First Solar, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; comparisons are with Q1 2016. The company adopted ASC 606 revenue guidance retrospectively, and the 2016 comparison shown reflects that adoption.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $891.8 million | $876.1 million |
| Gross profit / margin | $84.2 million / 9.4% | $277.6 million / 31.7% |
| Operating income (loss) | $(8.0) million | $179.9 million |
| Net income | $9.1 million | $195.6 million |
| Diluted EPS | $0.09 | $1.90 |
| Operating cash flow | $493.1 million | $84.2 million |
| Investing cash flow | $(293.2) million | $(145.1) million |
| Financing cash flow | $102.2 million | $(18.0) million |
Cash and marketable securities totaled $2.446 billion at March 31, 2017, up from $1.955 billion at year-end 2016. The balance included $1.656 billion of cash and $789.4 million of marketable securities. Reported long-term debt, including current maturities and before unamortized discounts and issuance costs, was $291.4 million; the balance-sheet carrying amount was $276.9 million. The $700 million revolving credit facility had no borrowings and $576.7 million of remaining availability after letters of credit. The company reported compliance with facility covenants.
Material changes and operating performance
- Sales rose 2%, but gross profit fell 70% and the gross margin contracted 22.3 percentage points. Management attributed the decline principally to a mix of lower-margin systems projects sold or under construction.
- Systems segment sales increased 5% to $591.5 million, while segment gross profit was $5.4 million versus $186.3 million a year earlier. Components segment sales declined 4% to $300.2 million, with gross profit of $78.8 million versus $91.3 million.
- Third-party module revenue increased 29% to $71.1 million, reflecting a 66% increase in volume partly offset by a 22% decrease in average selling price per watt. Systems revenue was essentially flat.
- Operating expenses included $20.0 million of restructuring and asset impairment charges and $1.2 million of production start-up costs. R&D and SG&A declined to $22.8 million and $48.2 million, respectively, mainly reflecting restructuring-related cost reductions.
- Net income included $25.9 million of other income, including a $26.8 million settlement from a former customer. Q1 2016 other income included $37.8 million of gains on restricted-investment sales. Results also reflected higher net interest expense ($9.2 million versus $4.6 million) and lower equity earnings from affiliates.
- Operating cash flow was supported by the Moapa project sale and collections of receivables from prior-period project sales; it also reflected substantial working-capital movements, including project assets and accrued liabilities. Investing outflows included capital expenditures and net purchases of marketable and restricted investments.
Outlook, commentary, and risks
- Management expected approximately 2.2 GW of module production in 2017. Q1 production was 0.7 GW, down 13% year over year, as the company ramped down Series 4 production and transitioned toward Series 6; capacity utilization was 98% and average module conversion efficiency was 16.6%.
- The Series 6 transition is expected to require approximately $1 billion of capital investment over two years. Management forecast $410–$510 million of capital expenditures for the remainder of 2017, mostly related to that transition, and up to $50 million of additional restructuring charges in 2017.
- Management said cash, securities, operating cash flows, project financing, and credit availability were expected to cover working capital, project investment, and capital expenditure needs for at least 12 months. It also noted that $1.2 billion of cash and marketable securities was held by foreign subsidiaries and that repatriation to the U.S. could entail taxes.
- The advanced-stage systems pipeline was approximately 1.8 GW AC as of May 4, 2017. Management expected a substantial portion of sales, operating income, and cash flows through 2019 to come from pipeline projects, while noting construction, sale timing, financing, and market risks.
- Management described intense industry pricing competition, excess manufacturing capacity, and expected near- to medium-term module price pressure. It warned these trends could further compress margins and affect demand, project economics, and results.
- In April 2017, First Solar said it was reviewing alternatives for selling its interests in 8point3 Energy Partners. The filing also highlights significant estimate sensitivity in warranties, recycling obligations, project costs, and tax matters.
- Potential obligations include $100.0 million of current tax-related indemnification liabilities, with maximum potential future payments of $210.8 million; warranty liabilities totaled $253.4 million. A 1% change in the estimated module warranty return rate would change the module warranty liability by $86.3 million. Legal proceedings included securities class and derivative actions for which the company could not estimate a probable loss or range. The DOL compliance review was settled in April 2017 without material financial-statement effect.
Important facts for investors to verify
- Whether Series 6 conversion proceeds on schedule, within the stated capital budget, and achieves expected cost, efficiency, and product-performance improvements.
- Whether project mix, pricing pressure, and project completion and sale timing allow gross margins and operating profitability to recover.
- How much of Q1 operating cash flow reflects repeatable operations versus project-sale proceeds and working-capital timing.
- Whether the 8point3 review results in a sale, and the effect on liquidity, earnings, and future project-sale channels.
- Developments in tax indemnification exposure, warranty and recycling estimates, tax examinations, and unresolved litigation.
- Whether project financing, foreign cash availability, and revolver covenant requirements remain adequate as capital spending and project investment increase.