FIRST SOLAR, INC. quarterly report, Q3 FY2022

First Solar, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. First Solar designs, manufactures, and sells thin-film CdTe solar modules; modules were its only reportable segment. Figures below are in U.S. dollars unless stated otherwise.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Net sales	$628.9 million	$583.5 million	$1,616.9 million	$2,016.1 million
Gross profit (margin)	$21.0 million (3.3%)	$124.6 million (21.4%)	$9.2 million (0.6%)	$483.5 million (24.0%)
Operating income (loss)	$(68.4) million	$50.9 million	$18.7 million	$413.6 million
Net income (loss)	$(49.2) million	$45.2 million	$(36.6) million	$337.3 million
Diluted EPS	$(0.46)	$0.42	$(0.34)	$3.16
Operating cash flow	Not stated separately	Not stated separately	$78.2 million	$203.1 million

Q3 sales rose 8%, mainly on 23% higher module volume, partly offset by a 10% lower average selling price per watt. Nine-month sales fell 20%; module sales declined 4% as a 12% lower average selling price outweighed 10% volume growth, while residual-business sales fell sharply after prior-year project sales.
Margins contracted substantially. Management cited lower module pricing, higher freight, demurrage and detention costs, and less benefit from warranty-liability revisions than in the prior year. Continued module cost reductions and higher sales volumes partly offset the pressures.
Q3 operating loss included $95.3 million of operating expenses, including $19.8 million of production start-up costs. Nine-month operating income included a $253.3 million net gain on business sales; results also included a $57.8 million impairment related to the Luz del Norte solar plant.

Financial position and liquidity

At September 30, 2022, cash and cash equivalents were $1.151 billion and marketable securities were $776.2 million, totaling $1.927 billion. Cash, cash equivalents, and marketable securities were $1.826 billion at December 31, 2021. Cash, cash equivalents, and restricted cash decreased $295.0 million during the first nine months.
Current assets were $3.339 billion and current liabilities were $816.3 million. Inventory totaled $1.050 billion, up from $903.8 million at year-end 2021.
Total debt principal was $266.2 million, including $5.4 million current; long-term debt on the balance sheet, net of discounts and issuance costs, was $259.7 million. Debt includes the Luz del Norte facilities and borrowings under a new India manufacturing facility credit facility.
Nine-month investing cash outflow was $622.5 million, including $576.7 million of property, plant and equipment purchases. Financing provided $209.5 million. Management said available liquidity, operating cash flows, and module-sale contracts should cover working-capital and capital needs for at least 12 months.
Deferred revenue was approximately $584.2 million, up 96% from year-end, primarily reflecting advance payments for future module sales.

Outlook, plans, and risks

Management expected 2022 module production of 8.9–9.0 GW DC; production was 2.4 GW DC in Q3, up 18% year over year. Installed nameplate capacity was approximately 9 GW DC.
The company planned approximately 11 GW DC of added capacity by 2025, including U.S. and India facilities and Ohio expansions. The fourth U.S. facility, targeted for 2025, remained contingent on permits and approvals of incentives. Management estimated about $2.5 billion of investment for the facilities and upgrades, and 2022 capital expenditures of $0.8–$1.0 billion. A separate U.S. R&D facility was expected to require about $0.3 billion and be completed in 2024.
As of September 30, the company had customer contracts for 50.0 GW DC of future module sales at an aggregate transaction price of $14.0 billion, expected to be recognized through 2027. Certain technology-related contract adjustments could add up to $0.7 billion if realized; these amounts are not included in the stated transaction price.
Management expected the Inflation Reduction Act to support U.S. module demand and said it currently expected to qualify for the Section 45X advanced manufacturing production tax credit, while noting that regulations and guidance were pending. Eligibility and the extent of benefits from India’s production-linked incentive scheme remained uncertain.
Key operating risks include persistent module price competition and possible industry oversupply; elevated freight and supply-chain costs; availability and pricing of raw materials; execution and funding of capacity expansion; policy, tariff, and subsidy changes; and changing customer demand and financing conditions. The company reported that COVID-19 had minimally affected manufacturing to date, but acknowledged possible disruption to operations and expansion projects.

Unusual items, commitments, and contingencies

The June 2022 sale of the Japan project development business generated a $245.2 million gain, net of transaction costs. Other O&M business sales also contributed to gains. These transactions materially affect comparisons with 2021.
The Luz del Norte plant impairment was recorded after the company pursued a potential sale; an agreement to sell was signed in October 2022, subject to Chilean antitrust approval, with completion expected in late 2022.
Litigation includes a securities class action and a derivative action concerning alleged statements about Series 6 modules and project development; the company said it could not assess potential loss. In arbitration, Southern Power was reported to be seeking approximately $55 million over EPC projects; hearings were scheduled for early 2023. The company disputes the claims.
Remaining minimum purchases under glass supply agreements were estimated at $1.6 billion for substrate glass and $314 million for cover glass; termination penalties could total up to $277 million as of September 30, 2022. The company also disclosed $102.3 million of maximum potential indemnification payments, with insurance and other recovery instruments covering up to $28.2 million.
The company recorded a $12.5 million income tax benefit in Q3 but $51.8 million of income tax expense for the first nine months. The nine-month effective tax rate was 341.4%, influenced by jurisdictional losses without recognized tax benefits, Vietnam deferred-tax remeasurement, and foreign tax credit rules.

Most important facts for investors to verify

Whether module pricing, freight and logistics costs, and gross margins stabilize or continue to pressure profitability.
Whether the 2022 production outlook and factory expansion timelines, budgets, permits, and incentive approvals are achieved.
How much of the $14.0 billion contracted module value—and any potential technology-related adjustments—converts to revenue, and on what schedule.
The realized benefits and implementation details of the IRA’s manufacturing credits, and any resulting supply-chain or input-cost pressures.
Outcomes and potential financial effects of the Southern Power arbitration, securities litigation, and Luz del Norte sale.
Cash conversion, inventory levels, capital spending, and continued dependence on customer advances and project financing to fund expansion.