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MEMC ELECTRONIC MATERIALS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto of MEMC Electronic Materials, Inc. included herein. OVERVIEW MEMC is a global leader in the development, manufacture and sale of silicon wafers and a major developer and seller of photovoltaic energy solutions. Through the Solar Energy segment, MEMC is one of the world's leading developers of solar energy projects and, we believe, one of the most geographically diverse. MEMC's technology leadership in silicon and downstream solar are enabling the company to expand its customer base and lower costs throughout the silicon supply chain. During 2013, we are continuing the actions set forth in the 2011 Global Plan and will execute a strategic plan for the ongoing operation of our businesses designed to continue to improve our performance and address the challenges within our industries. Our business strategy is designed to address the most significant opportunities and challenges facing the company, including: • Managing cash flow and mitigating liquidity risks, evaluating the level of committed financing prior to commencement of solar project construction and managing the timing of expenditures for the construction of solar energy systems as compared to receipts from final sale or financing; • Focusing on semiconductor operating cash flows and further streamlining those operations; and • Optimizing solar project pipeline development and achieving future growth in solar systems sales globally and across all platforms. Semiconductor Materials Segment Net sales and gross margins in our Semiconductor Materials segment increased in the first quarter of 2013 as compared to the same period in 2012 primarily due to higher volume as market conditions improved; however, pricing pressures continue as a result of the competitive landscape, over capacity in the industry and the weakening Japanese Yen. Since the first quarter of 2012, we have been realizing the benefits of our improved productivity through the ramp up of our Ipoh, Malaysia plant and the 2011 Global Plan, which has contributed to the semiconductor margin improvement even with declining pricing. We also generated positive cashflows for the first quarter of 2013. Solar Energy Segment During the three months ended March 31, 2013, revenues were recognized for direct sales of solar energy systems on 18 projects totaling 42.8 megawatts ("MW"). We currently have 135.4 MW of solar projects under construction, predominately in North America, and continue to evaluate project development opportunities outside of North America. We have project pipeline of approximately 2.7 gigawatts ("GW") as of March 31, 2013, up slightly from the 2.6 GW of project pipeline as of December 31, 2012. RESULTS OF OPERATIONS Net sales by segment for the three month periods ended March 31, 2013 and March 31, 2012 were as follows: Three Months Ended March 31, Net Sales 2013 2012 Dollars in millions Semiconductor Materials $ 229.8 $ 216.0 Solar Energy 213.8 303.2 Total Net Sales $ 443.6 $ 519.2 35-------------------------------------------------------------------------------- Semiconductor Materials Segment Net Sales The increase in Semiconductor Materials net sales in the first quarter of 2013 compared to the prior year was the result of volume increases of $33.6 million offset partially by price decreases of $17.7 million and a less favorable product mix of $2.1 million. Volume increased across all diameters as our market share continues to strengthen, especially as compared to the first quarter of 2012. Price decreases occurred primarily with 300mm and 150mm wafers, while prices for 200mm wafers remained relatively flat. Pricing was negatively impacted by a competitive market environment, over capacity and weakening of the Japanese Yen. Our semiconductor wafer average selling price in the three months ended March 31, 2013 was approximately 8.0% lower than the average semiconductor wafer selling price for the same period in 2012. Solar Energy Segment Net Sales Revenue from solar energy system sales decreased $89.4 million over the prior year first quarter from $303.2 million to $213.8 million in the three months ended March 31, 2013. The decrease is primarily due to the decline and change in mix of solar energy system sales. During the first quarter of 2013, solar energy system sales totaled 42.8 MW compared to 47.3 MW during the first quarter of 2012. In the prior year first quarter, almost all of the solar energy project revenue was related to fully developed solar energy systems, whereas in the first quarter of 2013, 18.5 MW of the 42.8 MW were related to engineering, procurement and construction ("EPC") solar energy system revenue. The decline in fully developed solar energy system sales volume was due to the decrease in development spend in the prior year to optimize liquidity. EPC solar system project sales per watt are generally lower than fully developed solar system project sales per watt because we are not directly involved in every phase of the solar energy system design, financing and development. This change in mix resulted in an average selling price ("ASP") decline from the first quarter of 2012 to first quarter of 2013 by approximately $1.44 per watt. The change in mix is a direct result of our decision to slow solar project development spending during the first half of 2012. Net sales for the three