ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
The following table presents revenues by country based on the location of the customer:
The composition of the Company’s property, plant and equipment, net of accumulated depreciation, is principally in the United States as of March 31, 2007 and June 30, 2006.
On April 19, 2007, the Company announced that it was implementing an organizational restructuring plan to consolidate and realign its business activities and reduce annual costs by approximately $23 million when fully implemented by the end of fiscal year 2008. The first phase of restructuring actions (from which approximately $17 million of the annualized savings will be realized) has begun, and a second phase will begin in the first quarter of fiscal year 2008. In connection with the implementation of this plan, management estimates that the Company will incur restructuring and other related charges in the fourth quarter of fiscal year 2007 of $3-6 million, with additional charges in fiscal year 2008.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This section summarizes significant factors affecting the Company’s consolidated operating results, financial condition and liquidity for the three and nine months ended March 31, 2007. This section should be read in conjunction with the Company’s Consolidated Financial Statements and related notes appearing elsewhere in this report and the Company’s filed Annual Report on Form 10-K for the year ended June 30, 2006.
Overview
We invent, design, develop and commercialize materials, products and production processes for the alternative energy generation, energy storage and information technology markets. Our materials, products and production processes originate from the pioneering work of Mr. Stanford R. Ovshinsky, principal inventor and our Chief Scientist and Technologist, in materials science at the atomic (or nanostructure) level, principally amorphous and disordered materials. We manufacture for commercial sale thin-film photovoltaic (“PV”) modules, which account for substantially all of our product sales, as well as manufacture and sell positive electrode nickel hydroxide battery materials, and license our NiMH battery technology, which is used in commercial products. Our principal joint ventures – Cobasys LLC and Ovonyx, Inc. – are also commercializing our NiMH battery and Ovonic Universal Memory (“OUM”) technologies, and battery products manufactured by Cobasys are commercially available. We conduct research and development activities for our emerging technologies in order to bring these technologies to full-scale commercialization. We seek third-party funding to offset our funding requirements for these activities.
These business activities represent application of our overall business strategy to commercialize our materials, products and production processes internally and through third-party relationships, such as licenses and joint ventures. Accordingly, our results reflect our approach to commercialization of a particular technology, as well as the commercial readiness of that technology, and consideration should be given to the following key factors when reviewing our results for the periods discussed:
• | We are engaged in full-scale manufacturing and sale of our PV products through our United Solar Ovonic segment, and our consolidated financial results are driven primarily by the performance of this segment. Our United Solar Ovonic segment accounted for 87% and 86% of our total revenue in the three and nine months ended March 31, 2007, respectively, and 86% for both the three and nine months ended March 31, 2006. Additionally, our United Solar Ovonic segment generated operating income of $585,000 and $3,205,000 in the three and nine months ended March 31, 2007, respectively, while our other two segments had combined operating losses of $11,048,000 and $27,820,000, respectively (which we seek to fund as described below). Given the projected growth of our photovoltaic business (see below) relative to our other business segments, our overall success in the foreseeable future will be |
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| aligned primarily with the performance of our United Solar Ovonic segment and subject to the risks of that business. |
• | We are rapidly expanding manufacturing capacity for our PV products to meet the rapid growth in the alternative energy generation market in general and the solar market in particular, and we will require significant capital to fund this expansion. We are expanding our PV module manufacturing capacity to an expected capacity exceeding 300MW per annum by 2010. In December 2006, we placed in service the manufacturing equipment for our new Auburn Hills 2 facility, thereby increasing our aggregate manufacturing capacity to 58MW. This manufacturing facility will be ramping up to full capacity in Fall 2007. We are also presently constructing two 60MW per annum PV cell manufacturing facilities in Greenville, Michigan, which are expected to begin operation in late calendar 2007 and mid-2008. We are funding the initial phases of our manufacturing capacity expansion with the proceeds from our March 2006 common stock offering. We will require additional funding for subsequent phases through 2010, which we may obtain from equity or debt financing, business agreements and other sources. |
• | We are commercializing our NiMH battery and OUM technologies principally through unconsolidated joint ventures, and we account for our interests in these joint ventures under the equity method of accounting. Our principal joint ventures—Cobasys and Ovonyx—were founded upon technologies that we pioneered, and then formed to further develop and commercialize these technologies. In each case, we participate in the business as equity holders but do not directly manage or have a controlling interest in the entity. We have not reported any earnings or losses from Cobasys because our only contributions to Cobasys have been noncash items, such as intellectual property and know-how. We have contributed intellectual property and cash (through royalty payments) to Ovonyx, and have, as of March 31, 2007, recognized equity losses of $1,300,000 related to our Ovonyx investment. Our interest in Cobasys was recorded at zero on our balance sheet at March 31, 2007 and June 30, 2006, respectively, and our investment in Ovonyx was recorded at $200,000 and zero at March 31, 2007 and June 30, 2006, respectively. See Note A, “Summary of Accounting Policies,” and Note D, “Joint Ventures and Investments,” of the Notes to our Consolidated Financial Statements, for additional details regarding our accounting for our investments in Cobasys and Ovonyx. |
