Notes to Financial Statements
December 31, 2019 and 2018
Note 1: Description of Plan
The following description of the KEMET Employees’ Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.
General
The Plan is a defined contribution plan sponsored by KEMET Electronics Corporation (the “Company” or “KEMET”) covering eligible U.S employees of the Company, its parent, and certain subsidiaries. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
On April 12, 2019, the Board of Directors of KEMET approved the merger of the TOKIN America 401(k) Plan into the Plan, effective May 1, 2019. As a result, all assets of the TOKIN plan of approximately $1,653,000 were transferred into the Plan on May 3, 2019.
On November 11, 2019, KEMET Corporation, the parent of KEMET, entered into an agreement and plan of merger pursuant to which Yageo Corporation would acquire all of KEMET Corporation's outstanding shares of common stock for $27.20 per share, subject to the satisfaction (or waiver of) specified conditions (the “Merger”). The Merger closed on June 15, 2020 and the KEMET Corporation common stock held in the Plan was redeemed for $27.20 per share on June 19, 2020. Each participant's proceeds from the redemption were deposited into their common trust fund account. The Merger is not expected to have any other effects on the Plan.
Contributions
Each year, participants may contribute up to 75% of their pretax annual compensation, as defined in the plan document, subject to Internal Revenue Code (“IRC”) limitations. Participants who have attained age 50 before the end of the plan year are eligible to make catch-up contributions. After a participant contributes the maximum allowed contribution, $19,000 for calendar year 2019 and $18,500 for calendar year 2018, a catch-up contribution may be made on a pre-tax or after-tax basis subject to Internal Revenue Service (“IRS”) limitations, $6,000 for each calendar year 2019 and 2018. Participants may also contribute amounts representing distributions from other qualified defined benefit and defined contribution plans. The Plan includes an auto-enrollment provision whereby all newly eligible employees are automatically enrolled in the Plan, unless they affirmatively elect not to participate. Automatically enrolled participants have their deferral rate set at 6% of their eligible compensation and their contributions are invested in a designated balanced fund until it is changed by the participants. All eligible participants contributing less than 10% will have their deferral rate increased by 1% annually until they reach 10% or opt out of the automatic increase option. The Company contributes 100% of the first 6% of compensation that a participant contributes to the Plan.
In addition, the Company, at its discretion, may make certain additional contributions as determined by the Board of Directors of the Company. No discretionary contributions were made in calendar years 2019 or 2018.
Participant Accounts
Each participant’s account is credited (charged) with (a) the participant’s contribution, (b) the Company’s matching contribution, (c) allocations of the Company’s additional contribution, (d) investment earnings (losses), and an allocation of investment expenses. Allocations are based on participant earnings, account balances, or specific participant transactions, as defined by the Plan. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account.
Vesting
Participants are immediately vested in their voluntary contributions, the Company’s matching contributions, and any discretionary contributions made by the Company, plus actual earnings (losses) thereon.
Investment Options
Participants may direct their investments in one or more of 28 investment options, which include 27 mutual funds (registered investment companies and retirement funds) and a common trust fund. The Plan’s administrative committee froze the option to purchase KEMET Corporation common stock effective December 31, 2008. As such, participants may no longer direct their investments into the KEMET Corporation Stock fund.
Notes Receivable from Participants
Participants may borrow from their account balance a minimum of $1,000 and up to a maximum amount equal to the lessor of 50% of their account balance or $50,000 (minus their highest outstanding loan balance from the past 12 months, if any). Loan transactions are treated as deductions from participants’ accounts and accounted for separately. Loan terms range from 1-5 years or up to 15 years for the purchase of a primary residence. The loans are secured by the balance in the participant’s account and bear interest at the prime lending rate plus 1% as of the date of the loan. As of December 31, 2019, interest rates ranged from 4.25% to 6.50% on participant loans. Principal and interest are paid through payroll deductions.
Payment of Benefits
Upon termination of service due to death, disability, or retirement, participants may elect to receive either a lump-sum amount equal to the value of the vested interest in their account, or payment can be deferred until a later retirement age upon election by the participant. For termination of service due to other reasons, participants may receive the value of the vested interest in their account as a lump-sum distribution or as a rollover distribution.
All fully vested balances are available for distribution after the participant reaches the age of 59 1/2.
Note 2: Summary of Significant Accounting Policies
Basis of Accounting
The financial statements of the Plan are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Notes receivable from participants
Notes receivable from participants are reported at their unpaid principal balances plus any accrued, but unpaid interest. Interest income is recorded on the accrual basis. Related fees are charged to the participants' account balance. No allowance for credit losses has been recorded as of December 31, 2019 or 2018. If a participant ceases to make loan repayments and the plan administrator deems the participant loan to be in default, the participant loan balance is reduced and a benefit payment is recorded.
Investment Valuation and Income Recognition
Plan investments are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 3, "Fair Value Measurements" for discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan's gains and losses on investments bought and sold as well as held during the year.
Payment of Benefits
Benefit payments are recorded when paid.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amount of assets, liabilities, and changes therein and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates and assumptions.
