The following discussion and analysis provide information that we believe is useful in understanding our operating results, cash flows, and financial condition for the three fiscal years endedMarch 31, 2020 , 2019, and 2018. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and related notes appearing elsewhere in this report. The discussions in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Our actual future results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the Item 1A, "Risk Factors" and, from time to time, in our other filings with theSecurities and Exchange Commission . Our Competitive Strengths We believe that our Company benefits from the following competitive strengths: Strong Customer Relationships We have a large and diverse customer base. We believe that our emphasis on quality control and our performance history establishes loyalty with OEMs, EMSs and distributors. Our customer base includes most of the world's major electronics OEMs (includingBosch Group , Cisco Systems, Inc., Continental AG, Delphi Technologies PLC, Dell Inc., Apple Inc.,Google LLC , Tesla Inc., andABB Group ), EMSs (including Celestica Inc.,Flextronics International LTD ,Jabil Circuit, Inc. , andSanmina-SCI Corporation ) and distributors (includingTTI, Inc. , Arrow Electronics, Inc., Satori Electric Co., and Avnet, Inc.). Our strong, extensive and efficient worldwide distribution network is one of our differentiating factors. We believe our ability to provide innovative and flexible service offerings, superior customer support and focus on speed-to-market results in a more rewarding customer experience, earning us a high degree of customer loyalty. Breadth of Our Diversified Product Offering and Markets We believe that we have the most complete line of primary capacitor types spanning a full spectrum of dielectric materials including tantalum, multilayer ceramic, solid and electrolytic aluminum and film capacitors. As discussed below, our acquisition of (and previous private label partnership with)TOKIN , has expanded our product offerings and markets. As a result, we believe we can satisfy virtually all of our customers' capacitance needs, thereby strengthening our position as their supplier of choice. In addition, through our acquisition ofTOKIN , we have products to assist in the management of electronic noise within a device and in communications between devices, as well as products that can sense and respond to human activity, physical vibration, and electric current. We sell our products into a wide range of end-markets, including computing, industrial, telecommunications, transportation, consumer, defense and healthcare across all geographical regions. No single end market industry accounted for more than 30% of net sales; although, one customer, an electronics distributor, accounted for more than 10% of our net sales in fiscal year 2020. No single end-use direct customer accounted for more than 5% of our net sales in fiscal year 2020. We believe that well-balanced product, geographic and customer diversification helps us mitigate some of the negative financial impact through economic cycles. Leading Market Positions and Operating Scale Based on net sales, we believe that we are the largest manufacturer of tantalum capacitors in the world and one of the largest manufacturers of direct current film capacitors in the world and have a substantial market position in the specialty ceramic and custom wet aluminum electrolytic markets. We believe KEMET's polymer tantalum sales lead the industry with an estimated market share of approximately 50%. As discussed below, our acquisition of (and previous private label partnership with)TOKIN allows us to achieve true scale in operations to manage raw materials sourcing as well as maximize efficiencies. We believe that our leading market positions and operating scale allow us to realize production efficiencies, leverage economies of scale and capitalize on growth opportunities in the global capacitor market. Strong Presence in Specialty Products We engage in design collaboration with our customers in order to meet their specific needs and provide them with customized products satisfying their engineering specifications. Whether at the concept or design stage, KEMET provides engineering tools and samples to our customers to enable them to make the best product selections. KEMET's Field Application Engineers (experts in electrical circuits) and Technical Product Managers (experts in product applications) assist our Sales team as they navigate the product selection process with our customers. During fiscal years 2020 and 2019, respectively, specialty products accounted for 42.1% and 39.4% of our revenue. By allocating an increasing portion of our management resources and research and development ("R&D") investment particularly through our acquisition of (and previous partnership with)TOKIN to specialty products, we have established ourselves as one of the leading innovators in this 35 -------------------------------------------------------------------------------- fast growing, emerging segment of the market, including healthcare, renewable energy, telecommunication infrastructure and oil and gas. Low-Cost and Strategic Locations We believe our manufacturing plants located inMexico ,China ,Vietnam ,Indonesia ,Thailand ,Bulgaria , andMacedonia provide some of the lowest cost production facilities in the industry. Many of our key customers relocated or added production facilities toAsia , particularlyChina . We believe our manufacturing production footprint is essential to best meet our customers' demands, production needs, and total value proposition. Our Brand Founded by Union Carbide in 1919 asKEMET Laboratories , we believe that we have established a reputation as a high quality, efficient and affordable partner that sets our customers' needs as the top priority. This has allowed us to successfully attract loyal clientele and enable us to expand our operations and market share over the past few years. We believe our commitment to addressing the needs of the industry in which we operate has differentiated us from our competitors. In addition to our traditional reputation of being the "Easy-To-Buy-From" company by providing excellent customer service and on-time delivery, we have now evolved to be the "Easy-To-Design-In" company with the addition of technical resources like KEMET's online Engineering Center and capacitor selection simulation tools. Our People We believe that we have successfully developed a unique corporate culture based on innovation, customer focus and commitment. We have a strong, highly experienced and committed team in each of our markets. Many of our professionals have developed unparalleled experience in building leadership positions in new markets, as well as successfully integrating acquisitions. Our 22-member senior management team has an average of 20 years of experience with us and an average of 29 years of experience in the manufacturing industry. Business Strategy Our strategy is to use our position as a leading, high-quality manufacturer of electronic components and materials to capitalize on the increasingly demanding requirements of our customers. Refer to "Item 1. Business" for KEMET's strategic highlights. Other important elements of our strategy include: One KEMET Campaign. We continue to focus on improving our commercial and technological capabilities through various initiatives that all fall under our One KEMET campaign. The One KEMET campaign aims to ensure that we, as a company, are focused on the same goals and working with the same processes and systems to ensure consistent quality and service that allow us to provide our customers with the technologies they require at a competitive "total cost of ownership." This effort was launched to ensure that, as we continue to grow, we not only remain grounded in our core principles but that we also use those principles, operating procedures and systems as the foundation from which to expand. These initiatives include our Lean andSix Sigma culture evolution, our global customer accounts management program and our evolution toward a philosophy of being "easy to design-in." Develop Our Significant Customer Relationships and Industry Presence. We continue to focus on our responsiveness to our customers' needs and requirements by making order entry and fulfillment easier, faster, more flexible and more reliable for our customers. We believe this can be accomplished by focusing on building products around customers' needs and by giving decision-making authority to customer-facing personnel and by providing purpose-built systems and processes. Leverage Our Technological Competence and Expand Our Leadership in Specialty Products We continue to leverage our technological competence and our acquisition ofTOKIN by introducing new products in a timely and cost-efficient manner. This allows us to generate an increasing portion of our sales from new and customized solutions that meet our customers' varied and evolving electronic component needs, as well as to improve our financial performance. We believe that by continuing to build on our strength in the higher growth and higher margin specialty segments of the capacitor, electro-magnetic, sensor and actuator markets, we will be well-positioned to achieve our long-term growth objectives while also improving our profitability. During fiscal year 2020, we introduced 13,233 new products of which 1,361 were first to market, and specialty products accounted for 42.1% of our revenue over this period. 