• | We and our joint venture partner are exploring strategic alternatives for Cobasys. We and Chevron have agreed to explore strategic alternatives regarding Cobasys that are intended to enable Cobasys to further capitalize on global opportunities for integrated energy storage solutions in the rapidly growing hybrid electric vehicle and stationary power industries. This process is continuing, and the timing and nature of a particular strategic alternative to be consummated, if any, has not been concluded. |
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• | We are continuing to further develop our emerging technologies to commercial product status. These development activities, which have historically generated losses, are being substantially reduced and balanced to sustainable levels as part of a restructuring plan. We have successfully brought our PV and NiMH technologies from pioneering technologies to commercial products, and Ovonyx has been collaborating successfully with a number of semiconductor companies to commercialize OUM. We are utilizing a similar strategy for our current emerging technologies. As part of the restructuring plan (discussed below), these development activities are being substantially reduced and balanced with external sources of revenues, such as royalties, development agreements (including government contracts) and product sales, to realign commercialization efforts at sustainable levels. Additionally, we are re-evaluating our emerging technologies to ensure that they are properly prioritized with these goals. |
Key Indicators of Financial Condition and Operating Performance. In evaluating our business, we use operating income and cash flow from operations as key performance metrics. We also use production capacity, measured in megawatt (MW) per annum, as a key performance metric for our United Solar Ovonic segment, particularly in connection with the manufacturing capacity expansion in this segment.
Succession Planning and Restructuring Plan. We are undertaking a number of corporate initiatives as the Company transitions from a project development company to a more commercially-oriented, operations-focused manufacturing environment.
We are developing and implementing an orderly succession plan for the Company’s management team. As part of this plan, and at his request, Stanford R. Ovshinsky relinquished his executive management responsibilities as the Company’s President and a member of its Office of the Chairman to devote his full energy and intellect to the further development of the science and application of amorphous and disordered materials in the fields of energy and information technologies. Mr. Ovshinsky remains an active member of the ECD Board of Directors, and contributes on strategic and technical issues as Founder and Chief Scientist and Technologist. James R. Metzger now serves in an expanded role as the Company’s Interim President and Chief Operating Officer, leading the development and execution of the Company’s operating plans.
In addition, we are implementing an organizational restructuring to consolidate and realign our business activities and reduce costs. The specific activities under the plan include consolidating the photovoltaic machine-building activities into the United Solar Ovonic business segment; consolidating the Ovonic Battery and ECD segments into a new Ovonic Materials segment; substantially reducing activities in the Ovonic Battery and ECD segments and rebalancing these activities with external revenue sources; and reducing G&A personnel and other costs at ECD. The plan is expected to yield the following principal benefits: reduce annual costs by approximately $23 million when fully implemented by the end of fiscal year 2008; strengthen our United Solar Ovonic segment by aligning all of the key components for photovoltaic operations within a single, unified operating structure to lower capital and production costs and drive technology
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improvements; align our emerging technologies with our business goals in our new Ovonic Materials segment, while directing integrated research and development and administrative resources accordingly; and right-size and consolidate enterprise G&A activities to realize organizational synergies. The first phase of activities under the plan, from which most of the annual cost savings will be realized, began and will be completed in the fourth quarter of fiscal year 2007. In connection with the implementation of this plan, management estimates that the Company will incur restructuring and other related charges in the fourth quarter of fiscal year 2007 of $3-6 million, with additional charges in fiscal year 2008. The operating results included herein do not include any costs or benefits from the restructuring plan.
Results of Operations
The period comparisons contained in this section exclude discontinued operations (see “Other Income/Expense” below).
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
The following table summarizes each of our business segment’s operating results (in thousands) for the periods indicated:
| | Three Months Ended March 31, |
| | 2007 | | 2006 | | 2007 | | 2006 |
Segment | | | Revenues | | Income (Loss) from
Operations |
United Solar Ovonic | | $ | 23,841 | | $ | 23,059 | | $ | 585 | | $ | 2,552 | |
Ovonic Battery(1) | | | 2,210 | | | 1,811 | | | (1,584 | ) | | (891 | ) |
Energy Conversion Devices | | | 46,551 | (2) | | 14,311 | (2) | | (9,464 | ) | | (9,193 | ) |
Consolidating Entries | | | (45,173 | ) | | (12,224 | ) | | (517 | ) | | 78 | |
Consolidated | | $ | 27,429 | | $ | 26,957 | | $ | (10,980 | ) | $ | (7,454 | ) |
| (1) | Excludes discontinued operations. |
| (2) | Principally the sales ($44,962,000 and $11,909,000 for the three months ended March 31, 2007 and 2006, respectively) by ECD to United Solar Ovonic of the solar PV module machinery and equipment which is eliminated in consolidation. The ECD revenues, excluding primarily the aforementioned sales to United Solar Ovonic, were $1,411,000 and $2,131,000 for the three months ended March 31, 2007 and 2006, respectively. |
Our loss from operations in 2007 was higher than 2006. Primary contributors to the increased operating loss were the expected impact of the ramp-up of United Solar Ovonic’s new Auburn Hills 2 manufacturing facility, an increase in the net product development costs and preproduction expenses related to United Solar Ovonic’s expansion in Greenville, Michigan, and in Tijuana, Mexico. The operating loss in our ECD segment increased due principally to increased product development expenses. Ovonic
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Battery’s operating loss increased due to reduced royalties and increased patent and other costs. After the quarter, the company began implementing a restructuring plan that substantially reduces the research and development, general and administrative and other expenses that were the primary contributors to the operating losses in these segments during the reported quarter.
