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 September 30, 2018 
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.)
KEMET Tower, One East Broward Blvd., Fort Lauderdale, Florida 33301
(Address of principal executive offices, zip code)
 
(954) 766-2800
(Registrant’s telephone number, including area code)
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES 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
x
Accelerated filer
o
Non-accelerated filer 
o
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 October 31, 2018 was 57,443,627.
 




KEMET CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter ended September 30, 2018
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 3.1
 
Exhibit 3.2
 
Exhibit 10.1
 
Exhibit 10.2
 
Exhibit 10.3
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
 





PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
(Unaudited)
 
 
September 30, 2018
 
March 31, 2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
263,047

 
$
286,846

Accounts receivable, net (1)
157,013

 
146,561

Inventories, net
213,268

 
204,386

Prepaid expenses and other current assets
36,320

 
41,160

Total current assets (1)
669,648

 
678,953

Property, plant and equipment, net of accumulated depreciation of $857,866 and $866,614 as of September 30, 2018 and March 31, 2018, respectively
408,076

 
405,316

Goodwill
40,294

 
40,294

Intangible assets, net
55,457

 
59,907

Equity method investments
12,215

 
12,016

Deferred income taxes 
12,124

 
13,837

Other assets (1)
11,783

 
12,600

Total assets (1)
$
1,209,597

 
$
1,222,923

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
20,553

 
$
20,540

Accounts payable
138,253

 
139,989

Accrued expenses (1)
96,666

 
125,119

Income taxes payable
2,584

 
2,010

Total current liabilities (1)
258,056

 
287,658

Long-term debt
296,084

 
304,083

Other non-current obligations (1)
128,427

 
152,249

Deferred income taxes (1)
14,459

 
15,058

Total liabilities (1)
697,026

 
759,048

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 57,436 and 56,641 shares at September 30, 2018 and March 31, 2018, respectively
574

 
566

Additional paid-in capital
465,474

 
462,737

Retained earnings (deficit) (1)
75,731

 
3,370

Accumulated other comprehensive income (loss) (1)
(29,208
)
 
(2,798
)
Total stockholders’ equity (1)
512,571

 
463,875

Total liabilities and stockholders’ equity (1)
$
1,209,597

 
$
1,222,923

________________
(1) Period ended March 31, 2018 adjusted due to the adoption of Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). Refer to Note 1, “Basis of Financial Statement Presentation.”


 See accompanying notes to the unaudited condensed consolidated financial statements.

3



KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales (1)
$
349,233

 
$
301,568

 
$
676,849

 
$
575,514

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of sales (1)
235,668

 
216,664

 
468,463

 
416,493

Selling, general and administrative expenses
52,258

 
42,417

 
100,800

 
78,048

Research and development (1)
10,995

 
9,536

 
21,683

 
18,783

Restructuring charges

 
1,393

 
(96
)
 
3,006

(Gain) loss on write down and disposal of long-lived assets
312

 
(39
)
 
823

 
(20
)
Total operating costs and expenses (1)
299,233

 
269,971

 
591,673

 
516,310

Operating income (loss) (1)
50,000

 
31,597

 
85,176

 
59,204

Non-operating (income) expense:
 

 
 

 
 

 
 

Interest income
(375
)
 
(95
)
 
(753
)
 
(161
)
Interest expense
7,287

 
7,365

 
14,323

 
18,325

Acquisition (gain) loss

 
(1,285
)
 

 
(136,873
)
Other (income) expense, net 
4,011

 
10,153

 
(7,360
)
 
16,292

Income (loss) before income taxes and equity income (loss) from equity method investments (1)
39,077

 
15,459

 
78,966

 
161,621

Income tax expense (benefit) (1)
2,000

 
2,864

 
6,600

 
4,004

Income (loss) before equity income (loss) from equity method investments (1)
37,077

 
12,595

 
72,366

 
157,617

Equity income (loss) from equity method investments
64

 
224

 
(5
)
 
75,641

Net income (loss) (1)
$
37,141

 
$
12,819

 
$
72,361

 
$
233,258

 
 
 
 
 
 
 
 
Net income (loss) per basic share
$
0.64

 
$
0.26

 
$
1.26

 
$
4.80

Net income (loss) per diluted share (2)
$
0.63

 
$
0.22

 
$
1.22

 
$
4.01

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
57,799

 
49,819

 
57,570

 
48,607

Diluted
59,197

 
58,409

 
59,119

 
58,136

 __________________
(1) Three and six months ended September 30, 2017 adjusted due to the adoption of ASC 606.
(2) Six months ended September 30, 2017 adjusted due to the adoption of ASC 606.

See accompanying notes to the unaudited condensed consolidated financial statements.

4



KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) (1)
$
37,141

 
$
12,819

 
$
72,361

 
$
233,258

Other comprehensive income (loss):
 


 
 
 

 
 
Foreign currency translation gains (losses) (1)
(3,149
)
 
9,020

 
(27,352
)
 
13,373

Defined benefit pension plans, net of tax
248

 
(297
)
 
287

 
(153
)
Defined benefit post-retirement plan adjustments
(39
)
 
(47
)
 
(78
)
 
(94
)
Equity interest in investee's other comprehensive income (loss)
(6
)
 

 
(17
)
 
5,573

Foreign exchange contracts
5,188

 
(2,429
)
 
750

 
(1,477
)
Other comprehensive income (loss) (1)
2,242

 
6,247

 
(26,410
)
 
17,222

Total comprehensive income (loss) (1)
$
39,383

 
$
19,066

 
$
45,951

 
$
250,480

 __________________
(1) Three and six months ended September 30, 2017 adjusted due to the adoption of ASC 606.

 
See accompanying notes to the unaudited condensed consolidated financial statements.


