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FIRST SOLAR, INC. - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 001-33156
fslrlogoa25.jpg
First Solar, Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-4623678
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)

(602414-9300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $0.001 par value
FSLR
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of October 18, 2019, 105,406,846 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
 



FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
546,806

 
$
676,220

 
$
1,663,740

 
$
1,552,803

Cost of sales
 
408,443

 
547,093

 
1,448,083

 
1,258,936

Gross profit
 
138,363

 
129,127

 
215,657

 
293,867

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
53,542

 
33,539

 
149,828

 
125,519

Research and development
 
24,912

 
22,390

 
71,184

 
63,084

Production start-up
 
18,605

 
14,723

 
38,564

 
76,159

Total operating expenses
 
97,059

 
70,652

 
259,576

 
264,762

Operating income (loss)
 
41,304

 
58,475

 
(43,919
)
 
29,105

Foreign currency gain (loss), net
 
1,209

 
(2,383
)
 
3,107

 
(2,478
)
Interest income
 
11,454

 
16,456

 
39,223

 
45,145

Interest expense, net
 
(4,976
)
 
(3,198
)
 
(24,018
)
 
(14,445
)
Other (loss) income, net
 
(3,399
)
 
(5,971
)
 
(4,328
)
 
7,635

Income (loss) before taxes and equity in earnings
 
45,592

 
63,379

 
(29,935
)
 
64,962

Income tax expense
 
(15,035
)
 
(2,396
)
 
(25,385
)
 
(7,857
)
Equity in earnings, net of tax
 
65

 
(3,233
)
 
(205
)
 
35,105

Net income (loss)
 
$
30,622

 
$
57,750

 
$
(55,525
)
 
$
92,210

 
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.29

 
$
0.55

 
$
(0.53
)
 
$
0.88

Diluted
 
$
0.29

 
$
0.54

 
$
(0.53
)
 
$
0.87

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
105,397

 
104,804

 
105,272

 
104,711

Diluted
 
106,227

 
106,163

 
105,272

 
106,211


See accompanying notes to these condensed consolidated financial statements.



1

Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
$
30,622

 
$
57,750

 
$
(55,525
)
 
$
92,210

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(6,570
)
 
1,793

 
(6,245
)
 
(7,252
)
Unrealized gain (loss) on marketable securities and restricted investments, net of tax of $(376), $273, $184, and $3,424
 
13,258

 
(6,688
)
 
21,816

 
(32,106
)
Unrealized gain (loss) on derivative instruments, net of tax of $98, $(22), $429, and $(1,000)
 
714

 
(39
)
 
(623
)
 
1,928

Other comprehensive income (loss)
 
7,402

 
(4,934
)
 
14,948

 
(37,430
)
Comprehensive income (loss)
 
$
38,024

 
$
52,816

 
$
(40,577
)
 
$
54,780


See accompanying notes to these condensed consolidated financial statements.



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Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Current assets:
 

 
 
Cash and cash equivalents
 
$
878,999

 
$
1,403,562

Marketable securities
 
661,552

 
1,143,704

Accounts receivable trade, net
 
367,306

 
128,282

Accounts receivable, unbilled and retainage
 
165,013

 
458,166

Inventories
 
576,770

 
387,912

Balance of systems parts
 
68,858

 
56,906

Project assets
 
5,557

 
37,930

Prepaid expenses and other current assets
 
319,435

 
243,061

Total current assets
 
3,043,490

 
3,859,523

Property, plant and equipment, net
 
2,106,968

 
1,756,211

PV solar power systems, net
 
484,593

 
308,640

Project assets
 
566,517

 
460,499

Deferred tax assets, net
 
66,114

 
77,682

Restricted cash and investments
 
305,469

 
318,390

Goodwill
 
14,462

 
14,462

Intangible assets, net
 
66,785

 
74,162

Inventories
 
152,574

 
130,083

Notes receivable, affiliate
 

 
22,832

Other assets
 
247,715

 
98,878

Total assets
 
$
7,054,687

 
$
7,121,362

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
218,088

 
$
233,287

Income taxes payable
 
15,409

 
20,885

Accrued expenses
 
377,364

 
441,580

Current portion of long-term debt
 
28,240

 
5,570

Deferred revenue
 
93,283

 
129,755

Other current liabilities
 
28,422

 
14,380

Total current liabilities
 
760,806

 
845,457

Accrued solar module collection and recycling liability
 
134,985

 
134,442

Long-term debt
 
452,064

 
461,221

Other liabilities
 
524,349

 
467,839

Total liabilities
 
1,872,204

 
1,908,959

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 105,406,367 and 104,885,261 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
 
105

 
105

Additional paid-in capital
 
2,835,868

 
2,825,211

Accumulated earnings
 
2,386,028

 
2,441,553

Accumulated other comprehensive loss
 
(39,518
)
 
(54,466
)
Total stockholders’ equity
 
5,182,483

 
5,212,403

Total liabilities and stockholders’ equity
 
$
7,054,687

 
$
7,121,362


See accompanying notes to these condensed consolidated financial statements.



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Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
Three Months Ended September 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at June 30, 2019
 
105,390

 
$
105

 
$
2,826,533

 
$
2,355,406

 
$
(46,920
)
 
$
5,135,124

Net income
 

 

 

 
30,622

 

 
30,622

Other comprehensive income
 

 

 

 

 
7,402

 
7,402

Common stock issued for share-based compensation
 
21

 

 

 

 

 

Tax withholding related to vesting of restricted stock
 
(5
)
 

 
(339
)
 

 

 
(339
)
Share-based compensation expense
 

 

 
9,674

 

 

 
9,674

Balance at September 30, 2019
 
105,406

 
$
105

 
$
2,835,868

 
$
2,386,028

 
$
(39,518
)
 
$
5,182,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at June 30, 2018
 
104,798

 
$
105

 
$
2,809,272

 
$
2,331,687

 
$
(30,237
)
 
$
5,110,827

Net income
 

 

 

 
57,750

 

 
57,750

Other comprehensive loss
 

 

 

 

 
(4,934
)
 
(4,934
)
Common stock issued for share-based compensation
 
21

 

 

 

 

 

Tax withholding related to vesting of restricted stock
 
(5
)
 

 
(265
)
 

 

 
(265
)
Share-based compensation expense
 

 

 
7,578

 

 

 
7,578

Balance at September 30, 2018
 
104,814

 
$
105

 
$
2,816,585

 
$
2,389,437

 
$
(35,171
)
 
$
5,170,956


See accompanying notes to these condensed consolidated financial statements.




4

Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
 
104,885

 
$
105

 
$
2,825,211

 
$
2,441,553

 
$
(54,466
)
 
$
5,212,403

Net loss
 

 

 

 
(55,525
)
 

 
(55,525
)
Other comprehensive income
 

 

 

 

 
14,948

 
14,948

Common stock issued for share-based compensation
 
826

 
1

 
1,672

 

 

 
1,673

Tax withholding related to vesting of restricted stock
 
(305
)
 
(1
)
 
(16,070
)
 

 

 
(16,071
)
Share-based compensation expense
 

 

 
25,055

 

 

 
25,055

Balance at September 30, 2019
 
105,406

 
$
105

 
$
2,835,868

 
$
2,386,028

 
$
(39,518
)
 
$
5,182,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
 
104,468

 
$
104

 
$
2,799,107

 
$
2,297,227

 
$
2,259

 
$
5,098,697

Net income
 

 

 

 
92,210

 

 
92,210

Other comprehensive loss
 

 

 

 

 
(37,430
)
 
(37,430
)
Common stock issued for share-based compensation
 
501

 
1

 
1,709

 

 

 
1,710

Tax withholding related to vesting of restricted stock
 
(155
)
 

 
(10,516
)
 

 

 
(10,516
)
Share-based compensation expense
 

 

 
26,285

 

 

 
26,285

Balance at September 30, 2018
 
104,814

 
$
105

 
$
2,816,585

 
$
2,389,437

 
$
(35,171
)
 
$
5,170,956


See accompanying notes to these condensed consolidated financial statements.




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Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(55,525
)
 
$
92,210

Adjustments to reconcile net (loss) income to cash used in operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
149,970

 
89,192

Share-based compensation
 
25,408

 
26,787

Equity in earnings, net of tax
 
205

 
(35,105
)
Distributions received from equity method investments
 

 
12,394

Remeasurement of monetary assets and liabilities
 
2,097

 
6,837

Deferred income taxes
 
11,678

 
(55,732
)
Gains on sales of marketable securities and restricted investments
 
(15,016
)
 
(19,473
)
Liabilities assumed by customers for the sale of systems
 
(88,050
)
 
(116,456
)
Other, net
 
7,080

 
7,271

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, trade, unbilled and retainage
 
51,803

 
(178,723
)
Prepaid expenses and other current assets
 
(29,311
)
 
(34,321
)
Inventories and balance of systems parts
 
(223,756
)
 
(158,311
)
Project assets and PV solar power systems
 
(253,260
)
 
50,294

Other assets
 
18,326

 
(12,694
)
Income tax receivable and payable
 
(24,585
)
 
6,302

Accounts payable
 
(532
)
 
28,591

Accrued expenses and other liabilities
 
(185,489
)
 
181,328

Accrued solar module collection and recycling liability
 
1,465

 
(31,701
)
Net cash used in operating activities
 
(607,492
)
 
(141,310
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(510,571
)
 
(610,620
)
Purchases of marketable securities and restricted investments
 
(668,052
)
 
(1,102,440
)
Proceeds from sales and maturities of marketable securities and restricted investments
 
1,120,961

 
627,106

Proceeds from sales of equity method investments
 

 
247,595

Payments received on notes receivable, affiliates
 

 
48,459

Other investing activities
 
3,027

 
(5,823
)
Net cash used in investing activities
 
(54,635
)
 
(795,723
)
Cash flows from financing activities:
 
 
 
 
Repayment of long-term debt
 
(10,583
)
 
(18,937
)
Proceeds from borrowings under long-term debt, net of discounts and issuance costs
 
107,396

 
174,594

Payments of tax withholdings for restricted shares
 
(16,070
)
 
(10,516
)
Other financing activities
 
999

 
(1,958
)
Net cash provided by financing activities
 
81,742

 
143,183

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(6,732
)
 
(12,454
)
Net decrease in cash, cash equivalents and restricted cash
 
(587,117
)
 
(806,304
)
Cash, cash equivalents and restricted cash, beginning of the period
 
1,562,623

 
2,330,476

Cash, cash equivalents and restricted cash, end of the period
 
$
975,506

 
$
1,524,172

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
111,791

 
$
144,928

Sale of system previously accounted for as sale-leaseback financing
 
$

 
$
31,992


See accompanying notes to these condensed consolidated financial statements.



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Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries in this Quarterly Report have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of First Solar management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Certain prior period balances have been reclassified to conform to the current period presentation.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other period. The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K, which has been filed with the SEC.

Unless expressly stated or the context otherwise requires, the terms “the Company,” “we,” “us,” “our,” and “First Solar” refer to First Solar, Inc. and its consolidated subsidiaries, and the term “condensed consolidated financial statements” refers to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report.

2. Recent Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, to simplify certain aspects of hedge accounting for both non-financial and financial risks and better align the recognition and measurement of hedge results with an entity’s risk management activities. ASU 2017-12 also amends certain presentation and disclosure requirements for hedging activities and changes how an entity assesses hedge effectiveness. The adoption of ASU 2017-12 in the first quarter of 2019 did not have a significant impact on our consolidated financial statements and associated disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), to provide financial statement users with more useful information about expected credit losses. ASU 2016-13 also changes how entities measure credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, and early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and associated disclosures.




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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and disclosing key information about leasing transactions. Leases are classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) – Targeted Improvements, which provided an optional transition method to apply the new lease requirements through a cumulative-effect adjustment in the period of adoption.

We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected certain practical expedients permitted under the transition guidance, which, among other things, allowed us to not reassess prior conclusions related to contracts containing leases or lease classification. The adoption primarily affected our condensed consolidated balance sheet through the recognition of $140.7 million of right-of-use assets and $119.9 million of lease liabilities as of January 1, 2019 and the derecognition of historical prepaid and deferred rent balances. The adoption did not have a significant impact on our results of operations or cash flows. See Note 7. “Leases” to our condensed consolidated financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.

3. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Cash and cash equivalents:
 
 
 
 
Cash
 
$
871,711

 
$
1,202,774

Money market funds
 
7,288

 
200,788

Total cash and cash equivalents
 
878,999

 
1,403,562

Marketable securities:
 
 
 
 
Foreign debt
 
361,414

 
318,646

Foreign government obligations
 
21,988

 
98,621

U.S. debt
 
90,388

 
44,468

Time deposits
 
187,762

 
681,969

Total marketable securities
 
661,552

 
1,143,704

Total cash, cash equivalents, and marketable securities
 
$
1,540,551

 
$
2,547,266



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 to the total of such amounts as presented in the condensed consolidated statement of cash flows (in thousands):
 
 
Balance Sheet Line Item
 
September 30,
2019
 
December 31,
2018
Cash and cash equivalents
 
Cash and cash equivalents
 
$
878,999

 
$
1,403,562

Restricted cash  current (1)
 
Prepaid expenses and other current assets
 
32,416

 
19,671

Restricted cash  noncurrent (1)
 
Restricted cash and investments
 
64,091

 
139,390

Total cash, cash equivalents, and restricted cash
 
 
 
$
975,506

 
$
1,562,623

——————————
(1)
See Note 4. “Restricted Cash and Investments” to our condensed consolidated financial statements for discussion of our “Restricted cash” arrangements.




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During the three and nine months ended September 30, 2019, we sold marketable securities for proceeds of $32.0 million and $52.0 million, respectively, and realized no gain or loss on the sales. During the nine months ended September 30, 2018, we sold marketable securities for proceeds of $10.8 million and realized gains of less than $0.1 million on the sales. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our marketable securities.

The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of September 30, 2019 and December 31, 2018 (in thousands):
 
 
As of September 30, 2019
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
360,923

 
$
1,090

 
$
599

 
$
361,414

Foreign government obligations
 
21,988

 

 

 
21,988

U.S. debt
 
90,250

 
171

 
33

 
90,388

Time deposits
 
187,762

 

 

 
187,762

Total
 
$
660,923

 
$
1,261

 
$
632

 
$
661,552

 
 
As of December 31, 2018
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
320,056

 
$
468

 
$
1,878

 
$
318,646

Foreign government obligations
 
99,189

 

 
568

 
98,621

U.S. debt
 
44,625

 
53

 
210

 
44,468

Time deposits
 
681,969

 

 

 
681,969

Total
 
$
1,145,839

 
$
521

 
$
2,656

 
$
1,143,704



As of September 30, 2019, we identified three investments totaling $38.5 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of less than $0.1 million. As of December 31, 2018, we identified 15 investments totaling $207.2 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $1.8 million. Such unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell these securities prior to the recovery of our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired.

The following tables show unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of September 30, 2019 and December 31, 2018, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
 
 
As of September 30, 2019
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Foreign debt
 
$
133,345

 
$
541

 
$
24,196

 
$
58

 
$
157,541

 
$
599

U.S. debt
 
25,797

 
29

 
14,270

 
4

 
40,067

 
33

Total
 
$
159,142

 
$
570

 
$
38,466

 
$
62

 
$
197,608

 
$
632




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As of December 31, 2018
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Foreign debt
 
$
150,842

 
$
802

 
$
94,446

 
$
1,076

 
$
245,288

 
$
1,878

Foreign government obligations
 

 

 
98,621

 
568

 
98,621

 
568

U.S. debt
 
15,356

 
32

 
14,085

 
178

 
29,441

 
210

Total
 
$
166,198

 
$
834

 
$
207,152

 
$
1,822

 
$
373,350

 
$
2,656


The contractual maturities of our marketable securities as of September 30, 2019 were as follows (in thousands):
 
 
Fair
Value
One year or less
 
$
346,453

One year to two years
 
182,861

Two years to three years
 
102,224

Three years to four years
 
30,014

Total
 
$
661,552



4. Restricted Cash and Investments

Restricted cash and investments consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
 
September 30,
2019
 
December 31,
2018
Restricted cash
 
$
64,091

 
$
139,390

Restricted investments
 
241,378

 
179,000

Total restricted cash and investments (1)
 
$
305,469

 
$
318,390


——————————
(1)
There was an additional $32.4 million and $19.7 million of restricted cash included within “Prepaid expenses and other current assets” at September 30, 2019 and December 31, 2018, respectively.

At September 30, 2019 and December 31, 2018, our restricted cash consisted of deposits held by various banks to secure certain of our letters of credit and other deposits designated for the construction or operation of systems projects as well as the payment of amounts related to project specific debt financings. At December 31, 2018, our restricted cash also included certain deposits held in custodial accounts to fund the estimated future costs of our solar module collection and recycling obligations.

