First Solar, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The year covered 53 weeks; fiscal 2009 covered 52 weeks. Although the request identifies 2010 Q4, this filing is an annual report. Selected fourth-quarter figures are included below.
Business context
First Solar manufactures cadmium-telluride thin-film solar modules and develops, builds, and services utility-scale solar projects. Its components segment is the primary profit driver; management operates the systems segment to support module sales and target break-even pretax results. The company produced nearly 1.4 GW of modules in 2010 and reported approximately 1.5 GW of annual capacity at year-end.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $2.564 billion | $2.066 billion |
| Gross profit / margin | $1.185 billion / 46.2% | $1.045 billion / 50.6% |
| Operating income / margin | $748.9 million / 29.2% | $679.6 million / 32.9% |
| Net income / diluted EPS | $664.2 million / $7.68 | $640.1 million / $7.53 |
| Cash from operations | $705.5 million | $675.2 million |
| Capital expenditures | $588.9 million | $279.9 million |
| Cash, cash equivalents and marketable securities | $1.114 billion | $1.114 billion |
| Total debt, including current maturities | $237.4 million | $175.0 million |
Operating cash flow less capital expenditures was approximately $116.6 million. Investing activities used $742.1 million, including $296.5 million net cash for the NextLight acquisition. Current assets were $1.584 billion versus current liabilities of $469.7 million. The revolving facility had $100 million drawn and $373.6 million of remaining availability, usable for letters of credit. The company reported no dividends and no off-balance-sheet arrangements.
Fourth-quarter 2010 sales were $609.8 million, operating income was $165.7 million, and net income was $155.9 million (diluted EPS $1.80). Compared with Q4 2009, sales declined from $641.3 million while net income rose from $141.6 million.
Changes versus the prior year
- Annual sales increased 24%, supported by 28% higher megawatts sold and a sharp increase in systems revenue; module average selling price fell approximately 10%.
- Manufacturing cost declined 11%, to $0.77 per watt from $0.87. Despite this, gross margin fell 4.4 percentage points, reflecting lower module pricing, systems mix, euro weakness, and a manufacturing-quality issue; cost reductions partly offset these pressures.
- Systems revenue rose to $378.4 million from $100.8 million, while the segment reported no pretax profit by design. Components revenue increased 11%.
- Germany remained a major exposure: it represented approximately 46% of 2010 net sales; customers headquartered in the EU represented 74%.
- Debt increased following a $100 million revolver draw and the company expanded its revolving facility from $300 million to $600 million. Cash and marketable securities were broadly unchanged year over year.
Outlook, commentary and risks
- Management expected up to $1.1 billion of capital expenditures in 2011 and planned to grow capacity to approximately 2.9 GW across 46 lines by the end of 2012. It said available liquidity and operating cash flows should cover needs for at least 12 months, subject to business results and plans.
- The North American utility project pipeline was nearly 2.4 GW AC as of February 24, 2011. The 290 MW AC Agua Caliente project was among projects planned or under construction. Pipeline conversion depends on permits, grid access, power contracts, construction execution, and financing.
- Policy changes are a major demand risk. Germany was expected to accelerate feed-in tariff reductions; France had suspended its tariff framework and First Solar had paused construction of its planned Blanquefort plant. Lower subsidies could support near-term demand pull-forward but weaken later demand and pricing.
- Competition and falling selling prices, customer and geographic concentration, euro exposure, project-finance availability, and dependence on limited or single-source suppliers—including tellurium—could pressure sales, margins, or production.
- A manufacturing excursion affecting less than 4% of output made from June 2008 to June 2009 could cause premature power loss. First Solar accrued $30.8 million in 2010 for replacement efforts beyond standard warranty; cumulative estimated costs were $37.9 million. The company said the root cause was mitigated and corrective-action testing was effective.
- Other material exposures include 25-year module performance warranties, a $133.0 million collection-and-recycling liability, environmental and cadmium-related regulation, project-asset impairment, and tax uncertainty. The 2010 effective tax rate was 12.8%, including a one-time $13.8 million noncash charge related to repatriating approximately $300 million.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Track realized module prices, rebate levels, unit costs, and gross-margin effects as European tariffs decline and supply competition intensifies.
- Verify customer commitments, collections, and concentration; fourteen European supply contracts covered significant planned production through 2012, but were subject to amendments and pricing adjustments.
- Assess the timing, financing, permitting, grid access, and sale proceeds for the utility project pipeline, including Agua Caliente and projects under development.
- Compare actual capital spending and capacity additions with the 2011 plan; monitor utilization and execution of the Vietnam, U.S., German, and Malaysian expansions and the France pause.
- Review cash generation, debt maturities and covenants, letters of credit, and funding needs for project development and construction.
- Monitor module replacement costs, warranty claims, recycling-liability assumptions, and any changes in environmental or product regulation.
- Check subsequent developments in subsidy policy, foreign exchange, tax audits and incentives, and the ERP implementation.