5



KEMET CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited) 
 
Six Months Ended September 30,
Operating activities
2018
 
2017
Net income (loss) (1)
$
72,361

 
$
233,258

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

 
 

Depreciation and amortization (1)
25,642

 
26,013

Equity (income) loss from equity method investments
5

 
(75,641
)
Acquisition (gain) loss

 
(136,873
)
Non-cash debt and financing costs
635

 
1,124

(Gain) loss on early extinguishment of debt

 
486

Stock-based compensation expense
8,477

 
2,631

Receivable write down
81

 
152

(Gain) loss on write down and disposal of long-lived assets
823

 
(20
)
Pension and other post-retirement benefits
2,549

 
2,608

Change in deferred income taxes (1)
578

 
(126
)
Change in operating assets (1)
(19,956
)
 
20,586

Change in operating liabilities (1)
(58,049
)
 
(34,639
)
Other (1)
(147
)
 
190

Net cash provided by (used in) operating activities (1)
32,999

 
39,749

Investing activities:
 

 
 

Capital expenditures
(40,478
)
 
(17,830
)
Acquisitions, net of cash received

 
167,129

Proceeds from sale of assets

 
600

Proceeds from dividend 
776

 
585

Investment in joint venture
(1,000
)
 

Net cash provided by (used in) investing activities
(40,702
)
 
150,484

Financing activities:
 

 
 

Payments on revolving line of credit

 
(33,881
)
Payment of long-term debt
(8,625
)
 
(357,313
)
Proceeds from issuance of debt
510

 
334,978

Debt issuance costs

 
(5,002
)
Proceeds from exercise of stock warrants

 
8,838

Proceeds from exercise of stock options
471

 
4,066

Net cash provided by (used in) financing activities
(7,644
)
 
(48,314
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(15,347
)
 
141,919

Effect of foreign currency fluctuations on cash, cash equivalents and restricted cash (1)
(8,452
)
 
1,980

Cash, cash equivalents, and restricted cash at beginning of fiscal period
286,846

 
109,774

Cash, cash equivalents, and restricted cash at end of fiscal period
263,047

 
253,673

Less: Restricted cash at end of period

 

Cash and cash equivalents at end of period
$
263,047

 
$
253,673

 __________________
(1) Six months ended September 30, 2017 adjusted due to the adoption of ASC 606.

See accompanying notes to the unaudited condensed consolidated financial statements.

6



Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1. Basis of Financial Statement Presentation
The Condensed Consolidated Financial Statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments unless otherwise disclosed, necessary for a fair presentation of the results for the interim periods. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“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, 2018 (the “Company’s 2018 Annual Report”).
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all intercompany amounts and transactions have been eliminated. Prior year balances for SG&A and Cost of sales amounts have been adjusted to correct the classification of certain TOKIN operating expenses to align with KEMET's classification of these expenses. Net sales and operating results for the three and six months ended September 30, 2018 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 2018 Annual Report. Refer to the “Change in accounting policies” section below for changes in accounting policies since the issuance of the Company's 2018 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.
Change in Accounting Policies
The Company implemented ASC 606, Revenue from Contracts with Customers (“ASC 606”) as of April 1, 2018. As a result, the Company changed its accounting policy for revenue recognition. Except as discussed below, there have not been any other changes to the Company's significant accounting policies since the issuance of the Company's 2018 Annual Report.
Research & development
The Company previously recognized all research and development (“R&D”) expenses when they were incurred. Under ASC 606, the Company capitalizes a portion of research and development expenses which directly relate to an existing or anticipated contract or specific business opportunity and amortizes them consistently with the pattern of transfer of the goods to which the asset relates. If the expected amortization period is one year or less, the research and development activities are expensed when incurred.
Specialized equipment
At times, the Company enters into contracts with customers that contain capital arrangements for specialized equipment obtained in order to manufacture products in accordance with customer specifications. The Company may agree to purchase and assemble specific tooling equipment on behalf of the customer and ultimately resell the equipment (and transfer title and control) to the customer. Previously, the Company accumulated such costs on the balance sheet and subsequently applied the receipt of payment from the customer against the asset, thus resulting in no impact to the statement of operations. Under ASC 606, the Company recognizes a distinct performance obligation for the capital arrangement and records the selling

7



price of the equipment as a component of revenue and cost of goods sold at a point in time when the customer obtains control over the asset.
Material up-front fees
At times, the Company enters into contracts with customers whereby the customer agrees to reimburse the Company for certain manufacturing equipment, capacity expansion, and fulfillment costs required to manufacture product which meets the customer’s required specifications. Previously, the Company recognized the reimbursement revenue in accordance with the contractual reimbursement schedule. Under ASC 606, the Company recognizes material up-front fees as options that provide the customer with a material right to acquire future goods. The Company applies the practical expedient in paragraph 606-10-55-45 and does not estimate the standalone selling price of the option, but instead allocates the transaction price to the optional goods by reference to the goods expected to be provided and the corresponding expected consideration. Accordingly, the revenue is recognized over the longer of the contract period or the estimated length of the product life cycle, which approximates the period during which the customer is expected to benefit.
Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue under the guidance provided in ASC 606. Consistent with the terms of ASC 606, the Company records revenue on product sales in the period in which the Company satisfies its performance obligation by transferring control over a product to a customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for transferring products to a customer. The Company has elected the practical expedient under ASC 606-10-32-18 and does not consider the effects of a financing component on the promised amount of consideration because the period between when the Company transfers a product to a customer and when the customer pays for that product is one year or less. As performance obligations are expected to be fulfilled in one year or less, the Company has elected the practical expedient under ASC 606-10-50-14 and has not disclosed information relating to remaining performance obligations.
The Company sells its products to distributors, original equipment manufacturers (“OEM”), and electronic manufacturing services providers (“EMS”), and the sales price may include adjustments for sales discounts, price adjustments, and sales allowances. The Company has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis. The principle forms of these adjustments include:
Inventory price protection and ship-from stock and debit (“SFSD”) programs,
Distributor rights of returns,
Sales allowances, and
Limited assurance warranties
The Company's inventory price protection and SFSD programs provide authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative, and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
Select distributors have the right to return a certain portion of their purchased inventory to KEMET from the previous fiscal quarter. The Company estimates future returns based on historical return patterns and records a corresponding right of return asset and refund liability as a component of the line items, “Inventories, net” and “Accrued expenses,” respectively, on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company’s sales channels.
The Company's sales allowances are recognized as a reduction in the line item “Net sales” on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable, net” on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company’s estimates.
The Company provides a limited assurance warranty on products that meet certain specifications to select customers. The warranty coverage period is generally limited to one year for United States based customers and a length of time commensurate with regulatory requirements or industry practice outside the United States. A warranty cannot be purchased by