month period ended March 31, 2013 also include $25.0 million related to revenue recognized as part of the amendment of the long-term solar wafer supply contract with Tainergy (see Note 13). There were no similar transactions for the three month period ended March 31, 2012. Solar Energy segment net sales do not include financing sale-leasebacks with executed contract sales values of $17.2 million and $19.2 million in the first quarters of 2013 and 2012, respectively, because these transactions resulted in the retention of assets on our balance sheet along with the related non-recourse debt. See "Revenue Recognition" contained in Note 2, "Summary of Significant Accounting Policies," within our 2012 Annual Report on Form 10-K. Three Months Ended March 31, Gross Profit 2013 2012 Dollars in millions Cost of Goods Sold $ 393.9 $ 469.1 Gross Profit 49.7 50.1 Gross Margin Percentage 11.2 % 9.6 % The Semiconductor Materials segment gross profit increase in the first quarter 2013 compared to the first quarter of 2012 is primarily due to higher volume, better efficiencies and continued focus on cost reduction which offset lower selling prices. The cost reductions have resulted from the ramp up of our Ipoh, Malaysia plant and the 2011 Global Plan restructuring efforts. In comparison to the first quarter of 2012, the Solar Energy segment gross profit in the first quarter of 2013 was negatively impacted by lower sales of fully developed solar energy systems. Offsetting the declines in the Solar Energy segment's margins in 2013 were the $25.0 million of revenue recognized on the Tainergy contract amendment, as well as $8.3 million of revenue recognized from profit deferrals for power guarantees that expired during the quarter. For the three months ended March 31, 2013 and March 31, 2012, we received cash in excess of our system construction costs of $2.6 million and $1.6 million, respectively, for our executed sale-leasebacks in which margin will be recognized in accordance with GAAP at the end of the leases. 36 -------------------------------------------------------------------------------- Three Months Ended March 31, Marketing and Administration 2013 2012 Dollars in millions Marketing and Administration $ 70.3 $ 83.2 As a Percentage of Net Sales 15.8 % 16.0 % The decrease in marketing and administration expenses for the three month period ended March 31, 2013 relative to the three month period ended March 31, 2012 is primarily due to the decline in spend on staffing, infrastructure, operations and certain other costs as part of our cost reduction efforts undertaken in conjunction with the 2011 Global Plan. Three Months Ended March 31, Research and Development 2013 2012 Dollars in millions Research and Development $ 17.4 $ 20.1 As a Percentage of Net Sales 3.9 % 3.9 % R&D expenses consist mainly of product and process development efforts to increase our capabilities in each of our business units. Overall spend on R&D for 2013 has decreased from 2012 amounts, primarily related to solar wafering. Three Months Ended March 31, Restructuring (Reversals) Charges 2013 2012 Dollars in millions Restructuring and Impairment $ (4.5 ) $ 1.0 As a Percentage of Net Sales (1.0 )% 0.2 % The $4.5 million of income recognized in the first quarter of 2013 is primarily a result of a reversal of amounts previously estimated at the Merano, Italy facility due to settlements of prior estimated reserves. The restructuring and impairment charges related to the first quarter of 2012 include severance and other restructuring charges of $3.0 million, offset by a $2.0 million favorable adjustment as a result of a contract amendment. Three Months Ended March 31, Operating Income (loss) 2013 2012 Dollars in millions Semiconductor Materials $ 1.4 $ (12.5 ) Solar Energy (10.8 ) (17.1 ) Corporate and Other (24.1 ) (24.6 ) Total Operating Loss $ (33.5 ) $ (54.2 ) During the three month period ended March 31, 2013, we had an operating loss of $33.5 million as compared to a loss of $54.2 million in the comparable period in 2012. The decrease was the net result of the changes in gross profit dollars and operating costs discussed above, including the revenue related to the settlement with Tainergy, and as further described below. Semiconductor Materials Segment The increase in our Semiconductor Materials operating income to $1.4 million in the three months ended March 31, 2013 from an operating loss of $12.5 million in the three months ended March 31, 2012 was primarily the result of higher volumes in a strengthening market, better efficiencies and continued cost reduction focus which were partially offset by lower selling prices. The cost benefit reductions we are realizing from the ramp up of our up Ipoh, Malaysia plant and the 2011 Global Plan have contributed to the improved profitability. 