36 -------------------------------------------------------------------------------- Further Expand Our Broad Capacitance Capabilities We identify ourselves as the "Electronic Components" company and strive to be the supplier of choice for all our customers' capacitance needs across the full spectrum of dielectric materials including tantalum, multilayer ceramic, solid and electrolytic aluminum, film and paper. While we believe we have the most complete line of capacitor technologies across these primary capacitor types, we intend to continue to research and pursue additional capacitance technologies and solutions to maximize the breadth of our product offerings. As discussed below through our acquisition ofTOKIN , we have further expanded our product offerings to electric double layer capacitors, electro-magnetic devices, sensors, and actuators. This expansion of product offerings is a continuation of our focus on the higher margin specialty segments of the market. Promote the KEMET Brand Globally We are focused on promoting the KEMET brand globally by highlighting the high-quality and high reliability of our products and our superior customer service. We will continue to market our products to new and existing customers around the world to expand our business. We continue to be recognized by our customers as a leading global supplier. For example, in calendar years 2015, 2016, and 2017, we received the "Global Operations Excellence Award" fromTTI, Inc. We received the "Supplier of the Year Award" in the "Consistent Supply Chain " category for calendar year 2018 fromElektronika Sales Pvt. Ltd and won the 2018 and 2019 "Supplier Excellence Award" fromTTI, Inc. Global Sales & Marketing Strategy Our motto "Think Global, Act Local" describes our approach to sales and marketing. Each of our four sales regions (Americas , EMEA, JPKO and APAC) have account managers, field application engineers, and strategic marketing managers. In addition, we also have local customer and quality-control support in each region. This organizational structure allows us to respond to the needs of our customers on a timely basis and in their native language. The regions are managed locally and report to a senior manager who is on the KEMET Leadership Team. Furthermore, this organizational structure ensures the efficient communication of our global goals and strategies and allows us to serve the language, cultural and other region-specific needs of our customers. Our go-to-market strategy includes a combination of strong engagement face to face with those top customers and an industry leading state of the art digital platform to engage the remaining customers. In addition, we partner with all the premier distributors in the electronics industry to ensure we obtain the biggest reach and leverage their expertise in stocking and servicing those customers. TOKIN Acquisition Through our acquisition ofTOKIN and the previous cross licensing agreement and Amended and Restated Private Label Agreement withTOKIN , we have expanded product offerings and markets for both KEMET andTOKIN . KEMET's strong presence in the western hemisphere andTOKIN's excellent position inJapan andAsia significantly enhanced our customer reach and has created cross-selling opportunities. ThroughTOKIN we believe we have achieved true scale in operations allowing us to manage raw materials sourcing as well as to maximize efficiencies and best practices in manufacturing and product development. We believe that the international management team of KEMET andTOKIN allows us to be more sensitive and aware of region-specific business needs compared to our competitors. Combining our R&D capabilities and university relationships allows us to be on the forefront of new developments and technological advancements in the capacitor industry. Leveraging R&D investment in bothJapan and theU.S. enables KEMET to diversify beyond capacitors in the passives market as a result of theTOKIN acquisition. Subsequent to the acquisition ofTOKIN , the Company has been able to improve its cash balance, net debt, and interest expense. The purchase ofTOKIN gave the Company access to the Japanese capital markets, which allowed the Company to refinance itsU.S. based debt with a Japanese bank. Interest rates inJapan are significantly lower than in theU.S. Recent Developments and Trends COVID-19 OnMarch 11, 2020 , theWorld Health Organization characterized the outbreak of a novel strain of coronavirus, known as COVID-19, as a global pandemic and recommended containment and mitigation measures. There have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the spread of COVID-19 across the world, including quarantines, "stay-at-home" orders, travel-bans, and similar mandates for many individuals to substantially restrict daily activities and for many non-essential businesses to curtail or cease normal operations. Every region is experiencing the severity of COVID-19 differently. As a result, we're monitoring and complying with local, state, and federal government requirements and mandated orders regarding our manufacturing, sales, and corporate 37 -------------------------------------------------------------------------------- facilities. As ofMarch 31, 2020 , our manufacturing facilities in theNorth America ,Asia , andEurope , excluding our facility inItaly , were operational with increased safety and health protocols applicable to all employees. Our plants inChina (Suzhou , Anting, andXiamen ) were closed for a short period of time during the month of February, but did not experience any major shut-downs. Our plant in Pontecchio,Italy was shut-down in March in response to the Italian Prime Minister's shut-down of all business activities in the country except for those activities essential to the health and safety of the country. This government mandated stoppage impacted our ability to produce and deliver film capacitors. Our plant in Pontecchio,Italy reopened and resumed operations onApril 4, 2020 . KEMET has instituted a work from home order and temporarily closed our corporate and sales offices inNorth America andEurope . InAsia , a work from home order has been instituted in our sales offices in accordance with local, state, and federal government mandates. The Company will continue to closely monitor the situation and maintain efforts to protect the health and safety of our employees. The Company is working to ensure business continuity for our employees and contractors through secure connections to our systems and access to necessary equipment while working from home. While there was little impact to the Company's results of operations and financial condition as ofMarch 31, 2020 due to COVID-19, there is uncertainty related to the future impact that the global pandemic will have on the Company's results of operations and financial condition. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. For example, virus containment efforts could lead to reductions in plant utilization levels and/or plant closures which could cause us to incur additional direct costs and lost revenue. If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers. As ofMarch 31, 2020 , the effects of COVID-19 have not had a significant impact on the Company's liquidity. The Company is actively monitoring the impact of COVID-19 on its liquidity and its ability to raise additional capital, if necessary. Yageo Merger OnNovember 11, 2019 , the Company entered into the Agreement pursuant to which Yageo will acquire all of the Company's outstanding shares of common stock for$27.20 per share, subject to the satisfaction (or waiver of) specified conditions (the "Merger"). The consummation of the Merger is subject to customary closing conditions, including the approval by the Company's stockholders. Certain further closing conditions in the Agreement include: (a) obtaining antitrust and other regulatory approvals inthe United States and certain other jurisdictions (including, among others,China andTaiwan ), (b) the absence of any applicable restraining order or injunction prohibiting the Merger, (c) receipt of approval from theCommittee on Foreign Investment inthe United States ("CFIUS"), (d) obtaining foreign investment approval by theInvestment Commission ,Ministry of Economic Affairs ,Taiwan , (e) the approval of Yageo's stockholders, if required by applicable law and (f) in the case of Yageo's obligations to complete the Merger, there not having been any "material adverse effect" (as customarily defined) on the Company. The Agreement contains certain restrictions on the conduct of our business prior to the completion of the Merger or the termination of the Agreement, including, among other things, a restriction prohibiting us from paying any dividends or making certain other distributions. Upon consummation of the Merger, the Company would be a fully owned subsidiary of Yageo. The Agreement is subject to termination if the Merger is not consummated within twelve months, subject to an automatic extension for a period of ninety days, for the purpose of obtaining certain antitrust clearances. The Agreement also contains certain other termination rights and provides that, upon termination of the Agreement under specified circumstances, including Yageo's decision to terminate the Agreement if there is a change in the recommendation of the Company's Board of Directors (the "Board") to adopt the Merger or a termination of the Agreement by the Company to enter into an agreement for a "superior proposal," the Company will pay Yageo a cash termination fee of$63.8 million . The Agreement additionally provides that, upon termination of the Agreement under specified circumstances, Yageo will pay the Company a cash termination fee of$65.4 million . The Merger with Yageo is proceeding as planned with several key milestones already completed. OnFebruary 4, 2020 , the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the review period under the Austrian Cartel Act expired, and the pending Merger was approved by the German Federal Cartel Office. OnFebruary 20, 2020 the Company's stockholders approved the Merger. OnMarch 5, 2020 , theMexican Competition Authority authorized the pending Merger and onApril 15, 2020 , theTaiwan Fair Trade Commission ("TFTC") announced its approval of the pending Merger. OnApril 23, 2020 , CFIUS notified KEMET and Yageo that it completed its review of the Merger and determined that there were no unresolved national security concerns with respect to the transaction. OnApril 29, 2020 , theAnti-Monopoly Bureau of China's State Administration for Market Regulation approved the pending Merger. 