Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013 
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from           to      
  
Commission File Number: 001-15491
 
KEMET CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
57-0923789
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

2835 KEMET WAY, SIMPSONVILLE, SOUTH CAROLINA 29681
(Address of principal executive offices, zip code)
 
(864) 963-6300
(Registrant’s telephone number, including area code)
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý  NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ý NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  ý NO
 
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of January 31, 2014 was 45,125,371.
 


Table of Contents

KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 2013
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
 



Table of Contents

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
 

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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
 
 
December 31, 2013
 
March 31, 2013
 
(Unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
55,594

 
$
95,978

Accounts receivable, net
93,542

 
93,774

Inventories, net
200,853

 
198,888

Prepaid expenses and other
37,732

 
41,100

Deferred income taxes
5,752

 
4,167

Current assets of discontinued operations
10,293

 
9,517

Total current assets
403,766

 
443,424

Property and equipment, net of accumulated depreciation of $794,784 and $771,093 as of December 31, 2013 and March 31, 2013, respectively
303,741

 
303,942

Goodwill
35,584

 
35,584

Intangible assets, net
37,722

 
38,646

Investment in NEC TOKIN
49,713

 
52,738

Restricted cash
14,028

 
17,397

Deferred income taxes
8,400

 
7,994

Other assets
8,885

 
10,150

Noncurrent assets of discontinued operations
486

 
1,716

Total assets
$
862,325

 
$
911,591

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
27,672

 
$
10,793

Accounts payable
71,598

 
72,002

Accrued expenses
75,822

 
91,950

Income taxes payable and deferred income taxes
3,660

 
1,074

Current liabilities of discontinued operations
5,862

 
5,661

Total current liabilities
184,614

 
181,480

Long-term debt, less current portion
374,223

 
372,707

Other non-current obligations
54,900

 
69,022

Deferred income taxes
8,033

 
8,542

Noncurrent liabilities of discontinued operations
2,728

 
2,924

Stockholders’ equity:
 

 
 

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

 

Common stock, par value $0.01, authorized 175,000 shares, issued 46,508 shares at December 31, 2013 and March 31, 2013
465

 
465

Additional paid-in capital
466,316

 
467,096

Retained deficit
(217,291
)
 
(163,235
)
Accumulated other comprehensive income
20,332

 
7,694

Treasury stock, at cost (1,384 and 1,519 shares at December 31, 2013 and March 31, 2013, respectively)
(31,995
)
 
(35,104
)
Total stockholders’ equity
237,827

 
276,916

Total liabilities and stockholders’ equity
$
862,325

 
$
911,591

 See accompanying notes to the unaudited condensed consolidated financial statements.

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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Net sales
$
207,339

 
$
197,698

 
$
617,845

 
$
624,363

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales
169,677

 
162,733

 
530,722

 
525,653

Selling, general and administrative expenses
22,431

 
25,313

 
70,826

 
77,119

Research and development
6,027

 
6,290

 
17,703

 
20,183

Restructuring charges
2,194

 
3,886

 
8,169

 
13,672

Goodwill impairment

 

 

 
1,092

Write down of long-lived assets
3,358

 
3,084

 
3,358

 
7,318

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

 
(196
)
 
71

 
(123
)
Total operating costs and expenses
203,716

 
201,110

 
630,849

 
644,914

Operating income (loss)
3,623

 
(3,412
)
 
(13,004
)
 
(20,551
)
Non-operating (income) expense:
 

 
 

 
 

 
 

Interest income
(7
)
 
(54
)
 
(182
)
 
(111
)
Interest expense
10,349

 
10,247

 
30,291

 
30,840

Other (income) expense, net
(1,349
)
 
(1,641
)
 
(49
)
 
(1,126
)
Loss from continuing operations before income taxes and equity income (loss) from NEC TOKIN
(5,370
)
 
(11,964
)
 
(43,064
)
 
(50,154
)
Income tax expense
1,033

 
611

 
4,293

 
4,004

Loss from continuing operations before equity income (loss) from NEC TOKIN
(6,403
)
 
(12,575
)
 
(47,357
)
 
(54,158
)
Equity income (loss) from NEC TOKIN
1,657

 

 
(2,962
)
 

Loss from continuing operations
(4,746
)

(12,575
)

(50,319
)

(54,158
)
Loss from discontinued operations
(1,076
)
 
(1,682
)
 
(3,737
)
 
(2,773
)
Net loss
$
(5,822
)
 
$
(14,257
)
 
$
(54,056
)
 
$
(56,931
)
Net loss per basic share:
 

 
 

 
 

 
 

Loss from continuing operations
$
(0.11
)
 
$
(0.28
)
 
$
(1.12
)
 
$
(1.21
)
Loss from discontinued operations
$
(0.02
)
 
$
(0.04
)
 
$
(0.08
)
 
$
(0.06
)
Net loss
$
(0.13
)
 
$
(0.32
)
 
$
(1.20
)
 
$
(1.27
)
 
 
 
 
 
 
 
 
Net loss per diluted share:
 

 
 

 
 

 
 

Loss from continuing operations
$
(0.11
)
 
$
(0.28
)
 
$
(1.12
)
 
$
(1.21
)
Loss from discontinued operations
$
(0.02
)
 
$
(0.04
)
 
$
(0.08
)
 
$
(0.06
)
Net loss
$
(0.13
)
 
$
(0.32
)
 
$
(1.20
)
 
$
(1.27
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
45,120

 
44,918

 
45,078

 
44,879

Diluted
45,120

 
44,918

 
45,078

 
44,879

 
See accompanying notes to the unaudited condensed consolidated financial statements.


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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Net loss
$
(5,822
)
 
$
(14,257
)
 
$
(54,056
)
 
$
(56,931
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation gains (losses)
3,879

 
3,456

 
12,510

 
(603
)
Defined benefit pension plans, net of tax impact
106

 
288

 
402


(854
)
Post-retirement plan adjustments
(81
)
 
(82
)
 
(212
)
 
(243
)
Equity interest in investee’s other comprehensive income (loss)
1,113

 

 
(62
)
 

Other comprehensive income (loss)
5,017

 
3,662

 
12,638

 
(1,700
)
Total comprehensive loss
$
(805
)
 
$
(10,595
)
 
$
(41,418
)
 
$
(58,631
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.


