FIRST SOLAR, INC. quarterly report, Q1 FY2019

First Solar, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018. First Solar designs and manufactures cadmium telluride solar modules and develops, constructs, sells, and services utility-scale solar power systems.

Financial performance

Metric	Q1 2019	Q1 2018
Net sales	$532.0 million	$567.3 million
Gross profit (margin)	$0.1 million (approximately 0.0%)	$172.8 million (30.5%)
Operating income (loss)	$(76.6) million (−14.4% of sales)	$74.3 million (13.1% of sales)
Net income (loss)	$(67.6) million	$83.0 million
Diluted earnings (loss) per share	$(0.64)	$0.78
Cash used in operating activities	$(303.4) million	$(45.3) million
Capital expenditures for property, plant and equipment	$(149.2) million	$(177.7) million

• Revenue fell 6%. Module sales rose 23% to $198.8 million; systems sales fell 18% to $333.2 million.
• Module gross loss was $25.0 million, compared with $10.3 million gross profit a year earlier. Systems gross profit was $25.1 million, down from $162.5 million.
• At March 31, cash and cash equivalents were $1.013 billion and marketable securities were $1.104 billion, totaling $2.117 billion. Cash, cash equivalents, and restricted cash reported in the cash flow statement totaled $1.207 billion.
• Long-term debt had $582.7 million of principal outstanding ($570.7 million carrying value after discounts and issuance costs). The $500 million revolving facility had no borrowings; $64.8 million of letters of credit used its capacity.
• Current assets were $3.663 billion and current liabilities were $836.5 million. Total liabilities were $2.128 billion and stockholders’ equity was $5.129 billion.

Material changes and drivers

• Gross margin dropped to approximately zero. Management cited a less profitable mix of systems projects, the prior-year California sales-and-use-tax examination settlement, and higher Series 6 manufacturing under-utilization and ramp charges. Series 6 ramp costs increased module cost of sales by $36.5 million.
• The 2018 comparison included a $54.6 million revenue increase associated with settling the California tax examination, as well as sales of certain India projects. These items contributed to lower systems revenue in 2019.
• Module sales benefited from a 15% increase in watts sold and a 7% increase in average selling price per watt. Systems revenue also reflected ongoing construction at Phoebe, Rosamond, and Lake Hancock.
• Operating cash use increased substantially, driven by lower gross profit, timing of customer receipts and operating expenditures associated with the Series 6 transition. Cash and cash equivalents plus marketable securities declined from $2.547 billion at year-end 2018.
• Debt principal increased to $582.7 million from $479.2 million at December 31, 2018, primarily reflecting project-specific borrowing. Investing cash use declined year over year, partly because of lower net securities purchases and lower capital expenditures.

Outlook, risks, and notable items

• Management expected 2019 module production of 5.2–5.5 GW DC, including approximately 2 GW DC of Series 4 modules. First Solar reported 1.1 GW DC of production in Q1 and installed annual nameplate capacity of 6.2 GW DC after commercial production began at its second Ho Chi Minh City facility.
• Planned Series 6 programs were expected to require approximately $2.0 billion of aggregate investment, including $1.3 billion already spent by March 31, 2019. The company expected $500–$600 million of capital expenditures for the remainder of 2019, mostly related to Series 6.
• Management said available liquidity, operating cash flows, project pipeline, revolving-credit availability, and capital-market access were expected to meet needs for at least 12 months. It also highlighted the systems business’s substantial working-capital needs and potential construction or project-sale delays.
• Industry risks include intense module and system pricing competition, possible supply-demand imbalances, declining selling prices, manufacturing ramp and utilization challenges, and competition from higher-efficiency crystalline-silicon and bifacial modules. Management noted that near-term price declines could adversely affect results.
• As of March 31, the company had $9.4 billion? No: contracts for future module sales totaled 9.4 GW DC at an aggregate transaction price of $3.4 billion, expected to be recognized through 2023. It also reported about 2.4 GW AC in its advanced-stage project pipeline and $0.6 billion of expected revenue from long-term O&M contracts over a weighted-average 11.2 years.
• A technical noncompliance under the Luz del Norte project credit facilities was waived; management expected to cure it within the waiver period ending June 2019.
• The long-running securities class action and an opt-out action remained unresolved. The company could not estimate potential loss; an adverse outcome could be material. Tax-related and other indemnifications had a maximum potential payment of $125.3 million, with insurance covering up to $84.9 million of amounts under covered policies.
• Product warranty liability was $217.2 million. Management estimated that a 1% change in module warranty return rates would change the module warranty liability by $77.1 million. The $134.2 million solar module collection and recycling liability was sensitive to inflation assumptions: a 1% increase or decrease in the annualized inflation rate would increase it by $25.7 million or decrease it by $21.7 million, respectively.
• Adoption of lease accounting in Q1 added $140.7 million of right-of-use assets and $119.9 million of lease liabilities at January 1, 2019, without significant reported impact on earnings or cash flows. Management reported effective disclosure controls and no material change to internal control over financial reporting apart from implementing the lease accounting system and controls.

Important facts for investors to verify

• Whether Series 6 utilization, costs, and production ramp as planned, and whether the 2019 production and capital expenditure expectations remain achievable.
• Whether systems project mix, construction timing, customer collections, and project sales improve margins and operating cash flow after the significant Q1 cash use.
• How module and system pricing, industry capacity, and competition affect average selling prices, margins, and the project pipeline.
• Progress in curing the Luz del Norte technical noncompliance and any developments in the securities litigation, tax examinations, warranty estimates, and recycling-cost assumptions.
• Changes in cash and marketable securities, project debt, restricted funds, and the availability of revolving-credit and other financing.