First Solar, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. First Solar designs and manufactures solar modules and develops, builds, sells, and services utility-scale solar power systems. Figures below are unaudited; dollar amounts are in millions unless noted.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $889.3 | $1,265.6 | $2,383.8 | $2,540.6 |
| Gross profit / margin | $189.3 / 21.3% | $364.0 / 28.8% | $518.7 / 21.8% | $673.5 / 26.5% |
| Operating income / margin | $83.8 / 9.4% | $207.9 / 16.4% | $224.9 / 9.4% | $308.2 / 12.1% |
| Net income | $88.4 | $195.0 | $205.0 | $287.8 |
| Diluted earnings per share | $0.87 | $1.94 | $2.02 | $3.08 |
| Operating cash flow | Not separately provided for the quarter | $(247.0) | $663.9 |
- Revenue and segment mix: Q3 sales fell 30%, with systems revenue down 32% and components revenue down 24%. For the nine months, sales fell 6%; third-party solar module revenue declined 57%, while solar power system revenue increased 2%.
- Margins and earnings: Gross margin fell 7.5 percentage points in Q3 and 4.7 points for the nine months. Management cited project mix and lower systems revenue; the prior-year comparison also benefited from a $43.3 million reduction in estimated recycling costs. Q3 net income included a $26.2 million tax benefit from expiration of the statute of limitations on uncertain tax positions.
- Liquidity: Cash and cash equivalents were $622.5 million at September 30, down from $1,325.1 million at year-end 2013. Cash, cash equivalents, and marketable securities totaled $1,115.4 million, versus $1,764.2 million at year-end. Current assets were $3,253.0 million and current liabilities $918.7 million.
- Cash flow and investment: Nine-month investing cash outflow was $448.8 million, including $184.2 million of property, plant and equipment purchases and a $190.0 million increase in restricted cash. Financing provided $3.6 million. Cash declined by $702.5 million. Management attributed weak operating cash flow chiefly to lower customer receipts and adverse working-capital movements.
- Debt: Long-term debt, including current maturities, was $218.3 million; the $600 million revolving credit facility had no borrowings and $407.8 million available after letters of credit. The company reported compliance with facility covenants. New Chile project-construction facilities had $63.3 million outstanding at quarter-end.
Material changes and operating developments
- Q3 systems revenue was affected by lower activity at Desert Sunlight and completion of several projects, partly offset by construction starts in California and Australia. Systems revenue recognition can be uneven as project milestones and other recognition criteria are met.
- Components revenue pressure reflected lower average selling prices and sales volumes. For Q3 third-party module sales, watts sold decreased 24% and average selling price per watt declined 18%; for the nine months, these fell 45% and 21%, respectively.
- Components manufacturing cost reductions continued, but the components segment recorded a pretax loss of $22.9 million in Q3 and $96.9 million for the nine months. Systems pretax income was $104.2 million and $321.4 million, respectively.
- Production was 0.4 GW in Q3, at approximately 77% capacity utilization; module efficiency averaged 14.2%, up 90 basis points year over year. The company reported installed annual capacity of approximately 2.4 GW across 28 production lines.
- The advanced-stage project pipeline was approximately 4.2 GW as of November 6, 2014, including approximately 2.8 GW sold or under contract. The company said about $3.7 billion of revenue remained to be recognized from sold or contracted projects.
Outlook, risks, and contingencies
- Management expected to produce approximately 1.8 GW of modules in 2014 and spend $60 million to $110 million on capital expenditures during the remainder of 2014. No full-year revenue or earnings guidance is stated in the supplied filing text.
- Management said available cash, securities, expected operating cash flows, and revolver availability were expected to meet working-capital and capital-expenditure needs for at least the next 12 months. This outlook depends in part on project execution, customer receipts, and access to financing.
- Management highlighted intense module and system pricing competition, industry capacity exceeding demand, potential further selling-price and margin pressure, and the risks of project delays, cost-estimate changes, and working-capital demands. Project development and construction may require substantial upfront investment.
- Product warranty liabilities totaled $214.3 million. A 1 percentage-point change in the estimated warranty return rate would change the estimated liability by approximately $61.7 million. The company also retained $40.8 million of accruals above normal warranty costs, primarily tied to a historical manufacturing excursion.
- The module collection and recycling liability was $247.4 million; a 1 percentage-point increase in the annualized inflation assumption would increase it by $61.5 million. Restricted investments of $330.2 million were held to fund this program.
- A securities class action and related derivative actions remained pending. The company said it could not assess whether a loss was probable or estimate a potential loss range. The filing also notes possible project-sale rescission or repurchase obligations, performance guarantees, and tax audit uncertainties.
- Disclosure controls were assessed as effective, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether project milestones, collections, and revenue-recognition timing support the stated pipeline revenue and liquidity expectations.
- Whether gross margins stabilize as project mix changes and module pricing remains under competitive pressure.
- Cash conversion and working-capital trends, particularly receivables and retainage, project assets, and customer billings.
- Assumptions underlying warranty and recycling liabilities, including potential costs beyond standard warranties.
- Progress on the 2014 production and capital-spending expectations, Chile project financing, and the company’s ability to maintain covenant compliance.
- Developments in the class action and derivative litigation, tax examinations, and any project rescission, performance-guarantee, or contingent-payment exposures.