8



the customer separately and, as a result, product warranties are not considered to be separate performance obligations. The Company’s liability under theses warranties is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs were not material for the three and six months ended September 30, 2018 and 2017.
Shipping and handling costs are included in cost of sales.
Disaggregation of Revenue
Refer to Note 8, “Segment and Geographic Information” for revenue disaggregated by primary geographical market, sales channel, and major product line.
Contract liabilities
Contract liabilities consist of advance payments from certain customers within the OEM channel for the development of additional production capacity. The current and noncurrent portions of these liabilities are included as a component of the line items, “Accrued expenses” and “Other non-current obligations,” respectively, on the Condensed Consolidated Balance Sheets.
The balance of net contract liabilities consisted of the following at September 30, 2018 and March 31, 2018 (amounts in thousands):
 
September 30, 2018
 
March 31, 2018
Contract liabilities - current (Accrued expenses)
$
256

 
$
256

Contract liabilities - noncurrent (Other non-current obligations)
384

 
513

Total contract liabilities
$
640

 
$
769

In each of the three and six months ended September 30, 2018, the Company recognized revenue of $0.1 million related to contract liabilities at March 31, 2018. In each of the three and six months ended September 30, 2017, the Company recognized revenue of $0.1 million related to contract liabilities at March 31, 2017. Revenue related to contract liabilities is recorded on the Condensed Consolidated Statements of Operations line item, "Net sales."
Contract assets
The Company recognizes an asset from the costs incurred to fulfill a contract if those costs directly relate to an existing or anticipated contract or specific business opportunity, if the costs enhance our own resources that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered through subsequent sale of product to the customer. The Company has determined that certain direct labor, materials, and allocations of overhead incurred within research and development activities meet the requirements to be capitalized. As most of our contracts and customer specific business opportunities do not include a stated term, the Company amortizes these capitalized costs over the expected product life cycle, which is consistent with the estimated transfer of goods to the customer. Capitalized contract costs were $1.9 million and $2.2 million at September 30, 2018 and March 31, 2018, respectively. Capitalized contracts costs are recorded on the Condensed Consolidated Balance Sheets in the line item, “Other assets.” Amortization expense related to the contract costs was $0.2 million and $0.4 million for the three and six months ended September 30, 2018, respectively, and $0.2 million and $0.4 million for the three and six months ended September 30, 2017, respectively. There was no impairment loss in relation to the costs capitalized for the three and six months ended September 30, 2018 and 2017. Amortization expense related to contract assets is recorded on the Condensed Consolidated Statements of Operations line item "Cost of sales."
Fair Value Measurement
The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s Condensed Consolidated Financial Statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The first two 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.

9



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 September 30, 2018 and March 31, 2018 are as follows (amounts in thousands):
 
Carrying Value September 30,
 
Fair Value September 30,
 
Fair Value Measurement Using
 
Carrying Value March 31,
 
Fair Value March 31,
 
Fair Value Measurement Using
 
2018
 
2018
 
Level 1
 
Level 2 (3)
 
Level 3
 
2018
 
2018
 
Level 1
 
Level 2 (3)
 
Level 3
Assets (Liabilities):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money markets (1)(2)
$
70,580

 
$
70,580

 
$
70,580

 
$

 
$

 
$
83,891

 
$
83,891

 
$
83,891

 
$

 
$

Total debt
(316,637
)
 
(334,194
)
 

 
(334,194
)
 

 
(324,623
)
 
(343,125
)
 

 
(343,125
)
 

___________________
(1) Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
(2) Certificates of Deposit of $27.5 million and $33.9 million that mature in three months of less are included within the balance as of September 30, 2018 and March 31, 2018, respectively.
(3) The valuation approach used to calculate fair value was a discounted cash flow based on the current market rate.
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The Company periodically evaluates its net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. For interim reporting purposes, the Company records income taxes based on the expected annual effective income tax rate, taking into consideration global forecasted tax results and the effect of discrete tax events. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. All deferred tax assets are reported as noncurrent in the Condensed Consolidated Balance Sheets.
Inventories
Inventories are stated at the lower of cost or net realizable value. The components of inventories are as follows (amounts in thousands):
 
September 30, 2018
 
March 31, 2018
Raw materials and supplies
$
89,198

 
$
88,408

Work in process
66,456

 
65,417

Finished goods
73,865

 
66,907

Subtotal
229,519

 
220,732

Inventory reserves
(16,251
)
 
(16,346
)
Inventories, net
$
213,268

 
$
204,386

 
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. Under this ASU, a customer will apply ASC 350-40 to determine whether to capitalize implementation costs of the cloud computing arrangement that is a service contract or expense them as incurred. This ASU is effective for fiscal years beginning after

