FIRST SOLAR, INC. annual report, FY2017

First Solar, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed February 22, 2018. Although the request identifies 2017 Q4, this is an annual filing. It also reports unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars.

Business context and financial performance

First Solar designs and sells thin-film cadmium telluride (CdTe) modules and develops, builds, sells, and maintains utility-scale solar power systems. Results depend significantly on project timing and sales, module pricing, and the transition from Series 4 to Series 6 manufacturing.

Metric	FY2017	FY2016
Net sales	$2.941 billion	$2.905 billion
Gross profit / margin	$548.9 million / 18.7%	$638.4 million / 22.0%
Operating income (loss)	$177.9 million	$(568.2) million
Net income (loss)	$(165.6) million	$(416.1) million
Diluted EPS	$(1.59)	$(4.05)
Operating cash flow	$1.341 billion	$206.8 million
Investing cash flow	$(626.8) million	$144.5 million
Financing cash flow	$192.0 million	$(136.4) million

Fourth-quarter 2017 net sales were $339.2 million and net loss was $432.5 million, or $(4.14) per diluted share. The quarter included a large tax-related charge; the filing does not provide a separate quarterly tax amount in its selected quarterly data.

Liquidity, debt, and other key metrics

• Cash, cash equivalents, and marketable securities totaled $2.989 billion at year-end, up from $1.955 billion. Management said available liquidity, operating cash flow, project pipeline, and financing access should meet needs for at least 12 months.
• Current assets were $3.833 billion and current liabilities $650.3 million. Current assets included substantial project and other operating balances, not only cash.
• Debt had a $393.5 million carrying value, with $406.5 million of principal before discounts and issuance costs. No borrowings were outstanding under the $500 million revolving facility; $57.5 million of letters of credit were issued under it.
• Operating cash flow benefited primarily from project sales and working-capital movements, including a large cash-flow contribution from project assets and systems. It should not be read as recurring earnings.
• Manufacturing output was 2.3 GW, down 26% year over year; facilities operated at approximately 99% utilization. Average module conversion efficiency improved to 16.9% from 16.4%.

Material changes versus the prior period

• Revenue was approximately flat year over year. Module-segment sales rose 19% to $806.4 million as watts sold increased 68%, partly offset by a 29% decline in average selling price per watt. Systems sales fell 4% to $2.135 billion, reflecting project completion timing and project sales.
• Gross margin fell 3.3 percentage points, mainly due to the mix of lower-margin projects and lower third-party module prices. The impact was partly offset by reductions in estimated warranty and recycling liabilities.
• Operating results improved from the unusually large 2016 restructuring and impairment losses. FY2017 still included $37.2 million of restructuring and impairment costs and $42.6 million of Series 6 start-up expense.
• The Tax Act generated a provisional $408.1 million tax expense, including a $401.5 million transition-tax provision and $6.6 million from deferred-tax remeasurement. This drove FY2017’s net loss despite positive operating income. The company estimated approximately $101.3 million of transition-tax cash payments, to be made over eight years; the accounting remained provisional.
• First Solar adopted the new revenue standard retrospectively in 2017. Prior-period figures shown in the filing were recast, and system-sale revenue recognition generally became earlier and more linear than under the previous method.

Outlook, commentary, risks, and contingencies

• Management expected 2018 module production of approximately 3.1 GW, including about 1 GW of Series 6. Commercial production at the Ohio facility was expected to begin in early 2018; Series 6 lines were also being installed in Malaysia, with Vietnam planned for production.
• Planned Series 6 programs represented approximately $1.4 billion of aggregate investment, including $0.5 billion already spent at year-end 2017. Management forecast 2018 capital expenditures of $650 million to $750 million and approximately 5 GW of annual Series 6 capacity when planned programs are complete. These are company expectations, not guaranteed outcomes.
• At year-end, the company had contracts for 6.5 GW DC of module sales with an aggregate transaction price of $2.3 billion, expected to be recognized through 2020. Long-term O&M contracts covered more than 7 GW DC, with $0.6 billion of expected revenue over a weighted-average 11.7 years. The advanced-stage systems pipeline was approximately 2.2 GW AC as of February 22, 2018.
• Management identified persistent module and systems price competition, industry oversupply, evolving silicon and bifacial technologies, and the Series 6 conversion and ramp as important uncertainties. Demand and project economics also depend on financing costs, tax equity, government policy, tariffs, PPAs, and transmission access. The 2018 U.S. crystalline-silicon import tariffs expressly excluded CdTe modules, but indirect market effects remained uncertain.
• Customer and geographic concentration are material: the United States generated 77% of FY2017 net sales, and one unnamed customer represented 47% of consolidated sales. California projects and module sales accounted for approximately 29% of total sales.
• Warranty liability was $224.3 million; a one-percentage-point change in estimated module warranty return rates would change that liability by $71.0 million. The $166.6 million collection and recycling liability was sensitive to inflation assumptions; a one-point increase in the annualized inflation rate would raise it by $33.5 million.
• In September 2017 the company paid $100 million under a project tax-related indemnity. Maximum potential future payments under tax indemnities were $125.2 million, with insurance coverage for up to $84.9 million of potential amounts under covered policies.
• The Hindupur project financing had a technical noncompliance for which the company was seeking a waiver. Securities class and derivative actions remained pending; after a January 2018 appellate ruling, the company said it could not assess whether a loss was probable or estimate a potential loss range.
• In February 2018, after year-end, First Solar agreed to sell its interests in 8point3 Energy Partners, subject to shareholder, regulatory, and other approvals. Completion was not assured. The filing reported effective disclosure controls and internal control over financial reporting, and the auditor issued an unqualified opinion.

Important facts for investors to verify

• Whether Series 6 production, yield, cost reductions, and planned capacity ramp meet stated timelines and expectations.
• Whether the 2018 production and capital-spending plans, module backlog, and systems pipeline convert into profitable revenue and cash flow.
• How much of operating cash flow reflects project-sale timing and working-capital movements, and how much is sustainable from ongoing operations.
• Final Tax Act accounting and cash payments, including potential effects of GILTI and other provisions that were still under evaluation.
• Exposure to concentrated customers and U.S. markets, and the effect of price competition, policy changes, and financing conditions on margins.
• Warranty and recycling assumptions, the Hindupur waiver, pending litigation, and completion terms and approvals for the 8point3 transaction.