Daqo New Energy Announces Fourth Quarter and Fiscal Year 2012 Results

April 1, 2013 - Daqo New Energy Corp. today announced its unaudited financial results for the fourth quarter and fiscal year 2012.

• Polysilicon shipments were approximately 592 metric tons, or MT, including 323MT shipped from our Xinjiang facilities. Wafer shipments were 4.8MW. 

• Revenues were $6.2 million, compared to $21.1 million in the third quarter of 2012 and $27.3 million in the fourth quarter of 2011. The sales proceeds from polysilicon made by the Xinjiang facilities during pilot production period were excluded from the revenues recorded in the fourth quarter of 2012. 

• Gross loss was $11.1 million, compared to $10.8 million in the third quarter of 2012 and $11.7 million in the fourth quarter of 2011. 

• Gross margin was negative 178.5%, compared to negative 51.1% in the third quarter of 2012 and negative 43.0% in the fourth quarter of 2011. 

• Operating loss was $55.9 million, compared to $15.7 million in the third quarter of 2012 and $45.7 million in the fourth quarter of 2011. Excluding $42.8 million of long-lived asset impairment, the non-GAAP operating loss in the fourth quarter of 2012 was $13.1 million. 

• Operating margin* was negative 902.5%, compared to negative 74.2% in the third quarter of 2012 and negative 167.0% in the fourth quarter of 2011. Excluding $42.8 million of long-lived asset impairment, the non-GAAP operating margin in the fourth quarter of 2012 was negative 212.1%. 

• Net loss attributable to Daqo New Energy Corp. shareholders was $75.6 million, compared to $15.5 million in the third quarter of 2012 and $39.4 million in the fourth quarter of 2011. Excluding $42.8 million of long-lived asset impairment and $19.9 million valuation allowance for deferred tax asset, the non-GAAP net loss attributable to shareholders was $12.9 million. 

•Earnings per fully diluted ADS were negative $10.76, compared to negative $2.21 in the third quarter of 2012, and negative $5.61 in the fourth quarter of 2011.

• Polysilicon shipments were 3,585MT including 323MT shipped from our Xinjiang facilities in the fourth quarter of 2012. Polysilicon shipments in 2012 decreased 9.2% from 2011. 

• Revenues were $86.9 million, a decrease of 62.6% from 2011. 

• Gross loss was $37.4 million, compared to gross profit of $87.2 million in 2011. 

• Gross margin was negative 43.1%, compared to positive 37.6% in 2011. 

• Operating loss was $88.5 million, compared to operation income of $50.8 million in 2011. 

• Net loss attributable to Daqo New Energy Corp. shareholders was $111.9 million, compared to net income attributable to the shareholders of $33.3 million in 2011. 

• The earnings per fully-diluted ADS were negative $15.92, compared to positive $4.74 in 2011.

"In September of 2012, we started pilot production for polysilicon in our Phase II facilities in Xinjiang. Thanks to the dedication and hard work of our technical and operation teams, we produced 617 MT of polysilicon in our Xinjiang facilities in the fourth quarter of 2012. We shipped 323 MT to our customers and 139 MT internally to our wafer manufacturing business in the fourth quarter of 2012. We successfully reached our targets in terms of capacity and cost structure by the end of first quarter 2013. Our total production cost of polysilicon in Xinjiang was already below $20/kg in February 2013 and we believe there is still room for further improvement. Now we are working intensely to maximize the output and further reduce the cost in Xinjiang," commented Dr. Gongda Yao, Chief Executive Officer of the Company. "Since the end of 2012, we do see the demand for polysilicon is picking up, the average selling price is increasing and the payment terms are improving. We are confident that we are well positioned in the current challenging market with Xinjiang facilities' low cost and high quality polysilicon products."

Dr. Yao continued, "As for our facilities in Wanzhou, we have successfully conducted annual maintenance in the fourth quarter of 2012. We have already completed the technical improvement project of Hydrogen vent gas recovery. The other two projects of DCS recovery and electrical system modification for CVD reactors are ongoing. In addition, we are also evaluating various technical improvement options for further cost reduction.