United Solar Ovonic Segment
| Three Months Ended
March 31, |
| 2007 | | 2006 | |
| (in thousands) |
REVENUES | | | | | | |
Product sales | $ | 22,143 | | $ | 21,075 | |
Revenues from product development agreements and other revenues | | 1,698 | | | 1,984 | |
TOTAL REVENUES | $ | 23,841 | | $ | 23,059 | |
EXPENSES | | | | | | |
Cost of product sales | $ | 18,362 | | $ | 16,084 | |
Cost of revenues from product development agreements | | 1,274 | | | 1,080 | |
Product development and research | | 1,146 | | | 806 | |
Preproduction costs | | 491 | | | 230 | |
Operating, general and administrative expenses and patent expenses | | 1,983 | | | 2,307 | |
TOTAL EXPENSES | $ | 23,256 | | $ | 20,507 | |
INCOME FROM OPERATIONS | $ | 585 | | $ | 2,552 | |
Our United Solar Ovonic segment’s revenues increased $782,000 while operating income decreased $1,967,000 in 2007 versus 2006. Operating profit declined primarily due to the expected impact of the ramp-up of the new Auburn Hills 2 manufacturing facility, an increase in the net cost of product development costs and preproduction expenses related to the expansion in Greenville, Michigan, and in Tijuana, Mexico.
The increase in revenues in 2007 were primarily attributable to increased volume of PV products ($2,400,000), partially offset by unfavorable mix ($1,280,000).
Gross profit margin on product sales decreased to 17.1% in 2007 from 23.7% in 2006 due to low production volumes in our new Auburn Hills 2 manufacturing facility, offset in part by favorable product mix. As we expand our manufacturing capacity, our gross profit margins are impacted by lower production volumes as we ramp up production to full capacity at our new manufacturing facilities. Our gross profit margin was significantly impacted during 2007 by production ramp ups at our Auburn Hills 2
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manufacturing facility. Gross margins for the remainder of fiscal 2007 will likewise be impacted as this manufacturing facility ramps up to full capacity by Fall 2007. Fiscal 2008 gross margins will be impacted by production ramp up at our Greenville and Tijuana facilities which are expected to be placed in service in late calendar 2007 through mid-2008.
Operating, general and administrative expenses and patent expenses decreased $324,000 due principally to lower warranty costs and a bad-debt expense in the prior year.
The combined product development and research expenses increased to $2,420,000 in 2007 from $1,886,000 in 2006, while funding decreased by $278,000 contributing $812,000 to the reduction in income from operations. The principal funded product development agreements continue to be with the U.S. Air Force (to develop new products for space and airship applications), Lockheed Martin and the National Renewable Energy Laboratory (“NREL”). In addition, we continue to incur product development and research expenses to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV modules.
Ovonic Battery Segment
| Three Months Ended
March 31, |
| 2007 | | 2006 | |
| (in thousands) |
REVENUES | | | | | | |
Product sales | $ | 1,063 | | $ | 289 | |
Royalties | | 705 | | | 969 | |
Revenues from product development agreements | | 163 | | | 146 | |
Revenues from license agreements | | 238 | | | 288 | |
Other operating revenues | | 41 | | | 119 | |
TOTAL REVENUES | $ | 2,210 | | $ | 1,811 | |
EXPENSES | | | | | | |
Cost of product sales | $ | 1,092 | | $ | 318 | |
Product development and research | | 2,204 | | | 2,650 | |
Operating, general and administrative expenses and patent expenses | | 498 | | | (266 | ) |
TOTAL EXPENSES | $ | 3,794 | | $ | 2,702 | |
LOSS FROM OPERATIONS | $ | (1,584 | ) | $ | (891 | ) |
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Our Ovonic Battery segment’s operating loss increased in 2007 due to reduced royalties ($264,000) and increased patent and other costs. After the quarter, the company began implementing a restructuring plan that substantially reduces the research and development, general and administrative and other expenses that were the primary contributors to the operating losses in this segment during the reported quarter.
