the products transfers to the customer.
A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company's distributor policy includes inventory price protection and "ship-from-stock and debit" ("SFSD") programs common in the industry.
KEMET's SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
Most of the Company's distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed 6% of their purchases from the previous fiscal quarter. KEMET estimates future returns based on historical return patterns and records a corresponding allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company's sales channels.
The establishment of sales allowances is recognized as a component of the line item "Net sales" on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company's estimates.

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The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1.0% for the quarters ended June 30, 2015 and 2014. 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 $7.4 million on the sale of the business (after income tax expense) offset by a loss from machinery operations of $0.4 million during the three month period ended June 30, 2014 resulting in net income from discontinued operations of $6.9 million.

Net sales and operating income (loss) from the Company’s discontinued operation for the quarters ended June 30, 2015 and 2014 were (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
Net sales
$

 
$
104

Operating income (loss)

 
(431
)

Note 3. Debt
 
A summary of debt is as follows (amounts in thousands):
 
June 30,
2015
 
March 31,
2015
10.5% Senior Notes, net of premium of $2,280 and $2,461 as of June 30, 2015 and March 31, 2015, respectively
$
357,280

 
$
357,461

Revolving line of credit
38,981

 
33,448

Other

 
462

Total debt
396,261

 
391,371

Current maturities
(6,000
)
 
(962
)
Total long-term debt
$
390,261

 
$
390,409


The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters ended June 30, 2015 and 2014, consists of the following (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
Contractual interest expense, net (1)
$
9,746

 
$
9,752

Amortization of debt issuance costs
348

 
425

Amortization of debt (premium) discount
(181
)
 
(47
)
Imputed interest on acquisition-related obligations
53

 
287

Interest expense on capital lease
47

 
39

Total interest expense
$
10,013

 
$
10,456

______________________________________________________________________________
(1) Net of capitalized interest of $40 thousand and $81 thousand for the quarters ended June 30, 2015 and 2014, respectively
 

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Revolving Line of Credit

As of June 30, 2015, the Company had the following activity and resulting balances under the revolving line of credit (amounts in millions, excluding percentages):

 
As of March 31, 2015
 
For the three month period ended June 30, 2015
 
As of June 30, 2015
 
Outstanding Borrowings
 
Additional Borrowings
 
Repayments
 
Outstanding Borrowings
 
Rate (1) (2)
 
Due Date (3)
U.S. Facility
$
21.5

 
$
6.0

 
$
2.5

 
$
25.0

 
4.750
%
 
December 19, 2019
Singapore Facility
 
 
 
 
 
 
 
 
 
 
 
Singapore Borrowing 1
12.0

 

 

 
12.0

 
3.125
%
 
August 24, 2015
Singapore Borrowing 2

 
2.0

 

 
2.0

 
3.000
%
 
October 13, 2015
Total Facilities
$
33.5

 
$
8.0

 
$
2.5

 
$
39.0

 
 
 
 
______________________________________________________________________________
(1) For U.S. borrowings, Base Rate plus 1.50%, as defined in the Loan and Security Agreement dated September 30, 2010, as amended, by and among KEC, KEMET Electronics Marketing (S) Pte. Ltd., KEMET Foil Manufacturing, LLC (“KEMET Foil”), KEMET Blue Powder Corporation (“KEMET Blue Powder”), The Forest Electric Company and the financial institutions party thereto (the “Loan and Security Agreement”).
(2) For Singapore borrowings, London Interbank Offer Rate ("LIBOR"), plus a spread of 2.75%.
(3) The Company has the intent and ability to extend the due date on the Singapore borrowings beyond one year.
These were the only borrowings under the revolving line of credit, and as of June 30, 2015, the Company's available borrowing capacity under the Loan and Security Agreement was $7.2 million.

10.5% Senior Notes
 
As of June 30, 2015 and March 31, 2015, 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 June 30, 2015 and March 31, 2015, 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.