37 -------------------------------------------------------------------------------- Solar Energy Segment The decrease in the Solar Energy segment operating loss is primarily attributable to the $25.0 million of revenue related to the Tainergy contract amendment, as well as $8.3 million of revenue recognized from profit deferrals for power guarantees that expired during the quarter. These amounts were offset by lower solar energy system sales when compared to the three months ended March 31, 2012 and lower average selling price per watt, as discussed above. The Solar Energy segment's operating results are highly dependent upon the timing of system sales and revenue recognition requirements related to the terms of sales agreements and type of project finance method utilized, as well as completed and uncompleted projects. Revenue and income recognition in any given period may differ due to the timing of installations, related expenditures, system warranty and indemnity provisions and the type of financing obtained. Corporate and Other Corporate and Other expenses are comprised of substantially all of our stock-based compensation expense, general corporate marketing and administration costs, research and development administration costs, legal, auditing and tax professional services and related costs, salary and other personnel costs, and other items not reflected in the segments. Three Months Ended March 31, Non-operating Expense (Income) 2013 2012 Dollars in millions Interest Expense $ 47.5 $ 27.7 Interest Income (0.5 ) (0.8 ) Other, Net 1.1 0.2 Total Non-operating Expense $ 48.1 $ 27.1 During each of the three months ended March 31, 2013 and March 31, 2012, we incurred interest expense of $10.7 million related to our 2019 Notes issued on March 10, 2011. Further, we incurred interest expense of $5.4 million during the three months ended March 31, 2013 related to the Term Loan entered into on September 28, 2012, which did not exist in the first quarter of 2012. See Liquidity and Capital Resources, below. For the three month period ended March 31, 2013, we recorded interest expense, including amortization of deferred debt issuance fees, accretion of contingent consideration and letter of credit and commitment fees of $19.1 million related to our solar energy business, net of capitalized interest of $2.3 million. For the three month period ended March 31, 2012, we recorded interest expense, including amortization of deferred debt issuance fees, accretion of contingent consideration, and letter of credit and commitment fees of $15.3 million related to solar energy systems, net of capitalized interest of $5.5 million. This increase to interest expense relates primarily to increased debt and leases for new solar energy systems. In addition, in the first quarter of 2013, we recorded $8.8 million to interest expense for fair value adjustments pertaining to an economic interest swap hedge related to several consolidated solar energy system projects for which we own 8.2% (see Note 6). The additional expense was offset on the consolidated condensed statement of operations by approximately $8.1 million of income from non-controlling interests which represents the 91.8% we do not own. This economic interest rate swap hedge did not exist in the first quarter of 2012. Three Months Ended March 31, Income Taxes 2013 2012 Dollars in millions Income Tax Expense $ 19.5 $ 17.0 Income Tax Rate as a % of Loss before Income Taxes (23.9 )% (20.9 )% The income tax expense in 2013 is primarily attributable to the worldwide operational earnings mix at various rates and a net increase to the accrual for uncertain tax positions of $8.3 million. The income tax expense in 2012 is primarily attributable to the recognition of a valuation allowance on deferred tax assets in the prior year and taxable income in lower rate jurisdictions. 38 -------------------------------------------------------------------------------- Three Months Ended March 31, Net Loss Attributable to Noncontrolling Interests 2013 2012 Dollars in millions Net Loss Attributable to Noncontrolling Interests $ 12.0 $ 0.9 For the three month period ended March 31, 2013, the increase in net loss attributable to noncontrolling interests is mainly due to the $8.1 million fair value adjustment pertaining to an economic interest rate swap instrument for several consolidated solar energy system projects for which we own 8.2%. See discussion above. FINANCIAL CONDITION Cash and cash equivalents decreased $151.0 million from $572.6 million at December 31, 2012 to $421.6 million at March 31, 2013. See additional discussion in Liquidity and Capital Resources below. Our short-term restricted cash totaled $54.6 million at March 31, 2013 compared to $72.4 million at December 31, 2012. The decrease of $17.8 million was primarily due to the release of collateral on fixed deposit guarantees relating to standby letters of credit as well as the release of restrictions due to the deconsolidation of certain entities during the three months ended March 31, 2013. Net accounts receivable of $220.4 million at December 31, 2012 increased $58.1 million to $278.5 million at March 31, 2013. The increase was primarily attributable to the timing of collections from customers. Our inventories decreased $20.2 million to $227.6 million at March 31, 2013 from $247.8 million at December 31, 2012. Inventories primarily decreased as a result of lower polysilicon inventory on hand and a decrease in the procurement of modules due to the lower use of modules in the construction of solar energy systems during the first three months of 2013. Solar energy systems held for sale and development of $133.8 million at December 31, 2012 increased $87.2 million to $221.0 million as of March 31, 2013. The increase primarily relates to the increase in development activity in the U.S. and China during the three month period ended March 31, 2013. No solar energy systems were held for sale at March 31, 2013 and December 31, 2012. Prepaid and other current assets decreased $21.9 million from $212.2 million