FIRST SOLAR, INC. - Quarter Report: 2022 March (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 March 31, 2022
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
![fslr-20220331_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001274494/000127449422000020/fslr-20220331_g1.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)
(602) 414-9300
(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 April 22, 2022, 106,584,190 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
FIRST SOLAR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022
TABLE OF CONTENTS
Page | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Net sales | $ | 367,040 | $ | 803,374 | ||||||||||
Cost of sales | 355,577 | 618,607 | ||||||||||||
Gross profit | 11,463 | 184,767 | ||||||||||||
Operating expenses: | ||||||||||||||
Selling, general and administrative | 36,728 | 52,087 | ||||||||||||
Research and development | 27,108 | 19,873 | ||||||||||||
Production start-up | 7,338 | 11,354 | ||||||||||||
Total operating expenses | 71,174 | 83,314 | ||||||||||||
Gain on sales of businesses, net | 1,907 | 150,895 | ||||||||||||
Operating (loss) income | (57,804) | 252,348 | ||||||||||||
Foreign currency loss, net | (4,198) | (2,595) | ||||||||||||
Interest income | 2,325 | 956 | ||||||||||||
Interest expense, net | (2,865) | (2,996) | ||||||||||||
Other (expense) income, net | (212) | 8,448 | ||||||||||||
(Loss) income before taxes | (62,754) | 256,161 | ||||||||||||
Income tax benefit (expense) | 19,499 | (46,490) | ||||||||||||
Net (loss) income | $ | (43,255) | $ | 209,671 | ||||||||||
Net (loss) income per share: | ||||||||||||||
Basic | $ | (0.41) | $ | 1.98 | ||||||||||
Diluted | $ | (0.41) | $ | 1.96 | ||||||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||
Basic | 106,412 | 106,088 | ||||||||||||
Diluted | 106,412 | 106,890 |
See accompanying notes to these condensed consolidated financial statements.
1
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Net (loss) income | $ | (43,255) | $ | 209,671 | ||||||||||
Other comprehensive loss: | ||||||||||||||
Foreign currency translation adjustments | (10,125) | (9,716) | ||||||||||||
Unrealized loss on marketable securities and restricted marketable securities, net of tax of $1,246 and $1,121 | (22,521) | (16,590) | ||||||||||||
Unrealized (loss) gain on derivative instruments, net of tax of $94 and $(637) | (442) | 3,382 | ||||||||||||
Other comprehensive loss | (33,088) | (22,924) | ||||||||||||
Comprehensive (loss) income | $ | (76,343) | $ | 186,747 |
See accompanying notes to these condensed consolidated financial statements.
2
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, 2022 | December 31, 2021 | |||||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash | $ | 1,326,363 | $ | 1,450,654 | ||||||||||
Marketable securities | 223,091 | 375,389 | ||||||||||||
Accounts receivable trade, net | 293,357 | 429,436 | ||||||||||||
Accounts receivable unbilled, net | 28,764 | 25,273 | ||||||||||||
Inventories | 840,750 | 666,299 | ||||||||||||
Other current assets | 282,668 | 244,192 | ||||||||||||
Total current assets | 2,994,993 | 3,191,243 | ||||||||||||
Property, plant and equipment, net | 2,785,824 | 2,649,587 | ||||||||||||
PV solar power systems, net | 214,386 | 217,293 | ||||||||||||
Project assets | 391,774 | 315,488 | ||||||||||||
Deferred tax assets, net | 61,794 | 59,162 | ||||||||||||
Restricted marketable securities | 220,167 | 244,726 | ||||||||||||
Goodwill | 14,462 | 14,462 | ||||||||||||
Intangible assets, net | 42,769 | 45,509 | ||||||||||||
Inventories | 237,854 | 237,512 | ||||||||||||
Other assets | 435,202 | 438,764 | ||||||||||||
Total assets | $ | 7,399,225 | $ | 7,413,746 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 146,233 | $ | 193,374 | ||||||||||
Income taxes payable | 4,759 | 4,543 | ||||||||||||
Accrued expenses | 334,975 | 288,450 | ||||||||||||
Current portion of long-term debt | 4,701 | 3,896 | ||||||||||||
Deferred revenue | 218,923 | 201,868 | ||||||||||||
Other current liabilities | 25,399 | 34,747 | ||||||||||||
Total current liabilities | 734,990 | 726,878 | ||||||||||||
Accrued solar module collection and recycling liability | 137,455 | 139,145 | ||||||||||||
Long-term debt | 247,354 | 236,005 | ||||||||||||
Other liabilities | 404,251 | 352,167 | ||||||||||||
Total liabilities | 1,524,050 | 1,454,195 | ||||||||||||
Commitments and contingencies | ||||||||||||||
Stockholders’ equity: | ||||||||||||||
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 106,583,300 and 106,332,315 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 107 | 106 | ||||||||||||
Additional paid-in capital | 2,863,318 | 2,871,352 | ||||||||||||
Accumulated earnings | 3,141,200 | 3,184,455 | ||||||||||||
Accumulated other comprehensive loss | (129,450) | (96,362) | ||||||||||||
Total stockholders’ equity | 5,875,175 | 5,959,551 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 7,399,225 | $ | 7,413,746 |
See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Earnings | Accumulated Other Comprehensive (Loss) Income | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 106,332 | $ | 106 | $ | 2,871,352 | $ | 3,184,455 | $ | (96,362) | $ | 5,959,551 | |||||||||||||||||||||||||||
Net loss | — | — | — | (43,255) | — | (43,255) | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (33,088) | (33,088) | ||||||||||||||||||||||||||||||||
Common stock issued for share-based compensation | 414 | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock | (163) | — | (11,505) | — | — | (11,505) | ||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 3,471 | — | — | 3,471 | ||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 106,583 | $ | 107 | $ | 2,863,318 | $ | 3,141,200 | $ | (129,450) | $ | 5,875,175 | |||||||||||||||||||||||||||
Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Earnings | Accumulated Other Comprehensive (Loss) Income | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 105,980 | $ | 106 | $ | 2,866,786 | $ | 2,715,762 | $ | (61,726) | $ | 5,520,928 | |||||||||||||||||||||||||||
Net income | — | — | — | 209,671 | — | 209,671 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (22,924) | (22,924) | ||||||||||||||||||||||||||||||||
Common stock issued for share-based compensation | 536 | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock | (205) | — | (15,689) | — | — | (15,689) | ||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 2,794 | — | — | 2,794 | ||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 106,311 | $ | 106 | $ | 2,853,891 | $ | 2,925,433 | $ | (84,650) | $ | 5,694,780 |
See accompanying notes to these condensed consolidated financial statements.
