Solar Cell IPO: Highlights from Photowatt's IPO Filing

Includes: PHWT, SPWR, STP
by: Evelyn Rubin

Photowatt, a Canadian developer of solar cells and modules, filed last week to go public on Nasdaq and the Toronto Stock Exchange. The company is being spun out of ATS Automation Tooling Systems (public in Toronto under the ticker ATA). Highlights from the company's filing with the SEC:

Proposed Ticker: (PHWT)

BMO Capital Markets, UBS

Maximum Offering: $250 million

Company Description:

We design, manufacture and sell photovoltaic products, commonly referred to as solar cells and modules. Solar cells and modules provide clean, renewable energy by converting sunlight into electricity through a process known as the photovoltaic effect. We operate through two segments, Photowatt International and Spheral Solar.

Photowatt International designs, manufactures and sells solar modules and installation kits, and provides solar power system design and other value-added services, principally in Western Europe. Photowatt International also manufactures wafers and solar cells, primarily for use in manufacturing its modules and for sale to third parties on an opportunistic basis. Most of Photowatt International’s products are manufactured in our Photowatt France facility outside of Lyon, France. [...]

Spheral Solar is developing a technology for a light weight, flexible crystalline solar module designed to compete with both conventional crystalline and thin film technologies. Our Spheral Solar technology incorporates thousands of tiny silicon spheres, bonded between thin, flexible aluminum foil substrates to form solar cells. We believe that our Spheral Solar technology, if we are able to successfully develop it, would have advantages over conventional crystalline solar cells, including better aesthetics, greater durability, less use of silicon, lighter weight, multiple available colors, more applications and physical flexibility.

Financial Highlights:
All of the company's revenue to date has originated from its Photowatt International activity, and almost entirely from the sale of solar cells and modules. In 2006, a small portion of the company's revenue was from kits and project management services; they expect this proportion to increase over time. The company's customers are highly concentrated, with three customers accounting for 46% of revenue in 2006. Fiscal 2006 (end of March) revenues were $121.9 million, an 8% increase over fiscal 2005. There was also a geographic shift in the period: Germany comprised 77% of 20005 sales and 46% of 2006 sales, whereas the US and Spain increased from 5% and 6% to 14% and 17% of sales in 2005 and 2006 respectively.

Cost of revenue consists of material purchase costs and direct labor costs, as well as factory overhead. In 2006, cost of revenue, which was almost entirely derived from Photowatt International, was $90.0 million, and represented 74% of revenue, compared to 80% in fiscal 2005. R&D revenue grew from $678k in 2005 to $9.25 million in 2006, largely attributed to the Spheral Solar segment. Additionally, the company recorded an asset impairment charge of $94.3 million against "Spheral Solar technology deferred development costs and other long-lived assets" in the fourth quarter of fiscal 2006.

Operating loss in fiscal 2006 was $91.1 million; in 2005, the company had operating earnings of $10.5 million. The main cause of this difference was the inclusion of Spheral Solar's loss in fiscal 2006 ($110.2 million), resulting largely from the asset impairment charge mentioned above. For Photowatt International, earnings from operations grew 81% in 2006 over 2005 to $19.8 million.

Use of Proceeds:
The IPO proceeds will fund, in part, an inter-company loan to ATS, as well as an investment in additional manufacturing capacity.

The company lists as competitors Sharp, Q-Cells (traded in Frankfurt), Kyocera (NYSE:KYO), Sanyo, Mitsubishi, Schott, Suntech (NYSE:STP), Sunpower (NASDAQ:SPWR) and BP Solar (a BP subsidiary).

Management & Employees:
Of the company's 711 employees, 604 are located in France, some of which belong to the French CFDT union. Mr. Silvano Ghirardi, who joined the company in 2005, is the company's president CEO:

From 2002-2005, Mr. Ghirardi was the president and chief operating officer of Hoya Opthalmics, the second largest public global manufacturer of prescription spectacle lenses. From 2000-2002, Mr. Ghirardi was the president and chief executive officer of Sartorius NA, a biotechnology and scientific instruments company. From 1996-2000, Mr. Ghirardi was the president and chief executive officer of 2C Optics Inc., a start-up company funded by venture capital, Dow Chemical, PPG Industries and Rodenstock and other industry participants for the purpose of producing plastic spectacle prescriptions, on demand, utilizing proprietary technology. Before that, Mr. Ghirardi held a variety of senior management positions at Ciba Vision, a business unit of Novartis AG focused on lenses, lens care and opthalmic pharmaceuticals, joining as an early founder in 1981, until 1995-1996 as president.

Also Of Interest:
  • Royalty agreement: The company received funding from Technology Partnerships Canada [TPC], in the order of $30 million Canadian. The company is obligated to pay royalties of 1.8% of Spheral Solar revenues once they exceed $20 million Canadian for a period of 10 years.
  • License agreement: The company acquired technology for Spheral Solar in 1997, and has a license obligation for use of the technology (2% of a portion of Spheral Solar revenues) through 2017.