First Solar, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. First Solar designs, manufactures, and sells CdTe solar modules and develops, sells, operates, and maintains solar power systems. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $642.4 million | $585.0 million | $1,174.5 million | $1,116.9 million |
| Gross profit | $137.5 million | $77.2 million | $227.8 million | $77.3 million |
| Gross margin | 21.4% | 13.2% | 19.4% | 6.9% |
| Operating income (loss) | $50.9 million | $(8.6) million | $52.6 million | $(85.2) million |
| Net income (loss) | $36.9 million | $(18.5) million | $127.6 million | $(86.1) million |
| Diluted earnings (loss) per share | $0.35 | $(0.18) | $1.20 | $(0.82) |
Revenue mix and operating performance. Q2 module sales rose 62% to $371.5 million, principally on a 59% increase in watts sold and a 2% increase in average selling price per watt. Systems sales fell 24% to $270.9 million, reflecting prior-year project sales and construction completions, partly offset by the American Kings project sale. Higher third-party module profitability and improved Series 6 factory utilization lifted margins; lower-margin project mix, GA Solar 4 weather and COVID-related delays, and pandemic-related manufacturing charges partly offset the improvement.
Cash flow and liquidity. Operating cash flow was negative $357.1 million for the first half, versus negative $289.9 million a year earlier. Investing activities provided $81.3 million, primarily reflecting marketable-security transactions, while financing used $22.7 million. Cash, cash equivalents, and marketable securities totaled $1.547 billion at June 30, down from $2.164 billion at year-end; the company cited the $350 million class-action settlement payment, capital spending, timing of customer receipts, and other operating spending as drivers. Management stated that available liquidity, customer contracts, and the project pipeline were expected to meet needs for at least 12 months.
Debt and balance sheet. Long-term debt principal was $475.6 million, with $464.8 million reported after discounts and issuance costs; no revolving-credit-facility borrowings were outstanding. The $500 million revolver matures in July 2022. Total liabilities were $1.846 billion and stockholders’ equity was $5.227 billion at June 30. Current assets were $2.731 billion and current liabilities $747.0 million.
Material changes and unusual items
- First-half sales increased 5%, but the mix shifted sharply: module revenue rose 79% while systems revenue declined 41%.
- First-half operating results improved substantially, supported by module margins, Series 6 utilization, and lower production start-up costs. First-half production start-up expense fell 46% to $10.8 million.
- The $79.0 million first-half income tax benefit included a $90.7 million discrete benefit from CARES Act net operating loss carryback provisions. The reported six-month effective tax rate was negative 163.2%; tax effects materially affected net income.
- A $6 million Q2 litigation charge increased the previously accrued estimate for the Opt-Out Action settlement to $19 million. The settlement was funded in July 2020. Separately, the $350 million class-action settlement was paid in January and received final court approval in June.
- The company recorded additional expected credit losses on loans to Clean Energy Collective; the loans remained unpaid at June 30, and certain CEC subsidiaries filed for Chapter 11 bankruptcy in July.
- In August, First Solar agreed to sell its North American O&M operations to a Clairvest subsidiary, subject to closing conditions; completion was expected in late 2020. In July, it also completed sales of two Indian projects, with their outstanding project debt assumed by the buyers.
Outlook, risks, and contingencies
- Operating outlook: Management expected 2020 module production of 5.9 GW DC, substantially all Series 6, and capital expenditures of $450 million to $550 million. The filing does not provide clear full-year revenue or earnings guidance.
- COVID-19 and market conditions: Management reported limited effects on manufacturing at the filing date but warned that restrictions, workforce availability, supply-chain disruption, project delays, weaker customer financing, and reduced module demand or pricing could worsen. The industry faces intense competition and potential global production overcapacity.
- Project and policy exposure: Project economics depend on financing availability, counterparties, permits, PPAs, government incentives, and trade policy. The company cited uncertainty around U.S. solar tariffs, Indian duties and procurement rules, and Japanese project deadlines.
- Commitments and estimates: Long-term glass supply agreements imply expected purchases of approximately $2.4 billion for substrate glass and $500 million for cover glass; termination penalties may reach $430 million in aggregate. Warranty liabilities totaled $123.2 million; a 1% increase in estimated module return rates would increase that liability by $97.5 million. The module collection and recycling liability was $140.5 million; a 1% increase in assumed annual inflation would raise it by $26.8 million.
- Other contingencies: Maximum potential future payments under tax-related and other indemnifications were $172.8 million, with insurance coverage of up to $84.9 million for covered amounts. A derivative lawsuit remained unresolved; the company said it could not estimate a potential loss.
Important facts for investors to verify
- Whether module volume, average selling prices, Series 6 utilization, and cost-per-watt improvements sustain the margin recovery.
- Whether cash generation improves after the settlement-related outflow and whether capital expenditure and project investment remain within expected liquidity capacity.
- The realization and cash-tax implications of the CARES Act tax benefit, including the effect of other discrete tax items.
- COVID-19 effects on customers, suppliers, manufacturing, project schedules, and financing, as well as developments in solar pricing, trade policy, and incentives.
- Closing and financial effects of the North American O&M sale, and the recoverability of the CEC loans and other receivables.
- Changes in warranty, recycling, indemnification, litigation, and project cost estimates, including the sensitivity disclosures above.