At September 30, 2019 and December 31, 2018, our restricted investments consisted of long-term marketable securities that were also held in custodial accounts to fund the estimated future costs of collecting and recycling modules covered under our solar module collection and recycling program. As necessary, we fund any incremental amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of 25 years less amounts already funded in prior years. To ensure that amounts previously funded will be available in the future regardless of potential adverse changes in our financial condition (even in the case of our own insolvency), we have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc.; First Solar Malaysia Sdn. Bhd.; and First Solar Manufacturing GmbH are grantors. Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any



10

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overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds.

During the nine months ended September 30, 2019, we sold certain restricted investments for proceeds of $47.9 million and realized gains of $15.0 million on such sales as part of efforts to align the currencies of the investments with those of the corresponding collection and recycling liabilities and disburse $14.9 million of overfunded amounts. During the nine months ended September 30, 2018, we sold certain restricted investments for proceeds of $101.6 million, realized gains of $19.5 million on such sales, and withdrew the funds from the trust as a reimbursement of overfunded amounts. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted investments.

The following tables summarize the unrealized gains and losses related to our restricted investments, by major security type, as of September 30, 2019 and December 31, 2018 (in thousands):
 
 
As of September 30, 2019
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
116,424

 
$
17,552

 
$

 
$
133,976

U.S. government obligations
 
98,414

 
8,988

 

 
107,402

Total
 
$
214,838

 
$
26,540

 
$

 
$
241,378

 
 
As of December 31, 2018
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
73,798

 
$
14,234

 
$
235

 
$
87,797

U.S. government obligations
 
97,223

 
416

 
6,436

 
91,203

Total
 
$
171,021

 
$
14,650

 
$
6,671

 
$
179,000



As of September 30, 2019, we had no restricted investments in a loss position. As of December 31, 2018, we identified six restricted investments totaling $87.4 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $6.4 million. Such unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase.

The following table shows unrealized losses and fair values for those restricted investments that were in an unrealized loss position as of December 31, 2018, aggregated by major security type and the length of time the restricted investments have been in a continuous loss position (in thousands):
 
 
As of December 31, 2018
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Foreign government obligations
 
$
41,335

 
$
235

 
$

 
$

 
$
41,335

 
$
235

U.S. government obligations
 

 

 
87,401

 
6,436

 
87,401

 
6,436

Total
 
$
41,335

 
$
235

 
$
87,401

 
$
6,436

 
$
128,736

 
$
6,671



As of September 30, 2019, the contractual maturities of our restricted investments were between 10 years and 20 years.




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5. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Accounts receivable trade, gross
 
$
369,295

 
$
129,644

Allowance for doubtful accounts
 
(1,989
)
 
(1,362
)
Accounts receivable trade, net
 
$
367,306

 
$
128,282



At September 30, 2019 and December 31, 2018, $63.2 million and $8.5 million, respectively, of our accounts receivable trade, net were secured by letters of credit, bank guarantees, surety bonds, or other forms of financial security issued by creditworthy financial institutions.

Accounts receivable, unbilled and retainage

Accounts receivable, unbilled and retainage consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Accounts receivable, unbilled
 
$
136,734

 
$
441,666

Retainage
 
28,279

 
16,500

Accounts receivable, unbilled and retainage
 
$
165,013

 
$
458,166



Inventories

Inventories consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Raw materials
 
$
241,305

 
$
224,329

Work in process
 
51,926

 
41,294

Finished goods
 
436,113

 
252,372

Inventories
 
$
729,344

 
$
517,995

Inventories – current
 
$
576,770

 
$
387,912

Inventories – noncurrent
 
$
152,574

 
$
130,083






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Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Prepaid expenses
 
$
128,776

 
$
90,981

Prepaid income taxes
 
76,613

 
59,319

Restricted cash
 
32,416

 
19,671

Indirect tax receivables
 
28,238

 
26,327

Notes receivable (1)
 
23,440

 
5,196

Derivative instruments (2)
 
2,299

 
2,364

Other current assets
 
27,653

 
39,203

Prepaid expenses and other current assets
 
$
319,435

 
$
243,061


——————————
(1)
In November 2014 and February 2016, we entered into a term loan agreement and a convertible loan agreement, respectively, with Clean Energy Collective, LLC (“CEC”). Our term loan bears interest at 16% per annum, and our convertible loan bears interest at 10% per annum. In November 2018, we amended the terms of the loan agreements to (i) extend their maturity to June 2020, (ii) waive the conversion features on our convertible loan, and (iii) increase the frequency of interest payments, subject to certain conditions. In January 2019, CEC finalized certain restructuring arrangements, which resulted in a dilution of our ownership interest in CEC and the loss of our representation on the company’s board of managers. As a result of such restructuring, CEC no longer qualified to be accounted for under the equity method. As of September 30, 2019, the aggregate balance outstanding on the loans was $23.1 million and was presented within “Prepaid expenses and other current assets.” As of December 31, 2018, the aggregate balance outstanding on the loans was $22.8 million and was presented within “Notes receivable, affiliate.”

(2)
See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.

Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Land
 
$
14,176

 
$
14,382

Buildings and improvements
 
658,510

 
567,605

Machinery and equipment
 
2,166,391

 
1,826,434

Office equipment and furniture
 
186,852

 
178,011

Leasehold improvements
 
49,018

 
49,055

Construction in progress
 
406,056

 
405,581

Property, plant and equipment, gross
 
3,481,003

 
3,041,068

Accumulated depreciation
 
(1,374,035
)
 
(1,284,857
)
Property, plant and equipment, net
 
$
2,106,968

 
$
1,756,211



We periodically assess the estimated useful lives of our property, plant and equipment whenever applicable facts and circumstances indicate a change in the estimated useful life of an asset may have occurred. During the three months ended September 30, 2019, we revised the estimated useful lives of certain core Series 6 manufacturing equipment from 10 years to 15 years. Such revision was primarily due to the validation of certain aspects of our Series 6 module technology, including the nature of the manufacturing process, the operating and maintenance cost profile of the manufacturing equipment, and the technology’s compatibility with our long-term module technology roadmap. We



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expect the revised useful lives to reduce depreciation by approximately $15 million per year based on the carrying value of the associated equipment as of September 30, 2019. Depreciation of property, plant and equipment was $42.8 million and $129.4 million for the three and nine months ended September 30, 2019, respectively, and $29.4 million and $72.6 million for the three and nine months ended September 30, 2018, respectively.

PV solar power systems, net

Photovoltaic (“PV”) solar power systems, net consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
PV solar power systems, gross
 
$
531,869

 
$
343,061

Accumulated depreciation
 
(47,276
)
 
(34,421
)
PV solar power systems, net
 
$
484,593

 
$
308,640



Depreciation of PV solar power systems was $5.9 million and $12.9 million for the three and nine months ended September 30, 2019, respectively, and $3.5 million and $11.8 million for the three and nine months ended September 30, 2018, respectively.

Project assets

Project assets consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Project assets – development costs, including project acquisition and land costs
 
$
297,753

 
$
298,070

Project assets – construction costs
 
274,321

 
200,359

Project assets
 
$
572,074

 
$
498,429

Project assets – current
 
$
5,557

 
$
37,930

Project assets – noncurrent
 
$
566,517

 
$
460,499



Capitalized interest

The cost of constructing project assets may include interest costs incurred during the development and construction period. The components of interest expense and capitalized interest were as follows during the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Interest cost incurred
 
$
(5,239
)
 
$
(5,023
)
 
$
(26,348
)
 
$
(19,080
)
Interest cost capitalized – project assets
 
263

 
1,825

 
2,330

 
4,635

Interest expense, net
 
$
(4,976
)
 
$
(3,198
)
 
$
(24,018
)
 
$
(14,445
)





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Other assets

Other assets consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Operating lease assets (1)
 
$
176,785

 
$

Indirect tax receivables
 
9,209

 
22,487

Note receivable (2)
 
8,003

 
8,017

Income taxes receivable
 
4,103

 
4,444

Equity method investments (3)
 
2,917

 
3,186

Derivative instruments (4)
 
449

 

Deferred rent
 

 
27,249

Other
 
46,249

 
33,495

Other assets
 
$
247,715

 
$
98,878

——————————
(1)
See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.

(2)
In April 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility bears interest at 8.0% per annum, payable quarterly, with the full amount due in December 2026.

(3)
In June 2015, 8point3 Energy Partners LP (the “Partnership”), a limited partnership formed by First Solar and SunPower Corporation (collectively the “Sponsors”), completed its initial public offering (the “IPO”). As part of the IPO, the Sponsors contributed interests in various projects to 8point3 Operating Company, LLC (“OpCo”) in exchange for voting and economic interests in the entity, and the Partnership acquired an economic interest in OpCo using proceeds from the IPO.

In June 2018, we completed the sale of our interests in the Partnership and its subsidiaries to CD Clean Energy and Infrastructure V JV, LLC, an equity fund managed by Capital Dynamics, Inc. and certain other co-investors and other parties, and received net proceeds of $240.0 million after the payment of fees, expenses, and other amounts. We accounted for our interests in OpCo, a subsidiary of the Partnership, under the equity method of accounting as we were able to exercise significant influence over the Partnership due to our representation on the board of directors of its general partner and certain of our associates serving as officers of its general partner. During the nine months ended September 30, 2018, we recognized equity in earnings, net of tax, of $39.7 million from our investment in OpCo, including a gain of $40.3 million, net of tax, for the sale of our interests in the Partnership and its subsidiaries. During the nine months ended September 30, 2018, we received distributions from OpCo of $12.4 million.

In connection with the IPO, we also entered into an agreement with a subsidiary of the Partnership to lease back one of our originally contributed projects, Maryland Solar, until December 31, 2019. Under the terms of the agreement, we make fixed rent payments to the Partnership’s subsidiary and are entitled to all of the energy generated by the project. Due to certain continuing involvement with the project, we accounted for the leaseback agreement as a financing transaction until the sale of our interests in the Partnership and its subsidiaries in June 2018. Following the sale of such interests, the Maryland Solar project qualified for sale-leaseback accounting, and we recognized net revenue of $32.0 million from the sale of the project.

(4)
See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.



15

Table of Contents

Goodwill

Goodwill for the relevant reporting unit consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
December 31,
2018

Acquisitions (Impairments)

September 30,
2019
Modules
 
$
407,827

 
$

 
$
407,827

Accumulated impairment losses
 
(393,365
)
 

 
(393,365
)
Goodwill
 
$
14,462

 
$

 
$
14,462



Intangible assets, net

The following tables summarize our intangible assets at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30, 2019
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
97,964

 
$
(39,977
)
 
$
57,987

Power purchase agreements
 
6,486

 
(892
)
 
5,594

Patents
 
7,408

 
(4,204
)
 
3,204

Intangible assets, net
 
$
111,858

 
$
(45,073
)
 
$
66,785

 
 
December 31, 2018
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
97,714

 
$
(33,093
)
 
$
64,621

Power purchase agreements
 
6,486

 
(648
)
 
5,838

Patents
 
7,408

 
(3,705
)
 
3,703

Intangible assets, net
 
$
111,608

 
$
(37,446
)
 
$
74,162



Amortization expense for our intangible assets was $2.6 million and $7.6 million for the three and nine months ended September 30, 2019, respectively, and $2.5 million and $7.4 million for the three and nine months ended September 30, 2018, respectively.

Accrued expenses

Accrued expenses consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Accrued project costs
 
$
85,285

 
$
147,162

Accrued property, plant and equipment
 
77,628

 
89,905

Accrued compensation and benefits
 
59,396

 
41,937

Accrued inventory
 
50,092

 
53,075

Product warranty liability (1)
 
19,526

 
27,657

Other
 
85,437

 
81,844

Accrued expenses
 
$
377,364

 
$
441,580

——————————
(1)
See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product warranty liability.”




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Table of Contents

Other current liabilities

Other current liabilities consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Operating lease liabilities (1)
 
$
11,221

 
$

Derivative instruments (2)
 
3,239

 
7,294

Contingent consideration (3)
 
350

 
665

Other
 
13,612

 
6,421

Other current liabilities
 
$
28,422

 
$
14,380

——————————
(1)
See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.

(2)
See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.

(3)
See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Contingent consideration” arrangements.

Other liabilities

Other liabilities consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Product warranty liability (1)
 
$
118,379

 
$
193,035

Operating lease liabilities (2)
 
142,256

 

Other taxes payable
 
88,786

 
83,058

Transition tax liability
 
68,851

 
77,016

Deferred revenue
 
40,995

 
48,014

Derivative instruments (3)
 
8,706

 
9,205

Contingent consideration (1)
 
5,250

 
2,250

Other liabilities — noncurrent
 
51,126

 
55,261

Other liabilities
 
$
524,349

 
$
467,839

——————————
(1)
See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product warranty liability” and “Contingent consideration” arrangements.

(2)
See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.

(3)
See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.





17

Table of Contents

6. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our financial position, results of operations, and cash flows. We use derivative instruments to hedge against these risks and only hold such instruments for hedging purposes, not for speculative or trading purposes.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive loss” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (i.e., “economic hedges”), we record the changes in fair value directly to earnings. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30, 2019
 
 
Prepaid Expenses and Other Current Assets
 
Other Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
230

 
$
449

 
$
180

 
$

Total derivatives designated as hedging instruments
 
$
230

 
$
449

 
$
180

 
$

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
2,069

 
$

 
$
2,594

 
$

Interest rate swap contracts
 

 

 
465

 
8,706

Total derivatives not designated as hedging instruments
 
$
2,069

 
$

 
$
3,059

 
$
8,706

Total derivative instruments
 
$
2,299

 
$
449

 
$
3,239

 
$
8,706

 
 
December 31, 2018
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
158

 
$

 
$

Total derivatives designated as hedging instruments
 
$
158

 
$

 
$

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
2,206

 
$
7,096

 
$

Interest rate swap contracts
 

 
198

 
9,205

Total derivatives not designated as hedging instruments
 
$
2,206

 
$
7,294

 
$
9,205

Total derivative instruments
 
$
2,364

 
$
7,294

 
$
9,205






18

Table of Contents

The following table presents the pretax amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the nine months ended September 30, 2019 and 2018 (in thousands):
 
 
Foreign Exchange Forward Contracts
Balance as of December 31, 2018
 
$
1,329

Amounts recognized in other comprehensive income (loss)
 
153

Amounts reclassified to earnings impacting:
 
 
Net sales
 
(124
)
Cost of sales
 
(1,081
)
Balance as of September 30, 2019
 
$
277

 
 
 
Balance as of December 31, 2017
 
$
(1,723
)
Amounts recognized in other comprehensive income (loss)
 
(3,884
)
Amounts reclassified to earnings impacting:
 
 
Net sales
 
1,698

Cost of sales
 
212

Foreign currency gain (loss), net
 
5,448

Other (loss) income, net
 
(546
)
Balance as of September 30, 2018
 
$
1,205


We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2019, we recognized unrealized gains of $0.2 million and $0.3 million, respectively, within “Cost of sales” for amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges. During the three and nine months ended September 30, 2018, we recognized unrealized gains of $1.0 million and $0.5 million, respectively, within “Other (loss) income, net” for amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges.

The following table presents gains and losses related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized in Income
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
Income Statement Line Item
 
2019
 
2018
 
2019
 
2018
Interest rate swap contracts
 
Cost of sales
 
$

 
$

 
$
(1,656
)
 
$

Foreign exchange forward contracts
 
Foreign currency gain (loss), net
 
3,635

 
7,098

 
883

 
13,477

Interest rate swap contracts
 
Interest expense, net
 
(357
)
 
883

 
(10,089
)
 
(1,284
)


Interest Rate Risk

We primarily use interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments. We do not use such swap contracts for speculative or trading purposes. During the nine months ended September 30, 2019 and 2018, the majority of our interest rate swap contracts related to project specific debt facilities. Such swap contracts did not qualify for accounting as cash flow hedges in accordance with ASC 815 due to our expectation to sell the associated projects before the maturity of their project specific debt financings and



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corresponding swap contracts. Accordingly, changes in the fair values of these swap contracts were recorded directly to “Interest expense, net.”

In May 2018, FS NSW Project No 1 Finco Pty Ltd, our indirect wholly-owned subsidiary and project financing company, entered into various interest rate swap contracts to hedge the floating rate construction loan facility and a portion of the floating rate term loan facility under the associated project’s Beryl Credit Facility (as defined in Note 9. “Debt” to our condensed consolidated financial statements). The swaps had an initial aggregate notional value of AUD 42.4 million and, depending on the loan facility being hedged, entitled the project to receive one-month or three-month floating Bank Bill Swap Bid (“BBSY”) interest rates while requiring the project to pay fixed rates of 2.0615% or 3.2020%. The notional amounts of the interest rate swap contracts are scheduled to proportionately adjust with the scheduled draws and principal payments on the underlying hedged debt. In June 2019, we completed the sale of our Beryl project, and its interest rate swap contracts and outstanding loan balance were assumed by the customer. As of December 31, 2018, the aggregate notional value of the interest rate swap contracts was AUD 103.4 million ($72.9 million).

