Annual report pursuant to Section 13 and 15(d)

Acquisitions

v3.19.1
Acquisitions
12 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Acquisitions
Acquisitions
Sale of Electro-Mechanical Business and Acquisition of Remaining Interest in TOKIN
Between February 1, 2013 and April 19, 2017, KEMET, through its wholly-owned subsidiary, KEMET Electronics Corporation (“KEC”), held a 34% economic interest in TOKIN Corporation (“TOKIN”) pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among KEC, TOKIN and NEC Corporation (“NEC”), as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of TOKIN outstanding as of such date. TOKIN was established in Japan in 1938 and is engaged in production and distribution of tantalum capacitors, transmitting communication devices, magnetic devices, piezoelectric devices and sensors. TOKIN has six manufacturing locations throughout Asia and was previously operating as a joint venture with NEC.
On April 14, 2017, TOKIN closed on the sale of its electro-mechanical devices (“EMD”) business to NTJ Holdings 1 Ltd. (“NTJ”), a special purpose entity that is owned by funds managed or operated by Japan Industrial Partners, Inc. (“JIP”), pursuant to a master sale and purchase agreement (the “EMD Master Sale and Purchase Agreement”) previously entered into between TOKIN, NTJ and JIP (“Sale of EMD”). The initial selling price for EMD was JPY 48.2 billion, or approximately $431.0 million, using the March 31, 2017 exchange rate of 111.823 Japanese Yen to 1.00 U.S. Dollar, and was subject to certain working capital adjustments. In the third quarter of fiscal year 2018, the selling price was adjusted by JPY 1.1 billion or approximately $10.1 million (using the December 31, 2017 exchange rate of 112.574 Japanese Yen to 1.00 U.S. Dollar) related to working capital and other adjustments in accordance with the EMD Master Sale and Purchase Agreement. At the closing of the Sale of EMD, TOKIN used a portion of the sale proceeds to repay debt related to a shareholder loan from NEC. The TOKIN historical balance sheet was adjusted to reflect the removal of net assets sold and other items directly impacted by the Sale of EMD. Additionally, due to KEMET’s 34% equity interest in TOKIN held as of the closing, adjustments have been made to reflect KEMET’s accounting for the Sale of EMD in accordance with the equity method of accounting.
On April 19, 2017, pursuant to a stock purchase agreement (the “TOKIN Purchase Agreement”) dated February 23, 2017 between KEC and NEC, KEC completed its acquisition, subject to final purchase price adjustment, of the remaining 66% economic interest in TOKIN, and as a result, TOKIN is now a 100% owned indirect subsidiary of KEMET (the “TOKIN Acquisition”). Under the terms of the TOKIN Purchase Agreement, KEC paid NEC JPY 16.2 billion, or approximately $148.6 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), for all of the outstanding shares of TOKIN it did not already own. The preliminary purchase price was comprised of JPY 6.0 billion, or approximately $55.0 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar) plus JPY 10.2 billion, or approximately $93.6 million, which represented one-half of the estimated excess net cash proceeds (“Excess Cash”) from the Sale of EMD. The acquisition price was subject to working capital adjustments pursuant to the EMD Master Sale and Purchase Agreement. As a result of these working capital adjustments, the acquisition price was increased by JPY 0.3 billion, or approximately $3.0 million (using the September 30, 2017 exchange rate of 112.502 Japanese Yen to 1.00 U.S. Dollar) in the second quarter of fiscal year 2018. There will be no more working capital adjustments under the purchase agreement.
The acquisition of TOKIN has expanded KEMET’s geographic presence, combining KEMET’s presence in the western hemisphere and TOKIN’s excellent position in Asia to enhance customer reach and created an entrance into Japan for KEMET. The Company believes TOKIN’s product portfolio is a strong complement to KEMET’s existing product portfolio and believes the combination has created a leader in the combined polymer and tantalum capacitors market. The acquisition also enhanced KEMET’s product diversification with entry into EMC devices, as well as sensors and actuators. With the increased scale, the Company has achieved synergies by optimizing costs through competitive raw materials sourcing and maximizing operating efficiencies. Consistent with expectations, the acquisition has been accretive to earnings with improvement in Net income, Adjusted EBITDA and cash flow. TOKIN’s tantalum capacitor business is included within KEMET’s Solid Capacitor reportable segment (“Solid Capacitors”) and the remainder of TOKIN’s business formed a new reportable segment for KEMET, Electro-Magnetic, Sensors, and Actuators (“MSA”).
The following table shows the components of the acquisition price (amounts in thousands):
Upfront cash consideration (1)
$
148,614