4
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net (loss) income | $ | (43,255) | $ | 209,671 | ||||||||||
Adjustments to reconcile net (loss) income to cash used in operating activities: | ||||||||||||||
Depreciation, amortization and accretion | 65,207 | 63,205 | ||||||||||||
Impairments and net losses on disposal of long-lived assets | 1,892 | 4,501 | ||||||||||||
Share-based compensation | 3,503 | 3,115 | ||||||||||||
Deferred income taxes | 1,083 | (11,538) | ||||||||||||
Gain on sales of businesses, net | (1,907) | (150,895) | ||||||||||||
Gains on sales of marketable securities and restricted marketable securities | — | (11,696) | ||||||||||||
Other, net | 273 | 1,412 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable, trade and unbilled | 144,286 | (320,461) | ||||||||||||
Other current assets | (15,044) | (42,750) | ||||||||||||
Inventories | (175,990) | 12,602 | ||||||||||||
Project assets and PV solar power systems | (98,695) | 59,623 | ||||||||||||
Other assets | (15,794) | (20,814) | ||||||||||||
Income tax receivable and payable | (23,502) | 33,278 | ||||||||||||
Accounts payable | (55,371) | 7,853 | ||||||||||||
Accrued expenses and other liabilities | 74,475 | (116,584) | ||||||||||||
Net cash used in operating activities | (138,839) | (279,478) | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Purchases of property, plant and equipment | (154,761) | (90,155) | ||||||||||||
Purchases of marketable securities | (750,220) | (292,308) | ||||||||||||
Proceeds from sales and maturities of marketable securities and restricted marketable securities | 900,165 | 508,289 | ||||||||||||
Proceeds from sales of businesses | 1,860 | 145,969 | ||||||||||||
Other investing activities | 12 | 43 | ||||||||||||
Net cash (used in) provided by investing activities | (2,944) | 271,838 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Repayment of long-term debt | (737) | (37,378) | ||||||||||||
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | 18,006 | 21,616 | ||||||||||||
Payments of tax withholdings for restricted shares | (11,505) | (15,689) | ||||||||||||
Net cash provided by (used in) financing activities | 5,764 | (31,451) | ||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 15,162 | (652) | ||||||||||||
Net decrease in cash, cash equivalents and restricted cash | (120,857) | (39,743) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of the period | 1,455,837 | 1,273,594 | ||||||||||||
Cash, cash equivalents and restricted cash, end of the period | $ | 1,334,980 | $ | 1,233,851 | ||||||||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||||||||
Property, plant and equipment acquisitions funded by liabilities | $ | 105,643 | $ | 76,095 | ||||||||||
Proceeds to be received from sales of businesses | $ | — | $ | 156,965 |
See accompanying notes to these condensed consolidated financial statements.
5
FIRST SOLAR, INC.
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 months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any other period. The condensed consolidated balance sheet at December 31, 2021 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, 2021 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. Sales of Businesses
Sales of North American and International O&M Operations
In August 2020, we entered into an agreement with a subsidiary of Clairvest Group, Inc. (“Clairvest”) for the sale of our North American operations and maintenance (“O&M”) operations. In March 2021, we completed the transaction and received initial consideration of $146.0 million. As a result of this transaction, we recognized a gain of $119.2 million, net of transaction costs, during the three months ended March 31, 2021, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
In January 2022, we completed the sale of certain international O&M operations to a separate subsidiary of Clairvest for consideration of $1.9 million. As a result of this transaction, we recognized a gain of $1.9 million, net of transaction costs and post-closing adjustments, during the three months ended March 31, 2022, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
6
Sale of U.S. Project Development Business
In January 2021, we entered into an agreement with Leeward Renewable Energy Development, LLC (“Leeward”), a subsidiary of the Ontario Municipal Employees Retirement System, for the sale of our U.S. project development business. In March 2021, we completed the transaction and received consideration of $151.4 million for the sale of such business. As a result of this transaction, we recognized a gain of $31.8 million, net of transaction costs, during the three months ended March 31, 2021, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
3. Cash and Marketable Securities
Cash and marketable securities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Cash | $ | 1,326,363 | $ | 1,450,654 | ||||||||||
Marketable securities: | ||||||||||||||
Foreign debt | 85,010 | 103,317 | ||||||||||||
U.S. debt | 18,030 | 18,627 | ||||||||||||
Time deposits | 120,051 | 253,445 | ||||||||||||
Total marketable securities | 223,091 | 375,389 | ||||||||||||
Total cash and marketable securities | $ | 1,549,454 | $ | 1,826,043 |
The following table provides a reconciliation of cash and restricted cash reported within our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 to the total of such amounts as presented in the condensed consolidated statements of cash flows (in thousands):
Balance Sheet Line Item | March 31, 2022 | December 31, 2021 | ||||||||||||||||||
Cash | Cash | $ | 1,326,363 | $ | 1,450,654 | |||||||||||||||
Restricted cash – current | Other current assets | 2,353 | 1,532 | |||||||||||||||||
Restricted cash – noncurrent | Other assets | 6,264 | 3,651 | |||||||||||||||||
Total cash and restricted cash | $ | 1,334,980 | $ | 1,455,837 |
During the three months ended March 31, 2021, we sold marketable securities for proceeds of $5.5 million and realized gains of less than $0.1 million on such sales. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our marketable securities.
7
The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of March 31, 2022 and December 31, 2021 (in thousands):
As of March 31, 2022 | ||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||||||||||||||||||
Foreign debt | $ | 85,228 | $ | 26 | $ | 220 | $ | 24 | $ | 85,010 | ||||||||||||||||||||||
U.S. debt | 19,000 | — | 968 | 2 | 18,030 | |||||||||||||||||||||||||||
Time deposits | 120,085 | — | — | 34 | 120,051 | |||||||||||||||||||||||||||
Total | $ | 224,313 | $ | 26 | $ | 1,188 | $ | 60 | $ | 223,091 |
As of December 31, 2021 | ||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||||||||||||||||||
Foreign debt | $ | 103,263 | $ | 81 | $ | 18 | $ | 9 | $ | 103,317 | ||||||||||||||||||||||
U.S. debt | 19,003 | 10 | 384 | 2 | 18,627 | |||||||||||||||||||||||||||
Time deposits | 253,531 | — | — | 86 | 253,445 | |||||||||||||||||||||||||||
Total | $ | 375,797 | $ | 91 | $ | 402 | $ | 97 | $ | 375,389 |
The following table presents the change in the allowance for credit losses related to our available-for-sale marketable securities for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Allowance for credit losses, beginning of period | $ | 97 | $ | 121 | ||||||||||
Provision for credit losses, net | 49 | 122 | ||||||||||||
Sales and maturities of marketable securities | (86) | (105) | ||||||||||||
Allowance for credit losses, end of period | $ | 60 | $ | 138 |
The contractual maturities of our marketable securities as of March 31, 2022 were as follows (in thousands):
Fair Value | ||||||||
One year or less | $ | 214,062 | ||||||
One year to two years | — | |||||||
Two years to three years | — | |||||||
Three years to four years | 4,635 | |||||||
Four years to five years | — | |||||||
More than five years | 4,394 | |||||||
Total | $ | 223,091 |
8
4. Restricted Marketable Securities
Restricted marketable securities consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Foreign government obligations | $ | 57,867 | $ | 64,855 | ||||||||||
Supranational debt | 10,085 | 10,997 | ||||||||||||
U.S. debt | 131,862 | 145,326 | ||||||||||||
U.S. government obligations | 20,353 | 23,548 | ||||||||||||
Total restricted marketable securities | $ | 220,167 | $ | 244,726 |
Our restricted marketable securities represent long-term investments to fund the estimated future cost of collecting and recycling modules covered under our solar module collection and recycling program. 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. As of March 31, 2022 and December 31, 2021, such custodial accounts also included noncurrent restricted cash balances of $3.5 million and $0.9 million, respectively, which were reported within “Other assets.” 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 overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. 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 marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years.
During the three months ended March 31, 2021, we sold all our restricted marketable securities for proceeds of $258.9 million and realized gains of $11.7 million on such sales. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted marketable securities.
