The problems with the film & electrolytic unit were brought up under a different topic but this unit's shortfalls are so important that I decided it deserved its own topic. KEM is down over 70% in price from 2 years ago and at least half of this decline stems from film & electrolytic. While sales for the ceramic and tantalum units were relatively flat year over year, film & electrolytic saw a decline of -37.7%. Worse still, they have negative gross margins. Yet this unit, which has seen sales average just $50 million for the past 3 quarters, dominates KEM's capital spending and restructuring costs. I imagine it has also preoccupied management's mindset and created a distraction that results in things like the bungling of the tantalum ore supply that occurred in the March quarter. Management has enough new things on their mind -- Niotan[KEMET Blue Powder], NEC Toikan, Cornel Dubilier[KEMET Foil] and the African mines -- without this unit. For those highly unprofitable sales of
~$50 million, film & electrolytic operates 14 plants spread throughout Europe, Asia and the U.S. with "product innovation centers" in the United Kingdom, Italy, Germany and Sweden.
How much is this loser costing? KEM expects to incur charges of $31 million for the unit's restructuring this year and incur another $22M of capital spending costs for the construction of a new manufacturing facility in Italy. KEM's CEO says he hopes to get the unit to breakeven by the March quarter of 2014. In the past, he has not met his goals. If past history is indicative of the future for this unit, it's insane to stay in film & electrolytic. The CEO sees this unit as a major part of the future for KEM because it addresses the alternative energy and green technology markets but if it's the future, why did sales fall off a cliff last year and so far this year? I believe it was the acquisitions in 2007 to get into film & electrolytic that brought KEM to the utter brink of insolvency.
Alternative is getting close, you may be right that it isn't close enough but it clearly is getting pushed harder. It may be just another head fake but the market is also telling you that solar is becoming a reality. There definitely will be more BK but there is a significant number of solar companies where it would have been real nice to have bought in a year or so ago. Triples, doubles, and outright home runs all over the place. Wouldn't be bad neighborhood to be associated with.
Great job on the post. I think they are trying to save the film and electrolytic division for their customers. It would be like going into a hamburger joint trying to buy a cheeseburger and a regular hamburger. If the restaurant told you that you could get the cheeseburger there, but that you would have to go to another restaurant for the hamburger, I doubt you would go back there next time you wanted to buy a meal. KEM would like to keep themselves a one stop shop and keep customers able to buy all the various things they need in one place. I think that is why they are trying to save the DOG film and Electrolytic business.