MEMC Electronic Materials Posts a Strong Q2

Aug. 4.11 | About: SunEdison (SUNEQ)

MEMC Electronic Materials Inc. (WFR) has reported second-quarter 2011 adjusted net income per share of 35 cents, strongly beating the Zacks Consensus Estimate of 7 cents. The outperformance was largely attributed to the strong segmental growth. The share price rose 1.86% in after-hours trading.

See the full earnings call transcript

The adjusted figure excludes the impact of restructuring charges but includes amounts related to direct sales and lease-back from the Solar Energy segment.

Revenue

On a GAAP basis, MEMC reported second-quarter revenue of $754.6 million, which shot up 66.3% from $448.3 million in the year-earlier quarter. The quarter’s revenue benefited from the outperformance in Solar Materials and Solar Energy segments, but was partially offset by moderate growth in Semiconductor Materials segment.

Including $22.6 million related to direct sales from the Solar Energy segment and $11.4 million from lease-back transactions, non-GAAP revenue came in at $779.6 million, which shot up 67.7% from the year-ago quarter. These items are not considered as revenue under GAAP.

Segment wise, revenue from Semiconductor Materials increased 10.3% year over year to $275.3 million and was 36.9% of the total revenue. MEMC witnessed decent wafer volume growth, as well as higher average selling prices (ASPs).

Solar Materials revenue shot up 92.3% year over year to $323.1 million and contributed 43.3% to total revenue. The improvement was driven by strong solar wafer volume growth and higher ASP. Moreover, a payout received due to the termination of a supply contract boosted the result.

SunEdison, which is currently the company’s Solar Energy segment, accounted for 19.7% of the total revenue. The segment generated revenue of $147.2 million, up 379.5% year over year. During the quarter, SunEdison’s project pipeline grew to 2.5 giga watt, reflecting third consecutive quarter of growth. MEMC also benefited from the completion of the 300mm semiconductor wafer capacity expansion in Korea, which added roughly 50,000 wafers per month of new production capacity.

Operating Results

On a GAAP basis, gross profit surged 135.5% year over year to $181.1 million. Gross margin increased 710 basis points year over year to 24.3%. On a non-GAAP basis (including direct sales and lease-back transactions from the Solar Energy segment), the quarter’s gross margin was 28.8%, compared to 20.9% in the year-earlier quarter.

On a GAAP basis, operating income was $51.7 million, compared with $3.3 million in the earlier-year quarter. Operating margin on a GAAP basis was 6.9%, compared with 0.7% in the year-ago quarter.

However, excluding restructuring charges and including adjustments from the Solar Energy segment, the non-GAAP operating margin was 10.8%. Marketing and administration expenses increased 29.5% year over year to $94.0 million and research and development expenses rose 89.6% year over year to $21.8 million.

Reported net income was $47.3 million or 21 cents per share, compared with $13.8 million or 6 cents in the comparable prior-year quarter. However, adjusted net income was $79.8 million, or 35 cents.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents and restricted cash of $690.0 million, down from $723.2 million in the previous quarter due to cash used in investing activities. Long-term debt and capital leases were $652.2 million, compared with $576.3 million in the previous quarter.

MEMC generated $198.7 million in operations, compared with cash usage of $225.1 million in the preceding quarter. The improvement in cash flow was attributable to well-planned working capital management. Capital expenditure was $102.7 million, down from $205.4 million in the previous quarter.

Guidance

For fiscal 2011, MEMC continues to expect revenue in the range of $3.3–$3.6 billion (previously $3.4–$3.7 billion) on a non-GAAP basis and $2.7–$3.0 billion (previously $2.8–$3.1 billion) on a GAAP basis. The projected non-GAAP and GAAP earnings per share are in the bands of 80 cents to $1.00 (previously $1.00 to $1.30) and 10 cents to 30 cents (25 cents to 55 cents), respectively. Keeping in mind the ongoing pricing weakness in solar wafer markets and softening of underlying semiconductor demand, management will now take up cost reduction measures across all segments. Moreover, it will be proactive in making more efficient and economic use of the existing assets.

Conclusion

MEMC’s second quarter surpassed the Zacks Consensus Estimate in terms of bottom line. Solar trend was outstanding, despite the ongoing pricing headwinds. Semiconductor materials growth was somewhat rationalized by the slowing demand trend. Based on this trend, MEMC lowered its full-year guidance.

We see MEMC’s solar initiatives as a key driver in the long term. The company recently tied up with key players such as Flextronics International Ltd. (NASDAQ:FLEX) and Jusung Engineering Co. Ltd. to make its solar ventures more cost efficient and profitable.

But the recent cessation of a solar wafer supply agreement with Suntech Power Holding Co. Ltd. (NYSE:STP) was alarming. The deal came to an end only because of a persistent fall in polysilicon prices. The deal price was much higher. Though we are unaware of any exact financial impact, we believe that MEMC’s revenue and margins will get affected.

Moreover, there are risks of cuts in feed-in tariffs, which could affect solar deployments.

Currently, MEMC has a Zacks #5 Rank, implying a short-term Strong Sell recommendation.