Acquisitions

Sale of Electro-Mechanical Business and Acquisition of Remaining Interest in TOKIN

Between February 1, 2013 and April 19, 2017, KEMET, through its wholly-owned subsidiary, KEMET Electronics Corporation (“KEC”), held a 34% economic interest in TOKIN Corporation (“TOKIN”) pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among KEC, TOKIN and NEC Corporation (“NEC”), as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of TOKIN outstanding as of such date. TOKIN was established in Japan in 1938 and is engaged in production and distribution of tantalum capacitors, transmitting communication devices, magnetic devices, piezoelectric devices and sensors. TOKIN has six manufacturing locations throughout Asia and was previously operating as a joint venture with NEC.

On April 14, 2017, TOKIN closed on the sale of its electro-mechanical devices (“EMD”) business to NTJ Holdings 1 Ltd. (“NTJ”), a special purpose entity that is owned by funds managed or operated by Japan Industrial Partners, Inc. (“JIP”), pursuant to a master sale and purchase agreement (the “EMD Master Sale and Purchase Agreement”) previously entered into between TOKIN, NTJ and JIP (“Sale of EMD”). The initial selling price for EMD was JPY 48.2 billion, or approximately $431.0 million, using the March 31, 2017 exchange rate of 111.823 Japanese Yen to 1.00 U.S. Dollar, and is subject to certain working capital adjustments pursuant to the EMD Master Sale and Purchase Agreement. At the closing of the Sale of EMD, TOKIN used a portion of the sale proceeds to repay debt related to a shareholder loan from NEC. The TOKIN historical balance sheet was adjusted to reflect the removal of net assets sold and other items directly impacted by the Sale of EMD. Additionally, due to KEMET’s 34% equity interest in TOKIN held as of the closing, adjustments have been made to reflect KEMET’s accounting for the Sale of EMD in accordance with the equity method of accounting.

On April 19, 2017, pursuant to a stock purchase agreement (the “TOKIN Purchase Agreement”) dated February 23, 2017 between KEC and NEC, KEC completed its acquisition, subject to final purchase price adjustment, of the remaining 66% economic interest in TOKIN, and as a result, TOKIN is now a 100% owned indirect subsidiary of KEMET (the “TOKIN Acquisition”). Under the terms of the TOKIN Purchase Agreement, KEC paid NEC JPY 16.2 billion, or approximately $148.6 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), for all of the outstanding shares of TOKIN it did not already own. The preliminary purchase price was comprised of JPY 6.0 billion, or approximately $55.0 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar) plus JPY 10.2 billion, or approximately $93.6 million, which represented one-half of the estimated excess net cash proceeds (“Excess Cash”) from the Sale of EMD. The acquisition price is subject to working capital adjustments pursuant to the EMD Master Sale and Purchase Agreement. As a result of these working capital adjustments, the acquisition price was increased by JPY 0.3 billion, or approximately $3.0 million (using the September 30, 2017 exchange rate of 112.502 Japanese Yen to 1.00 U.S. Dollar) in the second quarter of fiscal year 2018. No additional working capital adjustments were recorded in the third quarter of fiscal year 2018.

The Company believes the acquisition of TOKIN will expand KEMET’s geographic presence, combining KEMET’s presence in the western hemisphere and TOKIN’s excellent position in Asia to enhance customer reach and create an entrance into Japan for KEMET. The Company believes TOKIN’s product portfolio is a strong complement to KEMET’s existing product portfolio. KEMET believes the combination creates a leader in the combined polymer and tantalum capacitors market. The acquisition also enhances KEMET’s product diversification with entry into Electro-Magnetic Compatible components ("EMC") as well as sensors and actuators. With the increased scale, the Company anticipates optimizing costs through competitive raw materials sourcing and maximizing operating efficiencies. Consistent with expectations, the acquisition has been accretive to earnings with improvement in Net income, Adjusted EBITDA and cash flow. TOKIN’s tantalum capacitor business is included within KEMET’s Solid Capacitor segment (“Solid Capacitors”) and the remainder of TOKIN’s business formed a new reportable segment for KEMET, Electro-magnetic, Sensors & Actuators (“MSA”).

The following table shows the preliminary components of the acquisition price: (amounts in thousands):



Upfront cash consideration ⁽¹⁾	$	148,614
Acquisition payable ⁽²⁾	3,144
Indemnity asset⁽³⁾	8,500
Less: Put option ⁽⁴⁾	(9,900		)
Net consideration transferred	$	150,358

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⁽¹⁾ The upfront cash payment is comprised of JPY 6.0 billion plus one half of Excess Cash in an amount of approximately JPY 10.2 billion, approximately $55.0 million and $93.6 million (using the April 19, 2017 exchange rate of 109.007 Japanese Yen to 1.00 U.S. Dollar), respectively.

⁽²⁾ Current estimate of the additional amount due to NEC Corporation upon the settlement of the adjusted purchase price for the EMD sale.

