MEMC Beats Estimates on Solar Sales

MEMC Electronic Materials Inc. ( WFR - Analyst Report ) reported second-quarter 2012 adjusted earnings per share of 14 cents, whichbeat the Zacks Consensus Estimate of zero cents. The earnings beat was mostly driven by solid performance in the Solar Energy segment. Shares rose 1.32% after hours and 10.68% in the day’s trade.

The adjusted figure excludes the impact of direct sales and lease-back from the Solar Energy segment as well as some tax benefits, and also excludes restructuring and impairment charges.

Revenues

On a GAAP basis, MEMC reported second-quarter revenues of $808.4 million, up 8.4% from $745.6 million in the year-earlier quarter. The reported revenue surpassed the Zacks Consensus Estimate of $647.0 million. Weak contribution from Semiconductor Materials was more than offset by the strong performance of the Solar Energy segment.

Including direct sales from the Solar Energy segment and lease-back transactions, non-GAAP revenue came in at $933.4 million, which increased 19.7% from the year-ago quarter.

Segment wise, revenue from Semiconductor Materials fell 15.5% year over year to $232.7 million and was 28.8% of total revenue. MEMC witnessed lower wafer volume growth and average selling prices (ASPs). The semiconductor industry is going through a cyclical downturn and hence softer demand for the same adversely affected shipments and pricing. Nevertheless, the segment witnessed a sequential growth based on higher volume.

The Solar Energy segment (which now includes Solar Materials) accounted for 71.2% of total revenue. The segment generated revenue of $575.7 million, up 22.4% year over year. The improvement was driven by higher project sales, partially offset by lower solar wafer pricing and volume.

Solar Energy segment sold 169 megawatts (MW) of solar energy systems, compared with 28MW in the year-ago quarter. System sales in Europe were encouraging amidst prevailing debt issues. Projects interconnected during the second quarter represented 87 MW in 24 projects. MEMC also reported that construction of 104 MW of systems is underway. The project pipeline remained unchanged from the prior quarter at 2.9 gigawatt.

Operating Results

Reported gross profit was $106.4 million, down from $181.1 million in the year-ago quarter. Gross margin was 13.2%, compared with 24.3% in the year-ago quarter. The margin contraction was due to higher charges and lower pricing, partially offset by cost control initiatives.

Operating income was $0.7 million, compared with $51.7 million in the earlier-year quarter. Operating margin was 0.1%, compared with 6.9% in the year-ago quarter.

Total operating expenses decreased 18.3% from the year-ago quarter with marketing and administration expenses falling 8.9% and research and development expenses decreasing 16.1%. One-time items recorded during the quarter were negligible.

Reported net loss was $61.3 million or 27 cents per share, compared to net income of $47.3 million or 20 cents in the prior-year quarter. However, adjusted earnings per share (EPS) were 14 cents per share.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents and restricted cash of $501.7 million, up from $471.3 million in the previous quarter, primarily on the back of improved sales of solar energy projects and cessation of financings needed for solar projects. Long-term debt was $569.1 million, slightly down from $570.3 million in the previous quarter.

MEMC generated $100.3 million cash in operations, compared to ($386.5) million in the preceding quarter. The improvement was attributable to proceeds from solar systems sales. Capital expenditure was $36.3 million, down from $40.0 million in the previous quarter.

Guidance

Keeping in mind the ongoing uncertainty in the semiconductor and solar markets, MEMC refrained from providing any quantitative revenue and EPS guidance for the third quarter and fiscal 2012.

For the third quarter, management expects Semiconductor Materials segment revenue to grow 3.0–8.0% sequentially. Solar Energy systems sales is expected to range between 40 MW and 50 MW (pricing per watt to be roughly $3.50), which will be significantly lower than 169 MW sold during the second quarter. Furthermore, MEMC expects operating expenses of less than $100.0 million and capital expenditure of less than $30.0 million in the third quarter.

For the second half of fiscal 2012, MEMC expects consolidated revenue to be higher than the first half.

For fiscal 2012, management expects Semiconductor Materials segment revenue to fall 2.0–5.0% from the prior-year level. Solar Energy systems sales are expected to be higher than 400 MW (pricing per watt to be roughly $3.50). Furthermore, MEMC expects operating expenses of less than $385.0 million and capital expenditure of less than $150.0 million in fiscal 2012.

Conclusion

MEMC posted an impressive second quarter with both the top and bottom lines surpassing the Zacks Consensus Estimates. Both cash balance and cash from operating activities improved. But the improvement was solely based on higher solar systems sales. Considering the current market trend, it is difficult to predict whether the Solar Energy segment will sustain its growth momentum. The company itself seems dubious about the environment, which can be easily inferred from a weak third quarter guidance.

However, we are encouraged by management’s commentary of expecting a better demand/supply situation in the semiconductor market. Of course, expense control will also provide some support.

This apart, we noticed that SunEdison, MEMC’s solar energy unit, completed the sale of a 98MW project worth $220.0 million in Europe. Though solar system sales trajectory looks impressive, we are concerned due to cessation of MEMC’s long-term solar wafer supply agreement with Suntech Power Holding Co. Ltd. ( STP - Analyst Report ) and lack of new long-term supply agreements.

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