In January 2017, FS Japan Project 12 GK, our indirect wholly-owned subsidiary and project company, entered into an interest rate swap contract to hedge a portion of the floating rate senior loan facility under the project’s Ishikawa Credit Agreement (as defined in Note 9. “Debt” to our condensed consolidated financial statements). Such swap had an initial notional value of ¥5.7 billion and entitled the project to receive a six-month floating TIBOR plus 0.75% interest rate while requiring the project to pay a fixed rate of 1.482%. The notional amount of the interest rate swap contract is scheduled to proportionately adjust with the scheduled draws and principal payments on the underlying hedged debt. As of September 30, 2019 and December 31, 2018, the notional value of the interest rate swap contract was ¥19.1 billion ($176.7 million) and ¥19.2 billion ($174.1 million), respectively.

Foreign Currency Risk

Cash Flow Exposure

We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of September 30, 2019 and December 31, 2018, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to 19 months and 6 months, respectively. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We report unrealized gains or losses on such contracts in “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges as of September 30, 2019 and December 31, 2018.

As of September 30, 2019 and December 31, 2018, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
September 30, 2019
Currency
 
Notional Amount
 
USD Equivalent
U.S. dollar (1)
 
$31.6
 
$31.6
 
 
December 31, 2018
Currency
 
Notional Amount
 
USD Equivalent
Australian dollar
 
AUD 8.8
 
$6.2

——————————
(1)
These derivative instruments represent hedges of outstanding payables at certain of our foreign subsidiaries whose functional currencies are other than the U.S. dollar.



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In the following 12 months, we expect to reclassify to earnings $0.1 million of net unrealized losses related to forward contracts that are included in “Accumulated other comprehensive loss” at September 30, 2019 as we realize the earnings effects of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rates when we realize the related forecasted transactions.

Transaction Exposure and Economic Hedging

Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, deferred taxes, payables, accrued expenses, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported condensed consolidated statements of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on such foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.

We also enter into foreign exchange forward contracts to economically hedge balance sheet and other exposures related to transactions between certain of our subsidiaries and transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting. Accordingly, we recognize gains or losses from the fluctuations in foreign exchange rates and the fair value of these derivative contracts in “Foreign currency gain (loss), net” on our condensed consolidated statements of operations. These contracts mature at various dates within the next three months.

As of September 30, 2019 and December 31, 2018, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
September 30, 2019
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Australian dollar
 
AUD 14.2
 
$9.6
Sell
 
Australian dollar
 
AUD 7.3
 
$4.9
Purchase
 
Brazilian real
 
BRL 8.5
 
$2.0
Purchase
 
Canadian dollar
 
CAD 4.5
 
$3.4
Sell
 
Canadian dollar
 
CAD 1.6
 
$1.2
Purchase
 
Chilean peso
 
CLP 1,632.3
 
$2.2
Sell
 
Chilean peso
 
CLP 5,180.1
 
$7.1
Purchase
 
Euro
 
€138.3
 
$151.2
Sell
 
Euro
 
€148.8
 
$162.7
Purchase
 
Indian rupee
 
INR 85.9
 
$1.2
Sell
 
Indian rupee
 
INR 1,621.4
 
$23.0
Purchase
 
Japanese yen
 
¥2,462.8
 
$22.8
Sell
 
Japanese yen
 
¥20,906.6
 
$193.5
Purchase
 
Malaysian ringgit
 
MYR 65.5
 
$15.6
Sell
 
Malaysian ringgit
 
MYR 86.0
 
$20.5
Sell
 
Mexican peso
 
MXN 34.6
 
$1.8
Purchase
 
Singapore dollar
 
SGD 2.9
 
$2.1




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December 31, 2018
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Australian dollar
 
AUD 2.1
 
$1.5
Sell
 
Australian dollar
 
AUD 52.9
 
$37.3
Purchase
 
Brazilian real
 
BRL 8.5
 
$2.2
Sell
 
Canadian dollar
 
CAD 2.9
 
$2.1
Sell
 
Chilean peso
 
CLP 3,506.6
 
$5.1
Purchase
 
Euro
 
€115.2
 
$131.9
Sell
 
Euro
 
€191.8
 
$219.7
Sell
 
Indian rupee
 
INR 789.2
 
$11.3
Purchase
 
Japanese yen
 
¥931.6
 
$8.4
Sell
 
Japanese yen
 
¥23,858.8
 
$216.2
Purchase
 
Malaysian ringgit
 
MYR 34.3
 
$8.3
Sell
 
Malaysian ringgit
 
MYR 53.8
 
$12.9
Sell
 
Mexican peso
 
MXN 37.3
 
$1.9
Purchase
 
Singapore dollar
 
SGD 3.8
 
$2.8


7. Leases

Our lease arrangements include land associated with our systems projects, our corporate and administrative offices, land for our international manufacturing facilities, and certain of our manufacturing equipment. Such leases primarily relate to assets located in the United States, Japan, Malaysia, and Vietnam.

Upon commencement of a lease, we recognize a lease liability for the present value of the lease payments not yet paid, discounted using an interest rate that represents our ability to borrow on a collateralized basis over a period that approximates the lease term. We also recognize a lease asset, which represents our right to control the use of the underlying property, plant or equipment, at an amount equal to the lease liability, adjusted for prepayments and initial direct costs.

We subsequently recognize the cost of the lease on a straight-line basis over the lease term, and any variable lease costs, which represent amounts owed to the lessor that are not fixed per the terms of the contract, are recognized in the period in which they are incurred. Any costs included in our lease arrangements that are not directly related to the leased assets, such as maintenance charges, are included as part of the lease costs. Leases with an initial term of one year or less are considered short-term leases and are not recognized as lease assets and liabilities. We also recognize the cost of such short-term leases on a straight-line basis over the term of the underlying agreement.

Many of our leases, in particular those related to systems project land, contain renewal or termination options that are exercisable at our discretion. At the commencement date of a lease, we include in the lease term any periods covered by a renewal option, and exclude from the lease term any periods covered by a termination option, to the extent we are reasonably certain to exercise such options. In making this determination, we seek to align the lease term with the expected economic life of the underlying asset.




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The following table presents certain quantitative information related to our lease arrangements for the three and nine months ended September 30, 2019 and as of September 30, 2019 (in thousands):
 
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost
 
$
5,788

 
$
16,607

Variable lease cost
 
904

 
2,592

Short-term lease cost
 
1,118

 
6,818

Total lease cost
 
$
7,810

 
$
26,017

 
 
 
 
 
Payments of amounts included in the measurement of operating lease liabilities
 
 
 
$
15,995

Lease assets obtained in exchange for operating lease liabilities
 
 
 
$
172,760

 
 
 
 
 
 
 
 
 
September 30, 2019
Operating lease assets
 
 
 
$
176,785

Operating lease liabilities  current
 
 
 
11,221

Operating lease liabilities  noncurrent
 
 
 
142,256

 
 
 
 
 
Weighted-average remaining lease term
 
 
 
17 years

Weighted-average discount rate
 
 
 
4.5
%


As of September 30, 2019, the future payments associated with our lease liabilities were as follows (in thousands):
 
 
Total Lease Liabilities
Remainder of 2019
 
$
4,534

2020
 
15,688

2021
 
15,607

2022
 
15,124

2023
 
14,967

Thereafter
 
156,009

Total future payments
 
221,929

Less: interest
 
(68,452
)
Total lease liabilities
 
$
153,477






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8. Fair Value Measurements

The following is a description of the valuation techniques that we use to measure the fair value of assets and liabilities that we measure and report at fair value on a recurring basis:

Cash Equivalents. At September 30, 2019 and December 31, 2018, our cash equivalents consisted of money market funds. We value our cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.

Marketable Securities and Restricted Investments. At September 30, 2019 and December 31, 2018, our marketable securities consisted of foreign debt, foreign government obligations, U.S. debt, and time deposits, and our restricted investments consisted of foreign and U.S. government obligations. We value our marketable securities and restricted investments using observable inputs that reflect quoted prices for securities with identical characteristics or quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals). Accordingly, we classify the valuation techniques that use these inputs as either Level 1 or Level 2 depending on the inputs used. We also consider the effect of our counterparties’ credit standing in these fair value measurements.

Derivative Assets and Liabilities. At September 30, 2019 and December 31, 2018, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies and interest rate swap contracts involving major interest rates. Since our derivative assets and liabilities are not traded on an exchange, we value them using standard industry valuation models. As applicable, these models project future cash flows and discount the amounts to a present value using market-based observable inputs, including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. In evaluating credit risk, we consider the effect of our counterparties’ and our own credit standing in the fair value measurements of our derivative assets and liabilities, respectively.

At September 30, 2019 and December 31, 2018, the fair value measurements of our assets and liabilities measured on a recurring basis were as follows (in thousands):
 
 
 
 
Fair Value Measurements at Reporting
Date Using
 
 
 
 
 
 
 
September 30,
2019
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
7,288

 
$
7,288

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
 
Foreign debt
 
361,414

 

 
361,414

 

Foreign government obligations
 
21,988

 

 
21,988

 

U.S. debt
 
90,388

 

 
90,388

 

Time deposits
 
187,762

 
187,762

 

 

Restricted investments
 
241,378

 

 
241,378

 

Derivative assets
 
2,748

 

 
2,748

 

Total assets
 
$
912,966

 
$
195,050

 
$
717,916

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
11,945

 
$

 
$
11,945

 
$




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Fair Value Measurements at Reporting
Date Using
 
 
 
 
 
 
 
December 31,
2018
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
200,788

 
$
200,788

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
 
Foreign debt
 
318,646

 

 
318,646

 

Foreign government obligations
 
98,621

 

 
98,621

 

U.S. debt
 
44,468

 

 
44,468

 

Time deposits
 
681,969

 
681,969

 

 

Restricted investments
 
179,000

 

 
179,000

 

Derivative assets
 
2,364

 

 
2,364

 

Total assets
 
$
1,525,856

 
$
882,757

 
$
643,099

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
16,499

 
$

 
$
16,499

 
$


Fair Value of Financial Instruments

At September 30, 2019 and December 31, 2018, the carrying values and fair values of our financial instruments not measured at fair value were as follows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
 
Notes receivable – current (2)
 
$
23,440

 
$
25,319

 
$
5,196

 
$
5,196

Note receivable – noncurrent
 
8,003

 
9,974

 
8,017

 
8,010

Notes receivable, affiliate – noncurrent (2)
 

 

 
22,832

 
24,295

Liabilities:
 
 
 
 
 
 
 
 
Long-term debt, including current maturities (1)
 
$
490,859

 
$
511,027

 
$
479,157

 
$
470,124


——————————
(1)
Excludes unamortized discounts and issuance costs.

(2)
In January 2019, CEC no longer qualified to be accounted for under the equity method, and our loans to the company were no longer classified as notes receivable from an affiliate. As of September 30, 2019, the aggregate balance outstanding on the loans was presented within “Prepaid expenses and other current assets.” As of December 31, 2018, the aggregate balance outstanding on the loans was presented within “Notes receivable, affiliate.”

The carrying values in our condensed consolidated balance sheets of our trade accounts receivable, unbilled accounts receivable and retainage, restricted cash, accounts payable, and accrued expenses approximated their fair values due to their nature and relatively short maturities; therefore, we excluded them from the foregoing table. The fair value measurements for our notes receivable and long-term debt are considered Level 2 measurements under the fair value hierarchy.




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Credit Risk

We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, marketable securities, accounts receivable, restricted cash and investments, notes receivable, and foreign exchange forward contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, marketable securities, restricted cash and investments, and foreign exchange forward contracts with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty financial institutions. Our net sales are primarily concentrated among a limited number of customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. Depending upon the sales arrangement, we may require some form of payment security from our customers, including advance payments, parent guarantees, letters of credit, bank guarantees, or surety bonds. We also have power purchase agreements (“PPAs”) that subject us to credit risk in the event our offtake counterparties are unable to fulfill their contractual obligations, which may adversely affect our project assets and certain receivables. Accordingly, we closely monitor the credit standing of existing and potential offtake counterparties to limit such risks.

9. Debt

Our long-term debt consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
 
 
 
 
Balance (USD)
Loan Agreement
 
Currency
 
September 30,
2019
 
December 31,
2018
Revolving Credit Facility
 
USD
 
$

 
$

Luz del Norte Credit Facilities
 
USD
 
188,218

 
188,849

Ishikawa Credit Agreement
 
JPY
 
236,894

 
157,834

Japan Credit Facility
 
JPY
 

 

Tochigi Credit Facility
 
JPY
 
37,572

 
25,468

Anantapur Credit Facility
 
INR
 
15,285

 
16,101

Tungabhadra Credit Facility
 
INR
 
12,890

 
13,934

Beryl Credit Facility
 
AUD
 

 
76,971

Long-term debt principal
 
 
 
490,859

 
479,157

Less: unamortized discounts and issuance costs
 
 
 
(10,555
)
 
(12,366
)
Total long-term debt
 
 
 
480,304

 
466,791

Less: current portion
 
 
 
(28,240
)
 
(5,570
)
Noncurrent portion
 
 
 
$
452,064

 
$
461,221



Revolving Credit Facility

Our amended and restated credit agreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent provides us with a senior secured credit facility (the “Revolving Credit Facility”) with an aggregate borrowing capacity of $500.0 million, which we may increase to $750.0 million, subject to certain conditions. Borrowings under the credit facility bear interest at (i) London Interbank Offered Rate (“LIBOR”), adjusted for Eurocurrency reserve requirements, plus a margin of 2.00% or (ii) a base rate as defined in the credit agreement plus a margin of 1.00% depending on the type of borrowing requested. These margins are also subject to adjustment depending on our consolidated leverage ratio. We had no borrowings under our Revolving Credit Facility as of September 30, 2019 and December 31, 2018 and had issued $52.7 million and $66.0 million, respectively, of letters of credit using availability under the facility. Loans and letters of credit issued under the Revolving Credit Facility are jointly and severally guaranteed by First Solar, Inc.; First Solar Electric, LLC; First Solar Electric (California), Inc.; and First Solar Development, LLC and are secured by interests in substantially all of the guarantors’ tangible and intangible assets other than certain excluded assets.




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In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee at a rate of 0.30% per annum, based on the average daily unused commitments under the facility, which may also be adjusted due to changes in our consolidated leverage ratio. We also pay a letter of credit fee based on the applicable margin for Eurocurrency revolving loans on the face amount of each letter of credit and a fronting fee of 0.125%. Our Revolving Credit Facility matures in July 2022.

Luz del Norte Credit Facilities

In August 2014, Parque Solar Fotovoltaico Luz del Norte SpA (“Luz del Norte”), our indirect wholly-owned subsidiary and project company, entered into credit facilities (the “Luz del Norte Credit Facilities”) with the Overseas Private Investment Corporation (“OPIC”) and the International Finance Corporation (“IFC”) to provide limited-recourse senior secured debt financing for the design, development, financing, construction, testing, commissioning, operation, and maintenance of a 141 MWAC PV solar power plant located near Copiapó, Chile. In March 2017, we amended the terms of the credit facilities, which (i) allowed for the capitalization of accrued and unpaid interest through March 15, 2017, along with the capitalization of certain future interest payments as variable rate loans under the credit facilities, (ii) allowed for the conversion of certain fixed rate loans to variable rate loans upon scheduled repayment, (iii) extended their maturity until June 2037, and (iv) canceled the remaining borrowing capacity with the exception of the capitalization of certain future interest payments. As of September 30, 2019 and December 31, 2018, the balance outstanding on the OPIC loans was $140.9 million and $141.4 million, respectively. As of September 30, 2019 and December 31, 2018, the balance outstanding on the IFC loans was $47.3 million and $47.4 million, respectively. The credit facilities are secured by liens over all of Luz del Norte’s assets and by a pledge of all of the equity interests in the entity.

Ishikawa Credit Agreement

In December 2016, FS Japan Project 12 GK (“Ishikawa”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Ishikawa Credit Agreement”) with Mizuho Bank, Ltd. for aggregate borrowings up to ¥27.3 billion ($247.4 million) for the development and construction of a 59 MWAC PV solar power plant located in Ishikawa, Japan. The credit agreement consists of a ¥24.0 billion ($217.5 million) senior loan facility, a ¥2.1 billion ($19.0 million) consumption tax facility, and a ¥1.2 billion ($10.9 million) letter of credit facility. The senior loan facility matures in October 2036, and the consumption tax facility matures in April 2020. The credit agreement is secured by pledges of Ishikawa’s assets, accounts, material project documents, and by the equity interests in the entity. As of September 30, 2019 and December 31, 2018, the balance outstanding on the credit agreement was $236.9 million and $157.8 million, respectively.

