First Solar, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2023. First Solar designs, manufactures, and sells cadmium telluride thin-film solar modules; its modules business is the primary segment. Most module sales were to U.S. customers.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $810.7m | $621.0m | $1,359.0m | $988.0m |
| Gross profit (loss) | $310.4m | ($23.2m) | $422.5m | ($11.7m) |
| Gross margin | 38.3% | (3.7)% | 31.1% | (1.2)% |
| Operating income | $168.5m | $144.8m | $186.5m | $87.0m |
| Net income | $170.6m | $55.8m | $213.1m | $12.6m |
| Diluted EPS | $1.59 | $0.52 | $1.99 | $0.12 |
- Q2 sales rose 31%; module-segment sales increased 32%, reflecting 26% more module volume and a 4% higher average selling price per watt. For the first half, sales rose 38%, with module volume up 36% and average selling price per watt up 3%.
- Q2 operating margin was 20.8%, versus 23.3% a year earlier; the prior-year period included a $245.4m gain on the Japan project-development business sale. First-half operating margin was 13.7%, versus 8.8%.
- Q2 gross-margin improvement primarily reflected U.S. Section 45X advanced manufacturing credits, module cost reductions, higher sales volume, and a prior-year project impairment; higher Series 7 ramp under-utilization partly offset the gains. The company recognized $155.0m of these credits in Q2 and $225.1m in the first half as reductions to cost of sales.
- Cash from operations was a use of $124.3m in the first half, compared with a $50.8m use a year earlier. Capital expenditures were $753.7m, versus $353.4m. Cash, cash equivalents, restricted cash, and restricted cash equivalents declined by $648.9m.
- At June 30, cash and cash equivalents were $829.9m and marketable securities were $1,054.0m, or $1.884bn combined, excluding restricted marketable securities. Long-term debt was $437.4m net of issuance costs ($438.0m principal). A new $1.0bn revolving facility was undrawn, with no letters of credit outstanding under it.
- Total assets were $9.00bn and total liabilities $2.96bn. Current assets were $3.66bn and current liabilities $1.09bn. Deferred revenue was $1.55bn, up $339.5m since year-end, primarily from customer advance payments.
Material changes, outlook, and risks
- Production and sales outlook: Management expected 2023 production of 11.7–12.1 GW and sales of 11.8–12.3 GW. Q2 production and sales were each 2.8 GW; installed nameplate capacity was approximately 13 GW. Series 7 commercial production began at the third Ohio facility.
- Expansion and investment: The company was pursuing approximately 11.3 GW of additional capacity, including an India facility expected to start operations in the second half of 2023, U.S. facilities and Ohio upgrades. Remaining investment in these projects and upgrades was estimated at $2.2bn. 2023 capital expenditures were forecast at $1.7–$1.9bn. A dedicated U.S. R&D facility, with approximately $0.3bn of remaining investment, was expected to be completed in 2024. In July 2023, the company announced another U.S. facility adding 3.5 GW, expected to start in the first half of 2026.
- Demand visibility: Contracts covered 70.3 GW of future module sales, with an aggregate transaction price of $20.8bn expected to be recognized through 2029. The stated price excludes certain variable consideration; potential technology-related adjustments could add up to $0.7bn, largely in 2026–2027, if achieved.
- Policy and execution: Management expected IRA incentives to support U.S. demand and results, but noted that pending IRS and Treasury guidance could affect the credits. The company expected approximately $0.17 per watt for qualifying U.S.-made modules sold to third parties; credits are available from 2023 through 2032, with phase-down beginning in 2030. The company also reported a $143m allocation under India’s PLI scheme, subject to future qualification conditions.
- Unusual legal items: A July 2023 interim arbitration award of $35.6m for Southern Power was accrued in Q2. A jury awarded approximately $51.3m in a separate injury case; the company recorded an equal insurance receivable and was pursuing challenges to the verdict. A securities class action was dismissed with prejudice in June and judgment entered in July, but plaintiffs could appeal. A related derivative action remained pending, with potential loss not estimable.
- Other risks: Management cited potential industry oversupply and pricing volatility, competition, manufacturing ramp and expansion execution, raw-material and logistics costs, customer concentration, trade-policy changes, and uncertainty around government incentives. It also disclosed up to $676m in termination penalties under remaining substrate- and cover-glass supply agreements, declining over their terms; module collection and recycling liabilities were $132.1m.
- The six-month effective tax rate was 4.9%, compared with 83.7% in 2022, primarily reflecting IRA and foreign-tax-credit effects, prior-year discrete tax expense, and share-based compensation tax benefits. Management said liquidity sources were expected to meet working-capital and capital-expenditure needs for at least 12 months.
Important facts for investors to verify
- How much of the reported margin and earnings improvement depends on Section 45X credits, and how final regulations may affect eligibility and amounts.
- Whether production and sales guidance, Series 7 ramp targets, and planned India and U.S. capacity expansions remain on schedule and within the stated investment and capital-expenditure estimates.
- Cash conversion and funding needs as operating cash flow was negative while capital spending increased; also monitor customer advances and deferred revenue.
- Resolution, appeals, insurance recoveries, and any further costs related to the Southern arbitration and injury verdict, as well as the pending derivative and patent matters.
- Contract backlog delivery timing, customer performance, and the realized effect of variable contract-price adjustments; the filing cautions that actual revenue may differ from stated transaction prices.
- Exposure to module pricing and industry supply-demand imbalances, raw-material commitments, and potential costs under glass-supply agreements.