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, 2017 
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, 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
o
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer 
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
o
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. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  ý NO
 
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of January 30, 2018 was 56,605,329.
 


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KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 2017
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 3.1
 
Exhibit 3.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
 



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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, 2017
 
March 31, 2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
284,166

 
$
109,774

Accounts receivable, net
140,239

 
92,526

Inventories, net
201,091

 
147,955

Prepaid expenses and other (1)
38,551

 
28,782

Total current assets
664,047

 
379,037

Property, plant and equipment, net of accumulated depreciation of $853,623 and $821,276 as of December 31, 2017 and March 31, 2017, respectively
374,719

 
209,311

Goodwill
40,294

 
40,294

Intangible assets, net
61,068

 
29,781

Equity method investments
8,750

 
63,416

Deferred income taxes (1)
11,922

 
8,367

Other assets
10,987

 
4,119

Total assets
$
1,171,787

 
$
734,325

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
20,359

 
$
2,000

Accounts payable
133,314

 
69,674

Accrued expenses
108,360

 
57,752

Income taxes payable
4,541

 
715

Total current liabilities
266,574

 
130,141

Long-term debt, less current portion
307,803

 
386,211

Other non-current obligations
152,718

 
60,131

Deferred income taxes
6,694

 
3,370

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 56,595 and 46,689 shares at December 31, 2017 and March 31, 2017, respectively
566

 
467

Additional paid-in capital
460,087

 
447,671

Retained earnings (deficit) (1)
242

 
(251,854
)
Accumulated other comprehensive income
(22,897
)
 
(41,812
)
Total stockholders’ equity
437,998

 
154,472

Total liabilities and stockholders’ equity
$
1,171,787

 
$
734,325

_________________
(1) March 31, 2017 adjusted due to the adoption of Accounting Standards Update ("ASU") No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory

 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,
 
2017
 
2016
 
2017
 
2016
Net sales
$
306,408

 
$
188,029

 
$
881,879

 
$
560,272

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales (1)
213,947

 
140,551

 
629,905

 
423,526

Selling, general and administrative expenses (1)
47,751

 
26,520

 
125,799

 
78,119

Research and development (1)
10,005

 
7,013

 
29,057

 
20,956

Restructuring charges (credits)
3,530

 
(369
)
 
6,536

 
4,317

(Gain) loss on write down and disposal of long-lived assets
(902
)
 
132

 
(922
)
 
6,500

Total operating costs and expenses
274,331

 
173,847

 
790,375

 
533,418

Operating income (loss)
32,077

 
14,182

 
91,504

 
26,854

Non-operating (income) expense:
 

 
 

 
 

 
 

Interest income
(252
)
 
(5
)
 
(413
)
 
(14
)
Interest expense
7,407

 
9,918

 
25,732

 
29,751

Acquisition gains
(310
)
 

 
(137,183
)
 

Change in value of TOKIN option

 
(6,900
)
 

 
3,500

Other (income) expense, net (1)
4,769

 
(3,052
)
 
21,061

 
(5,627
)
Income (loss) before income taxes and equity income (loss)
20,463

 
14,221

 
182,307

 
(756
)
Income tax expense (benefit)
2,060

 
1,810

 
6,090

 
4,440

Income (loss) before equity income (loss)
18,403

 
12,411

 
176,217

 
(5,196
)
Equity income (loss) from equity method investments
238

 
(133
)
 
75,879

 
271

Net income (loss)
$
18,641

 
$
12,278

 
$
252,096

 
$
(4,925
)
 
 
 
 
 
 
 
 
Net income (loss) per basic share
$
0.33

 
$
0.26

 
$
4.91

 
$
(0.11
)
 
 
 
 
 
 
 
 
Net income (loss) per diluted share
$
0.32

 
$
0.22

 
$
4.31

 
$
(0.11
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
56,778

 
46,606

 
51,340

 
46,469

Diluted
58,937

 
55,296

 
58,431

 
46,469

_________________
(1) Quarter and nine-month period ended December 31, 2016 adjusted due to the adoption of ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

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,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
18,641

 
$
12,278

 
$
252,096

 
$
(4,925
)
Other comprehensive income (loss):
 


 
 
 

 
 
Foreign currency translation gains (losses)
6,503

 
(10,773
)
 
20,301

 
(17,848
)
Defined benefit pension plans, net of tax impact
147

 
165

 
(6
)
 
492

Post-retirement plan adjustments
(47
)
 
116

 
(141
)
 
31

Equity interest in TOKIN’s other comprehensive income (loss)
(5
)
 
6,161

 
5,568

 
598

Foreign exchange contracts
(5,330
)
 
(1,166
)
 
(6,807
)
 
(2,872
)
Other comprehensive income (loss)
1,268

 
(5,497
)
 
18,915

 
(19,599
)
Total comprehensive income (loss)
$
19,909

 
$
6,781

 
$
271,011

 
$
(24,524
)
 
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,
 
2017
 
2016
Net income (loss)
$
252,096

 
$
(4,925
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
36,694

 
27,971

Equity (income) loss from equity-method investments
(75,879
)
 
(271
)
Acquisition gains
(137,183
)
 

Non-cash debt and financing costs
1,820

 
561

(Gain) loss on early extinguishment of debt
486

 

Stock-based compensation expense
4,837

 
3,471

Receivable write down
162

 
64

Change in value of TOKIN option

 
3,500

(Gain) loss on write down and disposal of long-lived assets
(922
)
 
6,500

Pension and other post-retirement benefits
3,897

 
2,096

Change in deferred income taxes
(3,792
)
 
819

Change in operating assets
26,296

 
21,459

Change in operating liabilities
(26,316
)
 
(18,918
)
Other
499

 
(183
)
Net cash provided by (used in) operating activities
82,695

 
42,144

Investing activities:
 

 
 

Capital expenditures
(30,925
)
 
(15,011
)
Acquisitions, net of cash received
167,129

 

Proceeds from sale of assets
1,227

 

Proceeds from dividend
2,731

 

Net cash provided by (used in) investing activities
140,162

 
(15,011
)
Financing activities:
 

 
 

Payments on revolving line of credit
(33,881
)
 

Payments on long-term obligations
(361,625
)
 
(2,428
)
Proceeds from issuance of debt
334,978

 

Debt issuance costs
(5,002
)
 

Purchase of treasury stock

 
(1,052
)
Proceeds from exercise of stock warrants
8,838

 

Proceeds from exercise of stock options
5,122

 
69

Net cash provided by (used in) financing activities
(51,570
)
 
(3,411
)
Net increase (decrease) in cash and cash equivalents
171,287

 
23,722

Effect of foreign currency fluctuations on cash
3,105

 
(1,370
)
Cash and cash equivalents at beginning of fiscal period
109,774

 
65,004

Cash and cash equivalents at end of fiscal period
$
284,166

 
$
87,356

 
See accompanying notes to the unaudited condensed consolidated financial statements.


