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Article by DailyStocks_admin    (09-24-08 04:21 AM)

The Daily Magic Formula Stock for 09/24/2008 is MEMC Electronic Materials Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

We are a global leader in the manufacture and sale of wafers and have been a pioneer in the design and development of wafer technologies over the past four decades. With R&D and manufacturing facilities in the US, Europe and Asia Pacific, we enable the next generation of high performance semiconductor and solar applications. Our customers include major semiconductor device and solar cell (device) manufacturers. We provide wafers in sizes ranging from 100 millimeters (4 inch) to 300 millimeters (12 inch). In the first quarter of 2007, we began delivering 156 millimeter wafers targeted for solar applications. Depending on market conditions, we also sell intermediate products such as polysilicon, silane gas, partial ingots and scrap wafers to semiconductor device and equipment makers, solar customers, flat panel and other industries.

We were formed in 1984 as a Delaware corporation and completed our initial public stock offering in 1995. Our corporate structure includes, in addition to our wholly owned subsidiaries, an 80%-owned consolidated joint venture in South Korea (MEMC Korea Company or MKC).

On November 13, 2001, an investor group led by Texas Pacific Group and including TPG Wafer Holdings LLC and funds managed by Leonard Green & Partners, L.P. and TCW/Crescent Mezzanine Management LLC (collectively, TPG) acquired beneficial ownership of approximately 72% of our outstanding common stock and approximately $910 million of our debt from E.ON AG, our former parent company. All of the debt acquired by TPG from E.ON has been restructured or repaid. As part of the restructuring, TPG received shares of our Series A Cumulative Convertible Preferred Stock, all of which have been converted into shares of our common stock, and warrants to purchase our common stock. In a series of registered public offerings from 2003 to 2005 and in privately negotiated sales in 2006 and 2007, TPG divested all of its equity securities in MEMC and now owns none of our common stock or warrants.

In 2007, we were engaged in one reportable industry segment—the design, manufacture and sale of silicon wafers. Financial information regarding this industry segment is contained in our 2007 Annual Report, which information is incorporated herein by reference.

Industry Background

Almost all semiconductor devices and solar cells (devices) are manufactured from wafers. The silicon wafer industry grew shipments, measured in square inches of silicon, for semiconductor and solar applications at a compound annual growth rate of approximately 18% from approximately 2,200 million square inches in 1990 to approximately 40,000 million square inches in 2007, according to MEMC estimates based on data from SIA/SEMI, Solarbuzz and Prometheus. This growth was driven by the increase in the unit shipments of the semiconductor device industry and the megawatts (MW) of cells by the solar industry.

Wafers are becoming increasingly differentiated by specific physical and electrical characteristics such as flatness, silicon purity and uniform crystal structures. As markets for devices (semiconductor and solar) continue to evolve and become more specialized, we believe device manufacturers recognize the enhanced role that wafers and other materials play in improving device performance and reducing their production costs.

Semiconductor device manufacturers continue to move towards devices with shrinking device geometries and more stringent technical specifications. The wafers required to produce these next-generation devices are being developed in larger sizes. Thus, semiconductor device manufacturers continue to move to larger size wafers, with the 200 millimeter wafer being the primary wafer used today (measured in square inches). Solar cell makers are evolving to larger size wafers much like the semiconductor device makers did fifteen years ago.

Over the past decade, we believe the wafer industry has consolidated, with only four major suppliers of wafers targeted for semiconductor applications. We believe this change in the competitive landscape is causing segmentation between larger and smaller producers, with larger manufacturers gaining an increasing share of the overall wafer market. In parallel, there are a number of companies developing wafer manufacturing capability targeted for solar applications. Device manufacturers seek suppliers with whom they can better align wafer technology development with their own product development efforts. We believe these manufacturers will continue to select wafer suppliers that offer advanced technological capabilities, a broad product portfolio and superior service to satisfy their exacting device requirements.

Products

We offer wafers with a wide variety of features satisfying numerous product specifications to meet our customers’ exacting requirements. Our wafers vary in size, surface features, composition, purity levels, crystal properties and electrical properties. We provide our customers with a reliable supply of high quality wafers with consistent characteristics. These wafers range from 100 millimeter to 300 millimeter and are round in shape for semiconductor customers because of the nature of their processing equipment. Customers using wafers for solar applications utilize wafers that are square in nature so that they fit into solar panels. Our wafers are used as the starting material for the manufacture of various types of semiconductor devices, including microprocessor, memory, logic and power devices, as well as the starting material for solar cells. In turn, these semiconductor devices are used in computers, cellular phones and other mobile electronic devices, automobiles and other consumer and industrial products, and the solar cells are used to manufacture solar modules for converting energy from the sun into usable electrical energy.

Our wafers include three general categories of wafers:

Prime Wafers

Our prime wafer is a polished, highly refined, pure wafer with an ultraflat and ultraclean surface. The vast majority of our prime wafers are manufactured with a sophisticated chemical-mechanical polishing process that removes defects and leaves an extremely smooth surface. As devices become more complex, wafer flatness and cleanliness requirements, along with crystal perfection, become increasingly important because these properties have a significant impact on our customers’ processes and yields.

Our OPTIA™ wafer is a 100% defect-free crystalline structure based on our patented technologies and processes, including Magic Denuded Zone ® , or MDZ ® . Our patented MDZ ® product feature can increase our customers’ yield by drawing impurities away from the surface of the wafer in a manner that is efficient and reliable, with results that are reproducible. We believe the OPTIA™ wafer is the most technologically advanced polished wafer available today. Our annealed wafer is a prime wafer with near surface crystalline defects dissolved during a high-temperature thermal treatment.

