MEMC Electronic Materials, Inc.(NYSE: WFR) announced financial results for the fourth quarter and full year 2011 that reflected the continued challenging environment in both the semiconductor and solar markets.
Revenue in the company's Semiconductor Materials business was lower sequentially and year-over-year as softer demand negatively impacted shipments and pricing. Solar Materials revenue declined sharply both sequentially and year-over-year due to significantly weaker wafer pricing and volumes. For the fourth quarter 2011, SunEdison recognized non-GAAP revenue from solar energy systems representing 109 MW, up 33% sequentially and up 32% year-over-year. Despite interconnecting 161 MW in the 2011 fourth quarter, SunEdison's project pipeline remained flat versus the prior quarter at 3.0 GW, but was up over 100% year-over-year.
"During the fourth quarter and in the midst of a semiconductor market cyclical downturn and what we view as a prolonged and severe solar market dislocation, we initiated a broad restructuring to improve our overall competitive position," said MEMC's Chief Executive Officer Ahmad Chatila. "While the semiconductor market remains soft, we see signs of an improved second half of 2012. As the market recovers, we believe our productivity efforts and 300mm expansion will pay dividends. In the restructuring, we have sized the Solar Materials business to supply our downstream pipeline with low cost, high quality solar materials products. Although solar interconnections roughly doubled in 2011 and we expect strong growth in 2012, uncertainty regarding feed-in-tariffs and credit markets in Europe will remain challenging in 2012. Our operations and pipeline in the most promising, stable markets, and our brand recognition position us for long-term growth in solar. Through productivity and restructuring efforts, we will be positioned for both semiconductor, and eventually solar, market upturns."
Revenue
GAAP revenue for the fourth quarter was $717.8 million, representing a decline of 16% from $850.1 million in the fourth quarter of 2010 and an increase of 39% from $516.2 million in the third quarter of 2011. The year-over-year decline was due to lower semiconductor and solar wafer volume and pricing, partially offset by higher solar energy system direct sales. The sequential increase was primarily driven by higher solar energy system sales in the fourth quarter which included $142.6 million, net of $27.4 million of profit deferrals, of solar energy system sales recognized as non-GAAP revenue in the third quarter which were recognized as GAAP revenue in the fourth quarter, partially offset by weaker semiconductor wafer volume and pricing and significantly weaker solar wafer volume and pricing.
Non-GAAP revenue for the quarter was $772.1 million, a decrease of 19% from $949.5 million in the 2010 fourth quarter and a decrease of 10% from $859.0 million in the 2011 third quarter. The year-over-year and sequential decline were due to lower semiconductor and solar wafer volume and pricing, partially offset by higher solar energy system sales. Non-GAAP revenue for the 2011 fourth quarter includes $54.3 million related to real estate and sale-leaseback transactions that will be recognized in earnings under GAAP in the future, primarily beyond 2012. See the financial statement tables at the end of this press release for a reconciliation of all GAAP to non-GAAP financial measures included herein.
For the full year 2011, GAAP net sales were $2,715.5 million, an increase of 21% from $2,239.2 million in 2010, largely driven by increased sales at SunEdison. Non-GAAP net sales were $3,243.3 million in 2011, compared to $2,416.0 million in 2010 and include $527.8 million of adjustments for deferrals required under GAAP real estate and lease accounting.
Gross Margin
GAAP gross margin in the 2011 fourth quarter was (8.2%), compared to 13.6% in the fourth quarter of 2010 and 11.4% in the 2011 third quarter. Non-GAAP gross margin was (1.0%) in the 2011 fourth quarter, compared to 19.3% in the fourth quarter of 2010 and 14.5% in the 2011 third quarter. GAAP and non-GAAP gross margin were negatively affected sequentially and year-over-year by significantly weaker solar wafer pricing, lower semiconductor wafer pricing, less favorable SunEdison project mix and higher operating expenses, and charges related to restructuring, including inventory charges of $97 million.
Net Income (Loss)
GAAP net loss for the 2011 fourth quarter was $1,484.4 million, or ($6.44) per share, compared to a net loss of $94.4 million, or ($0.41) per share, in the 2011 third quarter and net income of $12.6 million, or $0.05 per share, in the 2010 fourth quarter. Fourth quarter 2011 net loss includes charges of $1,401.2 million, due to restructuring, impairments and other charges, as described below.
