First Solar, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing also presents unaudited quarterly results, including the quarter ended December 31, 2015; this is an annual report, not a standalone Q4 filing.
Business context
First Solar designs and manufactures thin-film cadmium telluride (CdTe) and crystalline-silicon solar modules, and develops, constructs, sells, operates, and maintains utility-scale solar power systems. The systems business generated most revenue. The company reported 30 installed production lines and approximately 2.8 GW of annual manufacturing capacity; it produced 2.5 GW of modules in 2015.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $3.579 billion | $3.391 billion |
| Gross profit / margin | $919.3 million / 25.7% | $824.9 million / 24.3% |
| Operating income / margin | $516.7 million / 14.4% | $422.0 million / 12.4% |
| Net income | $546.4 million | $396.0 million |
| Diluted EPS | $5.37 | $3.90 |
| Operating cash flow | $(360.9) million | $681.0 million |
| Cash, cash equivalents and marketable securities | $1.830 billion | $1.991 billion |
| Total long-term debt, including current maturities | $289.4 million | $213.5 million |
- Current assets were $3.346 billion and current liabilities were $960.8 million at year-end. The $700 million revolving credit facility had no borrowings; $508.4 million of availability remained after letters of credit.
- Operating cash flow turned negative mainly as project assets and deferred project costs rose with company-funded construction, and trade receivables increased. Investing cash outflow was $112.1 million; financing cash inflow was $137.1 million.
- Systems revenue was $3.352 billion, while third-party module revenue was $227.5 million. Components-segment sales include modules installed in First Solar systems, so segment figures should not be read as wholly external module sales.
- Q4 2015 sales were $942.3 million, gross profit $231.4 million, operating income $131.8 million, net income $164.1 million, and diluted EPS $1.60. Q4 2014 figures were $1.008 billion, $308.4 million, $199.2 million, $193.3 million, and $1.90, respectively.
Material changes versus the prior year
- Annual sales rose about 6%, primarily on higher module-plus revenue, sales of majority interests in partially constructed projects, and activity on projects including Silver State South, McCoy, and Imperial Solar Energy Center West. This was partly offset by completion or substantial completion of major projects in 2014.
- Gross margin improved 1.4 percentage points, principally from improved factory utilization and a lower module collection and recycling liability. The company recorded a $67.6 million cost-of-sales benefit and a $4.4 million accretion benefit from that liability reduction.
- Components-segment income before taxes rose to $171.8 million from a $105.5 million loss; the systems segment declined to $348.0 million from $537.6 million, reflecting lower systems revenue and a less favorable project mix.
- Module production increased 39%, factory utilization improved 11 percentage points to approximately 92%, and average module conversion efficiency increased to 15.6% from 14.0%.
- Operating cash flow fell from $681.0 million provided in 2014 to $360.9 million used in 2015. Cash and marketable securities declined by approximately $160.8 million.
Outlook, risks, contingencies and unusual items
- Management expected approximately 3.0 GW of module production in 2016 and forecast capital expenditures of $300 million to $400 million. No specific 2016 revenue or earnings guidance is provided in the supplied filing text.
- The approximately 3.8 GW advanced-stage systems pipeline included about 1.6 GW sold or under contract. The company expected approximately $1.7 billion of revenue to be recognized subsequently on those contracted projects, mostly through substantial completion or closing; project timing and revenue recognition are not linear.
- Management said available liquidity, expected operating cash flows, revolver availability, and capital-market access should cover working-capital, project-investment, and capital-expenditure needs for at least 12 months. Project construction and sales timing, however, create substantial working-capital demands; project assets and deferred project costs totaled about $1.299 billion at year-end.
- Reported 2015 earnings included a $41.7 million discrete tax benefit following a private letter ruling. The company also revised previously issued 2011–2014 financial statements for an uncertain foreign tax position and other errors; it said the errors were not material to prior statements individually, but their cumulative effect was significant. The 2014 year-end revision reduced accumulated earnings by $36.0 million.
- Key risks include intense module and systems pricing competition, industry overcapacity, reliance on government support and project financing, customer and geographic concentration, execution and financing risks on projects, foreign-exchange exposure, supplier constraints, and long-term module warranty and recycling obligations. Recycling liability was $163.4 million; product warranty liability was $231.8 million.
- Pending matters include securities class and derivative actions for which the company could not estimate a loss range, and a Department of Labor proceeding alleging prevailing-wage misclassification at the Agua Caliente project. Potential outcomes include back wages and debarment from certain federal contracting.
- The company reported effective disclosure controls and internal control over financial reporting, and its auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Review the restated historical financial statements and the details, timing, and potential resolution of the uncertain tax positions, including the $141.8 million of unrecognized tax benefits.
- Assess the sustainability of 2015 margins and earnings given the recycling-liability benefit and tax ruling benefit, as well as the decline in systems-segment pretax income.
- Track conversion of the contracted project pipeline into revenue and cash, construction schedules, project-sale terms, and the continuing level of project investment and operating cash flow.
- Examine the warranty and recycling liability assumptions: management estimated that a one-percentage-point change in the module warranty return rate would change the warranty liability by $71.5 million.
- Monitor customer concentration, the availability and cost of project and tax-equity financing, revolver covenant compliance, and the unresolved legal and labor proceedings.