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Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1. Basis of Financial Statement Presentation
The condensed consolidated financial statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2017 (the “Company’s 2017 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, 2017 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 2017 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
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The update amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of Operating income. The Company states the other components of net benefit cost within Other (income) expense, net, on its Condensed Consolidated Statements of Operations. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented. The Company adopted this guidance in the first quarter of fiscal year 2018; the adoption of this guidance had an immaterial impact on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other. The update eliminates the requirement to calculate the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. Under the update, the goodwill impairment loss would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective

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date of this update is for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements, however the adoption of this guidance is not expected to have a significant effect on the Company’s consolidated financial position, results of operations, or cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. The update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory.  The tax consequences were previously deferred. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires modified retrospective transition method which is a cumulative effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company adopted this guidance as of April 1, 2017 and recorded a cumulative effect adjustment to retained earnings of $203,000.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The update clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early application is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will have on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance requires either a retrospective or a modified retrospective approach at adoption. Additional updates to Topic 606 issued by the FASB include the following:
ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new guidance such that the new provisions will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017 (ASU No. 2015-14 is effective for the Company’s fiscal year that begins on April 1, 2018 and interim periods within that fiscal year).
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations (reporting revenue gross versus net).
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements.
ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the implementation guidance in a number of other areas.
ASU No. 2016-20, Technical Corrections and Improvements to (Topic 606): Revenue from Contracts with Customers.
ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Provides additional implementation guidance on the previously issued ASU 2014-09.
ASU No. 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). ASU 2017-14 includes amendments to certain SEC paragraphs within the FASB Accounting Standards Codification.
The effective date of this guidance is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted, but not before the Company’s fiscal year that began on April 1, 2017 (the original effective date of the ASU). The Company plans to adopt the requirements of the new standard in the first quarter of fiscal year 2019.

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The Company has completed the assessment phase, applied the principles of the new standard using the five step method to material customer contracts, and held discussions with key stakeholders and management. The Company is currently finalizing changes to accounting policies and internal controls over financial reporting. Key changes in the ASU that could potentially impact the Companys revenue recognition include certain customer tooling contracts primarily within the original equipment manufacturers (“OEM”) channel and the deferral of incremental costs to fulfill a contract. The Company is currently finalizing the impact of the ASU on the consolidated results of operations, financial position, cash flows and financial statement disclosures.
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.
Fair Value Measurement
The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The first two inputs are considered observable and the last is considered unobservable. The levels of inputs are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and March 31, 2017 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
 
2017
 
2017
 
Level 1
 
Level 2 (2)
 
Level 3
 
2017
 
2017
 
Level 1
 
Level 2 (2)
 
Level 3
Assets (Liabilities):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)
$
81,903

 
$
81,903

 
$
81,903

 
$

 
$

 
$
2,055

 
$
2,055

 
$
2,055

 
$

 
$

Total debt
(328,162
)
 
(344,661
)
 
(338,898
)
 
(5,763
)
 

 
(388,211
)
 
(385,251
)
 
(353,000
)
 
(32,251
)
 

TOKIN option,
 net (3)

 

 

 

 

 
(9,900
)
 
(9,900
)
 

 

 
(9,900
)
___________________
(1) Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2) The valuation approach used to calculate fair value was a discounted cash flow based on the borrowing rate for each respective debt facility.
(3) See Note 8, “Investment in TOKIN”, for a description of the TOKIN option, which was canceled on April 19, 2017 pursuant to the terms of the TOKIN Purchase Agreement as defined herein.  The value of the option depended on the enterprise value of TOKIN and its forecasted EBITDA over the duration of the option. The option was valued using option pricing methods in a Monte Carlo simulation.
The table below summarizes TOKIN option valuation activity using significant unobservable inputs (Level 3) (amounts in thousands):
March 31, 2017
$
(9,900
)
Option cancellation
9,900

December 31, 2017
$

 
As discussed in Note 8, “Investment in TOKIN”, on April 19 2017 the TOKIN option was canceled pursuant to the terms of the TOKIN Purchase Agreement as defined herein.

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Inventories
Inventories are stated at the lower of cost or market.  The components of inventories are as follows (amounts in thousands):
 
December 31, 2017
 
March 31, 2017
Raw materials and supplies
$
87,525

 
$
65,750

Work in process
64,752

 
47,408

Finished goods
65,376

 
50,738

Subtotal
217,653

 
163,896

Inventory reserves
(16,562
)
 
(15,941
)
Inventories, net
$
201,091

 
$
147,955

 
Warrant
On September 11, 2017, K Equity sold the remaining portion of the Platinum Warrant to UBS Securities LLC (the “Underwriter”), in connection with the offering of 8,416,814 shares of the Company’s common stock, at an offering price of $21.57 per share. The Company filed a registration statement on Form S-3 to register the offer and resale by K Equity of the shares. The Company did not receive any of the proceeds from the sale of the shares in the Offering, but received approximately $8.8 million from the Underwriter in connection with the cash exercise of the Platinum Warrant for all 8,416,814 shares underlying the Platinum Warrant at an exercise price of $1.05 per share.
As of December 31, 2017, K Equity does not have any outstanding warrants for shares of the Company’s common stock.
Revenue Recognition
The Company ships products to customers based upon firm orders and revenue is recognized when the sales process is complete. This occurs when products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred and collectability is reasonably assured. Based on product availability, customer requirements and customer consent, the Company may ship products earlier than the initial planned ship date. Shipping and handling costs are included in cost of sales.
A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. The Company recognizes revenue when title to the products transfers to the customer.
A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors. The Company’s distributor policy includes inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.
KEMET’s SFSD program provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
Most of the Company’s distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed 6% of their purchases from the previous fiscal quarter. KEMET estimates future returns based on historical return patterns and records a corresponding allowance on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company’s sales channels.
The establishment of sales allowances is recognized as a component of the line item “Net sales” on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable, net” on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company’s estimates.

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The Company provides a limited warranty to customers that the Company’s products meet certain specifications. The warranty period is generally limited to one year, and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1.0% for the quarters and nine-month periods ended December 31, 2017 and 2016. The Company recognizes warranty costs when they are both probable and reasonably estimable.