Epitaxial Wafers

Our epitaxial, or epi, wafers consist of a thin silicon layer grown on the polished surface of the wafer. Typically, the epitaxial layer has different electrical properties from the underlying wafer. This provides our customers with better isolation between circuit elements than a polished wafer, and the ability to tailor the wafer to the specific demands of the device. Without sufficient isolation of the various circuit elements, the elements could communicate electrically with each other, which could render the device useless. Epitaxial wafers provide improved isolation, thereby allowing for increased reliability of the finished semiconductor device and greater efficiencies during the semiconductor manufacturing process, which ultimately allows for more complex semiconductor devices.

Our AEGIS™ product is designed for certain specialized applications requiring high resistivity epitaxial wafers and our MDZ ® product feature. The AEGIS™ wafer includes a thin epitaxial layer grown on a standard starting wafer. The AEGIS™ wafer’s thin epitaxial layer eliminates harmful defects on the surface of the wafer, thereby allowing device manufacturers to increase yields and improve process reliability.

Test/Monitor Wafers

We supply test/monitor wafers to our customers for their use in testing semiconductor fabrication lines and processes. Although test/monitor wafers are substantially the same as prime wafers with respect to cleanliness, and in some cases flatness, other specifications are generally less rigorous. This allows us to produce some of the test/monitor wafers from the portion of the silicon ingot that does not meet customer specifications for wafers to be used in the manufacture of semiconductors.

Sales, Marketing and Customers

We market our products primarily through a global direct sales force. We have customer service and support centers globally, including in China, France, Germany, Italy, Japan, Malaysia, Singapore, South Korea, Taiwan and the United States. A key element of our marketing strategy is establishing and maintaining close relationships with our customers. We accomplish this through multi-functional teams of technical, sales and marketing, and manufacturing personnel. These teams work closely with our customers to continually optimize our products for their production processes in their current and future facilities. We monitor changing customer needs and target our research and development and manufacturing to produce wafers adapted to each customer’s process, requirements and specifications. Although we have some long-term supply agreements with a ten year term that specify price and volume for the length of the agreement, we make sales of wafers principally through agreements of one year or less (such agreements often are of three months or six months duration), which specify price and typically indicate only expected volumes or market share. We sell our wafers to virtually all major semiconductor device manufacturers, including the major memory, microprocessor and ASIC manufacturers, the world’s largest foundries, and solar cell and module manufacturers.

In 2007, two customers, Samsung and Yingli Green Energy, both accounted for more than 10% of our revenue. No other customer represented 10% or more of our 2007 revenue.

We sell some of our products to certain customers under consignment arrangements. Generally, these consignment arrangements require us to maintain a certain quantity of product in inventory at the customer’s facility or at a storage facility designated by the customer. Under these arrangements, we ship the wafers to the storage facility, but do not charge the customer or recognize revenue for those wafers until title passes to the customer. Title passes when the customer pulls the product from the assigned storage facility or storage area or, if the customer does not pull the product within a stated period of time (generally 60–90 days), at the end of that period, or when the customer otherwise agrees to take title to the product. Until that time, the wafers are considered part of MEMC’s inventory and are reflected on MEMC’s books and records as inventory. As such, these consignment arrangements are essentially inventory transfer arrangements. At December 31, 2007, we had approximately $8.4 million of inventory held on consignment.

Manufacturing

To meet our customers’ needs worldwide, we have established a global manufacturing network consisting of nine manufacturing facilities. We also utilize subcontractors to manufacture wafers.

Our monocrystalline wafer manufacturing process begins with high purity polysilicon. The polysilicon is melted in a quartz crucible along with minute amounts of electrically active elements such as arsenic, boron, phosphorous or antimony. We then lower a silicon seed crystal into the melt and slowly extract it from the melt. The resultant body of silicon is called an ingot. The temperature of the melt, speed of extraction and rotation of the crucible govern the size of the ingot, while the concentration of the electrically active element in the melt governs the electrical properties of the wafers to be made from the ingot. This is a complex, proprietary process requiring many control features on the crystal-growing equipment.

We then grind the ingots to the specified size and slice the ingots into thin wafers. Next, we prepare the wafers for surface polishing with a multi-step process using precision wafer planarization machines, edge contour machines and chemical etchers. Final polishing and cleaning processes give the wafers the clean and ultraflat mirror polished surfaces required for the fabrication of semiconductor devices. We further process some of our products into epitaxial wafers by utilizing a chemical vapor deposition process to deposit a single crystal silicon layer on the polished surface.

In certain of our manufacturing facilities we have fully integrated manufacturing capabilities that encompass the full range of wafer manufacturing process steps, including ingot growth, wafer slicing, wafer polishing and epitaxial deposition. We conduct certain of our processes in state-of-the-art cleanroom environments.

Raw Materials

We obtain our requirements for several raw materials, equipment, parts and supplies from sole suppliers. The main raw material in our production process is polysilicon. We use two types of polysilicon: granular polysilicon and chunk polysilicon. We produce all of our requirements for granular polysilicon at our facility in Pasadena, Texas. We produce chunk polysilicon in our Merano, Italy facility. Chunk polysilicon can be substituted for granular polysilicon, although our manufacturing throughput and yields could be adversely affected. We believe our ability to meet all of our polysilicon requirements through our in-house capabilities provides us with a key cost advantage to compete more effectively in the wafer industry. We have previously announced our plans to expand our polysilicon production capacity over the next few years, and we continue to work toward our capacity expansion targets. We sell some polysilicon to third parties. We also buy some polysilicon on the open market from time to time.

