First Solar, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing was signed February 21, 2019. This is an annual report; quarterly figures below are for the quarter ended December 31, 2018.
Business context
First Solar designs, manufactures, and sells thin-film cadmium telluride (CdTe) solar modules and develops, builds, sells, and services utility-scale solar systems. Its two segments are Modules and Systems. The company began commercial production of its Series 6 modules in 2018 and is transitioning manufacturing capacity away from legacy Series 4 products. The United States accounted for 66% of 2018 net sales; California module and system sales accounted for approximately 38% of total net sales.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $2.244 billion | $2.941 billion |
| Gross profit / margin | $392.2 million / 17.5% | $548.9 million / 18.7% |
| Operating income | $40.1 million | $177.9 million |
| Net income (loss) | $144.3 million | $(165.6) million |
| Diluted earnings (loss) per share | $1.36 | $(1.59) |
| Cash from operating activities | $(326.8) million | $1.341 billion |
| Cash and marketable securities at year-end | $2.547 billion | $2.989 billion |
| Long-term debt, net of discounts and issuance costs | $466.8 million | $393.5 million |
Investing cash outflow was $682.7 million, including $739.8 million of property, plant, and equipment purchases. Financing activities provided $255.2 million. The $500 million revolving credit facility was undrawn at year-end; $66 million of letters of credit used facility capacity. Management said available liquidity and anticipated sources were sufficient for at least the next 12 months.
Quarterly results: Q4 2018 sales were $691.2 million, gross profit $98.3 million, operating income $11.0 million, and net income $52.1 million. In Q4 2017, sales were $339.2 million, operating loss was $35.1 million, and net loss was $432.5 million.
Material changes versus prior periods
- Annual sales fell 24%. Module sales declined 38%, primarily as watts sold fell 34% during the Series 6 conversion and average selling price per watt fell 6%. Systems sales declined 18%, in part because several large projects were sold in 2017.
- Gross margin declined 1.2 percentage points. Series 6 ramp under-utilization and related charges increased 2018 cost of sales by $113.0 million; the 2017 comparison also benefited from a $31.3 million reduction in estimated warranty costs.
- The Modules segment recorded a $50.5 million gross loss in 2018, compared with $112.3 million gross profit in 2017. Systems gross profit increased to $442.6 million from $436.6 million.
- Operating cash flow swung to an outflow, reflecting lower cash proceeds from project sales than in 2017, Series 6 transition spending, working-capital needs, and $240.9 million of liabilities assumed by customers as consideration for certain project sales.
- Net income turned positive, but included non-operating and tax-related items. 2018 included a $40.3 million after-tax gain on the sale of 8point3 interests and $55.4 million of realized gains on restricted investments. 2017 net loss included a $408.1 million provisional Tax Act expense; the company completed its Tax Act accounting in Q4 2018.
Outlook, commentary, risks, and unusual items
- Management expected 2019 module production of 5.2–5.5 GW DC, including approximately 2 GW DC of Series 4 modules, and expected to ramp down substantially all Series 4 production during 2019.
- Planned Series 6 investments total approximately $2.0 billion, including $1.1 billion spent through year-end 2018. The company expected 2019 capital expenditures of $650–$750 million and stated that completed plans were expected to provide approximately 6.6 GW DC of annual Series 6 capacity.
- As of February 21, 2019, the advanced-stage project pipeline was approximately 2.6 GW AC. At year-end, contracted future module sales totaled 8.9 GW DC, with an aggregate transaction price of $3.2 billion expected to be recognized through 2022. Long-term O&M contracts covered approximately 8 GW DC.
- Management cited industry overcapacity, intense price competition, declining module and system prices, changing government incentives and trade policies, customer financing availability, and the execution and cost risks of the Series 6 ramp as important uncertainties. U.S. Section 201 solar tariffs described in the filing exempted thin-film products such as First Solar’s CdTe modules; India’s 2018 safeguard duty applied to imports from multiple countries, including Malaysia.
- The company recognized a $54.6 million revenue increase after settling a California sales-and-use-tax examination. It also reduced its module collection and recycling liability by $34.2 million, recognizing a net $25.0 million benefit in cost of sales. The year-end recycling liability was $134.4 million; management’s estimate is sensitive to assumptions, including inflation.
- In January 2019, PG&E and its utility subsidiary filed for Chapter 11 bankruptcy; PG&E was the counterparty to the company’s 75 MW AC Willow Springs 3 PPA, for a project expected to reach commercial operation in 2021. First Solar also disclosed a technical covenant noncompliance at the Luz del Norte facilities at year-end; it received a waiver in February 2019 and expected to cure it within the waiver period ending June 2019.
- A securities class action and an opt-out action remained pending. The company said it could not estimate the likelihood or range of potential loss. No dividends had been paid, and the company did not expect to pay them in the foreseeable future.
Important facts for investors to verify
- Whether Series 6 production reaches planned volume, cost, quality, and utilization levels, and whether the 2019 production and capital-spending expectations are met.
- Whether negative operating cash flow and increased working-capital needs persist as projects are built and sold; review project-sale timing, unbilled receivables, and inventory balances.
- How much 2018 earnings depended on investment-sale gains, the 8point3 sale, the California tax settlement, recycling estimates, and other nonrecurring or estimate-sensitive items.
- The status and financial effects of the Luz del Norte covenant cure, PG&E-related PPA exposure, and pending litigation.
- The assumptions behind warranty and recycling liabilities, customer and geographic concentration, project financing access, and the company’s $1.4 billion of purchase obligations.