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MEMC Electronic Materials Inc. reported third-quarter 2012 adjusted earnings per share of 30 cents, which outperformed the Zacks Consensus Estimate of 12 cents loss per share. Shares rose 4.18% in after-hours.

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 third-quarter revenues of $601.6 million, up 16.5% from $516.2 million in the year-earlier quarter. The reported revenue surpassed the Zacks Consensus Estimate of $473.0 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 $708.9 million, which decreased 17.5% from the year-ago quarter.

Segment wise, revenue from Semiconductor Materials fell 10.5% year over year to $240.3 million and was 39.9% 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 sequential growth based on higher volume and relatively flat pricing.

The Solar Energy segment (which now includes Solar Materials) accounted for 60.1% of total revenue. The segment generated revenue of $361.3 million, up 45.8% year over year. The improvement was driven by higher project sales, partially offset by lower solar wafer pricing and volume.

Solar Energy segment sold 48 megawatts (MW) of solar energy systems, compared with 3MW in the year-ago quarter. Projects interconnected during the third quarter represented 47 MW in 18 projects. MEMC also reported that construction of 117 MW of systems is underway. The project pipeline remained unchanged year over year at 2.9 gigawatt.

Operating Results

Reported gross profit was $86.9 million, up from $58.6 million in the year-ago quarter. Gross margin was 14.4%, compared with 11.4% in the year-ago quarter. The margin expansion was due to higher charges and lower pricing, partially offset by cost control initiatives.

Operating income was $58.9 million, compared with operating loss of $103.8 million in the year-earlier quarter. Operating margin was 9.8%, compared with (20.1%) in the year-ago quarter.

Total operating expenses decreased 82.8% from the year-ago quarter with marketing and administration expenses falling 17.8% and research and development expenses decreasing 22.0%.

Reported net income was $37.0 million or 16 cents per share, compared with net loss of $94.4 million or (41) cents in the prior-year quarter. However, adjusted earnings per share (EPS) were 30 cents, up 236.4% from the loss per share of 22 cents in the year-ago quarter.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents and restricted cash of $694.0 million, up from $501.7 million in the previous quarter. Long-term debt was $765.5 million, up from $569.1 million in the previous quarter. Debt increased as a result of generating funds for upcoming solar projects.

MEMC generated $3.0 million cash in operations, significantly down from $100.3 million in the preceding quarter. Capital expenditure was $24.0 million, down from $36.3 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 fourth quarter.

For the fourth quarter, management expects Semiconductor Materials segment revenue to be down 4.0–11.0% sequentially. Solar Energy systems sales is expected to range between 90 MW and 120 MW (pricing per watt to be roughly $3.50), which will be higher than 48 MW sold during the third quarter. Furthermore, MEMC expects operating expenses of less than $90.0 million and capital expenditure of less than $35.0 million in the fourth quarter.

Conclusion

MEMC posted a decent third quarter with both the top and bottom lines surpassing the Zacks Consensus Estimates. Cash balance improved but cash from operating activities decreased. Solar systems sales were higher but could not match the prior-quarter level. Considering the current market trend, it is difficult to predict whether the Solar Energy segment will sustain its growth momentum. The company itself is uncertain about the environment, which can be easily inferred from a weak fourth quarter guidance.

However, we are encouraged by management’s commentary of expecting a better demand/supply situation in the semiconductor market in 2013. Of course, expense control will also provide some support.

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. and lack of new long-term supply agreements.

Currently, MEMC has a Zacks #4 Rank, implying a short-term Sell rating.

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