First Solar, Inc. — Q2 2018 Form 10-Q
Business context and period. First Solar designs and manufactures cadmium telluride solar modules and develops, builds, sells, and services utility-scale solar systems. This unaudited report covers the three and six months ended June 30, 2018; comparisons are with the same 2017 periods unless noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $309.3m | $623.3m | $876.6m | $1,515.1m |
| Gross profit (loss) | $(8.1)m | $110.9m | $164.7m | $195.1m |
| Gross margin | (2.6)% | 17.8% | 18.8% | 12.9% |
| Operating income (loss) | $(103.6)m | $13.9m | $(29.4)m | $5.9m |
| Net income (loss) | $(48.5)m | $52.0m | $34.5m | $61.1m |
| Diluted earnings (loss) per share | $(0.46) | $0.50 | $0.32 | $0.58 |
- For the six months, operating cash flow was $83.9m, down from $325.3m. Investing cash use was $372.8m; financing provided $70.0m. Cash, cash equivalents, and restricted cash declined $232.1m.
- At June 30, cash and cash equivalents were $2.024bn and marketable securities were $1.110bn, totaling $3.135bn. Current assets were $3.986bn and current liabilities $815.4m.
- Balance-sheet debt, including current maturities and net of discounts and issuance costs, was $456.3m; the revolving credit facility had no borrowings. The company reported compliance with debt covenants.
- Capital spending was substantial: property, plant and equipment purchases were $372.6m in the first half. Total assets were $7.026bn and stockholders’ equity $5.111bn at June 30.
Material changes and drivers
- Q2 sales fell 50%, mainly because 2017 included sales of the Switch Station projects and third-party module sales declined. Six-month sales fell 42%, primarily reflecting the 2017 Moapa and Switch Station project sales.
- Q2 gross margin swung to a loss, driven by Series 6 manufacturing under-utilization charges, lower-margin systems project mix, and lower module selling prices. Series 6 under-utilization added $21.0m to Q2 cost of sales.
- First-half gross margin improved year over year, partly because a California sales-and-use-tax examination settlement increased revenue by $54.6m; other contract estimate changes reduced revenue, leaving a net $38.0m increase from estimate changes.
- Production start-up expense rose to $24.4m in Q2 and $61.4m in the first half, versus $8.4m and $9.5m, respectively, as the company transitioned to Series 6. The modules segment recorded a Q2 gross loss of $26.6m; systems generated $18.5m of gross profit.
- First-half net income included $38.3m of equity-method earnings, principally a $40.3m after-tax gain on the sale of First Solar’s interests in 8point3. The sale generated $240.0m net proceeds. Accordingly, reported first-half net income includes a significant unusual gain.
Outlook, commentary, and risks
- Management expected approximately 2.8 GW of module production in 2018, including 0.8 GW of Series 6. Series 6 commercial production began in Perrysburg in April and Kulim in July; production at the Vietnam facility was expected later in 2018.
- Planned Series 6 investment was approximately $1.8bn, including $0.8bn spent through June 30. Management expected $400m–$500m of capital expenditures in the remainder of 2018, primarily for Series 6, and estimated completed programs would provide about 6.6 GW of annual Series 6 capacity.
- Management stated that available liquidity, operating cash flows, project pipeline, credit facility availability, and capital-market access should cover working capital, project investment, and capital needs for at least 12 months. This is an expectation, not a guarantee.
- As of June 30, the company reported about 2.6 GW of advanced-stage projects, $3.0bn of contracted module sales covering 8.3 GW DC through 2021, and approximately $0.5bn of expected O&M revenue over a weighted-average 11.6 years.
- Management cited intense module and system pricing competition, industry oversupply, declining selling prices, and risks from competing silicon technologies. Results also depend on successful Series 6 ramp-up, project execution and sales, financing, and access to long-term power purchase agreements (PPAs). Projects selling power on an open-contract basis may be exposed to falling electricity prices.
- In March 2018, Maryland Solar off-taker FirstEnergy filed for bankruptcy and sought authority to reject certain energy contracts, including the project PPA. If terminated, First Solar expected to sell the project’s energy on an open-contract basis.
- New glass supply commitments were significant: approximately $2.4bn through December 2027 for substrate glass, with termination penalties up to $350m, and approximately $500m over a 10-year cover-glass agreement, with penalties up to $80m.
- Product warranty liabilities totaled $225.8m. The company estimated that a one-percentage-point change in module warranty return rates would change the liability by $74.5m. The solar-module collection and recycling liability was $166.8m.
- Shareholder securities litigation remained pending; the company said it could not assess the likelihood or estimate a loss range. Other disclosed uncertainties include tax audits and uncertain tax positions. The company was still finalizing aspects of its Tax Act accounting.
Important facts for investors to verify
- Whether Series 6 lines reach planned production, cost, and capacity targets, and how quickly start-up costs and under-utilization decline.
- Whether the reported first-half gross-margin improvement and earnings are repeatable, given the $54.6m California tax-settlement revenue adjustment and the 8point3 sale gain.
- Project pipeline conversion, customer demand, contracted pricing, project margins, and PPA or open-market exposure, including the status of the Maryland Solar PPA.
- Actual Series 6 capital spending versus the $1.8bn plan and the company’s ability to fund manufacturing investment and project construction while maintaining liquidity.
- Exposure to long-term glass purchase commitments, warranty and recycling estimates, tax matters, and the unresolved securities litigation.