First Solar, Inc. — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014; audited annual results, with unaudited quarterly data also reported. First Solar designs and manufactures thin-film CdTe solar modules and develops, builds, sells, and services utility-scale solar projects. It began manufacturing high-efficiency crystalline silicon modules in Q4.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $3.392 billion | $3.309 billion | +3% |
| Gross profit / margin | $827.1 million / 24.4% | $862.8 million / 26.1% | Profit −4%; margin −1.7 pts |
| Operating income / margin | $424.2 million / 12.5% | $368.5 million / 11.1% | +15% |
| Net income | $396.9 million | $353.0 million | +12% |
| Diluted EPS | $3.91 | $3.70 | +6% |
| Cash from operations | $681.0 million | $856.1 million | −20% |
- Q4 2014 sales were $1.008 billion, operating income $199.2 million, and net income $192.0 million (diluted EPS $1.89). Q4 2013 sales were $768.4 million, operating income $60.3 million, and net income $65.3 million.
- Cash, cash equivalents, and marketable securities totaled $1.991 billion at year-end, up from $1.764 billion. Cash and marketable securities held by foreign subsidiaries were approximately $1.4 billion.
- Long-term debt was $216.9 million carrying value ($224.0 million principal); no revolver borrowings were outstanding. Letters of credit used $202.5 million of the $600 million revolving facility, leaving $397.5 million available. The company reported compliance with debt covenants.
- Current assets were $3.190 billion and current liabilities $1.001 billion. Restricted cash and investments of $407.1 million are not freely available for general purposes, primarily supporting module recycling obligations.
Changes versus prior year
- Systems revenue rose 7% to $2.289 billion, while components-segment revenue fell 6% to $1.103 billion. Third-party module revenue dropped to $228.3 million from $380.9 million, reflecting a 26% decline in watts sold and a 19% lower average selling price per watt.
- Gross margin fell mainly because of project mix and a favorable recycling-cost estimate adjustment recorded in 2013. Higher manufacturing utilization, lower third-party module sales mix, and favorable revisions to estimated systems-project costs partly offset the decline.
- Operating income increased despite lower gross profit, in part because 2014 had no restructuring and asset-impairment charges versus $86.9 million in 2013. 2014 net income also included a $26.2 million tax benefit from the expiration of statutes of limitation on certain tax positions.
- Module production increased 13% to 1.8 GW; manufacturing capacity was approximately 2.7 GW and utilization 81%. Average module conversion efficiency improved to 14.0% from 13.2%.
Outlook, commentary, and key risks
- Management expected approximately 2.5 GW of module production in 2015 and $225–$275 million of 2015 capital expenditures.
- As of February 24, 2015, the advanced-stage systems pipeline was approximately 3.2 GW AC: 1.541 GW sold or under contract and 1.659 GW with executed PPAs but not sold or contracted. About $3.0 billion of contracted-project revenue remained to be recognized after year-end, primarily as projects reach substantial completion or close. Revenue timing is uneven and depends on project milestones and accounting criteria.
- Management expected large North American projects to contribute substantially to sales, operating income, and cash flow through 2016, while pursuing growth in sustainable markets internationally. It stated that available liquidity, operating cash flow, and facility access should meet needs for at least 12 months.
- Solar pricing competition and industry capacity oversupply threaten module and systems margins. U.S. demand also faces uncertainty from the scheduled federal investment tax credit reduction from 30% to 10% at the end of 2016 unless extended. First Solar reported that about 90% of 2014 sales were in the United States, and approximately 73% of sales were tied to California systems projects or module sales to California systems.
- Project development requires substantial upfront capital and depends on permits, grid access, PPAs, financing, construction execution, and timely project sales. Currency movements, limited-source materials, and reliance on key customers add exposure.
- Accrued module warranty liabilities were $223.1 million; the filing estimates a 1 percentage-point change in the assumed warranty return rate would change the liability by about $60.4 million. The recycling liability was $246.3 million; a 1-point change in the assumed annual inflation rate would change it by roughly +$60.6 million or −$49.8 million.
- First Solar and SunPower announced advanced negotiations in February 2015 to form a joint YieldCo and pursue an IPO; formation and offering remained subject to approvals, definitive agreements, and market conditions. First Solar also sold 51% of its Solar Gen 2 project for $459.2 million and retained a 49% equity-method interest.
- A securities class action and related derivative actions remained unresolved; the company could not estimate potential loss. The Agua Caliente project was subject to a Department of Labor Davis-Bacon compliance review with an uncertain outcome.
Important facts for investors to verify
- Whether the 2015 production and capital-spending plans were achieved and how large-project timing affected cash conversion and margins.
- Progress, financing, and remaining revenue recognition for the advanced-stage pipeline, including the distinction between contracted projects and projects with PPAs but no sale or construction contract.
- Effects of the 2016 U.S. tax-credit step-down, module-price competition, and geographic/customer concentration on future demand and profitability.
- Changes in warranty, recycling, and project-cost estimates; these rely on assumptions and could materially affect reported results.
- Outcome of the proposed YieldCo, tax matters including the pending ruling that could produce an approximately $41 million deferred-tax benefit, and outstanding litigation or compliance matters.