First Solar, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
First Solar makes CdTe solar modules and develops, constructs, sells, and services utility-scale solar systems. It reports Components and Systems segments. In June 2016, management ended crystalline-silicon module production and shifted resources toward next-generation CdTe modules and utility-scale systems.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $688.0m | $1,271.2m | $2,470.9m | $2,636.7m |
| Gross profit / margin | $186.3m / 27.1% | $484.4m / 38.1% | $640.4m / 25.9% | $687.8m / 26.1% |
| Operating income / margin | $88.7m / 12.9% | $397.8m / 31.3% | $262.8m / 10.6% | $384.8m / 14.6% |
| Net income | $154.1m | $349.3m | $338.1m | $382.3m |
| Diluted EPS | $1.49 | $3.41 | $3.28 | $3.75 |
| Operating cash flow | Not presented separately by quarter | $(100.6)m | $(414.0)m |
Q3 sales fell 46%, chiefly because of lower systems-project revenue as several projects reached substantial completion and construction activity shifted. Third-party module revenue rose 250% to $213.0m, while systems revenue declined 61% to $475.0m. Nine-month sales declined 6%. Q3 gross margin contracted 11.0 percentage points; nine-month gross margin was nearly flat year over year. Management cited project mix and the favorable $80.0m recycling-liability adjustment recorded in 2015 as factors in comparisons.
Cash, debt, and liquidity
- Cash, cash equivalents, and marketable securities were $2.09bn at September 30, 2016, versus $1.83bn at December 31, 2015. Restricted cash and investments were an additional $409.6m, including funds dedicated to module collection and recycling.
- Total debt carrying value was $787.2m, including $626.0m classified as current. This included $550.0m drawn on the revolving facility; management expected to repay those borrowings within 12 months. After $128.6m of letters of credit, revolving-facility availability was $21.4m. The company reported compliance with debt covenants.
- Nine-month investing cash flow was $(119.6)m and financing cash flow was $500.8m, primarily reflecting the revolver borrowing. Cash increased $287.4m during the period.
- Management said available liquidity, expected operating cash flows, and financing access should cover working capital, project investment, and capital expenditures for at least 12 months. The company reported $1.2bn of net capital investment in project development and construction.
Changes, outlook, and key commentary
- Restructuring and impairment charges were $89.8m for the first nine months, mainly related to ending crystalline-silicon production: manufacturing equipment, technology intangibles, and goodwill impairments. Management expected up to $5.0m of additional related charges during the remainder of 2016.
- Q3 included a $50.5m income-tax benefit, including a $35.4m benefit from reversing an uncertain tax position after confirmation of foreign tax residency. The nine-month tax benefit was $7.7m. These items materially affect reported earnings and tax-rate comparisons.
- Nine-month other income included $37.8m of gains from restricted-investment sales, a customer matter resolution, and reversal of TetraSun contingent consideration. The filing does not provide a clear standalone amount for the customer matter resolution.
- Production was 0.8 GW in Q3, with 97% capacity utilization and 16.5% average module conversion efficiency. Management expected approximately 3.1 GW of module production for 2016 and $50m–$100m of capital expenditures in the remainder of 2016.
- The advanced-stage systems pipeline was approximately 3.1 GW as of November 2, 2016. Management expected a substantial portion of sales, operating income, and cash flow through 2019 from large projects, while warning that construction or sale delays could adversely affect project value and revenue.
- Management described intense industry competition, oversupply, and falling module and system prices, which could pressure margins. It also noted risks from project timing, financing availability, foreign exchange, project-buyer demand, and potential impairment of manufacturing assets as technology plans evolve.
- Contingencies include securities class and opt-out lawsuits for which the company could not estimate potential loss, derivative litigation, and a Department of Labor wage-classification proceeding that could involve back wages or federal-government debarment. Product warranty and recycling liabilities were $254.9m and $169.7m, respectively; management disclosed sensitivity of the recycling liability to inflation assumptions.
Most important facts for investors to verify
- Whether project construction, completion, and sales progress as planned, especially for projects expected to contribute through 2019, and whether revenue recognition timing shifts materially.
- Whether the $550m revolver borrowing is repaid as expected, and how project spending, operating cash flow, and the limited remaining revolver availability affect liquidity.
- Whether declining industry prices and project mix continue to pressure gross margins, and whether module cost and efficiency improvements offset that pressure.
- Whether the crystalline-silicon exit requires further charges or impairments, including any effects on stored manufacturing assets and remaining inventory.
- Whether the tax benefit, investment gains, customer resolution, and contingent-consideration reversal distort comparisons with recurring earnings.
- Developments in the securities litigation, DOL proceeding, warranty exposure, and recycling-cost assumptions.