FSLR

Business Context and Reporting Period

Company: First Solar, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 27, 2008
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; Frankfurt/Oder, Germany; and Kulim, Malaysia. As of the reporting date, the company operated 19 production lines with a target global capacity of approximately 1,145 MW by the end of 2010. The company also operates a solar power systems and project development business following the acquisition of Turner Renewable Energy, LLC in late 2007.

Key Financial Metrics

Manufacturing Cost: Average manufacturing cost per watt decreased to $1.08 in 2008 from $2.94 in 2004.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 147% year-over-year, driven primarily by a 148% increase in megawatt volume sold due to the full ramp of the German plant and the commencement of shipments from the first two plants in Malaysia.
• Margin Expansion: Gross margin improved by 4.5 percentage points to 54.4%, attributed to increased leverage of fixed-cost infrastructure and a 9% decrease in average manufacturing cost per watt, which outpaced the 1% decline in average selling prices.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 112% to $174.0 million, and production start-up costs increased 93% to $32.5 million, reflecting global expansion and the qualification of new production lines.
• Foreign Exchange: A strengthening euro contributed $68.9 million to net sales and resulted in a foreign currency gain of $5.7 million.

Guidance, Outlook, Risks, and Contingencies

• Contractual Obligations: The company holds Long Term Supply Contracts aggregating approximately $5.8 billion in sales from 2009 to 2013. These contracts feature a fixed annual price decline of approximately 6.5%, requiring the company to reduce manufacturing costs at a similar rate to maintain profitability.
• Expansion Plans: First Solar expects to complete the construction of its fourth Malaysian plant and an Ohio expansion in the first half of 2009, aiming for 24 production lines by the end of 2010.
• Tax Holiday: Subsequent to year-end, the company received approval to accelerate its Malaysian tax holiday by one year, effective January 1, 2008. This is expected to result in an $11.6 million income tax benefit recognized in the first quarter of 2009.
• Key Risks:
  • Customer Concentration: Five customers accounted for 55% to 75% of net sales in 2008, with 94% of sales generated from the European Union.
  • Subsidy Dependence: Demand is heavily reliant on government subsidies (feed-in tariffs) in Germany, Spain, and other markets. Recent legislative changes in Germany and Spain have reduced subsidy rates and capped market growth.
  • Supply Chain: Critical raw materials, such as cadmium telluride, are sourced from a limited number of suppliers.
  • Product Warranty: The company maintains a 25-year power output warranty. Accrued warranty liability was $11.9 million as of December 27, 2008.

Investor Verification Checklist

• Verify the impact of the accelerated Malaysian tax holiday on Q1 2009 earnings ($11.6 million benefit).
• Monitor the execution of the 2009 expansion plans in Malaysia and Ohio to ensure capacity targets are met.
• Assess the stability of European feed-in tariff policies, particularly in Germany and Spain, given recent legislative reductions.
• Review the company's ability to reduce manufacturing costs by at least 6.5% annually to offset contractual price declines in Long Term Supply Contracts.
• Track the financial health of the top five customers, which represent a significant portion of revenue.