Evergreen's Future, Foretold

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During earnings season, it's important to remember that companies' quarterly numbers, as reported, do not represent "truth." They're merely a standardized way of presenting the data. Hence, the name GAAP -- generally accepted accounting principles. It's up to us to tease out the meaning.

In order to do just that, I often find myself starting with a firm's net income figure and then backing out insurance benefits, one-time tax windfalls, and the like. The number that gets so much press -- earnings per share beat analyst estimates by three cents! -- often distorts a firm's operational performance one way or another. But in the case of Evergreen Solar (Nasdaq: ESLR), there's critical information below the operating line.

In late 2006, Evergreen's European joint venture, EverQ, got divvied up equally between its three principals. Silicon and wafer whiz REC took a bigger slice, while Evergreen relinquished its majority share in exchange for bounteous silicon. Accounting conventions dictate that minority interests below a certain threshold be reported as equity investments, so EverQ's results got pulled out of the top of the income statement and now appear toward the bottom as a simple gain or loss.

Why is this important? Well, for one, Evergreen's revenues look like they got sliced in half this year, which would be a disaster for the up-and-comer. Including the EverQ numbers, however, sales of Evergreen's String Ribbon solar products soared. EverQ, which has a bigger production capacity, topped Evergreen's revenues severalfold.

Beyond mere appearances, the EverQ numbers also help us see the profitability of Evergreen's manufacturing technique, given adequate scale. Stand-alone Evergreen, which is just now bulking up its production base in America, reported an operating loss, while EverQ posted a solid 17% operating margin.

The Devens, Mass., factory ought to be formidable in 2009, and that's when I expect to see the stateside portion of this business starting to pull its own weight. For those wondering whether Evergreen would ever join Suntech Power (NYSE: STP) or SunPower (Nasdaq: SPWR) in making some green, that outcome is now firmly in sight. Just gaze across the ocean and you can see the future.