First Solar, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. First Solar designs and manufactures thin-film solar modules and develops, builds, sells, and services utility-scale solar power systems.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1.087 billion | $681.3 million | $2.602 billion | $2.574 billion |
| Gross profit / margin | $291.8 million / 26.8% | $170.9 million / 25.1% | $486.9 million / 18.7% | $630.6 million / 24.5% |
| Operating income / margin | $207.0 million / 19.0% | $73.3 million / 10.8% | $212.9 million / 8.2% | $253.0 million / 9.8% |
| Net income | $205.7 million | $150.5 million | $266.8 million | $334.7 million |
| Diluted EPS | $1.95 | $1.45 | $2.54 | $3.25 |
Q3 revenue rose 60%, principally on California Flats and Cuyama project sales and higher third-party module volumes. Q3 gross margin improved 1.7 percentage points, reflecting project mix and a reduction in the module collection and recycling liability, partly offset by lower module selling prices. For the first nine months, revenue was nearly flat, while gross profit fell 23% and net income fell 20%; management cited lower-margin systems project mix and module price declines.
Module revenue increased 41% in both comparison periods, as higher sales volumes offset lower average selling prices. Q3 third-party module volume rose 110% while average price per watt declined 33%; for the nine-month period, volume rose 105% and average price per watt declined 31%. Systems revenue rose 68% in Q3, but declined 7% for the nine months, reflecting the timing of project sales and construction completions.
Q3 tax expense was $7.6 million, versus a $68.2 million tax benefit in Q3 2016. The prior-year result included a $35.4 million benefit from reversal of an uncertain tax liability, among other items. Nine-month 2017 results included a $42.1 million discrete tax benefit related to the classification of certain German subsidiaries. The filing reports a negative 11.4% effective tax rate for the nine-month period.
Cash, debt, and liquidity
- At September 30, 2017, cash and cash equivalents were $2.019 billion and marketable securities were $699.5 million, totaling $2.719 billion. Restricted cash and investments were a further $408.9 million and are not all freely available.
- Long-term debt, including current maturities and net of discounts and issuance costs, was $343.7 million; principal was $356.95 million. No borrowings were outstanding under the $500 million revolving facility, which can increase to $750 million subject to conditions. The facility matures in July 2022; $131.4 million of letters of credit used its capacity.
- For the nine months, operating cash flow was $906.7 million, versus cash used of $61.7 million in 2016; investing cash use was $404.0 million and financing cash provided was $151.6 million. Operating cash generation benefited mainly from Moapa and California Flats project sales. Cash, cash equivalents, and restricted cash increased $663.8 million.
- Current assets were $3.966 billion and current liabilities $579.0 million. Management said available liquidity, operating cash flows, project pipeline, revolving-facility availability, and capital-market access should meet needs for at least 12 months. The company reported compliance with debt covenants.
Business changes, outlook, and risks
- Series 6 transition: The company plans to replace or upgrade its manufacturing fleet through 2019. It expects approximately $1.1 billion of aggregate Series 6 investment for about 4 GW of annual capacity, including use of its Vietnam plant. Expected capital expenditure for the remainder of 2017 was $100–$200 million, mostly related to the transition. Management expected approximately 2.3 GW of module production in 2017. Q3 production was 0.5 GW, down 32% year over year; capacity utilization was 98%, and average module conversion efficiency was 17.0%, up from 16.5%.
- The company expected up to $5 million of additional 2017 restructuring charges. Nine-month charges were $39.1 million, primarily related to Series 4/5 equipment dispositions, severance, and other exit costs. Production start-up expense increased to $22.2 million for the nine months as Series 6 lines were prepared.
- At quarter-end, the advanced-stage project pipeline was approximately 1.6 GW AC. The company also had contracts for 5.6 GW DC of future module sales for $2.0 billion, expected to be recognized through 2020, and long-term O&M contracts covering about 7 GW DC with an estimated $0.6 billion of revenue over a weighted-average 11.9 years.
- Management highlighted intense module and systems pricing competition, industry capacity in excess of demand, continued expected price declines, and risks from competing crystalline-silicon technologies. Policy changes, subsidy and tax-incentive reductions, trade actions, permitting constraints, project delays, and difficulty selling or financing projects could affect demand, margins, and liquidity. The USITC safeguard process described in the filing expressly excluded thin-film products, but broader or indirect market effects remained uncertain.
- In September, First Solar paid $100 million under a project tax-grant indemnification. Maximum potential future payments under tax-related indemnifications were $181.8 million, with insurance coverage of up to $60.3 million for covered amounts. The company also disclosed ongoing securities class-action, opt-out, and derivative litigation; it could not estimate potential loss for the principal pending matters.
- Warranty liability was $243.7 million. Management estimated that a 1 percentage-point change in module warranty return rates would change the module warranty liability by $74.5 million. The recycling liability was $163.7 million after a $15.8 million reduction from updated assumptions; a 1 percentage-point increase in the assumed annual inflation rate would increase that liability by $32.9 million.
- Adoption of the new revenue standard (ASU 2014-09) changed systems-sale recognition, generally accelerating and smoothing revenue and profit recognition compared with prior practice. Estimates of contract revenue and costs can materially affect reported results; unbilled receivables rose to $451.5 million, contributing to higher contract assets.
Investor verification priorities
- Verify project-sale timing and collectability, particularly the sizable unbilled contract assets and the cash-flow contribution from project dispositions.
- Track Series 6 execution, actual capital spending, manufacturing yields and costs, Vietnam ramp-up, and whether module price declines offset cost improvements.
- Assess the durability of Q3 margins against nine-month margin compression, project mix, and competitive pricing.
- Review the assumptions and sensitivity behind warranty, recycling, performance-guarantee, and indemnification liabilities, including the $100 million payment and remaining exposures.
- Monitor project pipeline conversion, project financing and sale conditions, revolving-facility letter-of-credit usage, and the potential effects of policy or trade developments.
- Consider the effect of discrete tax items and the revenue-standard adoption when comparing earnings across periods; prior-period figures were adjusted for accounting-standard adoptions.