First Solar, Inc. — Q1 2016 Form 10-Q
Business context and period: First Solar designs and manufactures solar modules and develops, builds, sells, and operates utility-scale solar projects. This unaudited filing covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $848.5 million | $469.2 million |
| Gross profit / margin | $262.9 million / 31.0% | $39.0 million / 8.3% |
| Operating income (loss) | $165.3 million | ($70.1 million) |
| Net income (loss) | $170.6 million | ($60.9 million) |
| Diluted EPS | $1.66 | ($0.61) |
| Operating cash flow | $50.5 million | ($424.6 million) |
| Investing cash flow | ($110.6 million) | ($290.6 million) |
| Financing cash flow | $13.2 million | $27.3 million |
- Revenue mix: Systems revenue was $793.2 million, up 116%; third-party solar module revenue was $55.3 million, down 45%. Systems segment sales growth reflected Desert Stateline, Silver State South, McCoy, and Astoria activity, partly offset by substantial completion of AGL Nyngan and Copper Mountain 2.
- Profitability: Management attributed the higher gross margin mainly to a favorable mix of higher-gross-profit projects sold and under construction. Operating expenses were $97.7 million versus $109.1 million; Q1 2015 included $6.7 million of production start-up expense.
- Unusual earnings item: Other income was $35.6 million, primarily reflecting a $37.8 million gain on sales of restricted investments. The sales were made to better align investment currencies with related recycling liabilities; the gain materially contributed to reported earnings.
- Cash and liquidity: Cash and equivalents were $1.086 billion and marketable securities were $794.2 million at quarter-end, together $1.881 billion, versus $1.830 billion at year-end. Cash and equivalents declined $40.5 million during the quarter. Management said available liquidity and expected cash flows should meet needs for at least 12 months.
- Debt: Debt carrying value, including current maturities, was $299.3 million; principal was $309.8 million. The $700 million revolving facility had no borrowings and $499.1 million of availability after letters of credit. The company reported compliance with facility covenants.
- Working capital and investment: Project assets and deferred project costs totaled $1.507 billion. Management estimated net capital investment in project development and construction at $1.3 billion. Inventories and balance-of-systems parts totaled $705.1 million.
Material changes and operating developments
- Sales rose 81%, while gross margin improved 22.7 percentage points. Systems sales were the principal growth driver; third-party module revenue contracted as watts sold fell 50%, partly offset by a 10% increase in average selling price per watt.
- Manufacturing output was 0.8 GW, up 43%, at 100% capacity utilization. Average module conversion efficiency increased to 16.2% from 14.7%.
- As of March 31, the company reported 30 production lines and approximately 3.2 GW of annual manufacturing capacity. Its advanced-stage systems pipeline was approximately 3.6 GW as of April 27; about 1.6 GW was sold or under contract, with approximately $1.3 billion of revenue remaining to be recognized on those projects.
- Operating cash flow improved substantially from Q1 2015, which management attributed to higher systems sales, stronger trade receivable collections, and lower project-asset expenditures funded with working capital.
Outlook, risks, and contingencies
- Company outlook: First Solar expected to produce approximately 3.1 GW of modules in 2016 and spend $250 million to $350 million on capital expenditures during the remainder of 2016. Management expected a substantial portion of sales, operating income, and cash flows through 2016 to come from large advanced-stage projects. The filing does not provide clear numerical full-year revenue or earnings guidance.
- Execution and pricing: Project construction, sale timing, permitting, financing, and revenue-recognition milestones may affect results and liquidity. Management warned that delays to certain projects beyond 2016 could significantly harm project value and expected revenue. Intense module and systems pricing competition, industry capacity, and declining prices may pressure margins.
- Liquidity exposure: Project construction can require significant upfront working capital; unsold or temporarily retained projects, additional investments, or unavailable project financing could increase liquidity needs. YieldCo market conditions may affect timing and execution of project sales to 8point3 Energy Partners.
- Estimates and obligations: Percentage-of-completion revenue depends on estimates of contract revenue and costs. Product warranty liability was $242.1 million; management estimated a 1% change in module warranty return rate would change the liability by $72.9 million. The $167.7 million module collection and recycling liability is also sensitive to inflation assumptions.
- Legal and regulatory: The company cannot estimate potential losses, if any, for securities class and opt-out litigation and related derivative actions. A Department of Labor proceeding concerning alleged worker misclassification at the Agua Caliente project could involve back wages or debarment from certain federal work; the outcome was uncertain.
- Tax and reporting: The filing revises prior-period financial statements for previously identified errors, including an uncertain foreign tax position; management said the errors were not material to prior statements individually, but their cumulative effect was significant to 2015 results. The company also reported ongoing tax examinations and disputes.
- Leadership: After quarter-end, First Solar announced that CFO Mark Widmar would become CEO effective July 1, 2016; Alexander Bradley was to serve as interim CFO pending appointment of a permanent successor.
Important facts for investors to verify
- How much Q1 earnings depended on the $37.8 million restricted-investment gain, and the sustainability of reported margins without it.
- Progress, completion dates, sales closings, and cash collections for major projects, including the remaining approximately $1.3 billion of contracted-project revenue.
- Whether 2016 production and capital-expenditure expectations remain achievable amid pricing pressure and project execution risks.
- Changes in warranty, recycling, and other project-related obligations, including the assumptions behind their estimates.
- Developments in the securities litigation, Department of Labor proceeding, and tax matters, as well as the CEO/CFO transition and effects on execution.