38 -------------------------------------------------------------------------------- If Yageo fails to obtain approval by Yageo's stockholders, if such approval is required by applicable law, Yageo will pay the Company a cash termination fee of$49.1 million . If Yageo fails to obtain debt financing upon the satisfaction of all conditions to closing, the Company may, within 30 days of termination, elect to receive a cash termination fee of$63.8 million . The only remaining regulatory approval required for the consummation of the Merger is the approval from theInvestment Commission ,Ministry of Economic Affairs inTaiwan . The Company currently expects the transaction to close in the summer of 2020. Novasentis OnJuly 1, 2019 , the Company acquired the remaining 72.1% interest in Novasentis for a preliminary purchase price of$2.7 million . Prior toJuly 2019 the Company owned 27.9% of Novasentis, a leading developer of film-based haptic actuators, and accounted for its investment using the equity method of accounting. We believe Novasentis' haptic actuator technology that we have acquired will provide unique flexibility, which will enable it to be incorporated into a wide variety of wearables and virtual/augmented reality applications to provide a variety of tactile sensations. Antitrust Class Action Legal Settlement As previously reported, including as reported in "Item 3. Legal Proceedings" of the Company's 2019 Annual Report, KEMET and KEC, along with more than 20 other capacitor manufacturers and subsidiaries (includingTOKIN ), were named as defendants in a purported antitrust class action complaint, In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD, filed onDecember 4, 2014 with theUnited States District Court, Northern District ofCalifornia (the "U.S. Class Action Complaint"). The complaint alleges a violation of Section 1 of the Sherman Act, for which it seeks injunctive and equitable relief and money damages. OnNovember 8, 2019 KEMET and KEC entered into a settlement agreement (the "Settlement Agreement") with the plaintiffs in theU.S. Class Action Complaint by which, in consideration for the release of KEMET, KEC, and their affiliates from all claims relating in any way to the conduct alleged in theU.S. Class Action Complaint and from claims which could have been asserted in theU.S. Class Action Complaint to the extent they relate to the sale of capacitors inthe United States , KEMET agreed to pay an aggregate of$62.0 million to the settlement class of plaintiffs. The Settlement Agreement is subject to court approval. Pursuant to the terms of the Settlement Agreement, KEMET paid$10.0 million into an escrow account onDecember 6, 2019 . The remaining amount will be paid by KEMET within 12 months of the date of the Settlement Agreement. Under the terms of the Settlement Agreement KEMET and KEC did not admit to any violation of any statute or law or any liability or wrongdoing. The Company recognized the$62.0 million expense in the Consolidated Statements of Operations for the year endedMarch 31, 2020 in the line item, "Antitrust class action settlements and regulatory costs." The remaining payable is included in the line item, "Accrued expenses," in the Consolidated Balance Sheets as ofMarch 31, 2020 . Outlook For the first quarter of fiscal year 2021, we expect net sales to be within the$278.0 million to$295.0 million range, non-GAAP adjusted gross margin as a percentage of net sales is expected to be between 28.0% and 30.0%, non-GAAP adjusted SG&A expenses are expected to be between$43.0 million and$45.0 million , and R&D expenses are expected to be approximately$12.5 million to$13.5 million . Our non-GAAP adjusted global effective tax rate is expected to be between 35.0% and 39.0%. We expect to spend in the range of$25.0 million to$35.0 million in capital expenditures for the first quarter of fiscal year 2021. The forecast provided for the first quarter of fiscal year 2021 does not include the impact of any unexpected shutdowns. The Company has presented certain non-GAAP financial measures as projected for the first quarter of fiscal year 2021, including adjusted gross margin as a percentage of net sales, adjusted SG&A expenses, and adjusted global effective tax rate. Reconciliations of GAAP to non-GAAP adjusted gross margin, GAAP to non-GAAP adjusted SG&A expenses, and GAAP to non-GAAP global effective tax rate are not provided. The Company does not forecast GAAP gross margin, GAAP SG&A expenses, and GAAP global effective tax rate 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, stock-based compensation expenses and enterprise resource planning ("ERP") integration costs/IT transition costs for GAAP SG&A expenses, and the timing of nondeductible items and tax reform provisions impacting foreign income for GAAP global effective tax rate. Further, in the future, other items with similar characteristics to those currently included in adjusted gross margin, adjusted SG&A expenses, and adjusted global effective tax rate 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, adjusted SG&A expenses, and adjusted global effective tax rate. 39 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we are not a party to any 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. Critical Accounting Policies Our accounting policies are summarized in Note 1, "Organization and Significant Accounting Policies" to the consolidated financial statements. The following identifies a number of policies which require significant judgments and estimates or are otherwise deemed critical to our financial statements. Our estimates and assumptions are based on historical data and other assumptions that we believe 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 our 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 consolidated financial statements. Readers should understand that actual future results could differ from these estimates, assumptions, and judgments. A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (i.e., 1%, 10%, etc.) are included to allow readers of this Annual Report on Form 10-K to understand a general cause and effect of changes in the estimates and do not represent our predictions of variability. For these estimates, it should be noted that future events rarely develop exactly as forecast, and estimates require regular review and adjustment. We believe the following critical accounting policies contain the most significant judgments and estimates used in the preparation of the consolidated financial statements: REVENUE RECOGNITION. The Company recognizes revenue under the guidance provided in Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers ("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. Recognized revenue is net of certain sales adjustments common in the industry, including but not limited to: • Ship-from-stock and debit ("SFSD") programs,
• Price protection programs
• Product return programs, and
• Rebate programs
SFSD represents the Company's largest sales program and 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. KEMET's SFSD program is specific to certain distributors within theAmericas and EMEA regions. 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 an allowance based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly. We believe this methodology enables us to make reliable estimates of future adjustments under the SFSD program. If the historical SFSD run rates used in our calculation changed by 1% in fiscal year 2020, net sales would have been impacted by$1.2 million . The Company's sales adjustments are recognized as a reduction in the line item "Net sales" on the Consolidated Statements of Operations, while the associated allowances are included in the line item "Accounts receivable, net" on the Consolidated Balance Sheets. Estimates used in determining 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 has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis. INVENTORIES. Inventories are valued at the lower of cost or net realizable value. For most of the inventory, cost is determined under the first-in, first-out method. For tool crib, a component of our raw material inventory, cost is determined 40 -------------------------------------------------------------------------------- under the average cost method. The valuation of inventories requires us to make estimates. We also must assess the prices at which we believe the finished goods inventory can be sold compared to its cost. A sharp decrease in demand could adversely impact earnings as the reserve estimates could increase. Excess and obsolete inventories are based on a combination of usage, age, order requirements, and sales history. Raw materials and tool crib obsolescence reserves are based on usage over one and two years, respectively, and the Company maintains reserves for raw materials and tool cribs that exceed these ages. Finished goods obsolescence reserves are either based on product age limits determined by market requirements, and/or based on excess quantities that exceed product orders and historical product sales. PENSION AND POST-RETIREMENT BENEFITS. Our management, with the assistance of actuarial firms, performs actuarial valuations of the fair values of our pension and post-retirement plans' benefit obligations. We make certain assumptions that have a significant effect on the calculated fair value of the obligations such as the: • discount rate-used to arrive at the net present value of the obligation; and • salary increases-used to calculate the impact future pay increases will have on post-retirement obligations. These assumptions directly impact the actuarial valuation of the obligations recorded on the Consolidated Balance Sheets and the income or expense that flows through the Consolidated Statements of Operations. We base our assumptions on either historical or market data that we consider reasonable. Variations in these assumptions could have a significant effect on the amounts reported in Consolidated Balance Sheets and the Consolidated Statements of Operations. The most critical assumption relates to the discount rate. A 25 basis point increase or decrease in the weighted average discount rate would result in changes to the projected benefit obligation of($3.7) million and$4.0 million , respectively.GOODWILL , INTANGIBLE ASSETS, AND PROPERTY, PLANT, AND EQUIPMENT. Intangible assets are classified into three categories: (i) goodwill; (ii) intangible assets with indefinite useful lives not subject to amortization; and (iii) intangible assets with definite useful lives subject to amortization. For goodwill and intangible assets with indefinite useful lives, tests for impairment must be performed at least annually, or more frequently if events or circumstances indicate that an asset may be impaired. For intangible assets with definite useful lives, tests for impairment must be performed if conditions exist that indicate the carrying value may not be recoverable. For goodwill, the Company has the option to perform a qualitative assessment rather than completing the impairment test. The Company must assess whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company concludes that this is the case, it must perform the testing discussed below. Otherwise, the Company does not need to perform any further assessment. The Company assesses its goodwill for impairment and performs testing, if necessary, as of the first day of the fourth fiscal quarter. We evaluate our goodwill on a reporting unit basis. This requires us to estimate the fair value of the reporting units based on the future net cash flows expected to be generated. The impairment test, if deemed necessary, involves a comparison of the fair value of each reporting unit, with the corresponding carrying amounts. If the reporting unit's carrying amount exceeds its fair value, then an indication exists that the reporting unit's goodwill may be impaired. The impairment to be recognized is measured by the amount by which the carrying value of the reporting unit's goodwill being measured exceeds its implied fair value. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the sum of the amounts assigned to identified net assets. As a result, the implied fair value of goodwill is generally the residual amount that results from subtracting the value of net assets including all tangible assets and identified intangible assets from the fair value of the reporting unit's fair value. We determine the fair value of our reporting units using an income-based, discounted cash flow ("DCF") analysis, and market-based approaches (Guideline Publicly Traded Company Method and Guideline Transaction Method) which examine transactions in the marketplace involving the sale of the stocks of similar publicly-owned companies, or the sale of entire companies engaged in operations similar to KEMET. In addition to the above described reporting unit valuation techniques, our goodwill impairment assessment also considers our aggregate fair value based upon the value of our outstanding shares of common stock. Our goodwill balance of$41.2 million is comprised of$35.6 million related to KBP, which is within the Tantalum reporting unit,$4.7 million related to IntelliData, which is a corporate asset, and$0.9 million related to Novasentis, which is within the Film and Electrolytic reporting unit. As part of our annual impairment testing, if deemed necessary, we determine the fair value of the relevant reporting unit(s) using an income-based, DCF analysis for KBP at the Tantalum product line level and for Novasentis at the Film and Electrolytic reportable segment level. An internal rate of return analysis is performed for IntelliData. 41 --------------------------------------------------------------------------------
