First Solar, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 27, 2010; comparisons are with the three months ended March 28, 2009 unless noted. First Solar manufactures and sells thin-film solar modules and develops and delivers photovoltaic systems. Its components business is the primary profit driver; the systems business is intended to support module sales and throughput.
Financial results and position
| Metric | Q1 2010 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $568.0 million | $418.2 million | +36% |
| Gross profit / margin | $282.0 million / 49.7% | $235.3 million / 56.3% | Profit +20%; margin down 6.6 percentage points |
| Operating income / margin | $191.1 million / 33.7% | $168.1 million / 40.2% | Income +14%; margin down 6.5 percentage points |
| Net income | $172.3 million | $164.6 million | +5% |
| Diluted EPS | $2.00 | $1.99 | +1 cent |
| Operating cash flow | $31.3 million | $63.7 million | Down $32.5 million |
| Capital expenditures | $106.0 million | $86.4 million | Up $19.6 million |
Liquidity and debt: At March 27, cash, cash equivalents, and marketable securities totaled $1.020 billion, compared with $1.114 billion at December 26, 2009. Current assets were $1.405 billion and current liabilities $322.5 million. Total debt, including current maturities, was $162.5 million. The $300 million revolving facility had no borrowings outstanding; $48.7 million was drawn in letters of credit, leaving approximately $251.3 million of capacity. The company reported compliance with debt covenants.
Cash movement: Cash and cash equivalents fell $243.6 million to $420.9 million. Investing used $262.4 million, including capital spending, net purchases of marketable securities, and $43.4 million placed in restricted investments for future module collection and recycling costs. Financing provided $2.0 million. The filing attributes lower operating cash flow chiefly to working-capital needs, including growth in the systems business.
Material changes and operating drivers
- Module sales volume rose 53%, while average selling price fell approximately 17%. Higher volume and systems activity drove revenue growth; lower module prices constrained margins.
- Average manufacturing cost declined 13%, from $0.93 to $0.81 per watt. Management cited production ramp-up, process improvements, and increased efficiency; average module conversion efficiency improved approximately 2% year over year.
- Gross margin fell as pricing declines and other factors outweighed manufacturing cost reductions. The euro’s exchange-rate movement reduced gross profit by 0.4%.
- Research and development expense increased 96% to $22.9 million, mainly from higher staffing and testing costs. Selling, general and administrative expense rose 36% to $66.9 million. Production start-up expense decreased 82% to $1.1 million.
- Systems revenue was $38.7 million, mainly from one utility-scale project sale in Spain and percentage-of-completion revenue on two U.S. projects. Systems gross profit was $4.4 million, versus a $0.7 million loss in the prior-year period.
- Income tax expense was $23.0 million and the effective tax rate was 11.8%, compared with 3.0% a year earlier. The prior-year rate benefited from an $11.5 million Malaysian tax-holiday-related benefit; without it, the prior-year effective rate would have been 9.8%.
Outlook, commentary, and risks
- Management said available liquidity, operating cash flows, the revolving facility, and capital-market access should be sufficient for working capital and capital expenditures for at least 12 months, while cautioning that changed results or plans could make resources insufficient.
- Management expected German module demand to remain strong in Q2 2010, partly because customers were anticipating possible reductions in German feed-in tariffs. It warned that tariff reductions in the second half of 2010 could materially reduce industry demand and/or pricing, and that other markets might not absorb supply without inventory buildup. No specific full-year financial guidance is provided in the supplied filing text.
- First Solar operated 24 production lines with approximately 1.3 GW of annual capacity and expected to reach 38 lines and approximately 2.1 GW by 2012. These are management expectations, not guaranteed outcomes.
- Key exposures include competition and pricing pressure, dependence on incentives and policy changes, lower module efficiency relative to crystalline silicon products and related balance-of-system costs, euro exposure, and the working-capital demands and long development cycles of the systems business. Approximately 59% of Q1 sales were to customers headquartered in Germany; 88% of sales were denominated in euros.
- A customer rebate program, running through Q4 2010, reduced revenue: Q1 rebates were €20.0 million ($27.8 million), and €31.8 million ($42.6 million) of claims were accrued at quarter-end. The company also reported a $97.8 million solar-module collection and recycling liability, supported in part by $77.3 million of restricted investments.
- Subsequent event: First Solar agreed to acquire NextLight Renewable Power for approximately $285 million, subject to adjustments and closing conditions, in an all-cash transaction expected to close in Q3 2010. The acquisition includes a 1.1 GW project pipeline. A separate project note of €19.9 million was repaid after quarter-end.
- The filing reported no material changes to previously disclosed risk factors, no material adverse effect expected from pending legal proceedings, and no off-balance-sheet arrangements at quarter-end. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether German feed-in tariff changes, customer demand pull-forward, and module pricing affect later 2010 sales, margins, and inventory.
- Whether cost-per-watt reductions and planned capacity expansion are achieved, and how they compare with competing module technologies and system costs.
- How systems-project investment, receivables, unbilled revenue, and other working-capital needs affect operating cash flow and liquidity.
- The terms, funding, closing conditions, and integration risks of the NextLight acquisition, including the project pipeline’s development status.
- Whether the Malaysian tax holiday’s employment and investment conditions remain satisfied, and whether the quarter’s tax rate is representative.