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 ourthe Company's contracts and customer specific business opportunities do not include a stated term, the Company amortizes these capitalized costs over the expected product life cycle, which is consistent with the estimated transfer of goods to the customer. Capitalized contract costs were $1.9$1.5 million and $2.2$1.6 million at SeptemberJune 30, 20182019 and March 31, 2018,2019, 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$0.2 million for the three and six months ended SeptemberJune 30, 2018, respectively,2019 and $0.2 million and $0.4 million for the three and six months ended September 30, 2017,2018, respectively. There was no impairment loss in relation to the costs capitalized for the three and six months ended SeptemberJune 30, 20182019 and 2017.2018. Amortization expense related to contract assets is recorded on the Condensed Consolidated Statements of Operations in the line item "Cost of sales."
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.
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.
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 are stated at the lower of cost or net realizable value. The components of inventories are as follows (amounts in thousands): |
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
Raw materials and supplies | $ | 104,160 |
| | $ | 97,119 |
|
Work in process | 83,856 |
| | 71,374 |
|
Finished goods | 86,766 |
| | 88,175 |
|
Subtotal | 274,782 |
| | 256,668 |
|
Inventory reserves | (18,642 | ) | | (15,539 | ) |
Inventories, net | $ | 256,140 |
| | $ | 241,129 |
|
|
| | | | | | | |
| 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
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.
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 |
|
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
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”).
Note 3. Debt
A summary of debt is as follows (amounts in thousands): |
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
TOKIN Term Loan Facility (1) | 284,623 |
| | 276,808 |
|
Customer Advances (2) | 20,906 |
| | 11,270 |
|
Other (3) | 6,567 |
| | 6,393 |
|
Total debt | 312,096 |
| | 294,471 |
|
Current maturities | (29,225 | ) | | (28,430 | ) |
Total long-term debt | $ | 282,871 |
| | $ | 266,041 |
|
_________________ |
| | | | | | | |
| 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 Amount shown areis net of discount, bank issuance costs, and other indirect issuance costs of $12.8$8.9 million and $13.3$8.7 million as of Septemberat June 30, 20182019 and March 31, 2018, respectively which reduce the Term Loan Credit Agreement (as defined herein) balance.2019, respectively.
(2) Amount shown is net of discount of $0.1$5.0 million and $2.1 million at SeptemberJune 30, 2018.2019, and March 31, 2019, respectively.
(3) Amounts are shown net of discounts of $0.4 million and $0.5$0.6 million at SeptemberJune 30, 20182019 and March 31, 2018,2019, respectively.
The line item “Interest expense” on the Condensed Consolidated Statements of Operations for the three and six months ended SeptemberJune 30, 20182019 and 2017,2018, consists of the following (amounts in thousands): |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Contractual interest expense | $ | 1,740 |
| | $ | 6,845 |
|
Capitalized interest | (105 | ) | | (64 | ) |
Amortization of debt issuance costs | 127 |
| | 116 |
|
Amortization of debt (premium) discount | 767 |
| | 98 |
|
Imputed interest on acquisition-related obligations | — |
| | 15 |
|
Interest expense on finance leases | 16 |
| | 26 |
|
Total interest expense | $ | 2,545 |
| | $ | 7,036 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
TOKIN Term Loan Credit AgreementFacility
On April 28, 2017,October 29, 2018, the Company entered into a JPY 33.0 billion Term Loan Credit Agreement (the “Term“TOKIN Term Loan Credit Agreement”Facility”) by and among TOKIN Corporation (“TOKIN”), the lenders party thereto (the “Lenders”) and Sumitomo Mitsui Trust Bank, Limited in its capacity as agent (the “Agent”), arranger and Lender. Funding for the TOKIN Term Loan Facility occurred on November 7, 2018. The proceeds, which were net of an arrangement fee withheld from the funding amount, were JPY 32.1 billion, or approximately $283.9 million using the exchange rate as of November 7, 2018. Net of the arrangement fee, bank issuance costs, and other indirect issuance costs, the Company's net proceeds from the TOKIN Term Loan Facility was $281.8 million.
The proceeds from the TOKIN Term Loan Facility were used by TOKIN to make intercompany loans (the “Intercompany Loans”) to the Company. The proceeds of the Intercompany Loans, along with other cash on hand, were used by the Company KEC (togetherto prepay in full the outstanding amounts under the Company's previous term loan of $323.4 million and a prepayment premium of 1.0%, or $3.2 million.
The TOKIN Term Loan Facility consists of (i) a JPY 16.5 billion (approximately $146.0 million using the exchange rate as of November 7, 2018) Term Loan A tranche (the “Term Loan A”) and (ii) a JPY 16.5 billion (approximately $146.0 million using the exchange rate as of November 7, 2018) Term Loan B tranche (the “Term Loan B” and, together with the 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,A, collectively, the “Term Loans”). The proceeds were used, together with cashPrincipal payments under Term Loan A are required semi-annually, in the amount of JPY 1.4 billion (approximately $12.8 million using the exchange rate as of June 30, 2019), while the principal of Term Loan B is due in one payment at maturity. At each reporting period, the carrying value of the loan is translated from Japanese Yen to U.S. Dollars using the spot exchange rate as of the end of the reporting period.
Interest payments are due semi-annually on 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 inwith the Term Loan Credit Agreement).interest rate based on a margin over the six-month Japanese TIBOR. The applicable margin for Term LoansLoan A is 5.0%2.00% and 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 AgreementB is 2.25%. Japanese TIBOR at any time, subject to certain notice requirements and certain prepayment premiums during the first two
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 interestJune 30, 2019 was 0.13%. Interest payable related to the TOKIN Term Loan Credit AgreementFacility 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$1.7 million as of June 30, 2019.
The Term Loans mature on September 30, 20182024. KEMET and March 31, 2018, respectively.certain subsidiaries of TOKIN provided guarantees of the obligations under the Term Loans, which also are secured by certain assets, properties and equity interests of TOKIN and its material subsidiaries. The Term Loans contain customary covenants applicable to both the Company and to TOKIN, including maintenance of a consolidated leverage ratio, the absence of two consecutive years of consolidated operating losses and the maintenance of certain required levels of consolidated net assets. The TOKIN Term Loan Facility agreement also contains customary events of default. The Company may prepay the Term Loans at any time, subject to certain notice requirements and reimbursement of loan breakage costs.
Revolving Line of Credit
In connection with the closing of the TOKIN Term Loan Credit Agreement, KEC alsoFacility on October 29, 2018, the Company entered into Amendment No. 910 to the Loan and Security Agreement, Waiver and Consent dated as of April 28, 2017,(the “Revolver Amendment”), by and among KEC,KEMET, KEMET Electronics Corporation (“KEC”), the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., a national banking association, as agent for the lenders (the “Loan Amendment”)lenders. The Revolver Amendment provides the Company with, among other things, increased flexibility for certain restricted payments (including dividends), which amendedand also released certain pledges that allowed the Company to obtain the TOKIN Term Loan and Security Agreement dated as of September 30, 2010 by and among KEC,Facility in order to pay in full 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”).Company's prior term loan. 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,has a facility amount of up to $75.0 million, which is based on factors including outstanding eligible accounts receivable, inventory, and equipment collateral,collateral. There were no borrowings under the revolving line of credit during the quarter ended June 30, 2019, and the Company’s available borrowing capacity under the Loan and Security Agreement was $75.0 million.was$62.5 million as of June 30, 2019.
AdvanceCustomer Advances
In September, 2018,November, and February of fiscal year 2019, the Company entered into an agreementthree agreements with a customerdifferent customers (the “Customer”“Customers”) pursuant to which the CustomerCustomers agreed to make advances (collectively, the “Advances”) to the Company in amountsan aggregate amount of up to $36.0 $72.0 million (the “Advance”(collectively, the “Customer Capacity Agreements”). The Company will use the Advanceis using these Advances to fund the purchase of production equipment and to make other investments and improvements in its business and operations (the “Investment”“Investments”) 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 CustomerCustomers from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advance.Advances. The AdvanceAdvances from the Customer will beCustomers are being made in quarterly installments (an “Installment”(“Installments”) over an expected period of 18 to 24 months starting in September 2018, withfrom the amounteffective date 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.Customer Capacity Agreements.
The AdvanceAdvances will be repaid beginning on the date that production from the InvestmentInvestments is sufficient to meet the Company's obligations under the agreementagreements with the Customer.Customers. Repayments will be made on a quarterly basis as determined by a calculationcalculations that generally takes into accountconsider the number of components purchased by the CustomerCustomers during the quarter. Repayments based on the calculationcalculations will continue until either the Advance isAdvances are repaid in full, or December 31, 2038.2038 for all three Customers. The Company has a quarterly repayment cap in the agreement with each of the Customers and is not required to make any quarterly repaymentrepayments to the Customers that in an amount thatthe aggregate exceeds $0.9$1.8 million. If the Customer doesCustomers do not purchase a number of components that would require full repayment of the AdvanceAdvances by December 31, 2038, then the AdvanceAdvances shall be deemed repaid in full. Additionally, if the Customer doesCustomers do not purchase a number of components that would require a payment on the AdvanceAdvances for a period of 16 consecutive quarters, the AdvanceAdvances shall be deemed repaid in full.full.
An initial advance paymentAs of $0.5 million was paid by the Customer to June 30, 2019, the Company on September 7, 2018.has received a total of $26.0 million in Advances from these Customers. Since the debt is non-interest bearing, we havethe Company has recorded a debt discount indiscounts on the amount of $0.1 million.Advances. This discounthese discounts will be amortized
over the expected life of the AdvanceAdvances through interest expense. During the three months ended June 30, 2019, the Company had $7.7 million in capital expenditures related to the Customer Capacity Agreements.
As of June 30, 2019, the Company had $2.6 million in cash that was restricted to be used to fund these Investments. Restricted cash is recorded within “Prepaid expenses and other current assets” in the Condensed Consolidated Balance Sheets.
Other Debt
In January 2017, KEMET’s wholly-owned subsidiary, KEMET Electronics Portugal, S.A. (“KEP”), a wholly owned subsidiary, entered into a program with the Portuguese government where KEP is eligible to receive interest free loans if purchases of fixed assets meet certain approved terms within the program. In January 2017, KEP received the first part of an interest free loan 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.KEP received the second part of the loan in the amount of EUR 0.3 million (or $0.3 million). The loan has a total termmaturity date of eight years ending February 1, 2025. The loan will be repaid through semi-annual payments on August 1 and February 1 of each year 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 paymentsrepayments will be in the amount of EUR 0.2 million (or $0.2 million).
In February 2019, KEP received a second interest free loan from the Portuguese government in the amount of EUR 0.9 million, (or $1.1 million). The loan has a maturity date of September 1, 2026 and will be repaid through semi-annual payments on March 1 and September 1 of each year beginning on March 1, 2021. The repayments will be in the amount of EUR 0.1 million (or $0.1 million).
Since the KEP debt is non-interest bearing, the Company has recorded 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 bediscounts on these loans. These discounts are being amortized over the life of the loanloans through interest expense. If certain conditions are met by KEP, such as increased headcount at its facility in Evora, Portugal, increased revenue, and increased gross value added, a portion of the loanthese loans could be forgiven during fiscal year 2020.forgiven.
In September 2017, TOKIN receivedhas 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, at an interest rate for the borrowing is the Japanese Tokyo Interbank Offered Rate (“TIBOR”)of 0.53% (Japanese TIBOR plus 40 basis points.points). The loan was originally due in September 2018 and was extended to September 2019. The loan agreement automatically renews annuallyfor successive one year periods if both parties choose not to terminate or modify it.
Note 4.3. Goodwill and Intangible Assets
The following table highlights the Company’s intangible assets (amounts in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | March 31, 2019 |
| | Carrying Amount | | Accumulated Amortization | | Net Amount | | Carrying Amount | | Accumulated Amortization | | Net Amount |
Indefinite Lived Intangible Assets: | | | | | | | | | | | | |
Trademarks | | $ | 15,375 |
| | $ | — |
| | $ | 15,375 |
| | $ | 15,151 |
| | $ | — |
| | $ | 15,151 |
|
Amortizing Intangibles: | | | | | |
| | | | | | |
Patents (10 - 18 years) | | 26,662 |
| | (12,401 | ) | | 14,261 |
| | 26,662 |
| | (12,046 | ) | | 14,616 |
|
Customer relationships (10 - 21 years) | | 38,714 |
| | (14,902 | ) | | 23,812 |
| | 37,850 |
| | (13,868 | ) | | 23,982 |
|
Other | | 215 |
| | (215 | ) | | — |
| | 214 |
| | (214 | ) | | — |
|
Total amortizing intangibles | | 65,591 |
| | (27,518 | ) | | 38,073 |
| | 64,726 |
| | (26,128 | ) | | 38,598 |
|
Total intangible assets | | $ | 80,966 |
| | $ | (27,518 | ) | | $ | 53,448 |
| | $ | 79,877 |
| | $ | (26,128 | ) | | $ | 53,749 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 each of the quartersthree months ended SeptemberJune 30, 20182019 and 2017,2018, 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$0.3 million and amortization related to customer relationships of $1.6$0.8 million.
The weighted-average useful life for patents was 15.8 years as of SeptemberJune 30, 20182019 and March 31, 2018,2019, respectively, and 12.3 years for customer relationships was 12.3 years as of SeptemberJune 30, 20182019 and March 31, 2018,2019, 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$15.7 million. Estimated amortization of patents for each of the next five fiscal years is $1.4 million, and thereafter, amortization will total $8.2$7.2 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$8.5 million.
There were no changes into the carrying amount of goodwill forduring the sixthree months ended SeptemberJune 30, 2018.2019. The Company’s goodwill balance was $40.3 million at SeptemberJune 30, 20182019 and March 31, 2018.
2019.
Note 5.4. 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 Septemberin progress or recently completed as of June 30, 20182019 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 |
| | — |
| — |
| | — |
| — |
|
|
| | | | | | | | | | | | | | | |
| | Total expected to be incurred | | Incurred during quarter ended June 30, 2019 | | 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 |
Tantalum powder facility relocation (1) | Solid Capacitors | 897 |
| 2,098 |
| | 448 |
| (552 | ) | | 448 |
| 2,805 |
|
Axial electrolytic production relocation from Granna to Evora | Film and Electrolytic | 673 |
| 3,964 |
| | 673 |
| 1,308 |
| | 673 |
| 3,603 |
|
Reorganization of MnO2 product line | Solid Capacitors | 3,128 |
| — |
| | 43 |
| — |
| | 1,628 |
| — |
|
__________________
(1) The current quarter credit for manufacturing relocation and exit costs is due to the recovery of costs related to the sale of tantalum that has been reclaimed (“tantalum reclaim”) as part of the plant exit activities. Tantalum reclaim in future periods is expected to further reduce the cumulative incurred costs.
A summary of the expenses aggregated in the Condensed Consolidated Statements of Operations line item “Restructuring charges” in the three and six months ended SeptemberJune 30, 20182019 and 2017,2018, is as follows (amounts in thousands): |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Personnel reduction costs | $ | 1,229 |
| | $ | (84 | ) |
Relocation and exit costs | 979 |
| | (12 | ) |
Restructuring charges | $ | 2,208 |
| | $ | (96 | ) |
|
| | | | | | | | | | | | | | | |
| 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 SeptemberJune 30, 20172019
The Company incurred $1.4$2.2 million in restructuring charges in the three months ended SeptemberJune 30, 20172019 comprised of $0.9$1.2 million in personnel reduction costs and $0.5$1.0 million in manufacturing relocation and exit costs.
The personnel reduction costs of $0.9$1.2 million were primarily due to $0.7 million in costs in the Film and Electrolytic segment related to severance charges across various overhead functionsresulting from the closing of the Granna, Sweden manufacturing plant as axial electrolytic production is being moved to the plant in Evora, Portugal and $0.5 million in costs in the Simpsonville, South Carolina officeSolid Capacitors segment related to severance charges resulting from the closing of the tantalum powder facility in Carson City, Nevada as these functions were relocatedtantalum powder production is moving to the Company's new corporate headquartersplant in Fort Lauderdale, Florida.Matamoros, Mexico.
The manufacturing relocation and exit costs of $0.5$1.0 million primarily consisted of $0.4related to $1.3 million in expenses related tocosts resulting from 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 toaxial electrolytic production equipment from the Company's new corporate headquartersplant in Fort Lauderdale, Florida.
The manufacturingGranna, Sweden to its plant in Evora, Portugal. 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,were benefited by a $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 productioncredit from Simpsonville, South Carolina to Victoria, Mexico.tantalum reclaim.
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 SeptemberJune 30, 20182019 and 20172018 is as follows (amounts in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Personnel Reductions | | Manufacturing Relocations | | Personnel Reductions | | Manufacturing Relocations |
Beginning of period | $ | 1,865 |
| | $ | 316 |
| | $ | 9,629 |
| | $ | 330 |
|
Costs charged to expense | 1,229 |
| | 979 |
| | (84 | ) | | (12 | ) |
Costs paid or settled | (1,315 | ) | | (979 | ) | | (5,131 | ) | | 12 |
|
Change in foreign exchange | 10 |
| | 9 |
| | (244 | ) | | (13 | ) |
End of period | $ | 1,789 |
| | $ | 325 |
| | $ | 4,170 |
| | $ | 317 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | |
| 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 6.5. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”)AOCI for the three and six months ended SeptemberJune 30, 20182019 and 20172018 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, net of Tax (1) | | Post-Retirement Benefit Plan Adjustments, net of Tax | | Defined Benefit Pension Plans, net of Tax (2) | | Ownership Share of Equity Method Investees’ Other Comprehensive Income (Loss), net of Tax | | Cash Flow Hedges, net of Tax | | Excluded Component of Fair Value Hedges, net of Tax | | Net Accumulated Other Comprehensive Income (Loss), net of Tax |
Balance at March 31, 2019 | $ | (14,350 | ) | | $ | 793 |
| | $ | (15,758 | ) | | $ | 274 |
| | $ | 566 |
| | $ | (2,249 | ) | | $ | (30,724 | ) |
Other comprehensive income (loss) before reclassifications (3) (4) | 5,834 |
| | — |
| | — |
| | — |
| | (1,704 | ) | | (346 | ) | | 3,784 |
|
Amounts reclassified out of AOCI | (2,655 | ) | | (37 | ) | | 164 |
| | — |
| | (4,294 | ) | | 1,638 |
| | (5,184 | ) |
Other comprehensive income (loss) | 3,179 |
| | (37 | ) | | 164 |
| | — |
| | (5,998 | ) | | 1,292 |
| | (1,400 | ) |
Balance at June 30, 2019 | $ | (11,171 | ) | | $ | 756 |
| | $ | (15,594 | ) | | $ | 274 |
| | $ | (5,432 | ) | | $ | (957 | ) | | $ | (32,124 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation, net of Tax (1) | | Post-Retirement Benefit Plan Adjustments, net of Tax | | Defined Benefit Pension Plans, net of Tax (2) | | Ownership Share of Equity Method Investees’ Other Comprehensive Income (Loss), net of Tax | | Cash Flow Hedges, net of Tax | | Excluded Component of Fair Value Hedges, net of Tax | | Net Accumulated Other Comprehensive Income (Loss), net of Tax |
Balance at March 31, 2018 | $ | 9,715 |
| | $ | 879 |
| | $ | (14,831 | ) | | $ | 285 |
| | $ | 1,154 |
| | $ | — |
| | $ | (2,798 | ) |
Other comprehensive income (loss) before reclassifications | (24,203 | ) | | — |
| | — |
| | (11 | ) | | (3,795 | ) | | — |
| | (28,009 | ) |
Amounts reclassified out of AOCI | — |
| | (39 | ) | | 39 |
| | — |
| | (643 | ) | | — |
| | (643 | ) |
Other comprehensive income (loss) | (24,203 | ) | | (39 | ) | | 39 |
| | (11 | ) | | (4,438 | ) | | — |
| | (28,652 | ) |
Balance at June 30, 2018 | $ | (14,488 | ) | | $ | 840 |
| | $ | (14,792 | ) | | $ | 274 |
| | $ | (3,284 | ) | | $ | — |
| | $ | (31,450 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 SeptemberJune 30, 20182019 and 2017.2018.
(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$2.4 million and $2.3 million as of SeptemberJune 30, 2019 and 2018, and 2017, respectively.
(3) Foreign currency translation, net of tax for the three months ended June 30, 2019 includes losses of $2.0 million related to a derivative instrument accounted for as a net investment hedge. Refer to Note 13, Derivatives, for further information.
(4) Cash flow hedges, net of tax for the three months ended June 30, 2019 includes losses of $6.9 million which were excluded from the assessment of hedge effectiveness.
Note 6. Changes in Stockholders' Equity
Changes in Stockholders' Equity for the three months ended June 30, 2019 and 2018 include the following components (amounts in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Shares Outstanding | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
Balance at March 31, 2019 | | 57,822 |
| | $ | 578 |
| | $ | 465,366 |
| | $ | 204,195 |
| | $ | (30,724 | ) | | $ | 639,415 |
|
Net income (loss) | | — |
| | — |
| | — |
| | 40,340 |
| | — |
| | 40,340 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | (1,400 | ) | | (1,400 | ) |
Cash dividends ($0.05 per share) | | — |
| | — |
| | — |
| | (2,900 | ) | | — |
| | (2,900 | ) |
Issuance of shares | | 196 |
| | 2 |
| | (1,387 | ) | | — |
| | — |
| | (1,385 | ) |
Stock-based compensation | | — |
| | — |
| | 2,725 |
| | — |
| | — |
| | 2,725 |
|
Balance at June 30, 2019 | | 58,018 |
| | $ | 580 |
| | $ | 466,704 |
| | $ | 241,635 |
| | $ | (32,124 | ) | | $ | 676,795 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Shares Outstanding | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
Balance at March 31, 2018 | | 56,641 |
| | $ | 566 |
| | $ | 462,737 |
| | $ | 3,370 |
| | $ | (2,798 | ) | | $ | 463,875 |
|
Net income (loss) | | — |
| | — |
| | — |
| | 35,220 |
| | — |
| | 35,220 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | (28,652 | ) | | (28,652 | ) |
Issuance of shares | | 706 |
| | 7 |
| | (5,536 | ) | | — |
| | — |
| | (5,529 | ) |
Stock-based compensation | | — |
| | — |
| | 4,060 |
| | — |
| | — |
| | 4,060 |
|
Balance at June 30, 2018 | | 57,347 |
| | $ | 573 |
| | $ | 461,261 |
| | $ | 38,590 |
| | $ | (31,450 | ) | | $ | 468,974 |
|
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): |
| | | | | | | | |
| | June 30, 2019 | | March 31, 2019 |
Nippon Yttrium Co., Ltd ("NYC") | | $ | 7,884 |
| | $ | 8,215 |
|
NT Sales Co., Ltd ("NTS") | | 1,258 |
| | 1,218 |
|
Novasentis Inc. (“Novasentis”) | | 671 |
| | 977 |
|
KEMET Jianghai Electronics Components Co., Ltd (“KEMET Jianghai”) | | 4,425 |
| | 2,515 |
|
| | $ | 14,238 |
| | $ | 12,925 |
|
Under the equity method, the Company's share of profits and losses and impairment charges on investments in affiliates are included in “Equity income (loss) from equity method investments” in the Consolidated Statements of Operations. |
| | | | | | | | |
| | 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$8.2 million as of SeptemberJune 30, 20182019 and March 31, 2018,2019, 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 SeptemberJune 30, 2018,2019, a significant portion of NTS' sales were TOKIN’s products. The carrying amount of the Company's equity investment in NTS was $1.1$1.3 million and $1.0$1.2 million as of SeptemberJune 30, 20182019 and March 31, 2018,2019, respectively.
