FSLR

First Solar, Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for First Solar, Inc., covering the three and nine months ended September 27, 2008. First Solar designs and manufactures solar modules using proprietary thin-film semiconductor technology. The company operates manufacturing facilities in Perrysburg, Ohio; Frankfurt/Oder, Germany; and Kulim, Malaysia. The company is a large accelerated filer and reported 81,089,850 shares of common stock outstanding as of October 24, 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 119.3% for the quarter and 168.0% for the nine-month period compared to the prior year. This was driven by a 114% increase in MW volume sold due to the full ramp of the German facility and the commencement of production at the Malaysian facility.
• Margin Expansion: Gross margin improved to 56.1% (Q3 2008) from 51.6% (Q3 2007) and 54.7% (9M 2008) from 46.3% (9M 2007). Improvements were attributed to fixed cost leverage, increased sellable watts per module, and favorable foreign exchange rates (USD/EUR).
• Expense Increases: Operating expenses rose significantly due to headcount increases and infrastructure build-out. Selling, general, and administrative (SG&A) expenses increased 80.9% for the quarter. Production start-up costs increased 126.2% for the quarter, primarily related to the Malaysian expansion.
• Foreign Currency: The company reported a foreign currency loss of $1.9 million for the quarter, compared to a gain of $1.0 million in the prior year, due to the strengthening of the U.S. dollar against the euro.

Guidance, Outlook, and Risks

• Capacity Outlook: Management expects annual global manufacturing capacity to reach approximately 1.1 GW by the end of fiscal 2009. Construction is ongoing for plants three and four in Malaysia and an expansion in Ohio.
• New Agreements: In October 2008, the company announced new long-term module supply agreements expanding contracted volume by 625 MW, representing approximately $1.03 billion in potential sales through 2013. Additionally, the company invested $25 million in SolarCity and entered into a framework agreement with Edison Mission Energy.
• Effective Tax Rate: The company expects an effective tax rate of approximately 26% for fiscal 2008, benefiting from a Malaysian tax holiday effective in 2009.
• Risk Factors:
  • Financing Environment: Tightening credit markets and rising interest rates could reduce end-user demand for solar systems, as many rely on debt financing.
  • Foreign Exchange: Approximately 97% of net sales are denominated in euros. A 10% change in the exchange rate could impact net sales by $81.3 million.
  • Supply Chain: The company relies on a limited number of suppliers for key raw materials. Disruptions could lead to higher costs or manufacturing delays.
  • Customer Concentration: No single customer accounted for more than 22% of sales, but the loss of large customers or their inability to perform could significantly impact results.

Investor Verification Checklist

• Verify the status of the Malaysian plant ramp-up and the timeline for full capacity of plants three and four.
• Monitor the EUR/USD exchange rate, as it significantly impacts reported revenue and margins.
• Assess the impact of the global credit crunch on the ability of project developers (customers) to secure financing for solar installations.
• Review the details of the new 625 MW supply agreements announced in October 2008 to confirm pricing and delivery terms.
• Track the utilization of the new export financing facility for the Malaysian center and associated debt covenants.