Stock-Based Compensation

The Company's stock-based compensation plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests.

The major components of stock-based compensation expense are as follows (amounts in thousands):



	Fiscal Year Ended March 31, 2016						Fiscal Year Ended March 31, 2015						Fiscal Year Ended March 31, 2014
	Stock Options		Restricted Stock		LTIPs		Stock Options		Restricted Stock		LTIPs		Stock Options		Restricted Stock		LTIPs
Cost of sales	$	81	$	617	$	720	$	233	$	269	$	1,075	$	421	$	62	$	523
Selling, general and administrative expenses	78		1,352		1,732		306		787		1,547		413		580		712
Research and development	4		23		167		13		3		279		5		—		193
	$	163	$	1,992	$	2,619	$	552	$	1,059	$	2,901	$	839	$	642	$	1,428

Employee Stock Options

As of March 31, 2016, the 2014 Amendment and Restatement of the KEMET Corporation 2011 Omnibus Equity Incentive Plan (the “2011 Incentive Plan”), approved by the Company’s stockholders in 2014, is the only plan the Company has to issue equity based awards to executives and key employees. Upon adoption of the 2011 Incentive Plan, no further awards were permitted to be granted under the Company’s prior plans, including the 1992 Key Employee Stock Option Plan, the 1995 Executive Stock Option Plan, and the 2004 Long-Term Equity Incentive Plan (collectively, the “Prior Plans”).

The 2011 Incentive Plan authorized the grant of up to 7.4 million shares of the Company's Common Stock, comprised of 6.6 million shares under the 2011 Incentive Plan and 0.8 million shares remaining from the Prior Plans and authorizes the Company to provide equity-based compensation in the form of:


•	stock options, including incentive stock options, entitling the optionee to favorable tax treatment under Section 422 of the Code;


•	stock appreciation rights;


•	restricted stock and restricted stock units;


•	other share-based awards; and,


•	performance awards.

Options issued under these plans vest within one to three years and expire ten years from the grant date. For the stock options granted to the Company's Chief Executive Officer on January 27, 2010, 50% vested on June 30, 2014 and 50% vested on June 30, 2015.

If available, the Company issues shares of Common Stock from treasury stock upon exercise of stock options and vesting of restricted stock units. The Company has no plans to purchase additional shares in conjunction with its employee stock option plans in the near future.

Employee stock option activity for fiscal year 2016 is as follows:



	Options (in thousands)		Weighted- Average Exercise Price
Outstanding at March 31, 2015	1,451		$	8.49
Granted	—		—
Exercised	—		—
Forfeited	(20	)	5.45
Expired	(177	)	14.96
Outstanding at March 31, 2016	1,254		7.63
Exercisable at March 31, 2016	1,170		$	7.76
Remaining weighted average contractual life of options exercisable (years)			4.9
Remaining weighted average contractual life of options outstanding (years)			5.1

Amounts included in the following table are in thousands, except weighted average fair value and weighted average exercise price:



	Fiscal Years Ended March 31,
	2016		2015		2014
Weighted average grant-date fair value of non-vested shares	$	2.72	$	2.73	$	3.13
Weighted average grant-date fair value of shares
Granted	—		—		2.71
Vested	2.73		3.50		4.55
Forfeited	2.81		3.25		5.47
Total estimated fair value of shares vested	548		1,000		1,100
Intrinsic value
Stock options exercised	—		—		200
Options outstanding	15
Options currently exercisable	15
Total unrecognized compensation cost, net of estimated forfeitures, non-vested options	46
Weighted-average period of recognition for unrecognized compensation cost (in years)	0.6
Weighted average exercise price of stock options expected to vest	5.89

The Company measures the fair value of each employee stock option grant at the date of grant using a Black-Scholes option pricing model. This model requires the input of assumptions regarding a number of complex and subjective variables that will usually have a significant impact on the fair value estimate.

The following table summarizes the weighted average assumptions used in the Black-Scholes valuation model to value stock option grants:



	Fiscal Years Ended March 31,
	2016	2015	2014
Assumptions:
Expected volatility (1)	N/A	N/A	59.8	%
Risk-free interest rate (2)	N/A	N/A	1.0	%
Expected option lives in years (3)	N/A	N/A	4.0
Dividend yield (4)	N/A	N/A	—

(1) Expected volatility is based on a historical volatility calculation of the Company's stock price.

(2) Risk-free rate is based on the U.S. Treasury yield with a maturity commensurate with the expected term.

(3) Expected term is based on the Company's historical option term which considers the weighted-average vesting, contractual term and vesting schedule.

(4) Dividend yield is based on a set dividend rate of 0.0% as the Company has not paid and does not anticipate paying dividends.

