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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019 
or
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.)
KEMET Tower, One East Broward Blvd., Fort Lauderdale, Florida 33301
(Address of principal executive offices, zip code)
 
(954) 766-2800
(Registrant’s telephone number, including area code)
 
Former name, former address and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, par value $0.01
KEM
New York Stock Exchange
 
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   No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer 
Smaller Reporting Company
Emerging Growth Company
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of February 4, 2020 was 58,267,955.
 




KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 2019
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 2.1
 
Exhibit 3.1
 
Exhibit 3.2
 
Exhibit 10.1
 
Exhibit 10.2
 
Exhibit 10.3
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
 
Exhibit 104
 





PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
(Unaudited)
 
 
December 31, 2019
 
March 31, 2019
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
208,448

 
$
207,918

Accounts receivable, net
142,007

 
154,059

Inventories, net
263,123

 
241,129

Prepaid expenses and other current assets
42,044

 
38,947

Total current assets
655,622

 
642,053

Property, plant and equipment, net of accumulated depreciation of $911,634 and $880,451 as of December 31, 2019 and March 31, 2019, respectively
548,594

 
495,280

Goodwill
40,294

 
40,294

Intangible assets, net
55,117

 
53,749

Equity method investments
16,641

 
12,925

Deferred income taxes 
47,871

 
57,024

Other assets
48,193

 
16,770

Total assets
$
1,412,332

 
$
1,318,095

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
29,032

 
$
28,430

Accounts payable
111,465

 
153,287

Accrued expenses
130,991

 
93,761

Income taxes payable
3,981

 
2,995

Total current liabilities 
275,469

 
278,473

Long-term debt
282,746

 
266,041

Other non-current obligations
153,025

 
125,360

Deferred income taxes 
13,779

 
8,806

Total liabilities
725,019

 
678,680

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 58,267 and 57,822 shares at December 31, 2019 and March 31, 2019, respectively
583

 
578

Additional paid-in capital
471,641

 
465,366

Retained earnings
240,074

 
204,195

Accumulated other comprehensive income (loss)
(24,985
)
 
(30,724
)
Total stockholders’ equity
687,313

 
639,415

Total liabilities and stockholders’ equity
$
1,412,332

 
$
1,318,095



 See accompanying notes to the unaudited condensed consolidated financial statements.

3



KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
294,741

 
$
350,175

 
$
967,380

 
$
1,027,024

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales
201,560

 
226,425

 
638,901

 
694,888

Selling, general and administrative expenses
50,031

 
48,271

 
147,243

 
149,071

Research and development
12,624

 
11,357

 
37,073

 
33,040

Restructuring charges
802

 
1,718

 
5,930

 
1,622

(Gain) loss on write down and disposal of long-lived assets
1,076

 
788

 
2,095

 
1,611

Total operating costs and expenses
266,093

 
288,559

 
831,242

 
880,232

Operating income
28,648

 
61,616

 
136,138

 
146,792

Non-operating (income) expense
 

 
 

 
 

 
 

Interest income
(904
)
 
(572
)
 
(2,525
)
 
(1,325
)
Interest expense
2,803

 
4,480

 
8,099

 
18,803

Antitrust class action settlements and regulatory costs
1,597

 
281

 
64,695

 
4,563

Other (income) expense, net 
3,091

 
13,725

 
450

 
2,083

Income before income taxes and equity income (loss) from equity method investments
22,061

 
43,702

 
65,419

 
122,668

Income tax expense
5,400

 
2,600

 
23,900

 
9,200

Income before equity income (loss) from equity method investments
16,661

 
41,102

 
41,519

 
113,468

Equity income (loss) from equity method investments
(59
)
 
(296
)
 
163

 
(301
)
Net income
$
16,602

 
$
40,806

 
$
41,682

 
$
113,167

 
 
 
 
 
 
 
 
Net income per basic share
$
0.28

 
$
0.70

 
$
0.71

 
$
1.96

Net income per diluted share
$
0.28

 
$
0.69

 
$
0.70

 
$
1.91

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
58,646

 
58,010

 
58,509

 
57,717

Diluted
59,529

 
59,111

 
59,328

 
59,116


See accompanying notes to the unaudited condensed consolidated financial statements.

