LDK Defends its Inventory Accounting

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."