Non-GAAP net loss for the 2011 fourth quarter was $48.9 million, or ($0.21) per share. Non-GAAP net loss includes the company's customary adjustments related to its SunEdison project development business, and excludes restructuring, impairment and other charges. Excluding the largely non-cash adverse tax effects associated with world-wide income distribution (which tax effects impacted both GAAP and non-GAAP EPS), non-GAAP EPS for the 2011 fourth quarter was ($0.09).
Cash Flow
During the 2011 fourth quarter, cash used in operations was $176.6 million and free cash flow use was $164.3 million. Negative operating and free cash flow were primarily driven by increased working capital necessary to fund the construction of solar energy projects, including those held for sale. See the reconciliation of free cash flow in the financial statement tables at the end of this press release.
Capital expenditures were $58.5 million in the 2011 fourth quarter, down from $85.9 million in the 2011 third quarter. For the full year 2011, capital spending was $452.5 million. The majority of this spend occurred in the first half of 2011 and was related to the Kuching, Malaysia solar wafering facility and the 300mm semiconductor capacity expansion in Korea. The company redirected its focus towards maintenance spending and reduced capital commitments in its Semiconductor Materials and Solar Materials businesses during the 2011 fourth quarter. The company expects 2012 capital expenditures to be less than $175 million.
Construction of solar energy systems of $127.9 million in the 2011 fourth quarter included solar energy systems currently classified as owned and carried as fixed assets. The majority of these projects are expected to become sale-leaseback transactions in which the assets are financed with non-recourse debt. Projects expected to result in direct sales are held in inventory, thus impacting operating cash flows as noted above.
MEMC ended the 2011 fourth quarter with cash and cash equivalents of $586 million, a decrease of $200 million from the prior quarter, primarily due to the delayed sales of solar energy projects. The company is actively engaged in implementing programs to manage its liquidity and capital resources and expects to maintain adequate liquidity during 2012.
Following is additional detail on fourth quarter 2011 results by segment.
Semiconductor Materials
Semiconductor Materials GAAP revenue was $227.9 million, a decrease of 15% compared to the 2011 third quarter and a decrease of 13% compared to the 2010 fourth quarter. The sequential decrease was driven by lower volume in smaller diameter wafers and to a lesser extent, moderately weaker prices across all diameters. The year-over-year decline was primarily due to lower volume and pricing for the company's smaller diameter wafers, partially offset by higher volume but weaker prices for large diameter wafers.
Segment operating loss was $61.4 million, compared to operating profit of $18.5 million in the 2011 third quarter, and $25.6 million in the 2010 fourth quarter. Fourth quarter 2011 segment operating loss included $62.2 million of restructuring, impairment and other charges.
Solar Materials
Solar Materials GAAP revenue was $108.6 million, a 46% decrease from the 2011 third quarter and 61% decrease from the 2010 fourth quarter. The sequential and year-over-year declines were due to significantly weaker solar wafer volume and pricing. Going forward, solar wafer sales to external parties are expected to decline to minimal levels due to the company's strategic shift to primarily supplying wafers for internal consumption by SunEdison, as well as the previously announced global restructuring, including the expected closure of the polysilicon manufacturing facility in Merano, Italy and the capacity reductions in the Portland, Oregon and Kuching, Malaysia facilities. As such, the Solar Materials segment was combined with SunEdison and will be reported as one Solar Energy business unit effective January 1, 2012.
Segment operating loss was $729.0 million, compared to an operating loss of $65.3 million in the 2011 third quarter, and operating profit of $38.1 million in the 2010 fourth quarter. Fourth quarter 2011 segment operating loss included restructuring, impairment and other charges of $721.5 million.
