First Solar, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparison is with the three months ended March 31, 2014. First Solar designs and manufactures solar modules and develops, constructs, sells, and services solar power systems. Results are unaudited interim results.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $469.2 million | $950.2 million; down 51% |
| Gross profit and margin | $39.0 million; 8.3% | $236.7 million; 24.9% |
| Operating income (loss) | $(70.1) million; (14.9)% of sales | $139.3 million; 14.7% of sales |
| Net income (loss) | $(62.3) million; $(0.62) per diluted share | $112.0 million; $1.10 per diluted share |
| Operating cash flow | $(417.9) million | $(318.2) million |
| Cash used in investing activities | $(290.6) million | $(20.4) million |
| Cash and cash equivalents | $779.9 million at March 31 | $1,482.1 million at December 31, 2014 |
| Cash, cash equivalents, and marketable securities | $1,484.6 million at March 31 | $1,991.1 million at December 31, 2014 |
| Long-term debt, including current maturities | $242.5 million carrying value | $216.9 million at December 31, 2014 |
Cash and cash equivalents fell by $702.1 million during the quarter. Operating cash use reflected lower systems sales and increased project assets and deferred project costs as First Solar funded project construction with working capital. Investing cash use included net marketable-security purchases of $197.4 million, $45.3 million in additional affiliate loans, and $55.3 million of property and equipment purchases. Financing activities provided $20.6 million, including $58.1 million of project-facility borrowings.
At March 31, 2015, the company had no borrowings under its $600 million revolving credit facility, but $209.9 million of letters of credit used availability, leaving $390.1 million. It was in compliance with facility covenants. Management said available liquidity, operating cash flows, the contracted project pipeline, facility availability, and capital-market access should be sufficient for at least 12 months. About $1.2 billion of cash, cash equivalents, and marketable securities was held by foreign subsidiaries.
Changes versus the prior-year quarter
- Systems revenue fell 60% to $368.1 million, chiefly because Campo Verde, Topaz, and Desert Sunlight were completed or substantially completed in earlier periods; higher AGL Nyngan and Copper Mountain 2 revenue partly offset the decline.
- Third-party solar-module revenue rose 147% to $101.1 million: watt volume increased 197%, partly offset by a 17% decline in average selling price per watt. Total components-segment sales nevertheless fell 29%, reflecting lower module volume and pricing, including modules used in systems projects.
- Systems-segment sales fell 62% to $243.6 million. Segment gross profit was $19.6 million versus $211.6 million; components gross profit was $19.4 million versus $25.1 million. Components pre-tax loss was essentially unchanged at $29.4 million.
- Consolidated gross margin contracted 16.6 percentage points, primarily due to lower systems revenue and a mix of lower-margin systems projects. SG&A rose 15% to $67.7 million, including higher compensation and professional fees associated with the proposed YieldCo IPO and international expansion.
- Research and development expense declined 10% to $34.8 million. Production start-up expense was $6.7 million, related to TetraSun operations in Malaysia and two additional Perrysburg production lines.
Outlook, management commentary, and risks
- First Solar expected 2015 module production of approximately 2.5 GW, following Q1 production of 0.5 GW and 87% factory utilization. Average module conversion efficiency was 14.7%, up 1.2 percentage points year over year. The company expected to spend up to $220 million on 2015 capital expenditures. The filing does not provide clear consolidated revenue or earnings guidance.
- As of April 30, 2015, the advanced-stage systems pipeline was approximately 3.3 GW: about 1.7 GW sold or under contract and 1.6 GW with executed PPAs but not sold or contracted. Approximately $3.3 billion of revenue remained to be recognized for sold/contracted projects, primarily through substantial completion or project closing. Management expected a substantial portion of sales, operating income, and cash flows through 2016 to come from advanced-stage projects.
- Management cited intense module and systems pricing competition and possible industry capacity oversupply. Lower selling prices may expand demand over time but could pressure near-term margins; aggressive competitor pricing and shifts in project timing or mix could further affect results. Project revenue recognition is uneven and depends on construction progress, contract estimates, and satisfaction of revenue-recognition criteria.
- In March 2015, First Solar and SunPower proposed 8point3 Energy Partners LP, a YieldCo expected to own and acquire solar projects. Its IPO and related transactions were not assured; a failed or unfavorable transaction could leave the company with costs and no expected benefits. If completed, the company expected to account for its interest under the equity method.
- Cash-intensive project development and construction, possible project ownership retention, foreign-currency exposure, and reliance on financing are liquidity risks. The company reported a $901.3 million net capital investment in project assets and related balances. It also identified possible conditional project repurchases, though it considered the likelihood remote.
- Warranty liability was $220.4 million, and additional accrued remediation costs beyond normal warranty were $25.2 million. A one-percentage-point change in the estimated module warranty return rate would change the estimated module warranty liability by about $66.2 million. The $236.2 million module collection and recycling liability was sensitive to inflation assumptions: a one-percentage-point increase in the annualized inflation rate would increase it by $58.5 million; a decrease would reduce it by $47.9 million.
- A class-action securities case and related derivative suits remained unresolved; the company said it could not assess whether a loss was probable or estimate a loss range. The Department of Labor alleged worker misclassification and prevailing-wage violations at the Agua Caliente project. First Solar disputed certain findings and pursued administrative review; possible outcomes include back wages and debarment from certain federal business.
- A Spanish tax audit settlement resulted in $2.5 million of Q1 tax expense. Separately, an April 2015 foreign private-letter ruling was expected to produce an approximately $42 million tax benefit in Q2 2015. This was a post-quarter expectation, not a Q1 recognized benefit.
Important facts for investors to verify
- Whether the contracted project pipeline converts to revenue and cash on the expected schedule, and whether project costs or completion estimates change materially.
- Progress, terms, and proceeds of the proposed 8point3 Energy Partners IPO and the value and accounting treatment of contributed assets.
- Whether operating cash outflows and project investment remain manageable against available unrestricted liquidity, debt maturities, and revolving-facility covenant requirements.
- Developments in the DOL proceeding, securities and derivative litigation, and any related financial exposure.
- Assumptions underlying warranty, remediation, and recycling liabilities, as well as the expected timing and realization of the approximately $42 million Q2 tax benefit.