| Basis of Financial Statement Presentation | Basis of Financial Statement Presentation The Condensed Consolidated Financial Statements contained herein are unaudited and have been prepared from the books and records of KEMET Corporation and its subsidiaries (“KEMET” or the “Company”). In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments unless otherwise disclosed, necessary for a fair presentation of the results for the interim periods. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2018 (the “Company’s 2018 Annual Report”). The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. In consolidation, all intercompany amounts and transactions have been eliminated. Prior year balances for SG&A and Cost of sales amounts have been adjusted to correct the classification of certain TOKIN operating expenses to align with KEMET's classification of these expenses. Net sales and operating results for the three and six months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year. The Company’s significant accounting policies are presented in the Company’s 2018 Annual Report. Refer to the “Change in accounting policies” section below for changes in accounting policies since the issuance of the Company's 2018 Annual Report. Use of Estimates and Assumptions The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments based on historical data and other assumptions that management believes are reasonable. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period. The Company’s judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the unaudited condensed consolidated financial statements. It is important that readers of these unaudited financial statements understand that actual results could differ from these estimates, assumptions, and judgments. Change in Accounting Policies The Company implemented ASC 606, Revenue from Contracts with Customers (“ASC 606”) as of April 1, 2018. As a result, the Company changed its accounting policy for revenue recognition. Except as discussed below, there have not been any other changes to the Company's significant accounting policies since the issuance of the Company's 2018 Annual Report. Research & development The Company previously recognized all research and development (“R&D”) expenses when they were incurred. Under ASC 606, the Company capitalizes a portion of research and development expenses which directly relate to an existing or anticipated contract or specific business opportunity and amortizes them consistently with the pattern of transfer of the goods to which the asset relates. If the expected amortization period is one year or less, the research and development activities are expensed when incurred. Specialized equipment At times, the Company enters into contracts with customers that contain capital arrangements for specialized equipment obtained in order to manufacture products in accordance with customer specifications. The Company may agree to purchase and assemble specific tooling equipment on behalf of the customer and ultimately resell the equipment (and transfer title and control) to the customer. Previously, the Company accumulated such costs on the balance sheet and subsequently applied the receipt of payment from the customer against the asset, thus resulting in no impact to the statement of operations. Under ASC 606, the Company recognizes a distinct performance obligation for the capital arrangement and records the selling price of the equipment as a component of revenue and cost of goods sold at a point in time when the customer obtains control over the asset. Material up-front fees At times, the Company enters into contracts with customers whereby the customer agrees to reimburse the Company for certain manufacturing equipment, capacity expansion, and fulfillment costs required to manufacture product which meets the customer’s required specifications. Previously, the Company recognized the reimbursement revenue in accordance with the contractual reimbursement schedule. Under ASC 606, the Company recognizes material up-front fees as options that provide the customer with a material right to acquire future goods. The Company applies the practical expedient in paragraph 606-10-55-45 and does not estimate the standalone selling price of the option, but instead allocates the transaction price to the optional goods by reference to the goods expected to be provided and the corresponding expected consideration. Accordingly, the revenue is recognized over the longer of the contract period or the estimated length of the product life cycle, which approximates the period during which the customer is expected to benefit. Significant Accounting Policies Revenue Recognition The Company recognizes revenue under the guidance provided in ASC 606. Consistent with the terms of ASC 606, the Company records revenue on product sales in the period in which the Company satisfies its performance obligation by transferring control over a product to a customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for transferring products to a customer. The Company has elected the practical expedient under ASC 606-10-32-18 and does not consider the effects of a financing component on the promised amount of consideration because the period between when the Company transfers a product to a customer and when the customer pays for that product is one year or less. As performance obligations are expected to be fulfilled in one year or less, the Company has elected the practical expedient under ASC 606-10-50-14 and has not disclosed information relating to remaining performance obligations. The Company sells its products to distributors, original equipment manufacturers (“OEM”), and electronic manufacturing services providers (“EMS”), and the sales price may include adjustments for sales discounts, price adjustments, and sales allowances. The Company has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis. The principle forms of these adjustments include: • Inventory price protection and ship-from stock and debit (“SFSD”) programs, • Distributor rights of returns, • Sales allowances, and • Limited assurance warranties The Company's inventory price protection and SFSD programs provide authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative, and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records a sales reserve based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly. Select distributors have the right to return a certain portion of their purchased inventory to KEMET from the previous fiscal quarter. The Company estimates future returns based on historical return patterns and records a corresponding right of return asset and refund liability as a component of the line items, “Inventories, net” and “Accrued expenses,” respectively, on the Condensed Consolidated Balance Sheets. The Company also offers volume based rebates on a case-by-case basis to certain customers in each of the Company’s sales channels. The Company's sales allowances are recognized as a reduction in the line item “Net sales” on the Condensed Consolidated Statements of Operations, while the associated reserves are included in the line item “Accounts receivable, net” on the Condensed Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company’s estimates. The Company provides a limited assurance warranty on products that meet certain specifications to select customers. The warranty coverage period is generally limited to one year for United States based customers and a length of time commensurate with regulatory requirements or industry practice outside the United States. A warranty cannot be purchased by the customer separately and, as a result, product warranties are not considered to be separate performance obligations. The Company’s liability under theses warranties is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs were not material for the three and six months ended September 30, 2018 and 2017 . Shipping and handling costs are included in cost of sales. Disaggregation of Revenue Refer to Note 8 , “ Segment and Geographic Information” for revenue disaggregated by primary geographical market, sales channel, and major product line. Contract liabilities Contract liabilities consist of advance payments from certain customers within the OEM channel for the development of additional production capacity. The current and noncurrent portions of these liabilities are included as a component of the line items, “Accrued expenses” and “Other non-current obligations,” respectively, on the Condensed Consolidated Balance Sheets. The balance of net contract liabilities consisted of the following at September 30, 2018 and March 31, 2018 (amounts in thousands): September 30, 2018 March 31, 2018 Contract liabilities - current (Accrued expenses) $ 256 $ 256 Contract liabilities - noncurrent (Other non-current obligations) 384 513 Total contract liabilities $ 640 $ 769 In each of the three and six months ended September 30, 2018 , the Company recognized revenue of $0.1 million related to contract liabilities at March 31, 2018 . In each of the three and six months ended September 30, 2017 , the Company recognized revenue of $0.1 million related to contract liabilities at March 31, 2017 . Revenue related to contract liabilities is recorded on the Condensed Consolidated Statements of Operations line item, "Net sales." Contract assets The Company recognizes an asset from the costs incurred to fulfill a contract if those costs directly relate to an existing or anticipated contract or specific business opportunity, if the costs enhance our own resources that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered through subsequent sale of product to the customer. The Company has determined that certain direct labor, materials, and allocations of overhead incurred within research and development activities meet the requirements to be capitalized. As most of our contracts and customer specific business opportunities do not include a stated term, the Company amortizes these capitalized costs over the expected product life cycle, which is consistent with the estimated transfer of goods to the customer. Capitalized contract costs were $1.9 million and $2.2 million at September 30, 2018 and March 31, 2018 , respectively. Capitalized contracts costs are recorded on the Condensed Consolidated Balance Sheets in the line item, “Other assets.” Amortization expense related to the contract costs was $0.2 million and $0.4 million for the three and six months ended September 30, 2018 , respectively, and $0.2 million and $0.4 million for the three and six months ended September 30, 2017 , respectively. There was no impairment loss in relation to the costs capitalized for the three and six months ended September 30, 2018 and 2017. Amortization expense related to contract assets is recorded on the Condensed Consolidated Statements of Operations line item "Cost of sales." Fair Value Measurement The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s Condensed Consolidated Financial Statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The first two inputs are considered observable and the last is considered unobservable. The levels of inputs are as follows: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and March 31, 2018 are as follows (amounts in thousands): Carrying Value September 30, Fair Value September 30, Fair Value Measurement Using Carrying Value March 31, Fair Value March 31, Fair Value Measurement Using 2018 2018 Level 1 Level 2 (3) Level 3 2018 2018 Level 1 Level 2 (3) Level 3 Assets (Liabilities): Money markets (1)(2) $ 70,580 $ 70,580 $ 70,580 $ — $ — $ 83,891 $ 83,891 $ 83,891 $ — $ — Total debt (316,637 ) (334,194 ) — (334,194 ) — (324,623 ) (343,125 ) — (343,125 ) — ___________________ (1) Included in the line item “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets. (2) Certificates of Deposit of $27.5 million and $33.9 million that mature in three months of less are included within the balance as of September 30, 2018 and March 31, 2018 , respectively. (3) The valuation approach used to calculate fair value was a discounted cash flow based on the current market rate. Deferred Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The Company periodically evaluates its net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. For interim reporting purposes, the Company records income taxes based on the expected annual effective income tax rate, taking into consideration global forecasted tax results and the effect of discrete tax events. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. All deferred tax assets are reported as noncurrent in the Condensed Consolidated Balance Sheets. Inventories Inventories are stated at the lower of cost or net realizable value. The components of inventories are as follows (amounts in thousands): September 30, 2018 March 31, 2018 Raw materials and supplies $ 89,198 $ 88,408 Work in process 66,456 65,417 Finished goods 73,865 66,907 Subtotal 229,519 220,732 Inventory reserves (16,251 ) (16,346 ) Inventories, net $ 213,268 $ 204,386 Recently Issued Accounting Pronouncements In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. Under this ASU, a customer will apply ASC 350-40 to determine whether to capitalize implementation costs of the cloud computing arrangement that is a service contract or expense them as incurred. This ASU is effective for fiscal years beginning after 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. |