A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters ended June 30, 2015 and 2014, is as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
Manufacturing relocation costs
$
280

 
$
1,684

Personnel reduction costs
1,544

 
146

Total restructuring charges
$
1,824

 
$
1,830


Quarter Ended June 30, 2015

The Company incurred $1.8 million in restructuring charges in the quarter ended June 30, 2015 including $1.5 million of personnel reduction costs due to the following: $0.6 million related a headcount reduction in Suzhou, China for the Film & Electrolytic production line transfer from Suzhou, China to Anting, China, $0.5 million for planned headcount reductions in Europe (primarily Landsberg, Germany), $0.2 million for headcount reductions in Matamoros, Mexico related to the relocation of certain Solid Capacitor manufacturing from Matamoros, Mexico to Victoria, Mexico, and $0.2 million for headcount reductions related to the outsourcing of the Company's information technology function and overhead reductions in North

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America and Europe. The Company also incurred $0.3 million of manufacturing relocation costs for transfers of Film and Electrolytic production lines.

Quarter Ended June 30, 2014

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

Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters ended June 30, 2015 and 2014 are as follows (amounts in thousands):
 
Quarter Ended June 30, 2015
 
Quarter Ended June 30, 2014
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
7,239

 
$

 
$
6,217

 
$

Costs charged to expense
1,544

 
280

 
146

 
1,684

Costs paid or settled
(2,439
)
 
(280
)
 
(2,924
)
 
(1,684
)
Change in foreign exchange
212

 

 
(55
)
 

End of period
$
6,556

 
$

 
$
3,384

 
$


Note 5. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the quarters ended June 30, 2015 and 2014 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)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at March 31, 2015
$
(12,132
)
 
$
(20,363
)
 
$
1,159

 
$
1,537

 
$
1,003

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

 

 

 
(932
)
 
(2,947
)
 
1,986

Amounts reclassified out of AOCI

 
167

 
(40
)
 

 

 
127

Other comprehensive income (loss)
5,865

 
167

 
(40
)
 
(932
)
 
(2,947
)
 
2,113

Balance at June 30, 2015
$
(6,267
)
 
$
(20,196
)
 
$
1,119

 
$
605

 
$
(1,944
)
 
$
(26,683
)
 
 
Foreign Currency
Translation (3)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at March 31, 2014
$
23,335

 
$
(7,386
)
 
$
1,464

 
$
771

 
$

 
$
18,184

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

 

 
491

 


 
(609
)
Amounts reclassified out of AOCI

 
60

 
(52
)
 

 

 
8

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

 
(52
)
 
491

 

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

 
$
(7,326
)
 
$
1,412

 
$
1,262

 
$

 
$
17,583



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(1)
Due primarily to the Company’s valuation allowance on deferred tax assets, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during the quarter ended June 30, 2015.
(2)
Ending balance is net of tax of $2.3 million and $2.2 million as of June 30, 2015 and June 30, 2014, respectively.
(3)
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 quarter ended June 30, 2014.

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") with NEC TOKIN Corporation ("NEC TOKIN"), a manufacturer of tantalum capacitors, electro-magnetic, electro-mechanical and access devices, to acquire 51% of the common stock of NEC TOKIN (which represented a 34% economic interest, as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of outstanding common and preferred shares of NEC TOKIN as of such date) (the "Initial Purchase") from NEC Corporation ("NEC") of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the “Initial Closing”). The Company accounts for its investment in NEC TOKIN using the equity method for a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN. The Company believes that the NEC TOKIN preferred stock represents in-substance common stock of NEC TOKIN and, as a result, its method of calculating KEC’s economic basis in NEC TOKIN is the appropriate basis on which to recognize its share of the earnings or loss of NEC TOKIN.
 
In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with NEC TOKIN and NEC, which provides for restrictions on transfers of NEC TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of NEC TOKIN held by it, certain management services to be provided to NEC TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. KEC holds four of seven NEC TOKIN director positions. However, NEC has significant board rights.
 
Concurrent with execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC, which was amended on August 29, 2014, whereby KEC had the right to purchase additional shares of NEC TOKIN common stock from NEC TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of NEC TOKIN’s common stock (the “First Call Option”) by providing notice of the First Call Option between the Initial Closing and April 30, 2015. Upon providing such First Call Option notice, but not before April 1, 2015, KEC could also have exercised a second option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. The First and Second Call Options expired on April 30, 2015 without being exercised. 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"), provided that KEC's payment of the Put Option price is permitted under the 10.5% Senior Notes and Loan and Security Agreement. However, in the event that KEC issues new debt securities principally to refinance its outstanding 10.5% senior notes due 2018 and its currently outstanding credit agreement, including amounts to pay related fees and expenses and to use for general corporate purposes (“Refinancing Notes”), prior to NEC’s delivery of its notification of exercise of the Put Option, then the earliest date NEC may exercise the Put Option is automatically extended to the day immediately following the final scheduled maturity date of such Refinancing Notes, or in the event such Refinancing Notes are redeemed in full prior to such final scheduled maturity date, then on the day immediately following the date of such full redemption, but in any event beginning no later than November 1, 2019. If not previously exercised, the Put Option will expire on October 31, 2023.

