10-QPeriod: Q2 FY2007

FIRST SOLAR, INC. Quarterly Report for Q2 Ended Jun 30, 2007

Filed August 2, 2007For Securities:FSLR

Summary

First Solar, Inc. (FSLR) reported a significant surge in revenue and profitability for the quarter and six months ended June 30, 2007. Net sales more than doubled in the quarter and nearly tripled over the six-month period compared to the prior year, driven by a substantial increase in the volume of solar modules sold and improvements in average watts per module. The company also saw an increase in its average selling price per watt, partly due to favorable foreign exchange rates. Gross margins improved considerably, reflecting better leverage of fixed costs and economies of scale from expanded production capacity. Profitability also saw a dramatic improvement, with the company swinging from a net loss in the prior year's periods to significant net income. This turnaround was heavily influenced by a substantial income tax benefit arising from the reversal of valuation allowances against deferred tax assets, based on improved future earnings projections. While operating expenses increased in absolute terms due to expansion and public company costs, they decreased as a percentage of net sales, demonstrating improving operational efficiency. The company is actively expanding its manufacturing capacity in Germany and Malaysia to meet growing demand and reduce costs.

Key Highlights

  • 1Net sales increased by 177% to $77.2 million for the three months ended June 30, 2007, compared to $27.9 million in the prior year period.
  • 2Net income for the three months ended June 30, 2007, was $44.4 million, a significant turnaround from a net loss of $2.5 million in the prior year period.
  • 3Gross profit margin improved to 36.7% for the quarter ended June 30, 2007, up from 32.7% in the same period last year, driven by increased production volume and better cost absorption.
  • 4Research and development and Selling, General, and Administrative expenses increased in absolute terms but decreased as a percentage of net sales, indicating operating leverage.
  • 5The company reported a significant income tax benefit of $36.6 million in the quarter due to the reversal of valuation allowances against U.S. deferred tax assets.
  • 6Cash used in investing activities increased substantially to $287.9 million in the first six months of 2007, primarily due to capital expenditures for new plant construction in Germany and Malaysia.
  • 7First Solar is actively expanding its manufacturing footprint with new facilities in Germany and plans for Malaysia, aiming to become a leading solar module manufacturer.

Frequently Asked Questions

First Solar's revenue growth is primarily driven by a substantial increase in the volume of solar modules sold. This is attributed to the company's expanded production capacity, including its Ohio expansion and the commencement of production at its German plant, as well as continued improvements in production throughput and an increase in the average sellable watts per solar module.

The significant improvement in profitability, swinging from a net loss to a substantial net income, was largely due to a one-time income tax benefit. This benefit of $36.6 million arose from the reversal of valuation allowances against U.S. deferred tax assets. This reversal was based on management's updated assessment of the future realization of these assets, supported by cumulative U.S. taxable income and projections of future taxable income. While operating performance improved, the tax benefit was a key driver of the reported net income.

The company's capital expenditures have significantly increased, with the majority directed towards the construction of new manufacturing facilities. Specifically, First Solar is investing in new plants in Germany and has begun construction of its manufacturing center in Malaysia, reflecting its strategy to expand global production capacity and reduce manufacturing costs.

Given that nearly all of First Solar's sales are denominated in Euros, the company has significant exposure to foreign currency exchange rate fluctuations, particularly between the U.S. dollar and the Euro. Fluctuations can impact gross and net profit margins. The company's average selling price was positively impacted by a favorable exchange rate in the current period, but it also notes that sales contracts are often at fixed Euro prices, meaning a strengthening dollar against the Euro could negatively affect revenue and margins.