First Solar CEO Gillette Leaving, Shares Collapse

(First Solar CEO Rob Gillette departure story, updated for details on recent executive departures at First Solar, rumors of infighting, and analysis of industry weakness)
NEW YORK ( TheStreet) -- First Solar ( FSLR) CEO Rob Gillette, hired less than three years ago to mark a new era in management of the largest solar company in the U.S., is leaving, an unexpected development adding to the woes of a stock that has seen its value severely eroded this year.

First Solar announced Tuesday afternoon that chairman and company founder, Mike Ahearn, will serve as interim CEO.

"Effective immediately, Rob Gillette is no longer serving as Chief Executive Officer, and the Board of Directors thanks him for his service to the company. The Board of Directors has formed a search committee and is initiating a search for a permanent Chief Executive Officer," said the company, a member of the S&P 500, in a tersely worded press release that created more questions than it answered, and as a result, led to a swift investor reaction.

First Solar shares fell by close to 25% shortly after the news was released on Tuesday afternoon. The shares, already near a 52-week low in recent trading, hit a new 52-week low after the news of Gillette's departure, closing at the $43.27 mark.

First Solar has been a favorite target of the shorts, and they have profited handsomely as the shares have capitulated in the past six months, from a high earlier this year at the $180 mark, to the recent free fall as the solar industry has gone through a massive correction, and Tuesday's cratering.

One of the hallmarks of the short-seller attack -- at least the part of the bear case not based on industry fundamentals -- against First Solar has always been the mass defection of senior executives, which has been a regular repeat occurrence in recent years at the highest ranks of the company.

In this respect, the headline about Gillette's departure -- without any explanation for his leaving -- is a serious blow to the company's case that its future is bright. First Solar President Bruce Sohn -- responsible for overseeing its manufacturing process -- and financial chief and head of its utility business, Jens Meyerhoff, left in the past year, and were just the latest and most high-profile of a handful of senior executive departures.

First Solar may hope that Ahearn stepping back into the CEO role while a search is conducted will limit the damage from Gillette's departure -- and it's typical for a chairman to fill the CEO void on an interim basis -- but the market was signaling the extent of how negative this news was being received on Tuesday afternoon. Ahearn's recent history at First Solar, too, has been a part of the short case against the stock, from his departure to his heavy insider selling, rather than a rebuttal of it.

There are still several analysts with buy recommendations on First Solar and target prices ranging from $150 to $190 -- though Goldman Sachs recently reduced its price target from $150 to $90 this month. Yet the only price target First Solar is close to now is the one offered by noted First Solar bear and analyst at Axiom Capital Gordon Johnson, who has a target price of $38 on First Solar shares.

Johnson speculated on Tuesday afternoon -- the company wasn't talking beyond its prepared statement-- that it's possible with earnings season coming up that Gillette was not willing to sign off on the company's financial statements. There is a long history of comment letters going back and forth between the Securities and Exchange Commission and First Solar over its accounting for large-scale solar projects it has in development, and the biggest of these to date, Agua Caliente, starts hitting the revenue line in a significant way in the third quarter.

First Solar announced after the close -- several hours after it announced the departure of its now-former CEO Gillette -- that it will report earnings on Nov. 3.

There was also a report in energy industry trade publication sparkspread on Monday that First Solar's deal to sell its Topaz project to Enbridge had fallen apart. In September, when First Solar announced that the Topaz project would not receive a federal loan guarantee, the company said it was in negotiations with a buyer with a low cost of capital -- effectively implying that it would be able to find a buyer for the project for whom the lack of a federal loan guarantee would not be a hindrance. A higher cost of capital -- more expensive debt financing -- means that First Solar has to sell the project for less (if it can find a buyer) and that hits its bottom line directly over a period of years. Topaz represents 6% of First Solar revenue next year, according to Stifel.

Johnson stressed that his accounting read of Gillette's departure was pure speculation, but given the proximity of earnings and sudden departure of the CEO -- and the history of accounting issues noted by the SEC -- it was logical speculation that couldn't be avoided without an explanation for Gillette's departure from the company.

There had already been chatter within the industry at the time that Meyerhoff departed that Gillette had him removed, reportedly because of a disagreement, potentially over accounting practices, and even disparaging comments made by Meyerhoff about Gillette. Related to this, one against-the-grain read of Ahearn's insider selling in recent years is that he sold his insider shares heavily because he didn't have confidence in Gillette to run the solar company and increase share value, as opposed to "having no skin in the game." Though again, this was the type of speculation that was flying on Tuesday afternoon as a result of the lack of actual information from First Solar to explain the situation adequately.

The company can use as cover the fact that it is technically in an earnings quiet period, though as detailed previously on TheStreet, First Solar picks and chooses when it wants to talk to analysts on Wall Street, and not always based on a strict reading of market disclosure regulations.

Given that the company disclosed the news during market trading -- a rare event -- and in a tersely worded statement, and three hours later announced its earnings date for the third quarter, solar analysts speculated that this was no amicable split, and furthermore, that a disagreement over accounting practices, and Gillette potentially not being willing to sign off on financials, was as good a theory as any to go with.

In any event, and even without firm explanations for either Meyerhoff or Gillette's departure, Johnson said there is no positive way to spin the fact that First Solar's CEO is leaving shortly after its former CFO and head of the company's most important business left. In fact, if there was a disagreement between the two officials, which Johnson said he could not confirm, the fact that both are now gone only makes the departures more troubling.

Even without speculating on accounting issues or management in-fighting, the fundamentals in the solar sector and at First Solar remain weak, and a guide-down when the company does report earnings is expected by analysts, as the core module business is suffering and the Topaz project, included in current earnings models, has yet to be sold. Aside from the sales that First Solar already has in the large-scale project market, the open market module sales business is expected by several bearish analysts to be operating at a loss, possibly as soon as this quarter.

As the price of polysilicon has plummeted and continues to plummet -- the raw material of crystalline silicon solar panels that are First Solar's main rival and made by many Chinese solar companies -- the company, which has used a rebate program to keep customers, can't effectively compete in the open market. In fact, even before things turned extremely bad for the solar industry, First Solar implemented its rebate program scheduled for 2011 in the last quarter of 2010. The price free fall in polysilicon wasn't even a major issue at the time of that decision.

Contracts that First Solar had signed with open market module customers in 2006 are rolling off next year too, and have represented a sizable portion of First Solar sales. With crystalline silicon panels recently hitting a $1 per watt sales price -- an event once considered "unfathomable" for 2011 pricing -- and Chinese rivals offering higher efficiency than First Solar, Johnson of Axiom Capital said there is no reason why First Solar's slide from $150 to $55 would be the bottoming out point.

And in light of that, and without more information, Gillette could have simply joined the parade of First Solar executives who don't want to stay on a "sinking ship," or so one of the main short seller's theses goes.

First Solar shorts have always maintained that while the company is viewed as a technology and cost leader in a growing sector by the bulls, they are in fact becoming a high cost producer in an undifferentiated business with massive overcapacity, and insiders have been realizing this in increasing numbers.

-- Written by Eric Rosenbaum from New York.

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