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

The Company has marked these options to fair value and in the quarter ended June 30, 2015 recognized a $29.2 million loss, which was included on the line item “Other (income) expense, net” in the Condensed Consolidated Statement of Operations. The line item "Other non-current obligation" on the Condensed Consolidated Balance Sheets includes $23.5 million and “Other assets” includes $5.7 million as of June 30, 2015 and March 31, 2015, respectively, related to the options. It

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changed to a liability position during the quarter ended June 30, 2015 due to expiration of the First and Second Call Options on April 30, 2015 without being exercised.

KEC's total investment in NEC TOKIN including the net call derivative described above on February 1, 2013, the closing date of the acquisition, was $54.5 million which includes $50 million cash consideration plus approximately $4.5 million in transaction expenses (fees for legal, accounting, due diligence, investment banking and various other services necessary to complete the transactions). The Company has made an allocation of the aggregate purchase price, which was based upon estimates that the Company believes are reasonable.
 
Summarized financial information for NEC TOKIN follows (amounts in thousands):
 
June 30,
2015
 
March 31,
2015
Current assets
$
225,284

 
$
223,495

Non-current assets
266,048

 
273,785

Current liabilities
141,405

 
143,523

Non-current liabilities
289,731

 
296,873


 
Quarters Ended June 30,
 
2015
 
2014
Sales
$
114,734

 
$
122,408

Gross profit
24,668

 
26,678

Net income (loss)
5,255

 
(3,154
)

A reconciliation between NEC TOKIN's net income (loss) and KEMET's equity investment income (loss) follows (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
NEC TOKIN net income (loss)
$
5,255

 
$
(3,154
)
KEMET's economic interest %
34
%
 
34
%
Equity income (loss) from NEC TOKIN before adjustments
1,787

 
(1,072
)
 


 


Adjustments:


 


Amortization and depreciation
(136
)
 
(603
)
Inventory valuation
(66
)
 

Equity income (loss) from NEC TOKIN
$
1,585

 
$
(1,675
)
    

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A reconciliation between NEC TOKIN's net assets and KEMET's investment in NEC TOKIN balance follows (amounts in thousands):
 
June 30,
2015
 
March 31,
2015
Investment in NEC TOKIN
$
45,668

 
$
45,016

Purchase price accounting basis adjustment:
 
 
 
Property, plant and equipment
3,293

 
3,334

Technology
(10,317
)
 
(10,889
)
Long-term debt
(2,440
)
 
(2,707
)
Goodwill
(6,932
)
 
(7,082
)
Indemnity asset for legal investigation
(8,500
)
 
(8,500
)
Inventory profit elimination
274

 
208

Other
(579
)
 
(39
)
KEMET's 34% economic interest of NEC TOKIN's net assets
$
20,467

 
$
19,341


The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of June 30, 2015, 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 quarters ended June 30, 2015 and 2014, KEMET recorded sales of $4.9 million and $1.9 million, respectively, to NEC TOKIN and NEC TOKIN recorded sales of $1.5 million and $0.5 million, respectively, to KEMET. As of June 30, 2015 and March 31, 2015, KEMET's accounts receivable from NEC TOKIN were $3.1 million and $3.3 million, respectively. KEMET's accounts payable to NEC TOKIN were $0.5 million and $0.8 million as of June 30, 2015 and March 31, 2015, 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 June 30, 2015 and March 31, 2015, KEC’s receivable balance under this agreement was $0.6 million.