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KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
 
Nine Month Periods Ended December 31,
 
2013
 
2012
Net loss from continuing operations
$
(50,319
)

$
(54,158
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
37,352

 
33,389

Equity loss from NEC TOKIN
2,962

 

Amortization of debt discount and debt issuance costs
2,817

 
3,046

Stock-based compensation expense
2,288

 
3,523

Long-term receivable write down
1,484

 

Change in value of NEC TOKIN options
(1,334
)
 

Net (gain) loss on sales and disposals of assets
71

 
(123
)
Pension and other post-retirement benefits
24

 
232

Write down of long-lived assets
3,358

 
7,318

Net curtailment and settlement gain on benefit plans

 
(1,088
)
Goodwill impairment

 
1,092

Change in deferred income taxes
(2,496
)
 
1,517

Change in operating assets
8,579

 
(13,632
)
Change in operating liabilities
(28,296
)
 
(25,156
)
Other
474

 
(137
)
Net cash used in operating activities
(23,036
)
 
(44,177
)
Investing activities:
 

 
 

Capital expenditures
(24,993
)
 
(38,349
)
Change in restricted cash
3,532

 
(24,000
)
Net cash used in investing activities
(21,461
)
 
(62,349
)
Financing activities:
 

 
 

Proceeds from revolving line of credit
21,000

 

Proceeds from issuance of debt

 
39,825

Deferred acquisition payments
(11,703
)
 
(6,617
)
Payments of long-term debt
(2,858
)
 
(1,901
)
Proceeds from exercise of stock options
86

 
58

Debt issuance costs

 
(275
)
Net cash provided by financing activities
6,525

 
31,090

Net decrease in cash and cash equivalents
(37,972
)
 
(75,436
)
Effect of foreign currency fluctuations on cash
864

 
(81
)
Net cash provided by (used in) operating activities of discontinued operations
(3,276
)
 
2,555

Cash and cash equivalents at beginning of fiscal period
95,978

 
210,521

Cash and cash equivalents at end of fiscal period
$
55,594

 
$
137,559

 
See accompanying notes to the unaudited condensed consolidated financial statements.


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Notes to Condensed Consolidated Financial Statements
 
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, 2013 (the “Company’s 2013 Annual Report”).
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all significant intercompany amounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to current year presentation.  Net sales and operating results for the quarter and nine month periods ended December 31, 2013 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 2013 Annual Report.
 
Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.
 
The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments.
 
Recently Issued Accounting Pronouncements
 
New accounting standards adopted
 
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Income Taxes (Topic 740). ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The Company does not expect the adoption of this guidance to have any material impact on its financial position, results of operations, comprehensive income or liquidity.
 
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830).  The ASU revised the authoritative guidance on accounting for cumulative translation adjustment specifying that a cumulative translation adjustment should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or a group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of cumulative translation adjustment attributable to the investment would be recognized in earnings upon sale of the investment. The guidance is effective for fiscal years beginning after December 15, 2013.  The Company does not expect the adoption of this guidance to have a material impact on its financial position, results of operations, comprehensive income or liquidity.
 
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The ASU adds new disclosure requirements for items

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reclassified out of accumulated other comprehensive income.  The ASU does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements.  The ASU is effective for the Company for interim and annual periods beginning after April 1, 2013.  The adoption of the ASU had no effect on the Company’s financial position, results of operations, comprehensive income or liquidity.
 
In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. This provision is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. This accounting guidance is not expected to have a material impact on the Company’s financial position, results of operations, comprehensive income or liquidity.
 
There are currently no other accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
 
Restricted Cash
 
As discussed in Note 2, Debt, the Company received a $24.0 million prepayment from an original equipment manufacturer (“OEM”) and, through December 31, 2013, utilized $12.3 million for the purchase of manufacturing equipment. The remaining proceeds of $11.7 million are classified as restricted cash at December 31, 2013.
 
A bank guarantee in the amount of EUR 1.5 million ($2.1 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 EUR 1.7 million ($2.3 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.
 

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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and March 31, 2013 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
 
2013
 
2013
 
Level 1
 
Level 2 (2)
 
Level 3
 
2013
 
2013
 
Level 1
 
Level 2 (2)
 
Level 3
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
504

 
$
504

 
$
504

 
$

 
$

 
$
29,984

 
$
29,984

 
$
29,984

 
$

 
$

Total debt
401,895

 
398,982

 
358,550

 
40,432

 

 
383,500

 
393,928

 
369,200

 
24,728

 

NEC TOKIN options,
 net (3)
1,823

 
1,823

 

 

 
1,823

 
489

 
489

 

 

 
489

___________________
(1)
Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2)
The valuation approach used to calculate fair value was a discounted cash flow for each respective debt facility.
(3)
See Note 7, 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 EBITDA over the duration of the instruments. Therefore, the options have been valued using option pricing methods in a Monte Carlo simulation.

The table below summarizes NEC TOKIN option valuation activity using significant unobservable inputs (Level 3) (amounts in thousand):
March 31, 2013
$
489

Increase in value of NEC TOKIN options
1,334

December 31, 2013
$
1,823

 
Inventories
 
Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):
 
December 31, 2013
 
March 31, 2013
Raw materials and supplies
$
94,282

 
$
84,149

Work in process
61,191

 
64,499

Finished goods
71,787

 
68,704

 
227,260

 
217,352

Inventory reserves (1)
(26,407
)
 
(18,464
)
 
$
200,853

 
$
198,888

___________________
(1)
During the nine month period ended December 31, 2013, the Company recorded a $3.9 million reserve for inventory held by a third party.
 
Warrant
 
As of December 31, 2013 and March 31, 2013, 8.4 million shares were subject to the warrant held by K Equity, LLC.
 
Revenue Recognition
 
The Company ships products to customers based upon firm orders and recognizes revenue 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, inventory price protection, and “ship-from-stock and debit” (“SFSD”) programs common in the industry.