4



KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
16,602

 
$
40,806

 
$
41,682

 
$
113,167

Other comprehensive income (loss), net of tax:
 


 
 
 

 
 
Foreign currency translation gains (losses)
14,160

 
(5,152
)
 
9,373

 
(32,504
)
Defined benefit pension plans
160

 
139

 
486

 
426

Defined benefit post-retirement plan adjustments
(37
)
 
(38
)
 
(111
)
 
(116
)
Equity interest in investee's other comprehensive income (loss)

 
8

 

 
(9
)
Cash flow hedges
4,759

 
(2,605
)
 
(5,392
)
 
(1,855
)
Excluded component of fair value hedges
46

 
(1,835
)
 
1,383

 
(1,835
)
Other comprehensive income (loss)
19,088

 
(9,483
)
 
5,739

 
(35,893
)
Total comprehensive income (loss)
$
35,690

 
$
31,323

 
$
47,421

 
$
77,274


 
See accompanying notes to the unaudited condensed consolidated financial statements.


5



KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)(Unaudited) 
 
Nine Months Ended December 31,
Operating activities:
2019
 
2018
Net income
$
41,682

 
$
113,167

Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of effect of acquisitions:
 

 
 

Depreciation and amortization
45,530

 
38,405

Equity (income) loss from equity method investments
(163
)
 
301

Non-cash debt and financing costs
3,013

 
1,085

(Gain) loss on early extinguishment of debt

 
15,988

Stock-based compensation expense
9,258

 
10,011

(Gain) loss on write down and disposal of long-lived assets
2,095

 
1,611

Pension and other post-retirement benefits
4,009

 
3,823

Change in deferred income taxes
13,430

 
1,395

Change in operating assets
(7,697
)
 
(42,130
)
Change in operating liabilities
(20,327
)
 
(61,485
)
Other
(95
)
 
556

Net cash provided by (used in) operating activities
90,735

 
82,727

Investing activities:
 

 
 

Capital expenditures
(104,129
)
 
(77,650
)
Proceeds from sale of assets

 
169

Acquisitions, net of cash received
(1,294
)
 

Proceeds from dividend 
433

 
776

Contributions to equity method investments
(5,000
)
 
(2,000
)
Net investment hedge settlement
4,536

 

Net cash provided by (used in) investing activities
(105,454
)
 
(78,705
)
Financing activities:
 

 
 

Payments of long-term debt
(13,149
)
 
(332,063
)
Proceeds from long-term debt

 
283,853

Customer advances related to customer capacity agreements
31,611

 
9,495

Proceeds from termination of derivative instruments
6,476

 

Early extinguishment of debt issuance costs

 
(3,234
)
Debt issuance costs

 
(1,797
)
Cash flow hedge settlement
(2,839
)
 

Principal payments on finance leases
(1,153
)
 

Proceeds from exercise of stock options
298

 
480

Payment of dividends
(5,803
)
 
(2,873
)
Net cash provided by (used in) financing activities
15,441

 
(46,139
)
Net increase (decrease) in cash, cash equivalents and restricted cash
722

 
(42,117
)
Effect of foreign currency fluctuations on cash, cash equivalents and restricted cash
1,221

 
(7,236
)
Cash, cash equivalents, and restricted cash, at beginning of fiscal period
207,918

 
286,846

Cash, cash equivalents, and restricted cash, at end of fiscal period
209,861

 
237,493

Less: Restricted cash at end of period
1,413

 
3,134

Cash and cash equivalents at end of period
$
208,448

 
$
234,359


See accompanying notes to the unaudited condensed consolidated financial statements.

6



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 unless otherwise disclosed, 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 (“GAAP”). Although the Company believes the disclosures are adequate to make the information presented not misleading, these Condensed Consolidated Financial Statements should 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, 2019 (the “Company’s 2019 Annual Report”).
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all intercompany amounts and transactions have been eliminated. Net sales and operating results for the three and nine months ended December 31, 2019 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 2019 Annual Report. Refer to the “Change in Accounting Policies” section below for changes in accounting policies since the issuance of the Company's 2019 Annual Report.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with 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.
Change in Accounting Policies
Effective April 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) and Accounting Standards Update (“ASU”) No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing (Hosting) Arrangement that is a Service Contract (“ASU 2018-15”). As a result, the Company changed its accounting policy for leases and for implementation costs related to hosting arrangements. Except as discussed below, there have not been any other changes to the Company's significant accounting policies since the issuance of the Company's 2019 Annual Report.
Leases
ASC 842 requires the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on the Condensed Consolidated Balance Sheets. The Company adopted ASC 842 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to not reassess whether arrangements contained leases, not reassess lease classifications, and not reassess initial direct costs. The adoption of ASC 842 did not impact beginning retained earnings, or the prior year Condensed Consolidated Statements of Operations and Cash Flows.
Under ASC 842, the Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. The Company has elected to not allocate the contract consideration for operating lease contracts with lease and non-lease components, and instead to account for the lease and non-lease components as a single lease component. Operating lease ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make