Beginning in March 2014, NEC TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan, South Korea Taiwan, Singapore and Brazil concerning alleged anti-competitive activities within the capacitor industry.  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 by direct and indirect purchasers in the United States and Canada. As of March 31, 2015, NEC TOKIN has recorded an accrual for approximately $30.0 million based on its estimation of losses likely to result from certain of the investigations and civil litigation. Pursuant to the Stock Purchase Agreement, NEC is required to indemnify NEC TOKIN and/or KEC for any breaches by NEC TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement.  NEC’s aggregate liability for indemnification claims is limited to $25.0 million. Accordingly, KEMET, under equity method accounting, has established an indemnity asset in the amount of $8.5 million (based upon our 34% economic interest in NEC TOKIN). However, pursuant to the Stock Purchase Agreement, claims arising out of fraud or criminal conduct are not limited by the $25.0 million indemnification cap, and for such claims the claimant retains all remedies available in equity or at law.  As of June 30, 2015, NEC TOKIN could not estimate the total losses which may result from the ongoing investigations and civil litigation because NEC TOKIN does not have sufficient information to be able to estimate the amount of all such losses.  During the quarter ended June 30, 2015, NEC TOKIN has not changed the estimated accrual.

Note 7. Acquisitions

IntelliData
 
On April 1, 2015, KEMET purchased 100% of the stock of IntelliData, Inc. "IntelliData", a Greenwood Village, Colorado-based developer of digital solutions supporting discovery, decision support, and the sales and marketing of electronic components. IntelliData has been a key vendor of KEMET for over 15 years and has provided critical software and support to allow the Company's sales team and customers to use real-time part number search and competitor cross references based on complex capacitor-specific specifications. The primary reason for the purchase of IntelliData was to gain more control over the direction of future iterations of the software and its functionality and to protect this critical link in the sales process from any potential unfavorable changes in IntelliData's business model in the future. The purchase price was $6.0 million plus an additional $0.1 million per a post-acquisition amendment for a total purchase price of $6.1 million, as amended. KEMET paid

16

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$3.0 million at closing, $0.1 million on June 3, 2015, and will pay the balance of $3.0 million on January 4, 2016 per the amended agreement. The Company preliminarily recorded goodwill of $4.7 million and amortizable intangibles of $1.8 million. The allocation of the purchase price to specific assets and liabilities was based on the relative fair value of all assets and liabilities. Factors contributing to the purchase price, which resulted in the goodwill, include the knowledge and expertise of the trained workforce as well as various trademarks. Pro forma results are not presented because the acquisition was not material to the consolidated financial statements.

The following table presents the preliminary allocations of the aggregate purchase price based on the estimated fair values of the assets and liabilities (amounts in thousands):

 
Fair Value
Cash
$
233

Accounts Receivable
10

Other current assets
6

Property, Plant and equipment
3

Goodwill
4,710

Intangible assets
1,820

Current liabilities
(9
)
Deferred income taxes
(648
)
Total net assets acquired
$
6,125


The allocation of the purchase price is preliminary as the Company is still evaluating the intangible assets and tax attributes of the transaction.

Note 8. Goodwill and Intangible Assets

The following table highlights the Company's intangible assets (amounts in thousands):

 
 
June 30, 2015
 
March 31, 2015
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Accumulated
Amortization
Indefinite Lived Intangible Assets:
 
 
 
 
 
 
 
 
Trademarks
 
$
7,207

 
$

 
$
7,207

 
$

Amortizing Intangibles:
 
 
 
 
 
 
 
 
Purchased technology, customer relationships and patents (3 - 18 years)
 
42,867

 
15,215

 
40,489

 
14,414

 
 
$
50,074

 
$
15,215

 
$
47,696

 
$
14,414




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The changes in the carrying amount of goodwill for the quarters ended June 30, 2015 and March 31, 2015 are as follows (amounts in thousands):

 
 
Balance at June 30, 2015
 
Balance at March 31, 2015
 
 
Solid Capacitors
 
Film and Electrolytic
 
Solid Capacitors
 
Film and Electrolytic
Gross balance at beginning of fiscal year
 
 
 
 
 
 
 
 
Goodwill
 
$
35,584

 
$
1,092

 
$
35,584

 
$
1,092

Accumulated impairment losses
 

 
(1,092
)
 

 
(1,092
)
Net balance at the end of the year
 
$
35,584


$


$
35,584


$

 
 
 
 
 
 
 
 
 
Goodwill acquired during the year
 
$
3,507

 
$
1,203

 
$

 
$

Impairment charges
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
Balance at the end of the year
 
 
 
 
 
 
 
 
Goodwill
 
$
39,091


$
2,295


$
35,584


$
1,092

Accumulated impairment losses
 


(1,092
)



