First Solar, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. First Solar manufactures cadmium telluride thin-film solar modules and also develops and provides services for utility-scale solar projects. In March 2021, it completed sales of its North American O&M operations and U.S. project development business.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $629.2 million | $642.4 million | $1,432.6 million | $1,174.5 million |
| Gross profit / margin | $174.1 million / 27.7% | $137.5 million / 21.4% | $358.9 million / 25.1% | $227.8 million / 19.4% |
| Operating income | $110.4 million | $50.9 million | $362.7 million | $52.6 million |
| Net income | $82.4 million | $36.9 million | $292.1 million | $127.6 million |
| Diluted EPS | $0.77 | $0.35 | $2.73 | $1.20 |
- Q2 module sales rose 46% to $543.0 million, reflecting 64% higher volume, partly offset by an 11% lower average selling price per watt. Systems sales fell 68% to $86.2 million. For the first half, total sales rose 22%; module sales increased 41% and systems sales declined 13%.
- Six-month operating income included a $149.2 million net gain on the two business sales. Q2 sales and gross profit also benefited from $65.1 million of revenue recognized on settlement of a project indemnification matter. These items make reported profit growth less indicative of underlying recurring performance.
- Six-month operating cash flow was negative $102.2 million, versus negative $357.1 million in 2020. Investing cash flow was positive $470.1 million, including $297.4 million of business-sale proceeds; financing cash flow was negative $9.1 million. Cash, cash equivalents and restricted cash ended the period at $1.633 billion.
- Cash, cash equivalents and marketable securities totaled $1.765 billion at June 30, 2021. Total debt principal was $288.1 million; balance-sheet debt, net of discounts and issuance costs, was $279.3 million, including $3.2 million current. The company terminated its undrawn $500 million revolving credit facility on June 30.
- Total assets were $7.248 billion, total liabilities $1.465 billion, and stockholders’ equity $5.784 billion. Current assets were $3.155 billion and current liabilities $660.9 million.
Material changes and unusual items
- Gross margin improved year over year, helped by module cost reductions and the $65.1 million indemnification settlement; increased logistics costs were a partial offset. Q2 SG&A declined 30%, primarily due to lower compensation, project development costs and expected credit losses.
- First-half net income comparison is affected by the prior-year $79.0 million income-tax benefit tied to the CARES Act; the 2021 six-month tax expense was $66.8 million. The six-month effective tax rate was 18.6% in 2021 versus negative 163.2% in 2020.
- During the first half, the company sold all restricted marketable securities held to fund its legacy module collection and recycling program and recorded $11.7 million of realized gains. Restricted cash held for the program increased substantially; it should not be treated as freely available operating liquidity.
Outlook, management commentary and risks
- Management expected 2021 Series 6 module production of 7.4–7.6 GW DC; installed Series 6 nameplate capacity was 7.9 GW DC. Q2 production was 2.0 GW DC, up 38% year over year.
- Planned 2021 capital expenditures were $825–$875 million. The company announced approximately $1.4 billion of investment to add 6.6 GW DC of capacity through a third U.S. factory and a first Indian factory, with planned operations in 2023. Both projects are conditional on permits; the India project also depends on satisfactory government incentives.
- Management said available liquidity, operating cash flows, module-sale contracts and the project pipeline should meet working-capital, capital-expenditure and project-investment needs for at least 12 months. As of June 30, contracts covered 15.4 GW DC of future module sales at an aggregate transaction price of $4.4 billion, expected to be recognized through 2024; contract amendments could change volumes, timing or revenue.
- Key risks include intense competition and potential module-price pressure, lower module selling prices, rising freight and logistics costs, raw-material availability and cost, project financing and execution, COVID-19 disruption, and changes in government incentives or trade policy. Management also identified possible impairment of the Luz del Norte solar plant if its expected use or sale prospects change.
- Contingencies include a $129.7 million module collection and recycling liability and $91.1 million product warranty liability. A 1% increase in the assumed module return rate would increase the warranty liability by $114.7 million; a 1% increase in the recycling cost inflation assumption would increase that liability by $22.6 million. Maximum potential indemnification payments were $146.8 million, with up to $72.0 million recoverable through insurance and other instruments.
- The filing gives production and capital-spending expectations but does not provide a clear full-year revenue, earnings or cash-flow forecast.
Important facts for investors to verify
- How much of reported margin and earnings improvement is repeatable after excluding business-sale gains and the $65.1 million indemnification revenue.
- Whether module volume growth can offset lower selling prices and higher freight costs, and whether module cost reductions continue.
- Execution, permitting, incentives and funding for the planned 6.6 GW capacity expansion, alongside the $825–$875 million 2021 capex plan.
- Conversion and timing of the $4.4 billion module contract portfolio, and the liquidity impact of project development and construction commitments.
- Potential changes in warranty, recycling and indemnification estimates, and the risk of an impairment at Luz del Norte.