First Solar, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 26, 2009 (52 weeks). This is an annual filing, not a standalone Q4 report; unaudited fourth-quarter data are included. Amounts are U.S. dollars unless noted.
Business context and reporting period
First Solar manufactures cadmium telluride thin-film solar modules and develops, engineers, builds and services utility-scale solar projects. Module manufacturing remained the primary profit driver; management described the systems business as a means to increase module throughput and targeted break-even pretax results for that business. The company produced more than 1.1 GW of modules in 2009 and operated 23 production lines at year-end.
Sales remained geographically concentrated: Germany represented approximately 65% of 2009 net sales, and customers headquartered in the European Union represented 86%. Five components-business customers each accounted for 10%–19% of that segment’s sales.
Financial performance and liquidity
| Metric | FY 2009 | FY 2008 | Change / note |
|---|---|---|---|
| Net sales | $2.066 billion | $1.246 billion | +66% |
| Gross profit / margin | $1.045 billion / 50.6% | $678.4 million / 54.4% | Gross profit +54%; margin down 3.8 percentage points |
| Operating income / margin | $679.6 million / 32.9% | $438.3 million / 35.1% | Operating income +55%; margin down 2.2 points |
| Net income / diluted EPS | $640.1 million / $7.53 | $348.3 million / $4.24 | Net income +84% |
| Operating cash flow | $675.2 million | $463.1 million | Up $212.1 million |
| Capital expenditures | $279.9 million | $459.3 million | Lower than prior-year expansion spending |
| Cash and marketable securities | $1.114 billion | $821.8 million | At fiscal year-end |
| Long-term debt, including current portion | $175.0 million | $198.5 million | Balance-sheet carrying amount |
Module sales volumes rose 114%, while average selling price fell approximately 25%. Average manufacturing cost declined 19%, to $0.87 per watt. Management attributed the gross-margin decline chiefly to lower selling prices and adverse euro-dollar movements. The Malaysian tax holiday materially reduced the effective tax rate to 6.7%; its reported earnings benefit was $132.8 million.
Cash and cash equivalents alone were $664.5 million. Current assets were $1.351 billion against current liabilities of $394.9 million. Operating cash flow exceeded capital expenditures by approximately $395 million, but investing activities used $701.7 million and cash declined $51.7 million during the year. The company had a $300 million revolving facility with no borrowings and $254 million of remaining capacity after letters of credit; Malaysian facility debt was $168.3 million. Management said available liquidity and operating cash flows should cover working capital and capital needs for at least 12 months.
Q4 data: Revenue was $641.3 million and net income was $141.6 million, versus $480.9 million and $153.3 million, respectively, in Q3 2009. Q4 gross profit was $266.2 million, or approximately 41.5% of revenue. Quarterly results are unaudited and not necessarily indicative of future periods.
Material changes versus the prior comparable period
- Revenue and net income increased substantially, driven by higher module volumes from Malaysian production ramp-up, manufacturing improvements and systems-project sales.
- Pricing pressure, customer rebates and currency effects reduced average selling prices; rebates granted in 2009 totaled €87.1 million ($128.9 million).
- Research and development expense increased 133% to $78.2 million; SG&A increased 57% to $272.9 million, including executive-related and OptiSolar acquisition/integration costs. Production start-up costs fell 57% to $13.9 million.
- Receivables rose to $226.8 million from $61.7 million, partly because certain customer payment terms were extended from net 10 to net 45 days. Inventories increased to $174.5 million from $121.6 million.
- Operating cash flow improved, but cash taxes paid rose to $147.8 million from $2.0 million. The company acquired OptiSolar’s project-development business for stock consideration valued at approximately $399.4 million and recorded $286.5 million of goodwill at year-end.
Outlook, commentary, risks and unusual items
- Management forecast global PV demand of about 7.5 GW in 2010 and projected a 35% compound annual market growth rate through 2012, while warning that industry manufacturing capacity was expected to exceed demand in 2010.
- Management expected up to $550 million in 2010 capital expenditures. Planned expansions were expected to bring capacity to approximately 1.8 GW across 34 lines by 2012, subject to execution and ramp risks.
- Management expected stronger German demand in the first half of 2010 amid anticipated subsidy reductions, but warned that further German feed-in tariff cuts could materially reduce demand and pricing. France and Italy also faced tariff changes; Ontario’s new domestic-content requirements could restrict future opportunities.
- Long-term module supply contracts accounted for a significant portion of planned production. They include declining prices, delivery and output requirements, and exposure to customer amendments, defaults, competition and euro-dollar movements. About 86% of 2009 sales were denominated in euros; the weaker euro reduced sales by $116.1 million year over year.
- Systems growth requires upfront project spending and depends on permits, grid access, project financing, tax equity and project sales. The company cited potential cost overruns, delays, project-asset write-downs and liquidity pressure if projects cannot be sold on acceptable terms. Its 2 GW Ordos, China proposal remained subject to definitive agreements.
- Other material risks include concentrated customers and geography, module oversupply and price competition, reliance on limited or sole-source suppliers, manufacturing expansion and replication challenges, long-term product warranty assumptions, and environmental or regulatory risks involving cadmium. The $92.8 million recycling liability depends on long-term cost estimates; the accrued warranty liability was $22.6 million.
- Unusual and relevant items include the $132.8 million earnings benefit from the Malaysian tax holiday, $11.5 million tax benefit from pulling the holiday forward, and $37.2 million of unrecognized tax benefits. The company also reported no material pending legal proceeding and no off-balance-sheet arrangements. A $16.3 million manufacturing tax-credit application was approved after year-end and was not included in FY 2009 results.
Important facts for investors to verify
- Whether 2010 German tariff changes, demand and module pricing validate management’s near-term demand expectations—and whether margins can withstand ongoing price declines.
- Customer concentration, collection of elevated receivables, customer credit quality and performance under amended long-term supply contracts.
- Actual versus planned manufacturing cost per watt, conversion-efficiency gains, production-line ramp results and the timing and cost of capacity expansions.
- Cash requirements and returns from project development, project-asset recoverability, financing availability and the status of major PPAs and project sales.
- The sustainability of earnings excluding Malaysian tax-holiday benefits, the resolution of uncertain tax positions, and the assumptions supporting warranty and recycling liabilities.
- Exposure to euro movements, supplier availability, cadmium-related regulation and the ability to maintain access to European markets.