Summarized transactions between KEMET and NTS were as follows (amounts in thousands):
| | | | Three Months Ended September 30, | | Six Months Ended September 30, | | Three Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
KEMET's sales to NTS | | $ | 12,389 |
| | $ | 13,131 |
| | $ | 24,597 |
| | $ | 25,965 |
| | $ | 11,537 |
| | $ | 12,208 |
|
NTS' sales to KEMET | | 383 |
| | 315 |
| | 771 |
| | 724 |
| | 307 |
| | 388 |
|
Investment in Novasentis
InDuring 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%27.9% and it has 1 of 3 seats on Novasentis’ board of directors. Additionally, KEMET has an exclusive manufacturing supply agreement with Novasentis, 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$0.7 million and $2.9$1.0 million as of SeptemberJune 30, 20182019 and March 31, 2018,2019, respectively. As of both SeptemberSubsequent to June 30, 2018 and March 31, 2018,2019, the Company's maximum exposure to loss in its investmentCompany purchased the remaining ownership interests in Novasentis was limited toand it became a wholly owned subsidiary of 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.Company.
KEMET Jianghai Joint Venture
On January 29, 2018, the CompanyKEC entered into a joint venture agreement (the “Agreement”) with JIANGHAIJianghai (Nantong) Film Capacitor Co., Ltd (“Jianghai Film”), a subsidiary of Nantong Jianghai Capacitor Co., Ltd (“Jianghai”) for the formation of KEMET Jianghai Electronic Components Co. Ltd., 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. During fiscal year 2019 the Company signed an amendment to the Agreement with Jianghai Film to expand the scope of KEMET Jianghai to also produce solid aluminum capacitors and aluminum electrolytic capacitors. The Company's ownership percentage is 50%50.0% and the Company and Jianghai Film will beare 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 SeptemberJune 30, 2018,2019, the carrying amount of the Company's equity investment in KEMET Jianghai was $0.9$4.4 million.
Note 8. Reportable Segment and Geographic Information
The Company is organized into three reportable segments: Solid Capacitors, the Film and Electrolytic, segmentand Electro-magnetic, Sensors & Actuators (“Film and Electrolytic”MSA”) and MSA. based primarily on product lines.
The reportable segments are responsible for their respective manufacturing sites as well as their research and development (“R&D”) efforts. The Company does not allocate corporate indirect selling, general and administrative (“SG&A”) or shared Research and development (“R&D”)&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 (polymer, aluminum, polymer,and Mn02) 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 teneight 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 reportable 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-magneticallyElectro-magnetic compatible ("EMC"(“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 tabletables also includes a reconciliationinclude reconciliations of the disaggregated revenue with the reportable segments for the three and six months ended SeptemberJune 30, 20182019 and 20172018 (amounts in thousands):
| | | Three Months Ended September 30, 2018 | Three Months Ended June 30, 2019 |
| Solid Capacitors | | Film and Electrolytic | | MSA | | Total | Solid Capacitors | | Film and Electrolytic | | MSA | | Total |
| | | | | | | | | | | | | | |
Primary geographical markets | |
| | | | |
| | | |
| | | | |
| | |
Asia and the Pacific Rim ("APAC") | $ | 106,535 |
| | $ | 12,709 |
| | $ | 19,144 |
| | $ | 138,388 |
| $ | 103,299 |
| | $ | 10,943 |
| | $ | 13,522 |
| | $ | 127,764 |
|
Europe, the Middle East, and Africa ("EMEA") | 46,073 |
| | 30,831 |
| | 828 |
| | 77,732 |
| 53,084 |
| | 27,793 |
| | 829 |
| | 81,706 |
|
North and South America ("Americas") | 73,345 |
| | 6,844 |
| | 2,100 |
| | 82,289 |
| 82,829 |
| | 7,794 |
| | 2,727 |
| | 93,350 |
|
Japan and Korea ("JPKO") | 9,520 |
| | 244 |
| | 41,060 |
| | 50,824 |
| 8,995 |
| | 179 |
| | 33,248 |
| | 42,422 |
|
| $ | 235,473 |
| | $ | 50,628 |
| | $ | 63,132 |
| | $ | 349,233 |
| $ | 248,207 |
| | $ | 46,709 |
| | $ | 50,326 |
| | $ | 345,242 |
|
| | | | | | | | | | | | | | |
Sales Channel | | | | | | | | |
Sales channel | | | | | | | | |
OEM | $ | 74,550 |
| | $ | 20,095 |
| | $ | 59,387 |
| | $ | 154,032 |
| $ | 77,704 |
| | $ | 18,527 |
| | $ | 46,972 |
| | $ | 143,203 |
|
Distributor | 116,947 |
| | 24,762 |
| | 2,707 |
| | 144,416 |
| 123,229 |
| | 22,326 |
| | 2,564 |
| | 148,119 |
|
EMS | 43,976 |
| | 5,771 |
| | 1,038 |
| | 50,785 |
| 47,274 |
| | 5,856 |
| | 790 |
| | 53,920 |
|
| $ | 235,473 |
| | $ | 50,628 |
| | $ | 63,132 |
| | $ | 349,233 |
| $ | 248,207 |
| | $ | 46,709 |
| | $ | 50,326 |
| | $ | 345,242 |
|
| | | | | | | | | | | | | | |
Major product lines | |
| | | | |
| | | |
| | | | |
| | |
Tantalum | $ | 148,054 |
| | $ | — |
| | $ | — |
| | $ | 148,054 |
| $ | 132,386 |
| | $ | — |
| | $ | — |
| | $ | 132,386 |
|
Ceramics | 87,419 |
| | — |
| | — |
| | $ | 87,419 |
| 115,821 |
| | — |
| | — |
| | 115,821 |
|
Film and Electrolytic | — |
| | 50,628 |
| | — |
| | $ | 50,628 |
| — |
| | 46,709 |
| | — |
| | 46,709 |
|
MSA | — |
| | — |
| | 63,132 |
| | $ | 63,132 |
| — |
| | — |
| | 50,326 |
| | 50,326 |
|
| $ | 235,473 |
| | $ | 50,628 |
| | $ | 63,132 |
| | $ | 349,233 |
| $ | 248,207 |
| | $ | 46,709 |
| | $ | 50,326 |
| | $ | 345,242 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
__________________ |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| Solid Capacitors | | Film and Electrolytic | | MSA | | Total |
| | | | | | | |
Primary geographical markets | |
| | | | |
| | |
APAC | $ | 100,370 |
| | $ | 15,589 |
| | $ | 17,000 |
| | $ | 132,959 |
|
EMEA | 41,466 |
| | 32,607 |
| | 575 |
| | 74,648 |
|
Americas | 63,105 |
| | 6,649 |
| | 2,397 |
| | 72,151 |
|
JPKO | 8,880 |
| | 110 |
| | 38,868 |
| | 47,858 |
|
| $ | 213,821 |
| | $ | 54,955 |
| | $ | 58,840 |
| | $ | 327,616 |
|
| | | | | | | |
Sales channel | | | | | | | |
OEM | $ | 70,388 |
| | $ | 22,441 |
| | $ | 56,100 |
| | $ | 148,929 |
|
Distributor | 107,634 |
| | 26,568 |
| | 2,484 |
| | 136,686 |
|
EMS | 35,799 |
| | 5,946 |
| | 256 |
| | 42,001 |
|
| $ | 213,821 |
| | $ | 54,955 |
| | $ | 58,840 |
| | $ | 327,616 |
|
| | | | | | | |
Major product lines | | | | | | | |
Tantalum | $ | 134,313 |
| | $ | — |
| | $ | — |
| | $ | 134,313 |
|
Ceramics | 79,508 |
| | — |
| | — |
| | 79,508 |
|
Film and Electrolytic | — |
| | 54,955 |
| | — |
| | 54,955 |
|
MSA | — |
| | — |
| | 58,840 |
| | 58,840 |
|
| $ | 213,821 |
| | $ | 54,955 |
| | $ | 58,840 |
| | $ | 327,616 |
|
(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 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
| $ | 373,386 |
| | $ | 95,481 |
| | $ | 106,647 |
| | $ | 575,514 |
|
| | | | | | | |
Sales Channel | | | | | | | |
OEM | $ | 125,915 |
| | $ | 42,735 |
| | $ | 98,160 |
| | $ | 266,810 |
|
Distributor | 172,392 |
| | 41,627 |
| | 8,187 |
| | 222,206 |
|
EMS | 75,079 |
| | 11,119 |
| | 300 |
| | 86,498 |
|
| $ | 373,386 |
| | $ | 95,481 |
| | $ | 106,647 |
| | $ | 575,514 |
|
| | | | | | | |
Major product lines | | | | | | | |
Tantalum | $ | 241,854 |
| | $ | — |
| | $ | — |
| | $ | 241,854 |
|
Ceramics | 131,532 |
| | — |
| | — |
| | 131,532 |
|
Film and Electrolytic | — |
| | 95,481 |
| | — |
| | 95,481 |
|
MSA | — |
| | — |
| | 106,647 |
| | 106,647 |
|
| $ | 373,386 |
| | $ | 95,481 |
| | $ | 106,647 |
| | $ | 575,514 |
|
__________________(1) Six months ended September 30, 2017 adjusted due to the adoption of ASC 606.
The following table reflects each segment’s operating income (loss), depreciation and amortization expenses, and restructuring charges for the three and six months ended SeptemberJune 30, 20182019 and 20172018 (amounts in thousands): |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Operating income (loss): | |
| | |
|
Solid Capacitors | $ | 102,686 |
| | $ | 69,665 |
|
Film and Electrolytic | (2,879 | ) | | 1,067 |
|
MSA | 3,658 |
| | 6,055 |
|
Corporate | (45,065 | ) | | (41,611 | ) |
| $ | 58,400 |
| | $ | 35,176 |
|
Depreciation and amortization expense: | |
| | |
|
Solid Capacitors | $ | 7,792 |
| | $ | 7,182 |
|
Film and Electrolytic | 2,291 |
| | 2,620 |
|
MSA | 1,510 |
| | 1,504 |
|
Corporate | 2,666 |
| | 1,791 |
|
| $ | 14,259 |
| | $ | 13,097 |
|
Restructuring charges: | | | |
Solid Capacitors | 121 |
| | (18 | ) |
Film and Electrolytic | 2,048 |
| | 1 |
|
MSA | — |
| | — |
|
Corporate | 39 |
| | (79 | ) |
| $ | 2,208 |
| | $ | (96 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Operating income (loss) (1): | |
| | |
| | |
| | |
|
Solid Capacitors | $ | 84,686 |
| | $ | 56,717 |
| | $ | 154,351 |
| | $ | 109,426 |
|
Film and Electrolytic | 4,236 |
| | 1,263 |
| | 5,303 |
| | 3,391 |
|
MSA | 7,132 |
| | 7,765 |
| | 13,187 |
| | 8,123 |
|
Corporate | (46,054 | ) | | (34,148 | ) | | (87,665 | ) | | (61,736 | ) |
| $ | 50,000 |
| | $ | 31,597 |
| | $ | 85,176 |
| | $ | 59,204 |
|
Depreciation and amortization expense: | |
| | |
| | |
| | |
|
Solid Capacitors | $ | 7,353 |
| | $ | 7,547 |
| | $ | 14,535 |
| | $ | 14,590 |
|
Film and Electrolytic | 2,198 |
| | 2,781 |
| | 4,818 |
| | 5,553 |
|
MSA | 1,153 |
| | 790 |
| | 2,657 |
| | 1,504 |
|
Corporate | 1,841 |
| | 2,436 |
| | 3,632 |
| | 4,366 |
|
| $ | 12,545 |
| | $ | 13,554 |
| | $ | 25,642 |
| | $ | 26,013 |
|
__________________(1) Restructuring charges included in Operating income (loss) are as follows (amounts in thousands). |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Restructuring charges: | |
| | |
| | |
| | |
|
Solid Capacitors | $ | — |
| | $ | 416 |
| | $ | (18 | ) | | $ | 720 |
|
Film and Electrolytic | — |
| | 104 |
| | 1 |
| | 265 |
|
MSA | — |
| | — |
| | — |
| | — |
|
Corporate | — |
| | 873 |
| | (79 | ) | | 2,021 |
|
| $ | — |
| | $ | 1,393 |
| | $ | (96 | ) | | $ | 3,006 |
|
Note 9. Defined Benefit Pension and Other Postretirement Benefit Plans
The Company sponsors eleventwelve defined benefit pension plans: six in Europe, one in Singapore, two in Mexico, and two in Japan.Japan, and one in Thailand. The Company funds the pension liabilities in accordance with laws and regulations applicable to those plans.
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
The balance sheet classifications and carrying amounts of the Company's pension and other post-retirement benefit plans are recorded using estimated amounts which may change as actual costs forat June 30, 2019 and March 31, 2019 consist of the fiscal year are determined.following (amounts in thousands): |
| | | | | | | | | | | | | | | | |
| | Pension | | Other Benefits |
| | June 30, 2019 | | March 31, 2019 | | June 30, 2019 | | March 31, 2019 |
Prepaid expenses and other current assets | | $ | 815 |
| | $ | 670 |
| | $ | — |
| | $ | — |
|
Accrued expenses | | (2,806 | ) | | (2,753 | ) | | (50 | ) | | (50 | ) |
Other non-current obligations | | (84,617 | ) | | (82,455 | ) | | (291 | ) | | (262 | ) |
Net amount recognized, end of period | | $ | (86,608 | ) | | $ | (84,538 | ) | | $ | (341 | ) | | $ | (312 | ) |
The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirementpost-retirement benefit plans for the three months ended SeptemberJune 30, 20182019 and 20172018 are as follows (amounts in thousands): |
| | | | | | | | | | | | | | | |
| Pension | | Other Benefits |
| Three Months Ended June 30, | | Three Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net service cost | $ | 1,250 |
| | $ | 1,233 |
| | $ | — |
| | $ | — |
|
Interest cost | 462 |
| | 478 |
| | 2 |
| | 3 |
|
Expected return on net assets | (470 | ) | | (531 | ) | | — |
| | — |
|
Amortization: | |
| | |
| | |
| | |
|
Actuarial (gain) loss | 113 |
| | 107 |
| | (37 | ) | | (39 | ) |
Prior service cost | 21 |
| | 23 |
| | — |
| | — |
|
Total net periodic benefit cost (credit) | $ | 1,376 |
| | $ | 1,310 |
| | $ | (35 | ) | | $ | (36 | ) |
|
| | | | | | | | | | | | | | | |
| Pension | | Other Benefits |
| Three Months Ended September 30, | | Three Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net service cost | $ | 1,233 |
| | $ | 1,316 |
| | $ | — |
| | $ | — |
|
Interest cost | 478 |
| | 425 |
| | 3 |
| | 3 |
|
Expected return on net assets | (531 | ) | | (504 | ) | | — |
| | — |
|
Amortization: | |
| | |
| | |
| | |
|
Actuarial (gain) loss | 107 |
| | 90 |
| | (39 | ) | | (47 | ) |
Prior service cost | 23 |
| | 20 |
| | — |
| | — |
|
Total net periodic benefit (income) costs | $ | 1,310 |
| | $ | 1,347 |
| | $ | (36 | ) | | $ | (44 | ) |
The components of net periodic benefit (income) costs relating to the Company’s pension and other postretirement benefit plans for the six months ended September 30, 2018 and 2017 are as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Pension | | Other Benefits |
| Six Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net service cost | $ | 2,466 |
| | $ | 2,632 |
| | $ | — |
| | $ | — |
|
Interest cost | 956 |
| | 850 |
| | 6 |
| | 6 |
|
Expected return on net assets | (1,062 | ) | | (1,007 | ) | | — |
| | — |
|
Amortization: | | | |
| | 0 |
| | |
|
Actuarial (gain) loss | 214 |
| | 181 |
| | (77 | ) | | (94 | ) |
Prior service cost | 46 |
| | 40 |
| | — |
| | — |
|
Total net periodic benefit (income) costs | $ | 2,620 |
| | $ | 2,696 |
| | $ | (71 | ) | | $ | (88 | ) |
All of the amounts in the tables above, other than service cost, were recorded in the line item "Other (income) expense, net" in our Condensed Consolidated Statements of Operations. In fiscal year 2019,2020, the Company expects to contribute up to $8.5$5.1 million to the pension plans, $5.0$0.9 million of which has been contributed as of SeptemberJune 30, 2018.2019. For the postretirement benefit plan, the Company’s policy is to pay benefits as costs are incurred.
Note 10. Stock-Based Compensation
As of SeptemberJune 30, 2018,2019, 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 utilized by the Company has to issue equity basedequity-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 has authorized, in the aggregate, 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 Plansprior 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 Internal Revenue 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 one to three years and expire ten years from the grant date.
Restricted stockStock Units (“RSUs”) and Long-term Incentive Plans (“LTIP”)
Time-based RSUs issued under these plans vest over one to fourthree years, except for RSUs granted to members of the Board of Directors (the “Board”), which vest immediately beginning in fiscal year 2019.immediately. The Company grants RSUs to members of the Board, the Chief Executive Officer and key members of management. Once vested and settled, RSUs are converted into restricted stock. For members of the Board and key members of management, 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 the Company has approved annual Long Term Incentive Plans (“LTIP”),LTIPs, which cover two yeartwo-year periods and are primarily based upon the achievement of an Adjustedadjusted 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’sCompany's Board. The 2016/2017, 2017/2018, 2018/2019 and 2019/2020 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. The 2017/2018 LTIP, 2018/2019 LTIP, 2019/2020 LTIP and 2020/2021 LTIP also awarded time-based RSUs which vest over the course of three years from the anniversary of the grant date and are not subject to a performance metric. Any related liability (for the cash portion of the LTIP) is reflected in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets and any RSU commitment is reflected in the line item “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.
On May 18, 2018,2019, the Company granted RSUs under the 2019/20202020/2021 LTIP with a grant date fair value of $17.86$17.43 that vest as follows (amounts in thousands):
|
| | |
| Shares |
May 18, 2019 | 63 |
|
May 18, 2020 | 13866 |
|
May 18, 2021 | 140141 |
|
May 18, 2022 | 144 |
|
Total sharesRSUs granted (1) | 341351 |
|
__________________(1) RSUs granted include a performance component. Therefore, the granted sharesRSUs shown above are an estimate based upon current performance expectations. The final number of sharesRSUs granted depends on the achievement of performance metrics.
The following is the vesting schedule of RSUs under each respective LTIP, which vested during the sixthree months ended SeptemberJune 30, 20182019 (shares in thousands):
|
| | | | | | | | | |
| | 2019/2020 | | 2018/2019 | | 2017/2018 |
Time-based award vested | | 53 |
| | 58 |
| | 156 |
|
Performance-based award vested | | — |
| | — |
| | — |
|
|
| | | | | | | | | |
| | 2018/2019 | | 2017/2018 | | 2016/2017 |
Time-based award vested | | 72 |
| | 198 |
| | 191 |
|
Performance-based award vested | | — |
| | — |
| | 173 |
|
Restricted stockRSU activity, excluding theincluding performance-based and time-based LTIP activity, discussed above, for the sixthree months ended SeptemberJune 30, 20182019 is as follows (amounts in thousands except fair value): | | | Shares | | Weighted- average Fair Value on Grant Date | Shares | | Weighted- average Fair Value on Grant Date |
Non-vested restricted stock at March 31, 2018 | 1,405 |
| | $ | 9.82 |
| |
Non-vested RSUs at March 31, 2019 | | 1,415 |
| | $ | 15.19 |
|
Granted | 83 |
| | 25.13 |
| 351 |
| | 17.43 |
|
Vested | (507 | ) | | 13.66 |
| (267 | ) | | 7.92 |
|
Forfeited | (11 | ) | | 6.84 |
| (8 | ) | | 15.32 |
|
Non-vested restricted stock at September 30, 2018 | 970 |
| | $ | 9.16 |
| |
Non-vested RSUs at June 30, 2019 | | 1,491 |
| | $ | 17.02 |
|
Vested shares include the acceleration of 275,000 shares related to the April 18, 2018 Amended and Restated Employment Agreement for Per-Olof Loof, Chief Executive Officer, which amends and restates Mr. Loof's prior employment agreement with the Company dated June 29, 2015. Upon the signing of the Amended and Restated Employment Agreement, certain RSUs previously granted to Mr. Loof on June 29, 2015, totaling 175,000 shares, and on September 6, 2017, totaling 100,000 shares, both of which were scheduled to vest over time, became fully vested. Incremental compensation cost resulting from the modification totaled $1.7 million.
The compensation expense associated with stock-based compensation for the three months ended SeptemberJune 30, 20182019 and 20172018 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Stock Options | | RSUs | | LTIPs | | Stock Options | | RSUs | | LTIPs |
Cost of sales | $ | — |
| | $ | 490 |
| | $ | 384 |
| | $ | — |
| | $ | 351 |
| | $ | 238 |
|
Selling, general and administrative expenses | — |
| | 1,005 |
| | 730 |
| | — |
| | 2,881 |
| | 521 |
|
Research and development | — |
| | 34 |
| | 82 |
| | — |
| | 16 |
| | 53 |
|
Total | $ | — |
| | $ | 1,529 |
| | $ | 1,196 |
| | $ | — |
| | $ | 3,248 |
| | $ | 812 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Three Months Ended September 30, 2017 |
| Stock Options | | Restricted Stock | | LTIPs | | Stock Options | | Restricted Stock | | LTIPs |
Cost of sales | $ | — |
| | $ | 351 |
| | $ | 335 |
| | $ | — |
| | $ | 174 |
| | $ | 168 |
|
Selling, general and administrative expenses | — |
| | 2,807 |
| | 840 |
| | — |
| | 726 |
| | 416 |
|
Research and development | — |
| | 17 |
| | 67 |
| | — |
| | 10 |
| | 36 |
|
Total | $ | — |
| | $ | 3,175 |
| | $ | 1,242 |
| | $ | — |
| | $ | 910 |
| | $ | 620 |
|
The compensation expense associated with stock-based compensation for the six months ended September 30, 2018 and 2017 is recorded on the Condensed Consolidated Statements of Operations as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended September 30, 2018 | | Six Months Ended September 30, 2017 |
| Stock Options | | Restricted Stock | | LTIPs | | Stock Options | | Restricted Stock | | LTIPs |
Cost of sales | $ | — |
| | $ | 701 |
| | $ | 574 |
| | $ | — |
| | $ | 338 |
| | $ | 314 |
|
Selling, general and administrative expenses | — |
| | 5,688 |
| | 1,361 |
| | — |
| | 1,083 |
| | 804 |
|
Research and development | — |
| | 32 |
| | 121 |
| | — |
| | 19 |
| | 73 |
|
Total | $ | — |
| | $ | 6,421 |
| | $ | 2,056 |
| | $ | — |
| | $ | 1,440 |
| | $ | 1,191 |
|
In the “Operating activities” section of the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to Netnet income (loss) for the sixthree months ended SeptemberJune 30, 2018,2019, and 2017.2018. There were 71,30016,667 stock options exercised in the sixthree months ended SeptemberJune 30, 20182019 and 644,79544,100 stock options were exercised in the sixthree months ended SeptemberJune 30, 2017.