Research and Development

The wafer market is characterized by continuous technological development and product innovation. We believe that continued and timely development of new products and enhancements to existing products is necessary to maintain our competitive position. Our goal in research and development is to maintain a close working relationship with our customers to continually develop new products and refine existing products to meet the needs of the marketplace. Our research and development model combines engineering innovation with specific commercialization strategies. Our model closely aligns our technology efforts with our customers’ requirements for new applications. We accomplish this through a better understanding of our customers’ technology requirements and through targeted research and development projects aimed at developing products to meet those technology requirements and applications. Some of these projects involve formal and informal joint development efforts with our customers.

In addition, in order to strengthen our customer relationships and interaction and to better target our research and development efforts, we assign research and development engineers to key customers worldwide. We do this through our Applications Engineering Group, in our laboratories located in the United States, Italy, Japan and South Korea, as well as field and resident engineers located at strategic locations throughout the world. The primary purpose of the Applications Engineering Group is to establish a close, technical working relationship with our customers to obtain a better knowledge of our customers’ materials requirements.

We devote a portion of our research and development resources to enhance our position in the crystal technology area. We have dedicated engineers and scientists, located in our St. Peters, Missouri, Merano, Italy and Chonan, South Korea facilities, to further our understanding of defect control and cost reduction. In conjunction with these efforts, we are developing wafering technologies to meet advanced flatness and particle requirements of our customers. In addition, we continue to focus on the development of our advanced epitaxial wafer technology with a dedicated staff of scientists located primarily in our St. Peters, Missouri, Novara, Italy and Utsunomiya, Japan facilities, who focus on the development of new epitaxial wafer products and cost reduction processes.

In addition to our focus on advancements in wafer material properties, we also continue to invest in research and development associated with larger wafer sizes. We produced our first 300 millimeter wafer in 1991 and continue to enhance our 300 millimeter technology program using our staff of research and development scientists, engineers and technicians located primarily in our St. Peters, Missouri and Utsunomiya, Japan facilities. In addition, we continue to focus on process design advancements to drive cost reductions and productivity improvements.

We have also entered into a license agreement for certain layer-transfer wafer technology and we are in the process of establishing production capability for 200 millimeter and 300 millimeter silicon-on-insulator (SOI) wafers using a dedicated group of engineers and scientists located in our St. Peters, Missouri facility.

Competition

The market for wafers is competitive. We compete globally and face competition from established manufacturers. Our major competitors are Shin-Etsu Handotai, SUMCO, Siltronic, BP Solar International, Evergreen Solar, Kyocera Corp., REC Group, Sanyo Corporation, Sharp Corporation, and SolarWorld AG.

Our wafers compete with wafers manufactured by others on the basis of product quality, consistency, price, technical innovation, customer service and product availability. We believe we are competitive on the basis of these factors.

Proprietary Information and Intellectual Property

We believe that the success of our business depends in part on our proprietary technology, information, processes and know how. We protect our intellectual property rights based on patents and trade secrets as part of our ongoing research, development and manufacturing activities. As of December 31, 2007, we owned of record or beneficially approximately 219 U.S. patents, of which approximately four will expire by 2010, approximately 42 will expire between 2011 and 2015 and approximately 174 will expire after 2015. As of December 31, 2007, we owned of record or beneficially approximately 453 foreign patents, of which approximately 43 will expire by 2010, approximately 34 will expire between 2011 and 2015 and approximately 377 will expire after 2015. These foreign patents are generally counterparts of our U.S. patents. As of December 31, 2007, we had approximately 58 pending U.S. patent applications and approximately 275 pending foreign patent applications. The patents we beneficially own relate to polysilicon technology. We exclusively licensed these patents from Albemarle Corporation in connection with our purchase of Albemarle’s granular polysilicon business. We may request that these patents be assigned to us at any time in exchange for a nominal purchase price.

We have agreed to indemnify some of our customers against claims of infringement of the intellectual property rights of others in our sales contracts with these customers. Historically, we have not paid any claims under these indemnification obligations and we do not have any pending indemnification claims. Employees

At December 31, 2007, we had approximately 4,900 full time employees and approximately 450 temporary workers worldwide. We have approximately 1,600 unionized employees in our St. Peters, Missouri, Pasadena, Texas, South Korea and Italy facilities. We have not experienced any material work stoppages at any of our facilities due to labor union activities during the last several years.

CEO BACKGROUND

Peter Blackmore, Director since 2006, Age 60

Mr. Blackmore has been President and Chief Operating Officer for UTStarcom, Inc. since July 2007. Before this position, Mr. Blackmore had been Executive Vice President of Unisys Corporation between February 2005 and July 2007. From 1991 through August 2004, Mr. Blackmore served in various roles at Compaq Computer Corporation, or Compaq, and Hewlett-Packard Company, or HP, most recently as Executive Vice President of the Customer Solutions Group at HP from May 2004 through August 2004, and as Executive Vice President of the Enterprise Systems Group at HP from 2002 through May 2004. Prior to the merger of Compaq and HP, Mr. Blackmore served as Senior Vice President of Worldwide Sales and Service of Compaq from 2000 through 2002 and Senior Vice President of Worldwide Sales and Marketing of Compaq from 1998 through 2000. Mr. Blackmore is a member of the Board of Directors of Multi-Fineline Electronix, Inc.