Note 2. 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 is subject to certain working capital adjustments pursuant to 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 is 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. No additional working capital adjustments were recorded in the third quarter of fiscal year 2018.
The Company believes the acquisition of TOKIN will expand KEMET’s geographic presence, combining KEMET’s presence in the western hemisphere and TOKIN’s excellent position in Asia to enhance customer reach and create an entrance into Japan for KEMET. The Company believes TOKIN’s product portfolio is a strong complement to KEMET’s existing product portfolio. KEMET believes the combination creates a leader in the combined polymer and tantalum capacitors market. The acquisition also enhances KEMET’s product diversification with entry into Electro-Magnetic Compatible components ("EMC") as well as sensors and actuators. With the increased scale, the Company anticipates 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 segment (“Solid Capacitors”) and the remainder of TOKIN’s business formed a new reportable segment for KEMET, Electro-magnetic, Sensors & Actuators (“MSA”).

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The following table shows the preliminary components of the acquisition price: (amounts in thousands):
Upfront cash consideration (1)
$
148,614

Acquisition payable (2)
3,144

Indemnity asset (3)
8,500

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

_________________     
(1) The upfront cash payment is 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) Current estimate of the additional amount due 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 is 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 reduces 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 have been measured at their fair values based on various preliminary estimates. The preliminary acquisition-date fair value of KEMET’s previously held 34% equity interest in TOKIN is approximately $206.0 million, which was derived from 34% of the fair value of TOKIN as of April 19, 2017 derived from the discounted cash flow method.
The following table presents the preliminary allocations of the aggregate purchase price based on the estimated fair values of the assets and liabilities (amounts in thousands):
 
Fair Value
Cash
$
315,743

Accounts Receivable
79,295

Inventory
35,310

Other current assets
20,902

Property, Plant and equipment (1)
154,961

Intangible assets (1)(2)
33,025

Equity method investments (1)
11,128

Other assets
8,617

Current portion of long term debt
(3,225
)
Accounts payable
(81,642
)
Accrued expenses
(46,276
)
Other non-current obligations
(103,486
)
Deferred income taxes (1)
(1,419
)
Total net assets acquired
$
422,933

_________________
(1) Amount revised in the third quarter of fiscal year 2018; however, the values are still preliminary.
(2) 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 components for purchase. The trade name was valued based on the relief from royalty method and have indefinite remaining useful life. The products and relationships were valued on the excess earnings method and are amortized over 10 years.

There were $0.8 million of acquisition-related costs, which were all recognized as an expense in the line item “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Operations in the nine-month period ended December 31, 2017.

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The above allocation of purchase price has been prepared based on preliminary estimates; the final amounts recorded may differ materially from the information presented herein. These estimates are subject to change pending further review of the acquired business. The following components of the initial valuation are still preliminary: deferred income taxes, equity method investments, products and relationships, property plant and equipment for some locations, and management continues to assess the bargain gain in accordance with ASC 805. In the quarter ended December 31, 2017, property, plant and equipment was reduced by $4.6 million, equity method investments decreased by $1.7 million, intangible assets decreased by $0.3 million and the value of the deferred income tax liability was decreased $6.9 million due to additional adjustments made to record property, plant and equipment and equity method investments at fair value. A change in the fair value of assets acquired or liabilities assumed in the merger from those preliminary valuations presented above would result in a corresponding change in the amount of bargain purchase gain that resulted from the merger in a business combination when the fair value of net assets acquired exceeds the sum of consideration transferred and the fair value of the acquirer’s previously held interest in the acquiree. The gain is recognized immediately in earnings in accordance with U.S. GAAP.
The following table reflects the preliminary bargain purchase gain resulting from the TOKIN Acquisition (amounts in thousands):
Net consideration transferred
$
150,358

Preliminary fair value of KEMETs previously held equity interest in TOKIN (1)
205,952

Less: Preliminary fair value of net assets acquired
(422,933
)
Bargain purchase gain
$
(66,623
)
_________________     
(1) Value based in the 34% of the enterprise value determined under the discounted cash flow method.

The gain is included in the line item “Acquisition gains” in the Condensed 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):
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017 (1)
 
2016 (2)
Pro forma revenues
$
306,408

 
$
263,260

 
$
899,353

 
$
785,388

Pro forma net income (loss) from continuing operations available to common stockholders
19,009

 
(4,484
)
 
44,741

 
243,746

Pro forma earnings per common share - basic
0.33

 
(0.10
)
 
0.87

 
5.25

Pro forma earnings per common share - diluted
0.32

 
(0.10
)
 
0.77

 
4.51

Pro forma common shares - basic
56,778

 
46,606

 
51,340

 
46,469

Pro forma common shares - diluted
58,937

 
46,606

 
58,431

 
53,990

_________________
(1) The net income for the nine-month period ended December 31, 2017 excludes the following: 34% of the preliminary gain on sale of the EMD business of $75.2 million, the preliminary gain related to the fair value of KEMET’s previous 34% interest in TOKIN of $70.6 million, and the preliminary bargain gain on the acquisition of TOKIN of $66.6 million.
(2) The net income for the nine-month period ended December 31, 2016 includes the following: 34% of the preliminary 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 preliminary gain related to the fair value of KEMET’s previous 34% interest in TOKIN of $68.5 million, and the preliminary bargain gain on the acquisition of TOKIN of $64.6 million.

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Note 3. Debt
A summary of debt is as follows (amounts in thousands):
 
December 31,
2017
 
March 31,
2017
Term Loan Credit Agreement (1)
$
322,540

 
$

10.5% Senior Notes, net (2)

 
352,472

Revolving line of credit

 
33,881

Other (3)
5,622

 
1,858

Total debt
328,162

 
388,211

Current maturities
(20,359
)
 
(2,000
)
Total long-term debt
$
307,803

 
$
386,211

_________________
(1) Amounts shown are net of discount, bank issuance costs and other indirect issuance costs of $13.8 million and zero as of December 31, 2017 and March 31, 2017, respectively which reduce the Term Loan Credit Agreement (as defined herein) balance.
(2) Amounts shown are net of premium and debt issuance costs of zero and $0.5 million as of December 31, 2017 and March 31, 2017, respectively, which reduce the 10.5% Senior Notes balance.
(3) The amount shown is net of discount of $0.5 million at both December 31, 2017 and March 31, 2017.
The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the quarters and nine-month periods ended December 31, 2017 and 2016, consists of the following (amounts in thousands):
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
Contractual interest expense
$
6,680

 
$
9,693

 
$
23,762

 
$
29,091

Capitalized interest
(41
)
 
(48
)

(80
)

(151
)
Amortization of debt issuance costs
98

 
348

 
410

 
1,044

Amortization of debt (premium) discount
570

 
(204
)
 
