A $700M haircut, 20% layoffs, and big capacity cutbacks hope to stem the tide of relentless silicon pricing pressure -- but there might be more pain ahead if some SunEdison projects don't get finished.

December 8, 2011 - MEMC Electronic Materials says it will lay off 20% of its workforce worldwide, including more than a hundred solar-specific workers in the US, blaming market softness and a need to realign its solar business to a downstream-friendly model.

""Changed market conditions require that we improve productivity across all segments and in solar move to a more balanced manufacturing model aligned with our downstream business," according to CEO Ahmad Chatila.

The changes, including workforce reduction, capacity reductions and plant idlings, and organizational consolidations (see below) will put a $700M dent in WFR's 4Q11 books, the bulk of it ($520M) non-cash: $475M in asset impairments, $175M in contract termination charges, and $50M in severance packages. But the company expects to save $200M (annualized cash flow) by the end of 2012 and reduce operating expenses by 15%. MEMC also is recalculating for a further $200M-$400M non-cash charge in 4Q11 on annual goodwill impairment, plus another $225M-$275M (noncash) in realizing deferred tax assets.

The other shoe to fall with MEMC's restructuring is yet another downward revision of its 2011 numbers. Back in May (fiscal 1Q11) the company's 2011 GAAP forecast was $2.8B-$3.1B sales and $0.25-$0.55 EPS; in August (fiscal 2Q) it lowered the bar to $2.7B-$3.0B and $0.10-$0.30; in November (fiscal 3Q) it dropped EPS yet again to ($0.55)-($0.35). And now MEMC says 4Q11 sales are about -25% to -40% off pace, coming in at $523M-$585M (vs. $700M-$1B), with fiscal 4Q11 EPS through the floor: ($5.20) to ($6.38) instead of flat to $0.20 -- and that's before any of the aforementioned restructuring charges. MEMC also warns that "capital market and liquidity risks in Europe" may shift some planned 4Q11 SunEdison project sales and pricing into 2012, which would further reduce 4Q11/2011 numbers.

Here's a rundown of MEMC's belt-tightening checklist:

- Reduce workforce by 1300 persons worldwide (~20%). 250 of those will be in the US; 41% in semiconductor, 47% in solar.

- Undertake "more aggressive productivity initiatives to implement best practices across sites," following a recently finished multiyear realignment of its global crystal and wafer manufacturing footprint.

- Reign in capacity: Idle its 6000 metric ton/year poly-Si facility in Merano, Italy (and maybe close the site entirely "unless dramatic feedstock, power, and other cost reductions are achieved in the near term"), reduce capacity at the Portland, OR crystal- facility "to optimize the technology," and limit the ramp of its Kuching, Malaysia wafering site to 300MW, vs. initial plans to hit 600MW by year's end.

The Kuching cutback isn't entirely unexpected. In August the company admitted "low initial volumes" which contributed to $14M in charges, and in November Chatila confirmed the site would be delayed due to low utilization levels and unrealized "operating metrics," indicating the company would instead ramp its JV in China. "Although we have made much progress in Kuching and have line of sight to world-class cost, our manufacturing ramp is behind schedule contributing to higher cost wafer production than expected," he said then.

We're waiting for the usual Wall Street watchers to weigh in; we'll share their analysis as we get it.

Analysts' Take

Update 12/8: Citi's Tim Arcuri is first in our inbox, golfclapping this news that "finally decouples EPS from further solar wafer pricing declines." In particular, the Merano idling/closure "significantly changes the complexion" of WFR's model and offers a big boost to margins: "Not only does it allow WFR to better utilize its poly manufacturing base which helps fixed cost absorption, but it also drives much lower poly costs" -- Merano's costs were $40-$45/kg vs. the mid-$20?s/kg achieved at the Pasadena plant. (Note the latest market data indicates spot-market silicon prices have already dipped below $30/kg and are closing in on $25/kg.) The blackout/closure of Merano also "reinjects margin leverage in the semi business, much of which was burdened when utilization across the system was low," Arcuri adds. Assuming WFR won't suddenly jump into the spot market, "we can see utilization jumping back up to ~95% after this is closed."

WFR also will likely soak up almost all its solar wafer production (<700MW) directly into its SunEdison business, which helps the bottom line immensely (i.e. no more selling wafers to third-party developers and paying extra margin). He notes, though, that any thoughts about EPS "remain very dependent upon SunEdison" and difficult-to-predict project timing, though the firm does have ~2.2GW in the US pipeline and 900MW of fixed offtake agreements.