REC Silicon Annual Report 2019

REC Silicon Annual Report 2019 8 Operations Impacts of the solar trade war between China and the United States, uncertain market conditions, and reduced demand for the Company’s solar grade polysilicon resulted in the shutdown of the FBR facility in Moses Lake, Washington on May 15, 2019. After this date, all polysilicon produced by REC Silicon was manufactured in the Semiconductor Materials segment from its plant in Butte, Montana. Polysilicon production in 2019 declined by 6,176MT (66.5 percent) to 3,109MT compared to 9,280MT in 2018. This was largely a result of the shutdown of the FBR facility in Moses Lake which produced 5,841MT less in 2019 than it produced during 2018. In addition, polysilicon production in the Semiconductor Materials segment declined by 335MT due to delays in the start-up of newwafer capacity and the completion of product qualifications. Primarily as a result of the shutdown of the FBR facility, polysilicon inventories declined by 2,783MT. Earnings Earnings Before Financial Items and Income taxes (EBIT) for 2019 was a loss of USD 82.6million which included impairment charges of USD 20.4 million (See note 8 to the consolidated financial statements). This represents a decreased loss compared to an EBIT loss of 407.1million in 2018 which included impairment charges of USD 340.5million. EBITDA for 2019 was a loss of USD 12.9million compared to a loss of USD 4.9million in 2018. EBITDA contributed by the Semiconductor Materials segment declined by USD 14.4million and was primarily the result of lower manufacturing capacity utilization, higher electricity costs, and lower average product sales prices. The EBITDA loss contributed by the solar materials segment was unchanged compared to the prior year; effectively, the costs to shut down the FBR facility in Moses Lake were offset by the decrease in costs to maintain the facility in a non-operating status subsequent to the shutdown. In Other and Eliminations, net operating costs declined by USD 6.4million due to cost reduction initiatives, the workforce reduction announced on July 15, 2019, and decreases in activity levels as a result of the shutdown of the FBR facility. Technology, Research, and Development REC Silicon’s long-term competitive position is based on cost efficiency and industry leading product performance. REC Silicon’s research and technology development activities are designed to enhance quality, improve efficiency, and reduce production costs of our products to add value to our customers and further enhance our competitive position. However, research and development efforts have been limited due to the Company’s current liquidity position. During 2019, research and development efforts were focused on maintaining minimum research lab operations to support the silicon gas and semiconductor grade polysilicon businesses. Cash expenditures for research and development were USD 1.4million in 2019 compared to USD 2.2million in 2018. SEGMENT INFORMATION SEMICONDUCTOR MATERIALS SEGMENT REC Silicon manufactures polysilicon and silicon gases for semiconductor markets from its manufacturing facility in Butte, Montana. This facility is the world’s largest supplier of silicon gases for semiconductor, flat panel display, and solar applications. The facility uses a silane-based Siemens polysilicon processing technology to produce the highest quality (FZ) polysilicon for use in the semiconductor industry. The Butte plant has a capacity of approximately 4,500MT of silicon gas loading and 2,000MT polysilicon production. Key financial - Semiconductor Materials (USD INMILLION) 2019 2018 Revenues 126.7 152.9 EBITDA contribution 37.8 52.2 Contribution margin 29.8% 34.2% Polysilicon production inMT(Siemens) 1,339 1,696 Polysilicon sales in MT (Siemens) 1,111 1,552 Silicon gas sales in MT 3,379 3,599 Markets Semiconductor grade polysilicon markets are improving; however, fixed sales contracts, excess inventories, and delays in the start-up of newwafer capacity continue to limit sales opportunities for REC Silicon. Semiconductor grade polysilicon consumers are operating at higher capacity utilization rates and inventories are declining. Demand for silicon gases in semiconductor applications remained strong due to advances in technology. However, REC Silicon’s sales volumes declined compared to 2018 due to the transfer of manufacturing capacity for basic flat panel displays into China and volatility in the PV market segment. Prices continued to drift downward as competitors attempted to increase production capacity utilization using price incentives to fight for market share. In addition, tariffs on silicon gas imports from the United States were enacted by China. Financial Performance In 2019, revenues for the Semiconductor Materials segment were USD 126.7million compared to USD 152.9million in 2018; a decrease of 17.1 percent. Total polysilicon sales in 2019 declined by 28.4 percent while the underlying volumes of semiconductor grade polysilicon sales decreased by 33.8 percent to 713MT. Demand for semiconductor devices was below expectations and supply chain participants reduced polysilicon purchases in order to lower excess inventory levels which had been increased because of the potential for supply limitations and the expectation of increases in polysilicon prices. In turn, these conditions resulted in delays in the start-up of newwafer capacity and the completion of product qualifications. Total average polysilicon sales prices declined by 2.3 percent. However, average prices realized for semiconductor grade polysilicon increased by 9.2 percent due to an Board of Directors’ report