2018.
Note 11. Income Taxes
During the quarterthree months ended SeptemberJune 30, 2018,2019, the Company recognized $2.0$16.8 million of income tax expense, solely comprised of $2.0 million of income tax expense related to foreign operations. The $2.0$5.7 million of income tax expense related to foreign operations, includes a $1.2 million expense related to the final settlement of an uncertain tax position. During the six months ended September 30, 2018, the Company recognized $6.6 million of income tax expense, comprised of $6.7 million of income tax expense related to foreign operations and $0.2 million of federal income tax expense, offset by $0.3 million of state income tax benefit. The $6.7 million of income tax expense related to foreign operations includes a $0.3 million expense related to the settlement of an uncertain tax position.
During the quarter ended September 30, 2017, the Company recognized $2.9 million of income tax expense comprised of $2.7 million of income tax expense related to foreign operations, $0.1$11.0 million of federal income tax expense, and $0.1 million of state income tax expense.
During the sixthree months ended September June 30, 2017,2018, the Company recognized $4.0$4.6 million of income tax expense, comprised of $3.6$4.7 million of income tax expense related to foreign operations, $0.2 million of federal income tax expense, and $0.2
$0.3 million of state income tax expense.benefit. The $4.7 million of income tax expense related to foreign operations included a $0.9 million benefit related to the settlement of an uncertain tax position.
The effective tax rates differ from income taxes recorded using a statutory rate largely due to the relative mix in earnings and losses in various tax jurisdictions, and the usage of the net operating losses, and reversal of associated valuation allowances previously recorded on the deferred tax assets.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings.
The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act. At September 30, 2018, the Company has not completed its accounting for all of the tax effects of the Act. In certain cases, as described below, the Company has made a reasonable estimate of certain effects of the Act. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under
ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. The Company’s estimates may also be affected as it gains a more thorough understanding of the tax law. These changes could be material to income tax expense.
The Company has initially determined a $0.8 million tax benefit impact related to the US federal corporate tax rate change to its existing deferred tax balances, which was included as a component of income tax expense for fiscal year 2018. The Company estimates no tax impact from the estimated transition tax repatriation charge of $75.3 million due to net operating loss utilization and a valuation allowance in the U.S. There is no impact to foreign locations. The Company is working to finalize the calculation for the one-time transition tax and in the interim we will continue to account for this item based on its existing accounting under ASC 740, Income Taxes.
Certain provisions of the Act did not impact the Company until the current fiscal year. These provisions include, but are not limited to, the base erosion anti-abuse tax (“BEAT”), the provision designed to tax global intangible low-taxed income (“GILTI”), the foreign-derived intangible income (“FDII”) provision, and the provision designed to limit interest expense deductions. Given the complexity of the new provisions, the Company continues to evaluate the impact the Act will have on the Condensed Consolidated Financial Statements.
The Company has made sufficient progress in its calculations related to BEAT to reasonably estimate the effect on its estimated annual effective tax rate for the 2019 fiscal year. This adjustment increased the annual effective tax rate by 0.5% and will be further evaluated in future interim periods. However, the Company is still evaluating the effects of GILTI, FDII, and the provision designed to limit interest expense deductions, and the Company is not able to quantify the impact on the Condensed Consolidated Financial Statements at this time. In addition, FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either treat taxes due on the GILTI as a current period expense or factor such amounts into the measurement of its deferred taxes. Given the complexity of the GILTI provisions, the Company is still evaluating and has not yet determined its accounting policy.
Note 12. Basic and Diluted Net Income (Loss) Per Common Share
Basic earnings per share calculation is based on the weighted-average number of common shares outstanding. Diluted earnings per share calculation is based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options and RSUs.
The following table presents basic earnings per share (“EPS”) and diluted EPS (amounts in thousands, except per share data): | | | Three Months Ended September 30, | | Six Months Ended September 30, | Three Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
Numerator: | |
| | |
| | | | | |
| | |
|
Net income (loss) (1) | $ | 37,141 |
| | $ | 12,819 |
| | $ | 72,361 |
| | $ | 233,258 |
| |
Net income | | $ | 40,340 |
| | $ | 35,220 |
|
Denominator: | |
| | |
| | | | | |
| | |
|
Weighted-average shares outstanding: | |
| | |
| | | | | |
| | |
|
Basic | 57,799 |
| | 49,819 |
| | 57,570 |
| | 48,607 |
| 58,350 |
| | 57,339 |
|
Assumed conversion of employee stock grants | 1,398 |
| | 2,284 |
| | 1,549 |
| | 2,489 |
| 705 |
| | 1,699 |
|
Assumed conversion of warrants | — |
| | 6,306 |
| | — |
| | 7,040 |
| |
Diluted | 59,197 |
| | 58,409 |
| | 59,119 |
| | 58,136 |
| 59,055 |
| | 59,038 |
|
| | | | | | | | | | |
Net income (loss) per basic share | $ | 0.64 |
| | $ | 0.26 |
| | $ | 1.26 |
| | $ | 4.80 |
| |
Net income per basic share | | $ | 0.69 |
| | $ | 0.61 |
|
| | | | | | | | | | |
Net income (loss) per diluted share (2) | $ | 0.63 |
| | $ | 0.22 |
| | $ | 1.22 |
| | $ | 4.01 |
| |
Net income per diluted share | | $ | 0.68 |
| | $ | 0.60 |
|
__________________ (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.
CommonThere were no common stock equivalents that could potentially dilute net income (loss) per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive,anti-dilutive.
Note 13. Derivatives
Certain of the Company’s foreign operations expose the Company to fluctuations in currency exchange rates. These fluctuations may impact the value of the Company’s cash payments, assets, and liabilities in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value of certain obligations and its net investment in its TOKIN subsidiary in terms of its functional currency, the U.S. dollar. The Company’s primary exposure to foreign currency exchange rate risk relates to (i) intercompany financings with TOKIN, (ii) its net investment in TOKIN, and (iii) certain operating expenses at the Company’s Mexican facilities.
The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not utilize derivatives for speculative or other purposes other than currency risk management. The use of derivative financial instruments carries certain risks, including the risk that any counterparty to a contractual arrangement may not be able to perform under the agreement. To mitigate this risk, historically the Company has only entered into derivative financial instruments with a counterparty that is a major financial institution with a high credit rating. The Company does not anticipate that the counterparty will fail to meet its obligations.
Each derivative instrument that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged, and the Company monitors each instrument for effectiveness on a quarterly basis. The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.
Changes in fair value of all its derivative instruments are reported in earnings or in AOCI, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction. The Company records all derivative financial instruments on its Condensed Consolidated Balance Sheets at fair value. Certain of the derivative
instruments are subject to master netting agreements and are presented in the Condensed Consolidated Balance Sheets on a net basis. If the Company were to account for the asset and liability balances of those derivative contracts on a gross basis, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current net presentation to the gross amounts as detailed in the table below.
The balance sheet classifications and fair value of derivative instruments designated as hedges as of June 30, 2019 and March 31, 2019 are as follows (amounts in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Assumed conversion of employee stock grants | — |
| | 121 |
| | — |
| | 97 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value of Derivative Instruments |
| | | | June 30, 2019 | | March 31, 2019 |
| | Balance Sheet Location | | As Presented | | Offset | | Gross | | As Presented | | Offset | | Gross |
Derivative Assets | | | | | | | | | | | | | | |
Cross-currency swaps | | Other assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,577 |
| | $ | — |
| | $ | 4,577 |
|
Foreign exchange contracts | | Prepaid and other current assets | | 706 |
| | 633 |
| | 1,339 |
| | 564 |
| | 645 |
| | 1,209 |
|
| | | | | | | | | | | | | | |
Derivative Liabilities | | | | | | | | | | | | | | |
Cross-currency swaps | | Other non-current obligations | | $ | 3,145 |
| | $ | — |
| | $ | 3,145 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Foreign exchange contracts | | Accrued expenses | | — |
| | 633 |
| | 633 |
| | — |
| | 645 |
| | 645 |
|
Note 13: DerivativesFair Value Hedging Strategy
The Company entered into two cross-currency swaps designated as fair value hedges on November 7, 2018 to hedge the foreign currency risk on the Intercompany Loans. These agreements were contracts to exchange floating-rate payments in one currency with floating-rate payments in another currency. Changes in the fair value of these cross-currency swaps due to changes in foreign currency exchange rates were recognized in earnings upon the recognition of the change in the fair value of the hedged intercompany financings. The notional value of these contracts was JPY 31.6 billion or $279.7 million at March 31, 2019.
The Company terminated these contracts with the counterparty on May 28, 2019, and received proceeds of $6.5 million for the combined fair value of these contracts at the time of termination.
Hedges of Net Investments in Foreign Operations Strategy
The Company entered into a cross-currency swap designated as a net investment hedge on November 7, 2018 to hedge the JPY currency exposure of the Company’s net investment in TOKIN. This agreement is a contract to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. Changes in the fair value of this swap are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments. In assessing the effectiveness of this hedge, the Company uses certain derivative instrumentsa method based on changes in spot rates to measure the impact of the foreign currency exchange rate fluctuations on both its foreign subsidiary net investment and the related swap. Under this method, changes in the fair value of the hedging instrument other than those due to changes in the spot rate are initially recorded in AOCI as a translation adjustment, and then are amortized into other (income) expense, net in the Condensed Consolidated Statement of Operations using a systematic and rational method over the instrument’s term. Changes in the fair value associated with the effective portion (i.e., foreign exchange contracts) to reduce exposure those changes due to the volatilityspot rate) are recorded in AOCI as a translation adjustment and are released and recognized in earnings only upon the sale or liquidation of foreign currencies impacting revenuesthe hedged net investment. The terms of this cross-currency swap are as follows:
An amortizing cross-currency swap with an initial notional value of JPY 33.0 billion. The notional amount is amortized by approximately JPY 1.4 billion every six months and matures on September 30, 2024. Interest payments are made by the costsCompany in JPY on March 31 and September 30 of its products.each year based on the JPY notional value and a fixed rate of 2.61%. The Company receives interest in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of 6.25%.
The notional value of this contract was JPY 31.6 billion or $279.7 million at June 30, 2019 and March 31, 2019, respectively.
Cash Flow Hedging Strategy
Foreign Exchange Contracts
Certain operating expenses at the Company’s Mexican facilities are paid in Mexican Pesos. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than twelvefifteen months, to buy Mexican Pesos for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. The notional value of outstanding Peso contracts was $71.3 million and $70.6 million as of September 30, 2018 and March 31, 2018, respectively.
The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.
The Company records and presents the fair values of all of its derivative assets and liabilities in the Condensed Consolidated Balance Sheets on a net basis, since they are subject to master netting agreements. If the Company were to account for the asset and liability balances of its forward foreign currency exchange contracts on a gross basis, the amounts presented in the Condensed Consolidated Balance Sheets would be adjusted from the current net presentation to the gross amounts as detailed in the following table.
The balance sheet classifications and fair value of derivative instruments as of September 30, 2018 and March 31, 2018 are as follows (amounts in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value of Derivative Instruments (1) |
| | September 30, 2018 | | March 31, 2018 |
| | As Presented (1) | | Offset | | Gross | | As Presented (1) | | Offset | | Gross |
Prepaid and other current assets | | $ | 1,903 |
| | $ | 30 |
| | $ | 1,933 |
| | $ | 1,154 |
| | $ | — |
| | $ | 1,154 |
|
Accrued expenses | | — |
| | (30 | ) | | (30 | ) | | — |
| | — |
| | — |
|
| | $ | 1,903 |
| | $ | — |
| | $ | 1,903 |
| | $ | 1,154 |
| | $ | — |
| | $ | 1,154 |
|
_________________(1) Fair Value measured using Level 2 inputs by adjusting the market spot rate by forward points, based on the date of the contract. The spot rates and forward points used are based on an average rate from an actively traded market.
Amounts reclassified from AOCI to earnings on the Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2018 and 2017 are as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net Sales | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating costs and expenses: | |
|
| |
|
| |
|
| |
|
|
Cost of sales | | (1,089 | ) | | 1,104 |
| | (446 | ) | | 45 |
|
Total operating costs and expenses | | (1,089 | ) | | 1,104 |
| | (446 | ) | | 45 |
|
Operating income (loss) | | $ | (1,089 | ) | | $ | 1,104 |
| | $ | (446 | ) | | $ | 45 |
|
inception.Unrealized gains and losses associated with the change in fair value of these financial instrumentsthe foreign exchange contracts are recorded in AOCI. Changes in the derivatives’ fair values are deferred and recorded as a component of AOCI until the underlying transaction is settled and recorded to the Condensed Consolidated Statement of Operations. When the hedged item affects income, gains or losses are reclassified from AOCI to the Condensed Consolidated Statement of Operations as Cost of salesSales for foreign exchange contracts to purchase such foreign currency. Any ineffectiveness, if material,The notional value of outstanding Peso contracts was $100.7 million and $74.3 million as of June 30, 2019 and March 31, 2019, respectively.
Cross-Currency Swaps
On May 28, 2019, the Company entered into two cross-currency swaps designated as cash flow hedges to hedge the foreign currency risk on the principal payments on the Intercompany Loans. These agreements are contracts to exchange floating-rate payments in one currency with fixed-rate payments in another currency. The Company uses these cross-currency swaps to hedge the changes in cash flows on the Intercompany Loans due to changes in foreign currency exchange rates. For this hedging program, the Company records the remeasurement of the Intercompany Loans due to changes in foreign currency exchange rates each period. Changes in the Company’s hedging relationshipsfair value of these cross-currency swaps are initially recorded in AOCI each period with an immediate reclassification into earnings for the change in fair value attributable to the fluctuations in foreign currency exchanges. The Company excludes the change in the fair value of these cross-currency swaps due to changes in interest rates from the assessment of hedge effectiveness. Changes in fair value of the swaps associated with changes in interest rates are initially recorded as a component of AOCI and recognized into other (income) expense, net in the Consolidated Statement of Operations using a systematic and rational method over the instrument’s term. The terms of the two cross-currency swaps designated as cash flow hedges are as follows:
An amortizing cross-currency swap with an initial notional value of JPY 15.1 billion. The notional value is recognizedamortized by approximately JPY 1.4 billion every six months and matures on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus 2.00%. Interest payments are made in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of 4.88%.
A non-amortizing cross-currency swap with a notional value of JPY 16.5 billion maturing on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus 2.25%. Interest payments are made in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of 5.26%.
The notional value of these contracts were JPY 31.6 billion, or $288.9 million as of June 30, 2019.
immediatelyHedging Strategy Impact on Statements of Operations
The following tables present gain and loss activity for the three months ended June 30, 2019 and 2018 for derivative instruments designated as a losshedges (amounts in thousands): |
| | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended June 30, 2019 |
| | | | | | Gain (Loss) |
Derivative Instrument | | Hedge Designation | | Location of Gain (Loss) Recognized in Statements of Operations | | Recognized in AOCI | | Reclassified from AOCI to Income | | Recorded Directly to Income |
Cross-currency swaps (1) | | Fair Value | | Other income/expense, net | | $ | (346 | ) | | $ | (1,622 | ) | | $ | 3,337 |
|
Cross-currency swaps (2) | | Net Investment | | Other income/expense, net | | (2,006 | ) | | 2,655 |
| | — |
|
Cross-currency swaps (3) | | Cash Flow | | Other income/expense, net | | (2,231 | ) | | 3,909 |
| | — |
|
Foreign exchange contracts (4) | | Cash Flow | | Cost of sales | | 527 |
| | 385 |
| | — |
|
|
| | | | | | | | | | | | | |
| | | | | | Three-Months Ended June 30, 2018 |
| | | | | | Gain (Loss) |
Derivative Instrument | | Hedge Designation | | Location of Gain (Loss) Recognized in Statements of Operations | | Recognized in AOCI | | Reclassified from AOCI to Income | | Recorded Directly to Income |
Foreign exchange contracts (4) | | Cash Flow | | Cost of sales | | (3,795 | ) | | 643 |
| | — |
|
_________________
(1) Amounts recognized in AOCI represent the change in the fair value of the derivative instruments related to the excluded components. Amounts reclassified from AOCI to income represent amortization of excluded components based upon the instruments' periodic coupons. Amounts recorded directly to income represent the change in the fair value of the derivative instruments related to the effective portion of the qualifying hedge.
(2) Amounts recognized in AOCI represent the total change in the fair value of the derivative instrument. Amounts recorded to AOCI are recorded within foreign currency translation. Amounts reclassified from AOCI to income represent amortization of excluded components based on the instrument's periodic coupon.
(3) Amounts recognized in AOCI represent the total change in the fair value of the derivative instruments. Amounts reclassified from AOCI to income represent the change in the fair value of the derivative instruments related of the effective portion of the qualifying hedges, as well as amortization of the excluded components based upon the instruments' periodic coupons. For the three months ended June 30, 2019, the amount reclassified to income from AOCI includes $4.7 million in gains related to the effective portion of the hedges and $0.8 million in losses related to amortization of the excluded components.
(4) Amounts recognized in AOCI represent the total change in the fair value of the derivative instruments. Amounts reclassified from AOCI to income represent the change in the fair value of the derivative instruments pertaining to the settlement of the qualifying hedged item (effective portion).
The following tables present the total amount of each income and expense line item presented in the Condensed Statements of Operations in which the results of fair value and cash flow hedges are recorded and the effects of those hedging strategies on income (amounts in thousands): |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| | Cost of sales | | Other income (expense), net | | Cost of sales | | Other income (expense), net |
Total income (expense) in Statements of Operations | | $ | (223,614 | ) | | $ | 726 |
| | $ | (232,795 | ) | | $ | 11,371 |
|
| | | | | | | | |
Fair value hedging impact | | | | | | | | |
Cross-currency swaps: | | | | | | | | |
Gain (loss) on hedged item | | — |
| | (3,337 | ) | | — |
| | — |
|
Gain (loss) on derivative instrument (1) | | — |
| | 1,715 |
| | — |
| | — |
|
| | | | | | | | |
Cash flow hedging impact | | | | | | | | |
Cross-currency swaps: | | | | | | | | |
Gain (loss) reclassified from AOCI to income (2) | | — |
| | 3,909 |
| | — |
| | — |
|
Foreign exchange contracts: | | | | | | | | |
Gain (loss) reclassified from AOCI to income (3) | | 385 |
| | — |
| | 643 |
| | — |
|
_________________
(1) Amounts recognized in income includes the change in the fair value of the derivative instruments related to the effective portion of the qualifying hedges and amortization of the excluded components.
(2) Net losses of $8.5 million are expected to be reclassified from AOCI into income within the samenext 12 months.
(3) Net gains of $1.5 million are expected to be reclassified from AOCI into income statement accountswithin the next 12 months.
Note 14. Leases
The Company’s operating leases are primarily for distribution facilities, and sales and administrative offices. These operating leases have lease periods expiring between 2019 and 2061.
The Company’s finance leases are primarily for vehicles and certain network equipment. These leases expire between 2019 and 2024. Many leases require the Company to pay certain executory costs (taxes, insurance, and maintenance) and contain renewal and purchase options. The Company does not assume renewals in the determination of the lease term unless renewals are deemed to be reasonably assured at lease commencement. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expense for the three months ended June 30, 2019 are as described above;follows (amounts in thousands): |
| | | |
| Three Months Ended June 30, 2019 |
Operating lease expense | $ | 2,404 |
|
Variable lease expense and other, net (1) | 277 |
|
Short-term lease expense | — |
|
Finance lease expense | |
Amortization of right-of-use assets | 251 |
|
Interest | 16 |
|
Total lease expense | $ | 2,948 |
|
__________________ (1) Predominantly includes common area maintenance and parking expenses.
Supplemental balance sheet information related to date, there has not been any ineffectiveness. Changesoperating and finance leases as of June 30, 2019 is as follows (amounts in derivative balances impact the line items “Prepaid expensesthousands, except lease term and other current assets” and “Accrued expenses” on the Condensed Consolidated Balance Sheets and Statementsdiscount rate): |
| | | | |
| Balance Sheet Location | June 30, 2019 |
Lease assets | | |
Operating lease ROU assets | Other assets | $ | 32,169 |
|
Finance lease ROU assets (1) | Property, plant and equipment, net of accumulated depreciation | 2,297 |
|
| | $ | 34,466 |
|
| | |
Lease liabilities | | |
Current operating lease liabilities | Accrued expenses | $ | 8,061 |
|
Current finance lease liabilities | Accrued expenses | 1,000 |
|
Non-current operating lease liabilities | Other non-current obligations | 23,646 |
|
Non-current finance lease liabilities | Other non-current obligations | 1,328 |
|
| | $ | 34,035 |
|
| | |
Weighted average remaining lease term | | |
Operating leases | | 6.43 years |
|
Finance leases | | 2.59 years |
|
| | |
Weighted average discount rate | | |
Operating leases | | 4.72 | % |
Finance leases | | 5.63 | % |
_________________ (1) Finance lease ROU assets are shown net of Cash Flows.accumulated depreciation of $4.5 million.
Supplemental cash flow information related to leases for the three months ended June 30, 2019 is as follows (amounts in thousands): |
| | | |
| Three Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows used for operating leases | $ | 2,922 |
|
Operating cash flows used for finance leases | 30 |
|
Financing cash flows used for finance leases | 367 |
|
| $ | 3,319 |
|
| |
Lease liabilities arising from obtaining ROU assets | |
Operating leases | $ | 1,975 |
|
Finance leases | 405 |
|
| $ | 2,380 |
|
Maturities of operating and finance lease liabilities as of June 30, 2019 were as follows (amounts in thousands): |
| | | | | | | |
Fiscal year ending March 31, | Operating Lease Liabilities | | Finance Lease Liabilities |
2020 (nine months ending March 31, 2020) | $ | 7,026 |
| | $ | 893 |
|
2021 | 7,546 |
| | 834 |
|
2022 | 4,431 |
| | 513 |
|
2023 | 4,035 |
| | 225 |
|
2024 | 3,426 |
| | 42 |
|
Thereafter | 11,501 |
| | 8 |
|
Total undiscounted cash flows | $ | 37,965 |
| | $ | 2,515 |
|
Less imputed interest | (6,258 | ) | | (187 | ) |
Present value of lease liabilities | $ | 31,707 |
| | $ | 2,328 |
|
Note 14.15. Concentrations of Risks
The Company sells to customers globally. Credit evaluations of its customers’ financial condition are performed periodically, and the Company generally does not require collateral from its customers. There were no customers’ accounts receivable balances exceeding 10% of gross accounts receivable at June 30, 2019 or March 31, 2019.
