First Solar, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. First Solar manufactures thin-film solar modules and develops, builds, and sells utility-scale solar systems. Its strategy is shifting toward integrated utility-scale solutions in sustainable markets; management also changed how it evaluates segment profitability during Q2.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $957.3 million | $532.8 million | $1,454.4 million | $1,100.1 million |
| Gross profit / margin | $243.7 million / 25.5% | $194.8 million / 36.6% | $320.5 million / 22.0% | $454.5 million / 41.3% |
| Operating income (loss) | $139.7 million | $64.5 million | $(316.6) million | $193.9 million |
| Net income (loss) | $111.0 million | $61.1 million | $(338.4) million | $177.1 million |
| Diluted EPS | $1.27 | $0.70 | $(3.90) | $2.03 |
- Q2 sales rose 80%, principally because systems revenue increased to $669.7 million from $37.5 million as more and larger utility projects were under construction. Third-party module revenue fell to $54.6 million from $427.4 million. Systems revenue, including modules installed in systems, was $902.7 million.
- Q2 gross margin declined 11.1 percentage points. Management cited lower third-party module prices and customer mix, manufacturing underutilization, remediation costs, and accelerated depreciation; higher systems margins partly offset these pressures. Average manufacturing cost was $0.78 per watt versus $0.75.
- First-half sales rose 32%, but gross profit fell 29% and the company reported a loss. The $420.1 million of restructuring expense was the principal unusual charge; cost-of-sales pressures also included underutilization, remediation, inventory write-downs, and accelerated depreciation.
- Systems segment reported pretax income of $228.3 million for Q2 and $285.2 million for the first half; components reported pretax losses of $92.9 million and $606.4 million, respectively. Segment measures include management allocations of module revenue and costs.
Cash flow, liquidity, and debt
- First-half operating cash flow was $412.3 million, versus cash used of $246.8 million a year earlier. Investing cash outflow was $301.3 million, including $282.0 million of capital expenditures; financing cash outflow was $85.9 million. Cash and cash equivalents increased $24.6 million.
- At June 30, cash and cash equivalents were $630.2 million and marketable securities were $113.5 million, totaling $743.7 million. Restricted cash and investments of $267.4 million are separate and largely fund module collection and recycling.
- Total debt, including current maturities and net of discount, was $518.9 million, down from $663.6 million at year-end. The company repaid its $141.8 million German facility in April. Its $600 million revolving facility had $215.0 million drawn, $133.8 million of letters of credit, and $251.2 million available; the company reported compliance with financial covenants.
- Management believed available liquidity, operating cash flow, contracted projects, credit facilities, and potential capital-market access would cover working capital and capital expenditures for at least 12 months, while cautioning that changed results or plans could undermine that assessment.
Material changes, outlook, and risks
- Restructuring charges were $420.1 million for the first half, including asset impairments and related costs, severance, and German grant repayments. Plans include closing Frankfurt (Oder) manufacturing by year-end 2012, not proceeding with the Vietnam plant, idling four Malaysian production lines, and reducing the workforce by about 2,000. Management estimated $30–$50 million of 2012 savings and $100–$120 million annually in 2013 and beyond, with $40–$60 million of additional restructuring expense expected. The filing gives differing timing for those additional charges: through Q1 2013 in MD&A and through Q2 2013 in the note.
- Management expected 2012 module production of approximately 1.8–1.9 GW and up to $100 million of capital expenditures during the remainder of 2012. It cited an approximately 2.9 GW AC advanced systems pipeline as of August 1, 2012; about 2.1 GW was sold or under contract, with approximately $6.1 billion of associated revenue remaining to be recognized. Revenue timing depends on project progress and recognition requirements. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Management cited industry-wide excess manufacturing capacity, intense pricing competition, falling module prices, European subsidy changes, and uncertain demand absorption. Other material exposures include project construction and customer-payment timing, underutilized plants, foreign-exchange and interest-rate movements, inventory valuation, and execution of the strategic market shift.
- Warranty and remediation exposure is significant: the warranty liability was $181.9 million at June 30, including $112.8 million of accrued costs beyond normal warranty for the 2008–2009 manufacturing excursion. The company said actual remediation needs or refurbished-module values could require additional expense.
- The company disclosed securities class-action and derivative lawsuits alleging misleading statements about financial performance and prospects. It could not assess the likelihood or range of any loss; the litigation was at an early stage.
Important facts for investors to verify
- Whether contracted system projects progress, bill, and collect on schedule, particularly given $436.2 million of unbilled receivables and $146.2 million of noncurrent retainage.
- Whether module pricing, production utilization, and inventory values stabilize, and whether the expected manufacturing cost and efficiency improvements materialize.
- Whether restructuring is completed on the stated schedule and delivers projected savings without further impairment, closure, or grant-repayment costs.
- Whether warranty and manufacturing-excursion estimates adequately reflect claims, replacement needs, and resale values of returned modules.
- Whether liquidity remains sufficient as project construction, capital spending, and potential project repurchases or strategic investments require cash; also monitor covenant headroom and available revolver capacity.
- Developments in the disclosed securities and derivative litigation, for which the filing provides no estimable loss range.