First Solar, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 26, 2009; comparative periods ended September 27, 2008. Amounts are in U.S. dollars unless stated otherwise. First Solar designs and manufactures thin-film solar modules and is expanding its solar power systems and project development business.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $480.9 million | $348.7 million | $1,424.9 million | $812.7 million |
| Gross profit / margin | $245.0 million / 50.9% | $195.4 million / 56.1% | $778.4 million / 54.6% | $444.5 million / 54.7% |
| Operating income | $162.8 million | $130.2 million | $534.9 million | $277.0 million |
| Net income | $153.3 million | $99.3 million | $498.5 million | $215.6 million |
| Diluted EPS | $1.79 | $1.20 | $5.88 | $2.63 |
| Operating cash flow | Not presented by quarter | $261.4 million | $259.8 million |
- Q3 sales grew 37.9%; management attributed this primarily to a 102.8% increase in module megawatts sold. Nine-month sales rose 75.3%, with module volume up 129.4%.
- Average selling prices fell approximately 22% in Q3 and 15% for the nine-month period, reflecting competition, customer rebates, euro weakness and customer mix. Manufacturing cost per watt fell to $0.85 in Q3 from $1.08 a year earlier; nine-month cost per watt was $0.88 versus $1.13.
- Gross margin fell 5.2 percentage points in Q3 year over year, as lower pricing and currency effects outweighed scale and cost improvements; nine-month gross margin was nearly unchanged.
- Q3 and nine-month effective tax rates were 7.0%, versus 25.4% and 26.2%, respectively. The lower rate primarily reflected the Malaysian tax holiday; the nine-month result also included an $11.5 million tax benefit from advancing its start date.
Balance sheet, liquidity and debt
- At September 26, 2009, cash and cash equivalents were $364.8 million and marketable securities were $465.3 million, totaling $830.1 million, compared with $821.8 million at December 27, 2008. Cash alone declined from $716.2 million.
- Total assets were $3.10 billion and stockholders’ equity was $2.46 billion. Total debt, including current maturities, was $192.5 million, down from $198.5 million at year-end 2008.
- Nine-month operating cash flow was $261.4 million. Investing activities used $605.0 million, including $210.8 million of capital expenditures and net purchases of marketable securities. Cash declined by $351.4 million over the period.
- Accounts receivable rose to $349.0 million from $61.7 million, primarily due to higher shipments and extension of certain customer payment terms from net 10 to net 45 days. The filing recorded a $4.0 million doubtful-account allowance after a $7.0 million allowance had been established earlier in 2009.
- A new $300 million senior secured, three-year revolving facility was entered into in September. No borrowings were outstanding at quarter-end; $14 million of letters of credit were drawn, leaving approximately $286 million of capacity. The company reported compliance with its financial covenants.
Material changes, outlook and risks
- First Solar acquired OptiSolar’s project development business on April 3 for approximately $399.4 million in First Solar shares. The acquisition added a multi-gigawatt project pipeline and approximately $250.2 million of goodwill. No revenue had yet been recognized from the acquired projects as of quarter-end.
- In Q3, the company introduced rebates for certain German customers. Rebates of €48.7 million ($71.5 million) reduced accounts receivable and revenue; management estimated Q4 rebates would be comparable. The program was scheduled to end after Q4 2010 and its rate subject to quarterly review.
- Management said current cash, securities, operating cash generation and available financing should fund working capital and capital expenditures for at least 12 months, subject to actual results and operating plans. Project development may require substantial upfront funding and could prompt future debt or equity financing.
- Management described a solar market with manufacturing capacity exceeding current demand, pricing pressure and customer financing constraints. Q3 German installations strengthened, helped by expected tariff reductions, seasonal demand, the rebate program and improving financing conditions; management cautioned that weaker conditions could return as seasonal strength fades.
- Key risks include changes to German feed-in tariffs and other subsidies, access to project and customer financing, permitting and transmission constraints, euro exchange-rate exposure, competition and declining module prices, and availability or cost of key materials and components. A 10% euro-rate change would have affected nine-month net euro sales by $140.8 million, according to the filing.
- The company expects to continue reducing manufacturing cost per watt, with a stated roadmap targeting reductions of 10% per year. This is a goal, not a guarantee. No specific revenue or earnings guidance was provided in the filing.
- Robert J. Gillette became CEO effective October 1, 2009, succeeding Michael J. Ahearn. The filing also disclosed post-quarter CEO compensation, including a $5 million sign-on bonus and equity awards.
- Management reported effective disclosure controls and no material adverse effect expected from pending legal proceedings. It stated there were no off-balance-sheet arrangements at quarter-end.
Important facts for investors to verify
- Whether pricing, German customer rebates and euro movements continue to pressure module margins and revenue.
- Collection of the sharply higher receivables balance, customer credit quality and the adequacy of the doubtful-account allowance.
- Milestones, financing needs and eventual revenue recognition for OptiSolar’s project pipeline, including potential project-asset or goodwill impairment.
- Actual future tax benefits and compliance with the conditions of the Malaysian tax holiday.
- Available project financing, permitting and transmission access, and the effect of policy or subsidy changes in major markets.