LDK Defends its Inventory Accounting

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When LDK Solar separated its silicon inventory into material it could use within a year and material it couldn’t use within a year in its fourth-quarter earnings, it sparked new concerns about the company’s accounting practices among analysts (see Inventory Concerns Keep Haunting LDK).

"Would it, perhaps, not be more conservative accounting to take a write-down of such inventory then, rather than capitalizing it?" asked Credit Suisse analyst Satya Kumar, referring to the "inventories to be processed beyond one year" line item during a conference call last week (see Associated Press story).

At the Morgan Stanley Technology Conference in Dana Point, Calif., on Wednesday, LDK CEO Xiaofeng Peng responded to some of those concerns, saying LDK plans to use all the silicon it has included in its inventory.

"[If we can use it in] less than one year, we say it’s current inventory, but if the material is more than 12 months -- maybe you need 18 months to use the material -- then you need to put it as noncurrent," he said. "It’s just an accounting gradation, but the material is still using and will be using in the next 18 or 24 months."

He reminded investors that LDK uses mostly recycled silicon, mixed with only about 15 to 30 percent so-called virgin polysilicon, and that most of the recycled silicon comes from the semiconductor industry.

The scrap silicon that comes from the semiconductor industry comes in a variety of different purity and reactivity levels, some of which can’t be mixed together or used interchangeably, he said. So if LDK has can only use, say, 5 kilograms of a certain type of material per ingot, it might take 18 or 24 months to use all of that material, he said.

In its fourth-quarter earnings, LDK reported $350 million of "net inventories," which it expects to use within the year, and $30 million of inventories it expects to use after a year.

The explanation matched one that Chief Financial Officer Jack Lai gave to an investor group, which released a report about LDK on Tuesday.

"He said if we had more virgin poly, we could use it up quicker," Hakan Telenius, author of the report and organizer of the investor group. "It’s basically a blending agent that you can only use so much of to make a sufficiently high-quality product, and they have more than their recipe allows them to use for 2008. That material is in 2008’s products too, but they have excess of what they can use in 2008."

Lai told the group that the company accounts for its silicon using the price it paid for the material, unless the silicon’s value goes down, in which case LDK uses the lower value, Telenius said. LDK doesn’t account for any growth in the value of silicon that it has bought at a lower price, he said.

The group doesn’t know what form the $30 million of inventories to be used after a year is in, Telenius said. The investor group asked for a further breakdown about the prices LDK had paid for the different parts of its silicon inventory, but Lai called the request "outrageous," Telenius said, adding "actually that’s true, because that is competitive information."

Telenius -- who is, to repeat, an investor -- said he believes the accounting is fair. After all, LDK’s auditor, KPMG, is OK with the reporting, and KPMG is likely to be extra careful with all the shareholder lawsuits in the wings, he said.

"I look at it from the half-full perspective," Telenius said. "I think it’s great that LDK has … tried to get polysilicon from all kinds of sources to make a quality product. I think it’s smart; it lowers the cost."

Still, some analysts and investors might not be satisfied with Peng’s answer to a question from the audience about the independent audit, which the company in December announced had found "no material discrepancies."  

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"Are you planning to release [the] auditor report officially someday?" the conference attendee asked.He didn’t answer directly, instead saying the report is controlled, not by LDK, but by the independent auditor.

"Of course, when they do the investigation, they have something confidential," he said. "It’s not controlled by us because this is not the company’s information. I have not seen the details, because it is not [for] the company to decide because this is a separate, independent -- totally independent -- investigation."

Stocking Up

Also during the fourth-quarter earnings conference call, analysts said that the inventory figures didn’t match up with their calculations, according to the Associated Press.

At the time, Lai said the inventory figures included other materials, including slurry, wires and packaging materials, aside from silicon. In addition, the company said that in had 1,600 tons of silicon "in possession," but only 856 tons in its warehouse.

According to the investor report, the remaining 752 tons -- valued at $121 million -- are in transit. During a conference call in October, Lai said LDK books silicon when it is bought, even if it is still being transported to its warehouse, likening it to customers owning products they buy at a store, even if they haven’t yet brought the purchases home.

