First Solar, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Unaudited consolidated results. First Solar designs and manufactures solar modules and develops, builds, sells, and services utility-scale solar power systems.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $934.4 million | $896.2 million | $1,782.9 million | $1,365.4 million |
| Gross profit / margin | $191.2 million / 20.5% | $164.5 million / 18.4% | $454.1 million / 25.5% | $203.5 million / 14.9% |
| Operating income (loss) | $8.9 million | $57.1 million | $174.1 million | $(13.0) million |
| Net income | $13.4 million | $93.9 million | $184.0 million | $33.0 million |
| Diluted EPS | $0.13 | $0.92 | $1.78 | $0.33 |
| Operating cash flow | Not separately stated | Not separately stated | $(24.8) million | $(435.0) million |
- Q2 revenue rose 4%; six-month revenue rose 31%. Q2 gross margin improved, principally from lower module costs and stronger module margins. Six-month margin also benefited from a favorable mix of higher-gross-profit projects.
- Q2 operating income and net income declined substantially year over year, chiefly reflecting $85.5 million of restructuring and impairment charges and a higher tax expense than in Q2 2015. The prior-year quarter included a $41.7 million discrete tax benefit.
- Six-month net income included $42.3 million of other income, mainly a $37.8 million gain on sales of restricted investments and a $7.4 million reversal of TetraSun contingent consideration. These are significant unusual items.
Cash, debt, and liquidity
- At June 30, 2016, cash and cash equivalents were $916.7 million and marketable securities were $750.8 million, totaling $1.67 billion. The total was $1.83 billion at December 31, 2015. Restricted cash and investments of $414.0 million are separately reported and are not generally available for operations.
- Six-month cash declined by $210.2 million. Operating cash use was $24.8 million; investing cash use was $149.1 million; financing cash use was $41.5 million.
- Long-term debt, including current maturities and before unamortized discounts and issuance costs, was $242.7 million; reported debt net of those amounts was $233.4 million. First Solar repaid its remaining Malaysian ringgit and euro facility balances during the period.
- The $700 million revolving credit facility had no borrowings and $477.2 million of availability after letters of credit. The company reported compliance with its financial covenants. Management said available liquidity and expected cash flows should cover needs for at least 12 months.
- Systems development and construction require substantial upfront funding. Net investment in project assets and related balances was approximately $1.2 billion at quarter-end; capital expenditures expected for the remainder of 2016 were $150 million to $200 million.
Business changes, outlook, and risks
- Management decided to end crystalline-silicon module production and reallocate capacity to a CdTe Series 5 assembly line, expected to be operational in early 2017. The company recorded $84.6 million of related charges, plus $0.9 million of other restructuring severance costs, and expected up to $10 million of additional charges in the remainder of 2016.
- First Solar had approximately 3.2 GW of annual manufacturing capacity, ran facilities at 100% utilization in Q2, and produced 0.8 GW of modules during the quarter. It expected 2016 production of approximately 3.1 GW. Average module conversion efficiency was 16.2%, versus 15.4% in Q2 2015.
- As of August 3, 2016, the advanced-stage systems pipeline was approximately 3.2 GW. Sold or contracted projects totaled approximately 1.0 GW, with about $0.6 billion of revenue remaining to be recognized. Management cautioned that construction or sale delays, particularly beyond year-end, could materially affect project value and expected revenue. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management cited intense module and system pricing competition, possible industry oversupply, margin pressure, and uncertainty in project sales and financing. Project construction delays, changes in percentage-of-completion estimates, foreign-exchange movements, and reliance on large projects also affect results and cash needs.
- Warranty liability was $250.4 million. A one-percentage-point change in the estimated module warranty return rate would change the module warranty liability by $74.0 million. The separate collection-and-recycling liability was $167.7 million; a one-percentage-point increase in assumed annual inflation would increase it by $37.9 million.
- First Solar expected to record an approximately $35 million tax benefit in Q3 2016 after a foreign tax authority confirmed residency status and the company planned to reverse an uncertain-tax-position liability. The company also said $47.8 million of uncertain tax positions could be recognized within 12 months.
- Legal matters include securities class and opt-out actions, derivative litigation, and a Department of Labor proceeding concerning alleged worker misclassification and prevailing-wage compliance at the Agua Caliente project. The company could not estimate potential loss in the securities and derivative matters; the DOL proceeding could involve back wages or debarment from certain federal business.
- The company revised prior-period financial information for an uncertain foreign tax liability and related currency adjustments, stating the errors were not material to prior statements individually but their cumulative effect was significant to 2015 results. Q2 2015 comparative figures shown reflect the revision.
Most important facts for investors to verify
- Whether the Series 5 line becomes operational on schedule and whether the planned silicon-production exit and restructuring costs stay within estimates.
- Whether pipeline projects are completed, sold, and recognized as revenue on schedule, and whether the remaining approximately $0.6 billion of contracted revenue converts as expected.
- Cash consumption, project financing needs, capital spending, and available revolver capacity as the company funds construction and project assets.
- Underlying earnings excluding restricted-investment gains, contingent-consideration reversals, impairments, and discrete tax effects.
- Developments in the foreign tax matter, warranty and recycling cost assumptions, and legal and labor contingencies.