Consistent with industry practice, the Company utilizes electronics distributors for a large percentage of its sales. Electronics distributors are an effective means to distribute the products to end-users and they accounted for 42.9% and 41.7% of the Company's net sales for the three months ended June 30, 2019 and 2018, respectively. One customer,of the Company's customers, TTI, Inc., an electronics distributor, accounted for over 10% of the Company’s net sales for the three and six months ended SeptemberJune 30, 2018 and 2017. There were no accounts receivable balances from any customer exceeding 10% of gross accounts receivable as of September 30, 2018 and March 31, 2018.
Electronics distributors are an important channel in the electronics industry and accounted for 41.4% and 35.6% of the Company's net sales for the three months ended September 30, 2018 and 2017, respectively, and 41.5% and 38.6% for the six months ended September 30, 2018 and 2017, respectively. As a result of the Company’s concentration of sales to electronics distributors, the Company may experience fluctuations in the Company’s operating results as electronics distributors experience fluctuations in end-market demand and/or adjust their inventory stocking levels.
Legal Update
In July 2013, TOKIN was named as one of eight defendants in two purported U.S. class action antitrust lawsuits (In Re: Lithium Ion Batteries Antitrust Litigation, 13-MD-02420-YGR, United States District Court, Northern District of California) (the “Battery Class Action Suits”) regarding the sale of lithium ion batteries brought on behalf of direct product purchasers and indirect product purchasers. On March 2, 2018, TOKIN entered into a settlement agreement, which, subject to court approval, provides for the release of TOKIN and its subsidiaries from claims asserted in the Battery Class Action Suits, in consideration of which, TOKIN agreed to pay $2.0 million to the settlement class of indirect product purchasers. On May 16, 2018, the Court granted final approval to a settlement agreement by which, in consideration of the release of TOKIN and its subsidiaries from claims asserted in the Battery Class Action Suits, TOKIN agreed to pay $4.95 million to the settlement class of direct product purchasers. TOKIN had paid the settlement amount for the settlement class of direct product purchasers on January 18, 2018, prior to receiving the final court approval.
Beginning in March 2014, TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan, South Korea, Taiwan, Singapore and Brazil concerning alleged anti-competitive activities within the capacitor industry.
On September 2, 2015, the United States Department of Justice announced a plea agreement with TOKIN in which TOKIN agreed to plead guilty to a one-count felony charge of unreasonable restraint of interstate and foreign trade and commerce in violation of Section 1 of the Sherman Act, and to pay a criminal fine of $13.8 million. The plea agreement was approved by the United States District Court, Northern District of California, on January 21, 2016. The fine is payable over five years in six installments of $2.3 million each, plus accrued interest. The first three payments were made in February 2016, January 2017 and January 2018, while the next payment is due in January 2019.
On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that TOKIN would be fined 1.2 billion New Taiwan dollars (“NTD”) (approximately USD $39.9 million) for violations of the Taiwan Fair Trade Act. Subsequently, the TFTC has reduced the fine to NTD 609.1 million (approximately USD $19.9 million). In February 2016, TOKIN commenced an administrative suit in Taiwan, challenging the validity of the amount of the fine. On August 23, 2018, the Taipei High Administrative Court revoked the TFTC decision, finding that the decision had been time-barred by applicable statute. On September 21, 2018, the TFTC filed an appeal against the High Administrative Court's decision.
On March 29, 2016, the Japan Fair Trade Commission published an order by which TOKIN was fined JPY 127.2 million (approximately USD $1.1 million) for violation of the Japanese Antimonopoly Act. Payment of the fine was made on October 31, 2016.
On July 15, 2016, TOKIN entered into definitive settlement agreements in two antitrust suits filed with the United States District Court, Northern District of California as In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD (the “Capacitor Class Action Suits”). Pursuant to the terms of the settlement, in consideration of the release of TOKIN and its subsidiaries (including TOKIN America, Inc.) from claims asserted in the Capacitor Class Action Suits, TOKIN will pay an aggregate $37.3 million to a settlement class of direct purchasers of capacitors and a settlement class of indirect purchasers of capacitors. Each of the respective class payments is payable in five installments, three of which have been paid on or before
their respective due dates of July 29, 2016, May 15, 2017, and May 15, 2018. The fourth payment is due May 15, 2019 and the final payment is due by December 31, 2019.
On July 27, 2016, Brazil’s Administrative Council for Economic Defense approved a cease and desist agreement with TOKIN in which TOKIN made a financial contribution of Brazilian Real 0.6 million (approximately USD $0.2 million) to Brazil’s Fund for Defense of Diffuse Rights.
On March 21, 2018, the European Commission announced a decision by which TOKIN was fined EUR 8.8 million directly (approximately USD $10.3 million) and EUR 5.0 million (approximately USD $5.9 million) jointly and severally with NEC Corporation, for violation of the competition laws of the European Union. Payment of the fines were made on June 28, 2018. On June 4, 2018, TOKIN filed an appeal with the General Court of the European Union, seeking annulment and/or reduction of the fines.
On May 30, 2018, TOKIN entered into a definitive settlement agreement, subject to court approval, with the plaintiffs in the Canadian Complaints (as defined in “Item 3. Legal Proceedings” of the Company's 2018 Form 10-K). Pursuant to the terms of the settlement, in consideration of the release of TOKIN and its subsidiaries (including TOKIN America, Inc.) from claims asserted in the Canadian Complaints, TOKIN paid CAD 2.9 million (approximately USD $2.2 million) to a settlement class of purchasers of aluminum and tantalum electrolytic capacitors and purchasers of products containing such capacitors. The settlement payment was made on June 27, 2018.
On July 2, 2018, TOKIN and TOKIN America Inc. were named as two of 20 defendants in a purported U.S. class action antitrust lawsuit, In re: Inductors Antitrust Litigation, No. 5:18-cv-00198-EJD-NC, filed in the United States District Court, Northern District of California, regarding the sale of inductors brought on behalf of direct product purchasers and indirect product purchasers. The complaint alleges violations of Sections 1 and 3 of the Sherman Act, for which it seeks injunctive and equitable relief and money damages.
On September 16, 2018, the Korean Fair Trade Commission (“KFTC”) announced its decision to impose an administrative fine on TOKIN for violation of South Korea's Monopoly Regulation and Fair Trade Law. Although the final amount of the fine has not been officially announced, based on communications with the KTTC, TOKIN expects the amount of the fine to be KRW 8.2 billion (approximately USD $7.3 million) The KFTC is required to provide TOKIN with its final written decision, which is expected within 40 days of the announcement date. TOKIN can appeal the KFTC's decision to the Seoul High Court within 30 days of TOKIN's receipt of the KFTC's final decision. TOKIN will be required to pay the fine within 60 days of its receipt of the KFTC's final decision, even if the decision is appealed.
The remaining governmental investigations are continuing at various stages. As of September 30, 2018, TOKIN’s accrual for antitrust and civil litigation claims totaled $51.8 million which is stated in the following line items, “Account payable” ($10.0 million), “Accrued expenses” ($19.2 million) and “Other non-current obligations” ($22.6 million) on the Condensed Consolidated Balance Sheets. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations, civil litigation and claims. However, the actual outcomes could differ from what has been accrued. Additionally, under the terms of the TOKIN Purchase Agreement, KEMET will be responsible for defending all suits brought against TOKIN, paying all expenses and satisfying all judgments to the extent incurred by or rendered against TOKIN arising out of or related the capacitor antitrust investigations and related litigation described above.
Note 15.16. Subsequent Events
Long-term debt
On October 29, 2018, TOKIN entered into a JPY 33.0 billion (approximately $296.0 million) Term Loan Agreement (the “Term Loan Facility”) by and among TOKIN, the lenders party thereto (the “Lenders”) and Sumitomo Mitsui Trust Bank, Limited in its capacity as agent (the “Agent”), arranger and Lender. The Company expectshas evaluated events from June 30, 2019 through the closing and funding of the new Term Loan Facility, which is subject to customary terms and conditions, to occur on or around November 7, 2018.
The proceeds from the new Term Loan Facility will be used by TOKIN to make intercompany loans to the Company. The Company will use the proceeds of the loans from TOKIN, together with other cash on hand, to prepay in full all of the outstanding amounts under the Company’s existing Term Loan Credit Agreement, by and among the Company, KEC, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent, and to pay related fees, costs and expenses (including a prepayment penalty of 1%). The Company currently has approximately $323.4 million outstanding under the existing Term Loan Credit Agreement. The new Term Loan Facility consists of (i) a JPY 16.5 billion (approximately $148.0 million) Term Loan A tranche (the “Term Loan A”) and (ii) a JPY 16.5 billion (approximately $148.0 million) Term Loan B tranche (the “Term Loan B” and, together with the Term Loan A, collectively, the “Term Loans”). Principal payments
under Term Loan A are required semi-annually, in the amount of JPY 1.4 billion (approximately $12.3 million), while the principal of Term Loan B is due in one payment at maturity. Interest payments are due semi-annually on the Term Loans, with the interest rate based on a margin over the six-month TIBOR. The applicable margin for Term Loan A is 2.00% and for Term Loan B is 2.25%. The new Term Loans mature on September 30, 2024. KEMET and certain subsidiaries of TOKIN will be providing guarantees of the obligations under the Term Loan Facility, which will also be secured by certain assets, properties and equity interests of TOKIN and its material subsidiaries. The Term Loan Agreement contains customary covenants applicable to both the Company and to TOKIN, including maintenance of a consolidated leverage ratio, the absence of two consecutive years of operating losses and the maintenance of certain required levels of net assets. The Term Loan Agreement also contains customary events of default. TOKIN may prepay the Term Loans at any time, subject to certain notice requirements and reimbursement of loan breakage costs.
The Company is expected to recognize a $15.8 million loss on the debt extinguishment.
In connection with the closing of the new Term Loan Facility, KEMET also entered into Amendment No. 10 to Loan and Security Agreement, Waiver and Consent, dated as of October 29, 2018 (the “Revolver Amendment”), by and among KEMET, KEC, the other borrowers named therein,date the financial institutions party thereto as lendersstatements were issued and Bank of America, N.A., a national banking association, as agent for the lenders. The Revolver Amendment provides KEMET with, among other things, increased flexibility for certain restricted payments (including dividends), and also releases certain pledges to allow the Company to complete the refinancing. The revolving credit facility is currently undrawn.there have not been any subsequent events that require disclosure.
On October 30, 2018, the Company announced its intention to pay a quarterly dividend of $0.05 per share on its common stock, representing a planned annual dividend of $0.20 per share. The initial dividend will be payable on November 26, 2018 to shareholders of record as of November 16, 2018. Future dividends will be subject to the determination, declaration, and discretion of the Company's Board, as well as compliance with the Company's existing credit facilities. As of September 30, 2018, the Company had 57.4 million shares of common stock outstanding.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” or variations or other similar expressions and future or conditional verbs such as “will,” “should,” “would”“would,” and “could” are intended to identify such forward-looking statements. Readers of this report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report, as well as those discussed under Part I, Item 1A Risk Factors, of the Company’s 20182019 Annual Report. The statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement.
All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. We face risks that are inherent in the businesses and the market places in which we operate. While management believes these forward-looking statements are accurate and reasonable, uncertainties, risks and factors, including those described below, could cause actual results to differ materially from those reflected in the forward-looking statements.
Factors that may cause actual outcomes and results to differ materially from those expressed in, or implied by, these forward-looking statements include, but are not necessarily limited to, the following: (i) adverse economic conditions could impact our ability to realize operating plans if the demand for our products declines, and such conditions could adversely affect our liquidity and ability to continue to operate and could cause a write down of long-lived assets or goodwill; (ii) an increase in the cost or a decrease in the availability of our principal or single-sourced purchased raw materials; (iii) changes in the competitive environment; (iv) uncertainty of the timing of customer product qualifications in heavily regulated industries; (v) economic, political, or regulatory changes in the countries in which we operate; (vi) difficulties, delays, or unexpected costs in completing the Company'sCompany’s restructuring plans; (vii) acquisitions and other strategic transactions expose us to a variety of risks, including the ability to successfully integrate and maintain adequate internal controls over financial reporting in compliance with applicable regulations; (viii) our acquisition of TOKIN Corporation may not achieve all of the anticipated results; (ix) our business could be negatively impacted by increased regulatory scrutiny and litigation; (x) difficulties associated with retaining, attracting, and training effective employees and management; (xi) the need to develop innovative products to maintain customer relationships and offset potential price erosion in older products; (xii) exposure to claims alleging product defects; (xiii) the impact of laws and regulations that apply to our business, including those relating to environmental matters, data protection, cyber security and privacy; (xiv) the impact of international laws relating to trade, export controls and foreign corrupt practices; (xv) changes impacting international trade and corporate tax provisions related to the global manufacturing and sales of our products may have an adverse effect on our financial condition and results of operations; (xvi) volatility of financial and credit markets affecting our access to capital; (xvii) default or failure of one or more of our counterparty financial institutions could cause us to incur significant losses; (xviii) the need to reduce the total costs of our products to remain competitive; (xviii)(xix) potential limitation on the use of net operating losses to offset possible future taxable income; (xix)(xx) restrictions in our debt agreements that could limit our flexibility in operating our business; (xx) disruption(xxi) failure to maintain effective internal controls over financial reporting; (xxii) service interruption, misappropriation of data, or breaches of security as it relates to our information technology systems to function properly or control unauthorized accesscould cause a disruption in our operations, financial losses, and damage to our systems may cause business disruptions; (xxi)reputation; (xxiii) economic and demographic experience for pension and other post-retirement benefit plans could be less favorable than our assumptions; (xxii)(xxiv) fluctuation in distributor sales could adversely affect our results of operations; (xxiii)(xxv) earthquakes and other natural disasters could disrupt our operations and have a material adverse effect on our financial condition and results of operations; and (xxiv)(xxvi) volatility in our stock price.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and could cause actual results to differ materially from those included, contemplated or implied by the forward-looking statements made in this report, and the reader should not consider the above list of factors to be a complete set of all potential risks or uncertainties.
Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based on the unaudited Condensed Consolidated Financial Statements included herein. Our significant accounting policies are described in Note 1 to the Condensed Consolidated Financial Statements in our 20182019 Form 10-K. Our critical accounting policies are described under the caption “Critical Accounting Policies” in Item 7 of our 20182019 Form 10-K.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“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.
Our judgments are based on management’s assessment as to the effect certain estimates, assumptions, 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.
Business Overview
KEMET is a leading global manufacturer of a wide variety of capacitors, and Electro-magnetic compatible ("EMC") devices, sensors and actuators. With respect to capacitors, we compete in the passive electronic component industry, specifically multilayer ceramic, tantalum, film and aluminum (solid & electrolytic) capacitors. While KEMET competes in the passive electronic component industry, our strategic focus is on growth markets, specialty products requiring high reliability, and within our Ceramic product line, larger case size capacitors.
Product offerings include surface mount capacitors,mounts, which are attached directly to the circuit board; leaded capacitors, which are attached to the circuit board using lead wires; and chassis-mount and other pin-through-hole board-mount capacitors, which utilize attachment methods such as screw terminal and snap-in.
Capacitors are electronic components that store, filter, and regulate electrical energy and current flow. As an essential passive component used in nearly all circuit boards, capacitors are typically used for coupling, decoupling, filtering, oscillating and wave shaping and are used in communication systems, servers, personal computers, tablets, cellular phones, automotive electronic systems, defense and aerospace systems, consumer electronics, power management systems and many other electronic devices and systems (basically anything that plugs in or has a battery).
KEMET’s capacitor product line consists of many distinct part configurations distinguished by various attributes, such as dielectric (or insulating) material, configuration, encapsulation, capacitance (at various tolerances), voltage, performance characteristics and packaging. Most of While our customers have multiple capacitance requirements, often within each of their products. Our broad product offering allows us to meet the majority of those needs independent of application and end use.use, our strategic focus is on high growth and specialty markets.
Our EMCSolid Capacitors' products are commonly used in conjunction with integrated circuits, and the same circuit may contain both ceramic and tantalum capacitors. Tantalum capacitors are a popular choice because of their ability for high capacitance in a small volume package. While ceramic capacitors are more cost-effective at lower capacitance values, tantalum capacitors are more cost-effective at higher capacitance values while solid aluminum capacitors can be more effective in special applications.
KEMET's Tantalum business continues to transition toward a higher proportion of Polymer technology sales in which KEMET has market share leadership greater than 50.0%. Growth drivers for this product line include advanced driver assistance and autonomous driving systems, tablets and PC’s, 5G infrastructure and connectivity, data servers and solid state drives and power density energy systems.
KEMET's Ceramic business continues to focus on its specialty (value added) and large cap size business. Growth drivers for Ceramic include electric vehicles, advanced driver assistance and autonomous driving systems, 5G infrastructure and connectivity, data servers and solid state drives, wireless charging, satellites, radar, and guidance systems.
Film, paper, and aluminum electrolytic capacitors can be used to support integrated circuits, but also are used in the field of power electronics to provide energy for applications such as motor starts, power conditioning, electromagnetic interference filtering safety, and inverters. Film and Electrolytic's self healing products deliver high reliability solutions for extreme conditions. Growth drivers for Film and Electrolytic include alternative energy solutions, electric vehicle charging stations, and hybrid and electric vehicles.
KEMET's Electro-magnetic, Sensors & Actuators (“MSA”) business offers a broad line of electrical noise management products. As circuits become more complex within a device, and the amount of information being communicated between devices increases at a dramatic rate, the quality of electronic signals becomes key to the integrity of the information being communicated. TOKIN EMC products that play a key role in maintaining signal integrity across a number of end markets including telecommunications, mobile computing, automotive and general industries. TheAdditionally, MSA's sensor and actuator business manufactures products that sense and respond to human activity, physical vibration, and electric current. These productscurrent, which are found in home appliances, consumer devices, and industrial electrical equipment. In addition, electromechanical actuation devices that are critical to the manufacture of semiconductor devicesGrowth drivers for MSA include electric vehicles, advanced driver assistance and the management of industrialautonomous driving systems, industry 4.0, 5G infrastructure and chemical gas flow. Sensors are an important family of devices as the “internet-of-things” continues to permeate everyday life.connectivity, and power density and energy efficiency systems.
KEMET operates twenty-fourtwenty-two production facilities in Europe, North America, and Asia, and employs approximately 14,90014,000 employees worldwide. Commodity manufacturing previously located in the United States has been substantially relocated to our lower-cost manufacturing facilities in Mexico, China, Vietnam, Indonesia, Thailand, and countries in Europe. We also have low cost manufacturing facilities located in Vietnam, Indonesia, and Thailand. Production remaining in the United States focuses primarily on early-stage manufacturing of new products and other specialty products for which customers are predominantly located in North America.
KEMET serves the needs of our global customer base through four geographic regions: North America and South America (“Americas”), Europe, the Middle East and Africa (“EMEA”), Asia and the Pacific Rim (“APAC”) and Japan and Korea (“JPKO”). The Company sells its products through three channels: distributors, original equipment manufacturers (“OEM”), and electronic manufacturing services providers (“EMS”).
Our products are sold into a wide range of different end markets,industries, including computing,the computer, communications, automotive, military, consumer, industrial, telecommunications, transportation, consumer, defensemedical, and healthcare across all geographic regions.aerospace industries. No single end market industry accounted for more than 30% of net sales, although one electronics distributor, TTI, Inc., accounted for more than 10% of net sales in the sixthree months ended SeptemberJune 30, 2018.2019. In addition, an aggregate of over 10% of our net sales in the sixthree months ended SeptemberJune 30, 20182019 were driven by sales to electronic manufacturing servicesEMS providers ("EMS") for incorporation into Apple Inc. products. No single end-use direct customer accounted for more than 5% of our net sales for the sixthree months ended SeptemberJune 30, 2018.2019. During the sixthree months ended SeptemberJune 30, 20182019 we introduced 16,775959 new products of which 142259 were first to market. In addition, we continue to focus on specialty products which accounted for 39.3%31.2% of our revenue over this period.
We believe the long-term demand for the various types of capacitors we offer will grow on a regional and global basis due to a variety of factors, including increasing demanddriven primarily by the following recent trends:
industry 4.0:
| |
◦ | the development of new products, applications and electronic controls for engines and industrial machinery, including cyber physical systems, cloud computing, and cognitive computing; security smart phones and mobile personal computing devices; |
the “internet-of-things”;
| |
◦ | the increase in the electronic content of existing products, such as home appliances and medical equipment, smart phones and mobile personal computing devices; |
the enhanced functionality, complexity and complexityconvergence of electronic products, growing demand for technology in emerging marketsdevices that use state-of-the-art microprocessors;
alternative and renewable energy systems;
Electric vehicles and advanced driver assisted electronics; and,
the ongoing development of new solutions for energy generation5G infrastructure and conservation.connectivity.
We are organized into three reportable segments: Solid Capacitor segment (“Solid Capacitors”),Capacitors, Film and Electrolytic, segment (“Film and Electrolytic”) and Electro-magnetic, Sensors & Actuators (“MSA”).MSA. Each segment is responsible for the operations of certain manufacturing sites as well as all related research and development efforts. The sales, marketing and corporate functions are shared by each of the segments.
The Company does not allocate corporate indirect selling, general and administrative (“SG&A”) or shared Research and development (“R&D”) expenses to the segments. 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 cost of sales.
Recent Developments and Trends
The following items are reflected in the financial statements for the three and six months ended September 30, 2018:
TOKIN
On April 19, 2017, the Company completed its acquisition of TOKIN, which at that time it became a 100% owned indirect subsidiary of KEMET. As such, the results for the six months ended September 30, 2017 do not include TOKIN's sales and expenses for the 19 days prior to the date of acquisition. For further information on the acquisition of TOKIN, refer to Note 2, “Acquisitions.”
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings.
The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act. At September 30, 2018, the Company has not completed its accounting for all of the tax effects of the Act. In certain cases, as described below, the Company has made a reasonable estimate of certain effects of the Act. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. The Company’s estimates may also be affected as it gains a more thorough understanding of the tax law. These changes could be material to income tax expense.
The Company has initially determined a $0.8 million tax benefit impact related to the US federal corporate tax rate change to its existing deferred tax balances, which was included as a component of income tax expense for fiscal year 2018. The Company estimates no tax impact from the estimated transition tax repatriation charge of $75.3 million due to net operating loss utilization and a valuation allowance in the U.S. There is no impact to foreign locations. The Company is working to finalize the calculation for the one-time transition tax and in the interim, we will continue to account for this item based on its existing accounting under ASC 740, Income Taxes.
Certain provisions of the Act did not impact the Company until the current fiscal year. These provisions include, but are not limited to, the base erosion anti-abuse tax (“BEAT”), the provision designed to tax global intangible low-taxed income (“GILTI”), the foreign-derived intangible income (“FDII”) provision, and the provision designed to limit interest expense deductions. Given the complexity of the new provisions, the Company continues to evaluate the impact the Act will have on the Condensed Consolidated Financial Statements.