Japan Credit Facility

In September 2015, First Solar Japan GK, our wholly-owned subsidiary, entered into a construction loan facility with Mizuho Bank, Ltd. for borrowings up to ¥4.0 billion ($36.3 million) for the development and construction of utility-scale PV solar power plants in Japan (the “Japan Credit Facility”). In September 2018, First Solar Japan GK renewed the facility for an additional one-year period until September 2019. The facility was guaranteed by First Solar, Inc. and secured by pledges of certain projects’ cash accounts and other rights in the projects. As of December 31, 2018, there was no balance outstanding on the facility.

Tochigi Credit Facility

In June 2017, First Solar Japan GK, our wholly-owned subsidiary, entered into a term loan facility with Mizuho Bank, Ltd. for borrowings up to ¥7.0 billion ($63.4 million) for the development of utility-scale PV solar power plants in Japan (the “Tochigi Credit Facility”). The term loan facility matures in March 2021. The facility is guaranteed by First Solar, Inc. and secured by pledges of certain of First Solar Japan GK’s accounts. As of September 30, 2019 and December 31, 2018, the balance outstanding on the term loan facility was $37.6 million and $25.5 million, respectively.




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Anantapur Credit Facility

In March 2018, Anantapur Solar Parks Private Limited, our indirect wholly-owned subsidiary and project company, entered into a term loan facility (the “Anantapur Credit Facility”) with J.P. Morgan Securities India Private Limited for borrowings up to INR 1.2 billion ($17.1 million) for costs related to a 20 MWAC PV solar power plant located in Karnataka, India. The term loan facility matures in February 2021 and is secured by a letter of credit issued by JPMorgan Chase Bank, N.A., Singapore, in favor of the lender. Such letter of credit is secured by a cash deposit placed by First Solar FE Holdings Pte. Ltd. As of September 30, 2019 and December 31, 2018, the balance outstanding on the term loan facility was $15.3 million and $16.1 million, respectively.

Tungabhadra Credit Facility

In March 2018, Tungabhadra Solar Parks Private Limited, our indirect wholly-owned subsidiary and project company, entered into a term loan facility (the “Tungabhadra Credit Facility”) with J.P. Morgan Securities India Private Limited for borrowings up to INR 1.0 billion ($14.3 million) for costs related to a 20 MWAC PV solar power plant located in Karnataka, India. The term loan facility matures in February 2021 and is secured by a letter of credit issued by JPMorgan Chase Bank, N.A., Singapore, in favor of the lender. Such letter of credit is secured by a cash deposit placed by First Solar FE Holdings Pte. Ltd. As of September 30, 2019 and December 31, 2018, the balance outstanding on the term loan facility was $12.9 million and $13.9 million, respectively.

Beryl Credit Facility

In May 2018, FS NSW Project No 1 Finco Pty Ltd, our wholly-owned subsidiary and project financing company, entered into a term loan facility (the “Beryl Credit Facility”) with MUFG Bank, Ltd.; Société Générale, Hong Kong Branch; and Mizuho Bank, Ltd. for aggregate borrowings up to AUD 146.4 million ($103.2 million) for the development and construction of an 87 MWAC PV solar power plant located in New South Wales, Australia. In October 2018, the borrowing capacity on the Beryl Credit Facility was reduced to AUD 136.4 million ($96.2 million). Accordingly, the credit facility consisted of an AUD 125.4 million ($88.4 million) construction loan facility, an AUD 7.0 million ($4.9 million) GST facility to fund certain taxes associated with the construction of the project, and an AUD 4.0 million ($2.8 million) letter of credit facility. In June 2019, we completed the sale of our Beryl project, and the outstanding balance of the Beryl Credit Facility of $88.0 million was assumed by the customer. As of December 31, 2018, the balance outstanding on the credit facility was $77.0 million.

Variable Interest Rate Risk

Certain of our long-term debt agreements bear interest at prime, LIBOR, TIBOR, BBSY, or equivalent variable rates. An increase in these variable rates would increase the cost of borrowing under our Revolving Credit Facility and certain project specific debt financings. Our long-term debt borrowing rates as of September 30, 2019 were as follows:
Loan Agreement
 
September 30, 2019
Revolving Credit Facility
 
4.02%
Luz del Norte Credit Facilities (1)
 
Fixed rate loans at bank rate plus 3.50%
 
Variable rate loans at 91-Day U.S. Treasury Bill Yield or LIBOR plus 3.50%
Ishikawa Credit Agreement
 
Senior loan facility at 6-month TIBOR plus 0.75% (2)
 
Consumption tax facility at 3-month TIBOR plus 0.5%
Tochigi Credit Facility
 
3-month TIBOR plus 1.0%
Anantapur Credit Facility
 
INR overnight indexed swap rate plus 1.5%
Tungabhadra Credit Facility
 
INR overnight indexed swap rate plus 1.5%
——————————
(1)
Outstanding balance comprised of $156.7 million of fixed rate loans and $31.5 million of variable rate loans as of September 30, 2019.



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(2)
We have entered into an interest rate swap contract to hedge a portion of this variable rate. See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for additional information.

Future Principal Payments

At September 30, 2019, the future principal payments on our long-term debt were due as follows (in thousands):
 
 
Total Debt
Remainder of 2019
 
$
8,414

2020
 
29,052

2021
 
79,746

2022
 
15,850

2023
 
18,097

Thereafter
 
339,700

Total long-term debt future principal payments
 
$
490,859



10. Commitments and Contingencies

Commercial Commitments

During the normal course of business, we enter into commercial commitments in the form of letters of credit, bank guarantees, and surety bonds to provide financial and performance assurance to third parties. Our amended and restated Revolving Credit Facility provides us with a sub-limit of $400.0 million to issue letters of credit, subject to certain additional limits depending on the currencies of the letters of credit, at a fee based on the applicable margin for Eurocurrency revolving loans and a fronting fee. As of September 30, 2019, we had $52.7 million in letters of credit issued under our Revolving Credit Facility, leaving $347.3 million of availability for the issuance of additional letters of credit. As of September 30, 2019, we also had $10.1 million of letters of credit under separate agreements that were posted by certain of our foreign subsidiaries and $176.7 million of letters of credit issued under three bilateral facilities, of which $33.0 million was secured with cash, leaving $535.7 million of aggregate available capacity under such agreements and facilities. We also had $80.7 million of surety bonds outstanding, leaving $635.2 million of available bonding capacity under our surety lines as of September 30, 2019. The majority of these letters of credit and surety bonds supported our systems projects.

Product Warranties

When we recognize revenue for module or system sales, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations for both modules and the balance of the systems. We make and revise these estimates based primarily on the number of solar modules under warranty, our historical experience with warranty claims, our monitoring of field installation sites, our internal testing and the expected future performance of our solar modules and balance of systems (“BoS”) parts, and our estimated replacement costs. From time to time, we have taken remediation actions with respect to affected modules beyond our limited warranties and may elect to do so in the future, in which case we would incur additional expenses. Such potential voluntary future remediation actions beyond our limited warranty obligations may be material to our condensed consolidated statements of operations if we commit to any such remediation actions.




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Product warranty activities during the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Product warranty liability, beginning of period
 
$
217,991

 
$
225,813

 
$
220,692

 
$
224,274

Accruals for new warranties issued
 
1,723

 
2,954

 
11,636

 
8,422

Settlements
 
(4,211
)
 
(2,423
)
 
(10,233
)
 
(7,504
)
Changes in estimate of product warranty liability
 
(77,598
)
 
(940
)
 
(84,190
)
 
212

Product warranty liability, end of period
 
$
137,905

 
$
225,404

 
$
137,905

 
$
225,404

Current portion of warranty liability
 
$
19,526

 
$
33,595

 
$
19,526

 
$
33,595

Noncurrent portion of warranty liability
 
$
118,379

 
$
191,809

 
$
118,379

 
$
191,809



We estimate our limited product warranty liability for power output and defects in materials and workmanship under normal use and service conditions based on return rates for each series of module technology. During the three months ended September 30, 2019, we revised this estimate downward based on updated information regarding our warranty claims, which reduced our product warranty liability by $80.0 million. This updated information reflected lower-than-expected return rates for our newer series of module technology, the evolving claims profile of each series, and certain changes to our warranty programs. In general, we expect the return rates for our newer series of module technology to be lower than our older series. We estimate that the return rate for such newer series of module technology will be less than 1%. As of September 30, 2019, a 1% increase in the return rate across all series of module technology would increase our product warranty liability by $83.3 million, and a 1% increase in the return rate for BoS parts would not have a material impact on the associated warranty liability.

Performance Guarantees

As part of our systems business, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the engineering, procurement, and construction (“EPC”) agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable period meets or exceeds the modeled energy expectation, after certain adjustments. If there is an underperformance event with regards to these tests, we may incur liquidated damages as specified in the EPC agreement. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. As of September 30, 2019 and December 31, 2018, we accrued $5.3 million and $0.4 million, respectively, for our estimated obligations under such arrangements, which were classified as “Other current liabilities” in our condensed consolidated balance sheets.

As part of our O&M service offerings, we typically offer an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside of our control as the service provider, such as weather, curtailment, outages, force majeure, and other conditions that may affect system availability. Effective availability guarantees are only offered as part of our O&M services and terminate at the end of an O&M arrangement. If we fail to meet the contractual threshold for these guarantees, we may incur liquidated damages for certain lost energy. Our O&M agreements typically contain provisions limiting our total potential losses under an agreement, including amounts paid for liquidated damages, to a percentage of O&M fees. Many of our O&M agreements also contain provisions whereby we may receive a bonus payment if system availability exceeds a separate threshold. As of September 30, 2019, we accrued $0.1 million liquidated damages under our effective availability guarantees, which were classified as “Other current liabilities” in our condensed consolidated balance sheets.




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Indemnifications

In certain limited circumstances, we have provided indemnifications to customers, including project tax equity investors, under which we are contractually obligated to compensate such parties for losses they suffer resulting from a breach of a representation, warranty, or covenant or a reduction in tax benefits received, including investment tax credits. Project related tax benefits are, in part, based on guidance provided by the Internal Revenue Service and U.S. Treasury Department, which includes assumptions regarding the fair value of qualifying PV solar power systems. For any sales contracts that have such indemnification provisions, we initially recognize a liability under ASC 460 for the estimated premium that would be required by a guarantor to issue the same indemnity in a standalone arm’s-length transaction with an unrelated party. We typically base these estimates on the cost of insurance policies that cover the underlying risks being indemnified and may purchase such policies to mitigate our exposure to potential indemnification payments. We subsequently measure such liabilities at the greater of the initially estimated premium or the contingent liability required to be recognized under ASC 450. We recognize any indemnification liabilities as a reduction of revenue in the related transaction.

After an indemnification liability is recorded, we derecognize such amount pursuant to ASC 460-10-35-2 depending on the nature of the indemnity, which derecognition typically occurs upon expiration or settlement of the arrangement, and any contingent aspects of the indemnity are accounted for in accordance with ASC 450. We accrued $2.1 million of current indemnification liabilities as of September 30, 2019 and $3.0 million of noncurrent indemnification liabilities as of September 30, 2019 and December 31, 2018. As of September 30, 2019, the maximum potential amount of future payments under our tax related and other indemnifications was $135.8 million, and we held insurance policies allowing us to recover up to $84.9 million of potential amounts paid under the indemnifications covered by the policies.

Contingent Consideration

We continually seek to make additions to our advanced-stage project pipeline by actively developing our early-to-mid-stage project pipeline and by pursuing opportunities to acquire projects at various stages of development. In connection with such project acquisitions, we may agree to pay additional amounts to project sellers upon the achievement of certain milestones, such as obtaining a PPA, obtaining financing, or selling the project to a new owner. We recognize a project acquisition contingent liability when we determine that such a liability is both probable and reasonably estimable, and the carrying amount of the related project asset is correspondingly increased. As of September 30, 2019 and December 31, 2018, we accrued $0.4 million and $0.7 million of current liabilities, respectively, and $5.3 million and $2.3 million of long-term liabilities, respectively, for project related contingent obligations. Any future differences between the acquisition-date contingent obligation estimate and the ultimate settlement of the obligation are recognized as an adjustment to the project asset, as contingent payments are considered direct and incremental to the underlying value of the related project.

Solar Module Collection and Recycling Liability

We previously established a module collection and recycling program, which has since been discontinued, to collect and recycle modules sold and covered under such program once the modules reach the end of their useful lives. For legacy customer sales contracts that were covered under this program, we agreed to pay the costs for the collection and recycling of qualifying solar modules, and the end-users agreed to notify us, disassemble their solar power systems, package the solar modules for shipment, and revert ownership rights over the modules back to us at the end of the modules’ service lives. Accordingly, we recorded any collection and recycling obligations within “Cost of sales” at the time of sale based on the estimated cost to collect and recycle the covered solar modules.

We estimate the cost of our collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; the scale of recycling centers; and an estimated third-party profit margin and return on risk for collection and recycling services. We base these estimates on (i) our experience collecting and recycling our solar modules, (ii) the



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expected timing of when our solar modules will be returned for recycling, and (iii) the expected economic factors at the time the solar modules will be collected and recycled. In the periods between the time of sale and the related settlement of the collection and recycling obligation, we accrete the carrying amount of the associated liability by applying the discount rate used for its initial measurement. We classify accretion as an operating expense within “Selling, general and administrative” expense on our condensed consolidated statements of operations.

We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly. During the three months ended September 30, 2018, we completed our annual cost study of obligations under our module collection and recycling program and reduced the associated liability by $34.2 million primarily due to higher by-product credits for glass, lower capital costs resulting from the expanded scale of our recycling facilities, and adjustments to certain valuation assumptions driven by our increased experience with module recycling.

Our module collection and recycling liability was $135.0 million and $134.4 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, a 1% increase in the annualized inflation rate used in our estimated future collection and recycling cost per module would increase our liability by $25.8 million, and a 1% decrease in that rate would decrease our liability by $21.8 million. See Note 4. “Restricted Cash and Investments” to our condensed consolidated financial statements for more information about our arrangements for funding this liability.

Legal Proceedings

Class Action

On March 15, 2012, a purported class action lawsuit titled Smilovits v. First Solar, Inc., et al., Case No. 2:12-cv-00555-DGC, was filed in the United States District Court for the District of Arizona (hereafter “Arizona District Court”) against the Company and certain of our current and former directors and officers. The complaint was filed on behalf of persons who purchased or otherwise acquired the Company’s publicly traded securities between April 30, 2008 and February 28, 2012 (the “Class Action”). The complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for damages, including interest, and an award of reasonable costs and attorneys’ fees to the putative class. The Company believes it has meritorious defenses and will vigorously defend this action.

On July 23, 2012, the Arizona District Court issued an order appointing as lead plaintiffs in the Class Action the Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme (collectively, the “Pension Schemes”). The Pension Schemes filed an amended complaint on August 17, 2012, which contains similar allegations and seeks similar relief as the original complaint. Defendants filed a motion to dismiss on September 14, 2012. On December 17, 2012, the court denied defendants’ motion to dismiss. On October 8, 2013, the Arizona District Court granted the Pension Schemes’ motion for class certification and certified a class comprised of all persons who purchased or otherwise acquired publicly traded securities of the Company between April 30, 2008 and February 28, 2012 and were damaged thereby, excluding defendants and certain related parties. Merits discovery closed on February 27, 2015.

Defendants filed a motion for summary judgment on March 27, 2015. On August 11, 2015, the Arizona District Court granted defendants’ motion in part and denied it in part, and certified an issue for immediate appeal to the Ninth Circuit Court of Appeals (the “Ninth Circuit”). First Solar filed a petition for interlocutory appeal with the Ninth Circuit, and that petition was granted on November 18, 2015. On May 20, 2016, the Pension Schemes moved to vacate the order granting the petition, dismiss the appeal, and stay the merits briefing schedule. On December 13, 2016, the Ninth Circuit denied the Pension Schemes’ motion. On January 31, 2018, the Ninth Circuit issued an opinion affirming the Arizona District Court’s order denying in part defendants’ motion for summary judgment. On March 16, 2018, First Solar filed a petition for panel rehearing or rehearing en banc with the Ninth Circuit. On May 7, 2018, the Ninth Circuit denied defendants’ petition. On August 6, 2018, defendants filed a petition for writ of certiorari to the U.S. Supreme Court. Meanwhile, in the Arizona District Court, expert discovery was completed on February 5, 2019. On June 24, 2019, the



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U.S. Supreme Court denied the petition. Following the denial of the petition, the Arizona District Court ordered that the trial begin on January 7, 2020.

