First Solar, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. First Solar designs, manufactures, and sells thin-film solar modules and develops, builds, sells, and services solar power systems. Results are unaudited.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $676.2 million | $1,087.0 million | $1,552.8 million | $2,602.1 million |
| Gross profit | $129.1 million | $291.8 million | $293.9 million | $486.9 million |
| Gross margin | 19.1% | 26.8% | 18.9% | 18.7% |
| Operating income | $58.5 million | $207.0 million | $29.1 million | $212.9 million |
| Net income | $57.8 million | $205.7 million | $92.2 million | $266.8 million |
| Diluted EPS | $0.54 | $1.95 | $0.87 | $2.54 |
- Revenue and profit: Q3 sales fell 38% year over year; nine-month sales fell 40%. Q3 operating income and net income declined sharply. Nine-month equity earnings included a $40.3 million after-tax gain from selling First Solar’s 8point3 interests, while the prior-year comparison included a $42.1 million discrete tax benefit.
- Segment mix: Q3 module sales declined 60% and systems sales declined 29%. The modules segment recorded a $5.7 million gross loss, while systems generated $134.8 million gross profit. Nine-month module sales fell 36% and systems sales fell 42%.
- Margins and unusual items: Q3 margin pressure reflected Series 6 manufacturing under-utilization and lower-margin project mix, partly offset by a reduction in the module recycling liability. Nine-month gross margin was broadly stable year over year, with a $54.6 million revenue increase following settlement of a California sales-and-use-tax examination. The annual recycling-cost review reduced the related liability by $34.2 million in Q3.
- Cash flow: Operating cash flow was negative $141.3 million for the nine months, versus positive $906.7 million a year earlier. Investing cash outflow was $795.7 million, including $610.6 million of property, plant and equipment purchases. Financing provided $143.2 million. Cash, cash equivalents, and restricted cash decreased $806.3 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $1.435 billion and marketable securities were $1.295 billion, totaling $2.730 billion, down from $2.989 billion at year-end 2017. Long-term debt was $466.1 million carrying value, including current maturities; principal outstanding was $478.2 million. The $500 million revolving facility had no borrowings, with $63.4 million of letters of credit issued under it.
Business changes, outlook, and risks
- Series 6 transition: Commercial production continued in Ohio and Malaysia and began in Vietnam. Installed annual capacity reached 5.2 GW. The company expected to produce approximately 2.8 GW of modules in 2018, including approximately 0.7 GW of Series 6 modules.
- Investment plans: Planned Series 6 programs were expected to require about $1.9 billion in aggregate capital investment, including $1.0 billion spent through September 30. The company expected $200–$300 million of capital expenditures in the remainder of 2018, mostly for Series 6. Planned capacity upon completion was approximately 6.6 GW.
- Commercial visibility: The company reported an approximately 2.7 GW advanced-stage systems pipeline as of October 25, 2018, and $1.1 billion of expected revenue from specified system and EPC contracts. It also had module contracts for 8.4 GW DC at an aggregate transaction price of $3.1 billion, with revenue expected through 2021, and long-term O&M contracts covering about 7 GW DC.
- Management outlook: Management believed available liquidity, operating cash flows, project pipeline, credit-facility availability, and capital-market access would meet needs for at least 12 months. The filing does not provide clear full-year financial guidance. Management warned that declining industry prices, oversupply, intense competition, and project timing could pressure sales and profitability.
- Commitments and contingencies: Glass supply agreements entered in 2018 contemplate approximately $2.4 billion of substrate glass and $500 million of cover glass purchases; termination penalties can total up to $430 million and decline over time. A securities class action was pending, with trial scheduled for April 2019; the company could not estimate potential loss, and an unfavorable outcome could be material. A separate opt-out action and other proceedings also remained unresolved.
- Other risks: Warranty liabilities totaled $225.4 million; a 1% change in estimated module warranty return rates would change the module warranty liability by $75.9 million. The recycling liability was $134.0 million and is sensitive to assumptions, including inflation. First Solar also cited uncertainty in finalizing Tax Act accounting. Management reported disclosure controls were effective and no material changes to internal control over financial reporting, apart from an ERP upgrade.
Important facts for investors to verify
- Whether Series 6 production ramps as planned and improves utilization, costs, and margins; compare actual 2018 production with the approximately 2.8 GW expectation.
- How much of the systems pipeline and module backlog converts to revenue and cash, and whether project schedules, sales, and customer collections proceed as expected.
- The sustainability of operating cash flow and liquidity as manufacturing investment and project working-capital needs remain high.
- The recurring profitability underlying reported earnings, separating the 8point3 sale gain, California tax-related revenue adjustment, and recycling-liability estimate changes from ongoing operations.
- Developments in the securities litigation, tax examinations and Tax Act estimates, warranty and recycling assumptions, and the obligations or termination exposure under long-term glass supply agreements.