10



December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s Condensed Consolidated Financial Statements.
In March 2018, the FASB issued ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 118. The amendments in this update provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act (the “Act”). The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. Additionally, this ASU discusses required disclosures that an entity must make with regard to the Act. This ASU is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The Company has adopted this standard and will continue to evaluate indicators that may give rise to a change in the Company's tax provision as a result of the Act. See Note 11, “Income Taxes” for additional information on the Act.    
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The ASU 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 Condensed Consolidated Financial Statements, however the adoption of this guidance is not expected to have a significant effect on the Company’s Condensed Consolidated Balance Sheets, Results of Operations, or Cash Flows.
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 adopted this guidance as of April 1, 2018. In connection with the adoption of this ASU, the Company elected to account for distributions received from equity method investees using the nature of distributions approach, under which distributions are classified based on the nature of activity that generated them. The other provisions of this ASU did not have an impact on the Company's Condensed Consolidated Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases, as modified by ASU 2017-03, Transition and Open Effective Date Information, requiring lessees to recognize a right-of-use asset and a lease liability for all leases. The ASU also requires expanded disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. In July 2018, the FASB issued an update which provides an additional transition method allowing entities to only apply the new lease standard in the year of adoption. The Company will adopt ASU 2016-02 on April 1, 2019. We are currently collecting the necessary information on our lease population, establishing a new lease accounting process, and designing new internal controls for the new process. The Company continues to assess the potential effects of this ASU, which have not yet been quantified. The Company's assessment, which it expects to substantially complete in the fourth quarter of fiscal year 2019, includes a detailed review of the Company's lease contracts and a comparison of its historical accounting policies and practices to ASC 2016-02. Based on the Company's progress in reviewing its leasing arrangements across all of its business units, the Company expects to recognize a material amount of lease assets and liabilities on its Condensed Consolidated Balance Sheet upon adoption of the standard. This ASU is not expected to have a material effect on the amount of expense recognized in connection with the Company's current practice. For information about the Company's future lease commitments as of March 31, 2018, see Note 15, "Commitments and Contingencies," in the Company's 2018 Form 10-K.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which superseded existing accounting standards for revenue recognition and created a single framework. ASU 2014-09 and its amendments were included primarily in ASC 606. The core principle of ASC 606 is that an entity should recognize revenue for the transfer of goods or services equal to an amount that it expects to be entitled to receive for those goods or services. ASC 606 also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company adopted the requirements of ASC 606 effective in the first quarter of fiscal year 2019, using the full retrospective method, which required us to restate each prior reporting period presented. The Company has applied practical expedient ASC 606-10-65-1(f)(3) and notes that all previously reported historical amounts are adjusted for the impact of ASC 606.

11



Adoption of the requirements in ASC 606 impacted our previously reported Condensed Consolidated Balance Sheet as of March 31, 2018, our Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended September 30, 2017, and the Condensed Consolidated Statement of Cash Flows for the six months ended September 30, 2017 as follows (amounts in thousands, except per share data):
Condensed Consolidated Balance Sheet
 
As of March 31, 2018
 
As Previously Reported
 
ASC 606 Adjustments
 
As Adjusted
Assets
 
 
 
 
 
Account receivable, net
$
144,076

 
$
2,485

 
$
146,561

Total current assets
676,468

 
2,485

 
678,953

Other assets
10,431

 
2,169

 
12,600

Total assets
1,218,269

 
4,654

 
1,222,923

Liabilities and Stockholders' Equity
 
 
 
 
 
Accrued expenses
$
122,377

 
$
2,742

 
$
125,119

Total current liabilities
284,916

 
2,742

 
287,658

Deferred income taxes (non-current)
14,571

 
487

 
15,058

Other non-current obligations
151,736

 
513

 
152,249

Total liabilities
755,306

 
3,742

 
759,048

Retained earnings (deficit)
2,675

 
695

 
3,370

Accumulated other comprehensive income (loss)
(3,015
)
 
217

 
(2,798
)
Total stockholders' equity
462,963

 
912

 
463,875

Total liabilities and stockholders' equity
1,218,269

 
4,654

 
1,222,923


Condensed Consolidated Statement of Operations
 
Three Months Ended September 30, 2017
 
As Previously Reported
 
ASC 606 Adjustments
 
As Adjusted
Net sales
$
301,471

 
$
97

 
$
301,568

Operating costs and expenses:
 
 
 
 
 
Cost of sales
216,395

 
269

 
216,664

Research and development
9,662

 
(126
)
 
9,536

Operating income (loss)
31,643

 
(46
)
 
31,597

Income tax expense
2,880

 
(16
)
 
2,864

Net income (loss)
12,849

 
(30
)
 
12,819

 
Six Months Ended September 30, 2017
 
As Previously Reported
 
ASC 606 Adjustments
 
As Adjusted
Net sales
$
575,471

 
$
43

 
$
575,514

Operating costs and expenses:
 
 
 
 
 
Cost of sales
415,958

 
535

 
416,493

Research and development
19,052

 
(269
)
 
18,783

Operating income (loss)
59,427

 
(223
)
 
59,204

Income tax expense
4,030

 
(26
)
 
4,004

Net income (loss)
233,455

 
(197
)
 
233,258

Net income (loss) per diluted share
4.02

 
(0.01
)
 
4.01



12





Condensed Consolidated Statement of Comprehensive Income
 
Three Months Ended September 30, 2017
 
As Previously Reported
 
ASC 606 Adjustments
 
As Adjusted
Net income (loss)
$
12,849

 
$
(30
)
 
$
12,819

Foreign currency translation gains (losses)
9,068

 
(48
)
 
9,020

Other comprehensive income (loss) 
6,295

 
(48
)
 
6,247

Total comprehensive income (loss)
19,144

 
(78
)
 
19,066

 
Six Months Ended September 30, 2017
 
As Previously Reported
 
ASC 606 Adjustments
 
As Adjusted
Net income (loss)
$
233,455

 
$
(197
)
 
$
233,258

Foreign currency translation gains (losses)
13,206

 
167

 
13,373

Other comprehensive income (loss) 
17,055

 
167

 
17,222

Total comprehensive income (loss)
250,510

 
(30
)
 
250,480




Condensed Consolidated Statement of Cash Flows
 
Six Months Ended September 30, 2017
 
As Previously Reported
 
ASC 606 Adjustments
 
As Adjusted
Operating activities
 
 
 
 
 
Net income (loss)
$
233,455

 
$
(197
)
 
$
233,258

Depreciation and amortization
25,569

 
444

 
26,013

Change in deferred income taxes
(108
)
 
(18
)
 
(126
)
Change in operating assets
21,080

 
(494
)
 
20,586

Change in operating liabilities
(34,558
)
 
(81
)
 
(34,639
)
Other
162

 
28

 
190

Net cash provided by (used in) operating activities
40,067

 
(318
)
 
39,749

Effect of foreign currency fluctuations on cash
1,662

 
318

 
1,980

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.

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

13



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 were 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 adjustments, of the remaining 66% economic interest in TOKIN, and as a result, TOKIN became 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.
The Company believes the acquisition of TOKIN expands KEMET’s geographic presence, combining KEMET’s presence in the western hemisphere and TOKIN’s excellent position in Asia to enhance customer reach and creates 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 ("EMC") devices, 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 flows. 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 in fiscal year 2018, Electro-Magnetic, Sensors, and Actuators (“MSA”).