The following tables summarize the unrealized gains and losses related to our restricted marketable securities, by major security type, as of March 31, 2022 and December 31, 2021 (in thousands):
As of March 31, 2022 | ||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||||||||||||||||||
Foreign government obligations | $ | 65,733 | $ | — | $ | 7,854 | $ | 12 | $ | 57,867 | ||||||||||||||||||||||
Supranational debt | 11,310 | — | 1,225 | — | 10,085 | |||||||||||||||||||||||||||
U.S. debt | 149,623 | — | 17,728 | 33 | 131,862 | |||||||||||||||||||||||||||
U.S. government obligations | 24,618 | — | 4,260 | 5 | 20,353 | |||||||||||||||||||||||||||
Total | $ | 251,284 | $ | — | $ | 31,067 | $ | 50 | $ | 220,167 |
9
As of December 31, 2021 | ||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||||||||||||||||||
Foreign government obligations | $ | 66,867 | $ | — | $ | 2,002 | $ | 10 | $ | 64,855 | ||||||||||||||||||||||
Supranational debt | 11,362 | — | 365 | — | 10,997 | |||||||||||||||||||||||||||
U.S. debt | 150,060 | — | 4,697 | 37 | 145,326 | |||||||||||||||||||||||||||
U.S. government obligations | 24,640 | — | 1,086 | 6 | 23,548 | |||||||||||||||||||||||||||
Total | $ | 252,929 | $ | — | $ | 8,150 | $ | 53 | $ | 244,726 |
The following table presents the change in the allowance for credit losses related to our restricted marketable securities for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Allowance for credit losses, beginning of period | $ | 53 | $ | 13 | ||||||||||
Provision for credit losses, net | (3) | 16 | ||||||||||||
Sales of restricted marketable securities | — | (29) | ||||||||||||
Allowance for credit losses, end of period | $ | 50 | $ | — |
As of March 31, 2022, the contractual maturities of our restricted marketable securities were between 9 years and 17 years.
5. Consolidated Balance Sheet Details
Accounts receivable trade, net
Accounts receivable trade, net consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Accounts receivable trade, gross | $ | 293,836 | $ | 430,100 | ||||||||||
Allowance for credit losses | (479) | (664) | ||||||||||||
Accounts receivable trade, net | $ | 293,357 | $ | 429,436 |
Accounts receivable unbilled, net
Accounts receivable unbilled, net consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Accounts receivable unbilled, gross | $ | 28,764 | $ | 25,336 | ||||||||||
Allowance for credit losses | — | (63) | ||||||||||||
Accounts receivable unbilled, net | $ | 28,764 | $ | 25,273 |
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Allowance for credit losses
The following tables present the change in the allowances for credit losses related to our accounts receivable for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31, | ||||||||||||||
Accounts receivable trade | 2022 | 2021 | ||||||||||||
Allowance for credit losses, beginning of period | $ | 664 | $ | 3,009 | ||||||||||
Provision for credit losses, net | (185) | 2,915 | ||||||||||||
Writeoffs | — | (97) | ||||||||||||
Allowance for credit losses, end of period | $ | 479 | $ | 5,827 |
Three Months Ended March 31, | ||||||||||||||
Accounts receivable unbilled | 2022 | 2021 | ||||||||||||
Allowance for credit losses, beginning of period | $ | 63 | $ | 303 | ||||||||||
Provision for credit losses, net | (63) | (27) | ||||||||||||
Allowance for credit losses, end of period | $ | — | $ | 276 |
Inventories
Inventories consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Raw materials | $ | 399,138 | $ | 404,727 | ||||||||||
Work in process | 57,854 | 65,573 | ||||||||||||
Finished goods | 621,612 | 433,511 | ||||||||||||
Inventories | $ | 1,078,604 | $ | 903,811 | ||||||||||
Inventories – current | $ | 840,750 | $ | 666,299 | ||||||||||
Inventories – noncurrent | $ | 237,854 | $ | 237,512 |
Other current assets
Other current assets consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Spare maintenance materials and parts | $ | 111,651 | $ | 112,070 | ||||||||||
Prepaid income taxes | 64,705 | 41,379 | ||||||||||||
Operating supplies | 40,896 | 41,034 | ||||||||||||
Prepaid expenses | 30,186 | 28,232 | ||||||||||||
Derivative instruments (1) | 14,854 | 5,816 | ||||||||||||
Restricted cash | 2,353 | 1,532 | ||||||||||||
Other | 18,023 | 14,129 | ||||||||||||
Other current assets | $ | 282,668 | $ | 244,192 |
——————————
(1)See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.
11
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Land | $ | 18,041 | $ | 18,359 | ||||||||||
Buildings and improvements | 693,740 | 693,289 | ||||||||||||
Machinery and equipment | 2,566,495 | 2,527,627 | ||||||||||||
Office equipment and furniture | 140,292 | 139,611 | ||||||||||||
Leasehold improvements | 40,594 | 40,517 | ||||||||||||
Construction in progress | 614,845 | 461,708 | ||||||||||||
Property, plant and equipment, gross | 4,074,007 | 3,881,111 | ||||||||||||
Accumulated depreciation | (1,288,183) | (1,231,524) | ||||||||||||
Property, plant and equipment, net | $ | 2,785,824 | $ | 2,649,587 |
Depreciation of property, plant and equipment was $58.6 million and $56.8 million for the three months ended March 31, 2022 and 2021, respectively.
PV solar power systems, net
PV solar power systems, net consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
PV solar power systems, gross | $ | 281,498 | $ | 281,660 | ||||||||||
Accumulated depreciation | (67,112) | (64,367) | ||||||||||||
PV solar power systems, net | $ | 214,386 | $ | 217,293 |
Depreciation of PV solar power systems was $2.8 million and $3.0 million for the three months ended March 31, 2022 and 2021, respectively.
We evaluate our PV solar power systems for impairment under a held and used impairment model whenever events or changes in circumstances arise that may indicate that the carrying amount of a particular system may not be recoverable. Such events or changes may include a significant decrease in the market price of the asset, current-period operating or cash flow losses combined with a history of such losses or a projection of future losses associated with the use of the asset, and changes in expectations regarding our intent to hold the asset on a long-term basis or the timing of a potential asset disposition.
As of March 31, 2022 and December 31, 2021, the recoverability of our Luz del Norte PV solar power plant was based, in part, on the likelihood of our continued ownership and operation of the system. However, it is reasonably possible that our intent to hold the asset may change in the near term due to our evaluation of strategic sale opportunities for the system. The pursuit of such opportunities, which require coordination with the system’s lenders, may result in a determination that the carrying value of the system is not recoverable based on the probability-weighted undiscounted future cash flows, which in turn could result in a possible impairment of the system in future periods. Accordingly, any changes in our expected use of the asset or its disposition may result in impairment charges that could be material to our condensed consolidated financial statements and have a significant adverse impact on our results of operations.
12
Project assets
Project assets consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Project assets – development costs, including project acquisition and land costs | $ | 107,609 | $ | 117,407 | ||||||||||
Project assets – construction costs | 284,165 | 198,081 | ||||||||||||
Project assets | $ | 391,774 | $ | 315,488 |
Goodwill
Goodwill for the relevant reporting unit consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
December 31, 2021 | Acquisitions (Impairments) | March 31, 2022 | ||||||||||||||||||
Modules | $ | 407,827 | $ | — | $ | 407,827 | ||||||||||||||
Accumulated impairment losses | (393,365) | — | (393,365) | |||||||||||||||||
Goodwill | $ | 14,462 | $ | — | $ | 14,462 |
Intangible assets, net
Intangible assets, net consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | ||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||
Developed technology | $ | 99,964 | $ | (64,451) | $ | 35,513 | ||||||||||||||
Power purchase agreements | 6,486 | (1,703) | 4,783 | |||||||||||||||||
Patents | 8,480 | (6,007) | 2,473 | |||||||||||||||||
Intangible assets, net | $ | 114,930 | $ | (72,161) | $ | 42,769 |
December 31, 2021 | ||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||
Developed technology | $ | 99,964 | $ | (61,985) | $ | 37,979 | ||||||||||||||
Power purchase agreements | 6,486 | (1,621) | 4,865 | |||||||||||||||||
Patents | 8,480 | (5,815) | 2,665 | |||||||||||||||||
Intangible assets, net | $ | 114,930 | $ | (69,421) | $ | 45,509 |
Amortization of intangible assets was $2.7 million for the three months ended March 31, 2022 and 2021.