at December 31, 2012 to $190.3 million at March 31, 2013 primarily due to a reclassification of deferred taxes from current to long-term. Short term solar energy system financing of $97.8 million at December 31, 2012 increased $30.4 million to $128.2 million at March 31, 2013 due to increase in development activity in the U.S. and China. Accounts payable decreased $74.4 million to $402.6 million at March 31, 2013 from $477.0 million as of December 31, 2012. The decrease relates primarily to the timing of payments to vendors and decrease in inventory. Short-term and long-term solar energy system deferred revenues of $259.1 million at December 31, 2012 increased $33.7 million to $292.8 million at March 31, 2013. The increase relates to deferred profits from direct sales of solar energy systems in 2013, in which certain guarantees exist. Short-term and long-term customer deposits of $261.7 million at December 31, 2012 decreased $49.9 million to $211.8 million at March 31, 2013. The decrease primarily originated in our Singapore operations and was due to milestone billings and the $25.0 million deposit release pertaining to the current quarter contract amendment with Tainergy. 39 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES We had net loss attributable to MEMC stockholders of $89.4 million for the three month period ended March 31, 2013. We used $118.6 million of cash for operations which included outflows related to the cost to construct solar energy systems held for development and payments of accounts payable coupled with an increase in accounts receivable. Challenging solar industry conditions have negatively impacted our results of operations and cash flows and may continue to do so in the future. Our consolidated financial statements have been prepared assuming the realization of assets and the satisfaction of liabilities in the normal course, as well as continued compliance with the financial and other covenants contained in our existing credit facilities and other financing arrangements. Liquidity Cash and cash equivalents at March 31, 2013 totaled $421.6 million, compared to $572.6 million at December 31, 2012. Of the cash and cash equivalents at March 31, 2013, approximately $246.1 million was held by our foreign subsidiaries, a portion of which may be subject to repatriation tax effects. We believe that any repatriation tax effects would have minimal impacts on future cash flows. The primary items impacting our liquidity in the future are cash from operations, including working capital effects from the sale of solar energy systems and reduction of current inventory levels, capital expenditures, borrowings and payments under our credit facilities and other financing arrangements, the monetization of our pipeline and the availability of project finance and/or project equity at acceptable terms. We believe our liquidity will be sufficient to support our operations for the foreseeable future, although no assurances can be made if significant adverse events occur, or if we are unable to access project capital needed to execute our business plan. In addition to our need to maintain sufficient liquidity, cash flow from our operations and borrowing capacity under our credit facilities, we will need to raise additional funds in the future in order to meet the operating and capital needs of our solar energy systems development business. These funds are expected to be in the form of non-recourse project finance capital or outright sale of solar energy systems to investors. However, there can be no assurances that such project financing or equity will be available to us, or available to us on terms and conditions we find acceptable. We may not be able to sell solar projects or secure adequate debt financing or equity funding for such projects on favorable terms, or at all, at the time when we need such funding. If these or other sources of funding are not available, this will have a significant negative impact on our ability to execute our business plan and on our overall operations, operational results and cash flows. The rate of growth of the Solar Energy segment is limited by capital access. During the construction phase of solar energy systems, MEMC provides short-term working capital support to a project company or may obtain third party non-recourse development and construction financing to fund engineering, procurement and installation costs. Once complete, MEMC either directly sells the project to a third party or obtains more permanent capital on behalf of the project company through sale-leaseback, or to a lesser extent, debt or other financing structures that will typically be secured by the energy producing assets and projected cash flows from energy sales. We expect cash on hand, 2013 operating cash flows, project finance debt, the Credit Facility, Term Loan and project finance construction revolver to provide sufficient capital to support the construction phase of our currently planned projects for 2013 and otherwise meet our capital needs for the remainder of 2013. However, we will continue to need to raise additional long-term project financing, either in the form of project debt or equity, or both. MEMC expects ongoing efforts to secure more project capital, including sources of non-recourse project capital, to generate sufficient resources to support growth. We anticipate incremental capital needs for the remainder of 2013 associated