K-V Pharmaceutical. Need advice/help!!
This post will be on the A share, KV-A. As of Friday 5/8/09, it closed at $1.60.
Here are some statistics I looked at:
Book value: $9.38
10 year average PE: $0.72 <== all 10 years were positive (impressive)
Generally healthy numbers.
At first glance, the numbers are excellent. The only real problem I saw was $266.9M of long-term debt. Well, the balance sheet's also a year old, but what can I do? Anyway, the long-term debt is pretty staggering.
I found the following in their 2008 annual report:
"In May 2003, we issued $200.0 million principal amount of Notes that are convertible, under certain circumstances, into shares of our Class A Common Stock at an initial conversion price of $23.01 per share. The Notes bear interest at a rate of 2.50% and mature on May 16, 2033. "
Later, it says:
"Holders may require us to repurchase all or a portion of their Notes on May 16, 2008, 2013, 2018, 2023, 2028, or upon a change in control, as defined in the indenture governing the Notes, at 100% of the principal amount of the Notes, plus accrued and unpaid interest to the date of repurchase, payable in cash."
The only thing holding me back from considering KV-A in real life a few weeks ago was the long-term debt. However, I'd like to note one thing:On their March 2008 balance sheet, there was $202M short-term portion of long-term debt. In other words, the $202M appeared in current liabilities for that quarter.
On their June 2008 balance sheet, the $200+M moved back to long-term liabilities. As I showed from the annual report above, the March 2008 balance sheet reflected the May 16, 2008 date in which holders of the convertible Notes could demand repurchase from the company. This means that other than a lot of interest, the principal from these Notes cannot be forced back upon the company until May 16, 2013.
The other problem is that the company's financial statements have only come out up to June 2008. This is not as big a problem, if the company proves to be as profitable as it has been in the past on average. The long-term debt is really the only thing I can see that would bring this company down. Otherwise, it's a profitable company with good numbers.
The long-term debt won't be due till 2013 at the earliest, and the holders of the convertible bonds may not even demand the principal back. As far as the common stock conversion goes, the stock would have to above $23.01 for the Note holders to make profit on their conversion. That means the only likely scenarios are that either they continue to hold the Notes, or that they demand principal back.
Am I missing something here? Am I understanding their convertible bonds incorrectly? Unless there's a major change in management, the long-term debt will not hurt. This seems to me like a decent speculative play as part of a diversified portfolio.