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Other assets
Other assets consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Operating lease assets (1) | $ | 197,058 | $ | 207,544 | ||||||||||
Advanced payments for raw materials | 91,854 | 86,962 | ||||||||||||
Income tax receivables | 39,862 | 39,862 | ||||||||||||
Indirect tax receivables | 28,980 | 21,873 | ||||||||||||
Accounts receivable unbilled, net | 19,387 | 20,840 | ||||||||||||
Accounts receivable trade, net | 9,376 | 21,293 | ||||||||||||
Restricted cash | 6,264 | 3,651 | ||||||||||||
Other | 42,421 | 36,739 | ||||||||||||
Other assets | $ | 435,202 | $ | 438,764 |
——————————
(1)See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.
Accrued expenses
Accrued expenses consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Accrued property, plant and equipment | $ | 77,101 | $ | 42,031 | ||||||||||
Accrued freight | 76,855 | 61,429 | ||||||||||||
Accrued project costs | 63,333 | 48,836 | ||||||||||||
Accrued inventory | 49,543 | 42,170 | ||||||||||||
Accrued compensation and benefits | 21,295 | 34,606 | ||||||||||||
Product warranty liability (1) | 11,809 | 13,598 | ||||||||||||
Accrued other taxes | 11,597 | 23,103 | ||||||||||||
Other | 23,442 | 22,677 | ||||||||||||
Accrued expenses | $ | 334,975 | $ | 288,450 |
——————————
(1)See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product Warranties.”
14
Other current liabilities
Other current liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Operating lease liabilities (1) | $ | 12,834 | $ | 12,781 | ||||||||||
Derivative instruments (2) | 3,790 | 3,550 | ||||||||||||
Other taxes payable | 1,875 | 8,123 | ||||||||||||
Other | 6,900 | 10,293 | ||||||||||||
Other current liabilities | $ | 25,399 | $ | 34,747 |
——————————
(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.
Other liabilities
Other liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||
Deferred revenue | $ | 154,885 | $ | 95,943 | ||||||||||
Operating lease liabilities (1) | 136,526 | 145,912 | ||||||||||||
Product warranty liability (2) | 35,207 | 38,955 | ||||||||||||
Deferred tax liabilities, net | 30,117 | 27,699 | ||||||||||||
Other | 47,516 | 43,658 | ||||||||||||
Other liabilities | $ | 404,251 | $ | 352,167 |
——————————
(1)See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.
(2)See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product Warranties.”
15
6. Derivative Financial Instruments
As a global company, we are exposed in the normal course of business to interest rate, foreign currency, and commodity price 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 March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | ||||||||||||||
Other Current Assets | Other Current Liabilities | |||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||
Foreign exchange forward contracts | $ | 1,026 | $ | — | ||||||||||
Commodity swap contracts | — | 402 | ||||||||||||
Total derivatives designated as hedging instruments | $ | 1,026 | $ | 402 | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Foreign exchange forward contracts | $ | 13,828 | $ | 3,388 | ||||||||||
Total derivatives not designated as hedging instruments | $ | 13,828 | $ | 3,388 | ||||||||||
Total derivative instruments | $ | 14,854 | $ | 3,790 |
December 31, 2021 | ||||||||||||||
Other Current Assets | Other Current Liabilities | |||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||
Foreign exchange forward contracts | $ | 1,336 | $ | 139 | ||||||||||
Total derivatives designated as hedging instruments | $ | 1,336 | $ | 139 | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Foreign exchange forward contracts | $ | 4,480 | $ | 3,411 | ||||||||||
Total derivatives not designated as hedging instruments | $ | 4,480 | $ | 3,411 | ||||||||||
Total derivative instruments | $ | 5,816 | $ | 3,550 |
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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 three months ended March 31, 2022 and 2021 (in thousands):
Foreign Exchange Forward Contracts | Commodity Swap Contracts | Total | ||||||||||||||||||
Balance as of December 31, 2021 | $ | 1,126 | $ | — | $ | 1,126 | ||||||||||||||
Amounts recognized in other comprehensive income (loss) | 426 | (402) | 24 | |||||||||||||||||
Amounts reclassified to earnings impacting: | ||||||||||||||||||||
Cost of sales | (560) | — | (560) | |||||||||||||||||
Balance as of March 31, 2022 | $ | 992 | $ | (402) | $ | 590 | ||||||||||||||
Balance as of December 31, 2020 | $ | (3,644) | $ | 1,472 | $ | (2,172) | ||||||||||||||
Amounts recognized in other comprehensive income (loss) | 1,859 | 1,024 | 2,883 | |||||||||||||||||
Amounts reclassified to earnings impacting: | ||||||||||||||||||||
Cost of sales | 1,129 | 7 | 1,136 | |||||||||||||||||
Balance as of March 31, 2021 | $ | (656) | $ | 2,503 | $ | 1,847 |
During the three months ended March 31, 2022 and 2021, we recognized unrealized losses of less than $0.1 million and $0.1 million, respectively, within “Cost of sales” 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 months ended March 31, 2022 and 2021 (in thousands):
Amount of Gain (Loss) Recognized in Income | ||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||
Income Statement Line Item | 2022 | 2021 | ||||||||||||||||||
Foreign exchange forward contracts | Cost of sales | $ | 78 | $ | 169 | |||||||||||||||
Foreign exchange forward contracts | Foreign currency loss, net | 18,981 | 10,296 |
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 March 31, 2022 and December 31, 2021, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to 8 months and 11 months, respectively. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with Accounting Standards Codification (“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 March 31, 2022 and December 31, 2021.
17
As of March 31, 2022 and December 31, 2021, 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):
March 31, 2022 | ||||||||||||||
Currency | Notional Amount | USD Equivalent | ||||||||||||
U.S. dollar (1) | $17.4 | $17.4 | ||||||||||||
December 31, 2021 | ||||||||||||||
Currency | Notional Amount | USD Equivalent | ||||||||||||
U.S. dollar (1) | $38.4 | $38.4 | ||||||||||||
British pound | GBP 10.6 | $14.4 |
——————————
(1)These derivative instruments represent hedges of outstanding payables denominated in U.S. dollars at certain of our foreign subsidiaries whose functional currencies are other than the U.S. dollar.
In the following 12 months, we expect to reclassify to earnings $1.0 million of net unrealized gains related to foreign exchange forward contracts that are included in “Accumulated other comprehensive loss” at March 31, 2022 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, deferred taxes, payables, accrued expenses, operating lease liabilities, 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 loss, net” on our condensed consolidated statements of operations.