1,326

 
(603
)
Imputed interest on acquisition-related obligations
28

 
39

 
84

 
120

Interest expense on capital lease
72

 
90

 
230

 
250

Total interest expense
$
7,407

 
$
9,918

 
$
25,732

 
$
29,751

10.5% Senior Notes
On April 28, 2017, the Company repurchased and retired the full outstanding balance of $353.0 million of its 10.5% Senior Notes due May 1, 2018 (the “10.5% Senior Notes”). The Company had interest payable related to the 10.5% Senior Notes included in the line item “Accrued expenses” on its Condensed Consolidated balance sheets of zero and $15.4 million as of December 31, 2017 and March 31, 2017, respectively.
Term Loan Credit Agreement
On April 28, 2017, KEMET entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among the Company, KEC (together with the Company, the “Borrowers”), Bank of America, N.A. as the Administrative Agent and Collateral Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and bookrunner and various other lenders thereto from time to time.
The Term Loan Credit Agreement provides for a $345 million term loan facility. In addition, the Borrowers may request incremental term loan commitments in an aggregate amount not to exceed $50 million (together with the initial $345 million term loan, the “Term Loans”). The proceeds were used, together with cash on hand, to fund the redemption of all of KEMET’s outstanding 10.5% Senior Notes, which were also called for redemption on April 28, 2017. The Term Loans were made with an original issue discount of 300 basis points. At the Company’s election, the Term Loans may be made as either Base Rate Term Loans or LIBO Rate Term Loans (each as defined in the Term Loan Credit Agreement). The applicable margin for term loans is 5.0% for Base Rate Term Loans and 6.0% for LIBO Rate Term Loans. All LIBO Rate Term Loans are subject to a pre-margin floor of 1.00%. The Term Loan Credit Agreement contains customary covenants and events of default.

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The Company also entered into the Term Loan Security Agreement dated as of April 28, 2017 (the “Security Agreement”), by and among the Company, KEC and certain other subsidiaries of the Company and Bank of America, N.A., as collateral agent, pursuant to which the Company’s obligations under the Term Loan Credit Agreement are secured by a pledge of 65% of the outstanding voting stock of certain first-tier subsidiaries organized in Italy, Japan, Mexico and Singapore, and a second lien pledge on the collateral securing KEMET’s revolving credit facility. The obligations of the Company under the Term Loan Credit Agreement are guaranteed by certain of its subsidiaries, including KRC Trade Corporation, KEMET Services Corporation, KEMET Blue Powder Corporation and The Forest Electric Company. The Term Loans mature April 28, 2024, and may be extended in accordance with the Term Loan Credit Agreement. The Company may prepay loans under the Term Loan Credit Agreement at any time, subject to certain notice requirements and certain prepayment premiums during the first two years. Pursuant to the terms of the Term Loan Credit Agreement, the Company is required to make quarterly principal payments equal to 1.25% of the aggregate principal amount on the initial $345 million term loan. The Company made a quarterly principal payment of 1.25% or $4.3 million, during the month of December 2017.
The Company currently pays interest on the Term Loan Security Agreement on a monthly basis due to favorable LIBO rates, and as such had only three days interest payable related to the Term Loan Security Agreement included in the line item “Accrued expenses” on its Condensed Consolidated balance sheets of $0.2 million and zero as of December 31, 2017 and March 31, 2017.
Revolving Line of Credit
In connection with the closing of the new Term Loan Credit Agreement, KEC also entered into Amendment No. 9 to Loan and Security Agreement, Waiver and Consent, dated as of April 28, 2017, by and among KEC, the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., as agent for the lenders (the “Loan Amendment”). The Loan Amendment increases the facility amount to $75.0 million and provides KEC with lower applicable interest rate margins and the ability to complete the refinancing. As part of the overall refinancing, KEC also repaid all amounts outstanding under the Loan Amendment.
As of December 31, 2017, there were no borrowings under the revolving line of credit, and the Company’s available borrowing capacity, which is based on factors including outstanding eligible accounts receivable, inventory and equipment collateral, under the Loan and Security Agreement was $65.1 million.
Other Debt
In January 2017, KEMETs wholly-owned subsidiary, KEMET Electronics Portugal, S.A., received the first part of an interest free loan from the Portuguese Government in the amount of EUR 2.2 million (or $2.5 million) to be used for fixed asset purchases. In July 2017, KEMET Electronics Portugal, S.A. received the second part of the loan in the amount of EUR 277 thousand (or $325 thousand). The loan has a total term of eight years ending February 1, 2025. The loan will be repaid through semi-annual payments beginning on August 1, 2019. The first payment will be in the amount of EUR 185 thousand (or $211 thousand) beginning on August 1, 2019 and the remaining payments will be in the amount of EUR 210 thousand (or $248 thousand). Since the debt is non-interest bearing, we have recorded a debt discount in the amount of EUR 0.5 million (or $0.6 million) with an offsetting reduction to fixed assets. This discount will be amortized over the life of the loan through interest expense. If certain conditions are met, such as increased headcount, increased revenue and increased gross value added, a portion of the loan could be forgiven during fiscal year 2020.
In September 2017, TOKIN received a short term borrowing pursuant to an overdraft agreement with The 77 Bank Limited, located in Japan, in the amount of 350 million yen (or $3.1 million), at an interest rate of 0.53% (JBA TIBOR + 40 basis points). The loan is due September 2018, and the loan agreement automatically renews if both parties choose not to terminate or modify it.

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Note 4. Goodwill and Intangible Assets
The following table highlights the Company’s intangible assets (amounts in thousands):
 
 
December 31, 2017
 
March 31, 2017
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
 
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
Indefinite Lived Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
$
15,024

 
$

 
$
15,024

 
$
7,207

 
$

 
$
7,207

Amortizing Intangibles:
 
 
 
 
 

 
 
 
 
 
 
Purchased technology, customer relationships and patents (2 - 21 years)
 
69,058

 
23,014

 
46,044

 
39,527

 
16,953

 
22,574

 
 
$
84,082

 
$
23,014

 
$
61,068

 
$
46,734

 
$
16,953

 
$
29,781

For the quarters ended December 31, 2017 and 2016, amortization related to intangibles was $1.1 million and $0.5 million, respectively. For the nine-month periods ended December 31, 2017 and 2016, amortization related to intangibles was $3.4 million and $1.6 million, respectively. The weighted-average useful life of amortized intangibles was 14.1 years and 16.7 years as of December 31, 2017 and 2016, respectively. The KEMET Blue Powder patent was renewed in October 2017, and the next renewal will take place in October 2021. Estimated amortization of intangible assets for each of the next five fiscal years is $4.6 million.
The changes in the carrying amount of goodwill for the nine-month period ended December 31, 2017 are as follows (amounts in thousands):
 
