FIRST SOLAR, INC. quarterly report, Q1 FY2012

First Solar, Inc. — Q1 2012 Form 10-Q

Reporting period: Three months ended March 31, 2012; unaudited. First Solar manufactures thin-film solar modules and develops, constructs, and sells utility-scale solar power systems.

Financial results and liquidity

Metric	Q1 2012	Q1 2011
Net sales	$497.1 million	$567.3 million
Gross profit / margin	$76.7 million / 15.4%	$259.7 million / 45.8%
Operating income (loss)	$(456.3) million	$129.4 million
Net income (loss)	$(449.4) million	$116.0 million
Diluted EPS	$(5.20)	$1.33
Operating cash flow	$(16.1) million	$(43.8) million
Capital expenditures	$124.5 million	$169.0 million

Cash and cash equivalents were $610.5 million; cash, cash equivalents, and marketable securities totaled $749.7 million at quarter-end, down from $788.0 million at December 31, 2011. Restricted cash and investments of $282.5 million are not included in that total.
Current assets were $2.900 billion and current liabilities were $1.171 billion. Total debt, including current maturities and unamortized discount, was $864.3 million; total liabilities were $2.565 billion.
Investing cash outflow was $182.3 million and financing cash inflow was $195.8 million. The latter included $200.0 million borrowed under the revolving credit facility.
After quarter-end, through May 2, First Solar repaid the $141.8 million German facility balance and made $200 million of net revolving-credit repayments, reducing total debt outstanding by about 40% from the March 31 level. It said it remained in covenant compliance at March 31.

Changes versus the prior comparable period

Revenue declined 12%. Module volume sold fell 55% and components module average selling price declined about 10%; higher systems-business sales partly offset these declines.
Revenue mix shifted sharply: solar module revenue was $67.4 million versus $505.7 million, while solar power system revenue was $429.6 million versus $61.6 million. Systems revenue growth reflected more and larger utility-scale projects under construction.
Cost of sales rose 37% to $420.3 million despite lower sales, primarily due to higher systems construction costs, remediation spending, inventory write-downs, accelerated depreciation, and factory underutilization.
Gross margin fell 30.4 percentage points. Restructuring charges of $401.1 million drove the operating loss; excluding those charges, the filing still reports significant pressure from lower module pricing, business mix, remediation, and underutilized capacity.
Average manufacturing cost declined 3%, to $0.73 per watt from $0.75. Average module conversion efficiency increased to 12.4% from 11.7%.

Outlook, management commentary, and risks

Management expected 2012 module production of approximately 1.4–1.7 GW and exit-year annual manufacturing run-rate capacity of about 1.7 GW, following announced capacity reductions and idling. The filing describes a transition toward sustainable markets and utility-scale solutions; it does not provide a clear full-year revenue or earnings forecast.
The April 2012 European restructuring plan included closing the Frankfurt (Oder), Germany manufacturing operations by year-end, reducing other European operations, indefinitely idling four Malaysia production lines, and reducing the workforce by about 2,000. Management estimated savings of $30–$60 million in 2012 and $100–$120 million annually thereafter, with $40–$80 million of additional restructuring expense expected in the remainder of 2012.
The filing reports $401.1 million of Q1 restructuring expense, including $270.4 million associated with the European restructuring described as approved in April. The timing and accounting basis of these charges merit review. The Vietnam plant was classified as held for sale, with a $92.2 million impairment and a $46.2 million carrying value.
Management cited industry-wide excess manufacturing capacity, falling module prices, European subsidy and policy changes, customer and financing constraints, and uncertainty about whether demand in newer markets can absorb supply. It also warned that systems-project development and construction can require substantial upfront working capital.
Cash generation and liquidity are exposed to collection timing: unbilled accounts receivable were $551.6 million, which management expected to bill and collect within 12 months. Inventory and balance-of-systems parts also rose substantially during the quarter.
Warranty and remediation estimates remain material. The company recorded a $23.4 million Q1 change in product-warranty estimates; the quarter-end warranty liability was $179.5 million, including $106.5 million accrued for costs beyond normal warranty related to the 2008–2009 manufacturing excursion.
A securities class action and several derivative actions were filed against the company and certain current or former officers and directors. The company said it could not estimate potential loss at this stage. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
First Solar appointed James A. Hughes CEO effective May 3, 2012, succeeding interim CEO Michael Ahearn, who remained board chair.

Most important facts for investors to verify

Reconcile the $401.1 million Q1 restructuring charge, particularly the $270.4 million European-related amount described alongside an initiative approved in April.
Track module pricing, shipment volumes, inventory write-downs, and factory utilization against the 1.4–1.7 GW production outlook and the planned capacity reductions.
Monitor conversion of the $551.6 million unbilled receivable balance and the funding, construction, and sale milestones for the major systems pipeline.
Assess cash needs against expected capital expenditures of up to $250 million for 2012, restructuring-related cash payments of $80–$120 million, and post-quarter debt repayments.
Review the adequacy of warranty and manufacturing-excursion reserves, potential German grant repayments, and developments in the securities and derivative litigation.