"In the fourth quarter of 2012, due to the continued challenging supply and demand conditions in the wafer segment, we recognized an impairment of long-lived assets of our wafer facilities in the amount of $42.8 million. The recording of the impairment charge was to reflect the less than expected profit-generating ability of our wafer assets. In addition, considering the uncertainty in the solar market, the Company determined it was more-likely-than-not that our deferred tax assets would not be utilized before they expire and recorded a valuation allowance for deferred tax assets recognized in the prior periods in the amount of $19.9 million.

"Although it is still early to say the downturn is over, we are encouraged to see the solar market has begun to stabilize across the value chain since the end of 2012. We believe that 2013 will be a year of growth especially in Asia where China, Japan and India will make a great contribution, and other emerging markets like Africa, South America, and the Middle East," Dr. Yao concluded.

Revenues

Revenues were $6.2 million, compared to $21.1 million in the third quarter of 2012 and $27.3 million in the fourth quarter of 2011.

The sales proceeds from polysilicon made by the Xinjiang facilities during pilot production period were excluded from the revenues recorded in the fourth quarter of 2012.

Gross loss and margin

Gross loss was $11.1 million, compared to $10.8 million in the third quarter of 2012 and $11.7 million in the fourth quarter of 2011.

Gross margin was negative 178.5%, compared to negative 51.1% in the third quarter of 2012 and negative 43.0% in the fourth quarter of 2011.

Gross margin decreased compared to the third quarter of 2012 and fourth quarter of 2011, because in the fourth quarter of 2012, our Wanzhou polysilicon facilities were in the process of annual maintenance and technology improvement with no polysilicon output and the sales proceeds from polysilicon made by the Xinjiang facilities were excluded from the revenues in such period.

Selling, general and administrative expenses

Selling, general and administrative expenses were $1.8 million in the fourth quarter of 2012, compared to $5.1 million in third quarter of 2012 and $2.6 million in the fourth quarter of 2011. 

The decrease from the third quarter of 2012 and fourth quarter of 2011 was primarily due to our effort on cost reduction. The Company recorded $2.1 million bad debt provision in the third quarter of 2012. 

Research and development expenses

Research and development expense was $2.8 million in the fourth quarter of 2012, compared to $0.3 million in the third quarter of 2012 and $0.3 million in the fourth quarter of 2011. The Company incurred additional research and development expenses for our Xinjiang Phase II polysilicon facilities to achieve the targets for product quality, capacity and cost during the pilot production period, which are not expected to recur.

Long-lived assets impairment loss

In the fourth quarter of 2012, the Company recorded a $42.8 million impairment of long-lived assets for our wafer facilities. The impairment of long-lived assets of our wafer facilities was to reflect the market challenges that have an adverse effect on the expected profit-generating ability of assets. In the fourth quarter of 2011, the Company recognized a long-lived assets impairment of $34.6 million for our wafer assets.

Other operating income

Other operating income was $2.5 million in the fourth quarter of 2012, compared to $0.6 million in the third quarter of 2012 and $3.6 million in the fourth quarter of 2011. Other operating income was mainly composed of unrestricted cash incentives that the Company received from local government authorities, which fluctuates from period to period.

Operating loss and margin

As a result of the foregoing, operating loss was $55.9 million, compared to $15.7 million in the third quarter of 2012 and $45.7 million in the fourth quarter of 2011. Excluding $42.8 million of long-lived asset impairment, the non-GAAP operating loss in the fourth quarter of 2012 was $13.1 million.

Operating margin was negative 902.5%, compared to negative 74.2% in the third quarter of 2012 and negative 167.0% in the fourth quarter of 2011. Excluding $42.8 million of long-lived asset impairment, the non-GAAP operating margin in the fourth quarter of 2012 was negative 212.1%.

Net Interest expense

Net interest expense in the fourth quarter of 2012 was $3.4 million, compared to $3.6 million in the third quarter of 2012 and $2.3 million in the fourth quarter of 2011. The decrease from the third quarter of 2012 was primarily due to debt repayment. The increase from the fourth quarter of 2011 was primarily due to the increase of the Company's loan balance related to Xinjiang project.

Income tax expense / benefit

Income tax expense in the fourth quarter of 2012 was $19.9 million, compared to income tax benefit of $5.5 million in the third quarter of 2012 and income tax benefit of $11.1 million in the fourth quarter of 2011.