 
Corporate
 
Solid Capacitors
 
Film and Electrolytic
 
Total
Gross balance as of March 31, 2017
 
 
 
 
 
 
 
 
Goodwill
 
$
4,710

 
$
35,584

 
$
1,092

 
$
41,386

Accumulated impairment losses
 

 

 
(1,092
)
 
(1,092
)
Net balance as of March 31, 2017
 
$
4,710

 
$
35,584


$

 
$
40,294

 
 
 
 
 
 
 
 


Gross balance as of December 31, 2017
 
 
 
 
 
 
 


Goodwill
 
$
4,710

 
$
35,584

 
$
1,092

 
$
41,386

Accumulated impairment losses
 

 

 
(1,092
)
 
(1,092
)
Net balance as of December 31, 2017
 
$
4,710

 
$
35,584


$

 
$
40,294

The Company’s goodwill balance was $40.3 million at December 31, 2017 and March 31, 2017. There was no goodwill related to the MSA segment.

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Table of Contents

Note 5. (Gain) Loss on Write Down and Disposal of Long-Lived Assets
In the nine-month period ended December 31, 2017, KEMET recorded a net gain on disposal of long-lived assets of $0.9 million primarily related to the sale of equipment from KEMET Foil Manufacturing, LLC (“KFM”) which was shut down in fiscal year 2017. The gain is recorded on the Condensed Consolidated Statements of Operations line item “(Gain) loss on write down and disposal of long-lived assets”.
In the nine-month period ended December 31, 2016 KEMET recorded charges of $6.5 million which was comprised of $0.3 million of disposals of long-lived assets and $6.2 million of write downs due to the following two actions:
On August 31, 2016, KEC made the decision to shut-down operations of its wholly-owned subsidiary, KFM. Operations at KFM’s Knoxville, Tennessee plant ceased as of October 31, 2016. KFM supplied formed foil to the Company’s Film and Electrolytic segment (“Film and Electrolytic”), as well as to certain third party customers. The Company anticipated that Film and Electrolytic would achieve raw material cost savings by purchasing its formed foil from suppliers that have the advantage of lower utility costs. During the second fiscal quarter ending September 30, 2016, Film and Electrolytic recorded impairment charges totaling $4.1 million comprised of $3.0 million for the write down of property plant and equipment and $1.1 million for the write down of intangible assets. The impairment charges are recorded on the Condensed Consolidated Statements of Operations line item “(Gain) loss on write down and disposal of long-lived assets”.
Solid Capacitors initiated a plan to relocate its K-Salt operations from a leased facility to its existing Matamoros, Mexico facility. Impairment charges of approximately $2.1 million are recorded on the Condensed Consolidated Statements of Operations line item “(Gain) loss on write down and disposal of long-lived assets”.

Note 6. Restructuring Charges
KEMET’s restructuring plans are focused on making the Company more competitive by reducing excess capacity, relocating production to lower cost locations and eliminating unnecessary costs throughout the Company. Restructuring plans which include personnel reduction costs initiated during the nine-month period ended December 31, 2017 are summarized below:
KEMET will take a reduction in force across various overhead functions in its Simpsonville, South Carolina office as these functions are relocated to the new corporate headquarters in Fort Lauderdale, Florida. The reduction is expected to be substantially complete by March 31, 2018. Within the TOKIN legacy group, KEMET will take a reduction in force across various internal operational and overhead functions.
The Solid Capacitors segment will modify its vertical integration strategy by relocating its tantalum powder facility equipment from Carson City, Nevada to its existing Matamoros, Mexico plant. Severance charges and equipment relocation costs are expected to be recognized over the next seven quarters.
The Film and Electrolytic segment anticipates a voluntary reduction in force in its Italian operations.

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Table of Contents

These restructuring plans are summarized in the table below (amounts in thousands):
 
 
Total expected to be incurred
 
Incurred during quarter ended December 31, 2017
 
Cumulative incurred to date
Restructuring Plan (1)
Segment
Personnel Reduction Costs
Relocation & Exit Costs
 
Personnel Reduction Costs
Relocation & Exit Costs
 
Personnel Reduction Costs
Relocation & Exit Costs
US overhead function relocation to Fort Lauderdale, FL
Corporate
$
3,127

$
909

 
$
957

$

 
$
2,134

$
909

TOKIN operational & overhead function reduction in force
MSA, Corporate, & Solid Capacitors
5,328


 
143


 
143


Tantalum powder facility relocation
Solid Capacitors
897

2,098

 


 


Italian operations reduction in force
Film and Electrolytic
5,000


 
2,202


 
2,202


(1) Restructuring charges included are not all-inclusive of the expenses aggregated in the Condensed Consolidated Statement of Operations line item "Restructuring charges."
A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the quarters and nine-month periods ended December 31, 2017 and 2016, is as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
Personnel reduction costs
$
3,278

 
$
(215
)
 
$
4,389

 
$
1,864

Relocation and exit costs
252

 
(154
)
 
2,147

 
2,453

Restructuring charges
$
3,530

 
$
(369
)
 
$
6,536

 
$
4,317

Quarter Ended December 31, 2017
The Company incurred $3.5 million in restructuring charges in the quarter ended December 31, 2017 comprised of $3.3 million in personnel reduction costs and $0.3 million in manufacturing relocation and exit costs.
The personnel reduction costs of $3.3 million are due to $2.2 million related to a voluntary reduction in force in the Film & Electrolytic segment's Italian operations; $1.0 million in U.S. headcount reductions related to the relocation of global marketing, finance and accounting, and information technology functions to the Company’s Fort Lauderdale, Florida office from Simpsonville, South Carolina; and $0.1 million in headcount reductions within the TOKIN legacy group related to a European sales reorganization.
The manufacturing relocation and exit costs of $0.3 million primarily consist of $0.1 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant and $0.1 million in exit costs related to the shut-down of operations for KFM in Knoxville, Tennessee.
Nine-Month Period Ended December 31, 2017
The Company incurred $6.5 million in restructuring charges in the nine-month period ended December 31, 2017 comprised of $4.4 million in personnel reduction costs and $2.1 million in manufacturing relocation and exit costs.
The personnel reduction costs of $4.4 million are due to $2.2 million related to a voluntary reduction in force in the Film & Electrolytic segment's Italian operations; $2.1 million in U.S. headcount reductions related to the relocation of global marketing, finance and accounting, and information technology functions to the Company’s Fort Lauderdale, Florida office from Simpsonville, South Carolina; and $0.1 million in headcount reductions within the TOKIN legacy group related to a European sales reorganization.
The manufacturing relocation and exit costs of $2.1 million primarily consist of $0.9 million in lease termination penalties related to the relocation of global marketing, finance and accounting, and information technology functions to the Company’s Fort Lauderdale, Florida office, $0.8 million in expenses related to the relocation of the K-Salt operations to the