Also at the Morgan Stanley conference, Peng said it has secured more than 80 percent of the silicon it needs for the coming year at a fixed price.

"This is a big advantage for LDK," he said.

While he acknowledged getting the other 20 percent is a challenge in the current silicon shortage, Peng said LDK has framework contracts for 800 tons of new silicon from producers in China, for which it’s made prepayments, as well as framework contracts for scrap silicon from the semiconductor industry. He added the company also plans to buy some silicon on auction and to buy some scrap silicon from the solar industry.

"Normally, we can get an extra 50 to 80 tons per month from these kinds of markets," he said. "We believe we can cover the 20 percent in the next few months."

According to DigiTimes, spot prices for high-purity silicon have grown more than 10 percent so far this year to between $450 and $470 per kilogram.

"On the spot market, the pricing is crazy," he said. "Silicon in the moment is the highest in history. The silicon production cost normally is below $30. Of course, now in the market, you can easily find from $180, $200, $300 -- even more."

But long-term contract prices are in the $60 to $80 per kilogram range, he said, adding that he expects prices to drop below $30 per kilogram in the long run, cutting silicon costs from $2 per watt to between 25 cents and 30 cents per watt.

LDK’s planned 15,000-ton polysilicon plant could help mitigate the shortage, if it doesn’t end this year, as Frost & Sullivan forecasts.

The company expects to begin receiving equipment for the plant in the second quarter and to have construction on the reactor building start in March, he said. The plant is on track to be completed by the end of this year and to begin producing silicon in the first quarter of next year, he said.

"Everything we see, we are happy about the schedule," he said. "We believe we will do completion for the capacity [of] 6,000 tons [of] production [at the] end of this year. So next year we will produce about 5,000 to 7,000 tons of silicon."

And in spite of some predictions that the silicon shortage is ending, Peng said he isn’t concerned about an oversupply.

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Costs will need to come way down to help lower solar prices overall and boost demand, he said, adding that he’d like to see silicon prices fall to $60 to $80 per kilogram -- and eventually even to $30 per kilogram. If silicon costs drop, demand for solar power will increase and an oversupply shouldn’t be an issue for another 10 years or more, he said.

While panel prices are around $4 per watt today, he said if silicon prices become more reasonable, the industry should be able to sell panels for $2 to $2.50 per watt while keeping "very healthy profits for the food chain."

Calling Out the Competition

Peng said LDK, which already is the largest solar-wafer manufacturer in Asia and the second-largest manufacturer in the world, plans to overtake Renewable Energy Corp. for the top spot in 2009.

While it’s taken REC some eight or nine years to build up to 400 megawatts of capacity, LDK is only two years old and is growing faster, he said.

"We are the cost leader on the nonsilicon manufacturing cost," he said. "Our manufacturing cost is now about 30 percent lower than most other peers, both in China and overseas."

LDK already has signed contracts for most of the equipment it needs to reach 1.6 gigawatts of wafer capacity next year. It also bought a 33.5 percent stake in a Chinese crucible company to guarantee a lower-cost supply of crucibles, which it usually imports from France and the United States, Peng said.

"Most of the equipment is long-lead item and it’s even not available in the short term. We have ordered most of our equipment. … And all the delivery is on schedule and it will continue on schedule."

Peng added that the company continues to improve its technology processes to "easily" reduce its cost from less than 30 cents per watt -- compared to competitors’ cost of 30 to 40 cents --to less than 20 cents per watt in the "near future."

One way it plans to reduce cost per watt is by increasing the amount of sunlight the panels made from LDK’s wafers can convert into electricity. LDK’s customers have reached average cell efficiencies of 15.8 percent -- with some reaching averages of 16 percent -- up from an average of 8.3 percent only half a year ago, he said, adding the company’s goal is to reach averages of 18 to 19 percent.

"We will continue growing faster, compared to the local manufacturers, and I think our capacity is much much bigger and we are growing much faster and our production -- especially our manufacturing cost -- is much lower," he said. "Cost reduction is the big end goal for LDK Solar."