The Company has made sufficient progress in its calculations related to BEAT to reasonably estimate the effect on its estimated annual effective tax rate for the 2019 fiscal year. This adjustment increased the annual effective tax rate by 0.5% and will be further evaluated in future interim periods. However, the Company is still evaluating the effects of GILTI, FDII, and the provision designed to limit interest expense deductions, and the Company is not able to quantify the impact on the Condensed Consolidated Financial Statements at this time. In addition, FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either treat taxes due on the GILTI as a current period expense or factor such amounts into the measurement of its deferred taxes. Given the complexity of the GILTI provisions, the Company is still evaluating and has not yet determined its accounting policy.
Tariffs
On July 6, 2018, the United States federal government imposed tariffs according to Section 301 of the Trade Act, on particular products that are imported into the United States from China. The Company primarily imports film, tantalum Polymer, and MSA products into the United States from China. The impact on the Company's future results from these tariffs is expected to be minimal as the Company does not import a significant number of products into the United States from China, and the Company expects to pass the entire cost of the tariffs onto its direct customers and distributors.
three months ended June 30, 2019:
Restructuring
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 Septemberin progress or recently completed as of June 30, 20182019 are summarized below (amounts in thousands): |
| | | | | | | | | | | | | | | |
| | Total expected to be incurred | | Incurred during quarter ended June 30, 2019 | | 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 |
Tantalum powder facility relocation (1) | Solid Capacitors | 897 |
| 2,098 |
| | 448 |
| (552 | ) | | 448 |
| 2,805 |
|
Axial electrolytic production relocation from Granna to Evora | Film and Electrolytic | 673 |
| 3,964 |
| | 673 |
| 1,308 |
| | 673 |
| 3,603 |
|
Reorganization of MnO2 product line | Solid Capacitors | 3,128 |
| — |
| | 43 |
| — |
| | 1,628 |
| — |
|
__________________ |
| | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | $ | — |
| $ | — |
| | $ | — |
| $ | — |
|
(1) The current quarter credit for manufacturing relocation and exit costs is due to the recovery of costs related to the sale of tantalum that has been reclaimed (“tantalum reclaim”) as part of the plant exit activities. Tantalum reclaim in future periods is expected to further reduce the cumulative incurred costs.Outlook
For the thirdsecond quarter of fiscal year 2019,2020, we expect net sales to be within the $350.0$320.0 million to $360.0$330.0 million range, non-GAAP adjusted gross margin as a percentage of net sales is expected to be between 33.5% and 34.5%35.0%, non-GAAP SG&A expenses are expected to be between $43.0 million and $45.0 million, and $50.0 million, R&D expenses are expected to be approximately $11.0$12.5 million to $12.0 million$13.5 million. Our global effective tax rate is expected to between 25.0% and income taxes are forecasted to be between $3.0 million and $3.5 million.28.0%. We expect to spend in the range of $25.0$45.0 million to $35.0$55.0 million in capital expenditures for the thirdsecond quarter of fiscal year 2019.2020.
The Company has presented certain non-GAAP financial measures as projected for the second quarter of fiscal year 2020, including adjusted gross margin and adjusted SG&A expenses. A reconciliation of GAAP to non-GAAP adjusted gross margin and GAAP to non-GAAP SG&A expenses are not provided. The Company does not forecast GAAP gross margin and GAAP SG&A expenses as it cannot, without unreasonable effort, estimate or predict with certainty various components of each. These components include stock-based compensation expenses for GAAP gross margin and stock-based compensation expenses and ERP integration costs/IT transition costs for GAAP SG&A expenses. Further, in the future, other items with similar characteristics to those currently included in adjusted gross margin and adjusted SG&A expenses, that have a similar impact on the comparability of periods, and which are not known at this time, may exist and impact adjusted gross margin and adjusted SG&A expenses.
Condensed Consolidated Results of Operations
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Comparison of the Quarter Ended SeptemberJune 30, 20182019 with the Quarter Ended SeptemberJune 30, 20172018
The following table sets forth the Condensed Consolidated Statements of Operations for the periods indicated (amounts in thousands, except percentages): |
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | % to Total Sales | | 2017 | | % to Total Sales |
Net sales (1) | $ | 349,233 |
| | |
| | $ | 301,568 |
| | |
|
Gross margin (1) | 113,565 |
| | 32.5 | % | | 84,904 |
| | 28.2 | % |
Selling, general and administrative expenses | 52,258 |
| | 15.0 | % | | 42,417 |
| | 14.1 | % |
Research and development (1) | 10,995 |
| | 3.1 | % | | 9,536 |
| | 3.2 | % |
Restructuring charges | — |
| | n.m. |
| | 1,393 |
| | 0.5 | % |
(Gain) loss on write down and disposal of long-lived assets | 312 |
| | 0.1 | % | | (39 | ) | | n.m. |
|
Operating income (loss) (1) | 50,000 |
| | 14.3 | % | | 31,597 |
| | 10.5 | % |
| | | | | | | |
Interest income | (375 | ) | | (0.1 | )% | | (95 | ) | | n.m. |
|
Interest expense | 7,287 |
| | 2.1 | % | | 7,365 |
| | 2.4 | % |
Acquisition (gain) loss | — |
| | n.m. |
| | (1,285 | ) | | (0.4 | )% |
Other (income) expense, net | 4,011 |
| | 1.1 | % | | 10,153 |
| | 3.4 | % |
Income (loss) before income taxes and equity income (loss) from equity method investments (1) | 39,077 |
| | 11.2 | % | | 15,459 |
| | 5.1 | % |
Income tax expense (benefit) (1) | 2,000 |
| | 0.6 | % | | 2,864 |
| | 0.9 | % |
Income (loss) before equity income (loss) from equity method investments (1) | 37,077 |
| | 10.6 | % | | 12,595 |
| | 4.2 | % |
Equity income (loss) from equity method investments | 64 |
| | n.m. |
| | 224 |
| | 0.1 | % |
Net income (loss) (1) | $ | 37,141 |
| | 10.6 | % | | $ | 12,819 |
| | 4.3 | % |
_________________(1) Three months ended September 30, 2017 adjusted due to the adoption of ASC 606, Revenue from Contracts with Customers ("ASC 606"). Refer to Note 1, "Basis of Financial Statement Presentation".
n.m. - not meaningful
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2019 | | % to Total Sales | | 2018 | | % to Total Sales |
Net sales | $ | 345,242 |
| | |
| | $ | 327,616 |
| | |
|
Gross margin | 121,628 |
| | 35.2 | % | | 94,821 |
| | 28.9 | % |
Selling, general and administrative expenses | 47,885 |
| | 13.9 | % | | 48,542 |
| | 14.8 | % |
Research and development | 12,175 |
| | 3.5 | % | | 10,688 |
| | 3.3 | % |
Restructuring charges | 2,208 |
| | 0.6 | % | | (96 | ) | | n.m. |
|
Gain (loss) on write down and disposal of long-lived assets | 960 |
| | 0.3 | % | | 511 |
| | 0.2 | % |
Operating income | 58,400 |
| | 16.9 | % | | 35,176 |
| | 10.7 | % |
| | | | | | | |
Interest income | (809 | ) | | (0.2 | )% | | (378 | ) | | (0.1 | )% |
Interest expense | 2,545 |
| | 0.7 | % | | 7,036 |
| | 2.1 | % |
Other (income) expense, net | (726 | ) | | (0.2 | )% | | (11,371 | ) | | (3.5 | )% |
Income before income taxes and equity income (loss) from equity method investments | 57,390 |
| | 16.6 | % | | 39,889 |
| | 12.2 | % |
Income tax expense (benefit) | 16,800 |
| | 4.9 | % | | 4,600 |
| | 1.4 | % |
Income before equity income (loss) from equity method investments | 40,590 |
| | 11.8 | % | | 35,289 |
| | 10.8 | % |
Equity income (loss) from equity method investments | (250 | ) | | (0.1 | )% | | (69 | ) | | n.m. |
|
Net income | $ | 40,340 |
| | 11.7 | % | | $ | 35,220 |
| | 10.8 | % |
Net Sales
Net sales for the quarter ended SeptemberJune 30, 20182019 of $349.2$345.2 million increased $47.7$17.6 million or 15.8%5.4% from $301.6$327.6 million for the quarter ended SeptemberJune 30, 2017.2018. For the quarter ended SeptemberJune 30, 2019 as compared to the quarter ended June 30, 2018, Solid Capacitors net sales increased $44.2$34.4 million, Film and Electrolytic net sales increased $2.6decreased $8.2 million, and MSA net sales increased $0.8 million from the quarter ended September 30, 2017.decreased $8.5 million.
The increase in Solid Capacitors net sales was primarily driven by a $31.5$36.3 million increase in Ceramics net sales. The increase in Ceramics nets sales resulted from a $24.5 million increase in distributor net sales across all regions, a $7.6$7.2 million increase in original equipment manufacturers' (“OEM”)EMS net sales across all regions, and a $5.1$4.8 million increase in OEM net sales across the Americas, APAC, and EMEA regions. The increase in Solid Capacitors net sales was partially offset by a $1.9 million decrease in Tantalum net sales. The decrease in Tantalum net sales was due to an $9.8 million decrease in distributor net sales across the APAC and EMEA regions and a $0.9 million decrease in OEM net sales across the EMEA and JPKO regions. These decreases in Tantalum net sales were partially offset by a $4.3 million increase in EMS net sales across all regions, except fora $3.6 million increase in OEM sales across the AsiaAmericas and APAC regions, and a $0.9 million increase in distributor net sales across the Pacific Rim (“APAC”) region, which was slightly lower. In addition,Americas and JPKO regions. Solid Capacitors net sales was negatively impacted by $2.7 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
For Film and Electrolytic, the decrease in net sales was primarily driven by a $4.6 million decrease in distributor sales across the APAC and EMEA regions, a $4.0 million decrease in OEM net sales across the APAC, EMEA, and JPKO regions, and a $0.9 million decrease in EMS sales across the APAC and EMEA channels. The decrease in Film and Electrolytic net sales was partially offset by a $0.8 million increase in EMS net sales in the Americas region and a $0.3 million increase in distributor net sales across the Americas and JPKO regions. Film and Electrolytic net sales was unfavorably impacted by $2.2 millionfrom foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
The decrease in MSA net sales was primarily driven by a $9.1 million decrease in OEM net sales across all regions and a $0.9 million decrease in distributor net sales in the APAC region. The decrease in MSA net sales was partially offset by a $0.9 million increase in distributor net sales across the Americas, EMEA, and JPKO regions and a $0.6 million increase in
EMS net sales in the APAC region. MSA net sales was favorably impacted by $0.1 million from foreign currency exchange due to the change in the value of the EuroJapanese Yen compared to the U.S. dollar.
For Film and Electrolytic, the increase in net sales was primarily driven by a $3.1 million increase in distributor sales in the Europe, the Middle East, and Africa (“EMEA”) region and a $1.8 million increase in distributor sales in the North and South America (“Americas”) region. These increases were partially offset by a $2.2 million decrease in OEM sales across all regions, except for the Japan and Korea (“JPKO”) region, which was slightly higher. Film and Electrolytic net sales was not significantly impacted by foreign currency exchange during the quarter ended September 30, 2018.
The increase in MSA net sales was primarily driven by a $0.9 million increase in EMS sales across all regions and a $0.9 million increase in distributor sales across all regions, except for the APAC region, which was slightly lower. The
increases in net sales were partially offset by a $1.0 million decrease in OEM sales across the Americas, APAC, and EMEA regions.
The following table reflects the percentage of net sales by region for the quarters ended SeptemberJune 30, 20182019 and 2017:2018: | | | Three Months Ended September 30, | Three Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
APAC | 39.6 | % | | 42.6 | % | 37.0 | % | | 40.6 | % |
EMEA | 22.3 | % | | 22.2 | % | 23.7 | % | | 22.8 | % |
Americas | 23.5 | % | | 20.4 | % | 27.0 | % | | 22.0 | % |
JPKO | 14.6 | % | | 14.8 | % | 12.3 | % | | 14.6 | % |
| 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
The following table reflects the percentage of net sales by channel for the quarters ended SeptemberJune 30, 20182019 and 2017.
| | | Three Months Ended September 30, | Three Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
OEM | 44.1 | % | | 49.6 | % | 41.5 | % | | 45.5 | % |
Distributor | 41.4 | % | | 35.6 | % | 42.9 | % | | 41.7 | % |
EMS | 14.5 | % | | 14.8 | % | 15.6 | % | | 12.8 | % |
| 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
Gross Margin
Gross margin for the quarter ended SeptemberJune 30, 20182019 of $113.6$121.6 million (32.5%(35.2% of net sales) improved $28.7$26.8 million or 33.8%28.3% from $84.9$94.8 million (28.2%(28.9% of net sales) for the quarter ended SeptemberJune 30, 2017,2018, and gross margin as a percentage of net sales improved 430630 basis points.
Solid Capacitors gross margin increased$28.2 $32.4 million, or42.4% 40.6%, primarily due to continued variable margin improvement resulting from manufacturing process improvements, vertical integration, and ongoing restructuring activities, as well as an increase in net sales due to a favorable shift in product mix and sales channel. Price increases for certain products also contributed to the increase in net sales and gross margin.
Film and Electrolytic gross margin decreased $0.6 million, or 16.7%, due to a decrease in net sales.
MSA gross margin decreased $5.0 million, or 42.3%, primarily due to a decrease in net sales, as well as continued variablea shift in the product mix toward lower margin improvement due to our restructuring activities, vertical integration, and manufacturing process improvements resulting from our cost reduction activities.
Film and Electrolytic gross margin increased $2.7 million, or 77.5%, primarily driven by the increase in net sales, as well as continued margin improvement due to our restructuring activities and manufacturing process improvements resulting from our cost reduction activities.
MSA gross margin decreased $2.2 million, or 14.9%, primarily due to increased manufacturing unit costs resulting from a decrease in production.products.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses of $52.3$47.9 million (15.0%(13.9% of net sales) for the quarter ended SeptemberJune 30, 2018 increased $9.82019 decreased $0.7 million or 23.2%1.4% from $42.4$48.5 million (14.1%(14.8% of net sales) for the quarter ended SeptemberJune 30, 2017.2018. The increasedecrease was mainly attributed to a $6.2$3.4 million decrease in payroll expenses, mainly due to a decrease in incentive compensation. Partially offsetting this decrease was a $2.1 million increase in payrollprofessional fees and related expenses, primarily due to an increase in salaries and incentive-based compensation, a $1.6$0.7 million increase in ERP integrationdepreciation and technology transition costs, a $1.6 million increase in consulting expenses, and a $1.4 million increase in office rent and software.amortization expense.
Research and Development (“R&D”)
R&D expenses of $11.0$12.2 million (3.1%(3.5% of net sales) for the quarter ended SeptemberJune 30, 20182019 increased $1.5 million or 15.3%13.9% compared to $9.5$10.7 million (3.2%(3.3% of net sales) for the quarter ended SeptemberJune 30, 2017.2018. The increase was primarily related to a $1.0$0.9 million increase in payroll expenses and relateda $0.7 million increase in materials and supplies expenses.
Restructuring Charges
The Company did not incur any restructuringRestructuring charges for the quarter ended September 30, 2018, compared to $1.4of $2.2 million for the quarter ended SeptemberJune 30, 2017.2019, increased $2.3 million compared to a credit of $0.1 million for the quarter ended June 30, 2018.
The Company incurred $1.4$2.2 million of restructuring charges in the quarter ended September June 30, 20172019 which consisted of $0.9$1.2 million in personnel reduction costs and $0.5$1.0 million in manufacturing relocation and exit costs.
The personnel reduction costs of $0.9$1.2 million were primarily due to $0.7 million in costs in the Film and Electrolytic segment related to severance charges across various overhead functionsresulting from the closing of the Granna, Sweden manufacturing plant as axial electrolytic production is being moved to the plant in Evora, Portugal and $0.5 million in costs in the Simpsonville, South Carolina officeSolid Capacitors segment related to severance charges resulting from the closing of the tantalum powder facility in Carson City, Nevada as these functions were relocatedtantalum powder production is moving to the Company's new corporate headquartersplant in Fort Lauderdale, Florida.Matamoros, Mexico.
The manufacturing relocation and exit costs of $0.5$1.0 million primarily consisted of $0.4related to $1.3 million in expenses related tocosts resulting from the relocation of axial electrolytic production equipment from the K-Salt operationsCompany's plant in Granna, Sweden to the existing Matamoros, Mexicoits plant in Evora, Portugal. Manufacturing relocation and $0.1 million in exit costs related to the shut-down of operations for KEMET Foil Manufacturing, LLC (“KFM”) in Knoxville, Tennessee.were benefited by a $0.6 million credit from tantalum reclaim.
Operating Income (Loss)
Operating income of $50.0$58.4 million for the quarter ended SeptemberJune 30, 20182019 improved $18.4$23.2 million from operating income of $31.6$35.2 million for the quarter ended SeptemberJune 30, 2017.2018. The improvement was primarily attributable to a $28.7$26.8 million improvement in gross margin and a $1.4$0.7 million decrease in restructuring charges.SG&A expenses. These improvements to operating income were partially offset by a $9.8$2.3 million increase in SG&A expenses,restructuring charges, a $1.5 million increase in R&D expenses, and an unfavorablea $0.4 million changeincrease in (gain)net loss on write down and disposal of long-lived assets.
Non-Operating (Income) Expense, Net
Non-operating expense, net was $10.9$1.0 million for the quarter ended SeptemberJune 30, 20182019 compared to non-operating expense,income, net of $16.1$4.7 million for the quarter ended SeptemberJune 30, 2017.2018. The $5.2$5.7 million decrease isunfavorable change was primarily attributable to a $3.6reduction in income from foreign exchange adjustments of $7.2 million decrease in TOKIN anti-trust litigation fines for the quarter ended September 30, 2018 versus the quarter ended September 30, 2017, and $1.7 million favorable change in foreignderived from currency exchange gain (loss), which was primarily due to the changefluctuations in the value ofThai Bhat, Chinese Yuan, Renminbi, Great Britain Pound, Thai Baht,British pound, Euro, and Mexican Peso, and Japanese Yen compareda decrease in R&D grant reimbursements and grant income of $4.1 million. The unfavorable change was partially offset by $4.9 million in net interest expense savings due to reduced interest expense attributable to the U.S. dollar.Company's refinancing of its term loan in the third quarter of fiscal year 2019.
Income Taxes
Income tax expense of $2.0$16.8 million for the quarter ended SeptemberJune 30, 2018 decreased $0.92019 increased $12.2 million compared to income tax expense of $2.9$4.6 million for the quarter ended SeptemberJune 30, 2017.2018. Income tax expense of $2.0$16.8 million for the quarter ended SeptemberJune 30, 20182019 was comprised solely of $2.0 million of income tax expense related to foreign operations. The $2.0$5.7 million of income tax expense related to foreign operations, includes a $1.2 million expense related to the final settlement of an uncertain tax position.
Income tax expense of $2.9 million for the quarter ended September 30, 2017 was comprised of $2.7 million of income tax expense related to foreign operations, $0.1$11.0 million of federal income tax expense, and $0.1 million of state income tax expense.
Income tax expense of $4.6 million for the quarter ended June 30, 2018 was comprised of $4.7 million of income tax expense related to foreign operations, $0.2 million of federal income tax expense, and $0.3 million of state income tax benefit. The $4.7 million of income tax expense related to foreign operations included a $0.9 million benefit related to the settlement of an uncertain tax position.
The effective tax rates differ from income taxes recorded using a statutory rate rate largely due to the relative mix in earnings and losses in various tax jurisdictions and the usage of the net operating losses and reversal of associated valuation allowances previously recorded on the deferred tax assets.
Equity Income (Loss) from Equity Method Investments
Equity incomeloss of $0.3 million for the quarter ended June 30, 2019 had an unfavorable change of $0.2 million compared to equity loss of $0.1 million for the quarter ended SeptemberJune 30, 2018 decreased $0.1 million compared to equity income of $0.2 million for the quarter ended September 30, 2017.2018. The decrease ischange was primarily related to equity losses of $0.3 million and $0.1 million from Novasentis and KEMET Jianghai, respectively, for the quarter ended SeptemberJune 30, 2018.2019.
Segment Comparison of the Quarter Ended SeptemberJune 30, 20182019 with the Quarter Ended SeptemberJune 30, 20172018
The following table reflects each segment’s net sales and operating income, (loss), for the quarters ended SeptemberJune 30, 20182019 and 20172018 (amounts in thousands): |
| | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
Net sales: | |
| | |
|
Solid Capacitors | $ | 235,473 |
| | $ | 191,267 |
|
Film and Electrolytic (1) | 50,628 |
| | 47,998 |
|
MSA | 63,132 |
| | 62,303 |
|
Total | $ | 349,233 |
| | $ | 301,568 |
|
Operating income (loss): | |
| | |
|
Solid Capacitors | $ | 84,686 |
| | $ | 56,717 |
|
Film and Electrolytic (1) | 4,236 |
| | 1,263 |
|
MSA | 7,132 |
| | 7,765 |
|
Corporate | (46,054 | ) | | (34,148 | ) |
Total | $ | 50,000 |
| | $ | 31,597 |
|
_________________(1) Three months ended September 30, 2017 adjusted due to the adoption of ASC 606.
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Net sales: | |
| | |
|
Solid Capacitors | $ | 248,207 |
| | $ | 213,821 |
|
Film and Electrolytic | 46,709 |
| | 54,955 |
|
MSA | 50,326 |
| | 58,840 |
|
Total | $ | 345,242 |
| | $ | 327,616 |
|
Operating income (loss): | |
| | |
|
Solid Capacitors | $ | 102,686 |
| | $ | 69,665 |
|
Film and Electrolytic | (2,879 | ) | | 1,067 |
|
MSA | 3,658 |
| | 6,055 |
|
Corporate | (45,065 | ) | | (41,611 | ) |
Total | $ | 58,400 |
| | $ | 35,176 |
|
Solid Capacitors
The following table sets forth net sales, operating income (loss), and operating income (loss) as a percentage of net sales for our Solid Capacitors segment for the quarters ended September 30, 2018 and 2017 (amounts in thousands, except percentages):
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| Amount | | % to Net Sales | | Amount | | % to Net Sales |
Tantalum product line net sales | $ | 148,054 |
| | | | $ | 125,404 |
| | |
Ceramic product line net sales | 87,419 |
| | | | 65,863 |
| | |
Solid Capacitors net sales | $ | 235,473 |
| | | | $ | 191,267 |
| | |
Solid Capacitors operating income (loss) | $ | 84,686 |
| | 36.0% | | $ | 56,717 |
| | 29.7% |
Net Sales
Solid Capacitors net sales of $235.5 million for the quarter ended September 30, 2018 increased $44.2 million or 23.1% from $191.3 million for the quarter ended September 30, 2017. The increase in net sales was primarily due to a $31.5 million increase in distributor sales across all regions, a $7.6 million increase in OEM sales across all regions, and a $5.1 million increase in EMS sales across all regions except for the APAC region, which was slightly lower. In addition, Solid Capacitors net sales was favorably impacted by $0.1 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
Segment Operating Income (Loss)
Segment operating income of $84.7 million for the quarter ended September 30, 2018 increased $28.0 million or 49.3% from $56.7 million in the quarter ended September 30, 2017. The increase in operating income was primarily a result of a $28.2 million increase in gross margin, which was primarily driven by an increase in net sales, as well as continued variable margin improvement due to our restructuring activities, vertical integration, and manufacturing process improvements resulting from our cost reduction activities. Also contributing to the increase in operating income were a $0.7 million decrease in SG&A expenses and a $0.4 million decrease in restructuring charges. Partially offsetting these improvements were a $1.2 million increase in R&D expenses and a $0.1 million increase in net loss on write down and disposal of long-lived assets for the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017.
