When Solar Giants Try To Shrink Their Way To Prosperity (FSLR)

What happens when you are the de facto king of solar, get an analyst downgrade, have no full-time CEO, announce factory closures, and announce broad layoffs?  It might not be a sign of any strength and it may pose a material weakness but the Wall Street reaction is somehow positive.

First Solar, Inc. (NASDAQ: FSLR) has announced a restructuring and it is really is a series of layoffs and closures.  First Solar will close its manufacturing operations in Frankfurt (Oder), Germany, in the fourth quarter of 2012.  The company will also “indefinitely idle four production lines” at its manufacturing center in Kulim, Malaysia, on May 1, 2012.  The company noted further personnel reductions in Europe and the U.S.  All in all, the layoffs globally will come to about 2,000 positions or about 30% of the workforce.  Doesn’t that sound like great growth???

The efforts are said to generate savings of $30 to $60 million this year and are projected to save $100 to $120 million annually going forward. First Solar is claiming that this will drive down the average manufacturing cost to a range of $0.70 to $0.72 per watt in 2012 as a result of the changes.  The prior projection was $0.74 per watt and the company is forecasting the average module cost in 2013 will be $0.60 to $0.64 per watt.

For total charges related to these ‘savings initiatives’ the company will record $245 to $370 million, with about $80 to $120 million being cash expenditures.  These charges will come primarily in the first quarter of 2012 and the rest charges will take place throughout the remainder of this year.  First Solar has also voluntarily paid down approximately $145 million of debt ahead of schedule in 2012 under its German loan agreement.

Bringing the cost per watt down this much may act to drive margins higher, but that assumes a flattening out of price trends in solar PV modules.  With Chinese dumping efforts and with the tariffs being so small against the dumping initiatives, this requires a large degree of trust that things will go as well as the company hopes.

Here is the company’s comment that goes to the core issues surrounding the new solar market trends: “The solar market has fundamentally changed, and we are quickly adapting our market approach and operations to maintain and build upon our competitive advantage.  After a period of robust growth, First Solar is scaled to operate at higher volumes than currently exist following the reduction of subsidies in key legacy markets. As a result, it is essential that we reduce production and decrease expenses to reflect the smaller volume of high-probability demand we forecast. These actions will enable us to focus our resources on developing the markets where we expect to generate significant growth in coming years.”

We’ll see.

First Solar shares were initially up as much as 4% or 5% in the early pre-market indications but after 15 minutes of trading the stock is only up 1.6% at $21.12.  As a reminder, anything under $20.00 is the demarkation line of what would have market a busted IPO level.

JON C. OGG