MEMC Plans Major Restructuring

Semiconductor and solar power chip maker MEMC Electronic Materials Inc. (WFR - Analyst Report) announced a major restructuring effort last week, aimed at reducing its global workforce and scaling back production capacity. The restructuring would also help in reducing costs and improving cash flows, according to MEMC.

The restructuring initiative will cover all the business segments of MEMC. First, the company announced a 20% cut in its global workforce, representing 1,300 jobs. The Semiconductor Materials segment will lose 41.0% of its personnel strength, while the Solar Materials segment will witness a 47.0% reduction.

Additionally, MEMC announced plans to idle its 6000 MT (metric ton) Merano, Italy polysilicon facility, reduce production capacity at its Portland, Oregon crystal facility and limit capacity at its new Malaysia solar wafering facility to 300 MW (mega watt). Management expects that semi material needs will be fulfilled by its Pasadena facility, and to some extent by external suppliers, if required.

Moreover, MEMC's plan to combine the Solar Materials and SunEdison businesses signals its effort to play down its wafer business, a decision that we see as a positive. In the last quarter, Solar Materials revenue fell 9.6% year over year to $199.4 million and contributed 38.6% to total revenue. The disappointment was mainly due to lower selling prices and an oversupply condition in the solar chip market. Hence, MEMC can now buy solar cells for its Solar Energy business from outside at a cheaper price.

MEMC would record $700.0 million as restructuring charges, $475.0 million as asset impairments charges for manufacturing capacity reduction, $175.0 million for contract termination, and $50.0 million in severance benefits. Other non-cash charges will include $200.0–$400.0 million of goodwill impairment and $225.0–$275.0 million for lower deferred tax asset valuation.

By realigning its asset base and reducing its workforce, MEMC plans to achieve $200 million in annualized cash flow benefits by fiscal 2012, while dealing with the lower demand for its solar chips. However, following weak demand trends, MEMC now expects fourth quarter 2011 non-GAAP revenue in the range of $789.0-$861.0 million and GAAP revenue of between $523.0 million and $585 million. Non-GAAP EPS is expected to be between ($0.05) and $0.10 and GAAP EPS between ($6.38)–($5.20).

We believe that this restructuring could prove a positive for MEMC going forward as the lackluster performance in the Solar Material segment will be offset by the steady performance of Solar Energy. During the third quarter, SunEdison’s project pipeline grew to 3.0 gigawatt, reflecting the fourth consecutive quarter of growth. Moreover, MEMC’s tie ups with Flextronics International Ltd. (FLEX - Snapshot Report) and Jusung Engineering Co. Ltd. to make its solar ventures more cost efficient and profitable, are encouraging.

But MEMC could face headwinds from continuous capacity expansion to produce polysilicon, the raw material for solar chips. In February 2011, MEMC and Samsung announced a joint venture to build a 10,000 MT polysilicon plant in Korea, targeting a high purity polysilicon production start-up in 2013. While this is expected to mitigate capex and lower ramp risk for MEMC, we think that the persistent drop in polysilicon prices would keep the lid on its margins.

Currently, MEMC has a Zacks #3 Rank, implying a short-term Hold recommendation.

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