First Solar, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in millions of U.S. dollars unless noted.
Business context
First Solar designs, manufactures, and sells thin-film cadmium telluride (CdTe) solar modules and develops, builds, sells, and services utility-scale solar power systems. It reports Modules and Systems segments. Management cited the Series 6 manufacturing transition, project execution, and intense industry pricing competition as important factors affecting results.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $585.0 | $309.3 | $1,116.9 | $876.6 |
| Gross profit (loss) | $77.2 | $(8.1) | $77.3 | $164.7 |
| Gross margin | 13.2% | (2.6)% | 6.9% | 18.8% |
| Operating loss | $(8.6) | $(103.6) | $(85.2) | $(29.4) |
| Net income (loss) | $(18.5) | $(48.5) | $(86.1) | $34.5 |
| Diluted EPS | $(0.18) | $(0.46) | $(0.82) | $0.32 |
- Q2 drivers: Sales increased 89%, reflecting higher third-party module sales and sales/construction activity for Beryl, Cove Mountain, Muscle Shoals, and Phoebe. Module sales rose 117%; Systems sales rose 75%. Gross margin recovered to 13.2%, attributed to project mix, lower module cost per watt, and improved factory utilization.
- Year-to-date comparison: Sales rose 27%, but gross margin fell to 6.9% from 18.8% and the company swung to a net loss. Management attributed the lower gross margin mainly to project mix and the prior-year California sales-tax settlement, which increased 2018 revenue by $54.6 million. Prior-year equity earnings included a $40.3 million after-tax gain from selling the 8point3 interests.
- Cash flow: Operating cash used was $289.9 million versus $83.9 million provided in the first half of 2018. Investing cash used was $17.9 million versus $372.8 million; financing provided $80.7 million versus $70.0 million. Cash, cash equivalents, and restricted cash declined $229.1 million to $1,333.6 million.
- Balance sheet at June 30: Cash, cash equivalents, and marketable securities totaled $2,029.1 million, down from $2,547.3 million at year-end 2018. Current assets were $3,412.2 million and current liabilities $843.3 million. Total assets were $7,137.8 million; stockholders’ equity was $5,135.1 million.
- Debt: Long-term debt carrying value was $481.3 million, including $28.3 million current; principal outstanding was $492.2 million. The $500 million revolving facility had no borrowings; $52.4 million of capacity was used for letters of credit. The Beryl project’s $88.0 million debt was assumed by its buyer after the June sale.
Outlook and management commentary
- Management expected 2019 module production of 5.3–5.5 GW DC, including approximately 2 GW DC of Series 4 modules. Installed annual nameplate capacity was 6.2 GW DC at June 30.
- Management expected $350–$450 million of capital expenditures during the remainder of 2019, primarily for the Series 6 transition. Planned Series 6 programs were expected to require approximately $2.0 billion in aggregate investment, of which $1.4 billion had been spent by June 30, and to provide about 6.6 GW DC of annual capacity when complete.
- The company said available liquidity, operating cash flows, customer contracts, project pipeline, revolving credit availability, and capital-market access should cover working capital, project investment, and capital needs for at least 12 months. It also noted that systems development and construction require significant upfront funding.
- At June 30, module contracts covered 10.2 GW DC for an aggregate transaction price of $3.5 billion, expected to be recognized through 2023, subject to possible contract amendments. The advanced-stage project pipeline was approximately 1.8 GW AC as of August 1, 2019. O&M contracts covered approximately 10 GW DC, with $0.6 billion expected over a weighted-average 11-year noncancelable term.
Risks, contingencies, and unusual items
- Risks include sustained module and system price competition, industry overcapacity, Series 6 ramp-up and execution, potential supply constraints, project delays or buyer financing, foreign exchange and interest-rate exposure, and changes in government incentives, tariffs, trade rules, or other energy policies.
- First Solar was pursuing a waiver for technical noncompliance under the Tungabhadra Credit Facility. The filing does not state the waiver outcome.
- The Willow Springs 3 offtaker, PG&E, entered Chapter 11. First Solar filed to terminate the project’s PPA and said it could remarket the energy if termination is confirmed.
- A securities class action had been set for trial beginning January 7, 2020; the company said it could not estimate potential loss. A related opt-out action remained in early stages, and a derivative action remained stayed. The company warned that an adverse result or settlement could materially affect it.
- Product warranty liability was $218.0 million. A 1 percentage-point change in estimated module warranty return rates would change the liability by $79.5 million. The discontinued legacy module collection and recycling program had a $136.3 million liability; a 1 percentage-point change in the assumed annual inflation rate would change it by approximately $21–$22 million.
- Management reported no material change in contractual obligations other than project debt and ordinary-course changes, and no off-balance-sheet debt or similar obligations other than financial-assurance instruments. Lease accounting adoption in Q1 added $140.7 million of right-of-use assets and $119.9 million of lease liabilities at adoption, without significant effect on earnings or cash flows.
Important facts for investors to verify
- Whether Series 6 ramp-up, utilization, and cost reductions progress as planned, and whether 2019 production guidance is achieved.
- How operating cash use, inventory growth, and planned capital spending affect liquidity and the timing of project cash receipts.
- Whether system project margins recover, given the first-half gross-margin decline and revenue-recognition estimates for construction contracts.
- The status of the Tungabhadra waiver, Willow Springs 3 PPA termination, and securities litigation, including any resulting financial exposure.
- Changes to module backlog, customer contract terms, project pipeline, and policy or trade conditions that could affect pricing and demand.