Nabeel Gareeb, Director since 2002, Age 43

Mr. Gareeb joined MEMC as President and Chief Executive Officer in April 2002. Prior to joining MEMC, Mr. Gareeb was the Chief Operating Officer of International Rectifier Corporation, a leading supplier of power semiconductors, where he was responsible for worldwide operations, research and development and marketing of the core products of the company. He joined International Rectifier in 1992 as Vice President of Manufacturing and subsequently held other senior management positions.

Marshall Turner, Director since 2007, Age 66

Mr. Turner served as Chairman and Chief Executive Officer of Toppan Photomasks, Inc. from June 2003 through April 2005, and President and Chief Executive Officer of the company through May 2006. Named “Dupont Photomasks, Inc.” prior to its acquisition by Toppan Printing Company, Ltd. in April 2005, the company manufactures photomasks for semiconductor chip fabricators. Mr. Turner is also a member of the board of directors of Xilinx, Inc. and the AllianceBernstein Funds.

Robert J. Boehlke, Director since 2001, Age 66

(Term expiring in 2009)

Mr. Boehlke was most recently Executive Vice President and Chief Financial Officer of KLA-Tencor, a position he held from 1990 until his retirement in 2000. Between 1983 and 1990, he held a variety of general management positions with that company. KLA-Tencor is a supplier of process control and yield management solutions for the semiconductor manufacturing industry. Mr. Boehlke is a member of the Board of Directors of Tessera Technologies, Inc.

John Marren, Director since 2001, Age 44

(Term expiring in 2010)

Mr. Marren has been Chairman of the Board of Directors of MEMC since November 2001. Mr. Marren has been a Partner of TPG Capital (formerly Texas Pacific Group), a privately held investment firm, since April 2000.

C. Douglas Marsh, Director since 2001, Age 62

(Term expiring in 2009)

Mr. Marsh was most recently Vice President Business Integration & U.S. Institutional Investor Relations of ASML US, Inc., a supplier of photolithography equipment to the semiconductor industry, a position he held from 2000 until his retirement in April 2004. From 1991 to 2000, Mr. Marsh held a variety of executive management positions with ASML. Mr. Marsh is a member of the Board of Directors of ATMI, Inc.

William E. Stevens, Director since 2001, Age 65

(Term expiring in 2010)

Mr. Stevens has served as Chairman of BBI Group, Inc., a private equity investment firm, since November 2000. Mr. Stevens served as Chairman and Chief Executive Officer of the Wesmark Group from 1999 to 2001. Mr. Stevens serves on the Board of Directors of McCormick & Company, Incorporated.

James B. Williams, Director since 2003, Age 51

(Term expiring in 2010)

Mr. Williams is a Partner of TPG Capital (formerly Texas Pacific Group), a privately held investment firm. Mr. Williams joined Texas Pacific Group in February 1999. Mr. Williams also is a member of the board of directors of several private companies.

MANAGEMENT DISCUSSION FROM LATEST 10K

RESULTS OF OPERATIONS

In both the three months and six months ended June 30, 2008, the increase in net sales was driven by overall increases in volume, which was primarily attributable to 156 millimeter and 300 millimeter wafer shipments, slightly offset by decreases in all other volumes. The remaining increase in our sales was primarily attributable to pricing for intermediate products such as polysilicon, silane gas, partial ingots and scrap wafers, offset slightly by price decreases for semiconductor wafers. Our overall wafer average selling prices for the three and six months ended June 30, 2008 were approximately 38% and 41% lower than the average selling prices for the 2007 periods due to a change in mix, which was primarily attributable to the increase in 156 millimeter wafer shipments in 2008 which have a lower average selling price per wafer.

These improvements in gross profit dollars and gross margin percentages were primarily due to increased wafer volumes and improved mix of 156 millimeter wafers and 300 millimeter wafers, as well as increased pricing on intermediate products such as polysilicon, silane gas, partial ingots and scrap wafers, partially offset by lower semiconductor wafer pricing.

The increase in marketing and administration expenses for the three months ended June 30, 2008 compared to the prior year period was primarily a result of one-time termination benefits for headcount reductions at a foreign site of approximately $3.2 million, increased payroll costs of $1.1 million and additional stock option expense of $1.2 million, partially offset by a favorable legal settlement. The increase for the six months ended June 30, 2008 versus the prior year period was primarily due to the one-time termination benefits noted above and additional stock option expense of $5.6 million, offset by net favorable legal settlements of $4.3 million. The increase in stock option expense is due to the adjustment of estimated forfeitures rates and new option grants during the quarter ended March 31, 2008.

R&D consisted mainly of product and process development efforts to increase our capability in the areas of flatness, particles and crystal defectivity. R&D expenditures were consistent with the same period in the prior year.

The change in non-operating (income) expense for the three months ended June 30, 2008 compared to the prior year period was primarily due to the loss recorded for the mark-to-market adjustment for the Suntech warrant of $12.3 million in the current year compared to a warrant gain of $7.9 million for the same period in 2007. The change in non-operating (income) expense for the six months ended June 30, 2008 was primarily due to the loss recorded for the mark-to-market adjustment for the warrant of $221.7 million in the current year compared to a gain of $6.8 million in the prior year period. The decrease in the value of the warrant is mainly due to the decrease in the price of Suntech’s ordinary shares underlying the warrant from the beginning of the period. The quoted market price of Suntech’s ordinary shares was $37.46, $82.32, $36.19 and $34.01 at June 30, 2008, December 31, 2007, June 30, 2007 and December 31, 2006, respectively.