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The SFSD program provides a mechanism for the distributor to meet a competitive price after obtaining authorization from the Company’s local sales office. This program allows the distributor to ship its higher-priced inventory and debit the Company for the difference between KEMET’s list price and the lower authorized price for that specific transaction. Management analyzes historical SFSD activity to determine the SFSD exposure on the global distributor inventory at the balance sheet date.  The establishment of these reserves 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 including, but 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 our estimates.
 
The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were 1.5% or less for the quarters and nine month periods ended December 31, 2013 and 2012. The Company recognizes warranty costs when they are both probable and reasonably estimable.
 
Note 2. Discontinued Operations
The Film and Electrolytic Business group has initiated a plan to dispose of its Machinery division. Management expects the sale to be completed in the fourth quarter of fiscal year 2014.

Net sales and net operating loss from the Company’s discontinued operation for the quarters and nine month periods ended December 31, 2013 and 2012 were (in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Net sales
$
1,711

 
$
2,599

 
$
6,668

 
$
15,557

Operating loss
(1,009
)
 
(1,878
)
 
(4,030
)
 
(2,804
)

Note 3. Debt
 
A summary of debt is as follows (amounts in thousands):
 
December 31,
2013
 
March 31,
2013
10.5% Senior Notes, net of premium of $3,304 and $3,773 as of December 31, 2013 and March 31, 2013, respectively
$
358,304

 
$
358,773

Advanced payment from OEM, net of discount of $469 and $1,056 as of December 31, 2013 and March 31, 2013, respectively
20,690

 
22,944

Revolving line of credit
21,000

 

Other
1,901

 
1,783

Total debt
401,895

 
383,500

Current maturities
(27,672
)
 
(10,793
)
Total long-term debt
$
374,223

 
$
372,707

 

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The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters and nine month periods ended December 31, 2013 and 2012, consists of the following (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Contractual interest expense
$
9,491

 
$
9,125

 
$
27,474

 
$
27,794

Amortization of debt issuance costs
426

 
426

 
1,278

 
1,278

Amortization of debt (premium) discount
14

 
48

 
118

 
(250
)
Imputed interest on acquisition related obligations
418

 
648

 
1,421

 
2,018

 
$
10,349

 
$
10,247

 
$
30,291

 
$
30,840

 
Revolving Line of Credit
 
KEMET Electronics Corporation (“KEC”) and KEMET Electronics Marketing (S) Pte Ltd. (“KEMET Singapore”) (each a “Borrower” and, collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Loan and Security Agreement”) which provides a $50.0 million revolving line of credit.  A portion of the U.S. and Singapore facilities can be used to issue letters of credit (“Letters of Credit”).
 
On September 24, 2013, the Company borrowed $9.0 million from the revolving line of credit at a rate of 5.75% (Base Rate, as defined in the Loan and Security Agreement, plus 2.5%).  As this is a base rate borrowing, there is not a specific repayment date and the amount can be repaid at any time prior to the expiration of the facility.  On September 27, 2013, the Company borrowed $12.0 million from the revolving line of credit at a rate of 4.0% (London Interbank Offer Rate (“LIBOR”) plus 3.75% based upon the fixed charge coverage ratio of KEMET Corporation and its subsidiaries on a consolidated basis).  The term on this borrowing was originally 31 days with total interest and principal payable at maturity on October 28, 2013, however, it was extended to April 28, 2014.  These borrowings are classified as current liabilities as the facilities expire on September 30, 2014.  These were the only borrowings under the revolving line of credit and they remained outstanding as of December 31, 2013.
 
As described below in the section titled “Advance Payment from OEM, a standby Letter of Credit for $16.0 million was delivered to the OEM on October 8, 2012. Additionally, in the nine month period ended December 31, 2013, the Company also issued two Letters of Credit for EUR 1.1 million ($1.5 million) and EUR 0.7 million ($0.9 million), respectively, related to the construction of the new manufacturing location in Italy. These three letters of credit reduced the Company’s availability under the Loan and Security Agreement.  As of December 31, 2013, the Company’s borrowing capacity under the Loan and Security Agreement was $3.0 million.
 
Advanced Payment from OEM
 
On August 28, 2012, the Company entered into and amended an agreement (the “Agreement”) with the OEM, pursuant to which the OEM agreed to advance the Company $24.0 million (the “Advance Payment”).  As of December 31, 2013 and March 31, 2013, the Company had $21.2 million and $24.0 million, respectively, outstanding due to the OEM.  On a monthly basis starting in June 2013, the Company began repaying the OEM an amount equal to a percentage of the aggregate purchase price of the capacitors sold to the OEM the preceding month, not to exceed $1.0 million per month.  Pursuant to the terms of the Agreement, the percentage of the aggregate purchase price of capacitors sold to the OEM used to repay the Advance Payment will double, not to exceed $2.0 million per month, in the event that (1) the OEM provides evidence that the price charged by KEMET for a particular capacitor during any prior quarter was equal to or greater than 110% of the price paid by the OEM or its affiliates for a third-party part qualified for the same product, and shipping in volume during such period; and,(2) agreement cannot be reached between the OEM and the Company for a price adjustment during the current quarter which would bring KEMET’s price within 110% of the third-party price.  In June 2015, the outstanding balance, if any, is due in full.  Pursuant to the terms of the Agreement, the Company delivered to the OEM an irrevocable standby Letter of Credit in the amount of $16.0 million on October 8, 2012; and, on October 22, 2012, the Company received the Advance Payment from the OEM.
 
The OEM may demand repayment of the entire balance outstanding or draw upon the Letter of Credit if any of the following events occur while the Agreement is still in effect: (i) the Company commits a material breach of the Agreement, the statement of work or the master purchase agreement between the OEM and the Company; (ii) the Company’s credit rating issued by Standard & Poor’s Financial Services LLC or its successor or Moody’s Investors Services, Inc. or its successors drops below CCC+ or Caa1, respectively; (iii) the Company’s cash balance on the last day of any fiscal quarter is less than

12

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$60.0 million; (iv) the Letter of Credit has been terminated without being replaced prior to repayment of the Advance Payment amount; (v) the Company or substantially all of its assets are sold to a party other than a subsidiary of the Company; (vi) all or substantially all of the assets of a subsidiary of the Company, or any of the shares of such subsidiary, are sold, whose assets are used to develop and produce the Goods; (vii) the Company or any subsidiary which accounts for 20% or more of the Company’s consolidated total assets (“Company Entity”) applies for judicial or extra judicial settlement with its creditors, makes an assignment for the benefit of its creditors, voluntarily files for bankruptcy or has a receiver or trustee in bankruptcy appointed by reason of its insolvency, or in the event of an involuntary bankruptcy action, liquidation proceeding, dissolution or similar proceeding is filed against a Company Entity and not dismissed within sixty (60) days.  To the Company’s best knowledge and belief, none of these triggers have been met including maintaining a minimum cash balance since the Company's cash balance (including restricted cash under the OEM agreement) exceeds the $60.0 million threshold.

