First Solar, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative quarter ended March 27, 2010. Financial statements are unaudited. First Solar manufactures thin-film solar modules and develops, builds, and sells utility-scale photovoltaic systems. It reports Components and Systems segments, with the Systems business managed toward pretax break-even.
Key financial metrics
| Metric | Q1 2011 | Prior comparable quarter |
|---|---|---|
| Net sales | $567.3 million | $568.0 million |
| Gross profit / margin | $259.7 million / 45.8% | $282.0 million / 49.7% |
| Operating income / margin | $129.4 million / 22.8% | $191.1 million / 33.7% |
| Net income | $116.0 million | $172.3 million |
| Diluted EPS | $1.33 | $2.00 |
| Operating cash flow | $(43.8) million | $31.3 million |
| Capital expenditures | $169.0 million | $106.0 million |
At March 31, 2011, cash and cash equivalents were $355.7 million; marketable securities and investments were $357.2 million; and restricted cash and investments were $147.7 million. Total assets were $4.434 billion, current assets $1.394 billion, current liabilities $469.9 million, and total liabilities $868.1 million. Debt, including current maturities, was $131.7 million, down from $237.4 million at year-end. The $600 million revolving facility had no borrowings outstanding, with $140.8 million in letters of credit and $459.2 million of remaining availability for letters of credit. The company reported compliance with its debt covenants.
Changes versus prior period
- Sales were nearly unchanged, as a 14% decline in module average selling price was largely offset by higher module volume and efficiency. Module revenue fell to $505.7 million from $528.9 million; solar power systems revenue rose to $61.6 million from $39.1 million.
- Gross margin declined 3.9 percentage points. Lower module prices, euro weakness, and sales mix outweighed manufacturing cost improvements. Average manufacturing cost fell 7%, from $0.81 to $0.75 per watt.
- Operating expenses increased to $130.3 million from $90.9 million. R&D rose 37% to $31.4 million, SG&A rose 30% to $87.0 million, and production start-up expense rose to $11.9 million from $1.1 million, principally reflecting manufacturing expansions.
- Net income fell 33%, while diluted EPS declined from $2.00 to $1.33. Operating cash flow swung from positive $31.3 million to negative $43.8 million, primarily due to supplier payments, lower customer receipts, and increased working capital needs for the Systems business.
- Cash and cash equivalents declined $410.0 million during the quarter. Investing used $263.4 million, including capital expenditures and $62.7 million added to restricted recycling investments; financing used $111.3 million, principally for $113.9 million of debt repayment.
Outlook, commentary, and risks
- Management said cash, investments, operating cash flows, the revolving facility, and potential capital-market access should meet working capital and capital expenditure needs for at least 12 months, while cautioning that changed results or plans could leave resources insufficient. No specific companywide revenue or earnings guidance was provided in the filing.
- The company reported 30 production lines and approximately 1.9 GW of annual capacity at quarter-end. It expected to reach 44 lines and approximately 2.8 GW by the end of 2012, including planned facilities in Vietnam and Mesa, Arizona.
- Management cited a 2.4 GW AC North American utility project pipeline as of May 3, 2011, including 454 MW under construction or planned to start construction in 2011. Project development can require substantial upfront funding and take months or years.
- European feed-in-tariff changes were a key demand and pricing risk. Germany represented approximately 51% of Q1 net sales; an anticipated German tariff reduction could tighten market economics. The company also highlighted competition, module-price pressure, euro-dollar movements, and uncertainty about whether other markets would absorb industry supply.
- Foreign-exchange cash-flow hedges had a $42.8 million unrealized loss at quarter-end; management expected $40.9 million of net unrealized losses to be reclassified to earnings over the following 12 months, subject to actual exchange rates. The company also funded restricted investments for its 25-year module collection and recycling program.
- A manufacturing excursion affecting less than 4% of product made from June 2008 to June 2009 had been mitigated; $37.9 million had been accrued in total for related replacement efforts, with no additional expense accrued in Q1 2011. The filing also reported $3.1 million of project-asset impairment expense.
- Management stated disclosure controls were effective and reported no material change in internal control during the quarter, while noting the phased ERP implementation. It reported no material changes to the prior annual report’s risk factors and did not believe pending legal proceedings would have a material adverse effect. President, Operations Bruce Sohn’s employment ended effective April 30, 2011.
Important facts for investors to verify
- Whether selling prices, European demand, and customer rebate participation continue to pressure module margins; Q1 eligible-customer participation in the rebate program was approximately 92%.
- Whether the North American project pipeline converts into contracts, construction, and timely customer collections, and how much upfront funding it requires.
- Whether planned capacity expansions proceed on schedule and at expected cost, and whether they improve output enough to offset start-up expenses.
- The sufficiency of cash generation and available financing given negative Q1 operating cash flow, planned capital spending, restricted recycling funds, and project-development needs.
- The assumptions behind warranty and recycling accruals, project-asset recoverability, and the timing and earnings impact of foreign-exchange hedge losses.