First Solar, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the same 2014 periods. First Solar designs and manufactures solar modules and develops, constructs, and services utility-scale solar power systems. Figures below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,271.2m | $890.3m | $2,636.7m | $2,383.2m |
| Gross profit / margin | $484.4m / 38.1% | $189.4m / 21.3% | $687.8m / 26.1% | $516.6m / 21.7% |
| Operating income / margin | $397.8m / 31.3% | $83.9m / 9.4% | $384.8m / 14.6% | $222.8m / 9.3% |
| Net income | $349.3m | $89.8m | $382.3m | $202.6m |
| Diluted EPS | $3.41 | $0.89 | $3.75 | $1.99 |
- Q3 sales increased 43%; nine-month sales increased 11%. Growth reflected project construction and sales, including the partial sale of Desert Stateline, and higher activity at Silver State South, McCoy, and Imperial Energy Center West.
- Systems revenue was $1,210.4m in Q3 and $2,455.9m for nine months; third-party module revenue was $60.8m and $180.8m, respectively. Nine-month module revenue growth reflected higher volume, partly offset by a 9% decline in average selling price per watt.
- Gross-margin improvement reflected project mix and lower manufacturing underutilization, as well as an $80.0m reduction in the module collection and recycling liability. The liability reduction was based on improved recycling technology and materially benefited reported results.
- Q3 factories ran at approximately 94% capacity utilization; module production was 0.7 GW, up 45.6% year over year. Average module conversion efficiency was 15.8%, versus 14.2%.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was negative $414.0m, versus negative $247.0m in 2014. The company attributed the greater cash use mainly to project assets and deferred project costs, and higher trade and unbilled receivables.
- Investing cash flow was negative $2.4m, versus negative $448.8m; financing cash flow was positive $142.5m, versus positive $3.6m. Cash and cash equivalents declined $292.4m to $1,189.7m. Cash, cash equivalents, and marketable securities totaled $1,809.5m, down from $1,991.1m at year-end 2014.
- Current assets were $3,251.3m and current liabilities $896.3m. Total debt carrying value was $285.5m, including $38.7m current; total debt principal before discounts and issuance costs was $296.9m. The $700m revolving facility had no borrowings and $523.3m availability after letters of credit; the company reported compliance with its covenants.
- Total assets were $7,060.6m and stockholders’ equity $5,388.7m. Project assets and deferred project costs totaled $1,128.9m. Trade, unbilled, and retainage receivables were $570.0m, including $219.5m unbilled.
Outlook, risks, and unusual items
- Management said available liquidity, expected operating cash flows, revolver availability, and capital-market access should be sufficient for at least 12 months. It expected 2015 module production of approximately 2.5 GW, including about 25 MW of crystalline-silicon modules, and $35m–$60m of capital expenditures in the remainder of 2015.
- As of November 9, the advanced-stage systems pipeline was approximately 3.7 GW; about 1.6 GW was sold or under contract. The company estimated approximately $2.5bn of revenue remained to be recognized on sold/contracted projects. Management expected substantial sales, operating income, and cash flows through 2016 from large projects, but cautioned that recognition depends on construction, closing, and other criteria.
- The 30% U.S. federal investment tax credit was scheduled to step down to 10% at the end of 2016. Delays to projects could affect project economics, trigger liquidated damages, or jeopardize PPA deadlines. Management highlighted intense module and systems pricing competition, potential industry oversupply, project execution and financing needs, foreign-currency exposure, and long project cycles.
- The company revised previously issued financial statements for an uncertain foreign tax position and other errors, including sales/use taxes, share-based compensation, and percentage-of-completion project estimates. It judged prior periods’ errors not material, but said their cumulative effect was expected to be significant to 2015 results. The revision reduced December 31, 2014 accumulated earnings by $36.0m.
- Other significant items include the $80.0m recycling-liability reduction; a $30.3m net nine-month tax benefit associated with a foreign private-letter ruling and revised recycling obligations; and a $20.7m investment tax credit generated when a project entered service. Nine-month effective tax rate was 2.3%.
- Contingencies include securities class and opt-out litigation, related derivative actions, and a Department of Labor proceeding alleging worker misclassification and prevailing-wage underpayment at the Agua Caliente project. The company said it could not estimate potential losses for the securities matters; possible DOL outcomes include back wages and debarment from certain federal business.
- A technical covenant noncompliance under India project credit facilities was subject to a requested waiver. The company also disclosed warranty and recycling estimates sensitive to assumptions: a one-percentage-point change in the estimated module warranty return rate would change the estimated module warranty liability by approximately $73.1m.
Most important facts for investors to verify
- How much of the reported margin and earnings improvement reflects the one-time $80.0m recycling-liability release, and how does the liability respond to revised cost and inflation assumptions?
- Whether operating cash use, elevated unbilled receivables, and project investment convert to collections and cash flow on schedule.
- Progress, completion timing, sales closings, and remaining revenue recognition for contracted pipeline projects, particularly ahead of the 2016 tax-credit deadline.
- The final impact and continuing disclosures from the financial-statement revisions, uncertain tax positions, and the foreign tax ruling.
- Resolution of the India facility waiver and developments in the DOL proceeding, securities litigation, warranty obligations, and project repurchase contingencies.