Film and Electrolytic
The following table sets forth net sales, operating income (loss), and operating income (loss) as a percentage of net sales for our Film and Electrolytic segment for the quarters ended September 30, 2018 and 2017 (amounts in thousands, except percentages):
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| Amount | | % to Net Sales | | Amount | | % to Net Sales |
Net sales (1) | $ | 50,628 |
| | |
| | $ | 47,998 |
| | |
|
Operating income (loss) (1) | 4,236 |
| | 8.4 | % | | 1,263 |
| | 2.6 | % |
_________________(1) Three months ended September 30, 2017 adjusted due to the adoption of ASC 606.
Net Sales
Film and Electrolytic net sales of $50.6 million for the quarter ended September 30, 2018 increased $2.6 million or 5.5% from $48.0 million for the quarter ended September 30, 2017. The increase in net sales was primarily driven by a $3.1 million increase in distributor sales in the EMEA region and a $1.8 million increase in distributor sales in the Americas region. These increases were partially offset by a $2.2 million decrease in OEM sales across all regions, except for the JPKO region, which was slightly higher. Film and Electrolytic net sales was not significantly impacted by foreign currency exchange during the quarter ended September 30, 2018.
Segment Operating Income (Loss)
Segment operating income of $4.2 million for the quarter ended September 30, 2018 increased by approximately $3.0 million from segment operating income of $1.3 million in the quarter ended September 30, 2017. The increase in operating income was primarily a result of a $2.7 million increase in gross margin, which was primarily driven by the increase in net sales, as well as continued margin improvement due to our restructuring activities and manufacturing process improvements resulting from our cost reduction activities. Also contributing to the increase in operating income was a $0.3 million decrease in SG&A expense. Partially offsetting these improvements was a $0.2 million decrease in net gain on write down and disposal of long-lived assets during the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017.
Electro-magnetic, Sensors & Actuators
The following table sets forth net sales, operating income (loss), and operating income (loss) as a percentage of net sales for our MSA segment for the quarter ended September 30, 2018 (amounts in thousands, except percentages).
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| Amount | | % to Net Sales | | Amount | | % to Net Sales |
Net sales | $ | 63,132 |
| | |
| | $ | 62,303 |
| | |
|
Operating income (loss) | 7,132 |
| | 11.3 | % | | 7,765 |
| | 12.5 | % |
Net Sales
MSA net sales of $63.1 million for the quarter ended September 30, 2018 increased $0.8 million or 1.3% from $62.3 million for the quarter ended September 30, 2017. The increase in net sales was primarily due to a $0.9 million increase in EMS sales across all regions and a $0.9 million increase in distributor sales across all regions, except for the APAC region, which was slightly lower. The increases in net sales were partially offset by a $1.0 million decrease in OEM sales across the Americas, APAC, and EMEA regions.
Segment Operating Income (Loss)
Segment operating income of $7.1 million for the quarter ended September 30, 2018 decreased approximately $0.6 million from segment operating income of $7.8 million in the quarter ended September 30, 2017. The decrease in operating income was primarily a result of a $2.2 million decrease in gross margin, which was primarily driven by increased manufacturing unit costs resulting from a decrease in production. Partially offsetting these declines were a $1.5 million decrease in SG&A expenses and a $0.1 million decrease in R&D expenses.
Consolidated Comparison of the Six Months Ended September 30, 2018 with the Six Months Ended September 30, 2017
The following table sets forth the Condensed Consolidated Statements of Operations for the six months ended September 30, 2018 and 2017 (amounts in thousands):
|
| | | | | | | | | | | | | |
| Six Months Ended September 30, |
| 2018 | | % to Total Sales | | 2017 | | % to Total Sales |
Net sales (1) | $ | 676,849 |
| | |
| | $ | 575,514 |
| | |
|
Gross margin (1) | 208,386 |
| | 30.8 | % | | 159,021 |
| | 27.6 | % |
Selling, general and administrative expenses | 100,800 |
| | 14.9 | % | | 78,048 |
| | 13.6 | % |
Research and development (1) | 21,683 |
| | 3.2 | % | | 18,783 |
| | 3.3 | % |
Restructuring charges | (96 | ) | | n.m. |
| | 3,006 |
| | 0.5 | % |
(Gain) loss on write down and disposal of long-lived assets | 823 |
| | 0.1 | % | | (20 | ) | | n.m. |
|
Operating income (loss) (1) | 85,176 |
| | 12.6 | % | | 59,204 |
| | 10.3 | % |
| | | | | | | |
Interest income | (753 | ) | | (0.1 | )% | | (161 | ) | | n.m. |
|
Interest expense | 14,323 |
| | 2.1 | % | | 18,325 |
| | 3.2 | % |
Acquisition (gain) loss | — |
| | n.m. |
| | (136,873 | ) | | (23.8 | )% |
Other (income) expense, net | (7,360 | ) | | (1.1 | )% | | 16,292 |
| | 2.8 | % |
Income (loss) before income taxes and equity income (loss) from equity method investments (1) | 78,966 |
| | 11.7 | % | | 161,621 |
| | 28.1 | % |
Income tax expense (benefit) (1) | 6,600 |
| | 1.0 | % | | 4,004 |
| | 0.7 | % |
Income (loss) before equity income (loss) from equity method investments (1) | 72,366 |
| | 10.7 | % | | 157,617 |
| | 27.4 | % |
Equity income (loss) from equity method investments | (5 | ) | | n.m. |
| | 75,641 |
| | 13.1 | % |
Net income (loss) (1) | $ | 72,361 |
| | 10.7 | % | | $ | 233,258 |
| | 40.5 | % |
_________________(1) Six months ended September 30, 2017 adjusted due to the adoption of ASC 606
n.m. - not meaningful
Net Sales
Net sales of $676.8 million for the six months ended September 30, 2018 increased $101.3 million or 17.6% from $575.5 million for the six months ended September 30, 2017. Solid Capacitor net sales increased $75.9 million, Film and Electrolytic net sales increased $10.1 million, and MSA net sales increased $15.3 million.
The increase in Solid Capacitors net sales was primarily driven by a $52.2 million increase in distributor sales across all regions, a $19.0 million increase in OEM sales across all regions except for the Americas region, which had a $0.9 million decrease, and a $4.7 million increase in EMS sales across all regions except for Asia, which was slightly lower. Also contributing to the increase in sales was an additional 19 days of TOKIN activity during the current year as TOKIN was acquired 19 days into fiscal year 2018. In addition, Solid Capacitors net sales was favorably impacted by $2.7 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
The increase in Film and Electrolytic net sales was primarily driven by a $9.7 million increase in distributor sales across all regions, a $0.6 million increase in OEM sales in the EMEA region, and a $0.5 million increase in EMS sales in the EMEA region. These increases were partially offset by a $1.1 million decrease in OEM sales in the APAC region. In addition, Film and Electrolytic net sales was favorably impacted by $3.2 million from foreign currency exchange, primarily due to the change in the value of the Euro compared to the U.S. dollar.
The increase in MSA net sales was primarily driven by a $20.6 million increase in OEM sales in the JPKO region, a $1.0 million increase in EMS sales across all regions, and $0.9 million and $0.8 million increases in distributor sales in the EMEA and Americas regions, respectively. Partially offsetting these increases were $3.0 million and $1.7 million decreases in distributor sales in the JPKO and APAC regions, respectively, and a $2.5 million decrease in OEM sales in the APAC region.
MSA became a new segment in the first quarter of fiscal year 2018 after the Company acquired TOKIN on April 19, 2017, thus there were an additional 19 days for sales to occur for the six months ended September 30, 2018 compared to the same period in fiscal year 2018, which helped contribute to the increase in sales.
The following table reflects the percentage of net sales by region for the six months ended September 30, 2018 and 2017:
|
| | | | | |
| Six Months Ended September 30, |
| 2018 | | 2017 |
Americas | 22.8 | % | | 22.0 | % |
EMEA | 22.5 | % | | 23.1 | % |
JPKO | 14.6 | % | | 13.9 | % |
APAC | 40.1 | % | | 41.0 | % |
| 100.0 | % | | 100.0 | % |
The following table reflects the percentage of net sales by channel for the six months ended September 30, 2018 and 2017:
|
| | | | | |
| Six Months Ended September 30, |
| 2018 | | 2017 |
Distributor | 41.5 | % | | 38.6 | % |
EMS | 13.7 | % | | 15.0 | % |
OEM | 44.8 | % | | 46.4 | % |
| 100.0 | % | | 100.0 | % |
Gross Margin
Gross margin of $208.4 million (30.8% of net sales) for the six months ended September 30, 2018 increased $49.4 million or 31.0% from $159.0 million (27.6% of net sales) for the six months ended September 30, 2017 and gross margin as a percentage of net sales improved 320 basis points.
Solid Capacitors gross margin increased $45.5 million, or 35.4%, primarily due to an increase in net sales, as well as continued variable margin improvement due to our restructuring activities, vertical integration, and manufacturing process improvements resulting from our cost reduction activities.
Film and Electrolytic gross margin increased $1.5 million, or 18.7%, primarily driven by an increase in net sales, as well as continued margin improvement due to our restructuring activities and manufacturing process improvements resulting from our costs reduction activities.
MSA gross margin increased $2.3 million, or 10.4%, primarily due to an increase in net sales and a favorable change in the product mix.
Selling, General and Administrative Expenses
SG&A expenses of $100.8 million (14.9% of net sales) for the six months ended September 30, 2018 increased $22.8 million or 29.2% compared to $78.0 million (13.6% of net sales) for the six months ended September 30, 2017. The increase was mainly attributed to a $12.3 million increase in payroll and related expenses, primarily consisting of salaries and incentive-based compensation, a $3.2 million increase in ERP integration and technology transition costs, a $2.8 million increase in office rent and software, and a $2.4 million increase in consulting expenses. Additionally, $2.5 million of the overall increase was attributed to expenses incurred during 19 additional days of ownership of our TOKIN subsidiary during the six months ended September 30, 2018, compared to the six months ended September 30, 2017.
Research and Development
R&D expenses of $21.7 million (3.2% of net sales) for the six months ended September 30, 2018 increased $2.9 million or 15.4% compared to $18.8 million (3.3% of net sales) for the six months ended September 30, 2017. The increase was primarily related to an increase in payroll and related expenses of $2.1 million and a $0.6 million increase attributed to expenses incurred during 19 additional days of ownership of TOKIN during the six months ended September 30, 2018 compared to the six months ended September 30, 2017.
Restructuring Charges
A credit to restructuring charges of $0.1 million for the six months ended September 30, 2018 improved $3.1 million or 103.2% from $3.0 million for the six months ended September 30, 2017.
The Company recorded a credit of $0.1 million in restructuring charges in the six months ended September 30, 2018 comprised of $0.1 million credit to personnel reduction costs.
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.
Operating Income (Loss)
Operating income of $85.2 million for the six months ended September 30, 2018 improved $26.0 million from operating income of $59.2 million for the six months ended September 30, 2017. The improvement was primarily attributable to a $49.4 million improvement in gross margin and a $3.1 million decrease in restructuring charges. These improvements to operating income were partially offset by a $22.8 million increase in SG&A expenses, a $2.9 million increase in R&D expenses, and an unfavorable $0.8 million change in (gain) loss on write down and disposal of long-lived assets.
Non-Operating (Income) Expense, Net
Non-operating expense, net was $6.2 million for the six months ended September 30, 2018, compared to non-operating income, net of $102.4 million for the six months ended September 30, 2017. The $108.6 million unfavorable change is primarily attributable to the acquisition gain of $136.9 million recognized during the six months ended September 30, 2017, compared to no such gain during the six months ended September 30, 2018. Partially offsetting this unfavorable change was the following favorable changes in the six months ended September 2018 versus the six months ended September 2017: a $3.7 million decrease in anti-trust litigation fines, a $4.6 million decrease in net interest expense, a $4.1 million gain related to a research and development grant reimbursement from the Japanese government, and a $14.3 million net favorable change in foreign currency exchange gain/(loss), which was primarily due to the change in the value of the Chinese Yuan Renminbi, Thai Baht, and Great Britain Pound compared to the U.S. dollar.
Income Taxes
Income tax expense of $6.6 million for the six months ended September 30, 2018 increased $2.6 million compared to income tax expense of $4.0 million for the six months ended September 30, 2017. Income tax expense of $6.6 million for the six months ended September 30, 2018 was comprised of $6.7 million of income tax expense related to foreign operations and $0.2 million of federal income tax expense, offset by $0.3 million of state income tax benefit. The $6.7 million of income tax expense related to foreign operations includes a $0.3 million expense related to the final settlement of an uncertain tax position.
Income tax expense of $4.0 million for the six months ended September 30, 2017 was comprised of $3.6 million of income tax expense related to foreign operations, $0.2 million of federal income tax expense, and $0.2 million of state income tax expense.
The effective tax rates differ from income taxes recorded using a statutory rate rate largely due to the relative mix in earnings and losses in various tax jurisdictions and the usage of the net operating losses and reversal of associated valuation allowances previously recorded on the deferred tax assets.
Equity Income (Loss) from Equity Method Investments
Equity loss of $5 thousand for the six months ended September 30, 2018 decreased $75.6 million compared to equity income of 75.6 million for the six months ended September 30, 2017. The decrease is primarily related to the TOKIN acquisition that occurred in the first quarter of fiscal year 2018, which resulted in equity income of $84.2 million related to our 34% economic interest in TOKIN for the 19 day period ended April 19, 2017 for the sale of TOKIN's electrical-mechanical devices ("EMD") business and a $9.0 million unfavorable removal of the cost basis of the portion of equity investment related to the EMD division. TOKIN is now a fully owned subsidiary of the Company and there were no such gains from our equity method investments for the six months ended September 30, 2018.
Segment Comparison of the Six Months Ended September 30, 2018 with the Six Months Ended September 30, 2017
The following table reflects each segment’s net sales and operating income (loss) for the six months ended September 30, 2018 and 2017 (amounts in thousands): |
| | | | | | | |
| Six Months Ended September 30, |
| 2018 | | 2017 |
Net sales: | |
| | |
|
Solid Capacitors | $ | 449,294 |
| | $ | 373,386 |
|
Film and Electrolytic (1) | 105,583 |
| | 95,481 |
|
MSA | 121,972 |
| | 106,647 |
|
Total | $ | 676,849 |
| | $ | 575,514 |
|
Operating income (loss): | |
| | |
|
Solid Capacitors | $ | 154,351 |
| | $ | 109,426 |
|
Film and Electrolytic (1) | 5,303 |
| | 3,391 |
|
MSA | 13,187 |
| | 8,123 |
|
Corporate | (87,665 | ) | | (61,736 | ) |
Total | $ | 85,176 |
| | $ | 59,204 |
|
_________________(1) Six months ended September 30, 2017 adjusted due to the adoption of ASC 606.
Solid Capacitors
The following table sets forth net sales, operating income, and operating income as a percentage of net sales for our Solid Capacitors segment for the six monthsquarters ended SeptemberJune 30, 20182019 and 20172018 (amounts in thousands, except percentages):
| | | Six Months Ended September 30, | Three Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
| Amount | | % to Net Sales | | Amount | | % to Net Sales | Amount | | % to Net Sales | | Amount | | % to Net Sales |
Tantalum product line net sales | $ | 282,367 |
| | |
| | $ | 241,854 |
| | |
| $ | 132,386 |
| | | | $ | 134,313 |
| | |
Ceramic product line net sales | 166,927 |
| | |
| | 131,532 |
| | |
| 115,821 |
| | | | 79,508 |
| | |
Solid Capacitors net sales | $ | 449,294 |
| | |
| | $ | 373,386 |
| | |
| $ | 248,207 |
| | | | $ | 213,821 |
| | |
Solid Capacitors operating income (loss) | $ | 154,351 |
| | 34.4 | % | | $ | 109,426 |
| | 29.3 | % | |
Solid Capacitors operating income | | $ | 102,686 |
| | 41.4% | | $ | 69,665 |
| | 32.6% |
Net Sales
Solid Capacitors net sales of $449.3$248.2 million for the six monthsquarter ended SeptemberJune 30, 20182019 increased $75.9$34.4 million or 20.3%16.1% from $373.4$213.8 million for the six monthsquarter ended SeptemberJune 30, 2017.2018. The increase in net sales was primarily driven bydue to a $52.2$36.3 million increase in Ceramics net sales. The increase in Ceramics nets sales resulted from a $24.5 million increase in distributor net sales across all regions, a $19.0$7.2 million increase in EMS net sales across all regions, and a $4.8 million increase in OEM net sales across the Americas, APAC, and EMEA regions. The increase in Solid Capacitors net sales was partially offset by a $1.9 million decrease in Tantalum net sales. The decrease in Tantalum net sales was due to an $9.8 million decrease in distributor net sales across the APAC and EMEA regions and a $0.9 million decrease in OEM net sales across the EMEA and JPKO regions. These decreases in Tantalum net sales were partially offset by a $4.3 million increase in EMS net sales across all regions, a $3.6 million increase in OEM sales across all regions except for the Americas region, which hadand APAC regions, and a $0.9 million decrease, and a $4.7 million increase in EMSdistributor net sales across all regions except for Asia, which was slightly lower. Also contributing to the increase in sales was an additional 19 days of TOKIN activity during the current year as TOKIN was acquired 19 days into fiscal year 2018. In addition,Americas and JPKO regions. Solid Capacitors net sales was favorablynegatively impacted by $2.7 million from foreign currency exchange due to the change in the value of the Euro compared to the U.S. dollar.
Segment Operating Income (Loss)
Segment operating income of $154.4$102.7 million for the six monthsquarter ended SeptemberJune 30, 20182019 increased $44.9$33.0 million or 41.1%47.4% from $109.4$69.7 million forin the six monthsquarter ended SeptemberJune 30, 2017.2018. The increase in operating income was primarily a result of a $45.5$32.4 million increase in gross margin, which was primarily driven by continued variable margin improvement resulting from manufacturing process improvements, vertical integration, and ongoing restructuring activities, as well as an increase in net sales as well as continued variable margin improvement due to our restructuring activities, vertical integration,a favorable shift in product mix and manufacturing process improvements resulting from our cost reduction activities. Also contributingsales channel. Price increases for certain products also contributed to the increase in operating income werenet sales and gross margin. Additionally, a $1.1$1.3 million decrease in SG&A expenses and a $0.7$0.1 million decrease in restructuring charges. Partially offsetting these improvements were a $2.2 million increase in R&D expenses and a $0.2 million increase in net loss on write down and disposal of long-lived assets contributed to the increase in operating income. Partially offsetting these improvements was a $0.7 million increase in R&D expenses and a $0.1 million increase in restructuring charges for the six monthsquarter ended SeptemberJune 30, 20182019 compared to the six monthsquarter ended SeptemberJune 30, 2017.2018.
Film and Electrolytic
The following table sets forth net sales, operating income, (loss) and operating income (loss) as a percentage of net sales for our Film and Electrolytic segment for the six monthsquarters ended SeptemberJune 30, 20182019 and 20172018 (amounts in thousands, except percentages): | | | Six Months Ended September 30, | Three Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
| Amount | | % to Net Sales | | Amount | | % to Net Sales | Amount | | % to Net Sales | | Amount | | % to Net Sales |
Net sales | $ | 105,583 |
| | |
| | $ | 95,481 |
| | |
| $ | 46,709 |
| | |
| | $ | 54,955 |
| | |
|
Operating income (loss) | 5,303 |
| | 5.0 | % | | 3,391 |
| | 3.6 | % | (2,879 | ) | | (6.2 | )% | | 1,067 |
| | 1.9 | % |
Net Sales
Film and Electrolytic net sales of $105.6$46.7 million for the six monthsquarter ended SeptemberJune 30, 2018 increased $10.12019 decreased $8.2 million or 10.6%15.0% from $95.5$55.0 million for the six monthsquarter ended SeptemberJune 30, 2017.2018. The increasedecrease in net sales was primarily driven by a $9.7$4.6 million increasedecrease in distributor sales across allthe APAC and EMEA regions, a $0.6 million increase in OEM sales in the EMEA region, and a $0.5 million increase in EMS sales in the EMEA region. These increases were partially offset by a $1.1$4.0 million decrease in OEM net sales inacross the APAC, region. In addition,EMEA, and JPKO regions, and a $0.9 million decrease in EMS sales across the APAC and EMEA channels. The decrease in Film and Electrolytic net sales was favorablypartially offset by a $0.8 million increase in EMS net sales in the Americas region and a $0.3 million increase in distributor net sales across the Americas and JPKO regions. Film and Electrolytic net sales was unfavorably impacted by $3.2$2.2 million from foreign currency exchange primarily due to the change in the value of the Euro compared to the U.S. dollar.
Segment Operating Income (Loss)
Segment operating incomeloss of $5.3$2.9 million for the six monthsquarter ended SeptemberJune 30, 2018 increased $1.92019 worsened by approximately $3.9 million from segmentcompared to operating income of $3.4$1.1 million forin the six monthsquarter ended SeptemberJune 30, 2017.2018. The increasedecrease in operating income was primarily attributable to a $1.5result of a $2.0 million increase in gross margin, which was primarily driven by anrestructuring charges, a $0.9 million increase in net sales, as well as continued margin improvement due to our restructuring activities and manufacturing process improvements resulting from our costs reduction activities. The increase was also attributable to a $0.3 million decrease in SG&A charges and a $0.3 million decrease in restructuring charges. These improvements were partially offset by a $0.2 million decrease in net gainloss on write down and disposal of long-lived assets.assets, a $0.6 million decrease in gross margin, and a $0.5 million increase in R&D expenses. The increase in restructuring charges mainly relates to the relocation of axial electrolytic production from the Granna plant to the Evora plant and the increase in net loss on write down and disposal of long-lived assets relates to $0.9 million impairment on the Granna property. The decrease in gross margin was due to a decrease in net sales. Partially offsetting these declines to operating income was a $0.1 million decrease in SG&A expenses during the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018.