18

Table of Contents

existing Matamoros, Mexico plant, $0.4 million in exit costs related to the shut-down of operations for KFM, and $0.1 million related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico.
Quarter Ended December 31, 2016
The Company recorded a credit of $0.4 million in restructuring charges in the quarter ended December 31, 2016 comprised of a $0.2 million credit to personnel reduction costs and a $0.2 million credit to manufacturing relocation and exit costs.
The credit to personnel reduction costs of $0.2 million is due to natural attrition in Matamoros, Mexico resulting in a reduction in severance accrual.
The credit to manufacturing relocation costs of $0.2 million primarily consists of a $0.3 million reduction in accrual related to contract termination costs for the shut-down of operations for KFM, partially offset by the following charges: $0.1 million related to transfers of Film and Electrolytic production lines and R&D functions to lower cost regions and $0.1 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant.
Nine-Month Period Ended December 31, 2016
The Company incurred $4.3 million in restructuring charges in the nine-month period ended December 31, 2016 comprised of $1.9 million in personnel reduction costs and $2.5 million in manufacturing relocation and exit costs.
The personnel reduction costs of $1.9 million consist of $0.4 million in headcount reductions related to the shut-down of operations for KFM in Knoxville, Tennessee, $0.3 million related to the consolidation of certain Solid Capacitor manufacturing in Matamoros, Mexico, $0.3 million for overhead reductions in Sweden, $0.3 million in U.S. headcount reductions related to the relocation of global marketing functions to the Company’s Fort Lauderdale, Florida office, $0.3 million related to headcount reductions in Europe (primarily Italy and Landsberg, Germany) corresponding with the relocation of certain production lines and laboratories to lower cost regions, $0.2 million related to overhead reductions as we relocated the R&D operations from Weymouth, England to Evora, Portugal, and $0.1 million in manufacturing headcount reductions related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant.
The manufacturing relocation costs of $2.5 million primarily consist of $1.9 million in expenses related to contract termination costs related to the shut-down of operations for KFM, $0.4 million related to transfers of Film and Electrolytic production lines and R&D functions to lower cost regions, $0.1 million related to the transfer of certain Tantalum production from Simpsonville, South Carolina to Victoria, Mexico and $0.1 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant.
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, 2017 and 2016 is as follows (amounts in thousands):
 
Quarter Ended December 31, 2017
 
Quarter Ended December 31, 2016
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
1,494

 
$
312

 
$
2,101

 
$
1,982

Costs charged to expense
3,278

 
252

 
(215
)
 
(154
)
Costs paid or settled
(444
)
 
(252
)
 
(579
)
 
(832
)
Change in foreign exchange
49

 
(1
)
 
(46
)
 

End of period
$
4,377

 
$
311

 
$
1,261

 
$
996


19

Table of Contents

 
Nine-Month Period Ended December 31, 2017
 
Nine-Month Period Ended December 31, 2016
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
999

 
$
406

 
$
976

 
$

TOKIN opening balance

 
314

 

 

Costs charged to expense
4,389

 
2,147

 
1,864

 
2,453

Costs paid or settled
(1,080
)
 
(2,553
)
 
(1,510
)
 
(1,457
)
Change in foreign exchange
69

 
(3
)
 
(69
)
 

End of period
$
4,377

 
$
311

 
$
1,261

 
$
996



Note 7. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) for the quarters and nine-month periods ended December 31, 2017 and 2016 include the following components (amounts in thousands):
 
Foreign 
Currency
Translation (1)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at September 30, 2017 (3)
$
(11,758
)
 
$
1,040

 
$
(15,151
)
 
$
274

 
$
1,430

 
$
(24,165
)
Other comprehensive income (loss) before reclassifications
6,503

 

 

 
(5
)
 
(7,130
)
 
(632
)
Amounts reclassified out of AOCI


 
(47
)
 
147

 

 
1,800

 
1,900

Other comprehensive income (loss)
6,503

 
(47
)
 
147

 
(5
)
 
(5,330
)
 
1,268

Balance at December 31, 2017
$
(5,255
)
 
$
993

 
$
(15,004
)
 
$
269

 
$
(3,900
)
 
$
(22,897
)
 
Foreign Currency
Translation (1)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at September 30, 2016
$
(17,347
)
 
$
1,029

 
$
(14,834
)
 
$
(12,302
)
 
$
(2,073
)
 
$
(45,527
)
Other comprehensive income (loss) before reclassifications
(10,773
)
 

 

 
6,161

 
(2,146
)
 
(6,758
)
Amounts reclassified out of AOCI

 
116

 
165

 

 
980

 
1,261

Other comprehensive income (loss)
(10,773
)
 
116

 
165

 
6,161

 
(1,166
)
 
(5,497
)
Balance at December 31, 2016
$
(28,120
)
 
$
1,145

 
$
(14,669
)
 
$
(6,141
)
 
$
(3,239
)
 
$
(51,024
)
 

20

Table of Contents

 
Foreign Currency
Translation (1)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit
Pension Plans, 
Net of Tax (2)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at March 31, 2017
$
(25,556
)
 
$
1,134

 
$
(14,998
)
 
$
(5,299
)
 
$
2,907

 
$
(41,812
)
Other comprehensive income (loss) before reclassifications
20,301

 

 

 
5,568

 
(9,711
)
 
16,158

Amounts reclassified out of AOCI

 
(141
)
 
(6
)
 

 
2,904

 
2,757

Other comprehensive income (loss)
20,301

 
(141
)
 
(6
)
 
5,568

 
(6,807
)
 
18,915

Balance at December 31, 2017
$
(5,255
)
 
$
993

 
$
(15,004
)
 
$
269

 
$
(3,900
)
 
$
(22,897
)
 
Foreign Currency
Translation (1)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit 
Pension Plans, 
Net of Tax (2)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss)
Balance at March 31, 2016
$
(10,272
)
 
$
1,114

 
$
(15,161
)
 
$
(6,739
)
 
$
(367
)
 
$
(31,425
)
Other comprehensive income (loss) before reclassifications
(17,848
)
 

 

 
598

 
(6,745
)
 
(23,995
)
Amounts reclassified out of AOCI

 
31

 
492

 

 
3,873

 
4,396

Other comprehensive income (loss)
(17,848
)
 
31

 
492

 
598

 
(2,872
)
 
(19,599
)
Balance at December 31, 2016
$
(28,120
)
 
$
1,145

 
$
(14,669
)
 
$
(6,141
)
 
$
(3,239
)
 
$
(51,024
)
_________________
(1) Due primarily to the Company’s valuation allowance on deferred tax assets, there were no significant deferred tax effects associated with the cumulative currency translation gains and losses during the quarters and nine-month periods ended December 31, 2017 and 2016.
(2) Ending balance is net of tax of $2.2 million and $2.0 million as of December 31, 2017 and December 31, 2016, respectively.
(3) Foreign Currency Translation opening balance adjusted due to fair value adjustments recorded retroactively related to the TOKIN acquisition.