(1,092
)
Ending balance, net
 
$
39,091


$
1,203


$
35,584


$


The Company's goodwill balances as of June 30, 2015 and March 31, 2015 were $40.3 million and $35.6 million, respectively. The most recent annual goodwill impairment test was performed for all reporting units as of January 1, 2015. The Company also performs Step 1 of the goodwill impairment test on an interim basis upon the occurrence of events or substantive changes in circumstances that indicate that a reporting unit's carrying value may be less than its fair value. The Company completed an interim impairment test on goodwill and indefinite-lived intangible assets as of June 30, 2015, due to an indicator of possible impairment related to a significant decline in our stock price. Consistent with the policy described in the 2015 10-K, the Company performed Step 1 of the goodwill impairment test using a discounted cash flow analysis to estimate the fair value of the reporting unit. The Company also evaluated the indefinite-lived intangible assets, including trademarks with a carrying value of $7.2 million, associated with the reporting unit for impairment as of June 30, 2015. The Company concluded that goodwill and indefinite-lived assets were not impaired nor were they at risk of failing step one of the impairment test as the ratios of fair value of the assets to carrying value were 1.9:1 and 13.1:1 for goodwill and trademarks, respectively. A one percent increase or decrease in the discount rate used in the goodwill valuation would have resulted in changes in the fair value of $(13.2) million and $16.7 million, respectively, and a one percent increase or decrease in the discount rate used in the indefinite-lived assets valuation would have resulted in changes in the fair value of $(10.0) million and $12.6 million, respectively. Neither would have resulted in an impairment charge.

Note 9. 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 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 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.

18

Table of Contents

 
The following table reflects each business group’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the quarters ended June 30, 2015 and 2014 (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
Net sales:
 

 
 

Solid Capacitors
$
139,677

 
$
159,790

Film and Electrolytic
47,913

 
53,091

 
$
187,590

 
$
212,881

Operating income (loss) (1):
 

 
 

Solid Capacitors
$
30,033

 
$
29,734

Film and Electrolytic
712

 
(6,047
)
Corporate
(29,502
)
 
(24,293
)
 
$
1,243

 
$
(606
)
Depreciation and amortization expense:
 

 
 

Solid Capacitors
$
5,756

 
$
5,478

Film and Electrolytic
2,942

 
3,817

Corporate
1,219

 
1,502

 
$
9,917

 
$
10,797

 
__________________

(1)    Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
Restructuring charges:
 

 
 

Solid Capacitors
$
232

 
$
1,230

Film and Electrolytic
1,286

 
489

Corporate
306

 
111

 
$
1,824

 
$
1,830

___________________
 
Quarters Ended June 30,
 
2015
 
2014
Sales by region:
 

 
 

North and South America (“Americas”)
$
56,034

 
$
65,982

Europe, Middle East, Africa (“EMEA”)
61,557

 
77,205

Asia and Pacific Rim (“APAC”)
69,999

 
69,694

 
$
187,590

 
$
212,881


The following table reflects each business group’s total assets as of June 30, 2015 and March 31, 2015 (amounts in thousands):
 
June 30, 2015
 
March 31, 2015
Total assets:
 

 
 

Solid Capacitors
$
444,798

 
$
469,823

Film and Electrolytic
246,210

 
218,858

Corporate
58,787

 
64,111

 
$
749,795

 
$
752,792

 

19

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Note 10.  Defined Benefit Pension and Other Postretirement Benefit Plans
 
The Company sponsors six defined benefit pension plans in Europe, one plan in Singapore and two plans in Mexico.  In addition, the Company sponsors a post-retirement plan in the United States.  Costs recognized for benefit plans are recorded using estimated amounts which may change as actual costs for the fiscal year are determined.

The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended June 30, 2015 and 2014 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended June 30,
 
Quarters Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net service cost
$
717

 
$
338

 
$

 
$

Interest cost
338

 
478

 
6

 
6

Expected return on net assets
(105
)
 
(124
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
197

 
74

 
(40
)
 
(52
)
Prior service cost
15

 
4

 

 

Total net periodic benefit (income) costs
$
1,162

 
$
770

 
$
(34
)
 
$
(46
)

In fiscal year 2016, the Company expects to contribute up to $1.5 million to the pension plans, $0.3 million of which has been contributed as of June 30, 2015.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred. 

