First Solar, Inc. — FY 2011 Form 10-K
Business context and reporting period. First Solar manufactures cadmium telluride thin-film solar modules and develops, builds, and services utility-scale solar power systems. The filing covers the fiscal year ended December 31, 2011; the fourth-quarter figures below are unaudited. The company reported two segments: components and systems.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $2.766 billion | $2.564 billion |
| Gross profit / margin | $971.8 million / 35.1% | $1.185 billion / 46.2% |
| Operating income (loss) | $(68.7) million | $748.9 million |
| Net income (loss) | $(39.5) million; $(0.46) per diluted share | $664.2 million; $7.68 per diluted share |
| Operating cash flow | $(33.5) million | $705.5 million |
| Capital expenditures | $731.8 million | $588.9 million |
| Cash, cash equivalents and marketable securities | $788.0 million | $1.114 billion |
| Total debt | $663.6 million | $237.4 million |
- Revenue rose 8%, reflecting an 85% increase in systems-segment sales and 7% more module watts sold, partly offset by a 10% decline in module average selling price.
- Systems revenue increased to $698.3 million from $378.4 million. Components revenue decreased 5% to $2.068 billion. The systems segment was managed to break even before tax.
- Manufacturing cost fell 3%, from $0.77 to $0.75 per watt. Gross margin nevertheless fell 11.1 percentage points, primarily due to lower module prices and increased warranty and remediation costs.
- Year-end current assets were $2.613 billion and current liabilities $973.7 million. The filing reports $251.3 million available under the revolving credit facility; the company said existing liquidity and expected cash flows should meet needs for at least 12 months. It was in compliance with debt covenants at year-end.
- Operating cash flow fell sharply as unbilled receivables, inventories, balance-of-systems parts, and project costs increased. Unbilled receivables were $533.4 million, which the company expected to bill and collect during 2012.
Material changes and unusual items
- Fourth-quarter sales were $660.4 million, gross profit was $138.1 million (20.9% margin), operating loss was $485.3 million, and net loss was $413.1 million. The quarter included a $393.4 million goodwill impairment and $60.4 million of restructuring charges.
- The company fully impaired components-segment goodwill. It also recorded substantial added warranty and voluntary-remediation accruals related to modules affected by a 2008–2009 manufacturing excursion. Total estimated remediation costs expensed to date were $215.7 million; up to approximately $44 million of additional costs could arise from remaining claims.
- Accrued module warranty liability rose to $157.7 million from $27.9 million. The company cited both excursion-related estimates and a $37.8 million reserve increase for expected performance exposure in hotter climates. For module sales after September 30, 2011, the workmanship warranty increased from five to ten years; power-output warranties extend up to 25 years.
- Cash from operations was negative despite a net loss that included significant non-cash impairment charges. Investing cash outflow was $676.5 million; financing inflow was $571.2 million, primarily reflecting new borrowings and revolving-credit activity.
Outlook, management commentary and risks
- The December 2011 long-term plan targets a transition to primarily sustainable markets by the end of 2014, emphasizing utility-scale solutions that compete with fossil-fuel generation and reducing the company’s focus on rooftop solar.
- For 2012, management expected module production of approximately 1.5–1.8 GW and planned capital expenditures of up to $425 million. It planned to idle half the Frankfurt/Oder capacity temporarily and make further production adjustments and upgrades.
- In February 2012, the company decided not to proceed with its Vietnam plant and postponed commissioning the Mesa, Arizona plant and construction of the France plant. It expected up to $135 million of charges in the first half of 2012 and up to $140 million in total for these manufacturing and related initiatives by year-end.
- Management cited persistent industry oversupply and price pressure, changing European subsidies, customer and geographic concentration, foreign-exchange exposure, project-financing and permitting risks, and execution risk in new markets. Germany represented about 23% and France about 15% of 2011 net sales; 43% of sales were to customers headquartered in the EU.
- NRG Energy was the principal systems customer and accounted for the majority of systems-segment sales. The largest customer represented 36% of total net sales in the filing’s concentration table.
- The CEO was serving on an interim basis. The SEC was investigating a possible Regulation FD violation related to 2011 disclosures about the Topaz project; the company said it was cooperating. Management reported effective disclosure controls and internal control over financial reporting, and the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether 2012 project billing and collection reduce the unusually high unbilled receivable balance and restore positive operating cash flow.
- The final cost and timing of manufacturing restructurings, including the Vietnam plant’s sale or impairment and further capacity idling.
- Actual warranty and remediation claims versus the recorded liabilities and the estimated additional exposure of up to $44 million.
- Module pricing, utilization, and demand trends amid industry oversupply, as well as progress toward the 2014 sustainable-market transition.
- Customer and regional concentration, project-financing availability, debt covenant headroom, and the outcome of the SEC investigation.