First Solar, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. First Solar manufactures and sells cadmium telluride thin-film solar modules; its residual operations include certain project development, O&M, and owned power systems.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $621.0 million | $629.2 million | $988.0 million | $1,432.6 million |
| Gross profit (loss) | $(23.2) million; (3.7)% margin | $174.1 million; 27.7% margin | $(11.7) million; (1.2)% margin | $358.9 million; 25.1% margin |
| Operating income | $144.8 million | $110.4 million | $87.0 million | $362.7 million |
| Net income | $55.8 million | $82.4 million | $12.6 million | $292.1 million |
| Diluted EPS | $0.52 | $0.77 | $0.12 | $2.73 |
- Q2 module-segment sales rose 12% to $607.4 million as volume increased 27%; a 12% lower average selling price per watt partly offset the volume gain. Six-month module sales fell 11%, primarily reflecting a 13% lower average selling price per watt.
- Gross margins deteriorated sharply. Management cited module pricing, higher freight costs, the prior-year project indemnification settlement, and a $57.8 million impairment of the Luz del Norte solar plant. Q2 modules-segment gross profit was $31.2 million, while “Other” recorded a $54.4 million gross loss.
- Q2 operating income included a $245.4 million gain on the Japan project-development business sale. Six-month gains on business sales totaled $247.3 million; operating income therefore does not represent underlying operating performance alone.
- Six-month income tax expense was $64.3 million and the effective tax rate was 83.7%, versus 18.6% a year earlier. The filing attributes the elevated rate to losses in some jurisdictions without tax benefits, Vietnam deferred-tax remeasurement, foreign-tax-credit rule changes, and income mix.
Cash flow, liquidity, and debt
- Six-month operating cash flow was negative $50.8 million, improving from negative $102.2 million. Investing cash flow was positive $138.3 million and financing cash flow positive $125.6 million; cash, cash equivalents, and restricted cash increased $253.0 million.
- At June 30, cash was $1.701 billion and marketable securities were $143.9 million. Current assets were $3.383 billion versus current liabilities of $803.6 million. Inventory totaled $1.049 billion.
- Total debt principal was $181.2 million, down from $246.7 million at year-end; cash and marketable securities substantially exceeded reported debt. First Solar repaid the remaining $73.2 million Kyoto facility balance. Debt primarily comprises Luz del Norte project financing.
- Capital expenditures were $353.4 million in the first half. Management expects 2022 capital expenditures of $0.9–$1.1 billion and says available liquidity, operating cash flows, and customer contracts should meet working-capital and capital needs for at least 12 months.
Material developments, outlook, and risks
- On June 30, First Solar completed the sale of its Japan project-development business for a stated purchase price of ¥66.4 billion ($488.4 million), subject to adjustments. It received $324.5 million at closing and transferred $61.9 million of cash and restricted cash; the sale generated the $245.4 million gain. A separate Japan O&M sale remained subject to closing conditions, with completion expected in the second half of 2022.
- As of June 30, customer contracts covered 37.3 GW DC of future module sales for an aggregate transaction price of $10.0 billion, expected to be recognized through 2026. The figure excludes certain potential price adjustments; the company estimated technology-related adjustments could add up to $0.4 billion.
- First Solar reported 8.4 GW DC of installed Series 6 capacity and produced 2.2 GW DC in Q2. It expects 2022 Series 6 and Series 6 Plus production of 8.5–9.0 GW DC. A 6.6 GW DC capacity expansion is under construction: the U.S. facility is expected to begin operations in the first half of 2023 and the India facility in the second half of 2023. These are operating targets, not earnings guidance.
- Management highlighted competitive pricing and potential industry oversupply, lower long-term module prices, elevated freight and commodity costs, supply-chain disruption, policy and trade uncertainty, and execution and funding demands of manufacturing expansion. Proposed U.S. clean-energy incentives and India manufacturing incentives were uncertain; proposed Indian e-waste rules could adversely affect the business if enacted without modification.
- The company was seeking a waiver for technical noncompliance under the Luz del Norte credit facilities. A securities class action concerning statements about Series 6 modules and the project-development business was at an early stage; the company said it could not assess potential loss or estimate a range.
- Other exposures include product warranties, a $134.1 million module collection and recycling liability, and indemnifications with maximum potential future payments of $102.3 million, partly supported by $28.2 million of insurance and other recovery instruments. The company also disclosed up to $292 million of potential termination penalties under glass supply agreements.
Important facts for investors to verify
- How much of reported operating income and net income depends on asset-sale gains, and how margins develop excluding unusual items and the Luz del Norte impairment.
- Whether module selling prices, freight and input costs, and manufacturing cost reductions improve gross profitability.
- Progress and spending against the $0.9–$1.1 billion 2022 capex plan, and timing and cost execution for the U.S. and India factories.
- Conversion, delivery timing, and realized pricing of the $10.0 billion contracted module backlog, including potential price adjustments and customer amendments.
- Resolution of the Luz del Norte technical noncompliance and the outcome of the securities litigation, as well as any material changes to warranty, recycling, or indemnification estimates.