First Solar Fails To Impress

Nov. 2.12 | About: First Solar, (FSLR)

Sometimes, the best company in a bad industry does not mean much for a stock. In recent years, that has been the case with First Solar (NASDAQ:FSLR). While many regard the company as the best of its industry, shares of the company dropped nearly 90% from early 2011 to their 2012 lows a few months ago. The solar industry has been hit hard, and First Solar has struggled a bit.

The company has undergone a huge restructuring plan to cut costs, and has taken a bunch of charges along the way. I keep asking if this name is viable after each quarter. One quarter, the answer is yes, the next it is no. On Thursday, First Solar reported its fiscal third quarter results. To say the report was mixed would be an understatement. There were some good numbers, but a fair amount of bad ones as well.

Third Quarter Results:

First Solar reported revenues of $839 million, which was a drop of 16.6% from the prior year period. Analysts were looking for a drop of 3.9% to $966.5 million, so First Solar widely missed. We saw a similar huge miss when First Solar reported its Q1 results.

On the bottom line, First Solar reported an adjusted earnings per share figure of $1.27. This number was adjusted due to the company taking a pre-tax restructuring charge of $24.2 million, or $0.27 per share. After the charge, GAAP earnings came in at $1.00. Since analysts look at the adjusted figure, First solar beat by $0.23. Analysts were looking for $1.04. On an adjusted basis, this is the second straight beat. First Solar had a huge beat on the bottom line in Q2 after three straight misses. Last year, First Solar's Q3 earnings per share were $2.25.

The following statement from the company explains the revenue miss:

The decrease in net sales from the second quarter of 2012 was primarily due to project-specific decreases including Silver State North, which was completed in the second quarter, and reduced construction activity at Agua Caliente, consistent with the Company's planned construction schedule. The decrease was partially offset by initial revenue recognition for the 550-megawatt Topaz Solar Farms project, which began construction in late 2011.

Margin Analysis:

The following table shows First Solar's Q3 margins over the past four years, which I can use to further analyze the results.

While gross margins fell 925 basis points over the prior year period, gross margins were actually up 299 basis points over Q2 levels. Operating margins fell 183 basis points over Q2 levels, while profit margins also declined by 112 basis points. Also, if you take out the restructuring charge, operating margins would have been 15.64%.

First Solar's gross margins fell because of the revenue drop of 16.57%, and the cost of revenues only declined by 4.18%. That will definitely impact your gross margins. The firm was able to see some improvement on both R&D costs, which declined 15.18% from year ago levels, and SG&A costs, which fell by 34.8% over last year's period. However, that $24 plus million restructuring charge hurt things, as there was no restructuring charge taken in Q3 of 2011.

Overall, operating income plunged by nearly 52%. Although the company was able to make up some of the drop thanks to some "other income items" producing $3.7 million of income, the firm's effective tax rate jumped from 11.78% to 20.62%. Overall, net income fell by 55.26%, and you can see the impact that had on profit margins.

Balance Sheet Update:

The following table shows some financial ratios over the past year, and I can use them to give an update on the company's balance sheet.

Click to enlarge

The first thing you'll notice is that First Solar's cash and marketable securities balance declined by about $27 million in the period. However, First Solar saw an increase of $324 million in its trade receivables, so current assets actually increased by $245.6 million. Current liabilities increased by $177.6 million. You can see that working capital increased nicely, but a higher percentage rise in current liabilities took a chunk out of the current ratio. The company's debt (liabilities to assets) ratio jumped a few percentage points as total liabilities increased a bit faster than total assets.

Guidance Update:

First Solar provided the following guidance update, which like all of the other results for the quarter, was mixed.

  • Net sales of $3.5 to $3.8 billion, compared to prior guidance of $3.6 to $3.9 billion. The reduction is due to weather-related disruptions in the supply chain and at certain project sites which may push the expected closing of the project sales from Q4 2012 into Q1 2013.
  • Non-GAAP earnings per fully diluted share of $4.40 to $4.70, compared to prior guidance of $4.20 to $4.70, in each case excluding restructuring and impairment charges and certain costs in excess of normal warranty expense related to the previously announced manufacturing excursion expected, which are expected to reduce 2012 earnings per fully diluted share by approximately $6.00. On a GAAP basis, earnings per fully diluted share are expected to be in the range of $(1.60) to $(1.30).
  • Operating Cash Flows of $650 to $850 million, compared to previous guidance of $850 to $950 million, primarily due to the aforementioned weather-related disruptions for certain projects.

So the company lowered its sales guidance and its operating cash flow guidance, but increased the high-end of its non-GAAP (adjusted) earnings per share. To me, this is all negative, since the company's adjusted earnings are purely fictional. When it comes to GAAP, they are losing a ton of money due to charges.

Recap / Final Thoughts:

This was definitely a mixed quarter for First Solar, and I've described in the past how their results can jump up and down based on the quarter. Revenues missed big, while adjusted earnings beat. The balance sheet saw some positives, but some negatives. The guidance was mostly cut. In Thursday's after-hours session, First Solar shares traded in a rough range of $23 to $27. They were down to $23 initially, but then rallied hard to $27 before falling back, ending down about 6% in after hours trading.

I've been convinced that First Solar has been a short over the past year, and I've been fairly right on that one. The third quarter results were not tremendous and guidance was lousy. This company can't seem to put two good quarters back to back, while probably means next quarter will be good. But for now, First Solar has failed to impress yet again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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