Business context and reporting period
First Solar, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. It manufactures thin-film solar modules and develops, constructs, and sells solar power systems. Comparatives are for the three and nine months ended September 25, 2010, reflecting the company’s prior fiscal-period convention.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,005.8m | $797.9m | $2,105.9m | $1,953.7m |
| Gross profit / margin | $379.2m / 37.7% | $321.9m / 40.3% | $833.6m / 39.6% | $888.1m / 45.5% |
| Operating income | $222.7m | $211.6m | $416.7m | $583.3m |
| Net income | $196.5m | $176.9m | $373.6m | $508.3m |
| Diluted EPS | $2.25 | $2.04 | $4.29 | $5.88 |
For the first nine months, cash used in operations was $44.2m, versus $355.7m provided in the prior-year period; investing used $502.2m and financing provided $458.3m. Cash and equivalents were $678.6m at September 30. Cash, cash equivalents, marketable securities, and investments totaled $794.8m, excluding $203.8m of restricted cash and investments. Long-term debt, including current maturities, was $608.3m; $261.2m remained available under the $600m revolving facility. Current assets were $2,430.5m and current liabilities $747.0m.
Material changes versus prior periods
- Q3 sales rose 26%, mainly on 77% higher systems revenue and 10% greater module volume; lower module average selling prices partly offset growth.
- Nine-month sales rose 8%, while net income fell about 26% and gross margin declined 5.9 percentage points. Module average selling prices fell 14% over the nine-month period, reflecting competition and geographic mix.
- Systems revenue was $654.1m in Q3 and $821.0m for nine months, compared with $357.9m and $508.8m, respectively. Third-party solar module revenue declined to $351.7m in Q3 and $1,284.8m for nine months.
- Manufacturing cost per watt improved: Q3 was $0.74 versus $0.77; nine-month cost was $0.75 versus $0.78. However, higher project costs, module pricing pressure, and customer-related charges weighed on margins.
- Cash and cash equivalents, marketable securities, and investments declined from $1,113.8m at year-end 2010 to $794.8m, while debt increased from $237.4m to $608.3m. Capital expenditures were $613.9m, principally for manufacturing expansions.
Outlook, management commentary, risks, and unusual items
Management stated that available liquidity, operating cash flows, credit facilities, and capital-market access were expected to meet working-capital and capital-expenditure needs for at least 12 months, while cautioning that changed results or plans could constrain resources. No numerical earnings or revenue guidance is provided in the supplied filing text.
Management cited volatile European feed-in-tariff policies, financing constraints, industry overcapacity, channel inventories, and sharp module-price declines as near-term risks. It noted uncertainty about whether demand outside Europe could absorb industry supply without further inventory accumulation or price reductions. The company was developing its North American systems pipeline and other geographic markets to diversify demand. It reported approximately 2.3 GW of manufacturing capacity; Mesa was expected to bring capacity to approximately 2.5 GW by year-end 2012, while commissioning of the Vietnam plant was postponed pending market conditions. As of November 3, 2011, its North American utility-scale systems pipeline was approximately 2.7 GW AC.
- Q3 included $22.1m of additional estimated manufacturing-excursion costs and $16.2m for customer module replacement and related work outside normal warranty obligations. The company said the 2008–2009 excursion affected less than 4% of product manufactured during that period; total accrued excursion expense was $63.6m.
- SG&A included a $10.5m allowance for a past-due customer receivable, reflecting collectability concerns. Unbilled receivables rose to $325.6m from $1.5m at year-end; management expected billing and collection within 12 months.
- The module rebate program ended September 30, 2011. The company also extended the defects-and-workmanship warranty from five to ten years for module sales after that date.
- The company reported covenant compliance, effective disclosure controls, and no material change in internal control over financial reporting. Management said pending legal proceedings were not expected to have a material adverse effect and reported no material change in stated risk factors.
Important facts for investors to verify
- Whether the large increase in unbilled and trade receivables converts to cash on expected timelines, and the status of the customer with collectability concerns.
- Future module pricing, gross margins, and demand amid European policy changes, channel inventories, and global manufacturing overcapacity.
- Actual costs and remaining exposure for the manufacturing excursion and other customer module-replacement commitments, including the effect of the longer warranty.
- Project construction progress, customer collections, and funding needs for the systems pipeline and manufacturing expansion; restricted recycling funds are not freely available for general use.
- Debt levels, covenant headroom, and the timing and cost of new facility borrowings; the filing reports a €56.0m draw under the Malaysian Euro Facility after quarter-end.