with project finance markets to range from $700.0 million to $900.0 million depending on the amount of megawatts ultimately installed and interconnected in 2013. There can be no assurances that such financing will be available to us or at terms that we find acceptable. In the event that we are unable to raise additional funds, our liquidity will be adversely impacted, we may not be able to maintain compliance with our existing debt covenants and our business will suffer. If we are able to secure additional financing, these funds could be costly to secure and maintain and could impact our earnings and our liquidity. We have discretion in how we use our cash to fund capital expenditures, to develop solar energy systems and for other costs of our business. We evaluate capital projects and the development of solar energy systems based on their expected strategic impacts and our expected return on investment. We may use this discretion to decrease our capital expenditures and development of solar energy systems, which may impact our operating results and cash flows for future years. For example, we may defer construction of solar energy systems and look for opportunities to partner with outside investors to finance the 40 -------------------------------------------------------------------------------- development of projects. If we delay the construction of solar energy systems or are unable to sell solar energy systems held for development and sale, our operating results and cash flows will be adversely impacted. Among our principal sources of cash during the three month period ended March 31, 2013 was $98.5 million from the sale-leaseback of solar energy systems. Uses of cash during the same period were as follows: • $118.6 million for operations; • $30.8 million in capital expenditures, primarily in our Semiconductor Materials segment; • $47.4 million invested in construction of Solar energy systems that will remain on our balance sheet; and • $26.2 million repaid to customers for deposits on long-term supply agreements. During the three month periods ended March 31, 2013 and March 31, 2012, $118.6 million and $386.7 million, respectively, of cash was used for operating activities. The cash use during the three month period ended March 31, 2013 was primarily a result of the net loss incurred and the decrease of accounts payable from payments made in 2013 related to December 31, 2012 accounts payable, and the increase in accounts receivable from December 31, 2012 to March 31, 2013 due to the timing of collections. Cash used in investing activities decreased to $76.2 million in the three month period ended March 31, 2013 compared to $95.5 million used in the three month period ended March 31, 2012, due to decreased spending on solar and non-solar energy system property, plant and equipment, partially offset by the net payment to our joint venture with Samsung Fine Chemicals Co. Ltd. For the three month period ended March 31, 2013, cash provided by financing activities was $50.9 million, compared to $275.5 million of cash provided by financing activities in the three month period ended March 31, 2012. The decrease was mainly due to $278.7 million in net proceeds from solar energy systems financing received during the first quarter of 2012 as compared to $86.1 million net proceeds from solar energy systems financing received during the three month period ended March 31, 2013. A majority of the change in cash provided by financing activities was due to the prior year financing of non-recourse term loans totaling $166.5 million for the Bulgaria solar energy system project. There were no financings of similar nature in the current period. Borrowings Senior Notes On March 10, 2011, we issued $550.0 million of 7.75% Senior Notes due April 1, 2019 (the "2019 Notes"). We incurred $13.8 million in debt issuance costs, which is amortized into the condensed consolidated statement of operations over the eight year term. The 2019 Notes were sold at a price equal to 100.0% of the principal amount thereof. The 2019 Notes are guaranteed by certain of MEMC's domestic subsidiaries (the "guarantors"). The 2019 Notes are senior unsecured obligations and are subordinated to all of our and the guarantors' existing and future secured debt. The indenture governing the 2019 Notes contains covenants that limit our and certain subsidiaries' ability, subject to certain exceptions and qualifications, (i) to make certain asset sales, (ii) to make certain restricted payments and investments, (iii) to incur indebtedness and issue preferred stock, (iv) to declare dividends, (v) to make other payments affecting restricted subsidiaries, (vi) to engage in certain transactions with affiliates, and (vii) to merge, consolidate or sell substantially all of our assets. These covenants are subject to a number of qualifications and limitations, and in certain situations, a cross default provision. As of March 31, 2013, we were in compliance with all covenants in the indenture governing the 2019 Notes. In addition, the indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among other things: failure to make payments on the 2019 Notes when due, failure to comply with covenants under the indenture, failure to pay other indebtedness or acceleration of maturity of other indebtedness, failure to satisfy or discharge final judgments and occurrence of bankruptcy events. Revolving Credit Facility Our corporate