The income tax rate of 47.1% for the six months ended June 30, 2008 included 21.7% related to the non-taxable loss for the mark-to-market adjustment associated with the Suntech warrant as discussed above. The remaining decrease to the effective

rate excluding the warrant was a result of an increase in earnings generated by foreign subsidiaries whose earnings are being permanently reinvested and taxed at lower rates offset by the effect of adjustments related to R&D credits. The closure of the Internal Revenue Service examination in late July, 2008 included resolution of uncertain tax positions associated with the 2004 and 2005 audit years. In the third quarter, we anticipate recognizing a decrease to the reserve for uncertain tax positions of $78.5 million including related interest, reducing income tax expense by $38.2 million and increasing income taxes payable by $40.3 million, due to the closure of the 2004 and 2005 examination in the United States.

FINANCIAL CONDITION

Cash and cash equivalents increased $251.6 million from $859.3 million at December 31, 2007 to $1,110.9 million at June 30, 2008. See additional discussion in Liquidity and Capital Resources below.

Short-term and long-term investments of $385.8 million at June 30, 2008 decreased $84.0 million from $469.8 million at December 31, 2007. This decrease was primarily due to net sales of investments of $72.7 million during the quarter associated with successful auctions of our ARS coupled with the redemption of debt instruments that have matured where the proceeds were held as cash and cash equivalents. The decrease in short and long-term investments was also attributable to a slight increase in unrealized temporary losses recorded to other comprehensive income and currency adjustments. As of June 30, 2008, MEMC classified $64.0 million of auction rate securities and an additional $33.0 million of corporate, asset-backed and mortgage-backed securities as non-current assets due to the current conditions in the general debt markets as further discussed in Note 6 to the Condensed Consolidated Financial Statements above as well as Liquidity and Capital Resources below.

Accounts receivable of $230.6 million at June 30, 2008 increased $32.7 million from $197.9 million at December 31, 2007. The increase was primarily attributable to the impact on accounts receivable of a mix of products and terms. Days’ sales outstanding was 40 days at June 30, 2008 compared to 34 days at December 31, 2007 based upon annualized sales.

Our inventories decreased $2.5 million to $33.9 million at June 30, 2008 from $36.4 million at December 31, 2007. Inventories primarily decreased as a result of the decrease in raw materials inventory. Annualized inventory turns, calculated as the ratio of annualized respective quarterly cost of goods sold divided by the period-end inventory balance, increased to 29 for the three month period ended June 30, 2008 compared to 27 for the three month period ended December 31, 2007. At June 30, 2008, we had approximately $9.9 million of inventory held on consignment, compared to $8.4 million at December 31, 2007.

Our net property, plant and equipment increased $116.4 million to $950.4 million over the prior year. The increase was primarily due to capital expenditures related to expansions at our plants in Pasadena, Texas, Hsinchu, Taiwan and Merano, Italy and foreign currency changes, offset by depreciation expense.

Customer warrant decreased to $84.6 million at June 30, 2008 from $306.3 million at December 31, 2007. The decrease was primarily due to the decline in the estimated fair value of the Suntech warrant of $221.7 million.

Accounts payable decreased $20.6 million to $147.7 million at June 30, 2008, compared to $168.3 million at the end of 2007. The decrease was primarily a result of decreased payables related to capital expenditures at June 30, 2008.

Short-term customer deposits increased $46.0 million to $168.0 million at June 30, 2008, primarily due to additional deposits received for long term supply agreements.

Income taxes payable decreased $33.2 million to $42.7 million at June 30, 2008 compared to $75.9 million at the end of 2007. This decrease was primarily attributable to tax payments during the period offset by tax expense.

Other noncurrent liabilities totaled $238.4 million as of June 30, 2008 versus $204.6 million as of December 31, 2007. This increase is mainly due to an increase of $36.0 million in reserves for uncertain tax positions due to adjustments related to deductions and tax credits claimed for tax purposes in prior years along with accrued interest on the total reserve for unrecognized tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

In the six months ended June 30, 2008, we generated $402.2 million of cash from operating activities compared to $412.1 million in the six months ended June 30, 2007. This decrease was primarily the result of increases in working capital.

Cash used in investing activities decreased to $96.5 million in the six months ended June 30, 2008 compared to $202.7 million in the six months ended June 30, 2007. Capital expenditures in 2008 primarily relate to increasing our capacity and capability for polysilicon production and our next generation products. For the six months ended June 30, 2008, approximately $169.2 million was spent on capital expenditures. This outflow was offset by proceeds from redemptions or sales of our investments of approximately $72.7 million.

Cash used in financing activities was $75.3 million in the six months ended June 30, 2008 compared to $96.7 million of cash provided in the six months ended June 30, 2007. The change in cash from financing activities was primarily related to cash used to repurchase our common stock of $154.9 million during the first six months of 2008 and lower net proceeds received from refundable customer deposits related to long-term supply agreements of $15.2 million. These deposits are returnable to the customer after two years, although such deposits are replaced each year with new deposits based on increased volume commitments stated in the agreements to reduce our risks associated with non-fulfillment of the agreements by the customers. In the first six months of 2008, the customers provided additional deposits of $130.1 million, and $81.6 million of deposits collected in prior years were returned to the customers in accordance with the agreements. The receipt and payment of the deposits for each customer were netted into one cash transaction because the amounts receivable and payable were due at the same time. On July 22, 2008, our Board of Directors approved an additional $500 million increase in the size of our share repurchase program, increasing the total amount of the share repurchase program to $1 billion.

