First Solar, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. First Solar manufactures and sells cadmium telluride thin-film solar modules; module sales accounted for the large majority of revenue.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $801.1 million | $628.9 million | $2,160.0 million | $1,616.9 million |
| Gross profit / margin | $376.2 million / 47.0% | $21.0 million / 3.3% | $798.6 million / 37.0% | $9.2 million / 0.6% |
| Operating income (loss) | $273.0 million | $(68.4) million | $459.5 million | $18.7 million |
| Net income (loss) | $268.4 million | $(49.2) million | $481.5 million | $(36.6) million |
| Diluted EPS | $2.50 | $(0.46) | $4.49 | $(0.34) |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $41.2 million | $78.2 million |
Q3 module sales rose 29%, driven by 20% higher shipment volume and an 8% increase in average selling price per watt. Year-to-date module sales increased 35%, with volume up 29% and average selling price per watt up 5%. Results benefited substantially from the U.S. Inflation Reduction Act’s Section 45X manufacturing credit, recorded as a reduction in cost of sales: $204.6 million in Q3 and $429.7 million year to date. Lower freight costs and higher selling prices also supported margins. Q3 production was 3.2 GW and sales were 2.7 GW.
Cash, debt, and investment: At September 30, cash, cash equivalents, and marketable securities totaled $1.82 billion, down from $2.58 billion at year-end 2022. Operating cash flow was $41.2 million for nine months; investing activities used $299.6 million, including $1.04 billion of property and equipment purchases, while financing activities provided $276.1 million. Long-term debt principal was $500 million, including $500 million borrowed under the India facility; the $1.0 billion revolving facility was undrawn. Current and long-term debt carrying value totaled approximately $499.4 million. Current assets were $3.82 billion versus current liabilities of $1.20 billion.
Material changes and outlook
- Compared with 2022, revenue and profitability improved sharply, but the prior nine-month period included a $253.3 million gain on business sales. The current period included a $35.6 million litigation loss related to the Southern arbitration.
- First Solar recognized $429.7 million of income-based government grant benefits in cost of sales year to date. The company expects roughly $0.17 per watt for eligible U.S.-made modules sold to third parties, but the ultimate benefit remains subject to tax-law guidance and interpretation.
- Management expects 2023 production of 11.7–12.1 GW and sales of 11.8–12.3 GW. It expects 2023 capital expenditures of $1.7–$1.9 billion and says remaining investment in announced capacity expansions is approximately $1.9 billion, with about $0.3 billion remaining for a U.S. R&D facility.
- Installed nameplate capacity was approximately 16.5 GW. The company expects announced expansions to add about 7.9 GW by 2026, taking total installed capacity to approximately 25 GW. Planned milestones include Ohio expansion completion in first-half 2024, a fourth U.S. facility starting in second-half 2024, and a fifth U.S. facility starting in late 2025.
- Customer contracts covered 77.6 GW of future module sales for an aggregate transaction price of $23.0 billion, expected to be recognized through 2030. Some contract consideration can change with technology improvements, freight, commodity prices, and delivered module wattage.
- Management believes available liquidity, operating cash flows, customer contracts, and the undrawn revolver will meet working-capital and capital-expenditure needs for at least 12 months. It notes possible financing needs and uncertainty around the timing of IRA credit payments.
Risks, contingencies, and notable items
- Market risks include potential global module oversupply, pricing pressure, customer financing constraints, supply-chain and raw-material costs, and reliance on policy incentives. IRA guidance remains incomplete; changes could reduce expected benefits. The company also cited U.S. trade-duty developments and possible duties on certain aluminum imports.
- On September 29, 2023, the company received an SEC subpoena seeking information concerning, among other matters, India operations, an India-based customer supply agreement, and its technology roadmap. First Solar is cooperating and cannot predict the outcome.
- The $35.6 million Southern arbitration interim award was accrued and paid in Q3; subsequent requests for interest and attorneys’ fees were denied. The award was expected to become final, subject to the appeal timeline described in the filing.
- A separate personal-injury jury award was reduced from $51.3 million to $21.8 million and accrued with an equal insurance receivable. The plaintiff rejected the reduced award, which was vacated; a new trial is to be scheduled.
- Patent-infringement claims concerning customer tracker systems remain at an early stage; the company says it cannot estimate potential loss. The putative securities class action and related derivative action were dismissed with prejudice.
- Warranty liability was $26.1 million at quarter-end, after a $5.7 million reduction in the Q3 estimate. Module collection and recycling liability was $130.1 million. Certain glass supply agreements carry aggregate termination penalties of up to $641 million, declining over time.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. Its new global ERP system went live in August, with post-implementation activities continuing.
Important facts for investors to verify
- Whether Section 45X credit eligibility, guidance, and cash realization support the unusually strong reported gross margins and future liquidity.
- Whether production ramps, new facilities, and the stated 2023 shipment targets are achieved without persistent under-utilization costs or delays.
- How the $23.0 billion, 77.6 GW contract book converts into revenue and margins, including potential contract adjustments and customer performance.
- Whether operating cash generation improves as major expansion spending continues, and whether additional financing is needed.
- Developments in the SEC inquiry, the Southern award and appeal process, the retrial, and the patent matters.