Equity Method Investments

The following table provides a reconciliation of equity method investments to the Company's consolidated balance sheet (amounts in thousands):



	March 31,
	2018		2017
Nippon Yttrium Co., Ltd ("NYC")	$	8,148	$	—
NT Sales Co., Ltd ("NTS")	998		—
Investment in Novasentis	2,870		—
Investment in TOKIN	—		63,416
	$	12,016	$	63,416

TOKIN's Joint Ventures - NYC and NTS

As noted in Note 2, “Acquisitions,” on April 19, 2017, the Company completed its acquisition of the remaining 66% economic interest in TOKIN and TOKIN became a 100% owned subsidiary of KEMET. TOKIN had two investments at the time of acquisition: NYC and NTS. The Company accounts for both investments using the equity method due to the related nature of operations and the Company's ability to influence management decisions.

NYC was established in 1966 by TOKIN and Mitsui Mining and Smelting Co., Ltd (“Mitsui”). NYC was established to commercialize yttrium oxides. Due to the acquisition of TOKIN, the Company owned 30% of NYC's stock as of March 31, 2018. The carrying amount of the Company's equity investment in NYC was $8.1 million as of March 31, 2018.

NTS was established in 2004 by TOKIN, however since then, TOKIN sold 77% of its stock to Shinko Electric Industries, Co. Ltd ("Shinko"). NTS provides world-class electronic devices by utilizing global procurement networks. Due to the TOKIN acquisition, the Company owned 33% of NTS' stock as of March 31, 2018. During the year ended March 31, 2018, a significant portion of NTS' sales were TOKIN’s products. The carrying amount of the Company's equity investment in NTS was $1.0 million as of March 31, 2018.

Summarized transactions between TOKIN and NTS are as follows (amounts in thousands):



	Fiscal Year March 31, 2018
KEMET's sales to NTS	$	52,883
NTS' sales to KEMET	1,616

Investment in Novasentis

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

While the Company determined that Novasentis is a variable interest entity ("VIE"), ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. KEMET does not have power to purchase or sell any of Novasentis’ significant assets. KEMET will not incur any additional indebtedness, and cannot solely make acquisition and/or divestiture decisions. Furthermore, KEMET cannot solely determine the strategic operating direction of the entity. Based on an evaluation of these factors, 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.

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. The carrying amount of the Company's equity investment in Novasentis was $2.9 million as of March 31, 2018.

Investment in TOKIN

On March 12, 2012, KEC, a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with TOKIN and NEC Corporation (“NEC”) (together with its affiliate NEC Capital Solutions Limited, the sole shareholder of TOKIN) to acquire 51% of the common stock of TOKIN (which represented a 34% economic interest, as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of outstanding common and convertible preferred shares of TOKIN as of such date) (the “Initial Purchase”). The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of TOKIN (the “Initial Closing”). Through April 19, 2017, the Company accounted for its investment in TOKIN using the equity method for a non-consolidated variable interest entity since KEC did not have the power to direct significant activities of TOKIN. The Company believes that the TOKIN convertible preferred stock represents in-substance common stock of TOKIN and, as a result, its method of calculating KEC’s economic basis in TOKIN is the appropriate basis on which to recognize its share of the earnings or loss of TOKIN.

In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with TOKIN and NEC, which provided for restrictions on transfers of TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of TOKIN held by it, certain management services provided to TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. From February 1, 2013 until April 19, 2017, KEC held four of seven TOKIN director positions. However, NEC had significant board rights.

Concurrent with the execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC, which was amended on August 29, 2014, whereby KEC had the right to purchase additional shares of TOKIN common stock from TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of TOKIN’s common stock (the “First Call Option”) by providing notice of the First Call Option between the Initial Closing and April 30, 2015. Upon providing such First Call Option notice, but not before April 1, 2015, KEC could also have exercised a second option to purchase all outstanding capital stock of TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. The First and Second Call Options expired on April 30, 2015 without being exercised.

Under the Option Agreement, from April 1, 2015 through May 31, 2018, NEC could have required KEC to purchase all outstanding capital stock of TOKIN from its stockholders, primarily NEC (the “Put Option”), provided that KEC’s payment of the Put Option price was permitted under the 10.5% Senior Notes and Loan and Security Agreement. On April 19, 2017, the Company completed its acquisition of the remaining 66% economic interest in TOKIN and TOKIN became a 100% owned subsidiary of KEMET. See Note 2, “Acquisitions,” for additional information. The Put Option was canceled under the Definitive TOKIN Stock Purchase Agreement, herein defined, for acquisition of the remaining 66% of TOKIN.

The Company marked these options to fair value in the fiscal years ended March 31, 2017 and 2016 and recognized a $10.7 million gain and a $26.3 million loss respectively, which are included on the line item “Change in value of TOKIN options” in the Consolidated Statement of Operations. The line item “Other non-current obligations” on the Consolidated Balance Sheets includes $9.9 million as of March 31, 2017 related to the options.

