First Solar, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. First Solar manufactures thin-film solar modules and develops, builds, and services utility-scale solar projects through its components and systems segments.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $755.2 million | $497.1 million |
| Gross profit / margin | $169.3 million / 22.4% | $76.7 million / 15.4% |
| Operating income (loss) | $61.2 million | $(456.3) million |
| Net income (loss) | $59.1 million | $(449.4) million |
| Diluted EPS | $0.66 | $(5.20) |
| Operating cash flow | $66.5 million | $(16.1) million |
- Sales rose 52%, driven by components revenue growth of 112% and systems growth of 21%. Module sales volume increased 197%, while module average selling prices fell 29%.
- Systems revenue was $398.6 million; components revenue was $356.6 million. Systems contributed $115.7 million of pre-tax income, while components recorded a $49.5 million pre-tax loss.
- Gross margin improved by 7.0 percentage points. Management attributed much of the improvement to lower manufacturing-excursion remediation costs, fewer inventory write-downs, and lower accelerated depreciation; lower module selling prices partly offset these benefits.
- Average module manufacturing cost declined 5% to $0.69 per watt from $0.73. Average module conversion efficiency rose to 12.9% from 12.4%.
- Cash used in investing was $141.6 million and cash provided by financing was $21.4 million. Cash and cash equivalents fell $58.5 million during the quarter.
Financial position and liquidity
- At March 31, cash and cash equivalents were $842.8 million; marketable securities were $169.0 million, for combined cash, cash equivalents, and marketable securities of $1.012 billion. Restricted cash and investments of $286.3 million are separately reported.
- Total debt, including current maturities, was $562.2 million. The $600 million revolving credit facility had $300 million drawn and $142 million of letters of credit outstanding, leaving $158 million available. The company reported compliance with its debt covenants.
- Current assets were $3.110 billion and current liabilities were $1.533 billion. Customer billings and payments for deferred project costs rose to $778.7 million current from $94.5 million at year-end; deferred project costs classified as current rose to $617.5 million from $21.4 million.
- Management said available liquidity, expected operating cash flows, and revolver availability should meet working-capital and capital needs for at least 12 months, subject to execution of its plans and assumptions.
Material changes, outlook, and risks
- Q1 2012 results included $401.1 million of restructuring expense, versus $2.3 million in Q1 2013. The prior-year loss therefore makes the year-over-year earnings turnaround unusually large. Management expected up to $5 million of further restructuring expense through year-end 2013 and $30–$40 million of remaining restructuring cash payments.
- Management expected 2013 module production of 1.5–1.7 GW and up to $330 million of capital expenditures for the remainder of 2013.
- The advanced-stage systems pipeline was approximately 3.1 GW AC as of May 6, 2013. Sold or contracted projects totaled about 2.0 GW AC, with approximately $4.4 billion of revenue expected to be recognized after March 31. Management expected four large North American projects to contribute substantially to sales, operating income, and cash flow through 2014; project revenue timing can be uneven.
- Management cited persistent industry capacity in excess of demand, intense pricing competition, and expected pressure on pricing and results through the remainder of 2013 and into 2014. Strategy centers on expanding systems and project-development activity in sustainable markets while reducing costs.
- On May 6, 2013, management approved a reduction of approximately 150 employees. It expected about $5 million of cash severance costs in the remainder of 2013 and annual savings of $25–$30 million beginning in 2014.
- After quarter-end, First Solar completed its TetraSun acquisition and described plans to target commercial-scale production in the second half of 2014; it also acquired Solar Chile in January 2013. The TetraSun transaction was not material to historical financial statements.
- Product warranty liability was $185.6 million. Management estimated that a one-percentage-point change in the warranty return-rate assumption would change the liability by approximately $48.9 million. The filing also describes legacy manufacturing-excursion remediation commitments.
- A securities class action and related derivative actions remained pending. The company said it could not estimate a potential loss. It also identified foreign-exchange and interest-rate exposure, project execution and liquidity needs, and reliance on large projects as risks. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether higher sales volumes and systems growth can offset continuing module price pressure and components-segment losses.
- Progress, timing, customer collections, and remaining costs for the large contracted projects supporting the stated $4.4 billion of future revenue.
- Actual 2013 production, capital spending, restructuring cash payments, and delivery of the announced workforce savings.
- Warranty and legacy remediation estimates, including whether claims or return-rate assumptions change materially.
- Liquidity and revolver availability after project investment needs, debt service, and any additional project acquisitions or ownership commitments.
- Commercialization timing and economics for TetraSun, and developments in the securities and derivative litigation.