7



lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease prepayments, net of lease incentives.
Leases with a lease term of 12 months or less at inception are not recorded on the Condensed Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Condensed Consolidated Statements of Operations. The lease term is determined by assuming the exercise of renewal options that are reasonably certain. As most of the Company's leases do not provide an implicit interest rate, the Company uses its local incremental borrowing rate at the lease commencement date to determine the present value of lease payments. 
ROU assets and the short-term and long-term lease liabilities from operating leases are included in “Other assets,” “Accrued expenses,” and “Other non-current obligations,” respectively, in the Condensed Consolidated Balance Sheet. The Company's accounting for finance leases (formerly referred to as capital leases prior to the adoption of ASC 842) remains substantially unchanged. Finance leases are not material to the Company's Condensed Consolidated Financial Statements. Refer to Note 16, Leases, for additional information regarding the Company's leases and related transition adjustments.
Capitalized Software and Hosting Arrangements
In August 2018, the Financial Accounting Standards Board issued ASU No. 2018-15. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted the amendment in the first quarter of fiscal year 2020 and is applying the ASU prospectively to implementation costs incurred after April 1, 2019. 
As of December 31, 2019, the Company had $6.8 million of capitalized implementation costs related to hosting arrangements. These capitalized implementation costs will be amortized on a straight-line basis over the expected terms of the hosting arrangements and will be amortized in the line item, “Selling, general, and administrative expenses” in the Condensed Consolidated Statements of Operations.
Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue under the guidance provided in ASC 606, Revenue from Contracts with Customers (“ASC 606”). Consistent with the terms of ASC 606, the Company records revenue on product sales in the period in which the Company satisfies its performance obligation by transferring control over a product to a customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for transferring products to a customer. The Company has elected the practical expedient under ASC 606-10-32-18 and does not consider the effects of a financing component on the promised amount of consideration because the period between when the Company transfers a product to a customer and when the customer pays for that product is one year or less. As performance obligations are expected to be fulfilled in one year or less, the Company has elected the practical expedient under ASC 606-10-50-14 and has not disclosed information relating to remaining performance obligations.
The Company sells its products to distributors, original equipment manufacturers (“OEM”), and electronic manufacturing services providers (“EMS”), and the sales price may include adjustments for sales discounts, price adjustments, and sales allowances. The Company has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis. The principle forms of these adjustments include:
Inventory price protection and ship-from stock and debit (“SFSD”) programs,
Distributor rights of returns,
Sales allowances, and
Limited assurance warranties.
The Company's inventory price protection and SFSD programs provide 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.

8



Select distributors have the right to return a certain portion of their purchased inventory to KEMET from the previous fiscal quarter. The Company estimates future returns based on historical return patterns and records a corresponding right of return asset and refund liability as a component of the line items, “Inventories, net” and “Accrued expenses,” respectively, 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 Company's sales allowances are recognized as a reduction in 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 assurance warranty on products that meet certain specifications to select customers. The warranty coverage period is generally limited to one year for United States based customers and a length of time commensurate with regulatory requirements or industry practice outside the United States. A warranty cannot be purchased by the customer separately and, as a result, product warranties are not considered to be separate performance obligations. The Company’s liability under these warranties is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs were not material for the three and nine months ended December 31, 2019 and 2018.
Shipping and handling costs are included in cost of sales.
Disaggregation of Revenue
Refer to Note 10, “Reportable Segment and Geographic Information” for revenue disaggregated by primary geographical market, sales channel, and major product line.
Contract assets
The Company recognizes an asset from the costs incurred to fulfill a contract if those costs directly relate to an existing or anticipated contract or specific business opportunity, if the costs enhance resources that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered through subsequent sale of product to the customer. The Company has determined that certain direct labor, materials, and allocations of overhead incurred within research and development activities meet the requirements to be capitalized. As most of the Company's contracts and customer specific business opportunities do not include a stated term, the Company amortizes these capitalized costs over the expected product life cycle, which is consistent with the estimated transfer of goods to the customer. Capitalized contract costs were $1.6 million at both December 31, 2019 and March 31, 2019. Capitalized contracts costs are recorded on the Condensed Consolidated Balance Sheets in the line item, “Other assets.” Amortization expense related to the contract costs was $0.1 million and $0.5 million for the three and nine months ended December 31, 2019 respectively, and $0.2 million and $0.6 million for the three and nine months ended December 31, 2018, respectively. There was no impairment loss in relation to the costs capitalized for the three and nine months ended December 31, 2019 and 2018. Amortization expense related to contract assets is recorded on the Condensed Consolidated Statements of Operations in the line item "Cost of sales."
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 Condensed 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 levels of 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.