Significant assumptions used in a DCF analysis are: • the discount rate based on the weighted average cost of capital ("WACC"),
• estimated sales growth rates, and
• the estimated market price and production cost for tantalum products
Our WACC is determined through market comparisons combined with small stock and equity risk premiums. Tantalum's sales growth rates are estimated through KEMET's three-year strategic plan. For indefinite-lived intangible assets, the Company has the option to perform a qualitative assessment rather than completing the impairment test. The Company must assess whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If the Company concludes that this is the case, it must perform the testing described below. Otherwise, the Company does not need to perform any further assessment. If deemed necessary, the Company tests its indefinite-lived intangible assets (trademarks) for impairment annually, or more frequently if events or circumstances indicate that an asset may be impaired. The Company performs these annual impairment tests as of the first day of our fourth fiscal quarter. We evaluate the value of our trademarks using an income-based, relief from royalty analysis. Definite-lived intangible assets subject to amortization and property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Tests for the recoverability, when necessary, of a definite-lived intangible asset, property, plant, and equipment, and other long-lived assets are performed by comparing the carrying amount of the asset to the sum of the estimated future undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, we use future projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. These assumptions include, among other estimates, periods of operation and projections of sales and cost of sales. Changes in any of these estimates could have a material effect on the estimated future undiscounted cash flows expected to be generated by the asset. If it is determined that the book value of an asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the asset over its fair value. The fair value is calculated as the discounted cash flows of the underlying assets. INCOME TAXES. Tax regulations requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual effective tax rate reflected in our consolidated financial statements is different from that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Income taxes are accounted for under the asset and liability method. 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 Consolidated Balance Sheets. We believe that it is more likely than not that a portion of the deferred tax assets in various jurisdictions will not be realized, based on the scheduled reversal of deferred tax liabilities, the recent history of cumulative losses, and the insufficient evidence of projected future taxable income to overcome the loss history. Therefore, we have provided a valuation allowance related to benefits from income taxes. We continue to have net deferred tax assets (future tax benefits) in several jurisdictions which we expect to realize, assuming, based on certain estimates and assumptions, sufficient taxable income can be generated to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional tax expense. Differences between the provision for income taxes on earnings from continuing operations and the amount computed using theU.S. Federal statutory income tax rate are primarily due to the tax on foreign earnings, non-deductible permanent differences, and differences due toU.S. and foreign tax law changes. The accounting rules require that we recognize, in our financial statements, the impact of a tax position, if that position is "more likely than not" of not being sustained on audit, based on the technical merits of the position. Accruals for estimated interest and penalties are recorded as a component of income tax expense. 42 -------------------------------------------------------------------------------- To the extent that the provision for income taxes changed by 1.0% of income before income taxes, consolidated net income would have changed by$0.8 million in fiscal year 2020. STOCK-BASED COMPENSATION. Stock-based compensation for stock options is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model considers volatility in the price of the Company's stock, the risk-free interest rate, the estimated life of the equity-based award, the closing market price of the Company's stock on the grant date and the exercise price. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. The Company's stock options were fully expensed during the fiscal year endedMarch 31, 2017 . Upon adoption of Accounting Standard Update ("ASU") No. 2016-09, Compensation Stock-Compensation, the Company elected to discontinue estimating forfeitures. Stock-based compensation cost for restricted stock is measured based on the closing fair market value of the Company's common stock on the date of grant. The Company recognizes stock-based compensation cost for arrangements with cliff vesting as expense ratably on a straight-line basis over the requisite service period. The Company recognizes stock-based compensation cost for arrangements with graded vesting as expense on an accelerated basis over the requisite service period. Results of Operations Historically, revenues and earnings may or may not be representative of future operating results due to various economic and other factors. The following table sets forth the Consolidated Statements of Operations for the periods indicated (amounts in thousands): Fiscal Years Ended March 31, 2020 2019 2018 Net sales$ 1,260,554 $ 1,382,818 $ 1,200,181 Operating costs and expenses: Cost of sales 840,066 924,276 860,744 Selling, general and administrative expenses 194,766 202,642 173,620 Research and development 49,264 44,612 39,114 Restructuring charges 8,882 8,779 14,843 (Gain) loss on write down and disposal of long-lived assets 19,710 1,660 (992 ) Total operating costs and expenses 1,112,688 1,181,969 1,087,329 Operating income 147,866 200,849 112,852 Non-operating (income) expense: Interest income (3,325 ) (2,035 ) (809 ) Interest expense 11,021 21,239 32,882 Acquisition (gain) loss - - (130,880 ) Antitrust class action settlements and regulatory costs 64,695 6,701 9,900 Other (income) expense, net (4,356 ) 4,513 14,692 Income before income taxes and equity income (loss) from equity method investments 79,831 170,431 187,067 Income tax expense (benefit) 38,526 (39,460 ) 9,132 Income before equity income (loss) from equity method investments 41,305 209,891 177,935 Equity income (loss) from equity method investments 76 (3,304 ) 76,192 Net income$ 41,381 $ 206,587 $ 254,127 43
-------------------------------------------------------------------------------- Consolidated Comparison of Fiscal Year 2020 to Fiscal Year 2019Net Sales Net sales of$1.3 billion in fiscal year 2020 decreased$122.3 million from$1.4 billion in fiscal year 2019. Solid Capacitor net sales decreased$49.8 million , Film and Electrolytic net sales decreased$30.4 million , and MSA net sales decreased$42.1 million . The decrease in Solid Capacitors net sales was driven by a$67.6 million decrease in Tantalum net sales, which was partially offset by a$17.8 million increase in Ceramics net sales. The decrease in Tantalum net sales was primarily due to a$56.6 million decrease in distributor net sales across all regions except for the JPKO region, a$12.4 million decrease in EMS net sales in theAmericas and EMEA regions, and a$7.3 million decrease in OEM net sales across all regions except for theAmericas regions. These decreases in Tantalum net sales were partially offset by a$5.1 million increase in distributor net sales in the JPKO region, a$1.9 million increase in EMS net sales in the APAC region, and a$1.8 million increase in OEM net sales in theAmericas region. The increase in Ceramics net sales was primarily due to a$12.0 million increase in OEM net sales across all regions, a$10.3 million increase in EMS net sales across all regions, and a$5.7 million increase in distributor net sales across the APAC and JPKO regions. These increases in Ceramics net sales were partially offset by a$10.2 million decrease in distributor net sales across theAmericas and EMEA regions. Solid Capacitors net sales was unfavorably impacted by$4.6 million from foreign currency exchange due to the change in the value of the Euro compared to theU.S. Dollar. The decrease in Film and Electrolytic net sales was driven by a$21.1 million decrease in distributor net sales across all regions except for the JPKO region, an$11.5 million decrease in OEM net sales across the EMEA and JPKO regions, and a$2.1 million decrease in EMS net sales in the EMEA region. These decreases in net sales were partially offset by a$3.2 million increase in EMS net sales across theAmericas and APAC regions, a$0.6 million increase in distributor net sales in the JPKO region, and a$0.5 million increase in OEM net sales across theAmericas and APAC regions. Film and Electrolytic net sales was unfavorably impacted by$5.2 million from foreign currency exchange due to the change in the value of the Euro compared theU.S. Dollar. The decrease in MSA net sales was driven by a$41.3 million decrease in OEM net sales across all regions except for the EMEA region, a$1.4 million decrease in EMS net sales across all regions, and a$0.8 million decrease in distributor net sales in the APAC region. These decreases in net sales were partially offset by a$1.2 million increase in distributor net sales across theAmericas and EMEA regions. MSA net sales was favorably impacted by$2.5 million from foreign currency exchange due to the change in the value of the Japanese Yen compared to theU.S. dollar. In fiscal years 2020 and 2019, net sales by channel and the percentages of net sales by region to total net sales were as follows (dollars in thousands): Fiscal Year 2020 Fiscal Year 2019 % of % of Net Sales Total Net Sales Total APAC$ 509,161 40.4 %$ 533,340 38.6 % Americas 296,929 23.6 % 337,842 24.4 % EMEA 276,477 21.9 % 315,535 22.8 % JPKO 177,987 14.1 % 196,101 14.2 % Total$ 1,260,554 $ 1,382,818
