Kemet's Collapse: Default Danger Looms

| About: Kemet Corporation (KEM)

Kemet (NYSE:KEM) shares have lost more than half their value today, after the company reported an ugly financial report for its fiscal first quarter June 30, announced plans to cut 12% of its staff and warned that it faces a potential debt default.

For the quarter
, Kemet posted revenue of $242.8 million, slightly below the Street consensus of $245.2 million. The bigger issue: the company recorded a loss of $187.3 million, or $2.33 a share. That includes an assortment of special charges, including a $152.6 million in impairment charge, as the company reduced the carrying value of both its ceramic business group and its electrolytic business group. The company also took a $16.5 million hit for inventory write downs and variances, a $4.1 million charge for equipment relocation and integration costs, and a $4.9 million charge for severance expenses. The various charges together totaled $2.22 a share; without them the company lost 11 cents a share. The Street had been looking for a profit of two cents a share.

In a statement, CEO Per-Olof Loof said that results were “below our expectations and disappointing. Loof said that results were hurt by higher energy costs, pricing pressure in Asian markets and general economic weakness. In response, the company is cutting 640 jobs, about 200 of those in the U.S., and the rest in Europe, Mexico and Asia.

The company, which makes manufactures tantalum, ceramic, film, electrolytic, paper and aluminum capacitors, also said that as a result of the impairment charge, it had not been in compliance with the minimum net worth covenant in its $40 million of 6.66% senior notes. However, Kemet said it entered an agreement with the holders of those notes to reduce the minimum consolidated net worth through August 31, and is now again compliant. But it also said Kemet is looking for alternative to restructure or replace those notes.

Kemet notes that if it cannot obtain funds to redeem the Senior Notes, or otherwise restructure them or get an additional waiver, the holders would be able to declare them in default. And that would create a default on the company’s $152 million credit facility with UniCredit. And if the company failed to pay either of those back when due, the holders of the company’s $175 million of convertible senior notes could demand repayment. And here’s the thing: At June 30, they only had $35.5 million in cash. You don’t need to be a financial genius to see that the math doesn’t work in Kemet’s favor.

Ergo, KEM shares today are down $1.61, or 54%, to $1.39.