Suntech Power Holdings Co., Ltd. (NYSE: STP), the world's largest producer of solar panels, today announced financial results for its third fiscal quarter ended September 30, 2011.
Highlights
"Suntech's diverse global sales channels combined with customer preference for high performance, bankable products enabled Suntech to meet our third quarter shipment and margin guidance, despite the challenging market conditions," said Dr. Shi, Suntech's chairman and CEO.
"While European markets remained the cornerstone of demand in the third quarter, we were pleased to see continuing growth opportunities in the Americas and the Asia Pacific. In particular, demand for solar in China accelerated rapidly with the introduction of the first national feed-in-tariff."
"Looking forward, we expect excess capacity to fuel strong competition and consolidation in the next two to three quarters. This will be challenging for all solar companies. Through this period, we will accelerate initiatives to strengthen our financial and operational discipline and streamline our organization. These include reducing operating expenses by 20% in 2012, holding capacity expansion in 2012, and improving working capital by $200 million by the end of 2011."
"At the same time, we also recognize that the near-term challenges create opportunities, and we are excited by the prospects for the solar industry. Lower cost will drive significant growth in demand, especially for utility-scale solar projects. With Suntech's brand, bankability and well-established channels to market, we are confident that we will be well positioned to supply this next wave of solar growth," said Dr. Shi.
Third Quarter 2011 Results
Net Revenues
Total net revenues for the third quarter of 2011 were $809.8 million, compared to $830.7 million in the second quarter of 2011 and $743.7 million in the third quarter of 2010. The sequential decrease of revenues was primarily due to a decline in the average selling price of PV products, which was partially offset by an increase of shipments.
Cost of Revenues
Cost of revenues was $702.0 million in the third quarter of 2011, compared to $797.0 million in the second quarter of 2011 and $610.6 million in the third quarter of 2010. Cost of revenues in the third quarter of 2011 included an inventory provision of $20.2 million, compared to an inventory provision of $29.5 million in the second quarter of 2011.
Gross Profit
For the third quarter of 2011, gross profit was $107.8 million and gross margin was 13.3 % compared to $33.7 million and 4.1%, respectively, in the second quarter of 2011; and $133.1 million and 17.9%, respectively, in the third quarter of 2010.
The gross profit in the second quarter of 2011 was impacted by a $91.9 million write-off of the unamortized cost of warrants previously issued to MEMC in conjunction with a supply agreement, which was terminated in the second quarter of 2011. Non-GAAP(1) gross profit in the second quarter of 2011 was $125.6 million.
Operating Expenses
Operating expenses for the third quarter of 2011 decreased to $123.8 million, which represented 15.3% of revenues, compared to $204.0 million, or 24.6% of revenues, in the second quarter of 2011, and $70.5 million, or 9.5% of revenues, in the third quarter of 2010. Operating expenses in the third quarter included a $17.5 million provision based on a German court ruling on November 16 that Suntech Power Japan Corp. ("SPJC"), formerly known as MSK Japan, had breached a solar cell supply contract with QCells. SPJC is reviewing the judgment and will file an appeal.
Operating expenses in the second quarter of 2011 included $120.0 million of expenses related to the termination of a wafer supply agreement with MEMC. Non-GAAP operating expenses in the second quarter of 2011 were $84.0 million. The sequential increase in operating expenses in the third quarter was primarily due to an increase in the provision for bad debts, an increase in sales and marketing expenses, and severance expenses. Suntech expects to incur up to $10 million of severance expenses in the second half of 2011.
Operating Income and Margin
Loss from operations in the third quarter of 2011 was $16.0 million and operating margin was negative 2.0%, compared to loss from operations of $170.3 million and operating margin of negative 20.5% in the second quarter of 2011; and income from operations of $62.6 million and operating margin of 8.4% in the third quarter of 2010. Non-GAAP income from operations in the second quarter of 2011 was $41.6 million and non-GAAP operating margin was 5.0%.
Interest Expense
Net interest expense was $35.7 million in the third quarter of 2011, compared to net interest expense of $32.5 million in the second quarter of 2011 and $23.1 million in the third quarter of 2010. Net interest expense in the third quarter of 2011 included $10.3 million in non-cash expenses, of which $8.5 million was related to the outstanding convertible notes.
