First Solar, Inc. — Q2 2013 Form 10-Q
Business and period: First Solar manufactures thin-film solar modules and develops, constructs, sells, and services utility-scale solar power systems. This unaudited report covers the three and six months ended June 30, 2013; comparisons are with the same 2012 periods unless stated otherwise. Results are affected by project timing and revenue-recognition milestones.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $519.8M | $957.3M | $1,275.0M | $1,454.4M |
| Gross profit / margin | $140.1M / 27.0% | $243.7M / 25.5% | $309.4M / 24.3% | $320.5M / 22.0% |
| Operating income (loss) / margin | $39.1M / 7.5% | $139.7M / 14.6% | $100.3M / 7.9% | $(316.6)M / (21.8)% |
| Net income (loss) | $33.6M | $111.0M | $92.7M | $(338.4)M |
| Diluted EPS | $0.37 | $1.27 | $1.03 | $(3.90) |
- Q2 change: Sales fell 46%; systems revenue declined 51% and components revenue 33%. Management attributed the systems decline mainly to fewer and smaller projects reaching revenue-recognition milestones. Components sales were affected by a 20% lower average selling price and 16% fewer watts sold.
- Six-month change: Sales declined 12%. Components revenue rose 21%, on 56% higher volume partly offset by 22% lower module prices; systems revenue fell 27%. The prior-year loss included $420.1M of restructuring expense, compared with $4.7M in the 2013 period.
- Q2 gross margin improved year over year, largely from systems project mix and lower remediation costs, but operating income and net income declined with lower sales and higher SG&A. Six-month gross margin also improved, while the sharp improvement in operating and net results primarily reflects the absence of the prior-year restructuring charge.
- Components remained loss-making before tax: $(67.3)M in Q2 and $(116.9)M for six months. Systems generated $108.4M and $224.1M of pretax income, respectively.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $928.7M and marketable securities were $356.6M, totaling $1,285.3M; restricted cash and investments of $275.2M are separately reported. Total cash, cash equivalents, and marketable securities were $1,003.9M at December 31, 2012.
- Total debt, including current maturities, was $255.8M, down from $562.6M at year-end. The revolving facility had no borrowings outstanding; $153.9M of letters of credit left $446.1M available. The company reported compliance with financial covenants.
- Current assets were $3,601.3M and current liabilities $1,854.8M. Current liabilities include $1,116.7M of customer payments and billings for deferred project costs; corresponding deferred project costs were $1,004.8M current.
- Six-month operating cash flow was $288.8M, versus $412.3M. Investing used $437.6M, including $156.9M of capital expenditures and $255.5M of net purchases of marketable securities. Financing provided $177.2M, including equity-offering proceeds and borrowings, partly offset by $635.9M of debt repayments. Cash increased $27.4M during the period.
- The company said available liquidity and expected operating cash flows should meet working-capital and capital needs for at least 12 months, while noting execution of its strategy could require further capital. It expects up to $230M of capital expenditures in the remainder of 2013.
Outlook, developments, and key risks
- Management expected 2013 module production of 1.6–1.7 GW, against installed annual capacity of approximately 2.2 GW. Average manufacturing cost was $0.67 per watt in Q2, compared with $0.78 a year earlier; six-month cost was $0.68 versus $0.75.
- The advanced-stage systems pipeline was approximately 3.1 GW AC as of August 6, 2013. Projects sold or under contract totaled approximately 2.2 GW AC, with about $4.3B of revenue remaining to be recognized after June 30. Management expected a substantial portion of sales, operating income, and cash flows through 2014 from large North American projects; timing and project execution remain important uncertainties.
- The company’s long-term strategy targets a transition toward sustainable markets by the end of 2016, emphasizing integrated systems and geographic expansion. Management warned that industry manufacturing capacity exceeded demand and that pricing pressure could persist through the remainder of 2013 and at least into 2014. Market access, competition, project delays, and potentially low-margin bids are risks.
- Warranty liability was $189.3M at June 30. Management estimated that a one-percentage-point change in the warranty return-rate assumption would change the liability by approximately $51M. Additional voluntary remediation could create material expense. Percentage-of-completion project estimates and project cost assumptions are also significant judgment areas.
- Restructuring followed closure of the eight-line Frankfurt plant and cancellation of planned expansions; up to $1M of additional restructuring expense was expected through 2013, and remaining restructuring cash payments were estimated at up to $13M.
- Pending securities class and derivative actions allege, among other matters, misleading statements about financial performance and prospects. The company said the cases were at early stages and it could not estimate any potential loss. One sold project remained subject to a conditional rescission clause; the company considered rescission remote.
- After quarter-end, the revolving facility was amended: $450M of commitments were extended to July 2018, while a $150M tranche retains an October 2015 maturity. On August 5, First Solar acquired GE’s CdTe solar intellectual property for 1.75M shares valued at $83.8M. TetraSun’s acquired in-process R&D was valued at $39.1M; commercial-scale production was targeted for late 2014 or early 2015.
Important facts for investors to verify
- Whether major contracted projects meet construction, sale-closing, and revenue-recognition milestones on schedule, and convert the reported $4.3B remaining contracted revenue into cash.
- Whether module pricing and industry oversupply continue to pressure margins, and whether planned manufacturing cost and efficiency improvements offset that pressure.
- Cash needs for project development, construction, acquisitions, and strategic-market expansion, including the timing of customer collections, retainage, and deferred project costs.
- Assumptions supporting the $189.3M warranty reserve and potential exposure from the 2008–2009 manufacturing excursion and related remediation commitments.
- Potential dilution and strategic returns from the June 2013 equity offering and the post-quarter GE share issuance; progress and costs associated with TetraSun commercialization.
- Developments in the securities and derivative litigation, for which the filing provides no clear estimate of potential loss.