In fiscal years 2020 and 2019, the percentages of net sales by channel to total net sales were as follows (dollars in thousands):
Fiscal Year 2020 Fiscal Year 2019 Net Sales % of Total Net Sales % of Total OEM$ 552,629 43.8 %$ 598,306 43.3 %
Distributor 508,536 40.4 % 584,618 42.2 % EMS
199,389 15.8 % 199,894 14.5 % Total$ 1,260,554 $ 1,382,818 Gross Margin Gross margin for the fiscal year endedMarch 31, 2020 of$420.5 million (33.4% of net sales) decreased$38.1 million from$458.5 million (33.2% of net sales) in the prior fiscal year. Gross margin as a percentage of net sales improved 20 basis points in the year-to-year period comparison. 44 -------------------------------------------------------------------------------- Solid Capacitors gross margin decreased$10.1 million primarily due to a decrease in net sales. The decrease in gross margin due to the decrease in net sales was substantially offset by continued variable margin improvement resulting from manufacturing process improvements, vertical integration, and ongoing restructuring activities, as well as a favorable shift in sales mix and channel. Price increases for certain products also contributed to a higher margin on a number of products. Film and Electrolytic gross margin decreased$12.2 million primarily due to a decrease in net sales caused by a softening in the industrial and automotive market, and an unfavorable change in sales channel and region mix. MSA gross margin decreased$15.7 million primarily due to a decrease in net sales and an unfavorable shift in sales mix. Selling, General and Administrative Expenses ("SG&A") SG&A expenses of$194.8 million (15.5% of net sales) for fiscal year 2020 decreased$7.9 million compared to$202.6 million (14.7% of net sales) for fiscal year 2019. The decrease was mainly attributed to a$15.7 million decrease in payroll expenses, mainly due to a decrease in incentive compensation, a$2.1 million decrease in travel expenses, and a$2.1 million decrease in consultants and contractors expenses. This decrease was partially offset by$7.1 million in Merger-related expenses incurred during fiscal year 2020 compared to no such expenses during fiscal year 2019. In addition, a$2.5 million increase in depreciation and amortization expense and a$2.4 million increase in professional fees unfavorably impacted SG&A expenses in fiscal year 2020 compared to fiscal year 2019. Research and Development R&D expenses of$49.3 million (3.9% of net sales) for fiscal year 2020 increased$4.7 million compared to$44.6 million (3.2% of net sales) for fiscal year 2019. The increase was primarily related to a$4.1 million increase in payroll expenses, driven by an increase in headcount related to the Novasentis acquisition in the current fiscal year, and a$0.6 million increase in materials and supplies expenses. Loss on Write Down and Disposal of Long-Lived Assets During fiscal year 2020, KEMET recorded a net loss on the write down and disposal of long-lived assets of$19.7 million , which was comprised of$18.9 million in impairment charges and$0.8 million in net losses on the sale and disposal of long-lived assets. The impairment charges of$18.9 million consisted of (i) an$8.9 million impairment of previously capitalized IT application development costs related to a hosted arrangement that was abandoned; (ii) a$6.1 million impairment of buildings and equipment related to the Film and Electrolytic plant inItaly , which is operating significantly under capacity; (iii) a$1.4 million impairment related to under-utilized Solid Capacitors' equipment at theThailand plant; (iv) a$0.9 million impairment of the Film and Electrolytic building inSweden due to the relocation of operations toPortugal ; and (v) a$0.8 million impairment related to an idle facility inJapan . During fiscal year 2019, the Company recorded a net loss on the write down and disposal of long-lived assets of$1.7 million , which was comprised of$0.7 million of impairment charges and$1.0 million in net losses on the sale and disposal of long-lived assets. The impairment charges were primarily related to the write down of idle land and machinery of$0.5 million and$0.2 million , respectively, atTOKIN . The$1.0 million net loss on the sale and disposal of long-lived assets primarily consisted of the disposal of furniture and fixtures resulting from the Company relocation of its corporate headquarters toFort Lauderdale, Florida and the disposal of old machinery that was no longer being used. 45 --------------------------------------------------------------------------------
Restructuring Charges The Company has implemented restructuring plans, which include programs to increase competitiveness by removing excess capacity, relocating production to lower cost locations, and eliminating unnecessary costs throughout the Company. Significant restructuring plans that occurred during the fiscal year endedMarch 31, 2020 are summarized below: Total expected to be Incurred during year ended incurred March 31, 2020 Cumulative incurred to date Personnel Personnel Restructuring Reduction Relocation & Reduction Relocation & Personnel Relocation & Plan Segment Costs Exit Costs Costs Exit Costs Reduction Costs Exit Costs Tantalum powder facility Solid relocation (1) Capacitors 1,107 2,606 1,107 (777 ) 1,107 2,580 Axial electrolytic production relocation from Granna to Film and Evora Electrolytic 732 4,313 732 2,018 732 4,313 TOKIN Japan fixed cost MSA and reduction (2) Corporate 5,729 - 5,021 - 5,021 - Corporate, Film and All Other Electrolytic 1,505 432 758 23 1,198 432
______________________________________________________________________________
(1) The credit to relocation and exit costs during the fiscal year endedMarch 31, 2020 was due to the recovery of costs related to the sale of tantalum that was recovered ("tantalum reclaim") as part of the plant exit activities. (2) Personnel reduction costs of 5.0 million for the fiscal year endedMarch 31, 2020 are comprised of$3.5 million and$1.5 million in the MSA segment and corporate respectively. Restructuring charges of$8.9 million in fiscal year 2020 increased$0.1 million from$8.8 million in fiscal year 2019. The restructuring charges for the fiscal year endedMarch 31, 2020 , are comprised of$7.6 million in personnel reduction costs and$1.3 million in relocation and exit costs. The personnel reduction costs of$7.6 million were primarily due to$5.0 million in severance charges due to headcount reductions at TOKIN Japan as part of a fixed cost reduction plan,$1.1 million in severance charges resulting from the closing of the tantalum powder facility inCarson City, Nevada ,$0.7 million in severance charges resulting from the closing of the Granna,Sweden manufacturing plant as axial electrolytic production was moved to the plant in Evora,Portugal , and$0.5 million in severance charges related to personnel reductions resulting from a reorganization of Film and Electrolytic's management structure. The relocation and exit costs of$1.3 million were primarily related to$2.0 million in costs resulting from the relocation of axial electrolytic production equipment from the Company's plant in Granna,Sweden to its plant in Evora,Portugal . This expense was partially offset by a$0.8 million credit related to tantalum reclaim at the tantalum powder facility inCarson City, Nevada . The Company incurred$8.8 million in restructuring charges in the fiscal year endedMarch 31, 2019 , including$2.8 million in personnel reduction costs and$6.0 million in relocation and exit costs. The personnel reduction costs of$2.8 million were primarily due to$0.9 million in costs related to headcount reductions in theTOKIN legacy group across various internal and operational functions,$0.3 million in severance charges related to personnel reductions in the Film and Electrolytic reportable segment resulting from a reorganization of the segment's management structure, and$1.6 million in severance charges related to headcount reductions in the Tantalum product line due to a decline in MnO2 sales. The relocation and exit costs of$6.0 million were primarily due to$3.4 million in costs related to the Company's relocation of its tantalum powder equipment fromCarson City, Nevada to its plant inMatamoros, Mexico and$2.3 million in costs related to the relocation of axial electrolytic production equipment from Granna,Sweden to its plant in Evora,Portugal . Operating Income Operating income for fiscal year 2020 of$147.9 million declined$53.0 million compared to operating income of$200.8 million in fiscal year 2019. The decrease in operating income was primarily due to a$38.1 million decrease in gross margin, a$18.1 million increase in net loss on write down and disposal of long-lived assets, a$4.7 million increase in R&D expenses, and a$0.1 million increase in restructuring charges. These unfavorable changes to operating income were partially offset by a$7.9 million decrease in SG&A expenses. 