9



Assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and March 31, 2019 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
 
2019
 
2019
 
Level 1
 
Level 2 (3)
 
Level 3
 
2019
 
2019
 
Level 1
 
Level 2 (3)
 
Level 3
Assets (Liabilities):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)(2)
$
33,694

 
$
33,694

 
$
33,694

 
$

 
$

 
$
60,687

 
$
60,687

 
$
60,687

 
$

 
$

Derivative assets
3,193

 
3,193

 

 
3,193

 

 
5,141

 
5,141

 
 
 
5,141

 
 
Derivative liabilities
(3,376
)
 
(3,376
)
 

 
(3,376
)
 

 

 

 

 

 

Total debt
(311,778
)
 
(321,492
)
 

 
(321,492
)
 

 
(294,471
)
 
(303,170
)
 

 
(303,170
)
 

___________________
(1) Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2) Certificates of Deposit of $16.7 million and $32.2 million that mature in three months or less are included within the balance as of December 31, 2019 and March 31, 2019, respectively.
(3) Derivative assets and liabilities fair value was determined by using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data. Where applicable, these models discount future cash flow amounts using market-based observable inputs, including interest rate yield curves, and forward and spot prices for currencies. For total debt, the valuation approach used to calculate fair value was a discounted cash flow based on the current market rate.
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled.
The largest deferred tax asset consists of net operating loss carryforwards (“NOL”). The measurement of NOLs requires careful evaluation of prior transactions in the Company's stock, and the application of judgment and interpretation on both the nature of the holder and the underlying transaction resulting in changes to the holders. Based on management's evaluation, there has not been a historical change in control that would have limited the availability of NOLs. The Company periodically evaluates its NOLs and other net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. It is reasonably possible that upon examination, tax authorities could propose adjustments to prior positions based on differences in judgments and interpretations, which could result in a significant increase to the Company's unrecognized tax liability balance if adjustments were to be assessed.
For interim reporting purposes, the Company records income taxes based on the expected annual effective income tax rate, taking into consideration global forecasted tax results and the effect of discrete tax events. All deferred tax assets are reported as noncurrent in the Condensed Consolidated Balance Sheets.
Inventories
Inventories are stated at the lower of cost or net realizable value. The components of inventories are as follows (amounts in thousands):
 
December 31, 2019
 
March 31, 2019
Raw materials and supplies
$
104,676

 
$
97,119

Work in process
91,317

 
71,374

Finished goods
87,426

 
88,175

Subtotal
283,419

 
256,668

Inventory reserves
(20,296
)
 
(15,539
)
Inventories, net
$
263,123

 
$
241,129

 