Third quarter 2007 product sales revenues were $1,063,000 compared to $289,000 for third quarter 2006. This increase was principally attributable to higher nickel hydroxide sales to our principal customer. Cost of sales increased in 2007 proportionate with product sales.
Royalties decreased in 2007 as compared to 2006, due principally to the fact that 2006 included $275,000 for past royalties from a former licensee (see Note H, “Product Sales, Royalties, Revenues from Product Development Agreements, Nonrefundable Advance Royalties and License Agreements,” of the Notes to our Consolidated Financial Statements).
The combined product development and research expenses decreased in 2007 to $2,204,000 from $2,650,000 in 2006, due to cost reductions in certain programs, plus a reduction in the allocation of general and administrative expenses to product development and research expenses. Revenues from product development agreements, which increased in 2007 as compared to 2006, represent research and development support for our Cobasys joint venture.
Revenues from license agreements were basically the same in 2007 as in 2006, representing amortization ($238,000 per quarter) over 10.5 years of a $10,000,000 payment received in a July 2004 settlement of certain patent infringement disputes (see Note D, “Joint Ventures and Investments,” of the Notes to our Consolidated Financial Statements). In 2006, there were license fees of $50,000 from new Chinese licensees.
Operating, general and administrative expenses and patent expenses increased in 2007 principally due to increased patent and other costs, plus a reduction in the allocation of general and administrative expenses to product development and research expenses.
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Energy Conversion Devices Segment
| Three Months Ended
March 31, |
| 2007 | | 2006 | |
| (in thousands) |
REVENUES | | | | | | |
Product sales (substantially all of which is from intercompany sales) | $ | 44,962 | (1) | $ | 11,947 | (1) |
Royalties | | 76 | | | 743 | |
Revenues from product development agreements | | 1,086 | | | 1,309 | |
Other operating revenues | | 427 | | | 312 | |
TOTAL REVENUES | $ | 46,551 | | $ | 14,311 | |
EXPENSES | | | | | | |
Cost of product sales | $ | 44,903 | | $ | 12,077 | |
Cost of revenues from product development agreements | | 1,385 | | | 1,844 | |
Product development and research | | 6,028 | | | 5,325 | |
Operating, general and administrative expenses and patent expenses | | 3,699 | | | 4,258 | |
TOTAL EXPENSES | $ | 56,015 | | $ | 23,504 | |
LOSS FROM OPERATIONS | $ | (9,464 | ) | $ | (9,193 | ) |
| (1) | Represents sales ($44,962,000 and $11,909,000 for the three months ended March 31, 2007 and 2006, respectively) of production equipment by our Production Technology and Machine Building Division to our United Solar Ovonic segment in connection with its manufacturing expansion. These product sales are eliminated in consolidation. |
Our ECD segment had an increased operating loss in 2007 as compared to 2006 due principally to increased product development expenses and reduced royalties. After the quarter, the company began implementing a restructuring plan that substantially reduces the research and development, general and administrative and other expenses that were the primary contributors to the operating losses in this segment during the reported quarter.
All of our 2007 product sales are sales of production equipment from our Production Technology and Machine Building Division to our United Solar Ovonic segment in connection with its manufacturing expansion. These product sales are eliminated in consolidation. Product sales and cost of product sales increased due to sales of production equipment for this expansion.
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Royalties, consisting principally of royalties related to our Ovonic photonic devices technologies, decreased principally due to a one-time adjustment ($690,000) recorded in 2006 for royalties paid in prior years in which the licensee no longer had any contractual obligation to make payment.
Other operating revenues consist primarily of facilities and administrative, laboratory, machine shop and miscellaneous services provided to some of our unconsolidated affiliates.
The combined product development and research expenses increased to $7,413,000 in 2007 from $7,169,000 in 2006, as we continued to develop our emerging technologies for future applications, including our Ovonic solid hydrogen storage systems, Ovonic photonic devices and Ovonic cognitive computer (including the Ovonic quantum control device) technologies. Revenues from product development agreements decreased primarily due to the completion of programs in 2006 with NREL and reduced activities with the National Institute of Standards and Technology (NIST) related to our Ovonic photonic devices technology. In addition, there were new programs in 2007 with the Department of Defense related to our fuel cell and hydrogen technologies.
Operating, general and administrative expenses and patent expenses were lower in 2007 compared to 2006.
Other Income/Expense
Other income (net) increased to $4,109,000 in 2007 from $1,827,000 in 2006, primarily due to higher interest income ($4,141,000 in 2007 compared to $1,933,000 in 2006) relating to increased funds available for investment.