We had no short-term borrowings outstanding at June 30, 2008, under approximately $51.7 million of short-term loan agreements. Of the $51.7 million committed short-term loan agreements, $14.6 million is unavailable because it relates to the issuance of third party letters of credit and foreign currency forward contracts. Long-term borrowings outstanding were $30.2 million at June 30, 2008, under $272.7 million of committed long-term loan agreements. Of the $272.7 million committed long-term loan agreements, $112.6 million is unavailable because it relates to the issuance of third party letters of credit and foreign currency forward contracts. Our weighted average cost of borrowing was 2.2% at June 30, 2008 and December 31, 2007.

On July 21, 2005, we entered into a Revolving Credit Agreement with National City Bank of the Midwest, US Bank National Association, and such other lending institutions as may from time to time become lenders (the “National City Agreement”). The National City Agreement was amended on December 20, 2006 to reduce the commitment fee and the interest spread on loans bearing interest at a rate determined by reference to the LIBOR rate, and to remove the pledge of the capital stock of certain of our domestic and foreign subsidiaries. The National City Agreement provides for a $200.0 million revolving credit facility and has a term of five years. Interest on borrowings under the National City Agreement would be payable based on our election at LIBOR plus an applicable margin (currently 0.34%) or at a defined prime rate plus an applicable margin (currently 0.0%). The National City Agreement also provides for us to pay various fees, including a commitment fee (currently 0.08%) on the lenders’ commitments. The National City Agreement contains covenants typical for credit arrangements of comparable size, such as minimum earnings before interest, taxes, depreciation and amortization and an interest coverage ratio. Our obligations under the National City Agreement are guaranteed by certain of our subsidiaries. At June 30, 2008, there were no borrowings outstanding under this credit facility, however, credit available under the facility has been reduced by $112.1 million related to the issuance of third party letters of credit.

As of June 30, 2008, we held $76.1 million of investments related to auction rate securities (ARS), net of temporary impairments of $1.6 million. The ARS are comprised of interest bearing state sponsored student loan revenue bonds and municipal bonds with varying maturity periods and typically provides short-term liquidity via an auction process that also resets the applicable interest rate at predetermined calendar intervals (typically every 7, 28 or 35 days). The student loan revenue bonds are collateralized and serviced by underlying student loans and the municipal bonds are serviced through revenue generated by the issuing municipal entity. In the event of an auction failing to settle on its respective settlement date, these funds would remain invested at a “failed” interest rate which is typically higher than the previous market rate until the next successful auction. For those auctions that failed to settle, we will not be able to access those funds until the next successful auction, another buyer is found outside of the auction process, the issuer redeems the security or the security matures. As of December 31, 2007, none of our ARS had failed. Beginning in mid-February 2008, $61.8 million of our ARS did not successfully settle due to tightening credit markets and a lesser degree of liquidity in the overall marketplace. As of June 30, 2008, MEMC has classified $64.0 million of ARS as non-current assets due to unsuccessful auctions coupled with current conditions in the general debt markets which have created uncertainty as to when successful auctions will be reestablished. We do not anticipate having to sell these securities below amortized cost in order to operate our business. The ARS are insured through two different monoline insurers that presently maintain a credit rating of AAA by S&P, Moody’s and/or Fitch as of June 30, 2008 or by a U.S. government backed student loan program.

As of June 30, 2008, we held $245.2 million of investments, net of temporary impairments of $7.5 million, in a strategic investment portfolio with a major banking institution, primarily invested in corporate bonds and asset-backed and mortgage-backed securities. As of December 31, 2007, we held $299.5 million of investments, net of temporary impairments of $4.3 million. A majority of these investments maintain a floating interest rate based on a range of spreads to the one and three month LIBOR rate. We believe the decline in fair value to be directly attributable to the current global credit conditions which we believe are temporary. However, for certain securities, we believe the time to reach the original carrying value to be greater than 12 months. Accordingly, we have classified $33.0 million of the portfolio as non-current assets. We do not anticipate having to sell these securities below amortized cost in order to operate our business. The asset backed securities are collateralized by various types of assets including auto, consumer, home equity, student loan and credit card loans. The collateralized mortgage obligations are collateralized primarily by residential mortgages. Many of these issuances have varying tranches and subordinations. Our investments are typically in investment grade and more senior, higher priority tranches.

The fair value of the Level 3 investments are estimated based on varying assumptions. The value of the ARS, CMO and ABS investments may fluctuate based on these assumptions, which include the tax status (taxable vs. tax-exempt), type of security (type of issuer, collateralization, subordination, etc.), credit quality, duration, likelihood of redemption, insurance coverage and degree of liquidity in the current credit markets. Due to the lack of observable inputs, active markets or transparency to the underlying assets, we may rely on qualitative factors to estimate the fair values of the investments, including general macro-economic information and other data supplied by our investment advisers and brokers.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

In both the three months and six months ended June 30, 2008, the increase in net sales was driven by overall increases in volume, which was primarily attributable to 156 millimeter and 300 millimeter wafer shipments, slightly offset by decreases in all other volumes. The remaining increase in our sales was primarily attributable to pricing for intermediate products such as polysilicon, silane gas, partial ingots and scrap wafers, offset slightly by price decreases for semiconductor wafers. Our overall wafer average selling prices for the three and six months ended June 30, 2008 were approximately 38% and 41% lower than the average selling prices for the 2007 periods due to a change in mix, which was primarily attributable to the increase in 156 millimeter wafer shipments in 2008 which have a lower average selling price per wafer.

