MEMC Electronic Materials Inc. (WFR) reported first-quarter 2011 adjusted net income per share of 9 cents, which missed the Zacks Consensus Estimate of 12 cents. Overall, MEMC’s results were negatively impacted by Japan disruptions and some legal settlements. However, the share price rose 1.67% in after-hours trading, presumably on strong performance in the Solar vertical.
The adjusted figure excludes the impact of restructuring charges and warrant adjustments but includes amounts related to direct sales and lease-back from the Solar Energy segment.
On a GAAP basis, MEMC reported first-quarter revenues of $735.9 million, which shot up 68.1% from $437.7 million in the year-earlier quarter and came in above the Zacks Consensus Estimate of $625.0 million. The quarter’s revenues benefited from outperformance in the Solar Materials and Solar Energy segments.
Including $36.4 million related to direct sales from the Solar Energy segment and $60.3 million from lease-back transactions, non-GAAP revenue came in at $832.6 million, which shot up 84.7% from the year-ago quarter. These items are not considered as revenue under GAAP.
Segment-wise, revenue from Semiconductor Materials increased 14.7% year over year to $251.5 million and was 34.2% of the total revenue. MEMC witnessed strong wafer volume growth, as well as higher average selling prices (ASPs).
Solar Materials revenue shot up 106.9% year over year to $326.3 million and contributed 44.3% to the total revenue. The improvement was driven by strong solar wafer volume growth and higher ASP.
SunEdison, which is currently the company’s Solar Energy segment, accounted for 21.5% of the total revenue. The segment generated revenue of $158.1 million, up 160.5% year over year. The sale of a 20.4MW project in Campania, Italy to the First Reserve for a total sum of $254.8 million explains the segment’s outperformance.
Operating Results
On a GAAP basis, gross profit surged 92.2% year over year to $114.0 million. Gross margin increased 200 basis points year over year to 15.5%.
Production efficiencies and a favorable pricing environment were partially offset by manufacturing disruptions due to the earthquake in Japan. On a non-GAAP basis (including direct sales and lease-back transactions from the Solar Energy segment), gross margin in the quarter stood at 25.3%, compared to 16.0% in the year-earlier quarter.
On a GAAP basis, operating loss was $0.2 million in the first quarter, compared to $15.3 million in the earlier-year quarter. Operating margin on a GAAP basis was -0.03%, compared to -3.5% in the year-ago quarter.
However, excluding restructuring charges and including adjustments from the Solar Energy segment, the non-GAAP operating margin was 4.8%. Marketing and administration expenses increased 49.5% year over year to $93.0 million and research and development expenses rose 89.2% year over year to $21.0 million.
Reported net loss was $4.5 million or 2 cents per share, compared to $9.6 million or 4 cents in the comparable prior-year quarter. However, adjusted net income was $20.1 million, or 9 cents.
Balance Sheet & Cash Flow
MEMC ended the quarter with cash, cash equivalents and restricted cash of $723.2 million, down from $751.2 million in the previous quarter due to excessive cash used in both operating and investing activities. However, the decline was partially offset by the cash generated in financing activities.
Receivables in the quarter were $401.3 million, up from $296.0 million in the prior quarter. Inventories were $275.7 million, compared to $214.6 million in the previous quarter.
MEMC used up $225.1 million in operations, compared to cash generation of $286.6 million in the preceding quarter. The deterioration in cash flow was due to lower net income as well as negative working capital.
Capital expenditure was $205.4 million, up from $115.1 million in the previous quarter, driven by investments in 300 mm wafer production, solar wafer manufacturing and projects for productivity improvements.
Long-term debt and capital leases were $576.3 million, compared to $682.7 million in the previous quarter. During the quarter, the company raised $550 million in a senior notes offering, to raise funds for general corporate purposes, capital expenditures, joint venture and other investments, and working capital, primarily for the construction of solar power projects.
Guidance
For fiscal 2011, MEMC continues to expect revenue in the range of $3.4–$3.7 billion on a non-GAAP basis and $2.8–$3.1 billion on a GAAP basis. The projected non-GAAP and GAAP earnings are in the bands of $1.00 to $1.30 and 25 cents to 55 cents, respectively. Management further commented that despite the emergence of unfavorable events such as legal verdicts and the Japan earthquake, they will remain focused on strategic business objectives, invest in growth and drive productivity in the core businesses.
Conclusion
MEMC’s first quarter missed the Zacks Consensus Estimates in terms of our bottom-line expectation but surpassed on the top line. Though the company has maintained a positive trend with respect to year-over-year comparisons, we observed a significant sequential decline, which was primarily driven by the temporary shutdown of the Utsunomiya facility following the earthquake in Japan. We think the loss could impact the coming quarter and hence the company must have provided a conservative guidance.
We remain positive on the recent 50-50 joint venture between the company and JA Solar Holdings Co. Ltd. (JASO). The two companies have agreed to build and operate a solar cell production facility in China.
Though the company’s solar prospects are growing, given Solaicx integration and solar projects in the pipeline, the analysts foresee an oversupply situation in the polysilicon market. This could pull down ASPs as well as margins. Moreover, there are risks of cuts in feed-in-tariffs, which could affect solar deployments.
Currently, MEMC has a Zacks #4 Rank, which indicates a short-term Sell recommendation. However, the company has a long-term Neutral rating.
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