First Solar, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts are in U.S. dollars.
Business context and period highlights
First Solar designs and manufactures cadmium telluride thin-film solar modules and develops, constructs, sells, and maintains utility-scale solar power systems. It reports Components and Systems segments. Management’s Long Term Strategic Plan (LTSP) prioritizes growth in markets where solar can compete economically with conventional power, while the company remains heavily reliant on North American utility-scale projects.
- The United States generated approximately 86% of 2013 net sales; California-related sales were approximately 77%.
- At February 25, 2014, the advanced-stage systems pipeline was approximately 3.8 GW AC, including approximately 2.7 GW sold or under contract. Remaining revenue expected from those contracted projects was approximately $4.1 billion, subject to project progress and revenue-recognition conditions.
- Fourth-quarter 2013 net sales were $768.4 million and net income was $65.3 million; diluted EPS was $0.64. Quarterly results are uneven because systems revenue depends on project milestones and recognition criteria.
Key financial metrics
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Net sales | $3.309 billion | $3.369 billion | Down 2% |
| Gross profit / margin | $862.8 million / 26.1% | $852.7 million / 25.3% | Profit up 1%; margin up 0.8 percentage point |
| Operating income (loss) | $368.5 million | $(37.6) million | Returned to operating profit |
| Net income (loss) | $353.0 million | $(96.3) million | Returned to profitability |
| Diluted EPS | $3.70 | $(1.11) | Improved with return to profit |
| Operating cash flow | $856.1 million | $762.2 million | Up $93.9 million |
| Investing / financing cash flow | $(537.1) million / $101.2 million | $(383.7) million / $(89.1) million | Investing use increased; financing turned positive |
| Cash, cash equivalents and marketable securities | $1.764 billion | $1.004 billion | Up $760.3 million |
| Long-term debt, including current portion | $223.3 million | $562.6 million | Down $339.2 million |
Gross margin improved despite lower sales. Management attributed the improvement partly to lower prior-period remediation, depreciation and inventory write-down costs, and a reduction in estimated recycling costs. Offsetting factors included lower module pricing, manufacturing underutilization, and a less favorable systems-project mix. Average module manufacturing cost fell 14%, from $0.73 to $0.63 per watt; production capacity utilization was approximately 77%.
Third-party solar module revenue increased 17% to $380.9 million, reflecting 39% higher watt volume partly offset by a 15% lower average selling price. Systems revenue was $2.928 billion, down from $3.043 billion, primarily due to project mix, construction progress, and revenue-recognition timing.
Liquidity, debt, and capital needs
- At year-end, current assets were $3.793 billion and current liabilities were $1.588 billion. The company reported $1.325 billion of cash and $439.1 million of marketable securities; restricted investments of $279.3 million are earmarked for module recycling and are not general-purpose liquidity.
- Debt was $223.3 million, with $60.9 million of principal due in 2014. The $600 million revolving facility had no borrowings and $441.4 million of availability after letters of credit; the company reported compliance with its financial covenants.
- Operating cash flow benefited from customer collections, including a decrease in accounts receivable, unbilled receivables, and retainage, while project assets and deferred project costs used cash. The net capital investment in developing, constructing, and completed systems projects was approximately $517.9 million.
- 2013 capital expenditures were $282.6 million. Management expected 2014 capital expenditures of $325–$350 million, mainly for equipment upgrades and module-efficiency improvements.
- The company raised $428.2 million net in a June 2013 equity offering. It paid no dividend and said it did not intend to pay one in the foreseeable future.
Outlook, commentary, and material risks
- Outlook: The filing gives no formal consolidated revenue or earnings guidance. Management expected a substantial portion of sales, operating income, and cash flow through the end of 2014 to come from large North American projects. It also expected LTSP-related market expansion and investments to require capital and management resources. Construction timing and revenue recognition make period comparisons potentially volatile.
- Policy and market exposure: Management cited persistent industry capacity in excess of demand and intense pricing competition. U.S. solar demand is exposed to the 30% federal investment tax credit scheduled to expire at the end of 2016 unless extended. Changes to subsidies, renewable-energy rules, trade measures, or local-content requirements could affect demand and pricing.
- Project execution and financing: Delays, cost overruns, permitting or transmission constraints, failure to secure PPAs or financing, and customer defaults could defer revenue, reduce margins, impair project assets, or create damages and repurchase obligations. Projects may require significant upfront cash before customer receipts.
- Concentration: Sales were concentrated in the United States and California, and a limited number of customers accounted for significant sales and receivables. The company also noted that project revenue timing can be lumpy.
- Product and environmental obligations: Module warranties generally extend up to 25 years for power output. The accrued product-warranty liability was $198.0 million; additional accrued expenses beyond normal warranty were $52.1 million, principally associated with earlier module issues. A 1 percentage-point change in the estimated warranty return rate would change the warranty liability by approximately $55 million. The recycling liability was $225.2 million and depends on long-term cost estimates.
- Unusual items: 2013 restructuring and asset-impairment charges were $86.9 million, including $56.5 million for the Mesa, Arizona facility and $25.2 million for the Vietnam facility. The Mesa sale generated approximately $115 million of net cash proceeds in the fourth quarter, with transaction recognition expected in the first quarter of 2014. In 2012, restructuring and impairment charges were $469.1 million, including actions related to German manufacturing closures.
- Technology investments: Acquisitions included TetraSun crystalline-silicon technology and GE cadmium-telluride intellectual property. First Solar targeted limited TetraSun module production by the end of 2014 and expected to integrate GE technology into manufacturing by 2016; commercial scale and returns were uncertain.
- Legal and contingent matters: The SEC concluded its Regulation FD investigation in September 2013 without action. A securities class action was certified; the company said it could not estimate any potential loss. Related derivative actions were stayed or inactive, and potential exposure was not estimable.
Important facts for investors to verify
- Whether the contracted project pipeline converts to cash and revenue on schedule, and whether the approximately $4.1 billion of remaining contracted revenue is realized at expected margins.
- How much reported margin and earnings depend on project mix, manufacturing utilization, recycling-cost estimates, and warranty assumptions.
- Whether customer concentration, unbilled receivables, retainage, and project-asset investment create collection or liquidity pressure.
- Progress on 2014 capital spending, TetraSun commercialization, and GE technology integration, including any delays or impairment indicators.
- Developments in the securities litigation, module-warranty and recycling obligations, and U.S. solar tax-credit policy ahead of its scheduled 2016 expiration.