First Solar, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. First Solar designs, manufactures, and sells thin-film CdTe solar modules and develops, builds, and services utility-scale solar projects. Comparisons are with Q1 2019 unless otherwise noted. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $532.1 million | $532.0 million |
| Gross profit / margin | $90.3 million / 17.0% | $0.1 million / approximately 0.0% |
| Operating income (loss) | $1.7 million | $(76.6) million |
| Net income (loss) | $90.7 million; $0.85 diluted EPS | $(67.6) million; $(0.64) diluted EPS |
| Net cash used in operating activities | $(504.9) million | $(303.4) million |
| Cash, cash equivalents, and marketable securities | $1.51 billion at March 31 | $2.16 billion at December 31, 2019 |
| Long-term debt principal | $483.4 million | $482.9 million at December 31, 2019 |
The Q1 2020 effective tax rate was an unusually large benefit of 5,657%, principally reflecting an $88.7 million discrete tax benefit from CARES Act net operating loss carryback provisions. Net income therefore substantially exceeded operating income and should not be read as a comparable measure of underlying operating performance. Cash and marketable securities exclude restricted balances; the company reported a further $246.4 million of restricted marketable securities at March 31.
The company had no borrowings under its $500 million revolving credit facility, which matures in July 2022. Cash, cash equivalents, and restricted cash totaled $1.019 billion at quarter-end, compared with $1.447 billion at year-end. Management said available liquidity, operating cash flows, module-sale contracts, and the project pipeline were expected to meet needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, but business mix shifted markedly: module sales rose 98% to $393.7 million, while systems sales fell 58% to $138.4 million. Higher module volumes and ongoing GA Solar 4 construction were offset by completion of major projects in 2019.
- Gross margin improved to 17.0%, mainly from stronger third-party module profitability and improved Series 6 factory utilization; lower-margin projects under construction partly offset the gains.
- Operating expenses rose to $88.7 million from $76.8 million. SG&A increased 29% to $58.6 million, including higher compensation, professional fees, and expected credit losses associated with COVID-19 conditions. R&D increased 17% to $25.6 million; production start-up costs declined 53% to $4.5 million.
- Operating cash use increased to $504.9 million. The company cited the $350 million class-action settlement payment, timing of module-sale receipts collected in late 2019, and other working-capital effects.
- Cash, cash equivalents, and marketable securities declined by approximately $655.6 million from year-end, primarily reflecting the settlement payment, receipt timing, capital expenditures, and operating needs.
Outlook, risks, contingencies, and unusual items
- Production and investment: First Solar reported 5.5 GW DC of installed Series 6 nameplate capacity, produced 1.5 GW DC of modules in Q1 (up 34% year over year), and expected 2020 production of 5.9 GW DC, substantially all Series 6. Planned 2020 capital expenditures were $450–$550 million, including manufacturing transition and capacity upgrades.
- COVID-19: Management said restrictions had so far had limited effect on manufacturing, while warning of potential disruption to demand, module pricing, financing, suppliers, workforce availability, project approvals and construction, and R&D. The company had implemented safety measures and said most employees able to work remotely were telecommuting.
- Market and execution risks: Management cited intense price competition, global module capacity potentially exceeding demand, pressure on selling prices and margins, competition from crystalline-silicon and bifacial products, reliance on project financing and tax equity, and uncertainty around government incentives, tariffs, and other trade policies.
- Litigation: The company paid $350 million into an escrow fund for a proposed settlement of a securities class action; the court had granted preliminary approval, with final approval still pending. The separate Maverick opt-out action remained active. First Solar had accrued $13 million as its best estimate of the lower bound of that action’s potential costs and warned the ultimate loss could be materially higher.
- Credit and other exposures: First Solar recorded $2.2 million of expected credit losses on trade receivables and $0.9 million on unbilled receivables attributed to COVID-19-related economic conditions. It also recorded an additional $13.1 million credit loss on notes receivable from Clean Energy Collective, citing the borrower’s liquidity problems and expected inability to repay at maturity.
- Commitments and estimates: Maximum potential future payments under tax-related and other indemnifications were $152.8 million, with insurance recovery coverage of up to $84.9 million for covered amounts. A 1% increase in the estimated module return rate would increase the product warranty liability by $94.5 million. The company also disclosed potential termination penalties of up to $430 million under certain glass supply agreements.
- Accounting change: Adoption of the expected-credit-loss standard reduced retained earnings by $9.2 million, net of tax, as of January 1, 2020.
Most important facts for investors to verify
- Whether the $88.7 million CARES Act tax benefit is nonrecurring and how future earnings compare before discrete tax items.
- Whether module margins, Series 6 utilization, and expected 2020 production and capital spending track management’s stated plans.
- How COVID-19 affects customer demand, pricing, factory operations, project financing, and the timing and profitability of the project pipeline.
- Final court approval and disbursement of the $350 million settlement, and developments in the opt-out litigation and potential loss exposure.
- Cash conversion and working-capital trends following the quarter’s substantial operating cash outflow, along with the availability of cash held by foreign subsidiaries.
- Recoverability of the Clean Energy Collective notes and the evolution of receivable allowances, warranty estimates, and recycling obligations.