Basis of Financial Statement Presentation (Policies)

3 Months Ended

Jun. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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.

Recently Issued Accounting Pronouncements

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 our 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 update 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 consolidated financial statements, however the adoption of this guidance is not expected to have a significant effect on the Company’s Consolidated Balance Sheets, results of operations, or cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other. The update eliminates the requirement to calculate the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. Under the update, the goodwill impairment loss would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date of this update is for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements, however the adoption of this guidance is not expected to have a significant effect on the Company’s 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 consolidated cash flows.

In February 2016, the FASB issued ASU No. 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 of leases with terms more than twelve months. The accounting standards update also requires expanded disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The change will be effective on a modified retrospective approach for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company will adopt ASU 2016-02 as of April 1, 2019. We have implemented a third-party supported lease accounting software solution to account for our leases. We have begun a project to implement this system and 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 is continuing 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 the new standard. Based on the Company's progress in reviewing its leasing arrangements across all of its business units, the Company expects to recognize incremental lease assets and liabilities on its 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, however based on the Company's preliminary review of its lease contracts to date, it anticipates that the amount of incremental lease assets and lease liabilities to be recognized upon adoption of this ASU will be material. 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 and our Condensed Consolidated Statements of Operations, Comprehensive Income, and Cash Flows for the quarter ended June 30, 2017 as follows (amounts in thousands, except per share data):

Condensed Consolidated Balance Sheet



	As of March 31, 2018
	As Previously Reported			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



	Quarter Ended June 30, 2017
	As Previously Reported		Adjustments			As Adjusted
Net sales	$	274,000	$	(54	)	$	273,946
Operating costs and expenses:
Cost of sales ⁽¹⁾	199,563		266			199,829
Research and development	9,390		(143		)	9,247
Income tax expense	1,150		(10		)	1,140
Net income (loss)	220,606		(167		)	220,439
Net income (loss) per basic share	4.66		(0.01		)	4.65

________________

⁽¹⁾ The as previously reported balance reflects a reclassification of certain TOKIN operating expenses from SG&A to Cost of Sales to align with KEMET's classification of these expenses.

Condensed Consolidated Statement of Comprehensive Income



	Quarter Ended June 30, 2017
	As Previously Reported		Adjustments			As Adjusted
Net income (loss)	$	220,606	$	(167	)	$	220,439
Foreign currency translation gains (losses)	4,138		215			4,353
Other comprehensive income (loss)	10,760		215			10,975
Total comprehensive income (loss)	231,366		48			231,414

Condensed Consolidated Statement of Cash Flows



	Quarter Ended June 30, 2017
	As Previously Reported			Adjustments			As Adjusted
Operating activities
Net income (loss)	$	220,606		$	(167	)	$	220,439
Depreciation and amortization	12,243			216			12,459
Change in deferred income taxes	(129		)	(18		)	(147		)
Change in operating assets	24,879			(209		)	24,670
Change in operating liabilities	(39,030		)	(9		)	(39,039		)
Other	(60		)	(28		)	(88		)
Net cash provided by (used in) operating activities	10,257			(215		)	10,042
Effect of foreign currency fluctuations on cash	941			215			1,156

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.

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 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.

Inventories

Inventories are stated at the lower of cost or net realizable value.

Revenue Recognition

Revenue is measured at an amount that reflects the consideration we expect to receive in exchange for transferring goods to a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Control transfers to a customer at the point in time when they obtain the ability to direct the use of and obtain substantially all of the remaining benefits of a product. The Company applies the practical expedient in 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 good or service to a customer and when the customer pays for that good or service is one year or less.

Nature of Goods

The Company principally generates revenue from products sold to customers based upon firm orders. Performance obligations are satisfied when product is shipped to the customer in accordance with the terms of a customer contract, having commercial substance, clearly identified payment terms, and for which collectability is reasonably assured. As performance obligations are expected to be fulfilled in one year or less, the Company applies practical expedient ASC 606-10-50-14 and has not disclosed information relating to remaining performance obligations as of June 30, 2018. Shipping and handling costs are included in cost of sales.

A portion of sales is related to products designed to meet customer specific requirements. These products typically have stricter tolerances making them useful to the specific customer requesting the product and to customers with similar or less stringent requirements. The Company recognizes revenue when control over the products transfers to the customer.

The Company utilizes different types of variable consideration, such as certain sales related discounts, that reduce the transaction price ultimately received by KEMET from the agreed upon contract price. The Company applies the practical expedient in ASC 606-10-10-4 and evaluates these sales-related discounts on a portfolio basis.

The amount of revenue recognized for distributor product sales is adjusted for certain rights of return and price protection on unsold merchandise held by distributors. The Company’s distributor policy includes inventory price protection and “ship-from-stock and debit” (“SFSD”) programs common in the industry.

KEMET’s SFSD program provides 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.

Certain distributors have the right to return to KEMET a certain portion of the purchased inventory, which, in general, does not exceed 6% of their purchases from the previous fiscal quarter. KEMET 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 amount of revenue recognized is also adjusted for certain sales allowances. The establishment of sales allowances is 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 to certain customers that the Company’s products meet certain specifications. 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. The warranty is not a separate performance obligation and the Company’s liability under the warranty is generally limited to a replacement of the product or refund of the purchase price of the product. Warranty costs as a percentage of net sales were less than 1.0% for the quarters ended June 30, 2018 and 2017. The Company recognizes warranty costs when they are both probable and reasonably estimable.