14



Note 3. Debt
A summary of debt is as follows (amounts in thousands):
 
September 30,
2018
 
March 31,
2018
Term Loan Credit Agreement (1)
$
310,645

 
$
318,782

Advance (2)
440

 

Other (3)
5,552

 
5,841

Total debt
316,637

 
324,623

Current maturities
(20,553
)
 
(20,540
)
Total long-term debt
$
296,084

 
$
304,083

_________________
(1) Amounts shown are net of discount, bank issuance costs and other indirect issuance costs of $12.8 million and $13.3 million as of September 30, 2018 and March 31, 2018, respectively which reduce the Term Loan Credit Agreement (as defined herein) balance.
(2) Amount shown is net of discount of $0.1 million at September 30, 2018.
(3) Amounts are shown net of discounts of $0.4 million and $0.5 million at September 30, 2018 and March 31, 2018, respectively.
The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2018 and 2017, consists of the following (amounts in thousands):
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
6,896

 
$
6,657

 
$
13,741

 
$
17,082

Capitalized interest
(56
)
 
(31
)

(120
)

(39
)
Amortization of debt issuance costs
93

 
145

 
209

 
312

Amortization of debt (premium) discount
299

 
490

 
397

 
756

Imputed interest on acquisition-related obligations
14

 
29

 
29

 
56

Interest expense on capital lease
41

 
75

 
67

 
158

Total interest expense
$
7,287

 
$
7,365

 
$
14,323

 
$
18,325

Term Loan Credit Agreement
On April 28, 2017, the Company 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 $345.0 million term loan facility. In addition, the Borrowers may request incremental term loan commitments in an aggregate amount not to exceed $50.0 million (together with the initial $345.0 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 called for redemption on April 28, 2017. The Term Loans were issued at a price of 97.0% (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 1.0%. The Term Loan Credit Agreement contains customary covenants and events of default.
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

15



years. On a quarterly basis, the Company must repay 1.25% of the aggregate principal amount on the initial $345.0 million term loan, or $4.3 million; payments began on September 29, 2017.
The Company currently pays interest on the Term Loan Credit Agreement on a monthly basis due to favorable LIBO rates, and as such, had only two days and three days of interest payable related to the Term Loan Credit Agreement included in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets as of September 30, 2018 and March 31, 2018, respectively. Interest payable related to the Term Loan Credit Agreement was $0.1 million and $0.2 million as of September 30, 2018 and March 31, 2018, respectively.
Revolving Line of Credit
In connection with the closing of the 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”), which amended the Loan and Security Agreement dated as of September 30, 2010 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 Agreement”). 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 Agreement.
As of September 30, 2018, 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 Agreement was $75.0 million.
Advance
In September 2018, the Company entered into an agreement with a customer (the “Customer”) pursuant to which the Customer agreed to make advances to the Company in amounts up to $36.0 million (the “Advance”). The Company will use the Advance to fund the purchase of production equipment and to make other investments and improvements in its business and operations (the “Investment”) in order to increase overall capacity to produce various electronic components of the type and part as may be sold by the Company to the Customer from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advance. The Advance from the Customer will be made in quarterly installments (an “Installment”) over an expected period of 18 to 24 months starting in September 2018, with the amount of each Installment based on the costs and expenses that have been incurred, or are reasonably expected to be incurred or committed to be incurred, by the Company in connection with the Investment during the quarter applicable to such Installment.
The Advance will be repaid beginning on the date that production from the Investment is sufficient to meet the Company's obligations under the agreement with the Customer. Repayments will be made on a quarterly basis as determined by a calculation that generally takes into account the number of components purchased by the Customer during the quarter. Repayments based on the calculation will continue until either the Advance is repaid in full, or December 31, 2038. The Company is not required to make any quarterly repayment in an amount that exceeds $0.9 million. If the Customer does not purchase a number of components that would require full repayment of the Advance by December 31, 2038, then the Advance shall be deemed repaid in full. Additionally, if the Customer does not purchase a number of components that would require a payment on the Advance for a period of 16 consecutive quarters, the Advance shall be deemed repaid in full.
An initial advance payment of $0.5 million was paid by the Customer to the Company on September 7, 2018. Since the debt is non-interest bearing, we have recorded a debt discount in the amount of $0.1 million. This discount will be amortized over the expected life of the Advance through interest expense.
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 0.3 million (or $0.3 million). 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 0.2 million (or $0.2 million) beginning on August 1, 2019 and the remaining payments will be in the amount of EUR 0.2 million (or $0.2 million). Since the debt is non-interest bearing, the Company has recorded a debt discount in the amount of EUR 0.6 million (or $0.7 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.

16



In September 2017, TOKIN received a short term borrowing pursuant to an agreement with The 77 Bank Limited, located in Japan, in the amount of 350.0 million Yen (or $3.2 million). The interest rate for the borrowing is the Japanese Tokyo Interbank Offered Rate (“TIBOR”) plus 40 basis points. The loan was originally due in September 2018 and was extended to September 2019. The loan agreement automatically renews annually if both parties choose not to terminate or modify it.

Note 4. Goodwill and Intangible Assets
The following table highlights the Company’s intangible assets (amounts in thousands):
 
 
September 30, 2018
 
March 31, 2018
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
 
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
Indefinite Lived Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
$
14,969

 
$

 
$
14,969

 
$
15,474

 
$

 
$
15,474

Amortizing Intangibles:
 
 
 
 
 

 
 
 
 
 
 
Patents (10 - 18 years)
 
26,662

 
(11,335
)
 
15,327

 
26,662

 
(10,625
)
 
16,037

Customer relationships (10 - 21 years)
 
37,692

 
(12,531
)
 
25,161

 
40,131

 
(11,735
)
 
28,396

Other
 
224

 
(224
)
 

 
238

 
(238
)
 

Total amortizing intangibles
 
64,578

 
(24,090
)
 
40,488

 
67,031

 
(22,598
)
 
44,433

Total intangible assets
 
$
79,547

 
$
(24,090
)
 
$
55,457

 
$
82,505

 
$
(22,598
)
 