Electro-magnetic, Sensors & Actuators
The following table sets forth net sales, operating income, (loss), and operating income (loss) as a percentage of net sales for our MSA segment for the six monthsquarters ended SeptemberJune 30, 2019 and 2018 (amounts in thousands, except percentages):. | | | Six Months Ended September 30, | Three Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
| Amount | | % to Net Sales | | Amount | | % to Net Sales | Amount | | % to Net Sales | | Amount | | % to Net Sales |
Net sales | $ | 121,972 |
| | |
| | $ | 106,647 |
| | |
| $ | 50,326 |
| | |
| | $ | 58,840 |
| | |
|
Operating income (loss) | 13,187 |
| | 10.8 | % | | 8,123 |
| | 7.6 | % | |
Operating income | | 3,658 |
| | 7.3 | % | | 6,055 |
| | 10.3 | % |
Net Sales
MSA net sales of $122.0$50.3 million for the six monthsquarter ended SeptemberJune 30, 2018 increased $15.32019 decreased $8.5 million or 14.4%14.5% from $106.6$58.8 million for the six monthsquarter ended SeptemberJune 30, 2017.2018. The increasedecrease in net sales was primarily driven bydue to a $20.6$9.1 million increasedecrease in OEM sales in the JPKO region, a $1.0 million increase in EMSnet sales across all regions and a $0.9 million and $0.8 million increasesdecrease in distributor net sales in the APAC region. The decrease in MSA net sales was partially offset by a $0.9 million increase in distributor net sales across the Americas, EMEA, and AmericasJPKO regions respectively. Partially offsetting these increases were $3.0 million and $1.7 million decreases in distributor sales in the JPKO and APAC regions, respectively, and a $2.5$0.6 million decreaseincrease in OEMEMS net sales in the APAC region. MSA became a new segmentnet sales was favorably impacted by $0.1 million from foreign currency exchange due to the change in the first quartervalue of fiscal year 2018 after the Company acquired TOKIN on April 19, 2017, thus there were an additional 19 days for sales to occur for the six months ended September 30, 2018Japanese Yen compared to the same period in fiscal year 2018, which helped contribute to the increase in sales.U.S. dollar.
Segment Operating Income (Loss)
Segment operating income of $13.2$3.7 million for the six monthsquarter ended SeptemberJune 30, 2018 increased $5.12019 decreased approximately $2.4 million from segment operating income of $8.1$6.1 million in the six monthsquarter ended SeptemberJune 30, 2017.2018. The increasedecrease in operating income was primarily a result of a $3.0$5.0 million decrease in SG&A expenses resulting from decreased payroll expenses due to a reduction in head count and a decrease in information technology expenses. Also contributing to the increase in operating income was a $2.3 million increase in gross margin, which was primarily driven by an increasea decrease in net sales, andas well as a favorable changeshift in the product mix.mix toward lower margin products. Partially offsetting these improvementsthis decline was a $0.2$2.5 million increasedecrease in SG&A expenses and a $0.1 million decrease in R&D expenses.
Liquidity and Capital Resources
Our liquidity needs arise from working capital requirements, capital expenditures, acquisitions, principal and interest payments on debt, and costs associated with the implementation of our restructuring plans.plans, and dividend payments. Historically, our cash needs have been met by cash flows from operations, borrowings under our loan agreements, and existing cash balances.
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 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 1.0%. 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 years. On a quarterly basis the Company must repay
1.25% of the aggregate principal amount of 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 the 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 amends 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 Amendment.
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.
TOKIN Term Loan Facility
Subsequent to quarter end onOn October 29, 2018, TOKINthe Company entered into a JPY 33.0 billion (approximately $296.0 million) Term Loan Agreement (the “Term“TOKIN Term Loan Facility”) by and among TOKIN Corporation (“TOKIN”), the lenders party thereto (the “Lenders”) and Sumitomo Mitsui Trust Bank, Limited in its capacity as agent (the “Agent”), arranger and Lender. The Company expectsFunding for the closing and funding of the newTOKIN Term Loan Facility which is subject to customary terms and conditions, to occuroccurred on or around November 7, 2018.
The proceeds, which were net of an arrangement fee withheld from the funding amount, were JPY 32.1 billion, or approximately $283.9 million using the exchange rate as of November 7, 2018.
The proceeds from the newTOKIN Term Loan Facility will bewere used by TOKIN to make intercompany loans (the “Intercompany Loans”) to the Company. The Company will use the proceeds of the Intercompany loans, from TOKIN, togetheralong with other cash on hand, were used to prepay in full all of the outstanding amounts under the Company’s existing Term Loan Credit Agreement, byprevious term loan of $323.4 million and among the Company, KEC, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent, and to pay related fees, costs and expenses (including a prepayment penaltypremium of 1%). 1.0%, or $3.2 million.
The Company currently has approximately $323.4 million outstanding
under the existing Term Loan Credit Agreement. The newTOKIN Term Loan Facility consists of (i) a JPY 16.5 billion (approximately $148.0 million)$146.0 million using the exchange rate as of November 7, 2018) Term Loan A tranche (the “Term Loan A”) and (ii) a JPY 16.5 billion (approximately $148.0 million)$146.0 million using the exchange rate as of November 7, 2018) Term Loan B tranche (the “Term Loan B” and, together with the Term Loan A, collectively, the “Term Loans”). Principal payments under Term Loan A are required semi-annually, in the amount of JPY 1.4 billion (approximately $12.3 million)$12.8 million using the exchange rate as of June 30, 2019), while the principal of Term Loan B is due in one payment at maturity. At each reporting period, the carrying value of the loan is translated from JPY to U.S. Dollars (“USD”) using the spot exchange rate as of the end of the reporting period. The carrying value of the TOKIN Term Loan Facility at June 30, 2019 was $284.6 million.
Interest payments are due semi-annually on the Term Loans, with the interest rate based on a margin over the six-month Japanese Yen Tokyo Interbank Offered Rate (TIBOR).TIBOR. The applicable margin for Term Loan A is 2.00% and for Term Loan B is 2.25%. Japanese TIBOR at June 30, 2019 was 0.13%. Interest payable related to the TOKIN Term Loan Facility included in the line item “Accrued expenses” on the Condensed Consolidated Balance Sheets was $1.7 million as of June 30, 2019.
The new Term Loans mature on September 30, 2024. KEMET and certain subsidiaries of TOKIN will be providingprovided guarantees of the obligations under the Term Loan Facility,Loans, which will also beare secured by certain assets, properties and equity interests of TOKIN and its material subsidiaries. The TOKIN Term Loan AgreementFacility contains customary covenants applicable to both the Company and to TOKIN, including maintenance of a consolidated leverage ratio, the absence of two consecutive years of consolidated operating losses and the maintenance of certain required levels of consolidated net assets. The TOKIN Term Loan AgreementFacility agreement also contains customary events of default. TOKINThe Company may prepay the Term Loans at any time, subject to certain notice requirements and reimbursement of loan breakage costs.
Revolving Line of Credit
In connection with the closing of the TOKIN Term Loan Facility on October 29 2018, the Company entered into Amendment No. 10 to the Loan and Security Agreement, Waiver and Consent (the “Revolver Amendment”), by and among KEMET, KEMET Electronics Corporation (“KEC”), the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., a national banking association, as agent for the lenders. The Revolver Amendment provides the Company with, among other things, increased flexibility for certain restricted payments (including dividends), and also released certain pledges that allowed the Company to obtain the TOKIN Term Loan Facility in order to pay down in full previous term loan. The revolving line of credit has a facility amount of up to $75.0 million, which is based on factors including outstanding eligible accounts receivable, inventory, and equipment collateral.
As of June 30, 2019, 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 Revolver Amendment was $62.5 million.
Customer Advances
In September, November, and February of fiscal year 2019, the Company entered into three agreements with different customers (the “Customers”) pursuant to which the Customers agreed to make advances (collectively, the “Advances”) to the Company in an aggregate amount of up to $72.0 million (collectively, the “Customer Capacity Agreements”). The Company is planningusing these Advances to execute a hedging strategy designedfund the purchase of production equipment and to minimize the effectmake other investments and improvements in its business and operations (the “Investments”) to increase overall capacity to produce various electronic components of the fluctuationstype and part as may be sold by the Company to the Customers from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advances. The Advances from the Customers are being made in quarterly installments (“Installments”) over an expected period of 18 to 24 months from the effective date of the Customer Capacity Agreements.
The Advances will be repaid beginning on the date that production from the Investments is sufficient to meet the Company's obligations under the agreements with the Customers. Repayments will be made on a quarterly basis as determined by calculations that generally consider the number of components purchased by the Customers during the quarter. Repayments based on the calculations will continue until either the Advances are repaid in full, or December 31, 2038 for all three Customers. The Company has a quarterly repayment cap in the agreement with each of the Customers and is not required to make any quarterly repayments to the Customers that in the aggregate exceeds $1.8 million. If the Customers do not purchase a number of components that would require full repayment of the Advances by December 31, 2038, then the Advances shall be deemed repaid in full. Additionally, if the Customers do not purchase a number of components that would require a payment on the Advances for a period of 16 consecutive quarters, the Advances shall be deemed repaid in full.
As of June 30, 2019, the Company has received a total of $26.0 million in Advances from these Customers. Since the debt is non-interest bearing, the Company has recorded debt discounts on the Advances. These discounts will be amortized over the expected life of the Advances through interest expense. The carrying value of this debt at June 30, 2019 was $20.9 million.
During the three months ended June 30, 2019, the Company had $7.7 million in capital expenditures related to the Customer Capacity Agreements. As of June 30, 2019, the Company had $2.6 million in cash that was restricted to be used to fund these Investments. Restricted cash is recorded within “Prepaid expenses and other current assets” in the Condensed Consolidated Balance Sheets
Derivatives
On November 7, 2018, the Company entered into two cross-currency swaps designated as fair value hedges in order to hedge the foreign currency exchange rates relatedrisk on the Intercompany Loans. On May 28, 2019, these two cross currency swaps were replaced with new swaps that were designated as cash flow hedges to the Japanese Yen denominated debt. Under this plan, the Company would enter into derivative instruments that would hedge the changeprincipal repayments on the Intercompany Loans. These new agreements are contracts to exchange floating-rate payments in JPY with fixed rate payments in USD. The swaps are intended to offset in the fairsame period the remeasurement of the carrying value of the Japanese Yen denominated debt related to changes inunderlying foreign currency exchange rates.Intercompany Loans. The first derivative instrumentterms of these cross-currency swaps are as follows:
An amortizing cross-currency swap with an initial notional value of JPY 15.1 billion. The notional value is amortized by approximately JPY 1.4 billion every six months and matures on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus 2.00%. Interest payments are made in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of 4.88%.
| |
• | A non-amortizing cross-currency swap with a notional value of JPY 16.5 billion maturing on September 30, 2024. The Company receives interest in JPY on March 31 and September 30 of each year based on the JPY notional value and JPY Libor plus 2.25%. Interest payments are made in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of 5.26% |
On November 7, 2018, the Company is planning to enterentered into is a cross-currency swap designated as a fair value hedge, which would entail the change in the fair value of the derivative instrument being recognized in earnings to offset the change in the fair value of the Japanese Yen denominated debt that is recognized in earnings. The second derivative instrument is a cross-currency swap designated as a net investment hedge to hedge the changeJPY currency exposure of the Company's net investment in TOKIN's net equity, whichTOKIN. This agreement is denominateda contract to exchange fixed-rate payments in Japanese Yen and subject to translation at each balance sheet date.one currency for fixed-rate payments in another currency. The change in the fairterms of this cross-currency swap are as follows:
An amortizing cross-currency swap with an initial notional value of this derivative instrumentJPY 33.0 billion. The notional amount is recognizedamortized by approximately JPY 1.4 billion every six months and matures on September 30, 2024. Interest payments are made by the Company in foreign currency translation adjustment within accumulated other comprehensive income to offsetJPY on March 31 and September 30 of each year based on the changesJPY notional value and a fixed rate of 2.61%. The Company receives interest in USD on March 31 and September 30 of each year based on the USD equivalent of the JPY notional value and a fixed rate of TOKIN's equity.6.25%.
Short-Term Liquidity
Cash and cash equivalents as of SeptemberJune 30, 20182019 of $263.0$217.3 million decreased $23.8increased $9.4 million from $286.8$207.9 million as of March 31, 2018.2019. Our net working capital (current assets less current liabilities) as of SeptemberJune 30, 20182019 was $411.6$405.1 million compared to $391.3$363.6 million as of March 31, 2018.2019. Cash and cash equivalents held by our foreign subsidiaries totaled $168.6$144.9 million and $196.8$139.6 million at SeptemberJune 30, 20182019 and March 31, 2018,2019, respectively, with the decreaseincrease primarily driven by cash held at TOKIN.in Singapore and China. Our operating income outside the U.S. is no longernot deemed to be permanently reinvested in foreign jurisdictions. As a result, we set up a deferred tax liability as of March 31, 2015 on the undistributed foreign earnings which was offset by a reduction in the valuation allowance on our deferred tax assets. However, we currently do not intend nor foresee a need to repatriate cash and cash equivalents held by foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue U.S. withholding taxes on the distributed foreign earnings.
Based on our current operating plans, we believe domestic cash and cash equivalents, including expected cash generated from operations, are sufficient to fund our operating requirements for at least the next twelve months, including approximately $5.5$6.5 million in interest payments, and approximately $24.5$29.2 million in debt principal payments, on the new Term Loan Facility, $120.0 to $130.0 million in expected capital expenditures, $3.2$1.9 million in restructuring payments, and $11.5$11.6 million in expected shareholder dividends.anticipated cash dividends (subject to approval by the Board of Directors of the Company). As of SeptemberJune 30, 2018,2019, our borrowing capacity, which is based on factors including outstanding eligible accounts receivable, inventory and equipment collateral, under the revolving line of credit was $75.0$62.5 million. The revolving line of credit expires on April 28, 2022.
Cash, and cash equivalents, decreased $23.8and restricted cash increased $12.0 million for the sixthree months ended SeptemberJune 30, 2018,2019, as compared to an increasea decrease of $143.9$42.2 million during the sixthree months ended SeptemberJune 30, 2017.2018.
The following table provides a summary of cash flows for the periods presented (amounts in thousands):
| | | Six months ended September 30, | Quarters Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Net cash provided by (used in) operating activities | $ | 32,999 |
| | $ | 39,749 |
| $ | 33,713 |
| | $ | (15,850 | ) |
Net cash provided by (used in) investing activities | (40,702 | ) | | 150,484 |
| (38,679 | ) | | (15,249 | ) |
Net cash provided by (used in) financing activities | (7,644 | ) | | (48,314 | ) | 15,780 |
| | (4,038 | ) |
Effect of foreign currency fluctuations on cash, cash equivalents and restricted cash | (8,452 | ) | | 1,980 |
| |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (23,799 | ) | | $ | 143,899 |
| |
Effect of foreign currency fluctuations on cash, cash equivalents, and restricted cash | | 1,150 |
| | (7,061 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | $ | 11,964 |
| | $ | (42,198 | ) |
Operating
Cash provided by operating activities duringDuring the sixthree months ended SeptemberJune 30, 2018 of $33.0 million decreased $6.8 million compared to2019, cash provided by operating activities of $39.7totaled $33.7 million, in the six months ended September 30, 2017.
Cash generated from net income and adjusted for non-cash income statement items during the six months ended September 30, 2018 of $111.0 million reflects a $57.2 million increase compared to cash generated from net income and adjusted for non-cash income statement itemsused in operating activities of $53.8$15.9 million induring the sixthree months ended SeptemberJune 30, 2017.
In2018. During the sixthree months ended SeptemberJune 30, 2019, cash provided by operating activities was positively impacted by net income. Operating cash flows were negatively impacted by the effects of a $26.3 million decrease in operating liabilities and a $15.6 million increase in operating assets.
During the three months ended June 30, 2018, we hadcash used in operating activities was driven by a $49.3 million decrease in operating liabilities and a $24.5 million increase in operating assets. Operating cash flows were positively impacted by net income of $72.4 million, and adjustments to cash flows from operations for non-cash income statement items were a net $38.6 million increase. Included in$35.2 million.
Investing
During the non-cash income statement items are depreciation and amortization, (income) loss from equity-method investments, non-cash debt and financing costs, stock-based compensation expense, write down of receivables, write down and disposals of long-lived assets, pension and other post-retirement benefits, and deferred income taxes.
In the sixthree months ended SeptemberJune 30, 2017, we had income of $233.3 million,2019 and adjustments to2018, cash flows for operations for non-cash income statement items were a net $179.5 million decrease, primarily driven by acquisition gain and income from equity-method investments of $136.9 million and $75.6 million, respectively. Also included in the non-cash income statement items are depreciation and amortization, loss on early extinguishment of debt, non-cash debt and financing costs, stock-based compensation expense, write down of receivables, write down and disposals of long-lived assets, pension and other post-retirement benefits, and deferred income taxes.
Offsetting the cash generation from net income, we had a $40.5 million decrease in cash from operating assets, excluding foreign currency exchange, comprised of the following:
In the six months ended September 30, 2018, an increase in accounts receivable used $11.7 million in cash, compared to the six months ended September 30, 2017, during which a decrease in accounts receivable generated $32.9 million in cash. The primary reason for the change in accounts receivable is due to the timing of customer receipts.
In the six months ended September 30, 2018, a decrease in prepaid expenses and other assets generated $7.1 million in cash, compared to the six months ended September 30, 2017, during which a decrease in prepaid expenses and other assets generated $1.0 million in cash.
In the six months ended September 30, 2018, an increase in inventory used $15.4 million in cash, compared to the six months ended September 30, 2017, during which an increase in inventory used $13.3 million in cash.
Additionally, we had a $23.4 million decrease in cash from operating liabilities, excluding foreign currency exchange, comprised of the following:
In the six months ended September 30, 2018, a decrease in accrued expenses used $58.8 million in cash, compared to the six months ended September 30, 2017, during which a decrease in accrued expenses used $20.1 million in cash. The primary reason for the change in accrued expenses is due to the payment of TOKIN anti-trust fines.
Partially offsetting the unfavorable changes, in the six months ended September 30, 2018, an increase in accounts payable generated $0.1 million in cash, compared to the six months ended September 30, 2017, during which a decrease in accounts payable used $14.5 million in cash. The primary reason for the change in accounts payable is due to the timing of supplier payments.
Also offsetting the unfavorable changes, in the six months ended September 30, 2018, an increase in accrued income taxes generated $0.6 million in cash, compared to the six months ended September 30, 2017, during which a decrease in accrued expenses used $0.1 million in cash.
Investing
Cash used in investing activities duringtotaled $38.7 million and $15.2 million, respectively. During the sixthree months ended SeptemberJune 30, 2018 of $40.7 million reflects a $191.2 million change compared to2019, cash provided byused in investing activities of $150.5 million in the six months ended September 30, 2017.
During the six months ended September 30, 2018, we madeincluded capital expenditures of $40.5$37.1 million, primarily related to expanding capacity at our manufacturing facilitieslocations in Mexico, China, Thailand, and Japan, as well as information technology projects in the United States and Mexico. $7.7 million of the $37.1 million in capital expenditures were related to the Customer Capacity Agreements. Additionally, the Company made a contribution of $2.0 million to KEMET Jianghai. Partially offsetting these uses of cash was the receipt of $0.4 million in dividends.
During the three months ended June 30, 2018, cash used in investing activities included capital expenditures of $16.0 million, primarily related to expanding capacity at our manufacturing locations in Mexico, Portugal, China, Thailand, and Japan, as well as information technology projects in Simpsonville, South Carolina. Additionally, we made an initial capital contribution to KEMET Jianghai of $1.0 million. OffsettingPartially offsetting these uses of cash we had proceeds from dividendswas the receipt of $0.8 million.million in dividends.
In comparison,Financing
During the three months ended June 30, 2019 cash provided by financing activities totaled $15.8 million and during the sixthree months ended SeptemberJune 30, 2017, we received $167.1 million in positive cash flow related to the TOKIN acquisition. Additionally, we had proceeds from dividends and from sale of assets of $0.6 million each. Offsetting these sources of cash, we made capital expenditures of $17.8 million, primarily related to expanding capacity at our manufacturing facilities in Mexico, Italy, China, Thailand and Japan, as well as information technology projects in Simpsonville, South Carolina.
Financing
Cash used in financing activities during the six months ended September 30, 2018 of $7.6 million reflects a $40.7 million change from cash used in financing activities of $48.3totaled $4.0 million. During the three months ended June 30, 2019, the Company received $12.5 million in loan proceeds from customers related to the six months ended September 30, 2017.Customer Capacity Agreements. Additionally, the Company received $6.5 million upon the termination of the cross-currency swaps designated as fair value hedges. Partially offsetting these cash inflows was $2.9 million in dividend payments.
During the sixthree months ended SeptemberJune 30, 2018, we made two quarterly payments totaling $8.6cash used in financing activities included a $4.3 million long-term debt repayment on the Term Loan Credit Agreement. Additionally, we received proceeds from an advance from a customer, as describedCompany's term loan that was paid off during fiscal year 2019. Partially offsetting this use of cash was $0.3 million in the section above titled “Advance,” and proceeds from the exercise of stock options, of which each generated $0.5 million in cash.
In comparison, during the six months ended September 30, 2017, we used $353.0 million to repay the remaining balance of our 10.5% Senior Notes, $33.9 million to repay the remaining outstanding balance of the revolving line of credit, and received $329.7 million in proceeds from the Term Loan Credit Agreement, net of discount, bank issuance costs, and other indirect issuance costs. Additionally, we made one quarterly payment of the Term Loan Credit Agreement of $4.3 million, and received proceeds on an interest free loan from the Portuguese Government of $0.3 million. Finally, proceeds from the exercise of stock warrants and exercise of stock options generated $8.8 million and $4.1 million in cash, respectively.options.
Commitments
With the exception of the items noted below, our commitments have not materially changed from those disclosed in the Company’s 20182019 Form 10-K as updated by our quarterly reports.10-K. An update to our contractual obligations is as follows (amounts in thousands):
| | | | | | Payment Due by Period | | | | Payment Due by Period |
Contractual obligations | | Total | | Year 1 (1) | | Years 2 - 3 | | Years 4 - 5 | | More than 5 years | | Total | | Year 1 | | Years 2 - 3 | | Years 4 - 5 | | More than 5 years |
Anti-trust fines and settlements | | $ | 49,025 |
| | $ | 26,466 |
| | $ | 17,574 |
| | $ | 4,985 |
| | $ | — |
| |
Debt obligations | | | $ | 326,654 |
| | $ | 29,225 |
| | $ | 63,074 |
| | $ | 63,621 |
| | $ | 170,734 |
|
Anti-trust fines and settlements (1) | | | 23,332 |
| | 11,230 |
| | 10,141 |
| | 1,961 |
| | — |
|
_________________(1) In addition to amounts reflected in the table, an additional $2.8$2.9 million has been recorded in the line item "Accrued expenses," for which the timing of payment has not been determined.
Non-Generally Accepted Accounting PrinciplesNon-GAAP Financial Measures
To complement our Condensed Consolidated Statements of Operations and Cash Flows, we use non-GAAP financial measures of Adjusted gross margin, Adjusted operating income, (loss), Adjusted net income (loss) and Adjusted EBITDA. Management believes that Adjusted gross margin, Adjusted operating income, (loss), Adjusted net income, (loss) and Adjusted EBITDA are complements to U.S. GAAP amounts and such measures are useful to investors. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or, in the case of EBITDA, as an alternative to cash flows from operating activities as a measure of liquidity.