18
As of March 31, 2022 and December 31, 2021, 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):
March 31, 2022 | ||||||||||||||||||||
Transaction | Currency | Notional Amount | USD Equivalent | |||||||||||||||||
Purchase | Australian dollar | AUD 3.2 | $2.4 | |||||||||||||||||
Purchase | British pound | GBP 11.5 | $15.1 | |||||||||||||||||
Sell | British pound | GBP 14.0 | $18.3 | |||||||||||||||||
Sell | Chilean peso | CLP 3,206.6 | $4.1 | |||||||||||||||||
Purchase | Euro | €85.4 | $94.4 | |||||||||||||||||
Sell | Euro | €68.8 | $76.0 | |||||||||||||||||
Sell | Indian rupee | INR 11,172.9 | $147.7 | |||||||||||||||||
Sell | Japanese yen | ¥35,758.9 | $290.3 | |||||||||||||||||
Purchase | Malaysian ringgit | MYR 42.0 | $10.0 | |||||||||||||||||
Sell | Malaysian ringgit | MYR 39.9 | $9.5 | |||||||||||||||||
Sell | Mexican peso | MXN 34.6 | $1.7 | |||||||||||||||||
Purchase | Singapore dollar | SGD 1.5 | $1.1 | |||||||||||||||||
December 31, 2021 | ||||||||||||||||||||
Transaction | Currency | Notional Amount | USD Equivalent | |||||||||||||||||
Purchase | Australian dollar | AUD 3.2 | $2.3 | |||||||||||||||||
Purchase | Brazilian real | BRL 2.6 | $0.5 | |||||||||||||||||
Sell | Brazilian real | BRL 2.6 | $0.5 | |||||||||||||||||
Purchase | British pound | GBP 2.5 | $3.4 | |||||||||||||||||
Sell | Chilean peso | CLP 4,058.6 | $4.8 | |||||||||||||||||
Purchase | Euro | €77.6 | $88.0 | |||||||||||||||||
Sell | Euro | €38.6 | $43.8 | |||||||||||||||||
Sell | Indian rupee | INR 10,943.0 | $147.1 | |||||||||||||||||
Purchase | Japanese yen | ¥667.5 | $5.8 | |||||||||||||||||
Sell | Japanese yen | ¥31,524.6 | $273.9 | |||||||||||||||||
Purchase | Malaysian ringgit | MYR 17.0 | $4.1 | |||||||||||||||||
Sell | Malaysian ringgit | MYR 24.5 | $5.9 | |||||||||||||||||
Sell | Mexican peso | MXN 34.6 | $1.7 | |||||||||||||||||
Purchase | Singapore dollar | SGD 5.5 | $4.1 |
Commodity Price Risk
We use commodity swap contracts to mitigate our exposure to commodity price fluctuations for certain raw materials used in the production of our modules. In March 2022, we entered into a commodity swap contract to hedge a portion of our forecasted cash flows for purchases of aluminum frames for a six-month period. Such swap had an initial notional value based on metric tons of forecasted aluminum purchases, equivalent to $9.8 million, and entitles us to receive a three-month average London Metals Exchange price for aluminum while requiring us to pay certain fixed prices. The notional amount of the commodity swap contract proportionately adjusts with forecasted purchases of aluminum frames.
19
This commodity swap contract qualifies for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. We report unrealized gains or losses on such contract in “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that this derivative financial instrument was highly effective as a cash flow hedge as of March 31, 2022. In the following 12 months, we expect to reclassify into earnings $0.4 million of net unrealized losses related to this commodity swap contract that are included in “Accumulated other comprehensive loss” at March 31, 2022 as we realize the earnings effects of the related forecasted transactions.
7. Leases
Our lease arrangements include land associated with our PV solar power systems and project assets, 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, India, and Vietnam.
The following table presents certain quantitative information related to our lease arrangements for the three months ended March 31, 2022 and 2021, and as of March 31, 2022 and December 31, 2021 (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Operating lease cost | $ | 4,377 | $ | 4,033 | ||||||||||
Variable lease cost | 599 | 538 | ||||||||||||
Short-term lease cost | 31 | 371 | ||||||||||||
Total lease cost | $ | 5,007 | $ | 4,942 | ||||||||||
Payments of amounts included in the measurement of operating lease liabilities | $ | 4,136 | $ | 4,113 | ||||||||||
Lease assets obtained in exchange for operating lease liabilities | $ | 534 | $ | 13,598 | ||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||
Operating lease assets | $ | 197,058 | $ | 207,544 | ||||||||||
Operating lease liabilities – current | 12,834 | 12,781 | ||||||||||||
Operating lease liabilities – noncurrent | 136,526 | 145,912 |
Weighted-average remaining lease term | 19 years | 19 years | ||||||||||||
Weighted-average discount rate | 2.8 | % | 2.8 | % |
As of March 31, 2022, the future payments associated with our lease liabilities were as follows (in thousands):
Total Lease Liabilities | ||||||||
Remainder of 2022 | $ | 11,618 | ||||||
2023 | 15,579 | |||||||
2024 | 15,111 | |||||||
2025 | 14,295 | |||||||
2026 | 12,814 | |||||||
2027 | 10,149 | |||||||
Thereafter | 98,584 | |||||||
Total future payments | 178,150 | |||||||
Less: interest | (28,790) | |||||||
Total lease liabilities | $ | 149,360 |
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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:
•Marketable Securities and Restricted Marketable Securities. At March 31, 2022 and December 31, 2021, our marketable securities consisted of foreign debt, U.S. debt, and time deposits, and our restricted marketable securities consisted of foreign and U.S. government obligations, supranational debt, and U.S. debt. We value our marketable securities and restricted marketable securities 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 March 31, 2022 and December 31, 2021, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies. At March 31, 2022, our derivative liabilities also included commodity swap contracts involving major commodity prices. 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 credit risk, foreign exchange rates, forward and spot prices for currencies, and forward prices for commodities. 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 March 31, 2022 and December 31, 2021, 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 | ||||||||||||||||||||||||||
| March 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Marketable securities: | ||||||||||||||||||||||||||
Foreign debt | $ | 85,010 | $ | — | $ | 85,010 | $ | — | ||||||||||||||||||
U.S. debt | 18,030 | — | 18,030 | — | ||||||||||||||||||||||
Time deposits | 120,051 | 120,051 | — | — | ||||||||||||||||||||||
Restricted marketable securities | 220,167 | — | 220,167 | — | ||||||||||||||||||||||
Derivative assets | 14,854 | — | 14,854 | — | ||||||||||||||||||||||
Total assets | $ | 458,112 | $ | 120,051 | $ | 338,061 | $ | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Derivative liabilities | $ | 3,790 | $ | — | $ | 3,790 | $ | — |
21
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||||
| December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Marketable securities: | ||||||||||||||||||||||||||
Foreign debt | $ | 103,317 | $ | — | $ | 103,317 | $ | — | ||||||||||||||||||
U.S. debt | 18,627 | — | 18,627 | — | ||||||||||||||||||||||
Time deposits | 253,445 | 253,445 | — | — | ||||||||||||||||||||||
Restricted marketable securities | 244,726 | — | 244,726 | — | ||||||||||||||||||||||
Derivative assets | 5,816 | — | 5,816 | — | ||||||||||||||||||||||
Total assets | $ | 625,931 | $ | 253,445 | $ | 372,486 | $ | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Derivative liabilities | $ | 3,550 | $ | — | $ | 3,550 | $ | — |
Fair Value of Financial Instruments
At March 31, 2022 and December 31, 2021, the carrying values and fair values of our financial instruments not measured at fair value were as follows (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Accounts receivable unbilled, net - noncurrent | $ | 19,387 | $ | 17,590 | $ | 20,840 | $ | 18,846 | ||||||||||||||||||
Accounts receivable trade, net - noncurrent | 9,376 | 7,462 | 21,293 | 18,605 | ||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Long-term debt, including current maturities (1) | $ | 258,672 | $ | 242,551 | $ | 246,737 | $ | 243,865 |
——————————
(1)Excludes unamortized discounts and issuance costs.
The carrying values in our condensed consolidated balance sheets of our current trade accounts receivable, current unbilled accounts receivable, 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 noncurrent unbilled accounts receivable, noncurrent trade accounts receivable, and long-term debt are considered Level 2 measurements under the fair value hierarchy.
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, marketable securities, accounts receivable, restricted cash, restricted marketable securities, foreign exchange forward contracts, and commodity swap contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place these instruments 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, but not limited to, advance payments, parent guarantees, letters of credit, bank guarantees, or surety bonds.