10.5% Senior Notes
 
As of December 31, 2013 and March 31, 2013, the Company had outstanding $355.0 million in aggregate principal amount of the Company’s 10.5% Senior Notes due May 1, 2018 (the “10.5% Senior Notes”).  The Company had interest payable related to the 10.5% Senior Notes included in the line “Accrued expenses” on its Condensed Consolidated balance sheets of $6.2 million and $15.5 million at December 31, 2013 and March 31, 2013, respectively.

Note 4. Write Down of Long-Lived Assets
The Company is in the process of restructuring its Evora, Portugal manufacturing operations, which is expected to be completed during the quarter ending June 30, 2014. As a part of the ongoing restructuring activities, the Company has moved certain Tantalum manufacturing operations from the Evora, Portugal facility to a manufacturing facility in Mexico and the remaining Tantalum equipment in Portugal will be disposed. During the third quarter of fiscal year 2013, the Company incurred impairment charges totaling $3.1 million related to the Solid Capacitors Business Group (“Solid Capacitors”). In the third quarter of fiscal year 2014 the Company incurred $2.8 million in additional impairment charges due to a decrease in forecasted revenues as capacity has been moved to a manufacturing facility in Mexico. The Company used an income approach to estimate the fair value of the assets to be disposed. In addition, during the third quarter of fiscal year 2014, the Company incurred impairment charges totaling $0.6 million related to the Film and Electrolytic Business Group (“Film and Electrolytic”) which were related to idle manufacturing equipment in a manufacturing facility in Italy. The impairment charges are recorded on the Condensed Consolidated Statements of Operations line item “Write down of long-lived assets” in the three and nine month periods ended December 31, 2013 and 2012.
During the second quarter of fiscal year 2013, in connection with the consolidation of two manufacturing facilities within Italy, the Company incurred impairment charges totaling $4.2 million related to Film and Electrolytic. The Company obtained appraisals for each of these facilities indicating a decrease in market price, and therefore, the carrying amounts for these manufacturing facilities were reviewed for recoverability. It was determined that the carrying amounts of the manufacturing facilities were not recoverable since they exceeded the sum of the undiscounted cash flows expected to result from their use and eventual disposition of the asset (asset group). The impairment was measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeded its fair value. The Company utilized the market approach to estimate fair value of the long-lived asset group. The impairment charge is recorded on the Condensed Consolidated Statements of Operations line item “Write down of long-lived assets” in the nine month period ended December 31, 2012.

Note 5. Restructuring Charges
 
In the second quarter of fiscal year 2010, the Company initiated the first phase of a plan to restructure Film and Electrolytic and to reduce overhead. Since that time, the restructuring plan was expanded to the Solid Capacitors Business Group ("Solid Capacitors") and includes implementing programs to make the Company more competitive by removing excess capacity, relocating production to lower cost locations, and eliminating unnecessary costs throughout the Company.
 

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A summary of the expenses aggregated on the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters and nine month periods ended December 31, 2013 and 2012, is as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Cost of relocating manufacturing equipment
$
1,037

 
$
497

 
$
2,060

 
$
1,658

Personnel reduction costs
1,157

 
3,389

 
6,109

 
12,014

 
$
2,194

 
$
3,886

 
$
8,169

 
$
13,672


Quarter Ended December 31, 2013

Restructuring charges in the quarter ending December 31, 2013 included $1.2 million of personnel reduction costs and $1.0 million of manufacturing relocation costs primarily due to the consolidation of manufacturing facilities in Italy. The personnel reduction costs are primarily due to $0.9 million in charges related to a headcount reduction of 31 employees due to the consolidation of manufacturing facilities in Italy.

Nine Month Period Ended December 31, 2013
 
The Company incurred $8.2 million in restructuring charges in the nine month period ended December 31, 2013 including $6.1 million related to personnel reduction costs which is primarily comprised of the following: $1.9 million related to the closure of a portion of our innovation center in the U.S., $1.2 million related to the reduction of the solid capacitor production workforce in Mexico, $1.1 million related to the Company’s initiative to reduce overhead, $0.4 million in termination benefits associated with converting the Weymouth, United Kingdom manufacturing facility into a technology center and $0.4 million related to an additional Cassia Integrazione Guadagni Straordinaria (“CIGS”) plan in Italy.  In addition, $0.9 million is related to a headcount reduction of 31 employees due to the consolidation of manufacturing facilities in Italy.

The additional expense related to CIGS is as a result of an agreement with the labor union which allowed the Company to place up to 170 workers, on a rotation basis, on the CIGS plan to save labor costs. CIGS is a temporary plan to save labor costs whereby a company may temporarily “lay off” employees while the government continues to pay their wages for a maximum of 12 months during the program. The employees who are in CIGS are not working, but are still employed by the Company. Only employees that are not classified as management or executive level personnel can participate in the CIGS program and upon termination of the plan, the affected employees return to work.

In addition to these personnel reduction costs, the Company incurred manufacturing relocation costs of $2.1 million due to the consolidation of manufacturing facilities within Italy and relocation of manufacturing equipment to Evora, Portugal, Skopje, Macedonia and Mexico.
 
Quarter Ended December 31, 2012

Restructuring charges of $3.9 million were incurred in the quarter ending December 31, 2012. These included 3.4 million related to personnel reduction costs which is primarily comprised of the following: $1.6 million for reductions in administrative overhead primarily in the Corporate headquarters, $0.7 million for reductions in production workforce in Mexico, $0.6 million in termination benefits associated with converting the Weymouth, United Kingdom manufacturing facility into a technology center and $0.5 million for reductions in workforce across the Company in response to lower volumes and demand.

