MEMC Misses Ests, Grows Annually - Analyst Blog

MEMC Electronic Materials Inc. (WFR">WFR) reported fourth-quarter 2010 adjusted net income per share of 25 cents, which missed the Zacks Consensus Estimate of 32 cents. However, the share price rose 3.35% in after-hours trading, presumably on strong performance in the Solar Energy segment.

The adjusted figure excludes the impact of restructuring charges, warrant adjustments and non-controlling interests but includes amounts related to direct sales and lease-back from the Solar Energy segment.

Revenues

On a GAAP basis, MEMC reported fourth-quarter revenues of $850.1 million, which shot up 138.3% from $356.7 million in the year-earlier quarter, but came below the Zacks Consensus Estimate of $903.0 million. The quarter's performance may be attributed to outperformance in the Solar Energy segment.

Including $58.1 million related to direct sales from the Solar Energy segment and $41.3 million from lease-back transactions, non-GAAP revenue came in at $949.5 million.

Segment-wise, revenue from Semiconductor Materials increased 26.4% year over year to $262.6 million and was 30.9% of the total revenue. MEMC witnessed strong wafer volume growth, as well as higher average selling prices (ASPs).

Solar Materials revenue shot up 292.8% year over year to $279.9 million and contributed 32.9% to the total revenue. The improvement was driven by strong solar wafer volume growth and modest ASP growth.

SunEdison, which is currently the company's Solar Energy segment, accounted for the highest share (36.2%) of total revenue, generating $307.6 million. Revenues increased substantially since the segment became operational during the fourth quarter of 2009. Moreover, sales to the 70 megawatt Rovigo project also added to the segment's outperformance.

Operating Results

On a GAAP basis, gross profit surged 134.0% year over year to $124.0 million. However, gross margin dropped 30 basis points year over year to 14.6%.

The increase in wafer volumes in a favorable pricing environment was offset by higher cost of sales, which resulted in lower gross margin. On a non-GAAP basis (including direct sales and lease-back transactions from the Solar Energy segment), gross margin in the quarter stood at 23.5%.

On a GAAP basis, operating profit was $20.9 million in the fourth quarter, compared to operating loss of $11.0 million in the earlier-year quarter. Operating margin on a GAAP basis was 2.5%, compared to -3.1% in the year-ago quarter.

However, excluding restructuring charges and including adjustments from the Solar Energy segment, the non-GAAP operating margin was 9.3%. Marketing and administration expenses increased 58.6% year over year to $83.1 million and research and development expenses surged 79.2% year over year to $19.0 million.

Reported net income was $11.4 million or 5 cents per share, compared to a net loss of $7.1 million or 3 cents in the comparable prior-year quarter. However, adjusted net income was $58.2 million, or 25 cents.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents, short-term investments and restricted cash of $751.2 million, up from $643.7 million in the previous quarter due to the completion of the Rovigo project and receipt of final payment.

Receivables in the quarter were $296.0 million, up from $251.9 million in the prior quarter. Inventories were $214.6 million, compared to $145.9 million in the previous quarter.

Cash generated from operations was $286.6 million versus $52.3 million in the preceding quarter. The improvement in cash flow was attributable to growth in net working capital and deferred revenues.

Capital expenditure was $115.1 million, up from $95.8 million in the previous quarter, driven by investments in 300 mm wafer production, solar wafer manufacturing and projects for productivity improvements. Free cash flow came in at $188.4 million.

Long-term debt and capital leases were $682.7 million, compared to $494.8 million in the previous quarter.

Guidance

For fiscal 2011, MEMC expects 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.

Conclusion

MEMC's fourth quarter missed the Zacks Consensus Estimates, both in terms of top and bottom lines, but the company has maintained a positive trend with respect to year-over-year comparisons.

Going forward, we expect MEMC to leverage the lower cost structure of Solaicx to capture the monocrystalline silicon market, which according to sources, is expected to grow at a compound annual growth rate of about 50% during the next three years. We look forward to a positive contribution from Solaicx, which should be accretive to 2011 earnings.

We are encouraged by SunEdison's solar initiatives and believe that the completion of pending solar projects will generate additional revenue streams.

However, analysts' concerns related to lackluster semiconductor demand, which could pressure earnings estimates, keep us cautious on the stock. Additionally, the company has a huge debt burden, which increases investor risks.

Currently, MEMC has a short-term Sell recommendation, as indicated by the Zacks #4 Rank and a long-term Neutral rating.

 
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