These improvements in gross profit dollars and gross margin percentages were primarily due to increased wafer volumes and improved mix of 156 millimeter wafers and 300 millimeter wafers, as well as increased pricing on intermediate products such as polysilicon, silane gas, partial ingots and scrap wafers, partially offset by lower semiconductor wafer pricing.

The increase in marketing and administration expenses for the three months ended June 30, 2008 compared to the prior year period was primarily a result of one-time termination benefits for headcount reductions at a foreign site of approximately $3.2 million, increased payroll costs of $1.1 million and additional stock option expense of $1.2 million, partially offset by a favorable legal settlement. The increase for the six months ended June 30, 2008 versus the prior year period was primarily due to the one-time termination benefits noted above and additional stock option expense of $5.6 million, offset by net favorable legal settlements of $4.3 million. The increase in stock option expense is due to the adjustment of estimated forfeitures rates and new option grants during the quarter ended March 31, 2008.

The change in non-operating (income) expense for the three months ended June 30, 2008 compared to the prior year period was primarily due to the loss recorded for the mark-to-market adjustment for the Suntech warrant of $12.3 million in the current year compared to a warrant gain of $7.9 million for the same period in 2007. The change in non-operating (income) expense for the six months ended June 30, 2008 was primarily due to the loss recorded for the mark-to-market adjustment for the warrant of $221.7 million in the current year compared to a gain of $6.8 million in the prior year period. The decrease in the value of the warrant is mainly due to the decrease in the price of Suntech’s ordinary shares underlying the warrant from the beginning of the period. The quoted market price of Suntech’s ordinary shares was $37.46, $82.32, $36.19 and $34.01 at June 30, 2008, December 31, 2007, June 30, 2007 and December 31, 2006, respectively.

The income tax rate of 47.1% for the six months ended June 30, 2008 included 21.7% related to the non-taxable loss for the mark-to-market adjustment associated with the Suntech warrant as discussed above. The remaining decrease to the effective

rate excluding the warrant was a result of an increase in earnings generated by foreign subsidiaries whose earnings are being permanently reinvested and taxed at lower rates offset by the effect of adjustments related to R&D credits. The closure of the Internal Revenue Service examination in late July, 2008 included resolution of uncertain tax positions associated with the 2004 and 2005 audit years. In the third quarter, we anticipate recognizing a decrease to the reserve for uncertain tax positions of $78.5 million including related interest, reducing income tax expense by $38.2 million and increasing income taxes payable by $40.3 million, due to the closure of the 2004 and 2005 examination in the United States.

CONF CALL

Bill Michalek - Director of Investor Relations

Good afternoon and thank you for joining our second quarter earnings conference call. Nabeel Gareeb, President and Chief Executive Officer; and Ken Hannah, Chief Financial Officer are with me today.

Before we begin, please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. These risks are described in the earnings release published today and in our 2007 Form 10-K.

As a supplement to today's call and as part of the press release, we've included two charts that maybe helpful to investors into which Nabeel refer in the second half of our prepared remarks. A copy of the press release is available on our website memc.com.

I will now turn the call over to Ken Hannah, who will present an overview of the financial results.

Ken Hannah - Senior Vice President and Chief Financial Officer

Thanks, Bill. Second quarter in the MEMC sales of $531.4 million, for 6% higher than in the first quarter and 12% higher compared to the year-ago quarter, driven primarily by higher product volumes.

Gross margin in the quarter was $282.8 million or 53.2% of sales. This represents sequential growth of 9.1% in gross margin dollars and 150 basis points as a percentage of net sales over the first quarter level driven primarily by cost reductions and mix improvement, compared to the 2007 second quarter, gross margin increased by 15.1% in dollar terms and 120 basis points as a percentage of sales.

Operating expenses came in at $40.3 million or 7.6% of sales as compared to 8.2% of sales in the previous quarter primarily due to our higher revenue level and lower stock compensation expense. Operating income in the second quarter was $242.5 million or 45.6% of sales compared to the first quarter $218.4 million or 43.6% of sales. This represents an 11% sequential improvement in operating income and a 200 basis point improvement as a percentage of sales. Compared to the second quarter of 2007, operating income grew by 17% or 170 basis points as a percentage of sales.

Total stock-based compensation expense in the second quarter was $9.6 million or 1.8% of sales. Using our estimated effective cash tax rate of 15% non-GAAP net income for the second quarter, excluding the non-cash effects of the quarterly valuation of the Suntech warrants was $212 million; and non-GAAP diluted earnings per share, excluding warrants, was $0.92 per share.

GAAP net income for the second quarter, using a GAAP tax-rate of 25.6%, was $176.1 million or $0.76 per share, which includes a $0.05 per share impact relating to a decrease in the valuation of the Suntech warrants. The company generated operating cash flow of $205 million or 38.6% of sales. Capital expenditures for the second quarter totaled $87.3 million or 16.4% of sales. And free cash flow, which is operating cash flow minus capital expenditures, was $117.7 million or 22.1% of sales.

