First Solar, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. First Solar designs and manufactures cadmium telluride (CdTe) solar modules and develops, builds, sells, and services utility-scale solar power systems. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods. The company adopted ASC 606 revenue guidance retrospectively in Q1 2017, affecting the timing and presentation of systems revenue and adjusting prior-period comparisons.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $623.3m | $1,016.4m | $1,515.1m | $1,892.5m |
| Gross profit / margin | $110.9m / 17.8% | $182.1m / 17.9% | $195.1m / 12.9% | $459.7m / 24.3% |
| Operating income (loss) | $13.9m | $(0.2)m | $5.9m | $179.7m |
| Net income (loss) | $52.0m | $(11.4)m | $61.1m | $184.2m |
| Diluted earnings (loss) per share | $0.50 | $(0.11) | $0.58 | $1.78 |
- Revenue and mix: Q2 sales fell 39%; six-month sales fell 20%. Q2 solar power system revenue declined 54% to $394.9m, principally after several large projects completed construction in 2016. Module revenue rose 45% to $228.4m, with watt volume up 110% but average selling price per watt down 31%. For the six months, module ASP was down 29% despite higher volume.
- Profitability: Q2 gross margin was nearly flat year over year, but the six-month margin dropped 11.4 percentage points. Management attributed the decline mainly to a mix of lower-gross-profit projects; higher margins on third-party module sales partly offset the pressure. Q2 operating income included $18.3m of restructuring and impairment charges and $8.4m of production start-up expense.
- Taxes and unusual items: Q2 and six-month net income benefited from a $42.1m discrete tax benefit after U.S. authorities accepted an election concerning certain German subsidiaries. The six-month effective tax rate was a benefit of 135.6%; reported earnings therefore include a material nonrecurring tax item.
- Cash flow: Six-month operating cash flow was $325.3m, versus $22.6m in 2016, mainly reflecting the Moapa project sale, partly offset by project construction spending. Investing cash outflow was $326.4m, including $217.5m of PP&E purchases. Financing provided $136.9m, including project-related borrowings. Cash, cash equivalents, and restricted cash ended at $1,554.6m.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $2,229.1m at June 30, up from $1,955.1m at year-end; $1.2bn was held by foreign subsidiaries. Long-term debt, including current maturities, had a $321.0m carrying value (principal of $335.1m). No revolving-facility borrowings were outstanding at June 30; $599.7m remained available under the then-existing facility. In July, the facility was amended, extending maturity to July 2022 and setting capacity at $500m, with a conditional increase option to $750m. Management reported compliance with debt covenants and expected liquidity to meet needs for at least 12 months.
Material changes and operating developments
- Q2 sales from the systems segment declined 46%; components-segment sales declined 30%. Systems revenue was affected by the completion of Desert Stateline, Kingbird, Butler, Taylor, Astoria, and East Pecos projects in 2016, partly offset by Switch Station sales.
- Production was 0.5 GW in Q2, down 38% year over year, as the company ramps down Series 4 and transitions to Series 6. The remaining facilities ran at 99% capacity utilization; average module conversion efficiency improved to 16.9% from 16.2%.
- Project assets fell to $822.2m from $1,462.9m at year-end, substantially reflecting project sales and reclassification. Unbilled receivables and retainage rose to $347.9m from $206.7m; deferred revenue declined to $31.5m from $308.7m, primarily reflecting project completions and revenue recognition.
Outlook, risks, and contingencies
- Management expected approximately 2.3 GW of module production in 2017. Series 6 transition investment through 2019 was estimated at approximately $1.1bn, targeting annual capacity of about 4 GW. The company expected $200m–$300m of capital expenditures in the remainder of 2017, mostly Series 6 related, and up to $15m of additional restructuring charges in 2017.
- The July 27 project pipeline included approximately 1.8 GW of advanced-stage systems projects. Contracts covered 1.4 GW DC of future module sales for about $0.6bn through 2019; long-term O&M contracts covered approximately 7 GW DC, with $0.7bn of expected revenue over a weighted-average 13.5-year noncancelable term.
- Management cited intense solar pricing competition, global capacity oversupply, falling module and system prices, potential margin pressure, and uncertainty around government incentives, regulation, trade remedies, and project financing. Series 6 execution, cost reductions, project schedules, and the ability to sell or finance projects are important dependencies.
- Warranty liability was $239.7m; a one-percentage-point change in the estimated module warranty return rate would change the module liability by $70.9m. The module collection and recycling liability was $175.0m; a one-percentage-point increase in the assumed annual inflation rate would increase it by $39.5m. Tax-related indemnification liabilities were $107.9m, with maximum potential future payments of $281.8m and insurance recovery of up to $16.5m.
- Several securities class, opt-out, and derivative actions relating to historic disclosures remained pending or on appeal. The company said it could not assess whether losses were probable or estimate a potential loss range. It also noted ongoing tax examinations in India, Chile, Germany, and California.
Most important facts for investors to verify
- How much reported earnings and operating cash flow depend on the discrete German tax benefit and project-sale timing, respectively.
- Whether module pricing declines and project mix continue to pressure gross margins, particularly given the sharp six-month margin contraction.
- Progress, timing, cost, and expected economics of the Series 6 transition and 2017 production plan.
- Conversion of the project pipeline and contracted module and O&M volumes into recognized revenue and cash, including collection of elevated unbilled receivables.
- Potential cash and earnings effects of warranty estimates, tax indemnifications, recycling obligations, litigation, and policy or trade changes.