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9. Debt
Our long-term debt consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
Balance (USD) | ||||||||||||||||||||
Loan Agreement | Currency | March 31, 2022 | December 31, 2021 | |||||||||||||||||
Luz del Norte Credit Facilities | USD | $ | 183,092 | $ | 183,829 | |||||||||||||||
Kyoto Credit Facility | JPY | 75,580 | 62,908 | |||||||||||||||||
Long-term debt principal | 258,672 | 246,737 | ||||||||||||||||||
Less: unamortized discounts and issuance costs | (6,617) | (6,836) | ||||||||||||||||||
Total long-term debt | 252,055 | 239,901 | ||||||||||||||||||
Less: current portion | (4,701) | (3,896) | ||||||||||||||||||
Noncurrent portion | $ | 247,354 | $ | 236,005 |
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 U.S. International Development Finance Corporation (“DFC”) 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. As of March 31, 2022 and December 31, 2021, the balance outstanding on the DFC loans was $137.1 million and $137.7 million, respectively. As of March 31, 2022 and December 31, 2021, the balance outstanding on the IFC loans was $46.0 million and $46.1 million, respectively. The DFC and IFC loans mature in June 2037 and are secured by liens over all of Luz del Norte’s assets, a pledge of all of the equity interests in the entity, and certain letters of credit.
Kyoto Credit Facility
In July 2020, First Solar Japan GK, our wholly-owned subsidiary, entered into a construction loan facility with Mizuho Bank, Ltd. for borrowings up to ¥15.0 billion ($142.8 million), which are intended to be used for the construction of a 38 MWAC PV solar power plant located in Kyoto, Japan (the “Kyoto Credit Facility”). Borrowings under the facility generally mature within 12 months following the completion of construction activities at the project. The facility is guaranteed by First Solar, Inc. and First Solar Japan GK and secured by pledges of the project’s cash accounts and certain other assets.
Variable Interest Rate Risk
Certain of our long-term debt agreements bear interest at LIBOR, TIBOR, or equivalent variable rates. An increase in these variable rates would increase the cost of borrowing under certain project specific debt financings. Our long-term debt borrowing rates as of March 31, 2022 were as follows:
Loan Agreement | March 31, 2022 | |||||||
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% | ||||||||
Kyoto Credit Facility | 1-month TIBOR plus 0.60% | |||||||
——————————
(1)Outstanding balance comprised of $129.3 million of fixed rate loans and $53.8 million of variable rate loans as of March 31, 2022.
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Future Principal Payments
At March 31, 2022, the future principal payments on our long-term debt were due as follows (in thousands):
Total Debt | ||||||||
Remainder of 2022 | $ | 3,298 | ||||||
2023 | 6,085 | |||||||
2024 | 82,600 | |||||||
2025 | 7,560 | |||||||
2026 | 7,965 | |||||||
2027 | 9,199 | |||||||
Thereafter | 141,965 | |||||||
Total long-term debt future principal payments | $ | 258,672 |
10. Commitments and Contingencies
Commercial Commitments
During the normal course of business, we enter into commercial commitments in the form of letters of credit and surety bonds to provide financial and performance assurance to third parties. As of March 31, 2022, the majority of these commercial commitments supported our module business. As of March 31, 2022, the issued and outstanding amounts and available capacities under these commitments were as follows (in millions):
Issued and Outstanding | Available Capacity | |||||||||||||
Bilateral facilities (1) | $ | 43.4 | $ | 171.6 | ||||||||||
Surety bonds | 12.9 | 229.9 |
——————————
(1)Of the total letters of credit issued under the bilateral facilities, $2.6 million was secured with cash.
Product Warranties
When we recognize revenue for sales of modules or projects, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations for both modules and the balance of the systems. 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. We make and revise these estimates based primarily on the number of solar modules under warranty installed at customer locations, our historical experience with and projections of warranty claims, and our estimated per-module replacement costs. We also monitor our expected future module performance through certain quality and reliability testing and actual performance in certain field installation sites. 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 months ended March 31, 2022 and 2021 were as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Product warranty liability, beginning of period | $ | 52,553 | $ | 95,096 | ||||||||||
Accruals for new warranties issued | 848 | 2,277 | ||||||||||||
Settlements | (6,002) | (3,226) | ||||||||||||
Changes in estimate of product warranty liability | (383) | (74) | ||||||||||||
Product warranty liability, end of period | $ | 47,016 | $ | 94,073 | ||||||||||
Current portion of warranty liability | $ | 11,809 | $ | 22,275 | ||||||||||
Noncurrent portion of warranty liability | $ | 35,207 | $ | 71,798 |
Indemnifications
In certain limited circumstances, we have provided indemnifications to customers or other parties, 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; a reduction in tax benefits received, including investment tax credits; the resolution of specific matters associated with a project’s development or construction; or guarantees of a third party’s payment or performance obligations. 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 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 may base these estimates on the cost of insurance or other instruments that cover the underlying risks being indemnified and may purchase such instruments 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 earnings associated with the related transaction.
After an indemnification liability is recorded, we derecognize such amount pursuant to ASC 460 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. As of March 31, 2022 and December 31, 2021, we accrued $3.8 million of current indemnification liabilities. As of March 31, 2022, the maximum potential amount of future payments under our indemnifications was $98.8 million, and we held insurance and other instruments allowing us to recover up to $28.2 million of potential amounts paid under the indemnifications.
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 service 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.
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We estimate the cost of our collection and recycling obligations based on the present value of the expected 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; and by-product credits for certain materials recovered during the recycling process. We base these estimates on our experience collecting and recycling solar modules and certain assumptions regarding costs 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 and classify the corresponding expense within “Selling, general and administrative” expense on our condensed consolidated statements of operations.
Our module collection and recycling liability was $137.5 million and $139.1 million as of March 31, 2022 and December 31, 2021, respectively. See Note 4. “Restricted Marketable Securities” to our condensed consolidated financial statements for more information about our arrangements for funding this liability.
Legal Proceedings
Class Action
On January 7, 2022, a putative class action lawsuit titled City of Pontiac General Employees’ Retirement System v. First Solar, Inc., et al., Case No. 2:22-cv-00036-MTL, was filed in the Arizona District Court against the Company and certain of our current officers. The complaint was filed on behalf of a purported class consisting of all purchasers of First Solar common stock between February 22, 2019 and February 20, 2020, inclusive. The complaint asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on allegedly false and misleading statements related to the Company’s Series 6 solar modules and its project development business. It seeks unspecified damages and an award of costs and expenses. The Company and its officers intend to vigorously defend this action in all respects. Given the early stage of the litigation, 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 amount or range of potential loss, if any, from this action.
Other Matters and Claims
We are party to legal matters and claims in the normal course of our operations. While we believe the ultimate outcome of these 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. There have been no material changes to these matters since our Annual Report on Form 10-K for the year ended December 31, 2021 was filed with the SEC on March 1, 2022.
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11. Revenue from Contracts with Customers
The following table presents the disaggregation of revenue from contracts with customers for the three months ended March 31, 2022 and 2021 along with the reportable segment for each category (in thousands):
Three Months Ended March 31, | ||||||||||||||||||||
Category | Segment | 2022 | 2021 | |||||||||||||||||
Solar modules | Modules | $ | 354,881 | $ | 534,670 | |||||||||||||||
Energy generation | Other | 6,293 | 14,579 | |||||||||||||||||
O&M services | Other | 3,897 | 27,235 | |||||||||||||||||
Solar power systems | Other | 1,969 | 226,967 | |||||||||||||||||
EPC services (1) | Other | — | (77) | |||||||||||||||||
Net sales | $ | 367,040 | $ | 803,374 |
——————————
(1)For certain of our engineering, procurement, and construction (“EPC”) agreements, we 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 regard to these tests, we may incur liquidated damages as specified in the applicable EPC agreement. During the three months ended March 31, 2021, we accrued liquidated damages for certain of these agreements, which we recognized as a reduction to revenue.
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 recognize revenue for sales of development projects or completed systems when we enter into the associated sales contract. For certain prior project sales, including sales of solar power systems with EPC services, such revenue included estimated amounts of variable consideration. These estimates may require significant judgment to determine the most likely amount of net contract revenues. The cumulative effect of revisions to estimates is recorded in the period in which the revisions are identified and the amounts can be reasonably estimated. During the three months ended March 31, 2021, revenue increased $1.6 million due to net changes in transaction prices for four projects, which represented 0.1% of the aggregate revenue for such projects.