Solar Energy (SunEdison)
SunEdison GAAP revenue was $381.3 million, compared to revenue of $48.4 million in the 2011 third quarter, and $307.6 million in the 2010 fourth quarter. Approximately $142.6 million of the sequential increase was due to several large solar projects that were sold and included in non-GAAP revenue in the 2011 third quarter, but could not be recognized as GAAP revenue under real estate accounting requirements until the 2011 fourth quarter due to the expiration of certain indemnifications, obligations and guarantees customary for such system sales. Solar energy projects representing 102 MW were recognized under segment GAAP revenue in the 2011 fourth quarter, compared to 73 MW in the 2010 fourth quarter.
Segment non-GAAP revenue for the 2011 fourth quarter was $435.6 million, compared to $391.2 million in the 2011 third quarter and $407.0 million in the 2010 fourth quarter. Fourth quarter 2011 non-GAAP revenue includes net adjustments of $54.3 million related to direct sale and sale-leaseback transactions. Solar projects representing 109 MW were recognized under segment non-GAAP revenue, of which 67 MW were direct sales and 42 MW were sale-leaseback transactions.
Solar projects interconnected during the 2011 fourth quarter represented 161 MW, including 99 MW of direct sales projects, 45 MW of sale-leaseback projects, and 17 MW of debt financed projects. We intend to sell approximately 35 MW of the remaining direct sale projects by the middle of 2012.
For the full year 2011, projects sold and included in non-GAAP revenue totaled 274 MW, of which 181 MW were direct sales and 93 MW were sale-leaseback transactions. Solar projects interconnected during the full year 2011 were 296 MW, of which 181 MW were direct sales, 95 MW were sale-leaseback transactions and 20 MW were debt financed.
Fourth quarter 2011 segment GAAP operating loss was $433.7 million, compared to a segment operating loss of $29.6 million in the 2011 third quarter, and a segment operating loss of $5.9 million in the 2010 fourth quarter. GAAP segment operating loss in the 2011 fourth quarter included charges of $395.6 million, primarily related to goodwill impairments. In addition to these restructuring, impairment and other charges, GAAP operating loss in the 2011 fourth quarter resulted from timing differences between recognition of cost and revenue under GAAP accounting, especially revenue deferrals related to direct sale projects in the fourth quarter. As a result, the higher sequential and year-over-year operating loss was due to an increase in project completions, with accompanying increased GAAP costs but without accompanying GAAP revenue, and higher operating expenses to support planned growth.
SunEdison's adjusted non-GAAP operating income for the 2011 fourth quarter was $13.2 million, compared to adjusted non-GAAP operating income of $36.4 million in the 2011 third quarter and $61.6 million in the fourth quarter of 2010. Segment non-GAAP operating income included charges of $395.6 million, primarily goodwill impairments. The sequential and year-over-year decline in adjusted non-GAAP operating profit, excluding these restructuring, impairment and other charges, was primarily due to less favorable project mix and higher operating expenses to support planned growth in the business.
SunEdison ended the 2011 fourth quarter with a pipeline of 3.0 GW, flat with the 3.0 GW pipeline in the 2011 third quarter and up over 100% from the 1.4 GW pipeline at the end of 2010. A solar energy system project is classified as "pipeline" where SunEdison has a signed or awarded PPA or other energy off-take agreement or has achieved each of the following three items: site control, an identified interconnection point with an estimate of the interconnection costs, and an executed energy off-take agreement or the determination that there is a reasonable likelihood that an energy off-take agreement will be signed. There can be no assurance that all pipeline projects will convert to revenue, because in the ordinary course of our development business some fall-out is typical and certain projects will not be built. As of December 31, 2011, 255 MW of the pipeline was under construction. "Under construction" refers to projects within pipeline, in various stages of completion, which are not yet operational.
Corporate/Other
Corporate/other costs were $24.1 million in the 2011 fourth quarter, compared to $27.4 million in the 2011 third quarter and $34.6 million in the 2010 fourth quarter. The sequential decline was primarily the result of lower legal fees and costs. The year-over-year decline reflected lower legal, consulting, stock compensation and other expenses.