Nine Months Ended March 31, 2007 Compared to Nine Months Ended March 31, 2006
The table below summarizes each of the Company’s business segment’s operating results (in thousands) for the nine months ended March 31, 2007 and 2006.
| | Nine Months Ended March 31, |
| | 2007 | | 2006 | | 2007 | | 2006 | |
Segment | | Revenues | | Income (Loss) from
Operations | |
United Solar Ovonic | | $ | 66,895 | | $ | 64,069 | | $ | 3,205 | | $ | 5,989 | |
Ovonic Battery(1) | | | 6,691 | | | 6,358 | | | (3,203 | ) | | (3,659 | ) |
Energy Conversion Devices | | | 91,845 | (2) | | 41,018 | (2) | | (24,617 | ) | | (23,391 | ) |
Consolidating Entries | | | (87,872 | ) | | (36,955 | ) | | (1,584 | ) | | (240 | ) |
Consolidated | | $ | 77,559 | | $ | 74,490 | | $ | (26,199 | ) | $ | (21,301 | ) |
| (1) | Excludes discontinued operations. |
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| (2) | Principally the sales ($87,182,000 and $36,257,000 for the nine months ended March 31, 2007 and 2006, respectively) by ECD to United Solar Ovonic of the solar PV module machinery and equipment which is eliminated in consolidation. The ECD revenues, excluding primarily the aforementioned sales to United Solar Ovonic, were $4,023,000 and $4,207,000 for the nine months ended March 31, 2007 and 2006, respectively. |
Our loss from operations in 2007 was higher than 2006. Primary contributors to the increased operating loss were the expected impact of the ramp-up of United Solar Ovonic’s new Auburn Hills 2 manufacturing facility, an increase in the net product development costs and preproduction expenses related to the expansion in Greenville, Michigan, and in Tijuana, Mexico. The operating loss in our ECD segment increased due principally to increased product development and general and administrative expenses. Ovonic Battery’s operating results improved due to a $750,000 reduction in 2007 in a product warranty accrual. After the quarter, the company began implementing a restructuring plan that substantially reduces the research and development, general and administrative and other expenses that were the primary contributors to the operating losses in these segments during the reported quarter.
United Solar Ovonic Segment
| Nine Months Ended
March 31, |
| 2007 | | 2006 | |
| (in thousands) |
REVENUES | | | | | | |
Product sales | $ | 61,715 | | $ | 60,118 | |
Revenues from product development agreements and other revenues | | 5,180 | | | 3,951 | |
TOTAL REVENUES | $ | 66,895 | | $ | 64,069 | |
EXPENSES | | | | | | |
Cost of product sales | $ | 49,986 | | $ | 47,135 | |
Cost of revenues from product development agreements | | 3,562 | | | 2,491 | |
Product development and research | | 2,509 | | | 2,464 | |
Preproduction costs | | 1,595 | | | 230 | |
Operating, general and administrative expenses and patent expenses | | 6,038 | | | 5,760 | |
TOTAL EXPENSES | $ | 63,690 | | $ | 58,080 | |
INCOME FROM OPERATIONS | $ | 3,205 | | $ | 5,989 | |
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Our United Solar Ovonic segment’s revenues increased $2,826,000 while operating income decreased $2,784,000 in 2007 versus 2006. Operating profit declined primarily due to the expected impact of the ramp-up of the new Auburn Hills 2 manufacturing facility, an increase in the net cost of product development costs and preproduction expenses related to the expansion in Greenville, Michigan, and in Tijuana, Mexico.
The increases in revenues in 2007 were primarily attributable to an increase in the volume of PV product sales ($700,000) and to favorable mix ($950,000). Volume was significantly impacted by the expected temporary, substantial decline for fiscal year 2007 of sales of our PV modules to SIT, which we were unable to fully reallocate during the first nine months to existing customers or offset through additional sales. SIT completed an equity offering in December 2006 and used a portion of the proceeds to pay its outstanding payables to us. We resumed shipments to SIT in February 2007.
Gross profit margin on product sales decreased to 19.0% in 2007 from 21.6% in 2006 due to low production volumes in our new Auburn Hills 2 manufacturing facility, offset in part by favorable product mix. As we expand our manufacturing capacity, our gross profit margins are impacted by higher costs associated with production volumes as we ramp up production to full capacity at our new manufacturing facilities. Our gross profit margin was primarily impacted during 2007 by production ramp up at our Auburn Hills 2 manufacturing facility. Gross margins for the remainder of fiscal 2007 will likewise be impacted as this manufacturing facility ramps up to full capacity by Fall 2007. Fiscal 2008 gross margins will be impacted by production ramp up at our Greenville and Tijuana facilities which are expected to be placed in service in late calendar 2007 and mid-2008.
The combined product development and research expenses increased to $6,071,000 in 2007 from $4,955,000 in 2006, while funding increased by $1,239,000 which more than offset the increased costs. The principal funded product development agreements continue to be with the U.S. Air Force (to develop new products for space and airship applications), Lockheed Martin and NREL. In addition, we continue to incur product development and research expenses to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV modules.