Stock-based compensation expense is calculated based on the number of awards that are ultimately expected to vest, and therefore has been reduced for estimated forfeitures. The Company's estimate of expected forfeitures is based on the Company's actual historical annual forfeiture rate of 2.7%. The estimated forfeiture rate, which is evaluated each balance sheet date throughout the life of the award, provides a time-based adjustment of forfeited shares. The estimated forfeiture rate is reassessed at each balance sheet date and may change based on new facts and circumstances. All option plans provide that options to purchase shares be supported by the Company's authorized but unissued common stock or treasury stock. All restricted stock and performance awards are also supported by the Company's authorized but unissued common stock or treasury stock. The prices of the options granted pursuant to these plans are not less than 100% of the value of the shares on the date of the grant.

Performance Vesting Stock Options

During fiscal year 2006, the Company issued 166,667 performance awards with a weighted-average exercise price of $24.15 to the Chief Executive Officer which entitle him to receive shares of common stock if and when the stock price achieves and maintains certain thresholds. These awards are open ended until they vest and have a ten-year life after vesting or expire on the third year following retirement, whichever comes first. Effective March 4, 2010, 83,333 of these awards were voluntarily relinquished and no concurrent grant, replacement award or other valuable consideration was provided.

Restricted Stock Units ("RSU's")

Restricted stock unit activity for fiscal year 2016 is as follows (amounts in thousands except fair value):



	Shares		Weighted- average Fair Value on Grant Date
Non-vested restricted stock at March 31, 2015	1,000		$	4.57
Granted	748		2.72
Vested	(304	)	4.98
Forfeited	(14	)	5.31
Non-vested restricted stock at March 31, 2016	1,430		$	3.51

The Company grants RSU's to members of the Board of Directors, the Chief Executive Officer and a limited group of executives. In fiscal year 2016, RSU's granted to the Board of Directors vest in one year, RSU's granted to certain officers vest over 3 years and RSU's granted under the key manager stock program vest approximately 33% per year over three years. Once vested, RSU's are converted into restricted shares of common stock, except for RSU's granted to members of the Board of Directors, who can elect to defer settlement of the RSU's to a later date. Restricted shares cannot be sold until 90 days after the Chief Executive Officer, executive, key manager, or member of the Board of Directors, as applicable, resigns from his or her position, or until the KEMET employee achieves the targeted ownership under the Company's stock ownership guidelines, and only to the extent that such ownership exceeds the target. As of March 31, 2016 and 2015, unrecognized compensation costs related to the unvested restricted stock share based compensation arrangements granted were $3.0 million and $3.1 million, respectively. The expense is being recognized over the respective vesting periods.

Long-term Incentive Plans ("LTIP")

Historically the Board of Directors of the Company has approved annual Long Term Incentive Plans which cover a two year performance period. A portion of the LTIPs awarded restricted stock units which vest over the course of three years from the anniversary of the establishment of the plan and a portion of the award is based upon the achievement of an Adjusted EBITDA range for the two-year period. At the time of the award, the individual plans entitle the participants to receive cash or restricted stock units, or a combination of both. The Company assesses the likelihood of meeting the Adjusted EBITDA financial metric on a quarterly basis and adjusts compensation expense to match expectations. Any related liability (for the cash portion of the LTIP) is reflected in the line item "Accrued expenses" on the Consolidated Balance Sheets and any restricted stock commitment is reflected in the line item "Additional paid-in capital" on the Consolidated Balance Sheets. The performance portion of the 2014/2015 LTIP achieved the lower range which resulted in 80 thousand shares issued in fiscal year 2016 with the remaining 73 thousand shares to be issued in fiscal year 2017 (subject to the respective participant's continued employment with KEMET). The performance portion of the 2015/2016 LTIP achieved the lower range which will result in 207 thousand shares being issued in both fiscal years 2017 and 2018 (subject to the respective participant's continued employment with KEMET). Under the performance component of the 2016/2017 LTIP the Company could issue 426 thousand shares if the two-year Adjusted EBITDA measure is achieved as of March 31, 2017 (potentially more shares could be issued if financial results exceed the two-year Adjusted EBITDA target).

The following is the time-based vesting schedule of RSU under each respective LTIP, subject to the respective participant's continued employment with KEMET (shares in thousands):



	2016/2017 (1)	2015/2016	2014/2015	2013/2014
Time-based award vested fiscal year 2016	—	124	139	90
Potential time-based award vesting fiscal year 2017 (2)	187	111	130	—
Potential time-based award vesting fiscal year 2018 (2)	187	114	—	—
Potential time-based award vesting fiscal year 2019 (2)	193	—	—	—

(1) Potential performance-based award assuming the target is achieved.

(2) Subject to participants' continued employment with KEMET.

In the Operating activities section of the Consolidated Statements of Cash Flows, stock-based compensation expense was treated as an adjustment to net income (loss) for fiscal years 2016, 2015 and 2014.