Note 11. Stock-based Compensation
 
The Company’s stock-based compensation plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests. At June 30, 2015, 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, 2015/2016 LTIP, and 2016/2017 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 June 29, 2015, the Company granted 250,000 shares of restricted stock units ("RSUs") to the Chief Executive Officer. The restricted stock units had a grant date fair value of $2.92 and vest as follows: 35,000 RSUs on March 31, 2017, 40,000 RSUs on March 31, 2018, and the balance of 175,000 RSUs on March 31, 2019.


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Table of Contents

Restricted stock activity for the three month periods ended June 30, 2015 is as follows (amounts in thousands except fair value):
 
Shares
 
Weighted-
average
Fair Value on
Grant Date
Non-vested restricted stock at March 31, 2015
1,000

 
$
4.57

Granted
250

 
2.92

Vested
(42
)
 
4.38

Forfeited

 

Non-vested restricted stock at June 30, 2015
1,208

 
4.24

 
The compensation expense associated with stock-based compensation for the quarters ended June 30, 2015 and 2014 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended June 30, 2015
 
Quarter Ended June 30, 2014
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
34

 
$
151

 
$
228

 
$
108

 
$
21

 
$
217

Selling, general and administrative expenses
42

 
343

 
458

 
115

 
178

 
289

Research and development
1

 
5

 
17

 
5

 

 
61

Total
$
77

 
$
499

 
$
703

 
$
228

 
$
199

 
$
567


  In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Net income (loss) for the quarters ended June 30, 2015, and 2014. No stock options were exercised in the three month period ended June 30, 2015 and approximately three thousand stock options were exercised in the three month period ended June 30, 2014.

Note 12. Income Taxes
 
During the quarter ended June 30, 2015, the Company recognized $0.2 million of income tax benefit from continuing operations which is comprised of a $0.6 million federal income tax benefit from the acquisition of IntelliData, $0.3 million income tax expense related to foreign operations and $0.1 million of state income tax expense.

During the quarter ended June 30, 2014, the Company incurred $1.3 million of income tax expense related to income taxes from continuing foreign operations. In addition, the Company incurred $0.9 million of income tax expense related to the gain on sale of discontinued operations. 
  
There is no U.S. federal income tax benefit from net operating losses for the quarters ended June 30, 2015 and 2014 due to a valuation allowance recorded on deferred tax assets. 


21

Table of Contents

Note 13. 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 June 30,
 
2015
 
2014
Numerator:
 

 
 

Income (loss) from continuing operations
$
(37,050
)
 
$
(10,483
)
Income (loss) from discontinued operations, net of income tax expense (benefit) of $0 and $918, respectively

 
6,943

Net income (loss)
$
(37,050
)
 
$
(3,540
)
Denominator:
 

 
 

Weighted-average shares outstanding:
 

 
 

Basic
45,552

 
45,274

Assumed conversion of employee stock grants

 

Assumed conversion of warrants

 

Diluted
45,552

 
45,274

Net income (loss) per basic share:
 
 
 
Income (loss) from continuing operations
$
(0.81
)
 
$
(0.23
)
Income (loss) from discontinued operations
$

 
$
0.15

Net income (loss)
$
(0.81
)
 
$
(0.08
)
 
 
 
 
Net income (loss) per diluted share:
 
 
 
Income (loss) from continuing operations
$
(0.81
)
 
$
(0.23
)
Income (loss) from discontinued operations
$

 
$
0.15

Net income (loss)
$
(0.81
)
 
$
(0.08
)
 
Common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
 
Quarters Ended June 30,
 
2015
 
2014
Assumed conversion of employee stock grants
2,303

 
1,568

Assumed conversion of warrants
6,015

 
6,824



22

Table of Contents

Note 14: Derivatives
In fiscal year 2015, the Company began using certain derivative instruments (i.e., foreign exchange contracts) to reduce exposure to the volatility of foreign currencies impacting revenues and the costs of its products.
The balance sheet classifications and fair value of derivative instruments as of June 30, 2015 are as follows (amounts in thousands):
 
 
Fair Value of Derivative Instruments
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Balance Sheet Caption
 
Fair Value (1)
 