Operating, general and administrative expenses and patent expenses increased ($278,000) due principally to increased support staff added to carry out the expansion activities associated with our new Auburn Hills 2 and Greenville, Michigan manufacturing facilities.
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Ovonic Battery Segment
| Nine Months Ended
March 31, |
| 2007 | | 2006 | |
| (in thousands) |
REVENUES | |
Product sales | $ | 2,988 | | $ | 2,271 | |
Royalties | | 2,324 | | | 2,384 | |
Revenues from product development agreements | | 508 | | | 719 | |
Revenues from license agreements | | 734 | | | 784 | |
Other operating revenues | | 137 | | | 200 | |
TOTAL REVENUES | $ | 6,691 | | $ | 6,358 | |
EXPENSES | | | | | | |
Cost of product sales | $ | 2,635 | | $ | 2,390 | |
Product development and research | | 6,295 | | | 7,046 | |
Operating, general and administrative expenses and patent expenses | | 964 | | | 581 | |
TOTAL EXPENSES | $ | 9,894 | | $ | 10,017 | |
LOSS FROM OPERATIONS | $ | (3,203 | ) | $ | (3,659 | ) |
Our Ovonic Battery segment’s operating loss decreased in 2007 due principally to a $750,000 reduction in 2007 in the product warranty accrual. After the quarter, the company began implementing a restructuring plan that substantially reduces the research and development, general and administrative and other expenses that were the primary contributors to the operating losses in this segment during the reported quarter.
Product sales, which include sales of our positive electrode nickel hydroxide materials, increased in 2007 as compared to 2006 due to increased sales of nickel hydroxide in 2007 partially offset by reduced sales to our Rare Earth Ovonic joint venture (zero in 2007 compared to $780,000 in 2006). Positive electrode nickel hydroxide sales increased to $2,988,000 in 2007 from $1,491,000 in 2006. Costs of sales of these products increased to $2,635,000 in 2007, from $1,659,000 in 2006, reflecting a higher volume of sales offset by the aforementioned reduction ($731,000) in 2007 in the Rare Earth Ovonic program.
Royalties declined slightly in 2007 as compared to 2006 due to decreases ($126,000) in consumer royalties, partially offset by an increase ($67,000) in transportation royalties.
The combined product development and research expenses decreased to $6,295,000 in 2007 from $7,046,000 in 2006 due to cost reductions in certain programs, plus a reduction in the allocation of general and administrative expenses to product
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development and research expenses. Revenues from product development agreements decreased principally due to reduced research and development support for our Cobasys joint venture as it transitioned toward product development and production ($508,000 in 2007 compared to $678,000 in 2006).
Revenues from license agreements were basically the same in 2007 as in 2006, representing principally the amortization ($238,000 per quarter) over 10.5 years of a $10,000,000 payment received in a July 2004 settlement of certain patent infringement disputes (see Note D, “Joint Ventures and Investments,” of the Notes to our Consolidated Financial Statements) plus an additional license agreement of $20,000 in 2007. In 2006, Ovonic Battery had additional license fees ($70,000) from new Chinese licensees.
Operating, general and administrative expenses and patent expenses increased in 2007 due to increased patent defense costs plus a reduction in the allocation of general and administrative expenses to product development and research, partially offset by a $750,000 reduction in the product warranty accrual in connection with the Rare Earth Ovonic joint venture.
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Energy Conversion Devices Segment
| Nine Months Ended
March 31, |
| 2007 | | 2006 | |
| (in thousands) |
REVENUES | | | | | | |
Product sales (substantially all of which is from intercompany sales) | $ | 87,210 | (1) | $ | 36,301 | (1) |
Royalties | | 103 | | | 861 | |
Revenues from product development agreements | | 3,259 | | | 3,172 | |
Other operating revenues | | 1,273 | | | 684 | |
TOTAL REVENUES | $ | 91,845 | | $ | 41,018 | |
EXPENSES | | | | | | |
Cost of product sales | $ | 87,515 | | $ | 36,573 | |
Cost of revenues from product development agreements | | 3,963 | | | 4,166 | |
Product development and research | | 17,305 | | | 15,836 | |
Operating, general and administrative expenses and patent expenses | | 7,679 | | | 7,834 | |
TOTAL EXPENSES | $ | 116,462 | | $ | 64,409 | |
LOSS FROM OPERATIONS | $ | (24,617 | ) | $ | (23,391 | ) |
| (1) | Represents sales ($87,182,000 and $36,257,000 for the nine months ended March 31, 2007 and 2006, respectively) by ECD to United Solar Ovonic of the solar PV module machinery and equipment which is eliminated in consolidation. |
The ECD segment had an increased operating loss in 2007 versus 2006 primarily due to increased product development expenses and reduced royalties. After the quarter, the company began implementing a restructuring plan that substantially reduces the research and development, general and administrative and other expenses that were the primary contributors to the operating losses in this segment during the reported quarter.