46 -------------------------------------------------------------------------------- Non-Operating (Income) Expense, net Non-operating expense, net was$68.0 million in fiscal year 2020 compared to non-operating expense, net of$30.4 million in fiscal year 2019. The$37.6 million increase in non-operating expense, net was primarily attributable to a$58.0 million increase in antitrust class action settlements and regulatory costs. Also contributing to the increase in non-operating expense, net was a$2.9 million decrease in R&D grant reimbursements and grant income, a$1.9 million pension curtailment expense that occurred during fiscal year 2020 compared to no such expense in fiscal year 2019, and a$1.7 million unfavorable change in foreign currency exchange (gain) loss, which was primarily due to currency fluctuations in the Euro, Chinese Yuan, Japanese Yen and British Pound. These unfavorable changes were partially offset by a$15.9 million decrease in loss on the early extinguishment of debt. Additionally, net interest expense decreased$11.5 million compared to fiscal year 2019 due to the refinancing of the Company's term loan during fiscal year 2019. Income Taxes Income tax expense of$38.5 million for fiscal year 2020 increased by$78.0 million compared to income tax benefit of$39.5 million in fiscal year 2019. Fiscal year 2020 income tax expense was comprised of$19.9 million ofU.S. federal income tax expense,$17.2 million of income tax related to foreign operations, and$1.4 million in state income tax expense. Fiscal year 2019 income tax benefit of$39.5 million was comprised of$50.1 million related to the partial release of valuation allowances in theU.S. andJapan , offset in part by$10.4 million in income tax expense related to foreign operations and$0.2 million in income tax expense related toU.S. operations. Equity Income (Loss) from Equity Method Investments Equity income from equity method investments of$0.1 million in fiscal year 2020 had a favorable change of$3.4 million compared to an equity loss of$3.3 million in fiscal year 2019. The favorable change primarily related to a$0.4 million gain associated with the Novasentis acquisition inJuly 2019 as a result of the Company adjusting its investment balance to fair value prior to its acquisition during fiscal year 2020. The Company impaired its investment in Novasentis by$2.7 million during fiscal year 2019, which primarily caused the$3.3 million equity method loss in fiscal year 2019. Reportable Segment Comparison of Fiscal Year 2020 to Fiscal Year 2019 The following table sets forth the operating income (loss) for each of our reportable segments for the fiscal years 2020 and 2019. The table also sets forth each of the reportable segments' net sales as a percentage of total net sales and total operating income as a percentage of total net sales (amounts in thousands, except percentages): For the Fiscal Years Ended March 31, 2020 March 31, 2019 % of Total % of Total Amount Sales Amount Sales Net sales Solid Capacitors$ 886,063 70.3 %$ 935,838 67.7 % Film and Electrolytic 175,803 13.9 % 206,240 14.9 % MSA 198,688 15.8 % 240,740 17.4 % Total$ 1,260,554 100.0 %$ 1,382,818 100.0 % Operating income (loss) Solid Capacitors$ 345,245 $ 348,150 Film and Electrolytic (14,209 ) 8,183 MSA 13,101 22,546 Corporate (196,271 ) (178,030 ) Total$ 147,866 11.7 %$ 200,849 14.5 % 47
--------------------------------------------------------------------------------
Solid Capacitors The table below sets forth net sales, operating income and operating income as a percentage of net sales for our Solid Capacitors reportable segment for fiscal years 2020 and 2019 (amounts in thousands, except percentages): For the Fiscal Years Ended March 31, 2020 March 31, 2019 % to Net % to Net Amount Sales Amount Sales Tantalum product line net sales$ 495,695 $ 563,255 Ceramic product line net sales 390,368 372,583 Solid Capacitors net sales$ 886,063 $ 935,838
Solid Capacitors operating income
37.2 %
Net Sales Solid Capacitors net sales of$886.1 million in fiscal year 2020 decreased$49.8 million from$935.8 million in fiscal year 2019. Tantalum product line net sales of$495.7 million in fiscal year 2020 decreased$67.6 million from$563.3 million in fiscal year 2019. Ceramic product line net sales of$390.4 million in fiscal year 2020 increased$17.8 million from$372.6 million in fiscal year 2019. The decrease in Solid Capacitors net sales was driven by a$67.6 million decrease in Tantalum net sales, which was partially offset by a$17.8 million increase in Ceramics net sales. The decrease in Tantalum net sales was primarily due to a$56.6 million decrease in distributor net sales across all regions except for the JPKO region, a$12.4 million decrease in EMS net sales in theAmericas and EMEA regions, and a$7.3 million decrease in OEM net sales across all regions except for theAmericas regions. These decreases in Tantalum net sales were partially offset by a$5.1 million increase in distributor net sales in the JPKO region, a$1.9 million increase in EMS net sales in the APAC region, and a$1.8 million increase in OEM net sales in theAmericas region. The increase in Ceramics net sales was primarily due to a$12.0 million increase in OEM net sales across all regions, a$10.3 million increase in EMS net sales across all regions, and a$5.7 million increase in distributor net sales across the APAC and JPKO regions. These increases in Ceramics net sales were partially offset by a$10.2 million decrease in distributor net sales across theAmericas and EMEA regions. Solid Capacitors net sales was unfavorably impacted by$4.6 million from foreign currency exchange due to the change in the value of the Euro compared to theU.S. Dollar. Reportable Segment Operating Income Segment operating income of$345.2 million for fiscal year 2020 decreased$2.9 million from$348.2 million for fiscal year 2019. The decrease in operating income was primarily attributable to a decrease in gross margin of$10.1 million , which was driven by a decrease in net sales. The decrease in gross margin due to the decrease in net sales was substantially offset by continued variable margin improvement resulting from manufacturing process improvements, vertical integration, and ongoing restructuring activities, as well as a favorable shift in sales mix and channel. Price increases for certain products also contributed to a higher margin on a number of products. Also contributing to the decrease in operating income was a$1.6 million increase in R&D expenses. These unfavorable changes to operating income were partially offset by a$5.7 million decrease in SG&A expenses, a$4.4 million decrease in restructuring charges, and a$1.3 million decrease in net loss on write down and disposal of long-lived assets during fiscal year 2020 compared to fiscal year 2019. 48 --------------------------------------------------------------------------------
Film and Electrolytic The table below sets forth net sales, operating income (loss) and operating income (loss) as a percentage of net sales for our Film and Electrolytic reportable segment for the fiscal years 2020 and 2019 (amounts in thousands, except percentages): For the Fiscal Years Ended March 31, 2020 March 31, 2019 % to Net % to Net Amount Sales Amount Sales Net sales$ 175,803 $ 206,240
Segment operating income (loss) (14,209 ) (8.1 )% 8,183
4.0 %
Net Sales Film and Electrolytic net sales of$175.8 million in fiscal year 2020 decreased$30.4 million from$206.2 million in fiscal year 2019. The decrease in net sales was driven by a$21.1 million decrease in distributor net sales across all regions except for the JPKO region, an$11.5 million decrease in OEM net sales across the EMEA and JPKO regions, and a$2.1 million decrease in EMS net sales in the EMEA region. These decreases in net sales were partially offset by a$3.2 million increase in EMS net sales across theAmericas and APAC regions, a$0.6 million increase in distributor net sales in the JPKO region, and a$0.5 million increase in OEM net sales across theAmericas and APAC regions. Film and Electrolytic net sales was unfavorably impacted by$5.2 million from foreign currency exchange due to the change in the value of the Euro compared theU.S. Dollar. Reportable Segment Operating Income (Loss) Segment operating loss of$14.2 million in fiscal year 2020 had a$22.4 million unfavorable change from operating income of$8.2 million in fiscal year 2019. The unfavorable change in operating income was primarily attributable to a$12.2 million decrease in gross margin driven by a decrease in net sales caused by a softening in the industrial and automotive market, and an unfavorable change in sales channel and region mix. The unfavorable change in operating income (loss) was also attributable to a$1.5 million increase in R&D expenses, a$0.7 million increase in restructuring charges, a$7.9 million unfavorable change in (gain) loss on write down and disposal of long-lived assets, and a$0.1 million increase in SG&A expenses. Electro-Magnetic, Sensors, and Actuators The following table sets forth net sales, operating income, and operating income as a percentage of net sales for our MSA reportable segment in fiscal years 2020 and 2019 (amounts in thousands, except percentages). For the Fiscal Years Ended March 31, 2020 March 31, 2019 % to Net % to Net Amount Sales Amount Sales Net sales$ 198,688 $ 240,740 Segment operating income 13,101 6.6 % 22,546 9.4 % Net Sales MSA net sales of$198.7 million in fiscal year 2020 decreased$42.1 million from$240.7 million in fiscal year 2019. The decrease in net sales was driven by a$41.3 million decrease in OEM net sales across all regions except for the EMEA region, a$1.4 million decrease in EMS net sales across all regions, and a$0.8 million decrease in distributor net sales in the APAC region. These decreases in net sales were partially offset by a$1.2 million increase in distributor net sales across theAmericas and EMEA regions. MSA net sales was favorably impacted by$2.5 million from foreign currency exchange due to the change in the value of the Japanese Yen compared to theU.S. dollar. Reportable Segment Operating Income Segment operating income of$13.1 million in fiscal year 2020 decreased$9.4 million from$22.5 million in fiscal year 2019. The decrease in operating income was primarily due to a$15.7 million decrease in gross margin, which was primarily driven by a decrease in net sales and an unfavorable shift in sales mix. A$3.1 million increase in restructuring charges also contributed to the decrease in operating income. This decrease to operating income was partially offset by a$9.2 million decrease in SG&A expenses and a$0.2 million decrease in R&D expenses during fiscal year 2020 compared to fiscal year 2019. 