First Solar, Inc. — Form 10-Q Summary
Business context and reporting period. First Solar designs and manufactures cadmium telluride solar modules and develops, builds, sells, and services utility-scale solar power systems. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. The company reported two segments: Modules and Systems.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $546.8 million | $676.2 million | $1,663.7 million | $1,552.8 million |
| Gross profit / margin | $138.4 million / 25.3% | $129.1 million / 19.1% | $215.7 million / 13.0% | $293.9 million / 18.9% |
| Operating income (loss) | $41.3 million | $58.5 million | $(43.9) million | $29.1 million |
| Net income (loss) | $30.6 million | $57.8 million | $(55.5) million | $92.2 million |
| Diluted earnings (loss) per share | $0.29 | $0.54 | $(0.53) | $0.87 |
| Net cash used in operating activities | Not presented quarterly | $(607.5) million | $(141.3) million |
- Q3 module sales rose 210% to $371.2 million, driven by a 221% increase in watts sold; average selling price per watt declined 3%. Systems sales fell 68% to $175.6 million, primarily reflecting completed or previously sold projects.
- For the nine months, module sales increased 107% to $798.7 million, while Systems sales decreased 26% to $865.0 million. Total sales rose 7%, but gross margin fell to 13.0% and the company recorded an operating and net loss.
- Q3 gross margin improved year over year partly because of an $80.0 million reduction in estimated product warranty liability, higher gross profit on third-party module sales, and improved factory utilization. Systems segment gross loss was $9.4 million for the quarter.
- At September 30, cash and cash equivalents were $879.0 million and marketable securities were $661.6 million, totaling $1.54 billion, down from $2.55 billion at December 31, 2018. Cash, cash equivalents, and restricted cash totaled $975.5 million.
- Total debt principal was $490.9 million, including $28.2 million current and $452.1 million long-term debt after discounts and issuance costs. The $500 million revolving facility had no borrowings; $52.7 million of letters of credit used its availability. Current assets were $3.04 billion versus current liabilities of $760.8 million.
- Nine-month investing cash use was $54.6 million and financing cash provided was $81.7 million. Capital expenditures for property, plant, and equipment were $510.6 million.
Material changes and unusual items
- Series 6 manufacturing expansion drove production to 1.5 GW DC in Q3, 108% above the prior-year quarter. Installed annual nameplate capacity was 6.2 GW DC at quarter-end.
- Management revised the estimated useful lives of certain Series 6 manufacturing equipment from 10 to 15 years. The change is expected to reduce depreciation by approximately $15 million annually based on the equipment’s carrying value at quarter-end.
- The warranty estimate reduction lowered the liability by $80.0 million in Q3. The company said a one-percentage-point increase in return rates across all module series would increase the liability by $83.3 million, underscoring estimation sensitivity.
- Cash used in operations increased substantially, which management attributed principally to Series 6 ramp expenditures and construction of projects. Capital spending and project development also contributed to the decline in liquid investments.
- The company adopted lease accounting in Q1 2019, recognizing $140.7 million of right-of-use assets and $119.9 million of lease liabilities at adoption; management said the change did not significantly affect earnings or cash flows.
Outlook, management commentary, and risks
- Management expected 2019 module production of 5.4–5.5 GW DC, including approximately 2 GW DC of Series 4 modules. It expected to spend $150–$250 million on capital expenditures during the remainder of 2019.
- Planned Series 6 programs represented approximately $2.0 billion of aggregate capital investment, including $1.6 billion spent through September 30, and were expected to provide approximately 6.6 GW DC of annual capacity when completed.
- Management stated that available liquidity, operating cash flows, customer contracts, project pipeline, credit-facility availability, and capital-markets access were expected to meet working-capital, project-investment, and capital-expenditure needs for at least 12 months. This is forward-looking and depends on execution, cash generation, and financing access.
- As of September 30, the company had contracts for future module sales of 11.7 GW DC at an aggregate transaction price of $4.0 billion, expected to be recognized through 2023, and O&M contracts covering approximately 11 GW DC with $0.5 billion of revenue expected over a weighted-average 9.4 years. Contracts may be amended or reduced.
- The advanced-stage project pipeline was approximately 1.7 GW AC as of October 24, 2019. Willow Springs 3, a 75 MW AC project, was removed after its PPA was terminated following the off-taker’s bankruptcy; it had not been re-contracted by that date.
- The company announced a transition in the United States from internal EPC services to an external model, expected to proceed through the remainder of 2019. Management said it was not expected to affect projects scheduled for completion that year.
- Key risks include intense module and system price competition, possible industry oversupply, competing crystalline-silicon and bifacial technologies, policy and incentive changes, trade measures, project execution and financing, and foreign-currency and interest-rate exposure. Management also noted significant up-front liquidity needs for systems development and construction.
- A securities class action was scheduled for trial beginning January 7, 2020. The company said it could not assess the likelihood or estimate a potential loss; an adverse judgment or settlement could be significant. A related opt-out lawsuit also remained pending.
Most important facts for investors to verify
- Whether the $80.0 million warranty-liability reduction and revised Series 6 equipment lives materially affect the sustainability and comparability of reported margins and earnings.
- Whether module production, Series 6 capacity expansion, and the planned $150–$250 million remainder-of-2019 capital spending proceed as expected.
- Whether operating cash use moderates and liquidity remains adequate as project construction, inventory needs, and factory ramp expenditures continue.
- Whether contracted module volumes and project pipeline convert into recognized revenue and cash, including replacement of the Willow Springs 3 offtake agreement.
- Developments in the securities litigation, tax examinations, and other contingencies, including potential outcomes not currently estimable by the company.
- The effect of solar pricing, trade and incentive policies, and competitors’ technology and cost improvements on future margins and demand.