Balance Sheet Caption
 
Fair Value (1)
Foreign exchange contracts
 
Prepaid and other assets
 
$

 
Accrued expenses
 
$
1,944

______________________________________________________________________________
(1) Fair Value measured using Level 2 inputs by adjusting the market spot rate by forward points, based on the date of the contract. The spot rates and forward points used are based on an average rate from an actively traded market.
Unrealized gains and losses associated with the change in value of these financial instruments are recorded in Accumulated other comprehensive income (loss) ("AOCI"). The pre-tax impact on AOCI related to the change in value of these financial instruments is as follows (amounts in thousands):
 
 
Three Month Period Ended June 30, 2015
Beginning of fiscal year
 
$
1,003

Current fiscal year unrealized gain (loss) related to the change in value of the financial instruments
 
(2,947
)
Plus unrealized gain (loss) in AOCI that were recognized in the current fiscal year
 

Net change in AOCI related to financial instruments
 
(2,947
)
Balance at June 30, 2015
 
$
(1,944
)
Changes in the derivatives' fair values are deferred and recorded as a component of AOCI until the underlying transaction is settled and recorded to the income statement. When the hedged item affects income, gains or losses are reclassified from AOCI to the Consolidated Statement of Operations as Net sales for foreign exchange contracts to sell euros, and as Cost of sales for foreign exchange contracts to purchase Mexican pesos and Japanese yen. Any ineffectiveness, if material, in the Company's hedging relationships is recognized immediately as a loss, within the same income statement accounts as described above; to date, there has been no ineffectiveness. Changes in derivative balances impact the line items "Prepaid and other assets" and "Accrued Expenses" on the Consolidated Balance Sheets and Statements of Cash Flows.
The impact on the Consolidated Statement of Operations for the three month period ended June 30, 2015 is as follows (amounts in thousands):
Impact of Foreign Exchange Contracts on Condensed Consolidated Statement of Operations
Statement Caption
 
Amount
Net Sales
 
$
(350
)
Operating costs and expenses:
 
 
Cost of sales
 
$
(154
)
Total operating costs and expenses
 
$
(154
)
Operating income (loss)
 
$
(504
)


23

Table of Contents

Hedging Foreign Currencies
Certain operating expenses at the Company's Mexican facilities are paid in Mexican pesos. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than twelve months, to buy Mexican pesos for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. There were $34.3 million in peso contracts (notional value) outstanding at June 30, 2015.
Certain expenditures at the Company's Mexican facilities are paid in Japanese yen. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than six months, to buy Japanese yen for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. There were $9.1 million in yen contracts (notional value) outstanding at June 30, 2015.
Certain sales are made in euros. In order to hedge a portion of these forecasted cash flows, management purchases foreign exchange contracts, with terms generally less than six months, to sell euros for periods and amounts consistent with the related underlying cash flow exposures. These contracts are designated hedges at inception and monitored for effectiveness on a routine basis. There were $7.1 million in euro contracts (notional value) outstanding at June 30, 2015.
The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.

Note 15. Concentrations of Risks
 
The Company sells to customers globally and, as the Company generally does not require collateral from its customers, on a monthly basis the Company evaluates customer account balances in order to assess the Company’s financial risks of collection.  One customer, TTI, Inc., an electronics distributor, accounted for over 10% of the Company’s net sales in the quarters ended June 30, 2015 and 2014.  There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable as of June 30, 2015 and March 31, 2015.
 
Electronics distributors are an important distribution channel in the electronics industry and accounted for 43% and 47% of the Company’s net sales in the three month periods ended June 30, 2015 and 2014, respectively.  As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand or adjust their inventory stocking levels. 

Note 16. 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
June 30, 2015
(Unaudited)

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

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
640

 
$
12,756

 
$
17,663

 
$

 
$
31,059

Accounts receivable, net

 
37,048

 
59,020

 

 
96,068

Intercompany receivable
318,372

 
425,919

 
193,602

 
(937,893
)
 

Inventories, net

 
125,324

 
58,160

 

 
183,484

Prepaid expenses and other
3,120

 
22,057

 
23,751

 
(2,971
)
 
45,957

Deferred income taxes

 
3,789

 
5,593

 

 
9,382

Total current assets
322,132

 
626,893

 
357,789

 
(940,864
)
 
365,950

Property and equipment, net
282

 
100,061

 
150,338

 

 
250,681

Goodwill

 
40,294

 

 

 
40,294

Intangible assets, net

 
28,471

 
6,388

 

 
34,859

Investment in NEC TOKIN

 
45,668

 

 

 
45,668

Investments in subsidiaries
373,841

 
429,862

 
30,285

 
(833,988
)
 

