First Solar, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 26, 2010; unaudited. Amounts below are in U.S. dollars unless stated otherwise. First Solar manufactures thin-film solar modules and develops, builds, and services photovoltaic systems.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $587.9 million | $525.9 million | $1,155.8 million | $944.1 million |
| Gross profit / margin | $284.2 million / 48.3% | $298.1 million / 56.7% | $566.2 million / 49.0% | $533.4 million / 56.5% |
| Operating income | $180.5 million | $204.0 million | $371.6 million | $372.1 million |
| Net income | $159.0 million | $180.6 million | $331.4 million | $345.2 million |
| Diluted EPS | $1.84 | $2.11 | $3.84 | $4.10 |
- Cash flow, first half: Operating cash flow was $107.6 million, versus $82.8 million. Investing activities used $223.7 million, including $239.5 million of capital expenditures; financing activities used $10.3 million. Cash and cash equivalents decreased by $154.0 million to $510.5 million.
- Liquidity: Cash, cash equivalents, and marketable securities totaled $960.5 million at June 26, compared with $1,114.3 million at December 26, 2009. The company said available resources were expected to meet working-capital and capital-expenditure needs for at least 12 months, subject to its assumptions and operating plans.
- Debt: Long-term debt, including current maturities, had a carrying value of $138.6 million. The $300 million revolving facility had no borrowings; $53.1 million of letters of credit were outstanding, leaving approximately $246.9 million of capacity. The company reported compliance with debt covenants.
- Other balance-sheet measures: Total assets were $3.63 billion and stockholders’ equity was $3.01 billion. Restricted cash and investments for module collection and recycling were $81.1 million.
Changes versus the prior comparable period
- Second-quarter sales rose 12%; first-half sales rose 22%. First-half module volume increased 32%, while module average selling prices fell approximately 16% (15% in Q2). German customers drove significant demand ahead of anticipated subsidy reductions.
- Solar power systems revenue increased to $111.8 million in Q2 and $150.9 million in the first half, from $5.3 million and $10.2 million, respectively, a year earlier. Module revenue was $476.1 million in Q2 and $1.005 billion in the first half.
- Despite higher sales, Q2 net income declined 12% and first-half net income declined 4%. Gross margin fell 8.4 percentage points in Q2 and 7.5 points in the first half. Lower selling prices, systems-versus-module mix, and costs from a manufacturing excursion more than offset manufacturing scale and cost-per-watt improvements.
- Average module manufacturing cost per watt declined 13% year over year to $0.76 in Q2 and 11% to $0.79 for the first half. R&D expense rose 51% in the first half; SG&A rose 19%, while production start-up expense fell 61%.
- First-half cash from operations improved year over year, but capital expenditures increased to $239.5 million from $146.0 million, reflecting manufacturing expansion. The company also paid down debt and received $61.7 million of note-receivable principal.
Outlook, commentary, and risks
- Outlook: No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected module manufacturing costs to continue declining and targeted approximately 10% annual cost-per-watt reductions. It expected capacity to grow from approximately 1.4 GW across 24 lines to approximately 2.2 GW across 38 lines by 2012.
- Market and pricing: German feed-in-tariff reductions took effect in stages beginning July 2010. Management warned they could materially reduce industry demand and/or prices, particularly for agricultural-land projects; it was uncertain whether demand in other markets would absorb available supply without inventory buildup or price reductions. The customer rebate program was expected to extend into 2011 with modifications; rebates reduce revenue and are not payable in cash.
- Concentration and foreign exchange: Germany represented 50% of Q2 net sales and 54% of first-half net sales. Euro-denominated sales were 81% and 84%, respectively. Currency volatility and changes in customer or business mix could affect margins.
- Manufacturing excursion: A 2008–2009 production issue affecting less than 4% of output could cause premature power loss. The cause was identified and mitigated, and testing supported the corrective actions, but replacement and related post-sale efforts continued. Accrued nonrecurring costs were $29.5 million to date, including $27.4 million in accrued expenses at June 26.
- Systems expansion and capital needs: Management noted that project development can require substantial up-front investment and long lead times, potentially increasing liquidity needs and requiring future debt or equity financing. On July 12, 2010, after quarter-end, First Solar acquired NextLight Renewable Power for approximately $297 million in cash, subject to closing adjustments; the filing presented a 2.2 GW North American utility-systems advanced pipeline after that acquisition.
- Other items: The Malaysian tax holiday was extended by three years, subject to additional investment requirements. The board changed the fiscal year to the calendar year effective at year-end 2010, with calendar quarters beginning in 2011. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; Phase I of a new ERP implementation was completed on June 27.
- The filing reported no material changes to the risk factors in the prior Form 10-K and stated that pending legal proceedings were not expected to have a material adverse effect. Actual outcomes remain subject to the risks described in the filing.
Important facts for investors to verify
- Whether the German subsidy changes and extension of rebates affect second-half shipment demand, selling prices, and margins.
- Whether module cost reductions and manufacturing capacity plans progress as expected, and whether falling prices or systems mix erode margins.
- Whether the manufacturing-excursion replacement program is completed within the accrued estimate, and whether further warranty or post-sale costs arise.
- Whether systems projects and the NextLight acquisition convert into contracted revenue and cash generation without materially increasing financing needs.
- How foreign-exchange exposure, customer concentration, and the Malaysian tax-holiday conditions affect reported results and cash flows.