First Solar, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. First Solar designs, manufactures, and sells thin-film CdTe solar modules and develops, builds, sells, and services solar power systems. Its reportable segments are Modules and Systems.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $927.6 million | $546.8 million | $2,102.1 million | $1,663.7 million |
| Gross profit / margin | $293.0 million / 31.6% | $138.4 million / 25.3% | $520.8 million / 24.8% | $215.7 million / 13.0% |
| Operating income (loss) | $207.2 million | $41.3 million | $259.7 million | $(43.9) million |
| Net income (loss) | $155.0 million | $30.6 million | $282.7 million | $(55.5) million |
| Diluted EPS | $1.45 | $0.29 | $2.65 | $(0.53) |
- Q3 sales rose 70%; nine-month sales rose 26%. Q3 Systems sales increased 188%, primarily from sales of five projects in Japan and India. Nine-month Modules sales grew 49%, driven mainly by a 48% increase in module watt volume.
- Margins improved year over year. Management cited higher-margin project mix, improved Series 6 manufacturing throughput, module cost reductions, and a reduction in the estimated module collection and recycling liability. Q3 included a $17.4 million impairment of manufacturing equipment and $3.5 million of COVID-related manufacturing charges.
- Q3 SG&A was $49.9 million, R&D $23.0 million, and production start-up expense $13.0 million. Nine-month litigation expense was $6.0 million.
- Q3 income tax expense was $38.1 million. Nine-month tax benefit was $40.9 million, mainly reflecting a CARES Act-related tax benefit; the nine-month effective tax rate was (16.9%).
Cash flow, liquidity, and debt
- For the first nine months, operating cash flow was negative $149.2 million, compared with negative $607.5 million in 2019. Investing activities provided $116.3 million, while financing activities used $98.2 million. Cash, cash equivalents, and restricted cash decreased $129.8 million.
- At September 30, unrestricted cash and cash equivalents were $1.277 billion and marketable securities were $353.8 million, totaling $1.631 billion. This was down from $2.164 billion at year-end 2019. Restricted marketable securities of $261.5 million are held to fund legacy module collection and recycling obligations.
- Long-term debt carrying value, including current maturities, was $260.9 million ($269.1 million principal), down from $471.7 million carrying value at December 31, 2019. The $500 million revolving facility had no borrowings outstanding and matures in July 2022.
- Management stated that liquidity resources were expected to be sufficient for working capital, project investment, and capital expenditure needs for at least 12 months. Planned 2020 capital expenditures were $450–$550 million.
Outlook, material developments, and risks
- First Solar produced 1.5 GW DC of modules in Q3, up 55% in Series 6 production year over year. It had 5.5 GW DC of installed Series 6 nameplate capacity and expected approximately 6 GW DC of module production in 2020, substantially all Series 6.
- At September 30, the company had contracted future module sales of 10.8 GW DC for $3.4 billion, expected to be recognized through 2023. O&M contracts covered approximately 14 GW DC and represented an expected $0.5 billion of revenue over a weighted-average 10.8 years; this includes contracts expected to transfer with the North American O&M business.
- The company agreed to sell its North American O&M operations to a Clairvest subsidiary, with closing expected in late 2020 subject to third-party consents, CFIUS review, and other conditions. First Solar was also exploring options for its U.S. project development business; no transaction was assured or subject to a definitive timetable.
- COVID-19 had limited effects on manufacturing at the filing date, but could disrupt demand, prices, financing, supply chains, staffing, construction, and research and development. Management cited intense competition, industry capacity exceeding demand at times, declining module and system prices, and risks from policy changes, trade measures, and reduced solar incentives.
- First Solar paid $350 million in January 2020 to settle a securities class action, which received final court approval in June. It paid $19 million in July to settle an opt-out action and recorded an additional $6 million litigation loss. A separate derivative action settlement was agreed in principle, subject to documentation and court approval.
- Other notable estimates and items included a $19.7 million Q3 reduction in product warranty liability and an $18.9 million reduction in the recycling liability. Management disclosed that a 1% increase in estimated warranty return rates would increase the warranty liability by $101.1 million. The filing also identifies customer concentration, project revenue and cost estimates, credit exposure, and project financing as risks.
Most important facts for investors to verify
- Whether reported margin gains and profit remain sustainable after project-sale timing, warranty and recycling estimate changes, and the manufacturing equipment impairment.
- Whether the expected 6 GW DC of 2020 production and the $450–$550 million capital expenditure plan were achieved, and how the Series 6 conversion and capacity expansion affected costs and cash flow.
- Whether operating cash flow improves, given negative nine-month operating cash flow despite reported net income, and how project investment, inventory, and customer payment timing affect liquidity.
- Whether the North American O&M sale closed on expected terms and whether the company’s U.S. project-development review resulted in a transaction.
- Whether contracted module and O&M revenue converts as expected, and how pricing pressure, COVID-19 effects, policy changes, tariffs, and financing availability affect demand and project economics.