Excess cash payment (2)
3,144

Indemnity asset (3)
8,500

Less: Put option (4)
(9,900
)
Net consideration transferred
$
150,358

_______________________________________________
(1) The upfront cash payment was comprised of JPY 6.0 billion plus one half of Excess Cash in an amount of approximately JPY 10.2 billion, approximately $55.0 million and $93.6 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), respectively.
(2) The additional amount paid to NEC Corporation upon the settlement of the adjusted purchase price for the EMD sale.
(3) Pursuant to the Stock Purchase Agreement between KEMET and NEC, NEC was required to indemnify TOKIN and/or KEC for any breaches by TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement. NEC’s aggregate liability for indemnification claims was limited to $25.0 million. Prior to the acquisition, KEMET's equity method investment balance included an $8.5 million indemnification asset pursuant to this indemnification arrangement. In connection with the TOKIN Acquisition, NEC was released from its indemnification obligations to KEMET without an exchange of consideration; as such, this amount of released obligation was included as purchase consideration by KEMET.
(4) Pursuant to the option agreement, dated as of March 12, 2012, by and among NEC and KEMET (the “Option Agreement”), from April 1, 2015 through May 31, 2018, NEC had the right to require KEC to purchase all outstanding capital stock of TOKIN (the “Put Option”). The fair value of the Put Option of $9.9 million was reflected as a liability on KEMET’s balance sheet prior to KEMET’s acquisition of the remaining 66% economic interest in TOKIN. The Put Option was canceled, pursuant to the terms of the TOKIN Purchase Agreement with no exchange of consideration between NEC and KEMET. Accordingly, the fair value of the Put Option reduced the amount of consideration paid to acquire NEC’s equity in TOKIN.
In accordance with ASC 805, KEMET’s previously held 34% equity interest in TOKIN and the assets acquired and the liabilities assumed were measured at their fair values based on various estimates. The acquisition-date fair value of KEMET’s previously held 34% equity interest in TOKIN was approximately $204.1 million, which was derived from 34% of the fair value of TOKIN as of April 19, 2017 determined under the discounted cash flow method, an income valuation approach.
The following table presents the allocations of the aggregate purchase price based on the estimated fair values of the assets and liabilities (amounts in thousands):
 
Fair Value
Cash
$
315,743

Accounts Receivable
79,295

Inventory
35,310

Other current assets
20,902

Property, Plant and equipment
154,744

Intangible assets (1)
32,996

Equity method investments
11,128

Other assets
6,512

Current portion of long-term debt
(3,225
)
Accounts payable
(81,642
)
Accrued expenses
(44,542
)
Other non-current obligations
(105,140
)
Deferred income taxes
(5,452
)
Total net assets acquired
$
416,629

________________________________________________
(1) Includes trade name for $8.0 million and products and relationships of $25.0 million. TOKIN’s technology, products, and relationships were valued as a grouped, composite intangible asset due to the Company’s products being dependent on the existing technology, which enabled a product portfolio that customers found appealing in selecting and designing electronic devices for purchase. The trade name was valued based on the relief from royalty method and has an indefinite remaining useful life. The products and relationships were valued on the excess earnings method and are amortized over 10 years.
There were $0.9 million of acquisition-related costs, which were all recognized as an expense in the line item “Selling, general and administrative expenses” on the Consolidated Statements of Operations for the fiscal year ended March 31, 2018. For the fiscal years ending March 31, 2019 and 2018, the Company's Consolidated Statements of Operations include net sales of $370.2 million and $358.2 million, respectively, and operating income of $34.8 million and $36.1 million, respectively, derived from TOKIN Corporation.    
The following table reflects the bargain purchase gain resulting from the TOKIN Acquisition (amounts in thousands):
Net consideration transferred
$
150,358

Fair value of KEMETs previously held equity interest in TOKIN (1)
204,112

Less: fair value of net assets acquired
(416,629
)
Bargain purchase gain
$
(62,159
)
______________________________________
(1) Value based in the 34% of the enterprise value determined under the discounted cash flow method.

In performing acquisition accounting procedures, we engaged an internationally recognized independent valuation firm to assist in the valuation of identifiable net assets acquired.  We also performed an extensive review for any unrecorded assets, liabilities, and contingencies. After identifying and valuing acquired assets and liabilities, we concluded recording a bargain purchase gain was appropriate and required under ASC 805-30-25-2. We believe the bargain purchase gain resulted from (1) NEC seeking repayment of its receivables due from TOKIN pursuant to TOKIN’s January 25, 2013 Loan Agreement with NEC of JPY 25.4 billion, or approximately $233.2 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), which the sale transaction achieved, and for which TOKIN did not have the resources to pay prior to the transaction; and, (2) a predetermined purchase price which, other than certain customary working capital adjustments, was  not subject to amendment irrespective of the amount of proceeds resulting from the sale of TOKIN’s EMD business, which was a precondition to our acquisition of TOKIN. The bargain purchase gain is recognized in the line item “Acquisition (gain) loss” in the Consolidated Statements of Operations.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and TOKIN as though the acquisition and the Sale of EMD had occurred as of April 1, 2016. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of April 1, 2016, or of future consolidated operating results (amounts in thousands, except per share data):
 
Fiscal Years Ended March 31,
 
2018 (1)
 
2017 (2)
Pro forma revenues (3)
$
1,217,655

 
$
1,060,777

Pro forma net income from continuing operations available to common stockholders (3)
51,975

 
226,086

Pro forma earnings per common share - basic (3)
0.98

 
4.86

Pro forma earnings per common share - diluted (3)
0.89

 
4.08

Pro forma common shares - basic
52,798

 
46,552

Pro forma common shares - diluted
58,640

 
55,389

___________________________________________
(1) The net income for the fiscal year ended March 31, 2018 excludes the following: 34% of the gain on sale of the EMD business of $75.2 million, the gain related to the fair value of KEMET’s previous 34% interest in TOKIN of $68.7 million, and the bargain gain on the acquisition of TOKIN of $62.2 million.
(2) The net income for the fiscal year ended March 31, 2017 includes the following: 34% of the gain on sale of the EMD business of $123.4 million (which includes the release of a valuation allowance that was recorded in the fourth quarter of fiscal year 2017 and the use of the deferred tax asset which was recorded in the first quarter of fiscal year 2018), the gain related to the fair value of KEMET’s previous 34% interest in TOKIN of $66.7 million, and the bargain gain on the acquisition of TOKIN of $60.3 million.
(3) Fiscal years ended March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.