In addition to these personnel reduction costs, $0.5 million of additional expense was incurred for manufacturing relocation of manufacturing equipment to China, Bulgaria, Macedonia and Mexico due to the consolidation of manufacturing facilities within Italy.



14

Table of Contents

Nine Month Period Ended December 31, 2012
 
Restructuring charges in the nine month period ended December 31, 2012 included personnel reduction costs of $12.0 million and manufacturing relocation costs of $1.7 million.  The personnel reduction costs were comprised of the following: $2.8 million in termination benefits associated with converting the Landsberg, Germany manufacturing facility into a technology center; $2.3 million in termination benefits associated with converting the Weymouth, United Kingdom manufacturing facility into a technology center; $1.5 million for reductions in production workforce in Mexico; $1.1 million for reductions in production workforce in Portugal; and $4.3 million for reductions in production workforce and administrative overhead throughout the Company.

In addition to these personnel reduction costs, the Company incurred manufacturing relocation costs of $1.7 million for relocation of equipment to Bulgaria, China, Macedonia and Mexico and for the consolidation of manufacturing facilities within Italy.

Reconciliation of restructuring liability
 
A reconciliation of the beginning and ending liability balances for restructuring charges included in the line items “Accrued expenses” and “Other non-current obligations” on the Condensed Consolidated Balance Sheets for the quarters and nine month periods ended December 31, 2013 and 2012 is as follows (amounts in thousands):
 
Quarter Ended December 31, 2013
 
Quarter Ended December 31, 2012
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
5,271

 
$

 
$
15,019

 
$

Costs charged to expense
1,157

 
1,037

 
3,389

 
497

Costs paid or settled
(1,313
)
 
(1,037
)
 
(4,139
)
 
(497
)
Change in foreign exchange
94

 

 
239

 

End of period
$
5,209

 
$

 
$
14,508

 
$

 
 
Nine Month Period Ended December 31, 2013
 
Nine Month Period Ended December 31, 2012
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel 
Reductions
 
Manufacturing 
Relocations
Beginning of period
$
13,509

 
$
567

 
$
11,474

 
$

Costs charged to expense
6,109

 
2,060

 
12,014

 
1,658

Costs paid or settled
(14,830
)
 
(2,627
)
 
(8,990
)
 
(1,658
)
Change in foreign exchange
421

 

 
10

 

End of period
$
5,209

 
$

 
$
14,508

 
$



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Note 6. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
 
Changes in Accumulated Other Comprehensive Income (Loss) for the quarters ended December 31, 2013 and 2012 includes the following components (amounts in thousands):
 
Foreign Currency
Translation (1)
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at September 30, 2013
$
22,169

 
$
(7,366
)
 
$
1,687

 
$
(1,175
)
 
$
15,315

Other comprehensive income before reclassifications
3,879

 

 

 
1,113

 
4,992

Amounts reclassified out of AOCI

 
106

 
(81
)
 

 
25

Other comprehensive income (loss)
3,879

 
106

 
(81
)
 
1,113

 
5,017

Balance at December 31, 2013
$
26,048

 
$
(7,260
)
 
$
1,606

 
$
(62
)
 
$
20,332

 
 
Foreign Currency
Translation (1)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at September 30, 2012
$
14,048

 
$
(9,224
)
 
$
1,834

 
$
6,658

Other comprehensive income before reclassifications
3,456

 

 

 
3,456

Amounts reclassified out of AOCI

 
288

 
(82
)
 
206

Other comprehensive income (loss)
3,456

 
288

 
(82
)
 
3,662

Balance at December 31, 2012
17,504

 
$
(8,936
)
 
$
1,752

 
$
10,320

 
Changes in Accumulated Other Comprehensive Income (Loss) for the nine month periods ended December 31, 2013 and 2012 includes the following components (amounts in thousands): 
 
Foreign Currency 
Translation (1)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement 
Benefit Plans
 
Ownership Share of 
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Net Accumulated
 Other 
Comprehensive 
Income
Balance at March 31, 2013
$
13,538

 
$
(7,662
)
 
$
1,818

 
$

 
$
7,694

Other comprehensive income (loss) before reclassifications
12,510

 

 

 
(62
)
 
12,448

Amounts reclassified out of AOCI

 
402

 
(212
)
 

 
190

Other comprehensive income (loss)
12,510

 
402

 
(212
)
 
(62
)
 
12,638

Balance at December 31, 2013
$
26,048

 
$
(7,260
)
 
$
1,606

 
$
(62
)
 
$
20,332

 

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Table of Contents

 
Foreign Currency
Translation (1)
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Post-Retirement
Benefit Plans
 
Net Accumulated 
Other 
Comprehensive 
Income
Balance at March 31, 2012
$
18,107

 
$
(8,082
)
 
$
1,995

 
$
12,020

Other comprehensive loss before reclassifications
(603
)
 

 

 
(603
)
Amounts reclassified out of AOCI

 
(854
)
 
(243
)
 
(1,097
)
Other comprehensive loss
(603
)
 
(854
)
 
(243
)
 
(1,700
)
Balance at December 31, 2012
$
17,504

 
$
(8,936
)
 
$
1,752

 
$
10,320

 
___________________
(1)
Due primarily to the Company’s permanent re-investment assertion relating to foreign earnings, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during the quarters and nine month periods ended December 31, 2013 and 2012.
(2)
Ending balance is net of tax of $2.3 million and $2.9 million as of December 31, 2013 and December 31, 2012, respectively.

Note 7. Investment in NEC TOKIN
 
On March 12, 2012, KEMET Electronics Corporation (“KEC”), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) to acquire 51% of the common stock (representing a 34% economic interest) of NEC TOKIN Corporation (“NEC TOKIN”), a manufacturer of tantalum capacitors, electro-magnetic, electro-mechanical and access devices, (the “Initial Purchase”) from NEC Corporation (“NEC”) of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the “Initial Closing”). The Company accounts for its investment using the equity method in a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN.
 