This lawsuit asserts claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement may result in a significant monetary judgment or award against us or a significant monetary payment by us, and could have a material adverse effect on our business, financial condition, and results of operations. Even if this lawsuit is not resolved against us, the costs of defending the lawsuit and of any settlement may be significant. These costs would likely exceed the dollar limits of our insurance policies or may not be covered by our insurance policies. Given the uncertainties of trial, at this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the range of potential loss, if any.

Opt-Out Action

On June 23, 2015, a suit titled Maverick Fund, L.D.C. v. First Solar, Inc., et al., Case No. 2:15-cv-01156-ROS, was filed in Arizona District Court by putative stockholders that opted out of the Class Action. The complaint names the Company and certain of our current and former directors and officers as defendants, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and violated state law, by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for recessionary and actual damages, interest, punitive damages, and an award of reasonable attorneys’ fees, expert fees, and costs. The Company believes it has meritorious defenses and will vigorously defend this action.

First Solar and the individual defendants filed a motion to dismiss the complaint on July 16, 2018. On November 27, 2018, the Court granted defendants’ motion to dismiss the plaintiffs’ negligent misrepresentation claim under state law, but otherwise denied defendants’ motion. This action is still in the initial stages, and the parties are beginning limited discovery. At this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the range of potential loss, if any.

Derivative Actions

On July 16, 2013, a derivative complaint was filed in the Superior Court of Arizona, Maricopa County, titled Bargar, et al. v. Ahearn, et al., Case No. CV2013-009938, by a putative stockholder against certain current and former directors and officers of the Company (“Bargar”). The complaint generally alleges that the defendants caused or allowed false and misleading statements to be made concerning the Company’s financial performance and prospects. The action includes claims for, among other things, breach of fiduciary duties, insider trading, unjust enrichment, and waste of corporate assets. By court order on October 3, 2013, the Superior Court of Arizona, Maricopa County granted the parties’ stipulation to defer defendants’ response to the complaint pending resolution of the Class Action or expiration of a stay issued in certain consolidated derivative actions in the Arizona District Court. On November 5, 2013, the matter was placed on the court’s inactive calendar. The parties have jointly sought and obtained multiple requests to continue the stay in this action. Most recently, on July 9, 2019, the court entered an order continuing the stay until November 27, 2019.

The Company believes that the plaintiff in the Bargar derivative action lacks standing to pursue litigation on behalf of First Solar. The Bargar derivative action is still in the initial stages and there has been no discovery. Accordingly, at this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the range of potential loss, if any.

Other Matters and Claims

We are party to other legal matters and claims in the normal course of our operations. While we believe the ultimate outcome of such other matters and claims will not have a material adverse effect on our financial position, results of operations, or cash flows, the outcome of such matters and claims is not determinable with certainty, and negative outcomes may adversely affect us.



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11. Revenue from Contracts with Customers

The following table represents a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2019 and 2018 along with the reportable segment for each category (in thousands):
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Category
 
Segment
 
2019
 
2018
 
2019
 
2018
Solar modules
 
Modules
 
$
371,184

 
$
119,825

 
$
798,744

 
$
386,450

Solar power systems
 
Systems
 
79,792

 
386,237

 
454,841

 
850,306

EPC services
 
Systems
 
47,219

 
134,369

 
287,270

 
203,941

O&M services
 
Systems
 
28,245

 
25,431

 
82,397

 
76,572

Energy generation
 
Systems
 
20,366

 
10,358

 
40,488

 
35,534

Net sales
 
 
 
$
546,806

 
$
676,220

 
$
1,663,740

 
$
1,552,803


We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Such contracts may contain provisions that require us to make liquidated damage payments to the customer if we fail to ship or deliver modules by scheduled dates. We recognize these liquidated damages as a reduction of revenue in the period we transfer control of the modules to the customer.

We generally recognize revenue for sales of solar power systems and/or EPC services over time using cost based input methods, in which significant judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If the estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

Changes in estimates for sales of systems and EPC services occur for a variety of reasons, including but not limited to (i) construction plan accelerations or delays, (ii) module cost forecast changes, (iii) cost related change orders, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on our condensed consolidated statements of operations. The following table outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the three and nine months ended September 30, 2019 and 2018 as well as the number of projects that comprise such changes. For purposes of the table, we only include projects with changes in estimates that have a net impact on revenue of at least $1.0 million during the periods presented with the exception of the sales and use tax matter described below, for which the aggregate change in estimate has been presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Number of projects (1)
 
4

 
2

 
4

 
23

 
 
 
 
 
 
 
 
 
(Decrease) increase in revenue from net changes in transaction prices (in thousands) (1)
 
$
(2,435
)
 
$
6,672

 
$
3,649

 
$
54,653

Decrease in revenue from net changes in input cost estimates (in thousands)
 
(6,676
)
 
(2,948
)
 
(15,645
)
 
(13,070
)
Net (decrease) increase in revenue from net changes in estimates (in thousands)
 
$
(9,111
)
 
$
3,724

 
$
(11,996
)
 
$
41,583

 
 
 
 
 
 
 
 
 
Net change in estimate as a percentage of aggregate revenue
 
(0.6
)%
 
0.3
%
 
(1.6
)%
 
0.4
%




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——————————
(1)
During the nine months ended September 30, 2018, we settled a tax examination with the state of California regarding several matters, including certain sales and use tax payments due under lump sum EPC contracts. Accordingly, we revised our estimates of sales and use taxes due for projects in the state of California, which affected the estimated transaction prices for such contracts, and recorded an increase to revenue of $54.6 million.

The following table reflects the changes in our contract assets, which we classify as “Accounts receivable, unbilled” or “Retainage,” and our contract liabilities, which we classify as “Deferred revenue,” for the nine months ended September 30, 2019 (in thousands):
 
 
September 30,
2019
 
December 31,
2018
 
Nine Month Change
Accounts receivable, unbilled
 
$
136,734

 
$
441,666

 

 

Retainage
 
28,279

 
16,500

 

 

Accounts receivable, unbilled and retainage
 
$
165,013

 
$
458,166

 
$
(293,153
)
 
(64
)%
 
 
 
 
 
 
 
 
 
Deferred revenue (1)
 
$
134,278

 
$
177,769

 
$
(43,491
)
 
(24
)%

——————————
(1)
Includes $41.0 million and $48.0 million of long-term deferred revenue classified as “Other liabilities” on our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.

Accounts receivable, unbilled represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. Billing requirements vary by contract but are generally structured around the completion of certain construction milestones. Some of our EPC contracts for systems we build may also contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones. When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs incurred on long-term construction contracts and advance payments received on sales of solar modules.

During the nine months ended September 30, 2019, our contract assets decreased by $293.2 million primarily due to billings on the California Flats and Willow Springs projects following the completion of substantially all construction activities and final billings on the Manildra project, which we sold in 2018, partially offset by certain unbilled receivables associated with the sale of Seabrook project and also ongoing construction activities at the GA Solar 4 and Phoebe projects. During the nine months ended September 30, 2019, our contract liabilities decreased by $43.5 million primarily as a result of revenue recognized for certain EPC projects in Florida, for which we received a portion of the proceeds in prior years, and revenue recognized for sales of solar modules, for which we had received advanced payments in 2018. During the nine months ended September 30, 2019 and 2018, we recognized revenue of $123.2 million and $71.9 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods.

The following table represents our remaining performance obligations as of September 30, 2019 for sales of solar power systems, including uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements for partner developed projects that we may construct. Such table excludes remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606. We expect to recognize $0.3 billion of revenue for such contracts through the later of the substantial completion or the closing dates of the projects.



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Project/Location
 
Project Size in MWAC
 
Revenue Category
 
EPC Contract/Partner Developed Project
 
Expected Year Revenue Recognition Will Be Completed
 
Percentage of Revenue Recognized
Phoebe, Texas
 
250

 
EPC
 
Innergix Renewable Energy
 
2019
 
98%
GA Solar 4, Georgia
 
200

 
Solar power systems
 
Origis Energy USA
 
2020
 
43%
Seabrook, South Carolina
 
72

 
Solar power systems
 
Dominion Energy
 
2019
 
41%
Japan (multiple locations)
 
52

 
Solar power systems
 
(1)
 
2020
 
—%
Troy Solar, Indiana
 
51

 
EPC
 
Southern Indiana Gas and Electric Company
 
2020
 
—%
Total
 
625

 
 
 
 
 
 
 
 
——————————
(1)
Contracted but not specified

As of September 30, 2019, we had entered into contracts with customers for the future sale of 11.7 GWDC of solar modules for an aggregate transaction price of $4.0 billion. We expect to recognize such amounts as revenue through 2023 as we transfer control of the modules to the customers. While our contracts with customers typically have certain firm purchase commitments, these contracts may be subject to amendments made by us or requested by our customers. These amendments may reduce the volume of modules to be sold under the contract, adjust delivery schedules, or otherwise decrease the expected revenue under these contracts. As of September 30, 2019, we had entered into O&M contracts covering approximately 11 GWDC of utility-scale PV solar power systems. We expect to recognize $0.5 billion of revenue during the noncancelable term of these O&M contracts over a weighted-average period of 9.4 years.

12. Share-Based Compensation

The following table presents share-based compensation expense recognized in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Cost of sales
 
$
1,719

 
$
1,612

 
$
5,520

 
$
5,148

Selling, general and administrative
 
6,243

 
4,620

 
15,627

 
16,884

Research and development
 
1,525

 
1,319

 
4,067

 
4,383

Production start-up
 
139

 

 
194

 
372

Total share-based compensation expense
 
$
9,626

 
$
7,551

 
$
25,408

 
$
26,787



The following table presents share-based compensation expense by type of award for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Restricted and performance stock units
 
$
9,298

 
$
7,200

 
$
23,921

 
$
25,193

Unrestricted stock
 
379

 
379

 
1,137

 
1,258

 
 
9,677

 
7,579

 
25,058

 
26,451

Net amount (absorbed into) released from inventory
 
(51
)
 
(28
)
 
350

 
336

Total share-based compensation expense
 
$
9,626

 
$
7,551

 
$
25,408

 
$
26,787






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Share-based compensation expense capitalized in inventory, project assets and power generating assets was $1.4 million and $1.8 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, we had $44.1 million of unrecognized share-based compensation expense related to unvested restricted and performance stock units, which we expect to recognize over a weighted-average period of approximately 1.2 years.

In February 2017, the compensation committee of our board of directors approved a long-term incentive program for key executive officers and associates. The program is intended to incentivize retention of our key executive talent, provide a smooth transition from our former key senior talent equity performance program, and align the interests of executive management and stockholders. Specifically, the program consists of (i) performance stock units to be earned over an approximately three-year performance period ending in December 2019 and (ii) stub-year grants of separate performance stock units to be earned over an approximately two-year performance period, which ended in December 2018. In February 2019, the compensation committee of our board of directors certified the achievement of the maximum vesting conditions applicable for the stub-year grants. Accordingly, each participant received one share of common stock for each vested performance unit, net of any tax withholdings. Vesting of the remaining 2017 grants of performance stock units is contingent upon the relative attainment of target cost per watt and operating expense metrics.

In April 2018, in continuation of our long-term incentive program for key executive officers and associates, the compensation committee of our board of directors approved additional grants of performance stock units to be earned over an approximately three-year performance period ending in December 2020. Vesting of the 2018 grants of performance stock units is contingent upon the relative attainment of target gross margin, operating expense, and contracted revenue metrics.

In July 2019, the compensation committee of our board of directors approved additional grants of performance stock units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2021. Vesting of the 2019 grants of performance stock units is contingent upon the relative attainment of target cost per watt, module wattage, gross profit, and operating income metrics.

Vesting of performance stock units is also contingent upon the employment of program participants through the applicable vesting dates, with limited exceptions in case of death, disability, a qualifying retirement, or a change-in-control of First Solar. Outstanding performance stock units are included in the computation of diluted net income per share based on the number of shares that would be issuable if the end of the reporting period were the end of the contingency period.

13. Income Taxes

Our effective tax rate was (84.8)% and 12.1% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in our effective tax rate was primarily driven by higher losses in certain jurisdictions for which no tax benefit could be recorded, combined with our pretax loss in the current period. Our provision for income taxes differed from the amount computed by applying the U.S. statutory federal income tax rate of 21% primarily due to higher losses in certain jurisdictions for which no tax benefit could be recorded, combined with our pretax loss in the current period, certain discrete tax expenses associated with filing a tax return in a foreign jurisdiction, interest and penalties related to various uncertain tax positions, and the beneficial impact of our Malaysian tax holiday.

Our Malaysian subsidiary has been granted a long-term tax holiday that expires in 2027. The tax holiday, which generally provides for a full exemption from Malaysian income tax, is conditional upon our continued compliance with certain employment and investment thresholds, which we are currently in compliance with and expect to continue to comply with through the expiration of the tax holiday in 2027.

In the normal course of business, we establish valuation allowances for our deferred tax assets when the realization of the assets is not more likely than not. We intend to maintain such valuation allowances on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowances. Given our anticipated future earnings in a foreign jurisdiction, it is reasonably possible that, within the next 12 months, sufficient positive evidence



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may become available to allow us to reverse the valuation allowance in such jurisdiction. However, the exact timing and amount of such reversal is subject to change depending on our future earnings in the jurisdiction and other factors.

We account for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740. We do not expect any uncertain tax positions will be recognized in the next 12 months due to the expiration of the statute of limitations associated with such tax positions.

We are subject to audit by federal, state, local, and foreign tax authorities. We are currently under examination in Chile, India, Malaysia, Singapore, and the state of California. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed by our tax examinations are not resolved in a manner consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.




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14. Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potentially dilutive common shares, including restricted and performance stock units and stock purchase plan shares, unless there is a net loss for the period. In computing diluted net income per share, we utilize the treasury stock method.

The calculation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands, except per share amounts):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Basic net income (loss) per share
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
30,622

 
$
57,750

 
$
(55,525
)
 
$
92,210

Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
105,397

 
104,804

 
105,272

 
104,711

 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
105,397

 
104,804

 
105,272

 
104,711

Effect of restricted and performance stock units and stock purchase plan shares
 
830

 
1,359

 

 
1,500

Weighted-average shares used in computing diluted net income (loss) per share
 
106,227

 
106,163

 
105,272

 
106,211

 
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.29

 
$
0.55

 
$
(0.53
)
 
$
0.88

Diluted
 
$
0.29

 
$
0.54

 
$
(0.53
)
 
$
0.87


The following table summarizes the potential shares of common stock that were excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2019 and 2018 as such shares would have had an anti-dilutive effect (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Anti-dilutive shares
 

 
603

 
787

 
394






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15. Accumulated Other Comprehensive Loss

The following table presents the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2019 (in thousands):
 
 
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Marketable Securities and Restricted Investments
 
Unrealized Gain (Loss) on Derivative Instruments
 
Total
Balance as of December 31, 2018
 
$
(66,380
)
 
$
10,641

 
$
1,273

 
$
(54,466
)
Other comprehensive (loss) income before reclassifications
 
(5,055
)
 
36,648

 
153

 
31,746

Amounts reclassified from accumulated other comprehensive loss
 
(1,190
)
 
(15,016
)
 
(1,205
)
 
(17,411
)
Net tax effect
 

 
184

 
429

 
613

Net other comprehensive (loss) income
 
(6,245
)
 
21,816

 
(623
)
 
14,948

Balance as of September 30, 2019
 
$
(72,625
)
 
$
32,457

 
$
650

 
$
(39,518
)


The following table presents the pretax amounts reclassified from accumulated other comprehensive loss into our condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
Comprehensive Income Components
 
Income Statement Line Item
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Foreign currency translation adjustment
 
Cost of sales
 
$

 
$

 
$
1,190

 
$

Unrealized gain on marketable securities and restricted investments
 
Other (loss) income, net
 

 

 
15,016

 
19,473

Unrealized gain (loss) on derivative contracts:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Net sales
 

 
46

 
124

 
(1,698
)
Foreign exchange forward contracts
 
Cost of sales
 

 
(212
)
 
1,081

 
(212
)
Foreign exchange forward contracts
 
Foreign currency gain (loss), net
 

 
(5,448
)
 

 
(5,448
)
Foreign exchange forward contracts
 
Other (loss) income, net
 

 
546

 

 
546

 
 
 
 

 
(5,068
)
 
1,205

 
(6,812
)
Total amount reclassified
 
 
 
$

 
$
(5,068
)
 
$
17,411

 
$
12,661






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16. Segment Reporting

We operate our business in two segments. Our modules segment involves the design, manufacture, and sale of cadmium telluride (“CdTe”) solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include integrators and operators of PV solar power systems. Our second segment is our systems segment, through which we provide integrated power plant solutions, which include (i) project development, (ii) EPC services, and (iii) O&M services. We may provide any combination of individual products and services within such capabilities depending upon the customer and market opportunity. Our systems segment customers include utilities, independent power producers, commercial and industrial companies, and other system owners. As part of our systems segment, we may also temporarily own and operate certain of our systems for a period of time based on strategic opportunities or market factors.