revolving credit facility with Bank of America, N.A. is an aggregate principal amount of $400.0 million (the "Credit Facility"). The Credit Facility has a term of three years and expires in March 2014. Our obligations under the facility are guaranteed by certain domestic subsidiaries of MEMC. Our obligations and the guaranty obligations of the subsidiaries are secured by liens on and security interests in substantially all present and future assets of MEMC and the subsidiary guarantors, including a pledge of the capital stock of certain domestic and foreign subsidiaries of MEMC. 41 -------------------------------------------------------------------------------- We have amended the Credit Facility from time to time to adjust various covenants to accommodate changes in our business results. Currently, our consolidated leverage ratio covenant under the Credit Facility is 2.5 to 1.0, and our minimum liquidity covenant under this facility requires a minimum liquidity amount based on our trailing twelve month consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA). Our minimum liquidity covenant amount under the Credit Facility is $500 million in the event our trailing twelve month consolidated EBITDA is less than $400 million. In the event the trailing twelve month consolidated EBITDA is greater than or equal to $400 million and less than $600 million, our minimum liquidity amount will be $400 million. In the event it is greater than or equal to $600 million and less than $850 million, our minimum liquidity will be $300 million. Finally, if our trailing twelve month consolidated EBITDA is greater than or equal to $850 million, then no minimum liquidity amount is required. The Credit Facility contains representations, covenants and events of default typical for credit arrangements of comparable size, including maintaining a consolidated leverage ratio and a variable minimum liquidity amount. The Credit Facility also contains a customary material adverse effects clause and a cross default clause. The cross default clause is applicable to defaults on other indebtedness in excess of $35 million, excluding our non-recourse indebtedness. Our liquidity position was in excess of the minimum liquidity amount by $261.1 million and our consolidated leverage ratio was 1.6 at March 31, 2013. As of March 31, 2013, we were in compliance with all covenants of the Credit Facility. Interest under the Credit Facility will accrue, depending on the type of borrowing, at the base rate (in the case of base rate loans and swing line loans) or the eurocurrency rate (in the case of eurocurrency rate loans), plus, in each case, an applicable rate that varies from (currently 3.75%) for the eurocurrency rate to (currently 2.75%) for the base rate, depending on our consolidated leverage ratio. As of March 31, 2013 and December 31, 2012, we had no borrowings outstanding under this facility, although we had approximately $160.5 million and $121.8 million, respectively, of outstanding third party letters of credit backed by this facility at such date, which reduces the available capacity. Therefore, funds available under this facility were $239.5 million and $278.2 million as of March 31, 2013 and December 31, 2012, respectively. Second Lien Term Loan Credit Agreement On September 28, 2012, we entered into a Second Lien Credit Agreement ("Term Loan") with Goldman Sachs Bank USA and Deutsche Bank Securities Inc. providing for a term loan maturing on October 2, 2017 in an aggregate principal amount of $200.0 million, with a 2.0% discount to par for proceeds of $196.0 million. Additionally, we incurred $10.8 million in debt issuance costs, which is amortized into the condensed consolidated statement of operations over the five-year term. Interest under the Term Loan will accrue, depending on the type of borrowing, at the base rate or the eurocurrency rate, with a floor of 1.50%, plus an applicable rate equal to 9.25% for the eurocurrency rate and 8.25% for the base rate. Interest is due and payable in arrears at the end of each interest period, no less than quarterly, and on the maturity date. As of March 31, 2013, the current interest rate on the Term Loan is 10.75%. On January 15, 2013, we entered into an interest rate cap with a notional amount of $200.0 million, a cap rate of 1.50%, an effective date of March 28, 2013 and a maturity date of September 30, 2015. The interest rate cap will hedge the 3-month LIBOR variable rate maintained within the Term Loan, described in Note 6. The obligations under the Term Loan are guaranteed by certain of our domestic subsidiaries pursuant to a guaranty agreement executed by each such subsidiary. Our obligations and the guaranty obligations of the subsidiaries are secured by second priority liens on and security interests in substantially all of our present and future assets and the assets of the subsidiary guarantors, including a pledge of the capital stock of domestic and foreign subsidiaries. Similar to the revolving Credit Facility with Bank of America, N.A. (discussed above), the Term Loan contains affirmative and negative covenants. These include but are not limited to limiting the company's and certain of our subsidiaries' ability, subject to certain exceptions and qualifications, (i) to create, incur, assume or suffer any liens on assets or revenues, (ii) to make other restricted payments and investments, (iii) to incur indebtedness, (iv) to enter into