10



Recently Issued Accounting Pronouncements
There are currently no 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.
Note 2. Yageo Merger
On November 11, 2019, the Company entered into an agreement and plan of merger (the “Agreement”) pursuant to which Yageo Corporation (“Yageo”) will acquire all of the Company’s outstanding shares of common stock for $27.20 per share, subject to the satisfaction (or waiver of) specified conditions (the “Merger”). The consummation of the Merger is subject to customary conditions, including the approval by the Company’s stockholders. Certain further conditions include: (a) obtaining antitrust and other regulatory approvals in the United States and certain other jurisdictions (including, among others, China and Taiwan), (b) absence of any applicable restraining order or injunction prohibiting the Merger, (c) receipt of approval from the Committee on Foreign Investment in the United States (“CFIUS”), (d) obtaining foreign investment approval by the Investment Commission, Ministry of Economic Affairs, Taiwan, (e) the approval of Yageo’s stockholders, if required by applicable law and (f) in the case of Yageo’s obligations to complete the Merger, there not having been any “material adverse effect” (as customarily defined) on the Company. The agreement contains certain restrictions on the conduct of our business prior to the completion of the Merger or the termination of the Agreement, including, among other things, a restriction prohibiting us from paying any dividends or making certain other distributions. Upon consummation of the Merger, the Company would be a fully owned subsidiary of Yageo.
The Agreement is subject to termination if the Merger is not consummated within twelve months, subject to an automatic extension for a period of ninety days, for the purpose of obtaining certain antitrust clearances. The Agreement also contains certain other termination rights and provides that, upon termination of the Agreement under specified circumstances, including Yageo’s decision to terminate the Agreement if there is a change in the Board’s recommendation to adopt the Merger or a termination of the Agreement by the Company to enter into an agreement for a “superior proposal,” the Company will pay Yageo a cash termination fee of $63.8 million. The Agreement additionally provides that, upon termination of the Agreement under specified circumstances, including a failure to obtain CFIUS approval, Yageo will pay the Company a cash termination fee of $65.4 million. If Yageo fails to obtain approval by Yageo’s stockholders, if such approval is required by applicable law, Yageo will pay the Company a cash termination fee of $49.1 million. If Yageo fails to obtain debt financing upon the satisfaction of all conditions to closing, the Company may, within 30 days of termination, elect to receive a cash termination fee of $63.8 million.
In a news release dated February 4, 2020, KEMET announced the Merger with Yageo is proceeding per plan with several key milestones already completed. The transaction is on track to close in the second half of 2020.
Note 3. Acquisition
Novasentis Inc. ("Novasentis")
On July 1, 2019, the Company acquired the remaining 72.1% interest in Novasentis for a preliminary purchase price of $2.7 million. Prior to July 2019, the Company owned 27.9% of Novasentis, a leading developer of film-based haptic actuators, and accounted for its investment using the equity method of accounting.
Note 4. Debt
A summary of debt is as follows (amounts in thousands):
 
December 31,
2019
 
March 31,
2019
TOKIN Term Loan Facility (1)
$
270,755

 
$
276,808

Customer Advances (2)
34,647

 
11,270

Other (3)
6,376

 
6,393

Total debt
311,778

 
294,471

Current maturities
(29,032
)
 
(28,430
)
Total long-term debt
$
282,746

 
$
266,041

_________________
(1) Amount shown is net of discounts, bank issuance costs, and other indirect issuance costs of $7.9 million and $8.7 million at December 31, 2019 and March 31, 2019, respectively.
(2) Amount shown is net of discounts of $10.4 million and $2.1 million at December 31, 2019 and March 31, 2019, respectively.
(3) Amount shown is net of discounts of $0.5 million and $0.6 million at December 31, 2019 and March 31, 2019, respectively.

11



The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2019 and 2018, consists of the following (amounts in thousands):
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Contractual interest expense
$
1,636

 
$
4,034

 
$
5,167

 
$
17,775

Capitalized interest
38

 
(41
)

(175
)

(161
)
Amortization of debt issuance costs
99

 
53

 
325

 
262

Amortization of debt (premium) discount
1,000

 
383

 
2,688

 
780

Imputed interest on acquisition-related obligations

 
14

 

