LDK Solar: Consistent Cash Flow, Unresolved Working Capital Deficit

| About: LDK Solar (LDK)

Positive operating cash flow for the fourth consecutive quarter is a positive sign for LDS Solar (NYSE:LDK) (see conference call transcript here). The company continued to operate with significant debt and a working capital deficit at the end of the third quarter 2010. The company’s efforts to quell the doubts about continuing to operate indefinitely are unclear. The company formulated a plan to relieve its liquidity problem, but at the end of the third quarter 2010, the working capital deficit had worsened again. The company indicated they are making progress on refinancing debt and indicated the problem will be resolved by April 2011 at the latest. We believe the consistent high short interest relative to its peers illustrates the skepticism surrounding the company’s share price.

The company saw improvements in its rankings on operating cash flow, free cash flow and the cash conversion cycle. Operating cash flow improved to 4th from 24th and free cash flow improved to 23rd from 35th. Gross margin declined to 20th from 17th in the prior quarter. Heavy reliance on debt continues to leave the company at the bottom for debt-to-equity.

The company does not provide statements of cash flow in its quarterly Form 6-K filings. This seems to be the norm among fellow Form 6-K filers. The company said operating cash flow for the third quarter of 2010 was $140 million and depreciation was $40.1 million. No other operating cash flow details were disclosed by the company. Based on our calculations, operating cash flow has been in excess of net income for four of the past eight quarters and has exceeded the industry average for this metric three of the past eight quarters. On a last-12 months basis, operating cash flow has exceeded net income three times in the past eight quarters and has been above the industry average in three of the past eight quarters. We believe a ratio of greater than one is an indication of good earnings quality.

Significant debt has contributed to a working capital deficit and raised questions regarding the ability of LDK Solar to continue as a going concern. Debt-to-equity has been above 1.0 for the past eight quarters and has been as high as 3.26 in the second quarter 2009. The company’s debt-to-equity has surpassed the industry average in each of the last eight quarters with ease. Conversely, the high amount of debt has pushed the cash-to-debt ratio to very low levels. It has failed to reach above 0.26 in any of the past eight quarters and has not exceeded the industry average.

At the end of the each quarter of 2010 and year-end 2009, the company had a working capital deficit, meaning its current liabilities exceeded its current assets. As of Sept. 30, 2010, the company had short-term borrowings and the current portion of long-term bank borrowings totaling $1.2 billion and long-term bank borrowings of $640.0 million. During the third quarter earnings conference call the company said it is looking into several different proposals to resolve outstanding debt issues. It expects to resolve the issues by April of 2011 at the latest.

Additional analysis of LDK Solar and its peer group can be found on here.

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