certain transactions with affiliates, (v) to merge, consolidate or sell/dispose of assets, (vi) to enter into burdensome agreements, (vii) to engage in any material line of business different from current lines, or (viii) to prepay indebtedness or amend indebtedness that adversely affects the Term Loan lenders. These covenants are subject to a number of qualifications and limitations. Additionally, the Term Loan has financial covenants requiring a consolidated leverage ratio of 3.0 to 1.0 and minimum liquidity levels depending on our trailing twelve-month EBITDA and also includes a cross default cause. Our minimum liquidity covenant amount will be $400 million in the event our trailing twelve month consolidated EBITDA is less than $400 million. In the event the trailing twelve month consolidated EBITDA is greater than or equal to $400 million and less than $600 million, our minimum liquidity amount will be $300 million. In the event it is greater than or equal to $600 million and less than $850 42 -------------------------------------------------------------------------------- million, our minimum liquidity will be $200 million. Finally, if our trailing twelve month consolidated EBITDA is greater than or equal to $850 million, then no minimum liquidity amount is required. As of March 31, 2013, we were in compliance with all covenants of the Term Loan. Short-term Debt We have a borrowing capacity of $150.0 million under the current terms of the SunEdison non-recourse project construction revolver. This revolver contains certain covenants that provides if our Corporate Family or Corporate Credit Rating for Moody's Investors Service ("Moody's") falls below "B1" or our Standard and Poor ("S&P") rating falls below "B+", we will be required to post, at our election, a letter of credit or surety bond equal to 15.0% of the total outstanding balance in order to be able to continue to make additional borrowings under this facility. As of March 31, 2013, our ratings were "B3" and "BB" for Moody's and S&P respectively. Because our Corporate Family Rating for Moody's was below "B1", a letter of credit equal to 15.0% of the $9.7 million outstanding balances was posted as of March 31, 2013. Interest on borrowings under the agreement will be based, on our election, at LIBOR plus an applicable margin (currently 3.50%) or at a defined prime rate plus an applicable margin (currently 2.50%). The construction financing revolver also requires SunEdison to pay various fees, including a commitment fee (currently 1.10%). The construction financing revolver will be used to support the construction costs of utility and rooftop solar energy systems throughout the U.S. and Canada. The construction loans are non-recourse debt to entities outside of the project company legal entities that subscribe to the debt and are secured by a pledge of the collateral, including the project contracts and equipment. This revolver also maintains a customary material adverse effects clause whereby a breach may disallow a future draw but not acceleration of payment. This revolver also includes a cross default clause whose remedy, among other rights, includes the right to restrict future loans as well as the right to accelerate principal and interest payments. Because this is non-recourse financing, covenants relate specifically to the collateral amounts and transfer of right restrictions. As of March 31, 2013 and December 31, 2012, there was $9.7 million and $7.4 million, respectively, outstanding on this construction revolver. In the event additional construction debt is needed, we have the ability to draw upon the available capacity of our Credit Facility (discussed above). In the event we do not have adequate net working capital, such inability to fund future projects may have an adverse impact on our business growth plans, financial position and results of operations. At March 31, 2013, we had $421.6 million of cash and cash equivalents, $2,427.2 million of debt outstanding, of which the majority is long-term, and availability to borrow up to an additional $239.5 million million under our Credit Facility, subject to certain provisions and compliance with covenant requirements. Of this total debt outstanding, $1,621.2 million relates to project specific non-recourse financing that is backed by solar energy system operating assets. The breach of any of the Credit Facility provisions or covenants could result in a default under the Credit Facility and could trigger acceleration of repayment, and a cross default on our 2019 Notes and Term Loan, which could have a significant adverse effect on our liquidity and our business. As of March 31, 2013, we were in compliance with all covenants. While we expect to comply with the provisions and covenants of the Credit Facility, the Indenture governing the 2019 Notes and the Term Loan through 2013, deterioration in the worldwide economy and our operational results could cause us to not be in compliance. While we would attempt to obtain waivers for noncompliance, we may not be able to obtain waivers, which could have a significant adverse effect on our liquidity and our business. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed consolidated financial statements and related footnotes. In preparing these financial statements, we have made our best estimates of certain amounts included in the financial statements. Application of these accounting policies and estimates, however, involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In arriving at our critical accounting estimates, factors we consider include how accurate the estimate or assumptions have been in the past, how much the estimate or assumptions have changed and how reasonably likely such change may have a material impact. Our critical accounting policies and estimates are more fully described in Item 7 and Note 2 of Notes to Consolidated Financial Statements, included in Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes to our critical accounting policies and estimates since December 31, 2012. 43 -------------------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING STANDARDS See Note 1. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Statements set forth in this Form 10-Q or statements incorporated by reference from documents we have filed with the Securities and Exchange Commission may contain forward-looking statements. Forward-looking statements are not based on historical facts but instead reflect our expectations, estimates or projections concerning future results or events, including, without limitation, statements regarding demand and/or pricing of our products or the pricing environment in the future; our expectation that we will generate sufficient taxable income to realize the benefits of our net deferred tax assets; the appropriateness of our tax positions and the timing of our tax audits; the timing of our various manufacturing ramps or the cessation or continuation of production at certain facilities; the anticipated growth of our business in 2013 and beyond; the effects of economic factors on our market capitalization; our expectation that we will have the financial resources and liquidity needed to meet our business requirements throughout 2013; future amendments or termination of our agreements with our long-term solar wafer customers and payments associated with such contracts; our estimates of penalties associated with termination of or purchase shortfalls under certain of our long-term supply contracts with our vendors; the nature and extent of tax rebate programs or feed-in-tariffs in the future; our expectations regarding indemnification payments related to tax credits; our expectations regarding repatriation tax effects; our expectations related to the undistributed earnings of our foreign subsidiaries; the ultimate impact our legal proceedings may have on us; the charges we expect to incur, the expected costs, the timing of completion, the savings we expect to realize, the number of employees who will be affected and our execution of our announced restructurings; our expectations regarding our annual pre-tax operating benefits upon the completion of our restructuring activities; our expectations regarding recognition of annual amortization expenses; our expectations regarding our investments in research and development; our expectations regarding our future cash flow generation; our expectations regarding solar wafer sales to external parties and sales of our solar energy systems; the amount of our contributions to our pension plans in 2013 and our estimates regarding actuarial loss (gain) and future benefits payable under our pension plans; the anticipated effect of certain accounting pronouncements on our results of operations and financial condition; the classification of our solar energy systems as direct sales, sale-leasebacks or held systems and the current and subsequent accounting treatment of such transactions; our expectations regarding the timing and amount of our investments in our joint ventures; our expectations regarding our cash commitments and proceeds received under the SMP JV Supply and License Agreement; the timing of completion of the construction, installation and testing of the equipment and the milestone payments related to the SMP JV; the requirements of and our compliance with the terms governing our indebtedness, including the indenture governing the 2019 Notes and the impact of related cross default provisions; the sources of funding and our ability to access funding for our SunEdison business and our anticipated capital needs for 2013; our expectation regarding SunEdison's purchase of RECs; our ability to compete effectively in the markets we serve; and our statements regarding our working capital and other capital requirements for the next 12 months. These statements generally can be identified by the use of forward-looking words or phrases such as "believe," "expect," "anticipate," "may," "could," "intend," "belief," "estimate," "plan," "likely," "will," "should" or other similar words or phrases. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results, performance or achievements to differ materially from those expressed in or indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this document are only made as of the date of this document and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You should not place undue reliance on such statements, which speak only as of the date that they were made. Factors that could cause actual results to differ materially are set forth under "Item 1A. Risk Factors," in our Form 10-K for the year ended December 31, 2012. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect later events or circumstances or to reflect the occurrence of unanticipated events. 44 -------------------------------------------------------------------------------- |