Substantially all of our product sales ($87,182,000) are sales of production equipment by our Production Technology and Machine Building Division to our United Solar Ovonic segment in connection with its manufacturing expansion that are eliminated in consolidation. Product sales and cost of product sales increased due to commencement of production and sales of production equipment for this expansion.
Royalties, consisting principally of royalties related to our Ovonic photonic devices technologies, decreased principally due to a one-time adjustment ($690,000) recorded in
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2006 for royalties paid in prior years in which the licensee no longer had contractual obligations to make payments.
Other operating revenues consist primarily offacilities and administrative, laboratory, machine shop and miscellaneous services provided to some of our unconsolidated affiliates.
The combined product development and research expenses increased to $21,268,000 in 2007 from $20,002,000 in 2006, as we continued to develop our emerging technologies for future applications, including our Ovonic solid hydrogen storage systems and Ovonic cognitive computer (including the Ovonic quantum control device) technologies. Revenues from product development agreements increased primarily due to increases in existing programs in 2007 for biofuel reformation with Xcel Energy and organic electroluminescent devices with United States Display Consortium, partially offset by the completion of the program in 2006 with NREL and reduced activities with NIST related to our Ovonic photonic devices technology. In addition, there were new programs in 2007 with the Department of Defense related to our fuel cell and hydrogen technologies.
Other Income/Expense
Other income (net) increased to $14,113,000 in 2007 from $3,159,000 in 2006, primarily due to higher interest income ($14,375,000 in 2007 compared to $3,530,000 in 2006) relating to increased funds available for investment.
Liquidity and Capital Resources
Our primary liquidity needs are to fund capital expenditures associated with expansion of our United Solar Ovonic segment’s manufacturing capacity, support our working capital requirements, and fund the further development of our emerging technologies in our other segments and general corporate purposes. Our principal sources of liquidity are cash, cash equivalents and short-term investments, and related interest income, (which principally represent the proceeds from our March 2006 common stock offering) and cash flows from operating activities at our United Solar Ovonic segment. We believe that cash, cash equivalents and short-term investments and cash flows from operations will be sufficient to meet our liquidity needs for the foreseeable future. We are using the net proceeds from our March 2006 common stock offering for our PV manufacturing expansion, which includes construction of two 60MW manufacturing facilities in Greenville, Michigan, an assembly plant in Tijuana, Mexico, and related assembly equipment, and general corporate purposes. We will require additional funding for this expansion through 2010, and for emerging technologies and general corporate purposes, which we may obtain from equity and debt financing, business agreements and other sources.
As of March 31, 2007, we had $271,922,000 consolidated cash, cash equivalents, and short-term investments consisting of certificates of deposits, variable rate corporate bonds (“VRCB’s”), auction rate certificates (“ARC’s”), corporate notes and money market
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funds. All short-term investments are classified as “available-for-sale.” These short-term investments have maturities up to 36 months, except for the ARC’s which have maturities from 23 to 41 years. Both the VRCB’s and ARC’s resemble short-term instruments due to the periodic interest rate reset and put options. At March 31, 2007, we had consolidated working capital of $292,182,000.
Cash Flows
Net cash used in operating activities for the nine months ended March 31, 2007 was $1,332,000 as compared to net cash used in operations of $17,030,000 for the nine months ended March 31, 2006.
In comparing the respective nine-month periods, the improvement in this area resulted from the following:
| • | Reduced net loss ($5,741,000). |
| • | Increased depreciation and amortization ($2,524,000), principally due to the new Auburn Hills facility which commenced production in December 2006. |
| • | Increased collection of accounts receivable ($6,409,000). |
| • | Increase in accounts payable and accrued expenses ($15,138,000), principally due to the increased accounts payable activities associated with the capital spending related to the United Solar Ovonic expansion. |
The above improvements were partially offset by the substantial increase ($13,394,000) in inventories compared to the increase in inventories in the nine months ended March 31, 2006. The increase in inventories in 2007 is a result of the acquisition of raw materials ahead of the ramp up of the new Auburn Hills manufacturing plant at United Solar Ovonic and an increase in finished goods inventory as production exceeded product sales at United Solar Ovonic.
Net cash used in investing activities was $118,116,000 in 2007 as compared to $133,459,000 used in 2006. This decrease was due to net proceeds from sales and maturities ($21,504,000) of investments in 2007 compared to net purchases ($93,277,000) in 2006 plus purchases ($139,421,000) of property, plant and equipment in 2007
compared to 2006 ($40,523,000). This increase in capital spending was principally associated with expansion of our United Solar Ovonic segment’s manufacturing capacity.
Net cash provided by financing activities was $8,308,000 in 2007 as compared to $348,175,000 in 2006 due to the public stock offering of $307.5 million in 2006.
For details of our cash flows, see the Consolidated Statements of Cash Flows in our Consolidated Financial Statements.