In September 2019, we announced our transition from an internal EPC service model in the United States to an external model, in which we expect to leverage the capabilities of third-party EPC services in providing power plant solutions to our systems segment customers. This transition is scheduled to occur through the rest of 2019 and is not expected to affect any projects to be completed this year. The shift to an external EPC service model in the United States aligns with our typical model in international markets and is facilitated, in part, by our Series 6 module technology and its improved BoS compatibility. See Note 22. “Segment and Geographical Information” in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional discussion of our segment reporting.

The following tables present certain financial information for our reportable segments for the three and nine months ended September 30, 2019 and 2018 and as of September 30, 2019 and December 31, 2018 (in thousands):
 
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
 
Modules
 
Systems
 
Total
 
Modules
 
Systems
 
Total
Net sales
 
$
371,184

 
$
175,622

 
$
546,806

 
$
119,825

 
$
556,395

 
$
676,220

Gross profit (loss)
 
147,806

 
(9,443
)
 
138,363

 
(5,654
)
 
134,781

 
129,127

Depreciation and amortization expense
 
38,063

 
6,628

 
44,691

 
25,539

 
4,268

 
29,807

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
 
Modules
 
Systems
 
Total
 
Modules
 
Systems
 
Total
Net sales
 
$
798,744

 
$
864,996

 
$
1,663,740

 
$
386,450

 
$
1,166,353

 
$
1,552,803

Gross (loss) profit
 
134,293

 
81,364

 
215,657

 
(21,927
)
 
315,794

 
293,867

Depreciation and amortization expense
 
118,448

 
15,206

 
133,654

 
52,802

 
14,363

 
67,165

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
 
 
Modules
 
Systems
 
Total
 
Modules
 
Systems
 
Total
Goodwill
 
$
14,462

 
$

 
$
14,462

 
$
14,462

 
$

 
$
14,462






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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”), which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: effects resulting from certain module manufacturing changes and associated restructuring activities; our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs (including estimated future module collection and recycling costs), warranties, solar module technology and cost reduction roadmaps, restructuring, product reliability, investments, business acquisitions, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules; effects resulting from pending litigation, including the class action lawsuit against us; our ability to expand manufacturing capacity worldwide; our ability to reduce the costs to develop and construct PV solar power systems; research and development (“R&D”) programs and our ability to improve the wattage of our solar modules; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “seek,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” “continue,” and the negative or plural of these words, and other comparable terminology.

Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q and therefore speak only as of the filing date. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason, whether as a result of new information, future developments, or otherwise. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the matters discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, elsewhere in this Quarterly Report on Form 10-Q, and our other reports filed with the SEC. You should carefully consider the risks and uncertainties described in these reports.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q. When referring to our manufacturing capacity, total sales, and solar module sales, the unit of electricity in watts for megawatts (“MW”) and gigawatts (“GW”) is direct current (“DC” or “DC”) unless otherwise noted. When referring to our projects or systems, the unit of electricity in watts for MW and GW is alternating current (“AC” or “AC”) unless otherwise noted.




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Executive Overview

We are a leading global provider of comprehensive PV solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin film semiconductor technology and also develop, design, construct, and sell PV solar power systems that primarily use the modules we manufacture. Additionally, we provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on module and system-level innovations. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers.

Certain of our financial results and other key operational developments for the three months ended September 30, 2019 include the following:

Net sales for the three months ended September 30, 2019 decreased by 19% to $546.8 million compared to $676.2 million for the same period in 2018. The decrease in net sales was primarily due to the sale of the Manildra project in 2018 and the completion of substantially all construction activities at the California Flats, Willow Springs, Balm Solar, Rosamond, and Payne Creek projects in late 2018 and early 2019, partially offset by the sale of the Seabrook project, the completion of substantially all construction activities at the Phoebe project, and an increase in third-party module sales.

Gross profit for the three months ended September 30, 2019 increased 6.2 percentage points to 25.3% from 19.1% for the same period in 2018. The increase in gross profit was primarily due to a reduction in our product warranty liability due to revised module return rates based on updated information regarding our warranty claims, higher gross profit on third-party module sales, and improved utilization of our manufacturing facilities, partially offset by the mix of lower gross profit projects under construction during the period.

As of September 30, 2019, we had 6.2 GWDC of installed annual nameplate production capacity across all our facilities in Perrysburg, Ohio; Kulim, Malaysia; and Ho Chi Minh City, Vietnam. We produced 1.5 GWDC of solar modules during the three months ended September 30, 2019, which represented a 108% increase from the same period in 2018. The increase in production was primarily driven by the Series 6 production capacity added at our manufacturing facilities in Kulim, Malaysia and Ho Chi Minh City, Vietnam. We expect to produce between 5.4 GWDC and 5.5 GWDC of solar modules during 2019, including approximately 2 GWDC of Series 4 modules.

Market Overview

The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. In particular, module average selling prices in many global markets have declined in recent years and are expected to continue to decline to some degree in the future. In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will continue to put pressure on pricing. Additionally, intense competition at the system level may result in an environment in which pricing falls rapidly, thereby further increasing demand for solar energy solutions but constraining the ability for project developers, EPC companies, and vertically-integrated companies such as First Solar to sustain meaningful and consistent profitability. In light of such market realities, we are focusing on our strategies and points of differentiation, which include our advanced module and system technologies, our manufacturing process, our vertically-integrated business model, our financial viability, and the sustainability advantage of our modules and systems.

Global solar markets continue to expand and develop, in part aided by demand elasticity resulting from declining industry average selling prices, both at the module and system levels, which have promoted the widespread adoption of solar energy. As a result of such market opportunities, we are expanding our manufacturing capacity while also developing, constructing, and operating multiple solar projects around the world as we execute on our advanced-stage utility-scale project pipeline. We also continue to develop our early-to-mid-stage project pipeline and evaluate



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acquisitions of projects to further expand both our early-to-mid-stage and advanced-stage pipelines. See the tables under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for additional information about projects within our advanced-stage pipeline. Although we expect a meaningful portion of our future consolidated net sales, operating income, and cash flows to be derived from such projects, we expect third-party module sales to have a more significant impact on our operating results as we complete our capacity expansion plans and corresponding transition to Series 6 module manufacturing.

Lower industry module and system pricing is expected to continue to contribute to diversification in global electricity generation and further demand for solar energy solutions as such solutions compete economically with traditional forms of energy generation. Over time, however, declining average selling prices may adversely affect our results of operations to the extent we have not already entered into contracts for future module or system sales. If competitors reduce pricing to levels below their costs; bid aggressively low prices for module sale agreements, EPC agreements, and PPAs; or are able to operate at minimal or negative operating margins for sustained periods of time, our results of operations could be further adversely affected. In certain markets in California and elsewhere, an oversupply imbalance at the grid level may reduce short-to-medium term demand for new solar installations relative to prior years, lower PPA pricing, and lower margins on module and system sales to such markets. However, we believe the effects of such imbalance can be mitigated by modern solar power plants that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements, including our transition to Series 6 module manufacturing, continuing the development of key markets, partnering with grid operators and utility companies, and implementing certain other cost reduction initiatives.

We face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects. Solar module manufacturers compete with one another on price and on several module value attributes, including wattage (or conversion efficiency), energy yield, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and levelized cost of electricity (“LCOE”), meaning the net present value of a system’s total life cycle costs divided by the quantity of energy that is expected to be produced over the system’s life. Many crystalline silicon cell and wafer manufacturers continue to transition from lower efficiency Back Surface Field (“BSF”) multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency Passivated Emitter Rear Contact (“PERC”) multi-crystalline and mono-crystalline cells at competitive cost structures. Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC modules are pursuing the commercialization of bifacial modules that also capture diffuse irradiance on the back side of a module. The cost effective manufacture of bifacial PERC modules has been enabled, in part, by the expansion of inexpensive crystal growth and diamond wire saw capacity in China. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which, after considering incremental BoS and other costs, could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce.

We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and systems is highly competitive. Our cost competitiveness is based in large part on our module wattage (or conversion efficiency), proprietary manufacturing technology (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers.



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Given the smaller size (sometimes referred to as form factor) of our legacy Series 4 modules compared to certain types of crystalline silicon modules, we may incur higher labor and BoS costs associated with the construction of systems using our Series 4 modules. Thus, to compete effectively on an LCOE basis, our Series 4 modules may need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules with larger form factors. Our next generation Series 6 modules have a larger form factor along with better product attributes and a lower manufacturing cost structure. Accordingly, the larger form factor and design of our Series 6 modules reduces the number of electrical connections, hardware, and labor required for system installation compared to current module technologies, including our Series 4 modules. The resulting cost savings are expected to improve project returns as BoS and labor costs represent a significant portion of the overall costs associated with the construction of a typical utility-scale system.

In terms of energy yield, in many climates, our CdTe modules provide an energy production advantage over most conventional crystalline silicon solar modules (including monofacial PERC technologies) of equivalent efficiency rating. For example, our CdTe solar modules provide a superior temperature coefficient, which results in stronger system performance in typical high insolation climates as the majority of a system’s generation, on average, occurs when module temperatures are well above 25°C (standard test conditions). In addition, our CdTe modules provide a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to laboratory standards. Our CdTe solar modules also provide a better shading response than conventional crystalline silicon solar modules, which may lose up to three times as much power as CdTe solar modules when shading occurs. As a result of these and other factors, our PV solar power systems typically produce more annual energy in real world field conditions than competing systems with the same nameplate capacity.

While our modules and systems are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in additional margin compression, further declines in the average selling prices of our modules and systems, erosion in our market share for modules and systems, and/or declines in overall net sales. We continue to focus on enhancing the competitiveness of our solar modules and systems by accelerating progress along our module technology and cost reduction roadmaps, including advances at the system level.

Certain Trends and Uncertainties

We believe that our operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations. See Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 and Item 1A. of this Quarterly Report on Form 10-Q for discussions of other risks (the “Risk Factors”) that may affect our business, financial condition, results of operations, and cash flows.

Our long-term strategic plans are focused on our goal to create long-term shareholder value through a balance of growth, profitability, and liquidity. In executing such plans, we are focusing on providing utility-scale PV solar energy solutions using our modules in key geographic markets that we believe have a compelling need for mass-scale PV electricity, including markets throughout the Americas, the Asia-Pacific region, Europe, and certain other strategic markets. Additionally, we are focusing on opportunities in which our PV solar energy solutions can compete directly with traditional forms of energy generation on an LCOE or similar basis, or complement such generation offerings. Such opportunities include the retirement and replacement of fossil fuel-based generation resources with utility-scale PV solar energy solutions. For example, cumulative global retirements of coal generation plants are expected to approximate 900 GWDC by 2040, representing a significant increase in the potential market for solar energy.

Such focus on our core module and utility-scale offerings exists within a current market environment that includes rooftop and distributed generation solar, particularly in the United States. While it is unclear how rooftop and distributed generation solar might impact our core utility-scale based offerings over the next several years, we believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain international markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions.



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Our ability to provide utility-scale offerings on economically attractive terms depends, in part, on market factors outside of our control, such as interest rate fluctuations, domestic or international trade policies, and government support programs. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for such systems and limit the number of potential buyers.

We closely evaluate and monitor the appropriate level of resources required as we pursue the most advantageous and cost effective projects and partnerships in our key markets. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. We expect that, over time, the majority of our consolidated net sales, operating income, and cash flows will come from solar offerings in the key geographic markets described above. The timing, execution, and financial impacts of our long-term strategic plans are subject to risks and uncertainties, as described in the Risk Factors. We are focusing our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with significant current or projected electricity demand, relatively high existing electricity prices, strong demand for renewable energy generation, and high solar resources.

Creating or maintaining a market position in certain strategically targeted markets and energy applications also requires us to adapt to new and changing market conditions. For example, our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins, which may adversely affect our results of operations. We expect the profitability associated with our various sales offerings to vary from one another over time, and possibly vary from our internal long-range profitability expectations and targets, depending on the market opportunity and the relative competitiveness of our offerings compared with other energy solutions, traditional or otherwise, that are available to potential customers. In addition, as we execute on our long-term strategic plans, we will continue to monitor and adapt to any changing dynamics in emerging technologies, such as commercially viable energy storage solutions, which are expected to further enable PV solar power systems to compete with traditional forms of energy generation by shifting the delivery of energy generated by such systems to periods of greater demand. Storage solutions continue to evolve in terms of technology and cost, and cumulative global deployments of storage capacity are expected to exceed 900 GWDC by 2040, representing a significant increase in the potential market for renewable energy. We will also continue to monitor and adapt to changing dynamics in the market set of potential buyers of solar projects. Market environments with few potential project buyers and a higher cost of capital would generally exert downward pressure on the potential revenue from the solar projects we are developing, whereas, conversely, market environments with many potential project buyers and a lower cost of capital would likely have a favorable impact on the potential revenue from such solar projects.

On occasion, we may temporarily own and operate certain systems with the intention to sell them at a later date. We may also enter into business arrangements with strategic partners that result in us temporarily retaining an ownership interest in the underlying systems projects we develop, supply modules to, or construct, potentially for a period of up to several years. In these situations, we may retain such ownership interests in a consolidated or unconsolidated separate entity. We may also elect to construct and temporarily retain ownership interests in partially contracted or uncontracted systems for which there is a partial or no PPA with an off-taker, such as a utility, but rather an intent to sell some portion of the electricity produced by the system on an open contract basis until the system is sold. Expected revenue from projects without a PPA for the full offtake of the system is subject to greater variability and uncertainty based on market factors and is typically lower than projects with a PPA for the full offtake of the system. Furthermore, all system pricing is effected by the pricing of energy to be sold on an open contract basis following the termination of the PPA (i.e., merchant pricing curves), and changes in market assumptions regarding future open contract sales may also result in significant variability and uncertainty in the value of our systems projects.

We continually evaluate forecasted global demand, competition, and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. In early 2019, we commenced commercial production of Series 6 modules at our second manufacturing facility in Ho Chi Minh City, Vietnam, and are also in the process of constructing an additional Series 6 manufacturing plant in Lake Township, Ohio, a short distance from our plant in Perrysburg, Ohio. These additional manufacturing plants, and any other potential



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investments to add or otherwise modify our existing manufacturing capacity in response to market demand and competition, may require significant internal and possibly external sources of capital, and may be subject to certain risks and uncertainties described in the Risk Factors, including those described under the headings “Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties” and “If any future production lines are not built in line with committed schedules, it may adversely affect our future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.”

Systems Project Pipeline

The following tables summarize, as of October 24, 2019, our approximately 1.7 GWAC advanced-stage project pipeline. The actual volume of modules installed in our projects will be greater than the project size in MWAC as module volumes required for a project are based upon MWDC, which will be greater than the MWAC size pursuant to a DC-AC ratio typically ranging from 1.2 to 1.3. Such ratio varies across different projects due to various system design factors. Projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized. Projects, or portions of projects, may also be removed from the tables below in the event an EPC-contracted or partner-developed project does not obtain permitting or financing, a project is not able to be sold due to the changing economics of the project or other factors, or we decide to temporarily own and operate, or retain interests in, such project based on strategic opportunities or market factors.

In July 2019, in connection with the voluntary petitions by PG&E Corporation and Pacific Gas and Electric Company, the previous off-taker to our 75 MWAC Willow Springs 3 project, for relief under chapter 11 of title 11 of the United States Code, we filed a motion with the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”) to terminate the PPA of the Willow Springs 3 project. In August 2019, the Bankruptcy Court granted the motion, and we terminated the PPA, thereby permitting us to remarket the energy related to the project to another off-taker. As of October 24, 2019, we had not contracted the offtake for this project. Accordingly, we have removed the Willow Springs 3 project from the tables below until we obtain another PPA for the project.