Restricted cash

 
1,846

 

 

 
1,846

Deferred income taxes

 
950

 
4,539

 

 
5,489

Other assets
3,757

 
333

 
918

 

 
5,008

Long-term intercompany receivable
66,338

 
40,715

 
1,088

 
(108,141
)
 

Total assets
$
766,350

 
$
1,315,093

 
$
551,345

 
$
(1,882,993
)
 
$
749,795

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$
4,000

 
$
2,000

 
$

 
$
6,000

Accounts payable
14

 
37,950

 
38,841

 

 
76,805

Intercompany payable
270,404

 
584,665

 
82,824

 
(937,893
)
 

Accrued expenses
8,127

 
19,744

 
28,660

 

 
56,531

Income taxes payable and deferred income taxes

 
2,971

 
21

 
(2,971
)
 
21

Total current liabilities
278,545

 
649,330

 
152,346

 
(940,864
)
 
139,357

Long-term debt, less current portion
357,280

 
20,981

 
12,000

 

 
390,261

Other non-current obligations

 
26,476

 
55,814

 

 
82,290

Deferred income taxes

 
6,031

 
1,331

 

 
7,362

Long-term intercompany payable

 
66,338

 
41,803

 
(108,141
)
 

Stockholders’ equity
130,525

 
545,937

 
288,051

 
(833,988
)
 
130,525

Total liabilities and stockholders’ equity
$
766,350

 
$
1,315,093

 
$
551,345

 
$
(1,882,993
)
 
$
749,795



25

Table of Contents

Condensed Consolidating Balance Sheet (1)
March 31, 2015
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Reclassifications
and Eliminations
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
640

 
$
33,094

 
$
22,628

 
$

 
$
56,362

Accounts receivable, net

 
35,535

 
55,322

 

 
90,857

Intercompany receivable
321,233

 
403,557

 
195,518

 
(920,308
)
 

Inventories, net

 
119,221

 
52,622

 

 
171,843

Prepaid expenses and other
3,191

 
21,134

 
20,164

 
(2,986
)
 
41,503

Deferred income taxes

 
5,031

 
5,731

 

 
10,762

Total current assets
325,064

 
617,572

 
351,985

 
(923,294
)
 
371,327

Property and equipment, net
293

 
100,844

 
148,504

 

 
249,641

Goodwill

 
35,584

 

 

 
35,584

Intangible assets, net

 
26,998

 
6,284

 

 
33,282

Investment in NEC TOKIN

 
45,016

 

 

 
45,016

Investments in subsidiaries
401,062

 
423,737

 
30,285

 
(855,084
)
 

Restricted cash

 
1,775

 

 

 
1,775

Deferred income taxes

 
971

 
4,140

 

 
5,111

Other assets
4,088

 
6,049

 
919

 

 
11,056

Long-term intercompany receivable
63,788

 
39,151

 
1,088

 
(104,027
)
 

Total assets
$
794,295

 
$
1,297,697

 
$
543,205

 
$
(1,882,405
)
 
$
752,792

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$
500

 
$
462

 
$

 
$
962

Accounts payable
47

 
36,565

 
33,173

 

 
69,785

Intercompany payable
254,852

 
578,318

 
87,138

 
(920,308
)
 

Accrued expenses
17,253

 
16,644

 
26,559

 

 
60,456

Income taxes payable and deferred income taxes

 
2,928

 
1,075

 
(2,986
)
 
1,017

Total current liabilities
272,152

 
634,955

 
148,407

 
(923,294
)
 
132,220

Long-term debt, less current portion
357,461

 
20,948

 
12,000

 

 
390,409

Other non-current obligations

 
2,987

 
54,144

 

 
57,131

Deferred income taxes

 
7,272

 
1,078

 

 
8,350

Long-term intercompany payable

 
63,789

 
40,238

 
(104,027
)
 

Stockholders’ equity
164,682

 
567,746

 
287,338

 
(855,084
)
 
164,682

Total liabilities and stockholders’ equity
$
794,295

 
$
1,297,697

 
$
543,205

 
$
(1,882,405
)
 
$
752,792


(1) Derived from audited financial statements.

26

Table of Contents

Condensed Consolidating Statement of Operations
For the Quarter Ended June 30, 2015
(Unaudited)
 
Parent
 
Guarantor