Business Context and Reporting Period
Company: First Solar, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 29, 2007
Business Overview: First Solar designs and manufactures solar modules using proprietary thin-film cadmium telluride semiconductor technology. The company operates manufacturing facilities in Perrysburg, Ohio, and Frankfurt/Oder, Germany, with a major expansion underway in Kulim, Malaysia. The company's primary objective is to achieve grid parity (non-subsidized cost equal to retail electricity) by 2010.
Key Financial Metrics
| Metric (in thousands) | 2007 | 2006 |
|---|---|---|
| Net Sales | $503,976 | $134,974 |
| Gross Profit | $251,403 | $54,244 |
| Gross Margin | 49.9% | 40.2% |
| Operating Income | $137,181 | $2,810 |
| Net Income | $158,354 | $3,974 |
| Diluted EPS | $2.03 | $0.07 |
| Operating Cash Flow | $205,951 | ($576) |
| Cash & Equivalents (End of Period) | $404,264 | $308,092 |
| Total Debt (Current + Long-term) | $108,165 | $80,697 |
Note: Debt figures include short-term debt, current portion of long-term debt, and long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 273% to $504.0 million, driven by a 259% increase in megawatt volume sold due to the ramp-up of the German plant and full production of the Ohio expansion.
- Profitability: The company transitioned from a net income of $4.0 million in 2006 to $158.4 million in 2007. Operating income surged from $2.8 million to $137.2 million.
- Margin Expansion: Gross margin improved by 9.7 percentage points to 49.9%, attributed to fixed cost leverage, scalability, and a favorable foreign exchange rate (strengthening Euro contributed $43.8 million to sales).
- Acquisition: On November 30, 2007, the company acquired Turner Renewable Energy, LLC for $34.3 million ($28.0 million stock, $6.3 million cash) to expand utility-scale project development in the U.S.
- Capital Expenditures: Investing cash outflows increased significantly to $547.3 million (from $160.0 million in 2006) due to construction of the German and Malaysian plants and purchases of marketable securities.
Guidance, Outlook, and Risks
Outlook and Capacity
The company plans to expand to 23 production lines by the end of 2009, achieving an annual global manufacturing capacity of approximately 1,012 MW. Construction is underway for four plants in Malaysia, with the first expected to reach full capacity in the second half of 2008.
Long-Term Contracts
First Solar holds Long Term Supply Contracts with twelve European customers covering approximately €4.5 billion ($5.9 billion) in sales from 2008 to 2012 for 3.2 GW of modules. These contracts feature a fixed price decline of approximately 6.5% annually, requiring the company to reduce manufacturing costs at a similar rate to maintain margins.
Key Risks
- Subsidy Dependence: Demand is heavily reliant on government subsidies (feed-in tariffs), particularly in Germany (90.7% of 2007 sales). Changes in legislation in Germany, Spain, or the U.S. could materially reduce demand.
- Customer Concentration: Six customers accounted for the majority of net sales in 2007, with the largest representing 22.6%.
- Supply Chain: The company relies on a limited number of suppliers for critical raw materials, specifically cadmium telluride. Disruptions could impair production.
- Foreign Exchange: Approximately 98.8% of net sales were denominated in Euros. Fluctuations in the USD/EUR exchange rate significantly impact reported revenue and margins.
- FINRA Inquiry: The company is cooperating with a FINRA inquiry regarding trading in its stock surrounding the announcement of long-term supply contracts and Q3 financial results in 2007.
Investor Verification Checklist
- Contractual Price Declines: Verify the company's ability to reduce manufacturing costs per watt by at least 6.5% annually to offset the fixed price declines in its Long Term Supply Contracts.
- Malaysia Expansion Execution: Monitor the timeline and cost efficiency of the four new plants in Malaysia, which are critical to meeting 2008-2012 delivery commitments.
- German Subsidy Policy: Track legislative changes in Germany regarding the Renewable Energy Law (EEG) and feed-in tariff degression rates, as this market represents the vast majority of revenue.
- Warranty and Recycling Liabilities: Review the accrued warranty liability ($7.3 million) and collection/recycling liability ($13.1 million) for adequacy given the limited long-term operating history of the thin-film technology.
- Debt Covenants: Confirm compliance with financial covenants on the German credit facility (IKB), specifically the debt service coverage ratio and leverage ratios.