First Solar, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Comparisons are with Q1 2017 unless otherwise noted. Amounts are in U.S. dollars.
Business context and reporting period
First Solar designs and manufactures cadmium-telluride solar modules and develops, constructs, sells, and services utility-scale solar power systems. The company is transitioning manufacturing from Series 4 to Series 6 modules. It reported two segments: Modules and Systems.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $567.3 million | $891.8 million |
| Gross profit / margin | $172.8 million / 30.5% | $84.2 million / 9.4% |
| Operating income (loss) | $74.3 million | $(8.0) million |
| Net income | $83.0 million | $9.1 million |
| Diluted EPS | $0.78 | $0.09 |
| Operating cash flow | $(45.3) million | $493.1 million |
| Capital expenditures for property, plant and equipment | $177.7 million | $113.0 million |
Module sales rose 127% to $161.3 million, mainly on a 203% increase in volume, partly offset by a 25% decline in average selling price per watt. Systems sales fell 51% to $406.0 million, primarily because the Moapa project was sold in Q1 2017; India projects and Rosamond contributed sales in Q1 2018.
At March 31, 2018, cash and cash equivalents were $1.858 billion and marketable securities were $1.020 billion, totaling $2.878 billion. Current assets were $3.770 billion and current liabilities $553.7 million. Debt carrying value, including current maturities, was $437.9 million; the $500 million revolving credit facility had no borrowings. The company reported compliance with debt covenants. Cash, cash equivalents and restricted cash totaled $1.948 billion at quarter-end, down $382.9 million during the quarter.
Material changes versus the prior comparable period
- Revenue declined 36%, while gross margin increased 21.1 percentage points and operating results shifted from a loss to income.
- The California sales-and-use-tax examination settlement led to a $54.6 million increase in systems revenue. Management cited this settlement and a mix of higher-gross-profit projects as key drivers of the margin improvement.
- Production start-up expense increased to $37.1 million from $1.2 million as Series 6 manufacturing and Vietnam operations ramped. No restructuring and impairment charge was recorded, versus $20.0 million in Q1 2017.
- Other income was $17.9 million and included $19.5 million of realized gains from restricted investments. Q1 2017 other income included a $26.8 million settlement with a former customer.
- Operating cash flow moved to a use of $45.3 million from a source of $493.1 million, reflecting the prior-year Moapa sale and lower current-period sales, among other changes.
Guidance, outlook, commentary and risks
- Management expected approximately 3 GW of module production in 2018, including approximately 1 GW of Series 6 modules. Commercial Series 6 production began in Perrysburg in April 2018; Malaysia and Vietnam production was expected to begin later in 2018.
- Planned Series 6 investments were estimated at approximately $1.8 billion, including $0.6 billion already invested by March 31. The company expected $650 million to $750 million of capital expenditures during the remainder of 2018, primarily for the Series 6 transition. Planned programs were expected to provide approximately 6.6 GW of annual Series 6 capacity when complete.
- Management believed available liquidity and other funding sources would be sufficient for working capital, project investment and capital expenditure needs for at least 12 months. It cautioned that project cycles, construction delays, project ownership and financing availability can affect liquidity.
- Remaining performance obligations for specified systems contracts were expected to generate $0.8 billion of revenue through project completion or closing. Module contracts covered 6.8 GW DC at an aggregate transaction price of $2.5 billion, expected to be recognized through 2021. Noncancelable O&M contracts covered approximately 7 GW DC and represented $0.6 billion of expected revenue over a weighted-average 11.7-year period.
- The company cited intense module and system price competition, industry capacity in excess of demand at times, declining selling prices, and competition from higher-efficiency crystalline-silicon and bifacial products. It also highlighted Series 6 execution, manufacturing investment, raw-material supply, foreign-exchange and interest-rate exposure, and the possibility of reduced project demand or margins.
- A new 10-year cover-glass supply agreement was expected to involve approximately $500 million of payments beginning by January 2020; termination penalties could reach $80 million and decline over six years.
- FirstEnergy Solutions, the offtaker for the Maryland Solar PPA, filed for Chapter 11 protection; it later sought authority to reject certain energy contracts, including that PPA. First Solar said it expected to sell the project’s power on an open-contract basis if the PPA were terminated.
- The long-running securities class action remained unresolved after an appellate ruling and a pending rehearing petition. The company said it could not estimate a potential loss; an adverse outcome could result in substantial damages. Related opt-out and derivative litigation also remained in progress.
Important facts for investors to verify
- How much of the reported gross-margin and earnings improvement is attributable to the $54.6 million California tax settlement, project mix and investment gains, rather than recurring operations.
- Whether Series 6 production, capacity additions and cost targets meet management’s schedule and whether planned capital spending stays within the stated range.
- How project-sale timing, working-capital needs and the negative Q1 operating cash flow affect cash generation through the rest of 2018.
- Whether the Maryland Solar PPA is rejected and the financial consequences of open-contract power sales.
- Developments in the securities litigation, Tax Act accounting and tax audits, warranty and recycling estimates, and the cover-glass supply commitment.