First Solar, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 25, 2010; comparisons are with the corresponding 2009 periods. First Solar manufactures thin-film solar modules and develops, builds, and services utility-scale solar power systems. The company changed to a calendar-year fiscal year, effective at the end of 2010.
Key financial results
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Net sales | $797.9m | $480.9m | $1,953.7m | $1,424.9m |
| Gross profit / margin | $321.9m / 40.3% | $245.0m / 50.9% | $888.1m / 45.5% | $778.4m / 54.6% |
| Operating income / margin | $211.6m / 26.5% | $162.8m / 33.9% | $583.3m / 29.9% | $534.9m / 37.5% |
| Net income | $176.9m | $153.3m | $508.3m | $498.5m |
| Diluted EPS | $2.04 | $1.79 | $5.88 | $5.88 |
- Q3 sales rose 66% year over year, driven by higher module volumes and utility-scale systems revenue. Nine-month sales increased 37%.
- Gross margin fell 10.6 percentage points in Q3 and 9.1 points year to date. Management cited the greater systems-business sales mix, lower module selling prices, and, year to date, costs related to a manufacturing excursion. Lower manufacturing cost per watt partly offset these pressures.
- Average module manufacturing cost declined to $0.77 per watt in Q3 from $0.85 a year earlier; nine-month cost was $0.78 versus $0.88.
- Cash from operations was $355.7m for the first nine months, compared with $261.4m. Capital expenditures were $377.1m; investing cash outflow was $584.3m, including the $296.5m net cash acquisition of NextLight. Financing provided $194.7m. Cash and cash equivalents ended at $621.2m, down $43.3m from year-end 2009.
- At September 25, unrestricted cash, cash equivalents, and marketable securities totaled $997.0m. Total debt, including current maturities, was $250.4m, including $100m drawn on the revolver. Current assets were $1,614.8m and current liabilities $457.8m. Restricted cash and investments of $95.0m were held for future module collection and recycling costs.
Material changes and significant items
- Systems revenue reached $222.4m in Q3 and $348.0m for the first nine months, compared with $0.6m and $5.0m, respectively, in 2009. Q3 included the completion and sale of a Canadian utility-scale project and percentage-of-completion revenue on U.S. projects. The systems segment is managed to break even before tax.
- Module sales prices declined approximately 6% in Q3 and 12% for the first nine months, reflecting European market pricing, contractual reductions, currency movements, and customer mix. The euro accounted for 52% of Q3 sales and 71% of nine-month sales.
- Q3 net income included a one-time, non-cash $14.7m tax charge related to the planned repatriation of $300m of foreign earnings before new U.S. international tax provisions take effect. The reported nine-month effective tax rate was 13.7%; management stated it would have been 11.2% without this charge.
- NextLight was acquired for $296.7m in cash in July, adding a U.S. utility-scale project pipeline. Goodwill increased to $433.3m, including $146.8m from NextLight.
- The company recorded additional estimated costs for voluntary replacement of modules affected by a 2008–2009 manufacturing excursion. The issue affected less than 4% of product manufactured during that period; the root cause was addressed in 2009. Accrued nonrecurring costs at quarter-end were $27.5m.
Outlook, risks, and contingencies
- No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management expected sufficient liquidity for at least 12 months, subject to operating results and plans.
- Management planned two new four-line plants in the United States and Vietnam, expected to be completed in 2012. Together with previously announced expansion, capacity was expected to rise from approximately 1.4 GW in 2010 to more than 2.7 GW by year-end 2012, requiring significant capital expenditures.
- After quarter-end, the revolving facility was amended to a five-year, $600m facility, all available for letters of credit, with an option—subject to conditions—to request capacity up to $750m. The company reported compliance with its debt covenants at September 25.
- Management highlighted potential demand and pricing pressure from German feed-in-tariff reductions, uncertain ability of other markets to absorb industry supply, intense competition, euro volatility, and systems projects’ long development cycles and upfront funding needs. Long-term supply contracts and the rebate program, extended into 2011 with modifications, are also significant to sales and pricing.
- Warranty estimates, project viability and impairment, foreign exchange hedges, and the solar-module recycling obligation involve estimation or market risks. The ERP system rollout continued in phases; management reported disclosure controls effective and no other material quarterly change to internal controls. The filing states pending legal proceedings were not believed likely to have a material adverse effect and reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether German tariff reductions and other market conditions affect module demand, selling prices, rebates, and customer inventory.
- Whether systems-project revenue recognition, unbilled receivables ($148.5m), project execution, and project financing convert to billings and cash as expected.
- Progress, costs, and funding for planned capacity expansion, including the U.S. and Vietnam plants, and the expected economics of the expanded systems business.
- Whether manufacturing cost reductions offset lower selling prices and systems-mix pressure, and whether the manufacturing-excursion replacement estimate remains adequate.
- Liquidity and covenant headroom after capital spending, the NextLight acquisition, and the amended credit facility; also confirm the tax and cash-flow effects of the planned $300m repatriation.