Expenses
Certain expenses of maintaining the Plan are paid directly by the Company and are excluded from these financial statements. Investment related expenses are included in net appreciation (depreciation) of fair value of investments.
Subsequent Events
Subsequent events are events or transactions that occur after the statement of net assets available for benefits date but before the financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the statement of net assets available for benefits, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the financial statements but arose after that date.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. The Plan is currently evaluating the impact of this new standard on its financial statements.
Note 3: Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy are described as follows:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Plan can access at the measurement date.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, such as:
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a.
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Quoted prices for similar assets or liabilities in active markets;
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b.
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Quoted prices for identical or similar assets or liabilities in inactive markets;
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c.
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Inputs other than quoted prices that are observable for the asset or liability; or
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d.
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2019 and 2018.
Common stock: Valued at the closing price reported on the active market on which the individual security is traded.
Mutual funds: Valued at the quoted market prices of shares held by the Plan at year end. Mutual funds held by the Plan are open-end mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value ("NAV") and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
Common Trust Fund: Valued at NAV. The NAV, as provided by the trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV. Participant transactions (purchases and sales) may occur daily. Were the Plan to initiate a full redemption of the collective trust, the investment adviser reserves the right to temporarily delay withdrawal from the trust in order to ensure that the securities liquidations will be carried out in an orderly business manner.
The following table sets forth by level within the fair value hierarchy a summary of the Plan’s assets measured at fair value on a recurring basis as of December 31, 2019 and 2018 (amounts in thousands):
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December 31,
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2019
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2018
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Investments in the fair value hierarchy (1)
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Mutual funds
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$
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119,946
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$
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94,877
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Common stock of KEMET Corporation
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4,785
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3,278
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Total assets in the fair value hierarchy
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124,731
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98,155
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Investments measured at net asset value (2)
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18,425
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19,261
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Total investments
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$
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143,156
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$
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117,416
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___________________________________________
(1) Mutual funds and common stock of KEMET Corporation have been classified within Level 1 of the fair value hierarchy.
(2) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the statement of net assets available for benefits.
The following table for December 31, 2019 and 2018 sets forth a summary of the Plan's investments reported at NAV as a practical expedient to estimate fair value (amounts in thousands):
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December 31, 2019
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Investment
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Fair Value
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Unfunded commitment
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Redemption frequency
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Redemption notice period
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Common collective trust fund (1)
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$
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18,425
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$
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—
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Daily
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See (1)
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December 31, 2018
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Investment
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Fair Value
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Unfunded commitment
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Redemption frequency
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Redemption notice period
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Common collective trust fund (1)
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$
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19,261
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$
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—
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Daily
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See (1)
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___________________________________________
(1) Investments in this category can be redeemed daily at the current net asset value per share based on the fair value of the underlying assets. Retirement plans invested in the trust are required to provide either twelve or thirty months’ advance written notice prior to redemption of trust units; this required notice period may be shortened or waived.
Note 4: Related Party Transactions
Certain plan investments are shares of mutual funds and a common collective trust fund managed by T. Rowe Price. T. Rowe Price is the trustee as defined by the Plan; and therefore, these transactions qualify as party-in-interest. Fees paid by the Plan to T. Rowe Price for loan administration, record-keeping, redemption fees, and other services were approximately $176,000 and $175,000 for the years ended December 31, 2019 and 2018, respectively. The Company pays for the annual audit and all legal and fiduciary related services related to the Plan. The Plan also has investments in common stock of KEMET Corporation. As described in Note 2, the Plan made direct payments to the third party administrator of approximately $81,000 and $75,000 for the years ended December 31, 2019 and 2018, respectively, which were not covered by revenue sharing. The Company pays directly any other fees related to the Plan's operations.
Note 5: Plan Termination
Although it has not expressed any intent to do so, the Company has the right under the Plan to amend it from time to time, to discontinue its contributions at any time, and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will remain 100% vested in their accounts.
Note 6: Tax Status
The Company has adopted the Plan based on a volume submitter plan document sponsored by Thompson Hine LLP, DBA Plan Document Systems. Thompson Hine LLP, DBA Plan Document Systems has received an opinion letter from the IRS dated March 31, 2014 that states that the form of the volume submitter plan is acceptable under Section 401 of the IRC. The Plan has been amended since the date of the IRS opinion letter on the volume submitter plan. The Company and the plan administrator believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC.
GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal revenue Service. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
Note 7: Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risk. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the 2019 Statement of Net Assets Available for Benefits.
Note 8: Subsequent Events
Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred that required adjustment.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The rapidly developing pandemic has generated significant uncertainty in the global economy and volatility in financial markets. The COVID-19 pandemic has affected and may continue to affect the market price of Plan assets. Due to the ongoing economic uncertainty and volatility caused by COVID-19, the resulting financial impact to the Plan cannot be reasonably estimated.
Following this declaration, the U.S. Federal government passed the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” on March 27, 2020. The CARES Act allows eligible plan participants to request penalty-free distributions of up to $100,000 before December 31, 2020 for qualifying reasons associated with the COVID-19 pandemic, permits increasing the limit for plan loans, permits suspension of loan payments due for up to one year, and permits individuals to stop receiving 2020 required minimum distributions. The Plan has implemented these changes.