⁽³⁾Pursuant to the Stock Purchase Agreement between KEMET and NEC, NEC was required to indemnify TOKIN and/or KEC for any breaches by TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement. NEC’s aggregate liability for indemnification claims was limited to $25.0 million. Prior to the acquisition, KEMET's equity method investment balance included an $8.5 million indemnification asset pursuant to this indemnification arrangement. In connection with the TOKIN Acquisition, NEC was released from its indemnification obligations to KEMET without an exchange of consideration; as such, this amount of released obligation is included as purchase consideration by KEMET.

⁽⁴⁾ Pursuant to the option agreement, dated as of March 12, 2012, by and among NEC and KEMET (the “Option Agreement”), from April 1, 2015 through May 31, 2018, NEC had the right to require KEC to purchase all outstanding capital stock of TOKIN (the “Put Option”). The fair value of the Put Option of $9.9 million was reflected as a liability on KEMET’s balance sheet prior to KEMET’s acquisition of the remaining 66% economic interest in TOKIN. The Put Option was canceled, pursuant to the terms of the TOKIN Purchase Agreement with no exchange of consideration between NEC and KEMET. Accordingly, the fair value of the Put Option reduces the amount of consideration paid to acquire NEC’s equity in TOKIN.

In accordance with ASC 805, KEMET’s previously held 34% equity interest in TOKIN and the assets acquired and the liabilities assumed have been measured at their fair values based on various preliminary estimates. The preliminary acquisition-date fair value of KEMET’s previously held 34% equity interest in TOKIN is approximately $206.0 million, which was derived from 34% of the fair value of TOKIN as of April 19, 2017 derived from the discounted cash flow method.

The following table presents the preliminary allocations of the aggregate purchase price based on the estimated fair values of the assets and liabilities (amounts in thousands):



	Fair Value
Cash	$	315,743
Accounts Receivable	79,295
Inventory	35,310
Other current assets	20,902
Property, Plant and equipment ⁽¹⁾	154,961
Intangible assets ⁽¹⁾⁽²⁾	33,025
Equity method investments ⁽¹⁾	11,128
Other assets	8,617
Current portion of long term debt	(3,225		)
Accounts payable	(81,642		)
Accrued expenses	(46,276		)
Other non-current obligations	(103,486		)
Deferred income taxes ⁽¹⁾	(1,419		)
Total net assets acquired	$	422,933

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⁽¹⁾ Amount revised in the third quarter of fiscal year 2018; however, the values are still preliminary.

⁽²⁾ Includes trade name for $8.0 million and products and relationships of $25.0 million. TOKIN’s technology, products, and relationships were valued as a grouped, composite intangible asset due to the Company’s products being dependent on the existing technology, which enabled a product portfolio that customers found appealing in selecting and designing electronic components for purchase. The trade name was valued based on the relief from royalty method and have indefinite remaining useful life. The products and relationships were valued on the excess earnings method and are amortized over 10 years.

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

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

The following table reflects the preliminary bargain purchase gain resulting from the TOKIN Acquisition (amounts in thousands):



Net consideration transferred	$	150,358
Preliminary fair value of KEMET’s previously held equity interest in TOKIN ⁽¹⁾	205,952
Less: Preliminary fair value of net assets acquired	(422,933		)
Bargain purchase gain	$	(66,623	)

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(1) Value based in the 34% of the enterprise value determined under the discounted cash flow method.

The gain is included in the line item “Acquisition gains” in the Condensed Consolidated Statements of Operations.

Pro Forma Results

The following table summarizes, on a pro forma basis, the combined results of operations of the Company and TOKIN as though the acquisition and the sale of EMD had occurred as of April 1, 2016. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of April 1, 2016, or of future consolidated operating results (amounts in thousands, except per share data):



	Quarters Ended December 31,					Nine-Month Periods Ended December 31,
	2017		2016			2017 ⁽¹⁾		2016 ⁽²⁾
Pro forma revenues	$	306,408	$	263,260		$	899,353	$	785,388
Pro forma net income (loss) from continuing operations available to common stockholders	19,009		(4,484		)	44,741		243,746
Pro forma earnings per common share - basic	0.33		(0.10		)	0.87		5.25
Pro forma earnings per common share - diluted	0.32		(0.10		)	0.77		4.51
Pro forma common shares - basic	56,778		46,606			51,340		46,469
Pro forma common shares - diluted	58,937		46,606			58,431		53,990

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

⁽²⁾ The net income for the nine-month period ended December 31, 2016 includes the following: 34% of the preliminary gain on sale of the EMD business of $123.4 million (which includes the release of a valuation allowance that was recorded in the fourth quarter of fiscal year 2017 and the use of the deferred tax asset which was recorded in the first quarter of fiscal year 2018), the preliminary gain related to the fair value of KEMET’s previous 34% interest in TOKIN of $68.5 million, and the preliminary bargain gain on the acquisition of TOKIN of $64.6 million.