 
43

Interest expense on finance leases
30

 
37

 
94

 
104

Total interest expense
$
2,803

 
$
4,480

 
$
8,099

 
$
18,803


TOKIN Term Loan Facility
On October 29, 2018, the Company entered into a JPY 33.0 billion Term Loan Agreement (the “TOKIN Term Loan Facility”) by and among TOKIN Corporation (“TOKIN”), the lenders party thereto (the “Lenders”) and Sumitomo Mitsui Trust Bank, Limited in its capacity as agent (the “Agent”), arranger and Lender. Funding for the TOKIN Term Loan Facility occurred on November 7, 2018. The proceeds, which were net of an arrangement fee withheld from the funding amount, were JPY 32.1 billion, or approximately $283.9 million using the exchange rate as of November 7, 2018. Net of the arrangement fee, bank issuance costs, and other indirect issuance costs, the Company's net proceeds from the TOKIN Term Loan Facility were $281.8 million.
The proceeds from the TOKIN Term Loan Facility were used, along with other cash on hand by the Company to prepay in full the outstanding amounts under the Company's previous term loan of $323.4 million and a prepayment premium of 1.0%, or $3.2 million.
The TOKIN Term Loan Facility consists of (i) a JPY 16.5 billion (approximately $146.0 million using the exchange rate as of November 7, 2018) Term Loan A tranche (the “Term Loan A”) and (ii) a JPY 16.5 billion (approximately $146.0 million using the exchange rate as of November 7, 2018) Term Loan B tranche (the “Term Loan B” and, together with the Term Loan A, collectively, the “Term Loans”). Principal payments under Term Loan A are required semi-annually, in the amount of JPY 1.4 billion (approximately $12.7 million using the exchange rate as of December 31, 2019), while the principal of Term Loan B is due in one payment at maturity. At each reporting period, the carrying value of the loan is translated from Japanese Yen to U.S. Dollars using the spot exchange rate as of the end of the reporting period.
Interest payments are due semi-annually on the Term Loans, with the interest rate based on a margin over the six-month Japanese TIBOR. The applicable margin for Term Loan A is 2.00% and for Term Loan B is 2.25%. Japanese TIBOR at December 31, 2019 was 0.13%.
The Term Loans mature on September 30, 2024. KEMET Corporation and certain subsidiaries of TOKIN provided guarantees of the obligations under the Term Loans, which also are secured by certain assets, properties and equity interests of TOKIN and its material subsidiaries. The Term Loans contain customary covenants applicable to both the Company and to TOKIN, including maintenance of a consolidated leverage ratio, the absence of two consecutive years of consolidated operating losses and the maintenance of certain required levels of consolidated net assets. The TOKIN Term Loan Facility agreement also contains customary events of default. The Company may prepay the Term Loans at any time, subject to certain notice requirements and reimbursement of loan breakage costs.
Revolving Line of Credit
In connection with the closing of the TOKIN Term Loan Facility on October 29, 2018, the Company entered into Amendment No. 10 to the Loan and Security Agreement, Waiver and Consent (the “Revolver Amendment”), by and among KEMET Corporation, KEMET Electronics Corporation (“KEC”), the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., a national banking association, as agent for the lenders. The Revolver Amendment provides the Company with, among other things, increased flexibility for certain restricted payments (including dividends), and also released certain pledges that allowed the Company to obtain the TOKIN Term Loan Facility in order to pay in full the Company's prior term loan. The revolving line of credit has a facility amount of up to $75.0 million, which is based on factors including outstanding eligible accounts receivable, inventory, and equipment collateral. There were no borrowings under the revolving line of credit during the quarter ended December 31, 2019, and the Company’s available borrowing capacity under the revolving line of credit was $62.2 million as of December 31, 2019.