21

Table of Contents

Note 8. Investment in TOKIN
Under the Option Agreement between KEC and NEC, from April 1, 2015 through May 31, 2018, NEC could have required KEC to purchase all outstanding capital stock of TOKIN from its stockholders, primarily NEC, provided that KEC’s payment of the Put Option price was permitted under the 10.5% Senior Notes and Loan and Security Agreement. On April 19, 2017, the Company acquired the remaining 66% economic interest in TOKIN and TOKIN became a 100% indirectly owned subsidiary of KEMET. See Note 2, “Acquisitions”, for additional information. Pursuant to the TOKIN Purchase Agreement, the Put Option was canceled. The line item “Other non-current obligations” on the Condensed Consolidated Balance Sheets included $9.9 million as of March 31, 2017 related to the fair value of the Put Option.
Summarized financial information for TOKIN follows (amounts in thousands):
 
Quarter Ended December 31, 2016
 
19 Day Period Ended April 19, 2017
 
Nine-Month Period Ended December 31, 2016
Sales
$
127,845

 
$
23,649

 
$
374,944

Gross profit
28,886

 
6,647

 
82,487

Net income (loss) (1)
1,082

 
247,786

 
5,444

_________________
(1) The significant change between the periods was due to the gain from the Sale of EMD that occurred on April 14, 2017; see the discussion in Note 2, “Acquisitions” for more information.
A reconciliation between TOKIN’s net income (loss) and KEC’s equity investment income (loss) follows (amounts in thousands):
 
Quarter Ended December 31, 2016
 
19 Day Period Ended April 19, 2017
 
Nine-Month Period Ended December 31, 2016
TOKIN net income (loss)
$
1,082

 
$
247,786

 
$
5,444

KEC’s economic interest %
34
%
 
34
%
 
34
%
Equity income (loss) from TOKIN before adjustments
368

 
84,247

 
1,851

 


 


 
 
Adjustments:


 


 
 
Amortization and depreciation
(562
)
 
(113
)
 
(1,686
)
Removal of EMD memo accounts

 
(8,981
)
 

Inventory profit elimination
61

 
24

 
106

Equity income (loss) from TOKIN
$
(133
)
 
$
75,177

 
$
271

Acquired equity method investment income (loss)
$

 
$
240

 
$

Equity income (loss) from equity method investments
$
(133
)
 
$
75,417

 
$
271

Summarized transactions between KEC and TOKIN are as follows (amounts in thousands):
 
Quarter Ended December 31, 2016
 
19 Day Period Ended April 19, 2017
 
Nine-Month Period Ended December 31, 2016
KEC’s sales to TOKIN
$
4,814

 
$
727

 
$
13,096

TOKIN’s sales to KEMET
2,350

 
356

 
6,112


22

Table of Contents

Note 9. Segment and Geographic Information
The Company is organized into three segments: Solid Capacitors, Film and Electrolytics and MSA.  In prior years, the Company reported two reportable segments, Solid Capacitors and Film and Electrolytics. However, effective beginning the quarter ended June 30, 2017 and in connection with the TOKIN acquisition, TOKINs tantalum capacitor business is included within KEMETs Solid Capacitors reportable segment and the remainder of TOKINs business became a new reportable segment, MSA. Refer to Note 2, "Acquisitions," for additional information on MSA.
The segments are responsible for their respective manufacturing sites as well as their respective research and development efforts. The Company does not allocate corporate indirect selling, general and administrative (“SG&A”) or shared Research and development (“R&D”) expenses to the segments so these expenses are recorded as a "Corporate" expense in the tables below.  Results for the first quarter of fiscal year 2018 have been reclassified to conform to the current period presentation where certain regional SG&A amounts have been allocated to certain segments, and also a portion of the allocation within the segments was allocated to costs of goods sold. These adjustments are reflected in the nine-month results included below.
Solid Capacitors
Solid Capacitors operates in eleven manufacturing sites in the United States, Mexico and Asia, and operates innovation centers in the United States and Japan. 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.
Film and Electrolytic
Film and Electrolytic operates in nine manufacturing sites throughout Europe and Asia. Film and Electrolytic primarily produces film, paper, and electrolytic capacitors which are sold globally. In addition, this segment has product innovation centers in Portugal, Italy and Sweden.
MSA
MSA operates in four manufacturing sites throughout Asia. MSA primarily produces electro magnetically compatible materials and components, piezo materials and actuators and various types of sensors which are sold globally. In addition, this segment has a product innovation center in Sendai, Japan.

23

Table of Contents

The following table reflects each segment’s net sales, operating income (loss), depreciation and amortization expenses and sales by region for the quarters and nine-month periods ended December 31, 2017 and 2016 (amounts in thousands):
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net sales:
 

 
 

 
 

 
 

Solid Capacitors
$
195,049

 
$
141,555

 
$
568,435

 
$
426,140

Film and Electrolytic
51,300

 
46,474

 
146,738

 
134,132

MSA
60,059

 

 
166,706

 

 
$
306,408

 
$
188,029

 
$
881,879

 
$
560,272

Operating income (loss) (1),(2),(3):
 

 
 

 
 

 
 

Solid Capacitors
$
60,991

 
$
37,421

 
$
170,417

 
$
108,262

Film and Electrolytic
574

 
2,361

 
4,188

 
(6,117
)
MSA
9,932

 

 
18,055

 

Corporate
(39,420
)
 
(25,600
)
 
(101,156
)
 
(75,291
)
 
$
32,077

 
$
14,182

 
$
91,504

 
$
26,854

Depreciation and amortization expense:
 

 
 

 
 

 
 

Solid Capacitors
$
6,900

 
$
5,078

 
$
21,490

 
$
15,643

Film and Electrolytic
2,500

 
2,560

 
7,609

 
8,111

MSA
(478
)
 