The following table provides a reconciliation from non-GAAP Adjusted Gross margin to GAAP Gross margin, the most directly comparable GAAP measure (amounts in thousands, except percentages): |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Net sales | $ | 345,242 |
| | $ | 327,616 |
|
Cost of sales | 223,614 |
| | 232,795 |
|
Gross margin (GAAP) | $ | 121,628 |
| | $ | 94,821 |
|
Gross margin as a % of net sales | 35.2 | % | | 28.9 | % |
Non-GAAP adjustments: | | | |
Plant start-up costs | 34 |
| | 753 |
|
Stock-based compensation expense | 874 |
| | 589 |
|
Adjusted gross margin (non-GAAP) | $ | 122,536 |
| | $ | 96,163 |
|
Adjusted gross margin as a % of net sales | 35.5 | % | | 29.4 | % |
The following table provides a reconciliation from non-GAAP Adjusted Operating income to GAAP operating income, the most directly comparable GAAP measure (amounts in thousands): |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Operating income (GAAP) | $ | 58,400 |
| | $ | 35,176 |
|
Non-GAAP adjustments: | |
| | |
|
Restructuring charges | 2,208 |
| | (96 | ) |
ERP integration/IT transition costs | 1,215 |
| | 1,650 |
|
Stock-based compensation expense | 2,725 |
| | 4,060 |
|
Legal expenses/fines related to antitrust class actions | 2,559 |
| | 1,286 |
|
Plant start-up costs | 34 |
| | 753 |
|
(Gain) loss on write down and disposal of long-lived assets | 960 |
| | 511 |
|
Adjusted operating income (non-GAAP) | $ | 68,101 |
| | $ | 43,340 |
|
The following table provides reconciliation from U.S. GAAP Gross margin to non-GAAP Adjusted gross marginNet income to GAAP Net income, the most directly comparable GAAP measure (amounts in thousands, except percentages)thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales (1) | $ | 349,233 |
| | $ | 301,568 |
| | $ | 676,849 |
| | $ | 575,514 |
|
Cost of sales (1) | 235,668 |
| | 216,664 |
| | 468,463 |
| | 416,493 |
|
Gross margin (U.S. GAAP) (1) | $ | 113,565 |
| | $ | 84,904 |
| | $ | 208,386 |
| | $ | 159,021 |
|
Gross margin as a % of net sales | 32.5 | % | | 28.2 | % | | 30.8 | % | | 27.6 | % |
Non-GAAP adjustments: | | | | | | | |
Plant start-up costs | 1,361 |
| | — |
| | 2,114 |
| | — |
|
Stock-based compensation expense | 686 |
| | 342 |
| | 1,275 |
| | 652 |
|
Adjusted gross margin (non-GAAP) (1) | $ | 115,612 |
| | $ | 85,246 |
| | $ | 211,775 |
| | $ | 159,673 |
|
Adjusted gross margin as a % of net sales | 33.1 | % | | 28.3 | % | | 31.3 | % | | 27.7 | % |
________________ |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Net income (GAAP) | $ | 40,340 |
| | $ | 35,220 |
|
Non-GAAP adjustments: | |
| | |
|
Restructuring charges | 2,208 |
| | (96 | ) |
R&D grant reimbursements and grant income | (35 | ) | | (4,087 | ) |
ERP integration/IT transition costs | 1,215 |
| | 1,650 |
|
Stock-based compensation expense | 2,725 |
| | 4,060 |
|
Legal expenses/fines related to antitrust class actions | 2,559 |
| | 1,248 |
|
Net foreign exchange (gain) loss | (489 | ) | | (7,521 | ) |
Equity (income) loss from equity method investments | 250 |
| | 69 |
|
Plant start-up costs | 34 |
| | 753 |
|
(Gain) loss on write down and disposal of long-lived assets | 960 |
| | 511 |
|
Income tax effect of non-GAAP adjustments | (1,568 | ) | | 451 |
|
Adjusted net income (non-GAAP) | $ | 48,199 |
| | $ | 32,258 |
|
(1) Three and six months endedSeptember 30, 2017 adjusted due to the adoption ASC 606.
The following table provides reconciliation from U.S. GAAP Operating income (loss) to non-GAAP Adjusted operatingEBITDA to GAAP Net income, (loss)the most directly comparable GAAP measure (amounts in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Operating income (loss) (U.S. GAAP) (1) | $ | 50,000 |
| | $ | 31,597 |
| | $ | 85,176 |
| | $ | 59,204 |
|
Non-GAAP adjustments: | |
| | |
| | |
| | |
|
Restructuring charges | — |
| | 1,393 |
| | (96 | ) | | 3,006 |
|
ERP integration/IT transition costs | 1,593 |
| | — |
| | 3,243 |
| | — |
|
Stock-based compensation expense | 4,417 |
| | 1,530 |
| | 8,477 |
| | 2,631 |
|
Legal expenses/fines related to antitrust class actions | 1,740 |
| | 2,375 |
| | 3,026 |
| | 3,516 |
|
Plant start-up costs | 1,361 |
| | — |
| | 2,114 |
| | — |
|
(Gain) loss on write down and disposal of long-lived assets | 312 |
| | (39 | ) | | 823 |
| | (20 | ) |
Adjusted operating income (loss) (non-GAAP) (1) | $ | 59,423 |
| | $ | 36,856 |
| | $ | 102,763 |
| | $ | 68,337 |
|
________________ (1) Three and six months ended September 30, 2017 adjusted due to the adoption ASC 606.
The following table provides reconciliation from U.S. GAAP Net income (loss) to non-GAAP Adjusted net income (loss) (amounts in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) (U.S. GAAP) (1) | $ | 37,141 |
| | $ | 12,819 |
| | $ | 72,361 |
| | $ | 233,258 |
|
Non-GAAP adjustments: | |
| | |
| | |
| | |
|
Acquisition (gain) loss | — |
| | (1,285 | ) | | — |
| | (136,873 | ) |
Restructuring charges | — |
| | 1,393 |
| | (96 | ) | | 3,006 |
|
Research and development grant reimbursement | — |
| | — |
| | (4,087 | ) | | — |
|
ERP integration/IT transition costs | 1,593 |
| | — |
| | 3,243 |
| | — |
|
Stock-based compensation expense | 4,417 |
| | 1,530 |
| | 8,477 |
| | 2,631 |
|
Legal expenses/fines related to antitrust class actions | 6,060 |
| | 10,327 |
| | 7,308 |
| | 11,468 |
|
(Gain) loss on early extinguishment of debt | — |
| | — |
| | — |
| | 486 |
|
Net foreign exchange (gain) loss | 193 |
| | 1,891 |
| | (7,328 | ) | | 6,934 |
|
Amortization included in interest expense | 406 |
| | 664 |
| | 635 |
| | 1,124 |
|
Equity (income) loss from equity method investments | (64 | ) | | (224 | ) | | 5 |
| | (75,641 | ) |
Plant start-up costs | 1,361 |
| | — |
| | 2,114 |
| | — |
|
(Gain) loss on write down and disposal of long-lived assets | 312 |
| | (39 | ) | | 823 |
| | (20 | ) |
Income tax effect of non-GAAP adjustments | (164 | ) | | (631 | ) | | 287 |
| | (853 | ) |
Adjusted net income (loss) (non-GAAP) | $ | 51,255 |
| | $ | 26,445 |
|
| $ | 83,742 |
|
| $ | 45,520 |
|
________________(1) Three and six months ended September 30, 2017 adjusted due to the adoption ASC 606.
The following table provides reconciliation from U.S. GAAP Net income (loss) to non-GAAP Adjusted EBITDA (amounts in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) (U.S. GAAP) (1) | $ | 37,141 |
| | $ | 12,819 |
| | $ | 72,361 |
| | $ | 233,258 |
|
Non-GAAP adjustments: | |
| | |
| | | | |
Interest expense (income), net | 6,912 |
| | 7,270 |
| | 13,570 |
| | 18,164 |
|
Income tax expense (benefit) (1) | 2,000 |
| | 2,864 |
| | 6,600 |
| | 4,004 |
|
Depreciation and amortization (1) | 12,545 |
| | 13,554 |
| | 25,642 |
| | 26,013 |
|
EBITDA (non-GAAP)(1) | 58,598 |
| | 36,507 |
| | 118,173 |
| | 281,439 |
|
Excluding the following items: | | | | | | | |
Acquisition (gain) loss | — |
| | (1,285 | ) | | — |
| | (136,873 | ) |
Restructuring charges | — |
| | 1,393 |
| | (96 | ) | | 3,006 |
|
Research and development grant reimbursement | — |
| | — |
| | (4,087 | ) | | — |
|
ERP integration/IT transition costs | 1,593 |
| | — |
| | 3,243 |
| | — |
|
Stock-based compensation expense | 4,417 |
| | 1,530 |
| | 8,477 |
| | 2,631 |
|
Legal expenses/fines related to antitrust class actions | 6,060 |
| | 10,327 |
| | 7,308 |
| | 11,468 |
|
Net foreign exchange (gain) loss | 193 |
| | 1,891 |
| | (7,328 | ) | | 6,934 |
|
Equity (income) loss from equity method investments | (64 | ) | | (224 | ) | | 5 |
| | (75,641 | ) |
(Gain) loss on early extinguishment of debt | — |
| | — |
| | — |
| | 486 |
|
Plant start-up costs | 1,361 |
| | — |
| | 2,114 |
| | — |
|
(Gain) loss on write down and disposal of long-lived assets | 312 |
| | (39 | ) | | 823 |
| | (20 | ) |
Adjusted EBITDA (non-GAAP) (1) | $ | 72,470 |
| | $ | 50,100 |
| | $ | 128,632 |
| | $ | 93,430 |
|
________________(1) Three and six months ended September 30, 2017 adjusted due to the adoption ASC 606. |
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Net income (GAAP) | $ | 40,340 |
| | $ | 35,220 |
|
Non-GAAP adjustments: | |
| | |
|
Interest expense (income), net | 1,736 |
| | 6,658 |
|
Income tax expense (benefit) | 16,800 |
| | 4,600 |
|
Depreciation and amortization | 14,259 |
| | 13,096 |
|
EBITDA (non-GAAP) | 73,135 |
| | 59,574 |
|
Excluding the following items: | | | |
Restructuring charges | 2,208 |
| | (96 | ) |
R&D grant reimbursements and grant income | (35 | ) | | (4,087 | ) |
ERP integration/IT transition costs | 1,215 |
| | 1,650 |
|
Stock-based compensation expense | 2,725 |
| | 4,060 |
|
Legal expenses/fines related to antitrust class actions | 2,559 |
| | 1,248 |
|
Net foreign exchange (gain) loss | (489 | ) | | (7,521 | ) |
Equity (income) loss from equity method investments | 250 |
| | 69 |
|
Plant start-up costs | 34 |
| | 753 |
|
(Gain) loss on write down and disposal of long-lived assets | 960 |
| | 511 |
|
Adjusted EBITDA (non-GAAP) | $ | 82,562 |
| | $ | 56,161 |
|
Adjusted gross margin represents net sales less cost of sales excluding adjustments which are outlined in the quantitative reconciliation provided above. Management uses Adjusted gross margin to facilitate our analysis and understanding of our business operations by excluding the items outlined in the quantitative reconciliation provided above which might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations. The Company believes that Adjusted gross margin is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company. Adjusted gross margin should not be considered as an alternative to gross margin or any other performance measure derived in accordance with U.S. GAAP.
Adjusted operating income (loss) represents operating income, (loss), excluding adjustments which are outlined in the quantitative reconciliation provided above. We use Adjusted operating income (loss) to facilitate our analysis and understanding of our business
operations by excluding the items outlined in the quantitative reconciliation provided above which might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations. The Company believes that Adjusted operating income (loss) is useful to investors to provide a supplemental way to understand our underlying operating performance and monitor and understand changes in our ability to generate income from ongoing business operations. Adjusted operating income (loss) should not be considered as an alternative to operating income or any other performance measure derived in accordance with U.S. GAAP.
Adjusted net income (loss) represents net income, (loss), excluding adjustments which are outlined in the quantitative reconciliation provided above. We use Adjusted net income (loss) to evaluate our operating performance by excluding the items outlined in the quantitative reconciliation provided above which might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations. The Company believes that Adjusted net income (loss) is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company and allows investors to monitor and understand changes in our ability to generate income from ongoing business operations. Adjusted net income (loss) should not be considered as an alternative to net income, (loss), operating income (loss) or any other performance measures derived in accordance with U.S. GAAP.
Adjusted EBITDA represents net income (loss) before income tax expense, interest expense, net, and depreciation and amortization expense, excluding adjustments which are outlined in the quantitative reconciliation provided above. We present
Adjusted EBITDA as a supplemental measure of our performance and ability to service debt. We also present Adjusted EBITDA because we believe this measure is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.
We believe Adjusted EBITDA is an appropriate supplemental measure of debt service capacity because cash expenditures on interest are, by definition, available to pay interest, and tax expense is inversely correlated to interest expense because tax expense goes down as deductible interest expense goes up; and depreciation and amortization are non-cash charges. The other items excluded from Adjusted EBITDA are excluded in order to better reflect our continuing operations.
In evaluating Adjusted EBITDA, one should be aware that in the future we may incur expenses similar to the adjustments noted above. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these types of adjustments. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, (loss), operating income, (loss), or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity.
Our Adjusted EBITDA measure has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
it does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;
it does not reflect changes in, or cash requirements for, our working capital needs;
it does not reflect any income tax expense or benefit, including any potential changes to income taxes resulting from the Tax Cuts and Jobs Act enacted December 22, 2017;
it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and our Adjusted EBITDA measure does not reflect any cash requirements for such replacements;
it is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
it does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;
it does not reflect limitations on or costs related to transferring earnings from our subsidiaries to us; and
other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementary.supplementarily.
Off-Balance Sheet Arrangements
Other than operating lease commitments, we are not a party to any material off-balance sheet financing arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Impact of Recently Issued Accounting Standards
See Note 1, “Recently Issued Accounting PronouncementsBasis of Financial Statement Presentation," in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
ThereForeign Currency Exchange Rate Risk
During fiscal year 2019, we entered into cross-currency swaps to hedge the foreign currency risk on Intercompany Loans and to hedge the JPY currency exposure of the Company's net investment in TOKIN. We use these derivative financial instruments primarily to reduce our exposure to adverse fluctuations in foreign currency exchange rates. We do not enter into derivative financial instruments for speculative purposes and our derivative positions are used to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal changes in the value of the underlying exposure. In the first quarter of fiscal year 2020, we terminated our fair value hedges and subsequently entered into two cash flow hedges to limit our exposure to fluctuations in foreign currency exchange rates. Other than the foregoing, there have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the year ended March 31, 20182019 filed with the SEC on May 25, 2018. 30, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2018,2019, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensurein ensuring that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’sCompany's management, including itsthe Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding requiredcontinued disclosure. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2019 (the end of the period covered by this Quarterly Report on Form 10-Q), due to a material weakness in internal controls over financial reporting, as further described in our 2019 Annual Report on Form 10-K filed with the SEC on May 30, 2019.
Notwithstanding the material weakness discussed above, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has concluded that the Company's Financial Statements included in this Form 10-Q present fairly, in all material respects, the financial condition, results of operations, and cash flows for the periods presented in this report on Form 10-Q in accordance with GAAP.
Remediation Plan
Management is in the process of remediating this material weakness and has engaged an independent third-party to assist with the evaluation of the internal controls pertaining to the initiation and recording of net sales and accounts receivable. We intend to implement new, and refine existing controls, as well as provide additional training and improve our documentation as it pertains to the initiation and recording of net sales and accounts receivable. We will continue to work to remediate these deficiencies prior to the end of fiscal year 2020. However, the deficiencies will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.
Changes in Internal Control over Financial Reporting
The Company implemented new internal controls for the adoption of the new lease standard that became effective in the first quarter of fiscal year 2020.
Other than those changes described below,in the immediately preceding paragraph, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended SeptemberJune 30, 20182019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
In the first quarter of 2017, the Company acquired TOKIN (see Note 2, “Acquisitions”). As of the date of this Quarterly Report, we are in the process of further integrating the acquired operations into our overall internal controls over financial reporting. Additionally, we are designing new internal controls for the implementation of the new lease standard that becomes effective fiscal year 2020.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
“Item 3. Legal Proceedings” of our 20182019 Form 10-K includes a discussion of our legal proceedings. For an update on certain legal matters see Note 14, “Concentrations of Risks.” Except for certain developments concerning TOKIN as described in Note 14, “Concentrations of Risks,”below, there have been no material changes from the Company’s legal proceedings described in our 20182019 Form 10-K10-K.
As previously reported, KEMET and KEC, along with more than 20 other capacitor manufacturers and subsidiaries (including TOKIN, as described below), are defendants in Part II. Itema purported antitrust class action complaint, In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD, filed on December 4, 2014 with the United States District Court, Northern District of California (the “U.S. Class Action Complaint”). The complaint alleges a violation of Section 1 Legal Proceedings of the Company's Quarterly ReportSherman Act, for which it seeks injunctive and equitable relief and money damages. The discovery phase has closed. Briefing on Form 10-Qdispositive motions will be completed in August 2019. Trial is currently scheduled to begin in February 2020.
In addition, KEMET, KEC, TOKIN, and TOKIN America, along with more than 20 other capacitor manufacturers and subsidiaries, had been named as defendants in two suits by plaintiffs who had chosen not to participate in the U.S. Class Action Complaint: AASI Beneficiaries’ Trust v. AVX Corporation, et al., filed on August 29, 2016 in the United States District Court, Southern District of Florida, and Benchmark Electronics, Inc., et al. v. AVX Corporation, et al., filed on April 18, 2017 in the United States District Court, Southern District of Texas (the “AASI and Benchmark Complaints”). The AASI and Benchmark complaints alleged generally the same violations as the U.S. Class Action Complaint. On May 24, 2019, TOKIN and TOKIN America Inc. entered into a definitive settlement agreement with the plaintiffs of the AASI and Benchmark Complaints, by which TOKIN agreed to pay $0.95 million in consideration of the release of TOKIN and its direct and indirect parents, subsidiaries and affiliates from any and all claims asserted in the AASI and Benchmark Complaints. TOKIN paid the settlement amount on June 20, 2019. On July 18, 2019, the AASI and Benchmark Complaints against KEMET, KEC, TOKIN, and TOKIN America were dismissed.
On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that TOKIN would be fined 1.2 billion New Taiwan dollars (“NTD”) (approximately USD $39.2 million) for violations of the quarter endedTaiwan Fair Trade Act. Subsequently, the TFTC has reduced the fine to NTD 609.1 million (approximately USD $19.6 million). In February 2016, TOKIN commenced an administrative suit in Taiwan, challenging the validity of the amount of the fine. On August 23, 2018, the Taipei High Administrative Court revoked the TFTC decision, finding that the decision had been time-barred by applicable statute. On September 21, 2018, the TFTC filed an appeal against the High Administrative Court's decision. Payment of the TFTC fine is not stayed during the administrative appeals; TOKIN has made installment payments of the fine aggregating to approximately NTD 182.7 million (approximately $5.9 million) as of June 30, 2018.2019.
As of June 30, 2019, the Company's accrual for TOKIN antitrust and civil litigation claims totaled $26.3 million. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations, civil litigation and claims. However, the actual outcomes could differ from what has been accrued.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A Risk Factors, of the Company’s 20182019 Annual Report and in Part II, Item 1A Risk Factors of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any of our equity securities during the sixthree months ended SeptemberJune 30, 20182019 that were not registered under the Securities Act of 1933, as amended.
Repurchase of Equity Securities
The following table provides information relating to our purchase of shares of our common stock during the quarter ended SeptemberJune 30, 2018 (amounts in thousands, except per share price):2019: |
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Periods | (a) Total Number of Shares Purchased (1) | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | (d) Maximum Number of Shares That May Yet be Purchased Under the Programs |
April 1 to April 30, 2019 | 178 |
| $ | 17.99 |
| — |
| — |
|
May 1 to May 31, 2019 | 77,674 |
| 18.15 |
| — |
| — |
|
June 1 to June 30, 2019 | — |
| — |
| — |
| — |
|
Total for Quarter Ended June 30, 2019 | 77,852 |
| $ | 18.15 |
| — |
| — |
|
________________ |
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Periods | (a) Total Number of Shares Purchased (1) | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | (d) Maximum Number of Shares That May Yet be Purchased Under the Programs |
July 1 to July 31, 2018 | 14 |
| $ | 26.25 |
| — |
| — |
|
August 1 to August 31, 2018 | 1 |
| 25.26 |
| — |
| — |
|
September 1 to September 30, 2018 | — |
| — |
| — |
| — |
|
Total for Quarter Ended September 30, 2018 | 15 |
| $ | 26.71 |
| — |
| — |
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________________(1) Represents shares withheld by the Company upon vesting of restricted stockRSUs to pay taxes due. The Company does not currently have a publicly announced share repurchase plan or program.
Restrictions on Paying Dividends
The Revolving Line of Credit AgreementRevolver Amendment includes certain restrictions on our ability to pay dividends or make other payments or distributions on our capital stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Index
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| Second Restated Certificate of Incorporation of the Company, as amended to date (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-15491) for the quarter ended June 30, 2011) |
| Amended and Restated By-laws of KEMET Corporation, effective June 5, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 1-15491) filed on June 5, 2008) |
| English Translation of the Term Loan Agreement, dated October 29, 2018, by and among TOKIN Corporation, the Lenders party thereto and Sumitomo Mitsui Trust Bank Limited, in its capacity as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K File No. 1-15491) filed on October 29, 2018) |
| Form of Guaranty Agreement, dated October 29, 2018, by and between KEMET Corporation and Sumitomo Mitsui Trust Bank Limited, in its capacity as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K File No. 1-15491) filed on October 29, 2018) |
| Amendment No. 10 to Loan and Security Agreement, Waiver and Consent, dated as of October 29, 2018, by and among KEMET, the other borrowers named therein, the financial institutions party thereto as lenders and Bank of America, N.A., a national banking association, as agent for the lenders (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K File No. 1-15491) filed on October 29, 2018) |
| Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer |
| Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer |
| Section 1350 Certification - Principal Executive Officer |
| Section 1350 Certification - Principal Financial Officer |
Exhibit 101 | The following financial information from KEMET Corporation’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2018,2019, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the threethree-month periods ended June 30, 2019 and six months ended September 30, 2018, and 2017, (ii) Condensed Consolidated Balance Sheets at SeptemberJune 30, 20182019 and March 31, 2019, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month periods ended June 30, 2019 and 2018, (iii)(iv) Condensed Consolidated Statements of Cash Flows for the six monthsthree-month periods ended SeptemberJune 30, 2019, and 2018, and 2017, and (iv)(v) the Notes to Condensed Consolidated Financial Statements.
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Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act of 1933, as amended, the registrant has not filed as exhibits to this Quarterly Report on Form 10-Q certain instruments with respect to long-term debt under which the amount of securities authorized does not exceed 10% of the total assets of the registrant. The registrant hereby agrees to furnish copies of all such instruments to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: | November 2, 2018August 1, 2019 | |
| | KEMET Corporation |
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| By: | /s/ WILLIAM M. LOWE, JR.GREGORY C. THOMPSON |
| | William M. Lowe, Jr.Gregory C. Thompson |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
| | (Duly Authorized Officer) |