First Solar, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results; comparison periods ended September 30, 2011. Amounts below are in millions of dollars unless noted.
Business context and financial performance
First Solar manufactures thin-film solar modules and develops, constructs, and sells utility-scale solar power systems. Its strategy is shifting toward integrated systems solutions in sustainable markets, while reducing European operations and aligning manufacturing capacity with expected demand.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $839.1 | $1,005.8 | $2,293.5 | $2,105.9 |
| Gross profit / margin | $238.7 / 28.4% | $379.2 / 37.7% | $559.2 / 24.4% | $833.6 / 39.6% |
| Operating income (loss) | $107.0 | $222.7 | $(209.6) | $416.7 |
| Net income (loss) | $87.9 | $196.5 | $(250.5) | $373.6 |
| Diluted earnings (loss) per share | $1.00 | $2.25 | $(2.89) | $4.29 |
| Operating cash flow | Not separately presented for the quarter | $434.7 | $(44.2) |
- Third-quarter sales fell 17% year over year. Systems revenue rose 21% to $557.2 million, while components revenue fell 48% to $281.9 million. Third-party solar module revenue declined to $59.7 million from $351.7 million; solar power systems revenue rose to $779.4 million from $654.1 million.
- For the nine-month period, sales increased 9%, driven by systems revenue growth of 190% to $1,555.8 million. Components revenue fell 53% to $737.7 million, reflecting lower third-party module volumes and prices.
- Systems segment income before tax was $173.7 million in Q3 and $458.9 million year to date. Components segment recorded a $62.9 million Q3 loss before tax and a $669.3 million year-to-date loss, including substantial restructuring charges.
- Average module manufacturing cost was $0.70 per watt in Q3, down from $0.74; year-to-date it was $0.73, down from $0.75. Average conversion efficiency increased to 12.7% in Q3 from 11.7%.
Liquidity, debt, and balance-sheet highlights
- At September 30, cash and cash equivalents were $614.7 million and marketable securities were $102.3 million, totaling $717.0 million, versus $788.0 million at December 31, 2011. Restricted cash and investments were an additional $285.6 million, principally dedicated to module collection and recycling obligations.
- Current assets were $2,710.0 million and current liabilities were $1,139.8 million. Total assets were $5,981.7 million; total liabilities were $2,523.6 million.
- Long-term debt, including current maturities, was $529.7 million, down from $663.6 million at year-end 2011. The company had $235.0 million drawn on its $600 million revolving facility, $130.0 million of letters of credit outstanding, and $235.0 million of stated remaining availability. It was in compliance with debt covenants at quarter-end.
- Year-to-date capital expenditures were $339.2 million. Cash increased $9.1 million during the nine months, after $434.7 million of operating cash inflow, $344.3 million of investing outflow, and $84.2 million of financing outflow.
- Management said available liquidity, operating cash flow, the contracted project pipeline, and facility availability should meet working-capital and capital-expenditure needs for at least 12 months, while cautioning that changed results or plans could leave resources insufficient to execute the strategy.
Material changes versus the prior period
- Gross margin compressed sharply: down 9.3 percentage points in Q3 and 15.2 points year to date. Management attributed the decline chiefly to lower third-party module selling prices; manufacturing underutilization, inventory write-downs, accelerated depreciation, and remediation costs also weighed on results.
- Year-to-date restructuring expense was $444.3 million, versus none in the prior-year period. The charge included approximately $355.0 million of long-lived asset impairment and followed major manufacturing and geographic footprint changes.
- Operating cash flow improved from an outflow of $44.2 million to an inflow of $434.7 million, while capital expenditures declined from $613.9 million to $339.2 million.
- Management changed how it assesses segment profitability following its strategic-plan update and the appointment of CEO James Hughes; prior segment information was restated for comparability, without changing consolidated results.
- The company corrected errors that reduced the reported nine-month 2012 net loss by $7.8 million; management said the correction was not material to current or prior periods.
Outlook, management commentary, risks, and unusual items
- Management cited persistent global solar manufacturing overcapacity, intense price competition, falling module prices, and uncertainty over whether demand in newer markets can absorb supply. It also pointed to European policy changes, financing constraints, and customer difficulties.
- The company expects to produce approximately 1.9 GW of modules in 2012. It reported 36 installed production lines and about 2.4 GW of annual capacity at quarter-end; planned operations after restructuring were 24 lines in Malaysia and four in Ohio. Four Malaysian lines were temporarily idled, and Frankfurt (Oder) manufacturing was scheduled to close by year-end 2012.
- Management estimated 2012 restructuring-related cost savings of $30–$50 million and annual savings of $100–$120 million in 2013 and beyond, partly offset by spending to establish local operations in target markets. It expected an additional $20–$40 million of restructuring expense through the first half of 2013, and total restructuring cash payments of $80–$120 million; approximately $27 million had been paid by September 30.
- As of October 31, the systems advanced project pipeline was approximately 3.0 GW AC. Sold or contracted projects represented about 2.0 GW AC, with approximately $5.3 billion of revenue remaining to be recognized. Management expected four major North American projects to contribute substantially to sales, operating income, and cash flow through 2015; project timing can make revenue uneven between periods.
- Key execution and liquidity risks include upfront project-development and construction funding, rising inventory and balance-of-systems needs, transition to unfamiliar markets, possible partner investments, and potential delays or changes in project sales. Up to $50 million of additional capital spending was expected in the remainder of 2012.
- Product and remediation exposure is material: the warranty liability was $177.2 million at September 30. Accrued commitments beyond normal warranty expense included $100.9 million relating primarily to the 2008–2009 manufacturing excursion and $15.8 million for a separate workmanship issue. Estimates could increase if actual claims or remediation costs exceed assumptions.
- A limited number of project agreements contain conditional repurchase clauses. Management considered repurchase remote but warned available working capital might not cover a required repurchase. Securities class-action and derivative litigation remained at an early stage; the company could not estimate a potential loss or its range.
- The filing identifies no off-balance-sheet arrangements as of September 30. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether project milestones, customer collections, and the contracted pipeline convert into the expected revenue and cash flows, especially for the four major North American projects.
- Whether module pricing, manufacturing utilization, and systems project margins stabilize or deteriorate further as industry oversupply persists.
- Actual restructuring cash payments, completion of the German closure and asset sales, and realization of the stated cost savings without offsetting strategic-market expenses.
- Changes in warranty and remediation estimates, including outcomes for the 2008–2009 manufacturing excursion and the related customer commitments.
- Liquidity and covenant headroom after project funding requirements, debt repayments, letters of credit, and any potential project repurchase obligations.
- Developments in the securities class action and derivative suits; the filing provides no clear estimate of potential exposure.