First Solar Jumps On Q2 Rebound

 |  About: First Solar, Inc. (FSLR), Includes: STP, TSL
by: Bill Maurer

After the bell on Wednesday, First Solar (NASDAQ:FSLR) reported its second quarter earnings. It was a very nice report, something we have not seen lately. We knew already that there would be a large jump in Q2 revenues, because as I detailed recently, certain revenues were not recognized in Q1, which led to a huge miss last quarter. The company did recognize those revenues in Q2, and to be honest, a lot more as well. This should put a short term bottom into the hard hit name, and shares were up 19% in after hours trading.

Overall Results:

First Solar reported Q2 revenues of $957.3 million, up almost 80% from the prior year period. The company stated that

increases were primarily due to an increase in the number and size of projects under construction meeting revenue recognition criteria during the quarter, including Antelope Valley Solar Ranch 1 in California and Silver State North in Nevada.

Like I said, we knew this was coming, but not to this extent. Analysts were only looking for revenues of $820 million.

The company reported net income of $1.27 per share, which also handily beat the $0.90 expected by analysts. Additionally, the company again took warranty and restructuring charges. Without these charges, non-GAAP EPS came in at $1.65.

Now, gross margins did decline steadily from prior year periods, as seen in the following table:

Q2 Margins 2009 2010 2011 2012
Gross 56.69% 48.34% 36.56% 25.46%
Operating 38.80% 30.70% 12.11% 14.59%
Profit 34.34% 27.05% 11.48% 11.59%
Click to enlarge

The cost of sales rose more than 111%, easily outpacing the 80% rise in revenues. That accounted for the 11.1% drop in gross margins.

However, the company was actually able to increase its operating margins. First, research and development costs declined by 2.2% over the prior year period. Selling, general, and administrative costs were down 40% as well. Production start up costs declined by 95% in the quarter, and were almost non existent. However, the company did take another $19 million in restructuring charges, something it didn't do in last year's quarter. Overall, operating expenses declined by 20%. That helped to more than offset the decline in gross margins.

However, not all of those gains were recognized on the bottom line. The company had interest expenses of more than $7.3 million, compared to zero in the prior year period. Also, so called "other income" and expenses were down a bit over the prior year period. Additionally, the effective tax rate rose from 15.04% to 18%. That's why profit margins only rose by 11 basis points.

First Solar did see margins rise over the terrible Q1, however. That quarter saw gross margins of 15.44%, as well as both negative operating and profit margins. The company lost money in Q1, but was profitable in Q2. However, as you saw in the table above, margins are still well below prior year periods. This could be a bottom, but there is still plenty of work to be done to get margins back to past levels.

Balance Sheet:

First Solar's balance sheet improved in the second quarter. The company did announce on the Q1 conference call that they had begun to pay back some debt, so we knew that certain areas would improve. The following table shows some key financial metrics at the end of prior Q2 periods and this year's Q1 (dollar values in thousands).

Key Financials 6/27/09 6/26/10 6/30/11 3/31/12 6/30/12
Cash & Investments $728,113 $960,492 $515,439 $749,718 $743,693
Current Ratio 3.40 4.97 3.10 2.48 2.56
Working Capital $878,359 $1,290,651 $1,244,362 $1,729,370 $1,502,159
Long Term Debt $60,880 $114,168 $332,492 $806,070 $471,083
Debt Ratio 21.50% 17.05% 25.46% 44.42% 38.74%
Liabilities/Equity 27.39% 20.55% 34.16% 79.92% 63.24%
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Now, in case you were wondering, I included both short and long term investments (marketable securities) in my cash and investments pile. From Q1 to Q2, that amount decreased. However, you may hear that cash increased by $80 million in the period. That includes only cash and short term investments, which did increase by that amount. However, First Solar reported $0 in long term marketable securities, compared to more than $86 million at the end of Q1. So overall, it was basically a wash.

The current ratio improved quarter over quarter, but is down from prior year periods. Working capital improved, and like I said earlier, they paid back some of their debt. The debt (liabilities to assets) and liabilities to equity ratios both improved over Q1, but are still worse off than they were a year ago.


Thanks to the excellent second quarter, First Solar was able to raise their full year guidance. Here's what they gave:

  • Net Sales of $3.6 - $3.9 billion, compared to prior guidance of $3.5 - $3.8 billion. Analysts were expecting $3.48 billion.
  • Earnings per fully diluted share to $4.20-$4.70, compared to prior guidance of $4.00-$4.50, in each case excluding restructuring and impairment charges, and certain costs in excess of normal warranty expense. Analysts were expecting $3.95.

Shaking Off Industry Weakness:

First Solar's great report should provide some short term positive news to a sector that has been crushed lately. Now, I've discussed many of the issues in the past regarding oversupply, falling prices, and solar companies losing tons of money. But lately, we've had some additional issues come to light.

First, Trina Solar (NYSE:TSL) shares dropped after the company warned, cut its module shipment report, and announced an inventory write-down, a foreign exchange loss, and a receivables provision. Shares of Trina Solar had fallen from $5.41 to $4.59 just in the past couple of days.

Also, Suntech Power (NYSE:STP) made all-time lows recently after it announced it was possibly the victim of a massive fraud. Suntech claims that it was guaranteed about $700 million worth of German bonds by asset management firm GSF Capital as collateral for an investment in a fund that invested in private companies developing solar projects. However, Suntech now claims that those bonds may never have existed. Suntech may now need additional funding, and analysts are concerned that the company's financial future is in serious doubt. Shares have dropped from $1.57 to $1.01 in recent days.

Conclusion - First Solar still the leader:

First Solar has always been considered the leader in this industry, even through the bad times, because even then, it was leading on the downside (had the most losses). But Wednesday's report may have turned things back towards the positive. The Q2 report was very good, with the company announcing a huge beat, raising guidance, and improving its balance sheet. Shares were up 19% in the extended hours trade, but still are below $18, compared to the $165 they were at just 18 months ago. There still are issues remaining with this name, but for now, Wednesday's report was positive, and we haven't seen that from this name in quite some time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.