FSLR

Business Context and Reporting Period

Company: First Solar, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 29, 2007
Business Overview: First Solar designs and manufactures solar modules using proprietary thin-film semiconductor technology. The company operates manufacturing facilities in Perrysburg, Ohio, and Frankfurt/Oder, Germany, with expansion underway in Malaysia. Sales are primarily to project developers in Europe (Germany, France, Spain).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 290% in the third quarter and 268% for the nine-month period compared to 2006. This was driven by a 280% increase in MW volume sold, resulting from the ramp-up of the German plant and full production of the Ohio expansion.
• Margin Expansion: Gross margin improved to 51.6% in Q3 2007 from 39.9% in Q3 2006, due to increased leverage of fixed costs and higher sellable watts per module.
• Profitability: The company transitioned from a net loss of $4.1 million for the nine months ended September 30, 2006, to a net income of $95.5 million for the same period in 2007.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose significantly (223% in Q3) due to increased headcount and a one-time $8.7 million share-based compensation charge for equity grants that vested immediately. Production start-up costs increased due to Malaysia expansion activities.
• Tax Benefit: Net income was significantly boosted by a $46.7 million tax benefit in the first nine months of 2007, primarily from the reversal of valuation allowances on deferred tax assets.

Guidance, Outlook, and Risks

• Outlook: Management expects cost of sales per watt to decrease over the next several years due to economies of scale and geographic diversification. The company aims to compete on a non-subsidized basis with retail electricity prices by 2010.
• New Contracts: Subsequent to the period end (November 5, 2007), the company announced two new agreements totaling 557 Megawatts, expected to generate approximately $1 billion in sales between 2008 and 2012.
• Liquidity: As of September 29, 2007, the company held $681.8 million in cash, cash equivalents, and marketable securities. Management believes this is sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
• Risks:
  • Foreign Exchange: 100% of net sales in the first nine months of 2007 were denominated in euros. A 10% change in exchange rates would impact net sales by $30.3 million.
  • Regulatory/Policy: Sales depend on government subsidies in Europe; changes in legislation could negatively impact demand.
  • FINRA Inquiry: The company is cooperating with a FINRA inquiry regarding trading in its stock surrounding the July 2007 announcement of new long-term supply contracts. No violations have been determined.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 268% revenue growth and the extent of reliance on European subsidy programs.
• Tax Impact: Assess the non-recurring nature of the $46.7 million tax benefit from valuation allowance reversals and its impact on future effective tax rates.
• Share-Based Compensation: Review the $29.2 million share-based compensation expense for the nine-month period, including the one-time $8.7 million charge, to understand its effect on future operating margins.
• Capital Expenditures: Monitor the $145.6 million in capital expenditures for the nine months, specifically regarding the ramp-up of the Malaysia manufacturing center.
• Currency Hedging: Evaluate the effectiveness of the company's hedging strategies given the 100% exposure of sales to the Euro.