49 -------------------------------------------------------------------------------- Consolidated Comparison of Fiscal Year 2019 to Fiscal Year 2018 For a discussion of consolidated results for the fiscal year endedMarch 31, 2019 compared to the fiscal year endedMarch 31, 2018 , refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 , which is incorporated herein by reference. Reportable Segment Comparison of Fiscal Year 2019 to Fiscal Year 2018 For a discussion of reportable segment results for the fiscal year endedMarch 31, 2019 compared to the fiscal year endedMarch 31, 2018 , refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 , which is incorporated herein by reference. Liquidity and Capital Resources Our liquidity needs arise from working capital requirements, acquisitions, capital expenditures, principal and interest payments on debt, costs associated with the implementation of our restructuring plans, and in the past, dividend payments. Historically, these cash needs have been met by cash flows from operations, borrowings under our loan agreements, and existing cash and cash equivalents balances. TOKIN Term Loan Facility OnOctober 29, 2018 , the Company entered into aJPY 33.0 billion Term Loan Agreement (the "TOKIN Term Loan Facility") by and amongTOKIN , the lenders party thereto (the "Lenders") andSumitomo Mitsui Trust Bank, Limited in its capacity as agent (the "Agent"), arranger and Lender. Funding for the Term Loan facility occurred onNovember 7, 2018 . The proceeds, which were net of an arrangement fee withheld from the funding amount, wereJPY 32.1 billion , or approximately$283.9 million using the exchange rate as ofNovember 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 . Principal payments on the TOKIN Term Loan Facility are required semi-annually in the amount ofJPY 1.4 billion (approximately$12.7 million using the exchange rate as ofMarch 31, 2020 ), with a final payment ofJPY 16.5 billion (approximately$152.0 million using the exchange rate as ofMarch 31, 2020 ) due upon maturity onSeptember 30, 2024 . Interest payments are due semi-annually on the TOKIN Term Loan Facility. The carrying value of the TOKIN Term Loan Facility atMarch 31, 2020 and 2019 was$258.7 million and$276.8 million , respectively. Revolving Line of Credit 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. There were no borrowings under the revolving line of credit during fiscal year 2020, and the Company's available borrowing capacity under the Loan and Security Agreement was$34.3 million as ofMarch 31, 2020 . Customer Advances As ofMarch 31, 2020 , the Company has received a total of$56.5 million in customer advances (collectively, the "Advances") from three separate customers. The three customers agreed to make Advances to the Company in an aggregate amount of up to$72.0 million (collectively, the "Customer Capacity Agreements"). The Customer Capacity Agreements are being used to fund the expansion of capacity for various electronic components that are sold to these customers (the "Investments"). 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, orDecember 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 minimum number of components that would require full repayment of the Advances byDecember 31, 2038 , then the Advances shall be deemed repaid in full. Additionally, if the Customers do not purchase a minimum 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. 50 -------------------------------------------------------------------------------- The carrying value of these Advances was$56.5 million and$13.4 million as ofMarch 31, 2020 and 2019, respectively. During fiscal year 2020, the Company had$42.8 million in capital expenditures related to the Customer Capacity Agreements. Short-term Liquidity Cash and cash equivalents of$222.4 million as ofMarch 31, 2020 increased$14.5 million from$207.9 million as ofMarch 31, 2019 . Our net working capital (current assets less current liabilities) of$343.8 million decreased$19.8 million from$363.6 million as ofMarch 31, 2019 , with the decrease primarily due to an increase in accrued expenses related to anti-trust settlements. Cash and cash equivalents held by our foreign subsidiaries totaled$137.1 million and$139.6 million atMarch 31, 2020 and 2019, respectively. 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 theU.S. , we may be required to accrueU.S. withholding taxes on the distributed foreign earnings. Based on our current operating plans, we believe 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$5.9 million in interest payments,$29.1 million in debt principal payments,$54.3 million in antitrust settlement payments,$50.0 million to$75.0 million in capital expenditures, excluding approximately$15.0 million to$18.0 million of customer-funded capacity expansion related to Customer Capacity Agreements, and$1.7 million in restructuring payments. The Company's expected capital expenditures in fiscal year 2021 mainly relate to the Company's continued plan of capacity expansion to support future growth, and to improve our information technology infrastructure around the world. As ofMarch 31, 2020 , our borrowing capacity, which is based on factors including outstanding eligible accounts receivable, inventory and equipment collateral, under the revolving line of credit was$34.3 million . The revolving line of credit expires onApril 28, 2022 . Cash and cash equivalents increased by$14.5 million during the year endedMarch 31, 2020 , as compared to a decrease of$78.9 million during the year endedMarch 31, 2019 and an increase of$177.1 million during the year endedMarch 31, 2018 as follows (amounts in thousands): Fiscal Years
Ended
2020 2019
2018
Net cash provided by (used in) operating activities$ 158,856 $ 131,731 $ 120,761 Net cash provided by (used in) investing activities (143,313 ) (147,012 ) 102,364 Net cash provided by (used in) financing activities 8,814 (56,657 ) (55,798 ) Effect of foreign currency fluctuations on cash (1,812 ) (6,990 ) 9,745 Net increase (decrease) in cash, cash equivalents, and restricted cash 22,545 (78,928 ) 177,072 Less: restricted cash at the end of the year 8,064 - - Net increase (decrease) in cash and cash equivalents$ 14,481 $
(78,928 )
Operating Cash Flow Activities During fiscal years 2020, 2019, and 2018, cash provided by operating activities totaled$158.9 million ,$131.7 million , and$120.8 million , respectively. During fiscal year 2020, cash provided by operating activities was$27.1 million higher than fiscal year 2019 due to a lower use of net working capital (excluding cash), which positively impacted operating cash flows. This favorable change was partially offset by lower cash-generating income. During fiscal year 2019, cash provided by operating activities was$11.0 million higher than fiscal year 2018 due to higher cash-generating income. This favorable change was partially offset by an increase in net working capital (excluding cash), which negatively impacted operating cash flows. Investing Cash Flow Activities During fiscal years 2020, 2019, and 2018, cash provided by (used in) investing activities totaled$(143.3) million ,$(147.0) million , and$102.4 million , respectively. 51 -------------------------------------------------------------------------------- During fiscal year 2020, cash used in investing activities included capital expenditures of$146.3 million , primarily related to expanding capacity at our manufacturing facilities inMexico ,China ,Thailand andJapan , as well as information technology projects across the world. Of the$146.3 million capital expenditures,$42.8 million related to the Customer Capacity Agreements. Additionally, the Company invested$5.0 million in the form of capital contributions to KEMET Jianghai and used$1.3 million in cash to purchase the remaining ownership interests in Novasentis. Partially offsetting these uses of cash was the receipt of$8.9 million from the periodic settlements of a net investment hedge and$0.4 million in dividends from our equity method investments. During fiscal year 2019, cash used in investing activities included capital expenditures of$146.1 million , primarily related to expanding capacity at our manufacturing facilities inMexico ,Portugal ,China ,Thailand andJapan , as well as information technology projects inthe United States andMexico . Of the$146.1 million in capital expenditures,$16.3 million related to the Customer Capacity Agreements. Additionally, the Company invested$4.0 million in the form of capital contributions to KEMET Jianghai and Novasentis. Partially offsetting these uses of cash were$2.3 million in proceeds from asset sales and$0.8 million in dividend proceeds. Financing Cash Flow Activities During fiscal years 2020, 2019, and 2018, cash provided by (used in) financing activities totaled$8.8 million ,$(56.7) million , and$(55.8) million , respectively. During fiscal year 2020, the Company received$43.1 million in customer advances related to Customer Capacity Agreements. Additionally, we received$6.5 million upon the termination of cross-currency swaps designated as fair value hedges, and we received$0.3 million in proceeds from the exercise of stock options. Partially offsetting these cash inflows was$26.9 million in payments on long term debt,$5.8 million in dividend payments for two quarters,$7.0 million in payments for the periodic settlement of cross-currency swaps designated as cash flow hedges, and$1.5 million in principal payments on finance leases. During fiscal year 2019, the Company received$281.8 million in proceeds from the TOKIN Term Loan Facility, net of discount, bank issuance costs, and other indirect issuance costs,$13.4 million in customer advances related to Customer Capacity Agreements, received proceeds on an interest free loan from the Portuguese Government of$1.1 million , and received$0.5 million in cash proceeds from the exercise of stock options. The Company made$344.5 million in payments on long term debt, including two quarterly principal payments on the Term Loan Credit Agreement of$4.3 million , for a total of$8.6 million ,$323.4 million to repay the remaining balance on the Term Loan Credit Agreement, and one principal payment on the TOKIN Term Loan Facility of$12.4 million . An early payment premium on the Term Loan Credit Agreement used$3.2 million in cash. Lastly, the Company paid two quarterly cash dividends for a total of$5.8 million . 52 --------------------------------------------------------------------------------
Commitments
At
Payment Due by
Period
More than
Contractual obligations Total Year 1 Years 2 - 3
Years 4 - 5 5 years Debt obligations (1)$ 272,618 $ 29,111 $ 51,942 $ 191,311 $ 254 Pension and other post-retirement benefits (2) 93,661 6,486 15,327 19,081 52,767 Contract liabilities (3) 56,506 - 9,000 14,400 33,106 Antitrust settlements and regulatory costs (4) 54,310 54,310 - - - Operating lease obligations (5) 35,711 8,921 10,914 6,558 9,318 Purchase commitments 29,055 29,055 - - - Interest obligations (1) 22,341 5,918 10,190 6,233 - Employee separation liability 7,044 487 657 657 5,243 Finance lease obligations (5) 3,195 1,376 1,542 202 75 Restructuring liability 1,833 1,744 89 - - Total$ 576,274 $ 137,408 $ 99,661 $ 238,442 $ 100,763
______________________________________________________________________________
(1) Refer to Note 4, "Debt" for additional information. (2) Reflects expected benefit payments through fiscal year 2030. (3) Repayment of the Customer Advances assumes the customers purchase products in a quantity sufficient to require the maximum permitted quarterly repayment allowed per the agreements. Repayment timing and amounts are estimates and are subject to change based upon actual and estimated product purchases by the customers in these agreements. Refer to the contract liabilities section in Note 1, "Organization and significant accounting policies" for additional information. (4) In addition to amounts reflected in the table, an additional$23.1 million has been recorded in the line item "Accrued expenses," for which the timing of payment has not been determined. (5) Refer to Note 14, "Leases" for additional information. Uncertain Income Tax Positions We have recognized a liability for our unrecognized uncertain income tax positions of approximately$6.3 million as ofMarch 31, 2020 . The ultimate resolution and timing of payment for remaining matters continues to be uncertain and are, therefore, excluded from the above table. Non-GAAP Financial Measures To complement our Consolidated Statements of Operations and Cash Flows, we use non-GAAP financial measures of adjusted gross margin, adjusted SG&A expenses, adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and certain related ratios. Management believes that these non-GAAP financial measures are complements to GAAP amounts and such measures are useful to investors. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or, in the case of EBITDA, as an alternative to cash flows from operating activities as a measure of liquidity. 53 --------------------------------------------------------------------------------