$
59,907

For the quarters ended September 30, 2018 and 2017, amortization related to intangibles was $1.1 million and $1.4 million, respectively, consisting of amortization related to patents of $0.4 million and $0.3 million, respectively, and amortization related to customer relationships of $0.8 million and $1.1 million, respectively. For each of the six months ended September 30, 2018 and 2017, amortization related to intangibles was $2.3 million, consisting of amortization related to patents of $0.7 million and amortization related to customer relationships of $1.6 million.
The weighted-average useful life for patents was 15.8 years as of September 30, 2018 and March 31, 2018, respectively, and for customer relationships was 12.3 years as of September 30, 2018 and March 31, 2018, respectively. Estimated amortization of intangible assets for each of the next five fiscal years is $4.5 million, and thereafter, amortization will total $17.8 million. Estimated amortization of patents for each of the next five fiscal years is $1.4 million, and thereafter, amortization will total $8.2 million. Estimated amortization of customer relationships for each of the next five fiscal years is $3.1 million, and thereafter, amortization will total $9.6 million.
There were no changes in the carrying amount of goodwill for the six months ended September 30, 2018. The Company’s goodwill balance was $40.3 million at September 30, 2018 and March 31, 2018.

Note 5. Restructuring Charges
The Company has implemented restructuring plans, which include programs to increase competitiveness by removing excess capacity, relocating production to lower cost locations, relocating corporate functions to the new headquarters, and eliminating unnecessary costs throughout the Company. Significant restructuring plans which include personnel reduction costs during the three months ended September 30, 2018 are summarized below (amounts in thousands):
 
 
Total expected to be incurred
 
Incurred during quarter ended September 30, 2018
 
Cumulative incurred to date
Restructuring Plan
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
$
2,655

$
909

 
$

$

 
$
2,655

$
909

Tantalum powder facility relocation
Solid Capacitors
897

2,098

 


 



17



A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the three and six months ended September 30, 2018 and 2017, is as follows (amounts in thousands):
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Personnel reduction costs
$

 
$
873

 
$
(84
)
 
$
1,111

Relocation and exit costs

 
520

 
(12
)
 
1,895

Restructuring charges
$

 
$
1,393

 
$
(96
)
 
$
3,006

Three Months Ended September 30, 2017
The Company incurred $1.4 million in restructuring charges in the three months ended September 30, 2017 comprised of $0.9 million in personnel reduction costs and $0.5 million in manufacturing relocation and exit costs.
The personnel reduction costs of $0.9 million were due to severance charges across various overhead functions in the Simpsonville, South Carolina office as these functions were relocated to the Company's new corporate headquarters in Fort Lauderdale, Florida.
The manufacturing relocation and exit costs of $0.5 million primarily consisted of $0.4 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 KEMET Foil Manufacturing, LLC (“KFM”) in Knoxville, Tennessee.
Six Months Ended September 30, 2017
The Company incurred $3.0 million in restructuring charges in the six months ended September 30, 2017 comprised of $1.1 million in personnel reduction costs and $1.9 million in manufacturing relocation and exit costs.
The personnel reduction costs of $1.1 million were due to severance charges across various overhead functions in the Simpsonville, South Carolina office as these functions were relocated to the Company's new corporate headquarters in Fort Lauderdale, Florida.
The manufacturing relocation and exit costs of $1.9 million primarily consisted 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, $0.6 million in expenses related to the relocation of the K-Salt operations to the existing Matamoros, Mexico plant, $0.3 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.
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 three and six months ended September 30, 2018 and 2017 is as follows (amounts in thousands):
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
4,170

 
$
317

 
$
798

 
$
314

Costs charged to expense

 

 
873

 
520

Costs paid or settled
(1,313
)
 

 
(179
)
 
(520
)
Change in foreign exchange
(20
)
 
(7
)
 
2

 
(2
)
End of period
$
2,837

 
$
310

 
$
1,494

 
$
312


18



 
Six Months Ended September 30, 2018
 
Six Months Ended September 30, 2017
 
Personnel 
Reductions
 
Manufacturing 
Relocations
 
Personnel
 Reductions
 
Manufacturing 
Relocations
Beginning of period
$
9,629

 
$
330

 
$
999

 
$
406

TOKIN opening balance

 

 

 
314

Costs charged to expense
(79
)
 

 
1,111

 
1,895

Costs paid or settled
(6,449
)
 

 
(636
)
 
(2,301
)
Change in foreign exchange
(264
)
 
(20
)
 
20

 
(2
)
End of period
$
2,837

 
$
310

 
$
1,494

 
$
312


Note 6. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) for the three and six months ended September 30, 2018 and 2017 include the following components (amounts in thousands):
 
Foreign 
Currency
Translation  (1)(2)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit
Pension Plans, 
Net of Tax (3)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss) (2)
Balance at June 30, 2018
$
(14,488
)
 
$
840

 
$
(14,792
)
 
$
274

 
$
(3,284
)
 
$
(31,450
)
Other comprehensive income (loss) before reclassifications
(3,149
)
 

 

 
(6
)
 
4,099

 
944

Amounts reclassified out of AOCI

 
(39
)
 
248

 

 
1,089

 
1,298

Other comprehensive income (loss)
(3,149
)
 
(39
)
 
248

 
(6
)
 
5,188

 
2,242

Balance at September 30, 2018
$
(17,637
)
 
$
801

 
$
(14,544
)
 
$
268

 
$
1,904

 
$
(29,208
)
 
Foreign 
Currency
Translation  (1)(2)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit 
Pension Plans, 
Net of Tax (3)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss) (2)
Balance at June 30, 2017
$
(21,203
)
 
$
1,087

 
$
(14,854
)
 
$
274

 
$
3,859

 
$
(30,837
)
Other comprehensive income (loss) before reclassifications
9,020

 

 

 

 
(1,325
)
 
7,695

Amounts reclassified out of AOCI

 
(47
)
 
(297
)
 

 
(1,104
)
 
(1,448
)
Other comprehensive income (loss)
9,020

 
(47
)
 
(297
)
 

 
(2,429
)
 
6,247

Balance at September 30, 2017
$
(12,183
)
 
$
1,040

 
$
(15,151
)
 
$
274

 
$
1,430

 
$
(24,590
)