In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with NEC TOKIN and NEC, which provides for restrictions on transfers of NEC TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of NEC TOKIN held by it, certain management services to be provided to NEC TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. KEC holds four of seven NEC TOKIN director positions. However, NEC has significant board rights.
 
Concurrent with execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC whereby KEC may purchase additional shares of NEC TOKIN common stock from NEC TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of NEC TOKIN’s common stock (the “First Call Option”) by providing notice of the First Call Option between the Initial Closing and August 31, 2014. Upon providing such notice, but not before August 1, 2014, KEC may also exercise an option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. From August 1, 2014 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC. However, NEC may only exercise this right (the “Put Option”) from August 1, 2014 through April 1, 2016 if NEC TOKIN achieves certain financial performance measures. The purchase price for the Put Option will be based on the greater of six times LTM EBITDA less previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC as of the date the Put Option is exercised. The purchase price for the Put Option is reduced by the amount of NEC TOKIN’s debt obligation to NEC which KEC will assume. The determination of the purchase price will be modified in the event there is a disagreement between NEC and KEC under the Stockholders’ Agreement. In the event the Put Option is exercised, NEC will be required to maintain in place the outstanding debt obligation owed by NEC TOKIN to NEC. The valuation of these options as of March 31, 2013 resulted in a net long-term asset of $0.5 million which is included in the line item “Other assets” on the Condensed Consolidated Balance Sheets.  The Company has marked these options to fair value and in the quarter and nine month period ended December 31, 2013 recognized a $1.7 million and $1.3 million gain, respectively which were included on the line item “Other expense, net” in the Condensed Consolidated Statement of Operations. The value included for the options in the line item “Other assets” on the Condensed Consolidated Balance Sheets as of December 31, 2013, is $1.8 million.
 

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Table of Contents

KEC’s total investment in NEC TOKIN including the net options described above on February 1, 2013 was $54.5 million which included $50.0 million cash consideration plus approximately $4.5 million in transaction expenses (fees for legal, accounting, due diligence, investment banking and other various services necessary to complete the transactions). The Company has made an allocation of the aggregate purchase price, which is based upon estimates that the Company believes are reasonable.
 
Summarized financial information for NEC TOKIN follows (in thousands):
 
December 31,
2013
 
 
 
Nine Month Period  
 Ended December 31, 
 2013
Current assets
$
243,029

 
Net sales
 
$
387,905

Noncurrent assets
367,503

 
Gross profit
 
68,748

Current liabilities
122,120

 
Net income
 
11,286

Noncurrent liabilities
370,610

 
 
 
 

 
As of December 31, 2013, the excess of the carrying value for its investment in NEC TOKIN over KEMET’s share of NEC TOKIN’s equity is $9.7 million. As of December 31, 2013, 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 nine month period ended December 31, 2013, KEMET recorded sales of $3.7 million to NEC TOKIN.  As of December 31, 2013, KEMET’s accounts receivable and accounts payable balances with NEC TOKIN were $1.3 million and $0.5 million respectively.  In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement to provide services for which KEC would be reimbursed.  As of December 31, 2013, KEMET’s receivable balance under this agreement is $0.4 million.

Note 8. Segment and Geographic Information
 
In the first quarter of fiscal year 2014, the Company reorganized its business by combining its Tantalum Business Group and Ceramic Business Group into one business group, Solid Capacitors.  Following the reorganization, based on information regularly reviewed by the chief operating decision maker, KEMET’s two business groups are comprised of Film and Electrolytic and Solid Capacitors.  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.  Prior period information has been reclassified to conform to current year presentation.
 
Solid Capacitors
 
Operating in ten manufacturing sites in the United States, Mexico, China and Portugal, Solid Capacitors primarily produces tantalum, aluminum, polymer and ceramic capacitors which are sold globally.  Solid Capacitors also produces tantalum powder used in the production of tantalum capacitors and has a product innovation center in the United States.
 
Film and Electrolytic
 
Operating in fifteen manufacturing sites throughout Europe, Asia, and the United States, Film and Electrolytic primarily produces film, paper, and electrolytic capacitors which are sold globally. Film and Electrolytic also manufactures etched foils utilized as a core component in the manufacture of electrolytic capacitors. In addition, this business group has product innovation centers in the United Kingdom, Italy, Germany and Sweden.
 

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The following table reflects each business group’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the quarters and nine month periods ended December 31, 2013 and 2012 (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Net sales:
 

 
 

 
 

 
 

Solid Capacitors
$
156,082

 
$
149,772

 
$
463,197

 
$
472,940

Film and Electrolytic
51,257

 
47,926

 
154,648

 
151,423

 
$
207,339

 
$
197,698

 
$
617,845

 
$
624,363

Operating income (loss) (1):
 

 
 

 
 

 
 

Solid Capacitors (2)
$
27,616

 
$
24,757

 
$
65,795

 
$
73,325

Film and Electrolytic (3)
(2,374
)
 
(5,554
)
 
(10,888
)
 
(23,049
)
Unallocated operating expenses
(21,619
)
 
(22,615
)
 
(67,911
)
 
(70,827
)
 
$
3,623

 
$
(3,412
)
 
$
(13,004
)
 
$
(20,551
)
Depreciation and amortization expenses:
 

 
 

 
 

 
 

Solid Capacitors
$
6,798

 
$
6,091

 
$
21,409

 
$
20,616

Film and Electrolytic
3,360

 
3,234

 
10,960

 
9,578

Unallocated operating expenses
1,601

 
1,080

 
4,983

 
3,195

 
$
11,759

 
$
10,405

 
$
37,352

 
$
33,389

 
___________________

(1)
Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Restructuring charges:
 

 
 

 
 

 
 

Solid Capacitors
$
91

 
$
2,030

 
$
3,235

 
$
5,389

Film and Electrolytic
2,100

 
1,856

 
4,573

 
8,283

Corporate
3

 

 
361

 

 
$
2,194

 
$
3,886

 
$
8,169

 
$
13,672

___________________
(2) Solid Capacitors incurred operating expenses related to the Write down of long-lived assets of $2.8 million and $3.1 million in the quarters and nine month periods ended December 31, 2013 and December 31, 2012, respectively. In the quarters and nine month periods ended December 31, 2012 Solid Capacitors incurred a curtailment charge on a benefit plan of $0.4 million.
(3)
In the quarter and nine month period ended December 31, 2013, Film and Electrolytic incurred expenses related to the Write down of long-lived assets of $0.6 million. In the nine month period ended December 31, 2012, Film and Electrolytic incurred the following operating expenses/benefits: Goodwill impairment of $1.1 million, Write down of long-lived assets of $4.2 million, and a net curtailment and settlement gain on benefit plans of $1.5 million.
 