KEC’s total investment in TOKIN including the net call forward contract described above on February 1, 2013 was $54.5 million which included $50.0 million cash consideration plus approximately $4.5 million in transaction expenses (fees for legal, accounting, due diligence, investment banking and other various services necessary to complete the transactions). The Company made an allocation of the aggregate purchase price, which was based upon estimates that the Company believed to be reasonable.

Summarized financial information for TOKIN follows (amounts in thousands):



	March 31, 2017
Current assets continuing operations	$	204,654
Assets held for sale (current) ⁽¹⁾	118,983
Noncurrent assets continuing operations	285,952
Current liabilities continuing operations	375,433
Liabilities held for sale (current) ⁽¹⁾	50,008
Noncurrent liabilities continuing operations	65,657

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⁽¹⁾ As discussed in Note 2, “Acquisitions,” TOKIN sold its EMD business on April 14, 2017.



	19 Day Period Ended April 19, 2017		Fiscal Year March 31, 2017		Fiscal Year March 31, 2016
Net sales	$	23,649	$	328,822	$	301,898
Gross profit	6,647		74,465		67,409
Net income (loss)	247,786		128,502		(42,995		)

A reconciliation between TOKIN’s net loss and KEMET’s equity investment income (loss) follows (amounts in thousands):



	19 Day Period Ended April 19, 2017			Fiscal Year March 31, 2017			Fiscal Year March 31, 2016
TOKIN net income (loss)	$	247,786		$	128,502		$	(42,995	)
KEMET’s equity ownership %	34		%	34		%	34		%
Equity income (loss) from TOKIN before Adjustments	$	84,247		$	43,691		$	(14,618	)

Adjustments:
Amortization and depreciation	(113		)	(2,210		)	(1,625		)
Removal of EMD memo accounts	(8,981		)	—			—
Inventory profit elimination	24			162			(163		)
Equity income (loss) from TOKIN	75,177			41,643			(16,406		)

Acquired equity method investment income (loss)	1,015			—			—
Equity income (loss) from equity method investments	$	76,192		$	41,643		$	(16,406	)

A reconciliation between TOKIN’s net assets and KEMET’s equity investment balance follows (amounts in thousands):



	March 31, 2017
Investment in TOKIN	$	63,416
Purchase price accounting basis adjustment:
Property, plant and equipment ⁽¹⁾	3,080
Technology ⁽¹⁾	(8,691		)
Long-term debt ⁽¹⁾	(1,067		)
Goodwill	(7,590		)
Indemnity asset for legal investigation	(8,500		)
Inventory profit elimination ⁽²⁾	208
Other	(569		)
KEMET’s 34% interest of TOKIN’s equity	$	40,287

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⁽¹⁾ Depreciated or amortized over the estimated lives.

⁽²⁾Adjusted each period for any activity

As of March 31, 2017, KEC’s maximum loss exposure as a result of its investments in TOKIN was limited to the aggregate of the carrying value of the investment, any accounts receivable balance due from TOKIN and obligations in the Put Option.

Summarized transactions between KEC and TOKIN are as follows (amounts in thousands):



	19 Day Period Ended April 19, 2017		Fiscal Year March 31, 2017		Fiscal Year March 31, 2016
KEC’s sales to TOKIN	$	727	$	17,100	$	21,061
TOKIN’s sales to KEMET	356		8,341		5,912



	March 31, 2017
Accounts receivable	$	2,662
Accounts payable	1,378
Management service agreement receivable ⁽¹⁾	775

___________________________________________

⁽¹⁾ In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement with TOKIN to provide services for which KEC was being reimbursed.

KEMET JIANGHAI Joint Venture

On January 29, 2018, KEC entered into a joint venture agreement (the “Agreement”) with Jianghai (Nantong) Film Capacitor Co., Ltd (“Jianghai Film”), a subsidiary of Nantong Jianghai Capacitor Co., Ltd (“Jianghai”) for the formation of KEMET Jianghai Electronic Components Co. Ltd., a limited liability company located in Nantong, China. KEMET Jianghai Electronic Components will manufacture axial electrolytic capacitors and (H)EV Film DC brick capacitors, for distribution through the KEMET and Jianghai sales channels. KEC and Jianghai Film will each provide initial capital contributions of $5.0 million through a combination of cash and manufacturing equipment, and will be equally represented on the joint venture’s board of directors.

Once the initial capital contribution is made to the KEMET Jianghai joint venture, the Company will account for its investment using the equity method due to the related nature of operations, and the Company's ability to influence the joint venture's decisions. As of March 31, 2018, the Company does not have an investment balance in KEMET Jianghai.