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Contractual Obligations
The Company, in the ordinary course of business, enters into purchase commitments for raw materials. The Company also enters into purchase commitments for capital equipment, including subcontracts for the purchase of components for the new solar cell manufacturing equipment constructed for the new Auburn Hills facility and being constructed for Greenville facilities in Michigan. The Company’s total obligations under purchase commitments at March 31, 2007, were $92,411,000 ($71,611,000 of which was due within one year and $20,800,000 thereafter) compared to $42,210,000 at June 30, 2006.
The increase in purchase commitments is primarily due to additional commitments to purchase steel for the new Auburn Hills facility and construction and equipment commitments for the new Greenville facilities.
Short-term Borrowings
As of March 31, 2007, we had a line of credit with LaSalle Bank Midwest N.A. in the amount of $4,000,000. This line of credit provides a mechanism for obtaining letters of credit and entering into future foreign exchange transactions. The line of credit, which expires on August 31, 2007, is secured by a security interest in inventory and receivables and contains certain covenants, including a minimum $20,000,000 liquidity covenant. At March 31, 2007, the Company had outstanding letters of credit of $2,161,000 against the line of credit.
Joint Ventures
We do not presently provide funding to either of our principal joint ventures, Cobasys and Ovonyx. Chevron, our partner in Cobasys, is presently funding Cobasys’ operations and is committed under the Cobasys operating agreement to continue funding approved operating budgets through December 2007. Beginning in January 2008, the joint venture partners will be required to make capital contributions as necessary to fund approved operating budgets in proportion to their percentage interests, subject to the terms of the Cobasys operating agreement. Ovonyx does not currently require financial support because it has generated sufficient funds for its operations through licensing activities.
Critical Accounting Estimates and Significant Accounting Policies
Our significant accounting policies are more fully described in Note A, “Summary of Accounting Policies,” to our Consolidated Financial Statements. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers
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and suppliers and information available from other outside sources, as appropriate. However, they are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates.
We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations.
Allowance for Uncollectible Accounts
Our allowance for uncollectible accounts decreased to $623,000 at March 31, 2007, from $691,000 at June 30, 2006. See Note B, “Accounts Receivable,” to our Consolidated Financial Statements.
Product Warranty Accrual
Our product warranty accrual decreased to $1,295,000 at March 31, 2007 from $1,835,000 at June 30, 2006, due principally to a $750,000 reduction in December 2006 in the warranty related to our Rare Earth Ovonic joint venture. See Note E, “Liabilities,” to our Consolidated Financial Statements. We generally provide a 20-year product warranty on power output on all Uni-Solar products installed as part of pre-engineered solutions.
Government Contracts and Reserves
Our reserves for government contracts decreased to $1,983,000 at March 31, 2007 from $2,345,000 at June 30, 2006 due to increased billings on government contracts in 2007. See Note E, “Liabilities,” to our Consolidated Financial Statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including in particular statements about our financial condition, results of operations, plans, objectives, expectations, future performance and business prospects. These statements are identified by forward-looking words such as “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and similar expressions. We have based these forward-looking statements on our current expectations with respect to future events and occurrences, but our actual results in the future may differ materially from the expected results reflected in our forward-looking statements. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements include general economic and industry conditions in the markets in which we operate, risks associated with conducting business in foreign countries, and the risks discussed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006, and in other filings with the SEC from time to time. Any or all of these factors could cause our actual results and financial or legal status for future periods
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to differ materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The following discussion about our exposure to market risk of financial instruments contains forward-looking statements. Actual results may differ materially from those described.
Our holdings of financial instruments are comprised of debt securities and time deposits. All such instruments are classified as securities available-for-sale. We do not invest in portfolio equity securities, or commodities, or use financial derivatives for trading purposes. Our debt security portfolio represents funds held temporarily, pending use in our business and operations. The Company had $271,690,000 and $403,816,000 of these investments (including cash equivalents) on March 31, 2007 and June 30, 2006, respectively. It is the Company’s policy that investments (including cash equivalents) shall be rated “A” or higher by Moody’s or Standard and Poor’s, no single investment (excluding cash equivalents) shall represent more than 10% of the portfolio and at least 10% of the total portfolio shall have maturities of 90 days or less. Our market risk primarily relates to the risks of changes in the credit quality of issuers. An interest rate change of 1% would result in a change in the value of our March 31, 2007, portfolio of approximately $336,000.
Item 4. | Controls and Procedures |
We have evaluated the effectiveness of our disclosure controls and procedures as required by the Exchange Act 13a-15(b) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
There have been no material changes from the risk factors as previously disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ENERGY CONVERSION DEVICES, INC. (Registrant) |
| By: | /s/ Sanjeev Kumar |
Date: May 8, 2007 | | Sanjeev Kumar
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
| |
| By: | /s/ Robert C. Stempel |
Date: May 8, 2007 | | Robert C. Stempel
Chairman and Chief Executive Officer |
| | |
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