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Sales by region:
 

 
 

 
 

 
 

North and South America (“Americas”)
$
67,875

 
$
61,255

 
$
192,625

 
$
182,684

Europe, Middle East, Africa (“EMEA”)
68,026

 
65,081

 
209,183

 
212,473

Asia and Pacific Rim (“APAC”)
71,438

 
71,362

 
216,037

 
229,206

 
$
207,339

 
$
197,698

 
$
617,845

 
$
624,363

 


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Table of Contents

The following table reflects each business group’s total assets as of December 31, 2013 and March 31, 2013 (amounts in thousands):
 
December 31, 2013
 
March 31, 2013
Total assets:
 

 
 

Solid Capacitors
$
483,352

 
$
517,024

Film and Electrolytic
289,287

 
297,518

Corporate
78,907

 
85,816

Discontinued operations
10,779

 
11,233

 
$
862,325

 
$
911,591

 
Note 9.  Defined Benefit Pension and Other Postretirement Benefit Plans
 
The Company sponsors six defined benefit pension plans in Europe, one plan in Singapore and two plans in Mexico.  In addition, the Company sponsors a post-retirement plan in the United States.  Costs recognized for benefit plans are recorded using estimated amounts which may change as actual costs for the fiscal year are determined.

The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the quarters ended December 31, 2013 and 2012 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended December 31,
 
Quarters Ended December 31,
 
2013
 
2012
 
2013
 
2012
Net service cost
$
332

 
$
353

 
$

 
$

Interest cost
428

 
436

 
6

 
7

Expected return on net assets
(110
)
 
(149
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
79

 
137

 
(65
)
 
(82
)
Prior service cost
1

 
3

 

 

Curtailment loss on benefit plans

 
587

 

 

Total net periodic benefit (income) costs
$
730

 
$
1,367

 
$
(59
)
 
$
(75
)
 
The components of net periodic benefit costs relating to the Company’s pension and other postretirement benefit plans are as follows for the nine month periods ended December 31, 2013 and 2012 (amounts in thousands):
 
Pension
 
Postretirement Benefit Plans
 
Nine Month Periods Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Net service cost
$
994

 
$
1,182

 
$

 
$

Interest cost
1,284

 
1,424

 
17

 
21

Expected return on net assets
(328
)
 
(493
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
235

 
397

 
(195
)
 
(243
)
Prior service cost
3

 
15

 

 

Net curtailment and settlement gain on benefit plans

 
(1,088
)
 

 

Total net periodic benefit (income) costs
$
2,188

 
$
1,437

 
$
(178
)
 
$
(222
)

In fiscal year 2014, the Company expects to contribute up to $1.6 million to the pension plans, $0.9 million of which has been contributed as of December 31, 2013.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred.
 


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Table of Contents

Note 10. Stock-based Compensation
 
The Company’s stock-based compensation plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests. At December 31, 2013, 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 (the “2011 Incentive Plan”).  The 2011 Incentive Plan authorizes the Company to provide equity-based compensation in the form of: (1) stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code; (2) stock appreciation rights; (3) restricted stock and restricted stock units; (4) other share-based awards; and, (5) performance awards. Options issued under these plans vest within one to three years and expire ten years from the grant date. The Company grants restricted stock units to members of the Board of Directors, the Chief Executive Officer and a limited group of executives. Once vested and settled, restricted stock units are converted into restricted stock and cannot be sold until 90 days after the Chief Executive Officer, the executive or the member of the Board of Directors, as applicable, resigns from his or her position, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership exceeds the target. This expense is being 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 and 2014/2015 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 Consolidated Balance Sheets and any restricted stock unit commitment is reflected in the line item “Additional paid-in capital” on the Consolidated Balance Sheets.
 
The compensation expense associated with stock-based compensation for the quarters ended December 31, 2013 and 2012 are recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Quarter Ended December 31, 2013
 
Quarter Ended December 31, 2012
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
92

 
$
43

 
$
130

 
$
131

 
$
113

 
$
97

Selling, general and administrative expenses
67

 
200

 
126

 
129

 
335

 
200

Research and development
(19
)
 

 
50

 
23

 

 
32

 
$
140

 
$
243

 
$
306

 
$
283

 
$
448

 
$
329

 
The compensation expense associated with stock-based compensation for the nine month periods ended December 31, 2013 and 2012 are recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
 
Nine Month Period Ended December 31, 2013
 
Nine Month Period Ended December 31, 2012
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
 
Stock 
Options
 
Restricted 
Stock
 
LTIPs
Cost of sales
$
354

 
$
69

 
$
356

 
$
540

 
$
338

 
$
244

Selling, general and administrative expenses
351

 
505

 
509

 
626

 
1,089

 
534

Research and development
1

 

 
143

 
72

 

 
80

 
$
706

 
$
574

 
$
1,008

 
$
1,238

 
$
1,427

 
$
858

 
In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Net loss for the nine month periods ended December 31, 2013, and 2012. Approximately thirty-five thousand and twenty-six thousand stock options were exercised in the nine month periods ended December 31, 2013 and 2012, respectively.




21

Table of Contents

Note 11. Income Taxes
 
During the quarter ended December 31, 2013, the Company incurred $1.0 million of income tax expense, comprised of a $1.3 million income tax expense which is related to income taxes for foreign operations and a $0.3 million tax benefit related to the release of uncertain tax positions in a foreign jurisdiction.  Income tax expense for the nine month period ended December 31, 2013 was $4.3 million, comprised of $4.3 million related to income taxes for foreign operations, and $0.1 million of state income tax expense and a $0.1 million income tax benefit related to uncertain tax positions in a foreign jurisdiction.

