While reviewing First Solar’s first quarter earnings, we were surprised by the dramatic rise in receivables on a decline in revenue. The company generated revenue of $418 million, down four percent sequentially, while its accounts receivable balance rose 300 percent, from $60 million to about $180 million. This had a substantial negative effect on the company’s cash flows. Since cash received from customers was down $100 million (25 percent) on a sequential basis, FSLR had net negative cash flows for the quarter. In addition, the company’s tax rate fell from 23 percent in the fourth quarter of 2008 to three percent in Q1 on a one-time Malaysian tax refund. This gave the company a $0.15 boost to its bottom line.

First Solar chose to extend the payment terms for its customers from 10 days to 45 days in the most recent quarter, giving the customers more flexibility in light of heightened uncertainty and credit difficulty in the solar industry. As a result, the company’s DSOs nearly tripled in the first quarter of 2009. We see this as evidence that FSLR’s customers are having increasing difficulty obtaining funds and maintaining liquidity, as well as potentially having working capital issues. This dramatic rise in receivables also raises the specter of write-downs and bad debt expense in the future. We also think that the company will burn cash at a faster rate going forward since it is receiving substantially less cash from customers. The company continues to invest in expanding its Malaysian plant capacity and financing large German solar projects, which will require continuous funding.

Though First Solar beat estimates for the first quarter of 2009, we think that it has hit a brick wall based on its receivables soaring 300 percent on a decline in revenues and its bottom line being artificially boosted by a one-time Malaysian tax refund. Because of these issues, we have concerns about the quality of First Solar’s Q1 earnings.

During the current recession, one sector has performed well relative to the market. Enrollments in for-profit postsecondary schools are currently at record levels. Many laid off workers as well as currently employed workers are flocking back to school in order to make themselves more marketable. Despite record growth, we are starting to see some hesitation in stock movements.

ITT Educational Services (NYSE: ESI) is a for-profit provider of technology-oriented postsecondary education. The company’s career-focused degree programs serve about 62,000 students. ITT operates 105 institutes and nine learning sites in 37 states. A learning site is an institute location where educational activities are conducted and student services are provided, but does not offer all of the services of a full-fledged institute. Currently about 80 percent of students are pursuing an associates degree and 20 percent of students are enrolled in bachelor’s programs. Of the six schools of study, IT, electronics, drafting and design, make up the core technology programs.

In ITT Education Services’ 10-K filing (February 18, 2009), we found new disclosure on bad debt expense expectations for 2009. We believe this is a significant disclosure due to increasing concerns with the quality of loans made to students. In 2008, bad debt expense as a percentage of revenue among the for-profit education sector was around 4.2 percent. ESI’s was 4.3 percent. The company is now guiding bad debt expense to between four and six percent in 2009.

When Apollo (NASDAQ: APOL) (parent company of University of Phoenix) reported Q1 fiscal 2009 earnings (ended November 30, 2008), bad debt expense rose higher than expected. Apollo’s bad debt expense jumped from 3.0 percent to 3.6 percent on a sequential basis.

There were a few reasons for the increase. Both macro as well as micro trends are putting pressures on students who took out loans. On the macro side, the company had trouble collecting receivables due to the economy. On the micro side, assuming unemployment continues to rise, it’ll be harder for graduates to start paying off the loans as they become due.

We expected companies in this sector to have similar bad debt issues. So the discovery of the 2009 bad debt expense guidance validated our original thesis. Although bad debt expense is rising in the sector, we don’t see this as surprising and we don’t believe this will have a material impact on the bottom line. However a prolonged economic downturn would increase bad debts even more and start having a material impact on net income.