First Solar, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; figures are unaudited and compared with the corresponding 2010 periods. First Solar manufactures thin-film solar modules and develops, builds, and sells utility-scale solar systems.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $532.8 million | $587.9 million | $1,100.1 million | $1,155.8 million |
| Gross profit / margin | $194.8 million / 36.6% | $284.2 million / 48.3% | $454.5 million / 41.3% | $566.2 million / 49.0% |
| Operating income / margin | $64.5 million / 12.1% | $180.5 million / 30.7% | $193.9 million / 17.6% | $371.6 million / 32.1% |
| Net income / diluted EPS | $61.1 million / $0.70 | $159.0 million / $1.84 | $177.1 million / $2.03 | $331.4 million / $3.84 |
| Operating cash flow | Not separately stated | Not separately stated | $(246.8) million | $107.6 million |
Q2 sales fell 9% and net income fell 62% year over year; six-month sales declined 5% and net income declined 47%. Module volumes increased (22% in Q2; 19% for six months), but average selling prices fell 24% in Q2 and 18% for the half. The company attributed pricing pressure to contract adjustments, competition and rebates, customer/geographic mix, and foreign exchange. Systems revenue fell 30% in Q2 and 14% for the half, mainly because project milestones were reached at different times.
Manufacturing cost averaged $0.75 per watt in Q2, down from $0.76 a year earlier; the six-month average was $0.75 versus $0.79. This cost improvement did not offset lower selling prices, increased manufacturing and ramp costs, or higher operating expenses. R&D and SG&A rose 45% and 11%, respectively, in Q2; production start-up expense increased to $10.3 million from $2.3 million.
Financial position, cash flow and debt
- At June 30, cash and cash equivalents were $357.5 million; cash, cash equivalents, marketable securities and investments totaled $515.4 million, down from $1.114 billion at year-end. A further $174.7 million of restricted cash and investments was reported separately and is not generally available for operations.
- Total debt was $360.8 million, including $100.0 million drawn on the revolving facility. The revolver had $356.6 million of remaining availability for letters of credit; $143.4 million of letters of credit were outstanding. The company reported compliance with applicable debt covenants.
- Operating cash use of $246.8 million reflected lower customer receipts, higher supplier and associate payments, and increased working-capital needs. Trade receivables rose $230.5 million during the half; inventory and balance-of-systems parts, and project assets, also increased.
- Investing cash use was $309.0 million, including $390.0 million of capital expenditures, principally for manufacturing expansions and new plants. Financing provided $137.1 million, including $224.4 million of net borrowings, partly offset by $114.3 million of debt repayments. Cash declined by $408.2 million over the half.
- Current assets were $1.836 billion and current liabilities $591.9 million. The filing says management believes available liquidity, operating cash flows, credit facilities and capital-market access can meet needs for at least 12 months, while cautioning that changed results or plans could leave resources insufficient.
Material changes, outlook and risks
- Market and pricing: European feed-in-tariff policy changes and uncertainty contributed to demand pauses and excess industry inventories. Management warned that demand elsewhere may not absorb industry supply without further inventory build-up or price reductions. Competition and lower module prices could pressure margins and sales.
- Capacity and strategy: Management reported 34 production lines and approximately 2.1 GW annual capacity at June 30, and expected 44 lines and approximately 2.7 GW by the end of 2012, including planned Vietnam and Mesa, Arizona facilities. These are capacity expectations, not financial guidance. The stated strategy is to reduce module and system costs and expand the North American utility-scale pipeline.
- Systems pipeline: As of August 4, the company reported a 2.5 GW AC North American advanced pipeline, including 597 MW sold or under contract, 280 MW permitted but unsold, and 1,650 MW in development with executed power purchase agreements. Project financing, permitting, construction and revenue-recognition milestones remain relevant execution risks.
- Unusual items and contingencies: The company continued voluntary module replacements tied to a 2008–2009 manufacturing excursion affecting less than 4% of product made during that period. It had accrued $41.5 million in total for related replacement efforts; $17.2 million of nonrecurring expenses remained accrued at quarter-end. Management said corrective actions were effective and replacement work was underway or complete for some customers.
- Foreign exchange and funding: Much of components sales was euro-denominated (68% in Q2 and 79% for the half). Cash-flow hedges had a $31.1 million unrealized loss at quarter-end; $29.6 million of net unrealized losses was expected to be reclassified to earnings over the following 12 months. Several debt facilities carry floating rates and are subject to financial covenants. German manufacturing incentives are conditional on funding availability and operating, employment, or asset-retention requirements.
- Expansion and liquidity: Systems development requires upfront spending and may take months or years to produce revenue; management said future debt or equity financing may be needed. Capital spending, project investment, and growth in working capital contributed to cash depletion. The company also reported higher production start-up costs as it expanded capacity.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter, while noting ongoing phased implementation of a new ERP system. It reported no material change in previously disclosed risk factors and did not believe pending legal proceedings would have a material adverse effect.
Most important facts for investors to verify
- Whether module selling prices and gross margins stabilize amid European policy uncertainty, industry inventories, rebates and competition.
- Whether receivables and working capital convert to cash, given the $246.8 million operating cash outflow and substantial receivables increase.
- Whether the planned manufacturing expansions and capacity targets are achieved on schedule and within expected cost.
- Whether the systems pipeline advances to completed projects, customer payments and recognized revenue, and whether upfront funding needs remain manageable.
- Whether the module-replacement accrual proves sufficient and whether foreign-exchange, floating-rate debt, grant conditions and covenant requirements create additional costs or constraints.