First Solar, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone Q4 report; selected unaudited quarterly results are also disclosed. Amounts below are in U.S. dollars.
Business context
First Solar designs and manufactures cadmium telluride (CdTe) thin-film solar modules and develops, builds, sells, and services utility-scale solar power systems. It reports Components and Systems segments. The company ended crystalline-silicon module production and is shifting manufacturing investment toward its next-generation Series 6 CdTe modules. The United States represented 83% of 2016 net sales.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $2.951 billion | $3.579 billion |
| Gross profit / margin | $704.0 million / 23.9% | $919.3 million / 25.7% |
| Operating income (loss) | $(502.6) million | $516.7 million |
| Net income (loss) | $(358.0) million | $546.4 million |
| Diluted EPS | $(3.48) | $5.37 |
| Operating cash flow | $206.8 million | $(325.2) million |
| Investing cash flow | $144.5 million | $(156.2) million |
| Financing cash flow | $(136.4) million | $101.2 million |
| Cash, cash equivalents and marketable securities | $1.955 billion | $1.830 billion |
| Long-term debt, carrying value | $188.4 million | $289.4 million |
At December 31, 2016, current assets were $3.787 billion and current liabilities were $899.7 million. The company had $575 million available under its $700 million revolving credit facility, after letters of credit, and reported compliance with its facility covenants at year-end. Its subsequent January 2017 amendment removed the minimum consolidated EBITDA covenant and raised the required minimum liquidity availability to $800 million.
Material changes versus the prior comparable period
- Sales declined 18%, primarily as major projects were sold or completed and module-plus revenue fell. Systems revenue decreased 33% to $1.467 billion; Components revenue increased 7% to $1.484 billion.
- Third-party module revenue rose to $675.5 million from $227.5 million, reflecting a 211% increase in volume, partly offset by a 5% decrease in average selling price per watt.
- Gross margin declined 1.8 percentage points, reflecting project mix, higher inventory write-downs, and the absence of the prior-year recycling-liability benefit.
- Operating results swung to a loss after $818.8 million of restructuring and impairment charges. These included $640.3 million related mainly to the Series 6 transition, $87.5 million tied to ending crystalline-silicon production, and $68.8 million of Systems goodwill impairment.
- Equity-method earnings rose to $171.9 million, including a $125.1 million after-tax gain on the sale of the remaining Desert Stateline interest. Other income also included realized gains on restricted investments and other items.
- Operating cash flow improved from a $325.2 million outflow to a $206.8 million inflow, primarily due to lower systems-project activity and project sales. Investing cash flow included proceeds from sales of equity and cost-method investments.
Outlook, management commentary, risks and unusual items
- Management expected 2017 module production of approximately 2.2 GW, down from 3.1 GW in 2016, during the Series 4 ramp-down and Series 6 transition.
- The company expected up to $80 million of additional restructuring charges in 2017–2018 and estimated annual reductions of approximately $80 million in cost of sales and $60 million in operating expenses from the restructuring actions.
- Planned Series 6 transition capital investment was approximately $1 billion over two years. 2017 capital expenditures were expected to be $525 million to $625 million, mostly for the transition.
- Management stated that cash, securities, operating cash flows, project financing, revolver availability and capital-market access were expected to meet needs for at least 12 months. However, systems projects require substantial upfront funding; net capital investment in project assets and related balances was approximately $1.1 billion at year-end.
- The approximately 2.0 GW advanced-stage pipeline was expected to drive a substantial portion of sales, operating income and cash flows through the end of 2018. The company disclosed approximately $0.8 billion of remaining revenue expected on 275 MW of sold/under-contract projects, subject to project timing and completion.
- In January 2017, First Solar discontinued development of the 310 MW AC Tribal Solar project amid land-rights, permitting and transmission-cost uncertainties; the PPA was terminated and performance security released.
- Key risks include persistent industry oversupply and module-price pressure; competition from improving crystalline-silicon technology; reliance on government support and project financing; execution and cost risks in the Series 6 conversion; project delays, permitting and transmission constraints; customer and geographic concentration; foreign-exchange exposure; warranty and recycling obligations; and uncertainty around the 8point3 Energy Partners project-sale channel.
- Other significant exposures include $252.4 million of accrued product warranty liabilities, $166.3 million of module collection and recycling liabilities, and $89.3 million of unrecognized tax benefits. The company also disclosed securities, derivative and shareholder litigation for which potential loss could not be estimated, and a Department of Labor wage-classification proceeding that management did not expect to have a material effect.
Important facts for investors to verify
- Whether Series 6 conversion milestones, production ramp, capital spending and anticipated cost savings are achieved on schedule and within budget.
- How quickly module pricing and margins respond to industry oversupply, and whether higher module volumes offset lower selling prices.
- Project pipeline conversion, revenue-recognition timing, customer collections and the funding required for construction and retained project ownership.
- The sustainability of liquidity after planned capital expenditures, project investments, and the January 2017 revolver covenant amendment.
- Assumptions underlying warranty and recycling accruals, including the filing’s sensitivity that a 1% change in estimated module warranty return rates would change the warranty liability by $83.5 million.
- Future performance of the 8point3 investment and collectability and terms of the $50 million Desert Stateline promissory note.