The following table reflects the changes in our contract assets, which we classify as “Accounts receivable unbilled, net” and our contract liabilities, which we classify as “Deferred revenue,” for the three months ended March 31, 2022 (in thousands):
March 31, 2022 | December 31, 2021 | Three Month Change | ||||||||||||||||||||||||
Accounts receivable unbilled, net (1) | $ | 48,151 | $ | 46,113 | $ | 2,038 | 4 | % | ||||||||||||||||||
Deferred revenue (2) | $ | 373,808 | $ | 297,811 | $ | 75,997 | 26 | % |
——————————
(1)Includes $19.4 million and $20.8 million of noncurrent accounts receivable unbilled, net classified as “Other assets” on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.
(2)Includes $154.9 million and $95.9 million of noncurrent deferred revenue classified as “Other liabilities” on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.
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During the three months ended March 31, 2022, our contract liabilities increased by $76.0 million primarily due to advance payments received for sales of solar modules in the current period, partially offset by the recognition of revenue for sales of solar modules for which payment was received in 2021. During the three months ended March 31, 2022 and 2021, we recognized revenue of $43.7 million and $72.0 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods.
As of March 31, 2022, we had entered into contracts with customers for the future sale of 25.4 GWDC of solar modules for an aggregate transaction price of $6.9 billion, which we expect to recognize as revenue through 2025 as we transfer control of the modules to the customers. Such aggregate transaction price excludes estimates of variable consideration for certain contracts with customers that are associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Certain other price adjustments associated with the proposed extension of the U.S. investment tax credit, sales freight, and potential changes to certain commodity prices have also been excluded. While our contracts with customers typically represent firm purchase commitments, these contracts may be subject to amendments made by us or requested by our customers. These amendments may increase or decrease the volume of modules to be sold under the contract, change delivery schedules, or otherwise adjust the expected revenue under these contracts.
12. Share-Based Compensation
The following table presents share-based compensation expense recognized in our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Cost of sales (1) | $ | 498 | $ | (92) | ||||||||||
Selling, general and administrative (1) | 2,574 | 4,515 | ||||||||||||
Research and development (2) | 431 | (1,308) | ||||||||||||
Total share-based compensation expense | $ | 3,503 | $ | 3,115 |
——————————
(1)On March 31, 2021, we completed the sales of our North American O&M operations and U.S. project development business, which resulted in the forfeiture of unvested shares for associates (our term for full- and part-time employees) departing the Company as part of the transactions. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information related to these transactions.
(2)Effective March 15, 2021, our former Chief Technology Officer retired from the Company, which resulted in the forfeiture of his unvested shares during the three months ended March 31, 2021.
Share-based compensation expense capitalized in inventory, project assets, and PV solar power systems was $0.7 million as of March 31, 2022 and December 31, 2021. As of March 31, 2022, we had $32.6 million of unrecognized share-based compensation expense related to unvested restricted and performance units, which we expect to recognize over a weighted-average period of approximately 1.7 years.
In July 2019, the compensation committee of our board of directors approved grants of performance units for key executive officers to be earned over a multi-year performance period, which ended in December 2021. Vesting of the 2019 grants of performance units was contingent upon the relative attainment of target cost per watt, module wattage, gross profit, and operating income metrics. In March 2022, the compensation committee certified the achievement of the vesting conditions applicable to the grants, which approximated the maximum level of performance. Accordingly, each participant received one share of common stock for each vested performance unit granted, net of any tax withholdings.
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In March 2020, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2022. Vesting of the 2020 grants of performance units is contingent upon the relative attainment of target contracted revenue, module wattage, and return on capital metrics.
In May 2021, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2023. Vesting of the 2021 grants of performance units is contingent upon the relative attainment of target contracted revenue, cost per watt, incremental average selling price, and operating income metrics.
In March 2022, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2024. Vesting of the 2022 grants of performance units is contingent upon the relative attainment of target contracted revenue, cost per watt, and return on capital metrics.
Vesting of performance 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 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.
In February 2022, First Solar adopted a Clawback Policy (“the Policy”) that applies to the Company’s current and former Section 16 officers. The Policy applies to all incentive compensation, including any performance-based annual incentive awards and performance-based equity compensation. The Policy was adopted to ensure that incentive compensation is paid or awarded based on accurate financial results and the correct calculation of performance against incentive targets.
13. Income Taxes
Our effective tax rate was 31.1% and 18.1% for the three months ended March 31, 2022 and 2021, respectively. The increase in our effective tax rate was primarily driven by the effect of tax law changes associated with the foreign tax credit (“FTC”) regulations described below and lower relative amounts of income earned in foreign jurisdictions with lower tax rates. 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 the effect of the FTC regulations described below and changes in our deferred income taxes related to our Malaysian tax holiday, partially offset by lower relative amounts of income earned in foreign jurisdictions with lower tax rates.
In December 2021, the U.S. Treasury released final FTC regulations addressing various aspects of the U.S. FTC regime. Among other items, these regulations revised the definition of a creditable foreign income tax and the time at which foreign taxes accrued can be claimed as a credit. These regulations are applicable for tax years beginning on or after December 28, 2021. As a result of these regulations, foreign taxes, which were previously creditable, are now treated as foreign tax deductions at the U.S. statutory federal income tax rate of 21%.
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 addition, our Vietnamese subsidiary has been granted a tax incentive that provides a two-year tax exemption, which began in 2020, and reduced annual tax rates through the end of 2025.
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We account for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740. It is reasonably possible that $0.3 million of uncertain tax positions will be recognized within the next 12 months due to the expiration of the statute of limitations associated with such positions.
We are subject to audit by federal, state, local, and foreign tax authorities. We are currently under examination in India, Malaysia, 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.
14. Net (Loss) Income per Share
The calculation of basic and diluted net (loss) income per share for the three months ended March 31, 2022 and 2021 was as follows (in thousands, except per share amounts):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Basic net (loss) income per share | ||||||||||||||
Numerator: | ||||||||||||||
Net (loss) income | $ | (43,255) | $ | 209,671 | ||||||||||
Denominator: | ||||||||||||||
Weighted-average common shares outstanding | 106,412 | 106,088 | ||||||||||||
Diluted net (loss) income per share | ||||||||||||||
Denominator: | ||||||||||||||
Weighted-average common shares outstanding | 106,412 | 106,088 | ||||||||||||
Effect of restricted stock and performance units | — | 802 | ||||||||||||
Weighted-average shares used in computing diluted net (loss) income per share | 106,412 | 106,890 | ||||||||||||
Net (loss) income per share: | ||||||||||||||
Basic | $ | (0.41) | $ | 1.98 | ||||||||||
Diluted | $ | (0.41) | $ | 1.96 |
The following table summarizes the potential shares of common stock that were excluded from the computation of diluted net (loss) income per share for the three months ended March 31, 2022 and 2021 as such shares would have had an anti-dilutive effect (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Anti-dilutive shares | 504 | — |
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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 three months ended March 31, 2022 (in thousands):
Foreign Currency Translation Adjustment | Unrealized Gain (Loss) on Marketable Securities and Restricted Marketable Securities | Unrealized Gain (Loss) on Derivative Instruments | Total | |||||||||||||||||||||||
Balance as of December 31, 2021 | $ | (89,452) | $ | (8,036) | $ | 1,126 | $ | (96,362) | ||||||||||||||||||
Other comprehensive (loss) income before reclassifications | (10,130) | (23,767) | 24 | (33,873) | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | 5 | — | (560) | (555) | ||||||||||||||||||||||
Net tax effect | — | 1,246 | 94 | 1,340 | ||||||||||||||||||||||
Net other comprehensive loss | (10,125) | (22,521) | (442) | (33,088) | ||||||||||||||||||||||
Balance as of March 31, 2022 | $ | (99,577) | $ | (30,557) | $ | 684 | $ | (129,450) |
The following table presents the pretax amounts reclassified from accumulated other comprehensive loss into our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021 (in thousands):
Comprehensive Income Components | Income Statement Line Item | Three Months Ended March 31, | ||||||||||||||||||
2022 | 2021 | |||||||||||||||||||
Foreign currency translation adjustment | Other (expense) income, net | $ | (5) | $ | (475) | |||||||||||||||
Unrealized gain on marketable securities and restricted marketable securities | Other (expense) income, net | — | 11,696 | |||||||||||||||||
Unrealized gain (loss) on derivative contracts: | ||||||||||||||||||||
Foreign exchange forward contracts | Cost of sales | 560 | (1,129) | |||||||||||||||||
Commodity swap contracts | Cost of sales | — | (7) | |||||||||||||||||
Total unrealized gain (loss) on derivative contracts | 560 | (1,136) | ||||||||||||||||||
Total gain reclassified | $ | 555 | $ | 10,085 |
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16. Segment Reporting
Our primary segment is our modules business, which 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 developers and operators of PV solar power systems. Our residual business operations include certain project development activities and O&M services, which are primarily concentrated in Japan, as well as the results of operations from PV solar power systems we own and operate in certain international regions.