12



Customer Advances
In September, November, and February of fiscal year 2019, the Company entered into three agreements with different customers (the “Customers”) pursuant to which the Customers agreed to make advances (collectively, the “Advances”) to the Company in an aggregate amount of up to $72.0 million (collectively, the “Customer Capacity Agreements”). The Company is using these Advances to fund the purchase of production equipment and to make other investments and improvements in its business and operations (the “Investments”) to increase overall capacity to produce various electronic components of the type and part as may be sold by the Company to the Customers from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advances. The Advances from the Customers are being made in quarterly installments over an expected period of 18 to 24 months from the effective date of the respective Customer Capacity Agreements.
The Advances will be repaid beginning on the date that production from the Investments is sufficient to meet the Company's obligations under the agreements with the Customers. Repayments will be made on a quarterly basis as determined by calculations that generally consider the number of components purchased by the Customers during the quarter. Repayments based on the calculations will continue until either the Advances are repaid in full, or December 31, 2038 for all three Customers. The Company has a quarterly repayment cap in the agreement with each of the Customers and is not required to make any quarterly repayments to the Customers that in the aggregate exceeds $1.8 million. If the Customers do not purchase a number of components that would require full repayment of the Advances by December 31, 2038, then the Advances shall be deemed repaid in full. Additionally, if the Customers do not purchase a number of components that would require a payment on the Advances for a period of 16 consecutive quarters, the Advances shall be deemed repaid in full.
As of December 31, 2019, the Company has received a total of $45.0 million in Advances. Since the debt is non-interest bearing, the Company has recorded debt discounts on the Advances. These discounts will be amortized over the expected life of the Advances through interest expense. During the nine months ended December 31, 2019, the Company had $28.0 million in capital expenditures related to the Customer Capacity Agreements.
As of December 31, 2019, the Company had $1.4 million in cash that was restricted to be used to fund these Investments. Restricted cash is recorded within “Prepaid expenses and other current assets” in the Condensed Consolidated Balance Sheets.
Other Debt
In January 2017, KEMET Electronics Portugal, S.A. (“KEP”), a wholly owned subsidiary, entered into a program with the Portuguese government where KEP is eligible to receive interest free loans if purchases of fixed assets meet certain approved terms within the program. In January 2017, KEP received the first part of an interest free loan in the amount of EUR 2.2 million (or $2.5 million). In July 2017, KEP received the second part of the loan in the amount of EUR 0.3 million (or $0.3 million). The loan has a maturity date of February 1, 2025. The loan is being repaid through semi-annual payments on August 1 and February 1 of each year. Repayments started in August 2019 and are in the amount of EUR 0.2 million (or $0.2 million).
    In February 2019, KEP received a second interest free loan from the Portuguese government in the amount of EUR 0.9 million (or $1.1 million). The loan has a maturity date of September 1, 2026 and will be repaid through semi-annual payments on March 1 and September 1 of each year beginning on March 1, 2021. The repayments will be in the amount of EUR 0.1 million (or $0.1 million).
Since the KEP debt is non-interest bearing, the Company has recorded debt discounts on these loans. These discounts are being amortized over the life of the loans through interest expense. If certain conditions are met by KEP, such as increased headcount at its facility in Evora, Portugal, increased revenue, and increased gross value added, a portion of these loans could be forgiven.
TOKIN has a short term borrowing pursuant to an agreement with The 77 Bank Limited in the amount of 350.0 million Yen (or $3.2 million), at an interest rate of 0.53% (Japanese TIBOR plus 40 basis points). The loan was originally due in September 2019 and was extended to September 2020. The loan agreement automatically renews for successive one year periods if both parties choose not to terminate or modify it.

13



Note 5. Goodwill and Intangible Assets
The following table highlights the Company’s intangible assets (amounts in thousands):
 
 
December 31, 2019
 
March 31, 2019
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
 
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
Indefinite Lived Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
$
15,314

 
$

 
$
15,314

 
$
15,151

 
$

 
$
15,151

In-process research and development (1)
 
3,279

 

 
3,279

 

 

 

Total indefinite lived intangibles (2)
 
18,593

 

 
18,593

 
15,151

 

 
15,151

Amortizing Intangibles:
 
 
 
 
 

 
 
 
 
 
 
Patents and acquired technology (3 - 18 years) (2)
 
27,755

 
(13,293
)
 
14,462

 
26,662

 
(12,046
)
 
14,616

Customer relationships (10 - 21 years)
 
38,352

 
(16,290
)
 
22,062

 
37,850

 
(13,868
)
 
23,982

Other
 
214

 
(214
)
 

 
214

 
(214
)
 

Total amortizing intangibles
 
66,321

 
(29,797
)
 
36,524

 
64,726

 
(26,128
)
 
38,598

Total intangible assets
 
$
84,914

 
$
(29,797
)
 
$
55,117

 
$
79,877

 
$
(26,128
)
 
$
53,749

_________________
(1) In-process research and development relates to haptic actuator products under development and expected to be commercialized in the future. In-process research and development was capitalized upon the acquisition of Novasentis. Refer to Note 3, “Acquisition” for more details on the Novasentis acquisition.
(2) Amounts capitalized for Novasentis are estimates based upon the preliminary purchase price allocation. These amounts are subject to change pending further review of the acquired business.
For the three months ended December 31, 2019 and 2018, amortization related to intangibles was $1.2 million and $1.1 million, respectively, consisting of amortization related to patents and acquired technology of $0.4 million for each period and amortization related to customer relationships of $0.8 million and $0.7 million, respectively. For the nine months ended December 31, 2019 and 2018, amortization related to intangibles was $3.6 million and $3.4 million, respectively, consisting of amortization related to patents and acquired technology of $1.2 million and $1.1 million, respectively, and amortization related to customer relationships of $2.3 million for each period.
The weighted-average useful life for patents and acquired technology was 15.3 and 15.8 years as of December 31, 2019 and March 31, 2019, respect