 
1,026

 

Corporate
2,203

 
1,457

 
6,569

 
4,217

 
$
11,125

 
$
9,095

 
$
36,694

 
$
27,971

 __________________
(1) Quarter and nine-month period ended December 31, 2016 adjusted due to the adoption of ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

(2) Restructuring charges included in Operating income (loss) are as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
Restructuring charges:
 

 
 

 
 

 
 

Solid Capacitors
$
121

 
$
(128
)
 
$
841

 
$
566

Film and Electrolytic
2,309

 
(243
)
 
2,574

 
3,421

MSA

 

 

 

Corporate
1,100

 
2

 
3,121

 
330

 
$
3,530

 
$
(369
)
 
$
6,536

 
$
4,317

(3) (Gain) loss on write down and disposal of long-lived assets included in Operating income (loss) are as follows (amounts in thousands):
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
(Gain) loss on write down and disposal of long-lived assets:
 

 
 

 
 

 
 

Solid Capacitors
$
21

 
$
67

 
$
33

 
$
2,227

Film and Electrolytic
(990
)
 
28

 
(1,153
)
 
4,236

MSA

 

 

 

Corporate
67

 
37

 
198

 
37

 
$
(902
)
 
$
132

 
$
(922
)
 
$
6,500


24

Table of Contents

 __________________
 
Quarters Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
Sales by region:
 

 
 

 
 

 
 

North and South America (“Americas”)
$
65,097

 
$
54,976

 
$
191,428

 
$
166,858

Europe, Middle East, Africa (“EMEA”)
68,676

 
55,765

 
201,711

 
176,298

Japan and Korea (“JPKO”)
48,395

 

 
128,514

 

Asia and Pacific Rim (“APAC”)
124,240

 
77,288

 
360,226

 
217,116

 
$
306,408

 
$
188,029

 
$
881,879

 
$
560,272


Note 10.  Defined Benefit Pension and Other Postretirement Benefit Plans
The Company sponsors six defined benefit pension plans in Europe, one plan in Singapore, two plans in Mexico, and, with the completion of the TOKIN acquisition in April 2017, one plan in Japan.  In addition, the Company maintains two frozen post-retirement benefit plans in the United States: health care and life insurance benefits for certain retired United States employees who reached retirement age while working for the Company. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is non-contributory. 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, 2017 and 2016 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Quarters Ended December 31,
 
Quarters Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net service cost 
$
1,307

 
$
347

 
$

 
$

Interest cost
425

 
358

 
3

 
1

Expected return on net assets
(501
)
 
(94
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
91

 
115

 
(47
)
 
(71
)
Prior service cost
20

 
21

 

 

Total net periodic benefit (income) costs
$
1,342

 
$
747

 
$
(44
)
 
$
(70
)
The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans are as follows for the nine-month periods ended December 31, 2017 and 2016 (amounts in thousands):
 
Pension
 
Post-retirement Benefit Plan
 
Nine-Month Periods Ended December 31,
 
Nine-Month Periods Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net service cost
$
3,926

 
$
1,040

 
$

 
$

Interest cost
1,274

 
1,076

 
9

 
9

Expected return on net assets
(1,502
)
 
(283
)
 

 

Amortization:
 

 
 

 
 

 
 

Actuarial (gain) loss
271

 
345

 
(141
)
 
(155
)
Prior service cost
60

 
64

 

 

Total net periodic benefit (income) costs
$
4,029

 
$
2,242

 
$
(132
)
 
$
(146
)




25

Table of Contents

In fiscal year 2018, the Company expects to contribute up to $3.3 million to the pension plans, $0.8 million of which has been contributed as of December 31, 2017.  For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred. 

Note 11. Stock-Based Compensation
As of December 31, 2017, the KEMET Corporation Omnibus Incentive Plan (the “Incentive Plan”), which amended and restated the KEMET Corporation 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan, approved by the Company’s stockholders on August 2, 2017, is the only plan the Company has to issue equity based awards to executives and key employees. Upon adoption of the Incentive Plan, no further awards were permitted to be granted under the Company’s prior plans, including the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, and the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”).
The Incentive Plan authorized the grant of up to 12.2 million shares of the Company’s Common Stock, comprised of 11.4 million shares under the Incentive Plan and 0.8 million shares remaining from the Prior Plans and authorizes the Company to provide equity-based compensation in the form of:
stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code;
stock appreciation rights;
restricted stock and restricted stock units (“RSUs”);
other share-based awards; and
performance awards.
Except as described below, options issued under these plans vest within two to three years and expire ten years from the grant date. Restricted stock and RSUs issued under these plans vest over three to four years, except for RSUs granted to members of the Board of Directors, which vest within one year, and performance-based RSUs, which vest over a one-year period following achievement of two-year performance targets. The Company grants RSUs to members of the Board of Directors, the Chief Executive Officer and key management. Once vested and settled, RSUs are converted into restricted stock. For members of the Board of Directors and senior personnel, such restricted stock cannot be sold until 90 days after termination of service with the Company, or until the individual achieves the targeted ownership under the Company’s stock ownership guidelines, and only to the extent that such ownership level exceeds the target. Compensation expense is recognized over the respective vesting periods. 
Historically, the Board of Directors of the Company has approved annual Long Term Incentive Plans (“LTIP”) which cover two year periods and are primarily based upon the achievement of an Adjusted EBITDA range for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or RSUs, or a combination of both as determined by the Company’s Board of Directors. The 2015/2016 LTIP, 2016/2017 LTIP, 2017/2018 LTIP, and 2018/2019 LTIP also awarded RSUs which vest over the course of three years from the anniversary of the establishment of the plan and are not subject to a performance metric. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. Any related liability is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any restricted stock unit commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.
On May 18, 2017, the Company granted RSUs under the 2018/2019 LTIP with a grant date fair value of $13.41 that vest as follows (amounts in thousands):
 
Shares
May 18, 2018
65

May 18, 2019
65

May 18, 2020
67

Total shares granted
197

    

26

Table of Contents

The following is the vesting schedule of RSUs under each respective LTIP, which vested during the nine-month period ended December 31, 2017 (shares in thousands):
 
 
2017/2018
 
2016/2017
 
2015/2016
Time-based award vested
 
198

 
186

 
113

Performance-based award vested
 

 
173

 
102

Restricted stock activity, excluding the LTIP activity discussed above, for the nine-month period ended December 31, 2017 is as follows (amounts in thousands except fair value):
 
Shares
 
Weighted-
average
Fair Value on
Grant Date
Non-vested restricted stock at March 31, 2017
1,382

 
$
4.00