19



 
Foreign Currency
Translation (1) (2)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit
Pension Plans, 
Net of Tax (3)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss) (2)
Balance at March 31, 2018
$
9,715

 
$
879

 
$
(14,831
)
 
$
285

 
$
1,154

 
$
(2,798
)
Other comprehensive income (loss) before reclassifications
(27,352
)
 

 

 
(17
)
 
304

 
(27,065
)
Amounts reclassified out of AOCI

 
(78
)
 
287

 

 
446

 
655

Other comprehensive income (loss)
(27,352
)
 
(78
)
 
287

 
(17
)
 
750

 
(26,410
)
Balance at September 30, 2018
$
(17,637
)
 
$
801

 
$
(14,544
)
 
$
268

 
$
1,904

 
$
(29,208
)
 
Foreign Currency
Translation (1) (2)
 
Post-Retirement 
Benefit Plan Adjustments
 
Defined Benefit
Pension Plans, 
Net of Tax (3)
 
Ownership Share of
Equity Method 
Investees’ Other 
Comprehensive 
Income (Loss)
 
Foreign Exchange Contracts
 
Net Accumulated 
Other 
Comprehensive 
Income (Loss) (2)
Balance at March 31, 2017
$
(25,556
)
 
$
1,134

 
$
(14,998
)
 
$
(5,299
)
 
$
2,907

 
$
(41,812
)
Other comprehensive income (loss) before reclassifications
13,373

 

 

 
5,573

 
(1,432
)
 
17,514

Amounts reclassified out of AOCI

 
(94
)
 
(153
)
 

 
(45
)
 
(292
)
Other comprehensive income (loss)
13,373

 
(94
)
 
(153
)
 
5,573

 
(1,477
)
 
17,222

Balance at September 30, 2017
$
(12,183
)
 
$
1,040

 
$
(15,151
)
 
$
274

 
$
1,430

 
$
(24,590
)
_________________
(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 three and six months ended September 30, 2018 and 2017.
(2) March 31, 2017, March 31, 2018 and September 30, 2017 were adjusted due to the adoption of ASC 606.
(3) Ending balance is net of tax of $2.2 million as of September 30, 2018 and 2017, respectively.

Note 7. Equity Method Investments
The following table provides a reconciliation of equity method investments to the Company's Condensed Consolidated Balance Sheets (amounts in thousands):
 
 
September 30, 2018
 
March 31, 2018
Nippon Yttrium Co., Ltd ("NYC")
 
$
7,883

 
$
8,148

NT Sales Co., Ltd ("NTS")
 
1,052

 
998

Novasentis Inc. (“Novasentis”)
 
2,351

 
2,870

KEMET Jianghai Electronics Components Co., Ltd (“KEMET Jianghai”)
 
929

 

 
 
$
12,215

 
$
12,016

TOKIN's Joint Ventures - NYC and NTS    

NYC was established in 1966 by TOKIN (previously Tohoku Metal Industries Co., Ltd.) and Mitsui Mining and Smelting Co., Ltd (“Mitsui”). NYC was established to commercialize yttrium oxides and the Company owns 30% of NYC's stock. The carrying amount of the Company's equity investment in NYC was $7.9 million and $8.1 million as of September 30, 2018 and March 31, 2018, respectively.

NTS was established in 2004 by TOKIN, however subsequent to its formation, TOKIN sold 67% of its stock. NTS provides world-class electronic devices by utilizing global procurement networks and the Company owns 33% of NTS' stock. During the quarter ended September 30, 2018, a significant portion of NTS' sales were TOKIN’s products. The carrying amount of the Company's equity investment in NTS was $1.1 million and $1.0 million as of September 30, 2018 and March 31, 2018, respectively.


20



Summarized transactions between KEMET and NTS were as follows (amounts in thousands):
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
KEMET's sales to NTS
 
$
12,389

 
$
13,131

 
$
24,597

 
$
25,965

NTS' sales to KEMET
 
383

 
315

 
771

 
724

Investment in Novasentis
In fiscal year 2018, KEMET invested in the Series-D round of funding of Novasentis, a leading developer of film-based haptic actuators. Novasentis produces the world’s thinnest electro mechanical polymer-based actuators that provide rich haptic feedback for a variety of applications, including AR/VR and Wearables. Novasentis supplies its “smart” film and KEMET applies its expertise in manufacturing film capacitors to the development and commercial production of the actuators. The Company's ownership percentage in Novasentis is 15% and has 1 of 3 seats on Novasentis’ board of directors. Additionally, KEMET has an exclusive manufacturing supply agreement, whereby Novasentis will purchase goods exclusively from KEMET and KEMET shall manufacture and sell goods exclusively to Novasentis.

While the Company determined that Novasentis is a variable interest entity, the Company concluded that it is not the primary beneficiary of Novasentis. Accordingly, the Company accounts for its investment in Novasentis under the equity method of accounting.

The carrying amount of the Company's equity investment in Novasentis was $2.4 million and $2.9 million as of September 30, 2018 and March 31, 2018, respectively. As of both September 30, 2018 and March 31, 2018, the Company's maximum exposure to loss in its investment in Novasentis was limited to the carrying amount of its investment.

Under the equity method, the Company's share of profits and losses, and impairment charges from equity method investments are included in “Equity income (loss) from equity method investments” in the Condensed Consolidated Statements of Operations.
KEMET Jianghai Joint Venture
On January 29, 2018, the Company entered into a joint venture agreement with JIANGHAI (Nantong) Film Capacitor Co., Ltd (“Jianghai Film”), a subsidiary of Nantong Jianghai Capacitor Co., Ltd (“Jianghai”) for the formation of KEMET Jianghai, a limited liability company located in Nantong, China. KEMET Jianghai was officially formed on May 16, 2018 to manufacture axial electrolytic capacitors and (H)EV Film DC brick capacitors, for distribution through the KEMET and Jianghai Film sales channels. The Company's ownership percentage is 50% and the Company and Jianghai Film will be equally represented on the joint venture’s board of directors.

The Company's initial capital contribution to KEMET Jianghai was made during the second quarter of fiscal year 2019, and the Company accounts for its investment using the equity method due to the related nature of operations and its ability to influence the joint venture's decisions. As of September 30, 2018, the carrying amount of the Company's equity investment in KEMET Jianghai was $0.9 million.