Restructuring, Impairments and Other Non-Routine Charges
During the 2011 fourth quarter, the company initiated various restructuring actions in order to better align its operations relative to current and expected business conditions in the semiconductor and solar markets, with the goal of improving its competitive position, lowering ongoing operating costs and increasing cash flow generation across its business segments. The restructuring actions include the expected closure of the polysilicon manufacturing plant in Merano, Italy, capacity reduction at the Portland, Oregon and Kuching, Malaysia facilities, supplier contract terminations, an approximately 20% reduction in the company's global workforce and the write-down of certain impaired assets and goodwill in its entirety. These activities are proceeding on plan and should be largely completed in 2012.
In the 2011 fourth quarter, estimated charges relating to restructuring, impairment and other totaled approximately $1.4 billion, of which approximately $1.2 billion will be non-cash. Included in cost of goods sold was $96.7 million of unfavorable inventory adjustments. Operating expenses also included estimated restructuring and impairment charges of $704.9 million and a goodwill impairment charge of $384.1 million. In addition, a charge of $214.1 million was incurred for the write-down of deferred tax assets, which charge is included in income tax expense. These deferred tax assets primarily relate to book-tax timing differences related to SunEdison financing sale-leaseback transactions which are considered taxable income at the time of sale but are not included in book income until the end of the lease. For GAAP purposes, the expected gain in the future is not taken into consideration regarding the recoverability of deferred tax assets. Please refer to the Three Months Ended December 31, 2011 - Restructuring, Impairment and Other Charges Summary table at the end of this press release for segment-level detail of the restructuring, impairments and other non-routine charges.
Outlook
In light of the current uncertainty in the semiconductor and solar markets, the company is not providing specific revenue and earnings guidance at this time. Instead, we are providing information on how we view the markets we serve, and our position in those markets. Accordingly, the company expects the following, assuming no significant worldwide economic issues or other exogenous shocks in 2012:
For the first quarter 2012:
- Semiconductor cycle bottom in Q1 2012
- Expecting 10% - 15% lower revenue in Q1 2012 vs. Q4 2011
- Orders picking up for Q2 2012
- Solar energy systems interconnection volume of less than 100 MW
- Approximately 50 MW will be recognized for non-GAAP revenue
- Approximately 45 MW of balance sheet projects
- Solar energy systems average pricing of approximately $4.25/watt
- Operating expenses less than $110 million
- Capital spending less than $50 million
- Interest / other expense less than $25 million
- Non-GAAP tax rate of approximately 30%
For the full year 2012:
- Semiconductor revenue flat year-over-year
- Revenue in second half 2012 stronger than in first half 2012
- Solar energy systems sales volume greater than 400 MW
- Solar energy systems average pricing of approximately $3.75/watt
- Operating expenses less than $375 million
- Capital spending less than $175 million
- Interest / other expense less than $100 million
- Non-GAAP tax rate of approximately 30%
In addition, the company expects first quarter 2012 non-GAAP EPS to be roughly in line with fourth quarter 2011 non-GAAP EPS excluding restructuring, impairment, and other charges.
Use of Non-GAAP Measures
Management has determined that certain non-GAAP metrics for the SunEdison segment presented herein are the key metrics that will help investors understand the ultimate income and near-term cash flows generated by our SunEdison business. These non-GAAP measures and metrics include deferrals required under GAAP real estate and lease accounting for some of SunEdison's direct sales and or its sale-leaseback transactions. Management has also determined that the non-GAAP measure of "free cash flow" is useful to help investors better understand the capital intensity of our business, including our project financing operations. Finally, because the vast majority of the restructuring, goodwill and other related charges and the unfavorable tax consequences from the GAAP financial measures are non-cash charges unrelated to ongoing operations, management determined that including among the non-GAAP financial performance measures that are presented herein, the adjusted non-GAAP earnings per share excluding these charges would be useful as more representative of the operating results of the reporting period. For a complete description of our non-GAAP measures, see the non-GAAP reconciliation tables below.
Conference Call
MEMC will host a conference call today, February 15 at 5:30 p.m. ET to discuss the company's fourth quarter results, 2012 outlook and related business matters. A live webcast will be available on the company's web site at www.memc.com.
A replay of the conference call will be available from 8:30 p.m. ET on February 15, 2012, until 11:59 p.m. ET on February 22, 2012. To access the replay, please dial (320) 365-3844 at any time during that period, using passcode 236137. A replay will also be available on the company's web site at www.memc.com.