The following table provides a reconciliation from non-GAAP adjusted gross margin to GAAP gross margin, the most directly comparable GAAP measure (amounts in thousands, except percentages):
Fiscal Years Ended March 31, 2020 2019 2018 Net sales$ 1,260,554 $ 1,382,818 $ 1,200,181 Cost of sales 840,066 924,276 860,744 Gross Margin (GAAP) 420,488 458,542 339,437 Gross margin as a % of net sales 33.4 % 33.2 % 28.3 % Non-GAAP adjustments: Plant start-up costs 369 (927 )
929
Stock-based compensation expense 3,843 2,756
1,519
Adjusted gross margin (non-GAAP)$ 424,700 $ 460,371 $ 341,885 Adjusted gross margin as a % of net sales 33.7 % 33.3 %
28.5 %
The following table provides a reconciliation from non-GAAP adjusted SG&A expenses to GAAP SG&A expenses, the most directly comparable GAAP measure (amounts in thousands): Fiscal Years Ended March 31, 2020 2019 2018 SG&A expenses (GAAP)$ 194,766 $ 202,642 $ 173,620 Non-GAAP adjustments: ERP integration costs/IT transition costs 6,282 8,813 80 Stock-based compensation expense 7,803 9,751 5,890 Legal expenses related to antitrust class actions 5,454 5,195 6,736 Merger related expenses 7,119 - - Contingent consideration fair value adjustment 127 - - Adjusted SG&A expenses (non-GAAP)$ 167,981 $
178,883
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): Fiscal Years Ended March 31, 2020 2019 2018 Operating income (GAAP)$ 147,866 $ 200,849 $ 112,852 Non-GAAP adjustments: (Gain) loss on write down and disposal of long-lived assets 19,710 1,660 (992 ) ERP integration costs/IT transition costs 6,282 8,813 80 Stock-based compensation 12,084 12,866 7,657 Restructuring charges 8,882 8,779 14,843 Legal expenses related to antitrust class actions 5,454 5,195 6,736 Plant start-up costs 369 (927 ) 929 Merger related expenses 7,119 - - Contingent consideration fair value adjustment 127 - - Adjusted operating income (non-GAAP)$ 207,893 $ 237,235 $ 142,105 54
-------------------------------------------------------------------------------- The following table provides a reconciliation from non-GAAP adjusted net income to GAAP net income, the most directly comparable GAAP measure (amounts in thousands): Fiscal Years Ended March 31, 2020 2019 2018 Net income (GAAP)$ 41,381 $ 206,587 $ 254,127 Non-GAAP adjustments: Equity (income) loss from equity method investments (76 ) 3,304 (76,192 ) Acquisition (gain) loss - - (130,880 ) (Gain) loss on write down and disposal of long-lived assets 19,710 1,660 (992 ) Restructuring charges 8,882 8,779 14,843 R&D grant reimbursements and grant income (1,595 ) (4,559 ) - ERP integration costs/IT transition costs 6,282 8,813 80 Stock-based compensation 12,084 12,866 7,657 Settlements, regulatory costs, and legal expenses related to antitrust class actions 70,149 11,896 16,636 Net foreign exchange (gain) loss (6,762 ) (7,230 ) 13,145 Plant start-up costs 369 (927 ) 929 Loss on early extinguishment of debt - 15,946 486 Write off of debt issuance costs 453 - - Merger related expenses 7,119 - - Curtailment/settlement expense on defined benefit pension plans 1,949 - - Unrealized (gain) loss on equity securities (705 ) - - Contingent consideration fair value adjustment 127 - - Income tax effect of non-GAAP adjustments (22,085 ) (50,012 ) (30 ) Adjusted net income (non-GAAP)$ 137,282 $ 207,123 $ 99,809 55
-------------------------------------------------------------------------------- The following table provides a reconciliation from EBITDA and non-GAAP adjusted EBITDA to GAAP net income, the most directly comparable GAAP measure (amounts in thousands): Fiscal Years Ended March 31, 2020 2019 2018 Net income (U.S. GAAP)$ 41,381 $ 206,587 $ 254,127 Non-GAAP adjustments: Income tax expense (benefit) 38,526 (39,460 ) 9,132 Interest expense, net 7,696 19,204 32,073 Depreciation and amortization 62,819 52,628 50,661 EBITDA (non-GAAP) 150,422 238,959 345,993 Excluding the following items: Equity (income) loss from equity method investments (76 ) 3,304 (76,192 ) Acquisition (gain) loss - - (130,880 ) (Gain) loss on write down and disposal of long-lived assets 19,710 1,660 (992 ) ERP integration costs/IT transition costs 6,282 8,813 80 Stock-based compensation 12,084 12,866 7,657 Restructuring charges 8,882 8,779 14,843 R&D grant reimbursements and grant income (1,595 ) (4,559 ) - Settlements, regulatory costs, and legal expenses related to antitrust class actions 70,149 11,896 16,636 Net foreign exchange (gain) loss (6,762 ) (7,230 ) 13,145 Plant start-up costs 369 (927 ) 929 Loss on early extinguishment of debt - 15,946 486 Write off of debt issuance costs 453 - - Merger related expenses 7,119 - - Curtailment/settlement expense on defined benefit pension plans 1,949 - - Unrealized (gain) loss on equity securities (705 ) - - Contingent consideration fair value adjustment 127 - - Adjusted EBITDA (non-GAAP)$ 268,408 $ 289,507 $ 191,705 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 GAAP. Adjusted SG&A expenses represents SG&A expenses excluding adjustments which are outlined in the quantitative reconciliation provided above. Management uses Adjusted SG&A expenses to facilitate our analysis and understanding of our business operations by excluding these items 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 SG&A expenses is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company. Adjusted SG&A expenses should not be considered as an alternative to SG&A expenses or any other performance measure derived in accordance with GAAP. Adjusted operating income represents operating income, excluding adjustments which are outlined in the quantitative reconciliation provided above. We use adjusted operating income 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 is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income from ongoing 56 -------------------------------------------------------------------------------- business operations. Adjusted operating income should not be considered as an alternative to operating income or any other performance measure derived in accordance with GAAP. Adjusted net income represents net income, excluding adjustments which are outlined in the quantitative reconciliation provided above. We use adjusted net income 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 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 should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP. EBITDA represents net income before income tax expense, interest expense, net, and depreciation and amortization expense. We present EBITDA as a supplemental measure of our ability to service debt. We believe 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. We also present adjusted EBITDA, which is EBITDA excluding adjustments that are outlined in the quantitative reconciliation provided above, as a supplemental measure of our performance and because we believe this measure is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. The 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 GAAP and should not be considered as an alternative to net income, operating income, or any other performance measures derived in accordance with 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 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 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 Consolidated 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 GAAP results and using adjusted EBITDA only supplementally. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements OnApril 1, 2019 , the Company early adopted 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 57
--------------------------------------------------------------------------------
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. The Company early adopted this ASU in the first quarter of fiscal year 2020 and applied the ASU prospectively to implementation costs incurred afterApril 1, 2019 . The adoption of this ASU did not have a material impact on our Consolidated Financial Statements. OnApril 1, 2019 , the Company adopted Topic 842, as amended, which superseded the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using the modified retrospective transition approach by applying the standard to all leases existing as of the date of the initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. For information regarding the impact of Topic 842 adoption, see "Significant Accounting Policies - Leases" in Note 1, "Organization and significant accounting policies" and Note 14, "Leases." Recent Accounting Pronouncements Not Yet Adopted InMarch 2020 , theFinancial Accounting Standards Board ("FASB") issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") to provide temporary optional expedients and exceptions to the contract modifications, hedge relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU, which was effective upon issuance and may be applied throughDecember 31, 2022 , is applicable to all contracts and hedging relationships that reference the London Interbank Offered Rate or any other reference rate expected to be discontinued. The Company is currently evaluating the impact of this ASU on our Consolidated Financial Statements. InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. The guidance will be effective for the Company in the first quarter of fiscal year 2022 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this ASU on our Consolidated Financial Statements. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The guidance will be effective for the Company in the first quarter of fiscal year 2021 and we do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements. 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. Effect of Inflation Inflation generally affects us by increasing the cost of labor, equipment, and raw materials. We do not believe that inflation has had any material effect on our business over the past three fiscal years except for the following discussion in Commodity Price Risk.
© Edgar Online, source