Note 8. Segment and Geographic Information
The Company is organized into three segments: Solid Capacitors, the Film and Electrolytic segment (“Film and Electrolytic”) and MSA. 
The segments are responsible for their respective manufacturing sites as well as their 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.
Solid Capacitors
Solid Capacitors operates in ten 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.

21



Film and Electrolytic
Film and Electrolytic operates in ten manufacturing sites throughout Europe and Asia, and maintain product innovation centers in Italy, Portugal, and Sweden. Film and Electrolytic primarily produces film, paper, and wet aluminum electrolytic capacitors, which are sold globally. In addition, the Film and Electrolytic segment designs and produces electromagnetic interference filters.
MSA
MSA operates in four manufacturing sites throughout Asia and operates a product innovation center in Japan. MSA primarily produces electro-magnetically compatible ("EMC") materials and devices, piezo materials and actuators, and various types of sensors, which are sold globally.
In the following tables, revenue is disaggregated by primary geographical market, sales channel, and major product lines. The table also includes a reconciliation of the disaggregated revenue with the reportable segments for the three and six months ended September 30, 2018 and 2017 (amounts in thousands):
 
Three Months Ended September 30, 2018
 
Solid Capacitors
 
Film and Electrolytic
 
MSA
 
Total
 
 
 
 
 
 
 
 
Primary geographical markets
 

 
 
 
 

 
 
Asia and the Pacific Rim ("APAC")
$
106,535

 
$
12,709

 
$
19,144

 
$
138,388

Europe, the Middle East, and Africa ("EMEA")
46,073

 
30,831

 
828

 
77,732

North and South America ("Americas")
73,345

 
6,844

 
2,100

 
82,289

Japan and Korea ("JPKO")
9,520

 
244

 
41,060

 
50,824

 
$
235,473

 
$
50,628

 
$
63,132

 
$
349,233

 
 
 
 
 
 
 
 
Sales Channel
 
 
 
 
 
 
 
OEM
$
74,550

 
$
20,095

 
$
59,387

 
$
154,032

Distributor
116,947

 
24,762

 
2,707

 
144,416

EMS
43,976

 
5,771

 
1,038

 
50,785

 
$
235,473

 
$
50,628

 
$
63,132

 
$
349,233

 
 
 
 
 
 
 
 
Major product lines
 

 
 
 
 

 
 
Tantalum
$
148,054

 
$

 
$

 
$
148,054

Ceramics
87,419

 

 

 
$
87,419

Film and Electrolytic

 
50,628

 

 
$
50,628

MSA

 

 
63,132

 
$
63,132

 
$
235,473

 
$
50,628

 
$
63,132

 
$
349,233



22



 
Three Months Ended September 30, 2017
 
Solid Capacitors
 
Film and Electrolytic
 
MSA
 
Total (1)
 
 
 
 
 
 
 
 
Primary geographical markets
 

 
 
 
 

 
 
APAC
$
95,315

 
$
14,164

 
$
19,097

 
$
128,576

EMEA
37,333

 
28,686

 
566

 
66,585

Americas
54,545

 
5,148

 
1,975

 
61,668

JPKO
4,074

 

 
40,665

 
44,739

 
$
191,267

 
$
47,998

 
$
62,303

 
$
301,568

 
 
 
 
 
 
 
 
Sales Channel
 
 
 
 
 
 
 
OEM
$
66,923

 
$
22,295

 
$
60,360

 
$
149,578

Distributor
85,472

 
20,224

 
1,761

 
107,457

EMS
38,872

 
5,479

 
182

 
44,533

 
$
191,267

 
$
47,998

 
$
62,303

 
$
301,568

 
 
 
 
 
 
 
 
Major product lines
 
 
 
 
 
 
 
Tantalum
$
125,404

 
$

 
$

 
$
125,404

Ceramics
65,863

 

 

 
65,863

Film and Electrolytic

 
47,998

 

 
47,998

MSA

 

 
62,303

 
62,303

 
$
191,267

 
$
47,998

 
$
62,303

 
$
301,568

 __________________
(1) Three months ended September 30, 2017 adjusted due to the adoption of ASC 606.
 
Six Months Ended September 30, 2018
 
Solid Capacitors
 
Film and Electrolytic
 
MSA
 
Total
 
 
 
 
 
 
 
 
Primary geographical markets
 

 
 
 
 

 
 
APAC
$
206,907

 
$
28,297

 
$
36,143

 
$
271,347

EMEA
87,538

 
63,439

 
1,403

 
152,380

Americas
136,449

 
13,493

 
4,498

 
154,440

JPKO
18,400

 
354

 
79,928

 
98,682

 
$
449,294

 
$
105,583

 
$
121,972

 
$
676,849

 
 
 
 
 
 
 
 
Sales Channel
 
 
 
 
 
 
 
OEM
$
144,938

 
$
42,536

 
$
115,487

 
$
302,961

Distributor
224,580

 
51,330

 
5,192

 
281,102

EMS
79,776

 
11,717

 
1,293

 
92,786

 
$
449,294

 
$
105,583

 
$
121,972

 
$
676,849

 
 
 
 
 
 
 
 
Major product lines
 

 
 
 
 

 
 
Tantalum
$
282,367

 
$

 
$

 
$
282,367

Ceramics
166,927

 

 

 
166,927

Film and Electrolytic

 
105,583

 

 
105,583

MSA

 

 
121,972

 
121,972

 
$
449,294

 
$
105,583

 
$
121,972

 
$
676,849


23



    
 
Six Months Ended September 30, 2017
 
Solid Capacitors
 
Film and Electrolytic
 
MSA
 
Total (1)
 
 
 
 
 
 
 
 
Primary geographical markets
 

 
 
 
 

 
 
APAC
$
167,971

 
$
28,463

 
$
39,551

 
$
235,985

EMEA
74,965

 
57,167

 
946

 
133,078

Americas
112,743

 
9,851

 
3,738

 
126,332

JPKO
17,707

 

 
62,412

 
80,119

 
$
373,38