During the quarter, the company repurchased 1.1 million shares of MEMC stock. Despite using $79 million in cash for our buyback program, cash and investment balances increased by $80 million to approximately $1.5 billion. With this consistent cash generation and virtually no debt, MEMC continues to strengthen its already strong balance sheet.

Now turning to business conditions, solar application demand continues to be strong. However semiconductor application demand seems to be uncertain due to the current macroeconomic conditions. Although we have made significant progress as a result of the accomplishments mentioned earlier, we did not achieve the targeted level of results for the second quarter and that continues to warrant a degree of caution.

Based on these considerations, we are targeting revenues of approximately $560 million to $620 million for the third quarter. In addition, we are targeting gross margin of approximately 54% to 55% of sales with operating expenses of approximately $41 million. For the full year based on market indicators, customer indications and our projected expansion plans, we are currently targeting revenue of approximately $2.25 billion to $2.35 billion.

Non-GAAP EPS of approximately $4 to $4.30 per share based on a cash tax rate of approximately 50% and excluding the non-cash affects of the Suntech warrant evaluation Capital expenditures of approximately 15% of sales and operating expenses for the year of approximately $163 to $165 million. And these targets would represent 2008 sales growth of 17% to 22% and non-GAAP earnings per share growth excluding the Suntech warrants of 23% to 33% compared to 2007.

On an administrative note, given the number of anticipated events associated with our expansion and ramp during the last few quarters as well as our cautious view, we are planning on providing an interim update this quarter via a conference call on September 2nd. In this update call, we intend to review the status of the company's production rate and provide and update to the quarterly financial targets if appropriate.

Let me now turn on the call over to Nabeel.

Nabeel Gareeb - President and Chief Executive Officer

Thank you, Ken.

While we demonstrated solid financial results in the second quarter as Ken mentioned, we were a bit below the bottom end of our target range. I am going to cover a few topics and provide additional detail, which you may find valuable.

First, I am going to provide a brief summary of why we were below the low end of the range, then I am going to talk about what I was disappointment with, next what accomplishments I was pleased with, and last provide prospective on our opposition looking forward.

We have also provided as a supplement to this press release, two charts that show our daily production of silane and polysilicon in Pasadena. These charts may helpful for you to visualize our production trajectory there. I will pause for a few seconds while you turn to the chart page of the release.

The charts on the slide show a three day moving average of our silane production in Pasadena on the upper chart and poly production on the lower one. As a frame of reference, we have also included on the charts an indication of what level of daily production output would be required to achieve approximately $500 million and approximately $600 million of revenue in the quarter. It is important to note that these are not cumulative quarter to date charge, just daily production points.

So let's start with a summary of what caused us to miss our targeted range of results. The premature failure of the heat exchanger that was relatively new at our Merano facility in June, reduced the company's total second quarter polysilicon output by just under 5% for the quarter. While Pasadena had been running enough ahead of schedule to offset the Merano shortfall, complications there from a loose pipefitting and resulting fire caused us to shut down half the silane production on June 13th.

And while the facility recovered from this fairly quickly and manage to produce enough silane and polysilicon to be in the middle of its targeted range for production, Pasadena could not produce enough product fast enough to offset the Merano shortfall and allow us to finish the quarter within our targeted band of revenue.

I am disappointed that we were not able to avoid additional unexpected events in Q2 or result the complications Merano faster or produce more polysilicon in Pasadena to offset all the Merano shortfalls. However, what I am pleased and excited about is the following: First, in Pasadena, Unit 3 overcame the issues that held us back in Q1 although with some limitations due to the fire, but has recovered well. Second, Unit 4 was started up over a month prior to the end of the quarter and has ramped and run at good rates other than interruption of the fire.

Third, the combined output from Units 3 and 4 during May and early June alone had positioned us on a trajectory to finish the quarter ahead of the upper end of our targeted revenue range and the strong output allowed us to offset a portion of the Merano shortfall in the last week of June.

Fourth, we have completed this technically and operationally challenging phase of silane expansion in Pasadena, and now have a high level of confidence in the longer-term performance of Units 3 and 4. We expect this should eliminate silane production as a constraining element. Fifth, we have mechanically completed the two additional poly-reactors in Pasadena, where the ramp is scheduled to begin next week. As a result of these installations, we are now at 75 to 100 metric tons of annualized poly capacity, have a number of... record number rectors available to produce poly, and have demonstrated good output in July.

Last, but not least, we have replaced the heat exchanger on Merano, started the expansion and are on track to finish the expansion and phases in August 1st, and September 1st, which will get us to the 8,000 metric tons of annualized capacity before the end of the third quarter. So, I would like to put all these events in perspective. Although we have had a difficult first half of this year, with ramps and unexpected events and discoveries, we have achieved numerous milestones and demonstrated capability for extended periods of time that have positioned us for significant growth in the second half of this year versus the first half. This is what we had hoped to accomplish when we last talked in our April call.

During this period although our results did not meet investor expectations, we continued to generate gross margins in the 50% plus range, operating margins in the mid-40% range and of course a continued high level of free cash flow, which continues to be a key operational differentiator for us. And although reduced slightly from the numbers articulated earlier this year, our revised full year financial targets would represent sales growth of 20% to 25%, and non-GAAP EPS growth, excluding the Suntech warrants of 23% to 31% compared to 2007.

To close, I continue to take full responsibility for our results. Even due to un-anticipated events and look forward to putting these operational discussions behind us by clearly demonstrating our production capability and growth during the second half of this year. With that, we will now take your questions.

Operator?

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