Foreign Exchange and Other Income
Foreign exchange loss was $56.3 million in the third quarter of 2011, compared to a foreign exchange gain of $11.7 million in the second quarter of 2011 and a gain of $42.0 million in the third quarter of 2010. The foreign exchange gain or loss is the result of the translation of the value of assets and liabilities denominated in foreign currencies from period to period. The loss in the third quarter of 2011 was primarily related to the depreciation of the Euro versus the US Dollar.
Net other expense consists primarily of gains and losses related to foreign currency hedging activities. The net other expense was $10.4 million in the third quarter of 2011, compared with net other expense of $41.4 million in the second quarter of 2011 and net other expense of $74.1 million in the third quarter of 2010. The net other expense in the third quarter of 2011 was mainly due to mark-to-market losses from foreign exchange hedging activities. The net impact of losses related to hedging and foreign exchange fluctuations was approximately $66.7 million in the third quarter of 2011.
Equity in Earnings of Affiliates
Equity in earnings of affiliates in the third quarter of 2011 was $2.9 million, compared to equity in earnings of affiliates of $4.0 million in the second quarter of 2011 and $23.1 million in the third quarter of 2010.
Net Income and Earnings per ADS
Net loss attributable to holders of ordinary shares was $116.4 million, or $0.64 per diluted ADS, for the third quarter of 2011, compared to a net loss of $259.5 million, or $1.44 per diluted ADS, for the second quarter of 2011 and a net gain of $33.1 million, or $0.18 per diluted ADS, for the third quarter of 2010. Non-GAAP net loss attributable to holders of ordinary shares in the second quarter of 2011 was $33.8 million, or $0.19 per diluted ADS.
Balance Sheet
Cash and cash equivalents totaled $458.4 million as of September 30, 2011, compared with $648.2 million as of June 30, 2011. The primary uses of cash in the third quarter of 2011 were capital expenditures and the repayment of the current portion of a long-term loan.
Inventory was $696.3 million as of September 30, 2011, compared with $571.4 million as of June 30, 2011. The increase in inventory was primarily due to the growth of shipments.
Accounts receivable totaled $785.1 million as of September 30, 2011, compared with $862.7 million as of June 30, 2011. The decrease in accounts receivable was primarily related to enhanced collection efforts in the third quarter of 2011.
Accounts payable was $632.0 million as of September 30, 2011, compared to $521.2 million as of June 30, 2011.
Short-term borrowings and the current portion of long-term borrowings were $1,582.6 million as of September 30, 2011, compared with $1,665.7 million as of June 30, 2011.
The Company is in the process of assessing potential impairments of its goodwill, intangible assets, investments and other long-lived assets mainly as a result of the significant recent decline in stock price. The Company expects the assessment process to take two to three months, and will report its outcome and any impairment when it is completed. If impairment charges are made they will be non-cash, accounting charges.
Cash Flow
In the third quarter of 2011, cash used in operations was $27.2 million, compared to cash provided by operations of $1.9 million in the second quarter of 2011, and $266.6 million in the third quarter of 2010, which resulted from higher operating profit and increased payables.
Non-Cash Items
In the third quarter of 2011, the major non-cash related expenses were share-based compensation charges of $3.3 million; depreciation and amortization expenses of $36.7 million; $10.3 million of non-cash interest expenses; and an inventory provision of $20.2 million.
Capital Expenditures
In the third quarter of 2011, capital expenditures totaled $80.8 million, compared to $119.9 million in the second quarter of 2011 and $137.0 million in the third quarter of 2010. Capital expenditures in the third quarter of 2011 were primarily related to the expansion of wafer manufacturing facilities.
Business Outlook
In the fourth quarter of 2011, Suntech expects PV shipments to decrease by approximately 20% compared with the third quarter of 2011. Suntech expects gross margin will be in the range of 9% to 11% in the fourth quarter of 2011.
For the fiscal year ending December 31, 2011, Suntech expects to ship at least 2GW of solar products and generate revenues of $3.0 billion to $3.1 billion, subject to changes in foreign exchange rates. This compares to previous shipment guidance of 2.2GW and revenue guidance $3.2 to $3.4 billion. Excluding the $91.9 million impact of the MEMC warrants in the second quarter of 2011, non-GAAP gross margin for the full year 2011 is expected to be range of 11% to 13%(2).
Full year 2011 capital expenditures are expected to be approximately $400 million, compared to previous guidance of $340 million to $360 million. Suntech will maintain its wafer capacity at 1.6GW and cell and module production capacity at 2.4GW.