First Solar, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. First Solar designs and manufactures solar modules and develops, constructs, sells, and services photovoltaic power systems. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Results are subject to project timing and estimates used in percentage-of-completion revenue recognition.
Financial performance and position
- Q2 revenue and earnings: Net sales were $896.2 million, up 65% year over year. Gross profit was $164.5 million (18.4% margin), versus $92.7 million (17.0%). Operating income was $57.1 million, compared with $1.9 million; net income was $94.5 million, or $0.93 per diluted share, versus $4.5 million, or $0.04.
- First-half results: Net sales were $1.365 billion, down 9%. Gross profit was $203.5 million (14.9% margin), down from $329.4 million (22.0%). The company recorded an operating loss of $13.0 million, versus operating income of $141.2 million, and net income of $32.2 million, versus $116.5 million.
- Revenue mix: Q2 solar power system revenue rose 83% to $877.4 million, while third-party module revenue fell 71% to $18.8 million. For the first half, system revenue declined 10% to $1.245 billion; module revenue rose 13% to $120.0 million.
- Cash flow: First-half operating cash flow was negative $435.0 million, compared with negative $199.8 million in 2014, primarily reflecting project investment and lower systems sales. Investing cash flow was negative $102.8 million and financing cash flow was positive $143.6 million. Cash and cash equivalents declined $406.9 million to $1.075 billion.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $1.775 billion, down from $1.991 billion at year-end 2014. Total long-term debt, including current maturities, was approximately $299.7 million. The $700 million revolving facility had no borrowings and $475.1 million of availability after letters of credit; the company reported compliance with its covenants. Current assets were $3.156 billion and current liabilities $914.1 million.
- Other metrics: Q2 production was 0.6 GW; factory utilization was approximately 85%, and average module conversion efficiency was 15.4%. Management expected approximately 2.5 GW of module production in 2015. First-half capital expenditures were $94.1 million.
Material changes and notable items
- Q2 revenue and margin improved with higher systems project activity and better manufacturing utilization. First-half performance weakened as prior large projects were completed and the mix of projects under construction and sold generated lower gross profit.
- A $41.7 million discrete tax benefit from a foreign private letter ruling materially affected Q2 and first-half earnings. The ruling permits certain obligations to be deducted when paid, with the deduction expected after expiration of the Malaysian tax holiday. The first-half effective tax rate was 442.9%, making reported net income an unusual basis for projecting earnings.
- In June, First Solar and SunPower completed the IPO of 8point3 Energy Partners. First Solar contributed project interests, retained a 31% interest, and disclosed a $283.7 million distribution following the IPO. The company accounts for its investment under the equity method and cautioned that the expected strategic and financial benefits are not assured.
- Production start-up costs increased to $13.6 million for the first half, primarily due to commencing TetraSun crystalline-silicon module operations in Malaysia. First-half SG&A rose 19% to $138.6 million, partly due to 8point3 IPO-related professional fees, expansion into target markets, and higher headcount.
Outlook, risks, and contingencies
- Management said available liquidity, expected operating cash flows, revolving-credit availability, and capital-market access should meet working-capital, project-investment, and capital-expenditure needs for at least the next 12 months. This is a liquidity assessment, not earnings guidance. Capital spending of $80–$105 million was expected for the remainder of 2015.
- As of August 4, 2015, the advanced-stage systems pipeline was approximately 3.3 GW. Sold or contracted projects totaled about 1.5 GW, with approximately $2.5 billion of revenue remaining to be recognized; management expected most of it through project substantial completion or closing. Project timing and revenue recognition can be uneven.
- Management highlighted intense module and systems pricing competition, industry capacity in excess of demand, possible margin pressure, project delays, and the substantial working-capital needs of developing and constructing projects. It also noted potential currency and financing risks, particularly in new markets.
- Product warranty liability was $222.3 million; a one-percentage-point change in the estimated module warranty return rate would change the estimated module liability by approximately $69.2 million. The separate module collection and recycling liability was $241.0 million and is sensitive to assumptions about future costs and inflation.
- Pending matters include a securities class action, an opt-out securities lawsuit, derivative actions, and a Department of Labor proceeding concerning alleged worker misclassification at the Agua Caliente project. The company said it could not estimate potential losses for the lawsuits; the DOL matter could involve back wages or debarment from certain federal business.
Important facts for investors to verify
- Whether the $41.7 million tax benefit is nonrecurring and how future tax rates compare with reported rates.
- Whether project completions, closings, and customer collections support the $2.5 billion of remaining contracted pipeline revenue and improve operating cash flow.
- Whether project margins, module pricing, manufacturing utilization, and production costs develop as management expects.
- Whether 8point3 generates expected distributions and strategic benefits, and how the retained interest and contributed assets perform.
- Whether warranty, recycling, litigation, and DOL exposures change materially, and whether project financing and liquidity remain adequate as construction spending continues.