SolarWorld Makes Profit By Keeping Wafer Purchase Prepayments

The company made $114M in the other income, which was a reversal of pre-payments made by companies for the purchase of solar wafers

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SolarWorld (ETR:SWV) has released the financial results of the first quarter of 2012. The company has reported a profit of $9.4 million, a decrease of 42 percent from the $16.2 million reported in the first quarter of 2011. This is translated as earnings per share of $0.09, down from $0.14 reported in Q1 2011. The company made $114M in the other income, which was a reversal of prepayments made by buyers for the purchase of solar wafers. It appears SolarWorld as much as Norwegian REC used the difficult conditions in the industry to hold their long term contract buyers accountable for non -compliance to contract pricing, despite massive drop in the ASP in the span of last 15 months.  This lack of flexibility may be a contributing factor to a loss of revenues in Asia.

Since the beginning of 2012, the share prices have fallen by 29.6%. Overall revenues have also fallen from $301M reported in Q1 2011 to $220M, showing a net decrease of 26.8%. Despite the decrease in profits, both return on equity (ROE) and return on capital employed (ROCE) remained stable to positive.

In the letter to shareholders, the CEO Frank Asbeck has blamed the Renewable Energy Sources Act (EEG) amendment and “price dumping” for the decrease in revenues. The EEG amendment’s objective is to cut government subsidies for German solar energy producers from 20% to 40%. The Chief, however, sees a bright future ahead as conventional energy costs continue to increase, and the business offers its customers even better payoffs despite the decrease in feed-in-tariff. Furthermore, the company is becoming more global by strengthening its foothold in markets outside of Germany by achieving sales increases on every continent.

The company has plants in Germany and the U.S., and Frank Asbeck believes that it produces better quality products more efficiently than its Chinese competitors; however, he claims that the company “cannot remain inactive in the face of unfair trade practices” from competitors. The current shareholder structure comprises 71.37% of the shares that are publicly traded, while 27.8% of the shares are owned by Mr. Frank Asbeck and 0.83% of the shares are kept by the company treasury under SolarWorld AG.

As of Q1 2012, the equity of the company stands at $812M while liabilities are at $1.6B, 93% of which are long-term liabilities and include $81M received in subsidies and grants. The equity ratio of the company is 29%. Total assets are at $2.8B, which indicates a decrease of 21% from $3.5B in Q1 2011. Liquid funds, including cash and its equivalents, are $606M, while net liquidity (difference between liquid assets and liabilities) is (negative) $980M.

The first three months of 2012 witnessed an increase in overall shipment from 99MW in Q1 2011 to 146MW in Q1 2012, representing an increase of 48 percent. The government in Germany had announced its plan on cutting subsidies for the solar sector. The cuts were initially planned for implementation in March 2012. This caused a short-term increase in demand, on which SolarWorld was able to capitalize.

In his letter, the CEO recognizes that Germany will no longer be the biggest solar market due to growing solar trends in Asia, the rest of Europe and the U.S., and claims of expanding the sales figures globally. The business was able to achieve sales figures in all the regions, but contrary to the claims, with the exception of Germany, sales revenues have dropped in all the regions. The biggest of such drops happened in Asia where revenues went from $34M in Q1 2011 to $3M in Q1 2012, showing a decrease of approximately 90 percent. 

 

Sales revenues have also decreased in the U.S. from $77M in Q1 2011 to $42M Q1 2012, or almost 45%. This decrease is mainly attributed to the conclusion of the U.S. “cash grant program”, in which SolarWorld was reimbursed in cash for 30% of the installation cost in Q1 2011. In the current year, the reimbursements came in the form of tax relief. SolarWorld’s subsidiary in the U.S. had also initiated a petition against “Unfair trade practices by Chinese competitors” that eventually lead to imposition of countervailing duties by the U.S. Department of Commerce on Chinese solar and module imports.

Small roof-mounted systems continue to be the company’s top selling product in the ‘rest of Europe’ region with positive sales figures coming from Belgium and Great Britain. Sales in Italy have fallen due to tariff cuts in the “Conto Energia-V”. Belgium also withdrew nearly 40 percent tax credits. The main reason for the decrease in sales revenues in Europe is attributed to falling prices for solar power systems.

SolarWorld does not have any expansion plans; instead it is focusing on optimizing its current capacity. Presently, the company has 1000MW wafer, 800MW cell and 850MW of module capacity.

SolarWorld expects to improve its performance, particularly in the U.S. and Europe, and promote its brand as a market leader in terms of quality. The business will continue with expansion strategies in the markets of Asia and Africa. It plans to improve its debt structure and has no borrowing requirements for 2012. As mentioned before, there is not going to be any expansion in the production capacities in the near future; however, investments of up to $97M will be made to enhance the technological capabilities of the current plants. In 2012, $19M was spent on production capacities in both German and U.S. sites, while $2M were spent on research and development (R&D). More investments will be made as production costs are expected to decline further due to internal R&D.