Projects under Sales Agreements
(Includes uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements, including partner developed projects that we may be constructing.)
Project/Location
 
Project Size in MWAC
 
PPA Contracted Partner
 
EPC Contract/Partner Developed Project
 
Expected Year Revenue Recognition Will Be Completed
 
% of Revenue Recognized as of September 30, 2019
Phoebe, Texas
 
250

 
Shell Energy North America
 
Innergix Renewable Energy
 
2019
 
98%
GA Solar 4, Georgia
 
200

 
Georgia Power Company
 
Origis Energy USA
 
2020
 
43%
Sun Streams, Arizona
 
150

 
SCE
 
(1)
 
2019
 
—%
Sunshine Valley, Nevada
 
100

 
SCE
 
(1)
 
2019
 
—%
Seabrook, South Carolina
 
72

 
South Carolina Electric and Gas Company
 
Dominion Energy
 
2019
 
41%
Japan (multiple locations)
 
52

 
TEPCO Energy
 
(1)
 
2020
 
—%
Troy Solar, Indiana
 
51

 
(2)
 
Southern Indiana Gas and Electric Company
 
2020
 
—%
Windhub A, California
 
20

 
SCE
 
(1)
 
2019
 
—%
Total
 
895

 
 
 
 
 
 
 
 




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Projects with Executed PPAs Not Under Sales Agreements
Project/Location
 
Project Size in MWAC
 
PPA Contracted Partner
 
Fully Permitted
 
Expected or Actual Substantial Completion Year
 
% Complete as of September 30, 2019
Little Bear, California
 
160

 
Marin Clean Energy
 
Yes
 
2020
 
12%
Sun Streams 2, Arizona
 
150

 
Microsoft Corporation
 
Yes
 
2020/2021
 
7%
Luz del Norte, Chile
 
141

 
(3)
 
Yes
 
2016
 
100%
American Kings Solar, California
 
123

 
SCE
 
Yes
 
2020
 
18%
Sun Streams PVS, Arizona
 
65

 
APS
 
No
 
2020
 
2%
Ishikawa, Japan
 
59

 
Hokuriku Electric Power Company
 
Yes
 
2018
 
100%
Japan (multiple locations)
 
55

 
(4)
 
No
 
2021/2022
 
12%
Miyagi, Japan
 
40

 
Tohoku Electric Power Company
 
Yes
 
2021
 
29%
India (multiple locations)
 
40

 
(5)
 
Yes
 
2017
 
100%
Total
 
833

 
 
 
 
 
 
 
 
——————————
(1)
Contracted but not specified

(2)
Utility-owned generation

(3)
Approximately 70 MWAC of the plant’s capacity is contracted under various PPAs

(4)
Chubu Electric Power Company – 38 MWAC and Hokuriku Electric Power Company – 17 MWAC 

(5)
Gulbarga Electricity Supply Co. – 20 MWAC and Chamundeshwari Electricity Supply Co. – 20 MWAC 




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Results of Operations

The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
74.7
 %
 
80.9
 %
 
87.0
 %
 
81.1
 %
Gross profit
 
25.3
 %
 
19.1
 %
 
13.0
 %
 
18.9
 %
Selling, general and administrative
 
9.8
 %
 
5.0
 %
 
9.0
 %
 
8.1
 %
Research and development
 
4.6
 %
 
3.3
 %
 
4.3
 %
 
4.1
 %
Production start-up
 
3.4
 %
 
2.2
 %
 
2.3
 %
 
4.9
 %
Operating income (loss)
 
7.6
 %
 
8.6
 %
 
(2.6
)%
 
1.9
 %
Foreign currency gain (loss), net
 
0.2
 %
 
(0.4
)%
 
0.2
 %
 
(0.2
)%
Interest income
 
2.1
 %
 
2.4
 %
 
2.4
 %
 
2.9
 %
Interest expense, net
 
(0.9
)%
 
(0.5
)%
 
(1.4
)%
 
(0.9
)%
Other (loss) income, net
 
(0.6
)%
 
(0.9
)%
 
(0.3
)%
 
0.5
 %
Income tax expense
 
(2.7
)%
 
(0.4
)%
 
(1.5
)%
 
(0.5
)%
Equity in earnings, net of tax
 
 %
 
(0.5
)%
 
 %
 
2.3
 %
Net income (loss)
 
5.6
 %
 
8.5
 %
 
(3.3
)%
 
5.9
 %

Segment Overview

We operate our business in two segments. Our modules segment involves the design, manufacture, and sale of CdTe solar modules to third parties, and our systems segment includes the development, construction, operation, maintenance, and sale of PV solar power systems, including any modules installed in such systems and any revenue from energy generated by such systems.

In September 2019, we announced our transition from an internal EPC service model in the United States to an external model, in which we expect to leverage the capabilities of third-party EPC services in providing power plant solutions to our systems segment customers. This transition is scheduled to occur through the rest of 2019 and is not expected to affect any projects to be completed this year. The shift to an external EPC service model in the United States aligns with our typical model in international markets and is facilitated, in part, by our Series 6 module technology and its improved BoS compatibility. See Note 16. “Segment Reporting” to our condensed consolidated financial statements for more information on our operating segments.

Net sales

Modules Business

We generally price and sell the energy from our solar modules on a per watt basis. During the three and nine months ended September 30, 2019, we sold the majority of our solar modules to integrators and operators of systems in the United States and France, and substantially all of our modules business net sales were denominated in U.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts.




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Systems Business

During the three months ended September 30, 2019, the majority of our systems business net sales were in the United States and were denominated in U.S. dollars. During the nine months ended September 30, 2019, the majority of our systems business net sales were in the United States and Australia and were denominated in U.S. dollars and Australian dollars. We typically recognize revenue for sales of solar power systems using cost based input methods, which result in revenue being recognized as work is performed based on the relationship between actual costs incurred compared to the total estimated costs for a given contract. We may also recognize revenue for the sale of a system after the project has been completed due to the timing of when we enter into the associated sales contract with the customer.

The following table shows net sales by reportable segment for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Modules
 
$
371,184

 
$
119,825

 
$
251,359

 
210
 %
 
$
798,744

 
$
386,450

 
$
412,294

 
107
 %
Systems
 
175,622

 
556,395

 
(380,773
)
 
(68
)%
 
864,996

 
1,166,353

 
(301,357
)
 
(26
)%
Net sales
 
$
546,806

 
$
676,220

 
$
(129,414
)
 
(19
)%
 
$
1,663,740

 
$
1,552,803

 
$
110,937

 
7
 %

Net sales from our modules segment increased $251.4 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to a 221% increase in the volume of watts sold, partially offset by a 3% decrease in the average selling price per watt. Net sales from our systems segment decreased $380.8 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the sale of the Manildra project in 2018 and the completion of substantially all construction activities at the California Flats, Willow Springs, Balm Solar, Rosamond, and Payne Creek projects in late 2018 and early 2019, partially offset by the sale of the Seabrook project and the completion of substantially all construction activities at the Phoebe project in 2019.

Net sales from our modules segment increased $412.3 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to a 100% increase in the volume of watts sold and a 3% increase in the average selling price per watt. Net sales from our systems segment decreased $301.4 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the sale of the Manildra and certain India projects in 2018 and the completion of substantially all construction activities at the California Flats, Willow Springs, Balm Solar, and Payne Creek projects in late 2018 and early 2019, partially offset by the sale of the Beryl and Seabrook projects and ongoing construction activities at the Phoebe and GA Solar 4 projects in 2019.

Cost of sales

Modules Business

Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion).




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Systems Business

For our systems business, project-related costs include development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPC costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering, and construction labor), and site specific costs.

The following table shows cost of sales by reportable segment for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Modules
 
$
223,378

 
$
125,479

 
$
97,899

 
78
 %
 
$
664,451

 
$
408,377

 
$
256,074

 
63
 %
Systems
 
185,065

 
421,614

 
(236,549
)
 
(56
)%
 
783,632

 
850,559

 
(66,927
)
 
(8
)%
Total cost of sales
 
$
408,443

 
$
547,093

 
$
(138,650
)
 
(25
)%
 
$
1,448,083

 
$
1,258,936

 
$
189,147

 
15
 %
% of net sales
 
74.7
%
 
80.9
%
 
 

 
 

 
87.0
%
 
81.1
%
 
 
 
 

Our cost of sales decreased $138.7 million, or 25%, and decreased 6.2 percentage points as a percent of net sales for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease in cost of sales was driven by a $236.5 million decrease in our systems segment cost of sales primarily due to the lower volume of projects under construction during the period. Such decrease was partially offset by a $97.9 million increase in our modules segment cost of sales primarily due to higher costs of $219.8 million from an increase in the volume of modules sold, partially offset by a reduction in our product warranty liability of $80.0 million due to revised module return rates and lower under-utilization and certain other charges associated with the initial ramp of certain Series 6 manufacturing lines, which decreased cost of sales by $42.6 million compared to 2018.

Our cost of sales increased $189.1 million, or 15%, and increased 5.9 percentage points as a percent of net sales for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in cost of sales was driven by a $256.1 million increase in our modules segment cost of sales primarily due to higher costs of $354.9 million from an increase in the volume of modules sold, partially offset by the reduction in our product warranty liability described above. This increase in cost of sales was partially offset by a $66.9 million decrease in our systems segment cost of sales primarily due to the lower volume of projects under construction during the period and the timing of when all revenue recognition criteria were met.

Gross profit

Gross profit may be affected by numerous factors, including the selling prices of our modules and systems, our manufacturing costs, project development costs, BoS costs, the capacity utilization of our manufacturing facilities, and foreign exchange rates. Gross profit may also be affected by the mix of net sales from our modules and systems businesses.

The following table shows gross profit for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Gross profit
 
$
138,363

 
$
129,127

 
$
9,236

 
7
%
 
$
215,657

 
$
293,867

 
$
(78,210
)
 
(27
)%
% of net sales
 
25.3
%
 
19.1
%
 
 

 
 

 
13.0
%
 
18.9
%
 
 
 
 

Gross profit increased by 6.2 percentage points to 25.3% during the three months ended September 30, 2019 from 19.1% during the three months ended September 30, 2018 primarily due to the reduction in our product warranty liability described above, higher gross profit on third-party module sales, and improved utilization of our manufacturing facilities, partially offset by the mix of lower gross profit projects under construction during the period.



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Gross profit decreased 5.9 percentage points to 13.0% during the nine months ended September 30, 2019 from 18.9% during the nine months ended September 30, 2018 due to the mix of lower gross profit projects under construction during the period and the settlement of a tax examination with the state of California in 2018, which affected our estimates of sales and use taxes due for certain projects, partially offset by the reduction in our product warranty liability described above and higher gross profit on third-party module sales.

Selling, general and administrative

Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.

The following table shows selling, general and administrative expense for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Selling, general and administrative
 
$
53,542

 
$
33,539

 
$
20,003

 
60
%
 
$
149,828

 
$
125,519

 
$
24,309

 
19
%
% of net sales
 
9.8
%
 
5.0
%
 
 

 
 

 
9.0
%
 
8.1
%
 
 
 
 

Selling, general and administrative expense for the three and nine months ended September 30, 2019 increased compared to the three and nine months ended September 30, 2018 primarily due to lower accretion expense in 2018 associated with a reduction in our module collection and recycling liability in that period, higher employee compensation expense, and higher professional fees.

Research and development

Research and development expense consists primarily of salaries and other personnel-related costs; the cost of products, materials, and outside services used in our R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules and systems.

The following table shows research and development expense for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Research and development
 
$
24,912

 
$
22,390

 
$
2,522

 
11
%
 
$
71,184

 
$
63,084

 
$
8,100

 
13
%
% of net sales
 
4.6
%
 
3.3
%
 
 

 
 

 
4.3
%
 
4.1
%
 
 
 
 

Research and development expense for the three and nine months ended September 30, 2019 increased compared to the three and nine months ended September 30, 2018 primarily due to increased material and module testing costs and higher employee compensation expense.

Production start-up

Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase and applicable facility related costs. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in production start-up expense as well as costs related to the selection of a new site, related legal and regulatory costs, and costs to maintain our plant replication program to the extent we cannot capitalize these expenditures. In general, we expect production



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start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition or replacement of production lines at an existing manufacturing facility, primarily due to the additional infrastructure investment required when building an entirely new facility.

The following table shows production start-up expense for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Production start-up
 
$
18,605

 
$
14,723

 
$
3,882

 
26
%
 
$
38,564

 
$
76,159

 
$
(37,595
)
 
(49
)%
% of net sales
 
3.4
%
 
2.2
%
 
 

 
 

 
2.3
%
 
4.9
%
 
 
 
 

During the three and nine months ended September 30, 2019, we incurred production start-up expense at our new facility in Lake Township, Ohio. We also incurred production start-up expense at our second facility in Ho Chi Minh City, Vietnam in early 2019. During the three and nine months ended September 30, 2018, we incurred production start-up expense for the transition to Series 6 module manufacturing at our facilities in Kulim, Malaysia and Ho Chi Minh City, Vietnam. We also incurred production start-up expense for the transition to Series 6 module manufacturing at our facility in Perrysburg, Ohio in early 2018.

Foreign currency gain (loss), net

Foreign currency gain (loss), net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries’ functional currencies.

The following table shows foreign currency (loss) gain, net for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Foreign currency gain (loss), net
 
$
1,209

 
$
(2,383
)
 
$
3,592

 
151
%
 
$
3,107

 
$
(2,478
)
 
$
5,585

 
225
%

Foreign currency gain for the three months ended September 30, 2019 increased compared to the three months ended September 30, 2018 primarily due to differences between our economic hedge positions and the underlying exposures and lower costs associated with hedging activities related to our subsidiaries in India and Japan. Foreign currency gain for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018 primarily due to lower costs associated with hedging activities related to our subsidiaries in India and Japan, partially offset by the differences between our economic hedge positions and the underlying exposures.

Interest income

Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest income also includes interest earned from notes receivable and late customer payments.

The following table shows interest income for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Interest income
 
$
11,454

 
$
16,456

 
$
(5,002
)
 
(30
)%
 
$
39,223

 
$
45,145

 
$
(5,922
)
 
(13
)%




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Interest income for the three months ended September 30, 2019 decreased compared to the three months ended September 30, 2018 primarily due to lower average balances of time deposits and lower interest rates associated with restricted investments. Interest income for the nine months ended September 30, 2019 decreased compared to the nine months ended September 30, 2018 primarily as a result of lower average balances and interest rates associated with restricted investments, partially offset by higher interest rates on marketable securities.

Interest expense, net

Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with ASC 815. We may capitalize interest expense into our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period.

The following table shows interest expense, net for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Interest expense, net
 
$
(4,976
)
 
$
(3,198
)
 
$
(1,778
)
 
56
%
 
$
(24,018
)
 
$
(14,445
)
 
$
(9,573
)
 
66
%

Interest expense, net for the three and nine months ended September 30, 2019 increased compared to the three and nine months ended September 30, 2018 primarily due to changes in the fair value of interest rate swap contracts, which do not qualify for hedge accounting, and lower interest capitalized to certain projects under construction.

Other (loss) income, net

Other (loss) income, net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted investments.

The following table shows other income, net for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Other (loss) income, net
 
$
(3,399
)
 
$
(5,971
)
 
$
2,572

 
(43
)%
 
$
(4,328
)
 
$
7,635

 
$
(11,963
)
 
157
%

Other loss, net for the three months ended September 30, 2019 decreased compared to the three months ended September 30, 2018 primarily due to the prior period impairment of our warrant to purchase additional ownership interests in CEC. Other loss, net for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018 primarily due to the impairment of a strategic investment, lower realized gains from sales of restricted investments, and net charges associated with certain letter of credit arrangements.

Income tax expense

Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions in which we operate, principally Australia, India, and Malaysia. Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate in the United States is 21%, and the tax rates in Australia, India, and Malaysia are 30%, 34.9%, and 24%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax, conditional upon our continued compliance with certain employment and investment thresholds.




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The following table shows income tax expense for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Income tax expense
 
$
(15,035
)
 
$
(2,396
)
 
$
(12,639
)
 
528
%
 
$
(25,385
)
 
$
(7,857
)
 
$
(17,528
)
 
223
%
Effective tax rate
 
33.0
%
 
3.8
%
 
 

 
 

 
(84.8
)%
 
12.1
%
 
 
 
 

Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. The rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period. Income tax expense increased by $12.6 million during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to a lower benefit from the expiration of the statute of limitations on uncertain tax positions. Income tax expense increased by $17.5 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to a lower tax benefit from the expiration of the statute of limitations on uncertain tax positions and certain discrete tax expenses associated with filing a tax return in a foreign jurisdiction.

Equity in earnings, net of tax

Equity in earnings, net of tax represents our proportionate share of the earnings or losses from equity method investments as well as any gains or losses on the sale or disposal of such investments.

The following table shows equity in earnings, net of tax for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
(Dollars in thousands)
 
2019
 
2018
 
Three Month Change
 
2019
 
2018
 
Nine Month Change
Equity in earnings, net of tax
 
$
65

 
$
(3,233
)
 
$
3,298

 
102
%
 
$
(205
)
 
$
35,105

 
$
(35,310
)
 
(101
)%

Equity in earnings, net of tax for the three months ended September 30, 2019 increased compared to the three months ended September 30, 2018 primarily due to higher losses in 2018 from our investment in CEC. Equity in earnings, net of tax for the nine months ended September 30, 2019 decreased compared to the nine months ended September 30, 2018 primarily as a result of the sale of our ownership interests in 8point3 Operating Company, LLC, which resulted in a gain of $40.3 million, net of tax in 2018. See Note 5. “Consolidated Balance Sheet Details” to our condensed consolidated financial statements for additional information.




