First Solar, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. First Solar manufactures thin-film solar modules and develops, builds, and services utility-scale solar power systems.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,265.6 million | $839.1 million | $2,540.6 million | $2,293.5 million |
| Gross profit / margin | $364.0 million / 28.8% | $238.7 million / 28.4% | $673.5 million / 26.5% | $559.2 million / 24.4% |
| Operating income (loss) | $207.9 million | $107.0 million | $308.2 million | $(209.6) million |
| Net income (loss) | $195.0 million | $87.9 million | $287.8 million | $(250.5) million |
| Diluted EPS | $1.94 | $1.00 | $3.08 | $(2.89) |
For the nine months, operating cash flow was $663.9 million, versus $434.7 million in 2012. Investing used $493.7 million and financing provided $118.9 million; cash and cash equivalents increased $291.4 million to $1,192.6 million. Cash, cash equivalents, and marketable securities totaled $1,531.9 million at quarter-end, excluding $278.8 million of restricted cash and investments.
Total debt, including current maturities, was $229.2 million, down from $562.6 million at December 31, 2012. The $600 million revolving facility had no borrowings outstanding; $166.9 million of letters of credit left $433.1 million available. The company reported compliance with debt covenants. Management said available liquidity and expected cash generation should meet working capital and capital needs for at least 12 months, subject to execution and operating assumptions.
Material changes and operating drivers
- Q3 sales rose 51% year over year, mainly from systems revenue, including initial recognition on Desert Sunlight and sales of three Ontario projects. Nine-month sales rose 11%; systems revenue increased 4% and components revenue increased 26%.
- Q3 systems segment sales were $884.9 million and components segment sales were $380.7 million. Systems income before taxes was $229.0 million, while components recorded a $20.3 million loss before taxes, highlighting the importance of project mix and timing.
- Gross margin improved year over year, but included a $43.3 million reduction in cost of sales from revised estimates of future module collection and recycling costs. The related reduction in SG&A accretion expense was $4.5 million.
- Manufacturing cost per watt fell to $0.59 in Q3 from $0.70, and to $0.65 for the nine months from $0.73. Average module conversion efficiency increased to 13.3% in Q3 from 12.7%.
- Nine-month net income also reflects a much lower restructuring and impairment burden than the prior-year period: $62.0 million versus $444.3 million. The 2013 amount includes a $56.6 million impairment on the Mesa, Arizona facility.
- June’s equity offering raised $428.2 million net and issued 9.747 million shares. GE received 1.75 million shares, valued at $83.8 million, for CdTe intellectual property.
Outlook, commentary, risks, and unusual items
- Management expected 2013 module production of 1.7–1.8 GW against approximately 2.2 GW of annual installed capacity. Industry manufacturing capacity exceeded demand; management expected pricing pressure through the rest of 2013 and at least into 2014.
- The advanced-stage systems pipeline was approximately 3.7 GW AC as of October 31, 2013, including about 2.7 GW sold or under contract. First Solar had recognized revenue equivalent to about 1.1 GW of those contracted projects and expected approximately $4.6 billion of remaining revenue, principally through substantial completion or sale closing. Recognition and cash conversion depend on project milestones and contract terms.
- Management expected major North American projects to contribute substantially to sales, operating income, and cash flow through the end of 2014, while pursuing its plan to transition toward sustainable markets by the end of 2016. Systems development and construction can require significant upfront working capital.
- Management anticipated up to $100 million of capital expenditures for the remainder of 2013. The Mesa facility sale was expected to close in Q4, with approximately $115 million net proceeds and an estimated $10 million annual reduction in operating expenses; these were expectations, not completed results at quarter-end.
- The acquired TetraSun technology was intended to complement CdTe products; manufacturing was targeted for late 2014 or early 2015, subject to successful development and scale-up. GE’s CdTe intellectual property was expected to advance module efficiency.
- Key risks include sustained module-price competition and industry oversupply, project construction or sale delays, revenue recognition estimates, capacity utilization, foreign-exchange exposure, and the capital needs of project development. Management noted that its percentage-of-completion estimates may change materially.
- Product warranty liabilities were $189.7 million. A one-percentage-point change in the estimated warranty return rate would change the liability by approximately $53.5 million. The separate module collection and recycling liability was $214.3 million; a one-percentage-point increase in the assumed annual inflation rate would raise it by $54.0 million.
- A securities class action was certified on October 8, 2013; the company said it could not estimate any potential loss. Related derivative actions remained pending or stayed, with no loss estimate available. The SEC had concluded its investigation and advised it would take no action.
Most important facts for investors to verify
- Whether project milestones, closings, and collections support the pipeline’s expected $4.6 billion of remaining contracted revenue and forecast cash flows.
- How much reported profitability depends on the one-time recycling-cost estimate reduction, project mix, and other unusual items, versus recurring operating performance.
- Whether module pricing, factory utilization, and manufacturing-cost reductions remain favorable as industry oversupply persists.
- Whether warranty, recycling, and litigation exposures change materially as estimates and claims develop.
- Whether the Mesa sale closes on expected terms and whether management’s 12-month liquidity assessment remains valid as project investment and financing needs evolve.