In consideration of the uncertainty in the solar market, the Company determined it was more-likely-than-not that our deferred tax assets would not be utilized before they expire and recorded a valuation allowance for deferred tax assets recognized in the prior periods in the amount of $19.9 million.

Net loss attributable to our shareholders and earnings per share

As a result of the aforementioned, net loss attributable to Daqo New Energy Corp. shareholders was $75.6 million, compared to $15.5 million in the third quarter of 2012 and $39.4 million in the fourth quarter of 2011. Excluding $42.8 million of long-lived asset impairment and $19.9 million valuation allowance for deferred tax asset, the non-GAAP net loss attributable to shareholders was $12.9 million. Earnings per fully diluted ADS were negative $10.76 compared to negative $2.21 in the third quarter of 2012, and negative $5.61 in the fourth quarter of 2011.

Revenues

Revenues were $86.9 million, compared to $232.2 million in 2011. The decrease was primarily attributable to $145.5 million decrease of the revenues generated from sales of polysilicon, partially offset by $2.8 million increase of the revenues generated from sales of wafer. The Company shipped approximately 3,585MT of polysilicon and 42.5MW of wafer during 2012, compared to 3,947MT of polysilicon and 16.8MW of wafer during 2011.

Gross loss and margin

Gross loss for 2012 was $37.4 million, compared to gross profit of $87.2 million for 2011 .Gross margin was negative 43.1% for 2012, compared to positive 37.6% for 2011.

The change in gross profit and gross margin from 2011 was primarily due to lower average selling price and lower shipment of polysilicon.

Selling, general and administrative expenses

Selling, general and administrative expenses were $12.9 million in 2012, compared to $13.1 million in 2011.

Research and development expenses

Research and development expense was $4.1 million in 2012, compared to $0.7 million in 2011. The Company incurred additional research and development expenses for our Xinjiang Phase II polysilicon facilities to achieve the targets for quality, capacity and cost during the pilot production period, which are not expected to recur.

Long-lived assets impairment loss

The Company recognized a $42.8 million impairment loss for the long-lived assets of its wafer facilities in the fourth quarter of 2012. The impairment loss of long-lived assets of our wafer facilities was to reflect the market challenges that have an adverse effect on the profit-generating ability of the assets. In 2011, the Company recognized an impairment loss for the long-lived assets of its wafer facilities of $34.7 million.

Other operating income

Other operating income was $8.7 million in 2012, compared to $12.0 million in 2011. Other operating income was mainly composed of unrestricted cash incentives that the Company received from local government authorities, which fluctuates from period to period.

Operating loss and margin

As a result of the foregoing, operating loss was $88.5 million in 2012, compared to operating income of $50.8 million in 2011. Operating margin was negative 101.6% in 2012, compared to positive 21.9% in 2011.

Net Interest expense

Net interest expense in 2012 was $14.4 million, compared to $7.4 million in 2011. The increase from 2011 was primarily due to the increase of the Company's loan balance related to Xinjiang project.

Income tax expense

Income tax expense was $10.3 million, compared to $2.7 million for 2011.

In consideration of the uncertainty in the solar market, the Company determined it was more-likely-than-not that our deferred tax assets would not be utilized before they expire and recorded a valuation allowance for deferred tax asset in 2012.

Net income (loss) attributable to our shareholders and earnings per share

As a result of the aforementioned, net loss attributable to Daqo New Energy Corp. shareholders for 2012 was $111.9 million, compared to net income attributable to Daqo New Energy Corp. shareholders of $33.3 million in 2011. 

The earnings per fully-diluted ADS were negative $15.92, compared to positive $4.74 in 2011.

As of December 31, 2012, the Company had $17.3 million in cash and cash equivalents and restricted cash, compared to $53.8 million as of September 30, 2012. As of December 31, 2012, the accounts receivable balance was $27.8 million, compared to $26.4 million as of September 30, 2012. As of December 31, 2012, total borrowings were $307.8 million, of which $187.5 million were long-term borrowings, compared to total borrowings of $333.6 million, including $210.2 million long-term borrowings as of September 30, 2012.

For the first quarter of 2013, the Company expects to ship 720MT of polysilicon. The Company also expects to ship approximately 3.6MW of wafer and 150MT of polysilicon ingots and blocks. This outlook reflects our current and preliminary view and may be subject to change. Our ability to achieve this projection is subject to risks and uncertainties.