During the quarter ended December 31, 2012, the Company incurred $0.6 million of income tax expense which was related to income taxes for foreign operations.  Income tax expense for the nine month period ended December 31, 2012 was $4.0 million, comprised of $4.4 million related to income taxes for foreign operations and $0.2 million of state income tax expense and a $0.6 million benefit related to a release of an uncertain tax position in a foreign jurisdiction.
 
There is no U.S. federal income tax benefit from the quarter and nine month periods ended December 31, 2013 and 2012 due to a valuation allowance on deferred tax assets.
 
Note 12. Basic and Diluted Net Loss Per Common Share
 
The following table presents basic EPS and diluted EPS (amounts in thousands, except per share data):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Numerator:
 

 
 

 
 

 
 

Loss from continuing operations
$
(4,746
)
 
$
(12,575
)
 
$
(50,319
)
 
$
(54,158
)
Loss from discontinued operations
(1,076
)
 
(1,682
)
 
(3,737
)
 
(2,773
)
Net loss
$
(5,822
)
 
$
(14,257
)
 
$
(54,056
)
 
$
(56,931
)
Denominator:
 

 
 

 
 

 
 

Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
45,120

 
44,918

 
45,078

 
44,879

Assumed conversion of employee stock grants

 

 

 

Assumed conversion of warrants

 

 

 

Diluted
45,120

 
44,918

 
45,078

 
44,879

Net loss per basic share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.28
)
 
$
(1.12
)
 
$
(1.21
)
Loss from discontinued operations
$
(0.02
)
 
$
(0.04
)
 
$
(0.08
)
 
$
(0.06
)
Net loss
$
(0.13
)
 
$
(0.32
)
 
$
(1.20
)
 
$
(1.27
)
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.28
)
 
$
(1.12
)
 
$
(1.21
)
Loss from discontinued operations
$
(0.02
)
 
$
(0.04
)
 
$
(0.08
)
 
$
(0.06
)
Net loss
$
(0.13
)
 
$
(0.32
)
 
$
(1.20
)
 
$
(1.27
)
 
Common stock equivalents that could potentially dilute net loss per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive, are as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine Month Periods Ended December 31,
 
2013
 
2012
 
2013
 
2012
Assumed conversion of employee stock grants
1,777

 
2,186

 
1,800

 
2,033

Assumed conversion of warrants
6,822

 
6,444

 
6,646

 
6,798

 


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Table of Contents

Note 13. Concentrations of Risks
 
The Company sells to customers globally and, as the Company generally does not require collateral from its customers, on a monthly basis the Company evaluates customer account balances in order to assess the Company’s financial risks of collection.  One customer accounted for over 10% of the Company’s net sales in the quarters and nine month periods ended December 31, 2013 and 2012.  There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable at December 31, 2013 and March 31, 2013.
 
Electronics distributors are an important distribution channel in the electronics industry and accounted for 44% of the Company’s net sales in the nine month periods ended December 31, 2013 and 2012.  As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand or adjust their inventory stocking levels.
 
Note 14. Condensed Consolidating Financial Statements
 
The 10.5% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company’s 100% owned domestic subsidiaries (“Guarantor Subsidiaries”) and secured by a first priority lien on 51% of the capital stock of certain of our foreign restricted subsidiaries (“Non-Guarantor Subsidiaries”).  The Company’s Guarantor Subsidiaries and Non-Guarantor Subsidiaries are not consistent with the Company’s business groups or geographic operations; accordingly this basis of presentation is not intended to present the Company’s financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. The Company is required to present condensed consolidating financial information in order for the subsidiary guarantors of the Company’s public debt to be exempt from reporting under the Securities Exchange Act of 1934, as amended.

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


23

Table of Contents

Condensed Consolidating Balance Sheet
December 31, 2013
(Unaudited)

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

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
405

 
$
21,558

 
$
33,631

 
$

 
$
55,594

Accounts receivable, net

 
42,092

 
51,450

 

 
93,542

Intercompany receivable
317,951

 
322,120

 
190,234

 
(830,305
)
 

Inventories, net

 
126,449

 
74,404

 

 
200,853

Prepaid expenses and other
3,144

 
14,761

 
22,742

 
(2,915
)
 
37,732

Deferred income taxes

 
770

 
4,982

 

 
5,752

Current assets of discontinued operations

 

 
10,293

 

 
10,293

Total current assets
321,500

 
527,750

 
387,736

 
(833,220
)
 
403,766

Property and equipment, net
340

 
107,064

 
196,337

 

 
303,741

Goodwill

 
35,584

 

 

 
35,584

Intangible assets, net

 
28,726

 
8,996

 


 
37,722

Investment in NEC TOKIN

 
49,713

 

 

 
49,713

Investments in subsidiaries
408,439

 
424,387

 
30,285

 
(863,111
)
 

Restricted cash

 
14,028

 

 

 
14,028

Deferred income taxes

 
1,450

 
6,950

 

 
8,400

Other assets
5,747

 
2,238

 
900

 

 
8,885

Noncurrent assets of discontinued operations

 

 
486

 

 
486

Long-term intercompany receivable
81,764

 
60,677

 
2,800

 
(145,241
)
 

Total assets
$
817,790

 
$
1,251,617

 
$
634,490

 
$
(1,841,572
)
 
$
862,325

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$
5,363

 
$
9,000

 
$
13,309

 
$

 
$
27,672

Accounts payable, trade
64

 
29,624

 
41,910

 

 
71,598

Intercompany payable
165,174

 
545,611

 
119,520

 
(830,305
)
 

Accrued expenses
34,788

 
12,782

 
28,252

 

 
75,822

Income taxes payable and deferred income taxes

 
3,111

 
3,464

 
(2,915
)
 
3,660

Current liabilities of discontinued operations

 

 
5,862

 

 
5,862

Total current liabilities
205,389

 
600,128

 
212,317

 
(833,220
)
 
184,614

Long-term debt, less current portion
373,631

 

 
592

 

 
374,223

Other non-current obligations
943

 
2,938

 
51,019

 

 
54,900

Deferred income taxes

 
3,007

 
5,026

 

 
8,033

Noncurrent liabilities of discontinued operations

 

 
2,728

 

 
2,728

Long-term intercompany payable

 
81,764

 
63,477