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Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the amounts of reported assets, liabilities, revenues, and expenses, as well as the disclosure of contingent liabilities. Some of our accounting policies require the application of significant judgment in the selection of the appropriate assumptions for making these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our judgments and estimates on our historical experience, our forecasts, and other available information as appropriate. We believe the judgments and estimates involved in over time revenue recognition, accrued solar module collection and recycling, product warranties, accounting for income taxes, long-lived asset impairments, and testing goodwill for impairment have the greatest potential impact on our condensed consolidated financial statements. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

For a description of the accounting policies that require the most significant judgment and estimates in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to our accounting policies during the nine months ended September 30, 2019 with the exception of certain changes to our lease accounting policies as part of the adoption of ASU 2016-02 as described in Note 7. “Leases” to our condensed consolidated financial statements.

Recent Accounting Pronouncements

See Note 2. “Recent Accounting Pronouncements” to our condensed consolidated financial statements for a summary of recent accounting pronouncements.

Liquidity and Capital Resources

As of September 30, 2019, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, contracts with customers for the future sale of solar modules, advanced-stage project pipeline, availability under our Revolving Credit Facility (considering the minimum liquidity covenant requirements therein), and access to the capital markets will be sufficient to meet our working capital, systems project investment, and capital expenditure needs for at least the next 12 months. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally.

We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, capital expenditures, and strategic discretionary spending. In the future, we may also engage in additional debt or equity financings, including project specific debt financings. We believe that when necessary, we will have adequate access to the capital markets, although our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to industry-wide or company-specific concerns. Such financings could result in increased debt service expenses, dilution to our existing stockholders, or restrictive covenants, which could limit our ability to pursue our strategic plans.

As of September 30, 2019, we had $1.5 billion of cash, cash equivalents, and marketable securities compared to $2.5 billion as of December 31, 2018. Cash, cash equivalents, and marketable securities as of September 30, 2019 decreased primarily as a result of purchases of property, plant and equipment, operating expenditures associated with the initial ramp of certain Series 6 manufacturing lines, and expenditures for the construction of certain projects. As of September 30, 2019, $0.8 billion of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Japanese yen, and Euro denominated holdings.

We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations in the United States, we may be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. We maintain the intent



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and ability to permanently reinvest our accumulated earnings outside of the United States, with the exception of our subsidiaries in Canada and Germany. In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources.

Our systems business requires significant liquidity and is expected to continue to have significant liquidity requirements in the future. The net amount of our project assets and related portion of deferred revenue, which approximates our net capital investment in the development and construction of systems projects, was $557.3 million as of September 30, 2019. Solar power project development and construction cycles, which span the time between the identification of a site location and the commercial operation of a system, vary substantially and can take many years to mature. As a result of these long project cycles and strategic decisions to finance the development and construction of certain projects using our working capital, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale of such projects. Delays in construction or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. In certain circumstances, we may need to finance construction costs exclusively using working capital, if project financing becomes unavailable due to market-wide, regional, or other concerns.

From time to time, we may develop projects in certain markets around the world where we may hold all or a significant portion of the equity in a project for several years. Given the duration of these investments and the currency risk relative to the U.S. dollar in some of these markets, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted.

Additionally, we may elect to retain an ownership interest in certain systems projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a systems project at economics that are attractive to us or potential customers are unwilling to assume the risks and rewards typical of PV solar power system ownership, we may instead elect to temporarily own and operate such system until we can sell it on economically attractive terms. The decision to retain ownership of a system impacts our liquidity depending upon the size and cost of the project. As of September 30, 2019, we had $484.6 million of net PV solar power systems that had been placed in service, primarily in international markets. We have elected, and may in the future elect, to enter into temporary or long-term project financing to reduce the impact on our liquidity and working capital with regards to such projects and systems. We may also consider entering into tax equity or other arrangements with respect to ownership interests in certain of our projects, which could cause a portion of the economics of such projects to be realized over time.

The following additional considerations have impacted or may impact our liquidity for 2019 and beyond:

We expect to continue to make significant capital investments as we transition our production to Series 6 module technology and purchase the related manufacturing equipment and infrastructure, including expenditures for our additional U.S. manufacturing plant in Lake Township, Ohio. We expect the aggregate capital investment for currently planned Series 6 related programs to be approximately $2.0 billion, including $1.6 billion of capital expenditures already made as of September 30, 2019. These capital investments are expected to provide an annual Series 6 manufacturing capacity of approximately 6.6 GWDC once completed. During the remainder of 2019, we expect to spend $150 million to $250 million for capital expenditures, the majority of which is associated with our Series 6 transition.

Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Accordingly, we may enter into long-term supply agreements to mitigate potential risks related to the procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules.



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Our actual purchases under these supply agreements are expected to be approximately $2.4 billion of substrate glass and $500 million of cover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which are up to $430 million in the aggregate and decline over time during the respective supply periods).

The balance of our solar module inventories and BoS parts was $505.0 million as of September 30, 2019. As we continue to develop and construct our advanced-stage project pipeline, we must produce solar modules and potentially procure BoS parts in volumes sufficient to support our planned construction schedules. As part of this construction cycle, we typically produce or procure these inventories in advance of receiving payment for such materials, which may temporarily reduce our liquidity. Once solar modules and BoS parts are installed in a project, they are classified as either project assets, PV solar power systems, or cost of sales depending on whether the project is subject to a definitive sales contract and whether other revenue recognition criteria have been met. We also produce significant volumes of modules for sale directly to third-parties, which requires us to carry inventories at levels sufficient to satisfy the demand of our customers and the needs of their projects, which may also temporarily reduce our liquidity.

We may commit significant working capital over the next several years to advance the construction of various U.S. systems projects or procure the associated modules or BoS parts by specified dates for such projects to qualify for certain federal investment tax credits (“ITC”). Among other requirements, such credits require projects to commence construction in 2019, which may be achieved by certain qualifying procurement activities, to receive a 30% investment tax credit. The credit will step down to 26% for projects that commence construction in 2020, 22% for projects that commence construction in 2021, and 10% for projects that commence construction thereafter.

We may also commit working capital to acquire solar power projects in various stages of development, including advanced-stage projects with PPAs, and to continue developing those projects and our existing projects, as necessary. Depending upon the size and stage of development, the costs to acquire such solar power projects could be significant. When evaluating project acquisition opportunities, we consider both the strategic and financial benefits of any such acquisitions.

Cash Flows

The following table summarizes the key cash flow activity for the nine months ended September 30, 2019 and 2018 (in thousands):
 
 
Nine Months Ended
September 30,
 
 
2019
 
2018
Net cash used in operating activities
 
$
(607,492
)
 
$
(141,310
)
Net cash used in investing activities
 
(54,635
)
 
(795,723
)
Net cash provided by financing activities
 
81,742

 
143,183

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(6,732
)
 
(12,454
)
Net decrease in cash, cash equivalents and restricted cash
 
$
(587,117
)
 
$
(806,304
)

Operating Activities

The increase in net cash used in operating activities was primarily driven by operating expenditures associated with our ongoing transition to Series 6 module manufacturing and expenditures for the construction of certain projects.




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Investing Activities

The decrease in net cash used in investing activities was primarily due to higher net sales of marketable securities and restricted investments and lower purchases of property, plant and equipment, partially offset by proceeds associated with the sale of our interests in the Partnership and its subsidiaries in 2018.

Financing Activities

The decrease in net cash provided by financing activities was primarily the result of lower net proceeds from borrowings under project specific debt financings associated with the construction of certain projects in Australia and India.

Contractual Obligations

Our contractual obligations have not materially changed since December 31, 2018 with the exception of borrowings under project specific debt financings and other changes in the ordinary course of business. See Note 9. “Debt” to our condensed consolidated financial statements for more information related to the changes in our long-term debt. See also our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding our contractual obligations.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had no off-balance sheet debt or similar obligations, other than financial assurance related instruments, which are not classified as debt. We do not guarantee any third-party debt. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for further information about our financial assurance related instruments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the information previously provided under Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2019 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

We also carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) to determine whether any changes in our internal control over financial reporting occurred during the three months ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes in our internal control over financial reporting that occurred during the three months ended September 30, 2019.



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CEO and CFO Certifications

We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4. be read in conjunction with those certifications for a more complete understanding of the subject matter presented.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.




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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 10. “Commitments and Contingencies” under the heading “Legal Proceedings” of our condensed consolidated financial statements for legal proceedings and related matters.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition, results of operations, or cash flows. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently consider immaterial may also materially adversely affect our business, financial condition, results of operations, or cash flows. Except for the updated risk factor appearing below, there have been no material changes in the risk factors contained in our Annual Report on Form 10-K.

The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results.

Although we believe that solar energy will experience widespread adoption in those applications where it competes economically with traditional forms of energy without any support programs, in certain markets our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Federal, state, and local governmental bodies in many countries have provided subsidies in the form of feed-in-tariffs, rebates, tax incentives, and other incentives to end-users, distributors, system integrators, and manufacturers of PV solar products. Many of these support programs expire, phase out over time, require renewal by the applicable authority, or may be amended. A summary of certain recent developments in the major government support programs that may impact our business appears under Item 1. “Business – Support Programs” of our Annual Report on Form 10-K. To the extent these support programs are reduced earlier than previously expected or are changed retroactively, such changes could negatively impact demand and/or price levels for our solar modules and systems, lead to a reduction in our net sales, and adversely impact our operating results. Another consideration in the U.S. market, and to a lesser extent in other global markets, is the effect of governmental land-use planning policies and environmental policies on utility-scale PV solar development. The adoption of restrictive land-use designations or environmental regulations that proscribe or restrict the siting of utility-scale solar facilities could adversely affect the marginal cost of such development.

In addition, policies of the U.S. presidential administration may create regulatory uncertainty in the renewable energy industry, including the solar industry, and our business, financial condition, and results of operations could be adversely affected. Members of the U.S. presidential administration, including representatives of the U.S. Department of Energy, have made public statements that indicate that the administration may not be supportive of various clean energy programs and initiatives designed to curtail climate change. For example, in June 2017, the U.S. President announced that the United States would withdraw from participation in the 2015 Paris Agreement on climate change mitigation. In addition, the administration has indicated that it may be supportive of overturning or modifying policies of or regulations enacted by the prior administration that placed limitations on gas and coal electricity generation, mining, and/or exploration. Additionally, in October 2017, the United States Environmental Protection Agency (“U.S. EPA”) issued a Notice of Proposed Rulemaking, proposing to repeal the previous U.S. presidential administration’s Clean Power Plan (“CPP”), which established standards to limit carbon dioxide emissions from existing power generation facilities. In June 2019, the U.S. EPA issued the final Affordable Clean Energy (“ACE”) rule and repealed the CPP. Under the ACE rule, emissions from electric utility generation facilities would be regulated only through the use of various “inside the fence” or onsite efficiency improvements and emission control technologies. In contrast, the CPP allowed facility owners to



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reduce emissions with “outside the fence” measures, including those associated with renewable energy projects. While the ACE rule is currently subject to legal challenges and may be subject to future challenges, the ultimate resolution of such challenges, and the ultimate impact of the ACE rule, is uncertain. As a result of the new ACE rule and other policies or actions of the current U.S. administration and/or the U.S. Congress, we may be subject to significant risks, including the following:

a reduction or removal of clean energy programs and initiatives and the incentives they provide may diminish the market for future solar energy off-take agreements, slow the retirement of aging fossil fuel plants, including the retirements of coal generation plants, and reduce the ability for solar project developers to compete for future solar energy off-take agreements, which may reduce incentives for such parties to develop solar projects and purchase PV solar modules;

any limitations on the value or availability to potential investors of tax incentives that benefit solar energy projects such as the ITC and accelerated depreciation deductions could result in such investors generating reduced revenues and economic returns and facing a reduction in the availability of affordable financing, thereby reducing demand for PV solar modules. The ITC is a U.S. federal incentive that provides an income tax credit to the owner of the project after the project is placed in service of up to 30% of eligible basis. Under the Modified Accelerated Cost-Recovery System, owners of equipment used in a solar project may claim all of their depreciation deductions with respect to such equipment over five years, even though the useful life of such equipment is generally greater than five years. In addition, in December 2017, the U.S. government enacted comprehensive tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Under the Tax Act, qualified property placed in service after September 22, 2017 and before January 1, 2023 is generally eligible for 100% expensing, and such property placed in service after December 31, 2022 and before January 1, 2027 is generally eligible for expensing at lower percentages. However, the Tax Act also reduced the U.S. corporate income tax rate to 21% effective January 1, 2018, which could diminish the capacity of potential investors to benefit from incentives such as the ITC and reduce the value of accelerated depreciation deductions and expensing, thereby reducing the relative attractiveness of solar projects as an investment; and

any effort to overturn federal and state laws, regulations, or policies that are supportive of solar energy generation or that remove costs or other limitations on other types of electricity generation that compete with solar energy projects could negatively impact our ability to compete with traditional forms of electricity generation and materially and adversely affect our business.

Application of U.S. trade laws, or trade laws of other countries, may also impact, either directly or indirectly, our operating results. For example, in January 2018, following a petition filed by a U.S.-based manufacturer of solar cells under Sections 201 and 202 of the Trade Act of 1974 for global safeguard relief with the U.S. International Trade Commission (the “USITC”), requesting, among other things, the imposition of certain tariffs on crystalline silicon solar cells imported into the United States and the establishment of a minimum price per watt on imported crystalline silicon solar modules, the U.S. President proclaimed tariffs on imported crystalline silicon modules, and a tariff-rate quota on imported crystalline silicon cells, over a four-year period, with the tariff on modules, and the tariff on cells above the first 2.5 GWDC of imports, starting at 30% for the February 2018 to February 2019 period and declining by five percentage points in each subsequent 12-month period. Thin film solar cell products, such as our CdTe technology, are expressly excluded from the tariffs. The Office of the United States Trade Representative (the “USTR”) has also granted certain requests that particular types of solar products be excluded from the tariffs. Among these is an exclusion for bifacial solar modules that was issued on June 13, 2019. However, in a notice published on October 9, 2019, the USTR announced that it will withdraw the exclusion for bifacial solar modules, effective October 28, 2019. In addition, the USITC is expected to review developments regarding the relevant domestic industry (including its efforts to adjust to import competition) and issue a report to the U.S. President by February 2020. Such report could serve as a basis for the U.S. President to reduce, modify, or terminate the safeguard tariffs.




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The United States has also imposed import tariffs in connection with other proceedings during 2018 and 2019. In March 2018, the U.S. President proclaimed tariffs on certain imported aluminum and steel articles, generally at rates of 10% and 25%, respectively, under Section 232 of the Trade Expansion Act of 1962. Currently, all countries except Argentina, Australia, Canada, and Mexico are covered by the aluminum tariff, and all countries except Argentina, Australia, Brazil, Canada, Mexico, and South Korea are covered by the steel tariff. In addition, in May 2018, the U.S. President proclaimed absolute quotas for the import of aluminum articles from Argentina and the import of steel articles from Argentina, Brazil, and South Korea. Separately, in a series of actions during 2018 and 2019 that followed an investigation under Section 301 of the Trade Act of 1974, the United States imposed tariffs on various articles imported from China at a rate of 25%, including crystalline silicon solar cells and modules and various other articles. In August 2019, the U.S. President announced that the Section 301 tariff on various products, including crystalline silicon solar cells and modules, would increase to 30%, but such increase has been postponed and may be reversed subject to a tentative agreement reached with China.

Internationally, in July 2018, the Indian government imposed a safeguard duty on solar cells and modules imported from various countries, including member countries of the Organisation for Economic Co-operation and Development, China, and Malaysia, for a two-year period, starting at 25% through July 2019 and declining by five percentage points in each subsequent six-month period. In addition, in March 2019, the Indian government issued technical guidelines related to the enlistment of approved models and manufacturers of PV solar modules. Pursuant to the regulations, after March 2020, all projects owned by the Indian government or from which energy would be supplied to the government would be required to procure eligible components from these enlisted manufacturers. The enlistment procedures have certain distinguishing criteria depending on whether a manufacturer is located inside or outside of India, which may restrict our ability to access the Indian market. Such tariffs and policies, or any other U.S. or global trade remedies or other trade barriers, may directly or indirectly affect U.S. or global markets for solar energy and our business, financial condition, and results of operations.

These examples show that established markets for PV solar development face uncertainties arising from policy, regulatory, and governmental constraints. While the expected potential of the markets we are targeting is significant, policy promulgation and market development are especially vulnerable to governmental inertia, political instability, the imposition of trade remedies and other trade barriers, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements, and limited available infrastructure.

Item 5. Other Information

None.




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Item 6. Exhibits

The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibit Number
 
Exhibit Description
 
 
 
 
101.INS
 
XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
——————————
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
FIRST SOLAR, INC.
 
 
 
 
Date: October 24, 2019
By:
 
/s/ BYRON JEFFERS
 
Name:
 
Byron Jeffers
 
Title:
 
Interim Chief Accounting Officer




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