Several solar equipment companies recently had to learn an expensive lesson on what happens when they've built up their inventories too much during a sluggish market.

Energy Conversion Devices (NSDQ: ENER), based in Rochester Hills, Mich., has decided to try to avoid that mistake by shutting down production for two weeks starting on March 22, the company said Monday. Energy Conversion Devices, which makes solar thin films through its subsidiary United Solar Ovonic based in Auburn Hills, Mich., still plans to build a new factory but will delay ordering equipment and hiring people until it needs to increase production.

The company announced the new factory, located in Battle Creek, Mich., last fall. The factory has been designed to have a capacity to produce 120 megawatts of its thin films using amorphous silicon as a key ingredient for converting sunlight into electricity. Each solar cell has a layer of amorphous silicon and two layers of an alloy of amorphous silicon and germanium.

The company had a capacity produce 178 megawatts of thin films per year by the end of its fiscal second quarter on Dec. 31, 2008, according to its quarterly filing with the U.S. Securities and Exchange Commission.

The news, released after the market closed, didn't sit well with investors, however. The company's stock plummeted nearly 26 percent to reach $13.68 per share in after-market trading.

Mark Morelli, CEO of Energy Conversion Devices, said during a conference call Monday that the measures his company is taking to trim production should prevent any need to take an inventory write-down for the fiscal third quarter, which ends March 31.

"We will trim capacity based on the demand so that we don't end up in that situation," Morelli said. He conceded that some of its customers have delayed orders because financing for building solar power projects is hard to come by these days. 

Several companies, such as LDK Solar, Trina Solar and ReneSola, recently took multimillion dollar write-downs because the market values of their inventories fell below costs (see LDK Solar Faces Tough Road Ahead, Says Analyst). Those excess products in the warehouses are also likely to squeeze the companies' bottom lines by driving down their products' sale prices.

As part of its restructuring efforts, Energy Conversion Devices, which also develops batteries and other technologies, is laying off about 70 people from its Auburn Hills 1 solar equipment factory and moving the remaining 130 people to the newer Auburn Hills 2 factory.

The company also warned investors that they should no longer rely on the fiscal third-quarter and fiscal 2009 forecast it had issued last month. The company previously expected to generate $95 million to $110 million for its fiscal third quarter ending March 31, including $90 million to $105 million for its solar equipment.  For fiscal 2009, the company had anticipated generating $395 million to $440 million, including $375 million to $410 million from solar equipment sales.

Energy Conversion Devices CFO Harry Zike did say during a conference call Monday that the company expects sales for its fiscal third-quarter to be about the same as what it generated from the same quarter a year ago.

The company generated nearly $70 million in revenue for its fiscal third-quarter that ended March 31, 2008, including $66.7 million by United Solar. 

 

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