For the year ended December 31, 2021, we changed our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. Following this change, our modules business represents our only reportable segment. We previously operated our business in two segments, which included our modules and systems businesses. Systems business activities primarily involved (i) project development, (ii) EPC services, and (iii) O&M services, which now comprise our residual business operations and are categorized as “Other” in the tables below. All prior year balances were revised to conform to the current year presentation.
See Note 20. “Segment and Geographical Information” in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional discussion of our segment reporting.
The following tables provide a reconciliation of certain financial information for our reportable segment to information presented in our condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 and as of March 31, 2022 and December 31, 2021 (in thousands):
Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||
Modules | Other | Total | Modules | Other | Total | |||||||||||||||||||||||||||||||||
Net sales | $ | 354,881 | $ | 12,159 | $ | 367,040 | $ | 534,670 | $ | 268,704 | $ | 803,374 | ||||||||||||||||||||||||||
Gross profit | 11,189 | 274 | 11,463 | 100,440 | 84,327 | 184,767 | ||||||||||||||||||||||||||||||||
Depreciation and amortization expense | 56,199 | 2,846 | 59,045 | 50,724 | 3,097 | 53,821 | ||||||||||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
Modules | Other | Total | Modules | Other | 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: the length and severity of the ongoing COVID-19 (novel coronavirus) outbreak, including its impacts across our businesses on demand, manufacturing, project development, O&M, construction, financing, and our global supply chains, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impacts, and the ability of our customers, suppliers, equipment vendors, and other counterparties to fulfill their contractual obligations to us; effects resulting from certain module manufacturing changes; 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, currently anticipated delays in the implementation of our Copper Replacement (“CuRe”) program and related estimated impacts, restructuring, product reliability, investments, 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; the potential impact of proposed legislation intended to encourage renewable energy investments through tax credits; effects resulting from pending litigation; our ability to expand manufacturing capacity worldwide; our ability to reduce the costs to develop and construct PV solar power systems; the impact of supply chain disruptions, further exacerbated by the COVID-19 pandemic, that may affect the procurement of raw materials used in our manufacturing process and the distribution of our modules; 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,” “contingent,” 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 severity and duration of the COVID-19 pandemic, including its potential impact on the Company’s business, financial condition, and results of operations; structural imbalances in global supply and demand for photovoltaic (“PV”) solar modules; the market for renewable energy, including solar energy; our competitive position and other key competitive factors; reduction, elimination, or expiration of government subsidies, policies, and support programs for solar energy projects; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules; the passage of proposed legislation intended to encourage renewable energy investments through tax credits; our ability to execute on our long-term strategic plans; our ability to execute on our solar module technology and cost reduction roadmaps; our ability to improve the wattage of our solar modules; interest rate fluctuations and our customers’ ability to secure financing; the loss of any of our large customers, or the ability of our customers and counterparties to perform under their contracts with us; the satisfaction of conditions precedent in our sales agreements; our ability to attract new customers and to develop and maintain existing customer and supplier relationships; our ability to convert existing or construct production facilities to support new product lines; general
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economic and business conditions, including those influenced by U.S., international, and geopolitical events; environmental responsibility, including with respect to CdTe and other semiconductor materials; claims under our limited warranty obligations; changes in, or the failure to comply with, government regulations and environmental, health, and safety requirements; effects resulting from pending litigation; future collection and recycling costs for solar modules covered by our module collection and recycling program; supply chain disruption, including the availability of shipping containers, port congestion, cancelled shipments by logistic providers, and the cost of fuel, all of which may be exacerbated by the COVID-19 pandemic; our ability to protect our intellectual property; our ability to prevent and/or minimize the impact of cyber-attacks or other breaches of our information systems; our continued investment in research and development (“R&D”); the supply and price of components and raw materials, including CdTe; our ability to attract and retain key executive officers and associates; and the matters discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, 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.
Executive Overview
We are a leading American solar technology company and global provider of PV solar energy solutions. Developed at our R&D labs in California and Ohio, we manufacture and sell PV solar modules with an advanced thin film semiconductor technology that provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar modules. From raw material sourcing through end-of-life module recycling, we are committed to reducing the environmental impacts and enhancing the social and economic benefits of our products across their life cycle. We are the world’s largest thin film PV solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere.
Certain of our financial results and other key operational developments for the three months ended March 31, 2022 include the following:
•Net sales for the three months ended March 31, 2022 decreased by 54% to $367.0 million compared to $803.4 million for the same period in 2021. The decrease was primarily driven by sales of certain projects in the United States in the prior period, a decrease in the volume of modules sold to third parties, and a lower average selling price per watt.
•Gross profit for the three months ended March 31, 2022 decreased 19.9 percentage points to 3.1% from 23.0% for the same period in 2021. The decrease in gross profit was primarily due to the volume of higher gross profit projects sold during the prior period, a decrease in the average selling price per watt of our modules, and an increase in sales freight, partially offset by continued module cost reductions and manufacturing related charges associated with the COVID-19 pandemic in the prior period.
•As of March 31, 2022, we had 7.9 GWDC of total installed Series 6 nameplate production capacity across all our facilities. We produced 2.1 GWDC of solar modules during the three months ended March 31, 2022, which represented a 19% increase in Series 6 module production from the same period in 2021. The increase in production was primarily driven by higher throughput at our manufacturing facilities. We expect to produce between 8.2 GWDC and 8.8 GWDC of Series 6 and Series 6 Plus modules during 2022.
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Market Overview
Solar energy is one of the fastest growing forms of renewable energy with numerous economic and environmental benefits that make it an attractive complement to and/or substitute for traditional forms of energy generation. In recent years, the price of PV solar power systems, and accordingly the cost of producing electricity from such systems, has decreased to levels that are competitive with or below the wholesale price of electricity in many markets. This price decline has opened new possibilities to develop systems in many locations with limited or no financial incentives, thereby promoting the widespread adoption of solar energy. As a result of such market opportunities, we are in the process of expanding our manufacturing capacity by 6.6 GWDC by constructing our third manufacturing facility in the U.S. and our first manufacturing facility in India. These new facilities, which we expect to produce our next generation Series 7 modules, are currently under construction and are expected to commence operations in the first half of 2023 and the second half of 2023, respectively. In the aggregate, we believe manufacturers of solar cells and modules, particularly those in China, have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. Accordingly, we believe the solar industry may experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that excess capacity will also put pressure on pricing. In light of such market realities, we continue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process, our R&D capabilities, the sustainability advantage of our modules, and our financial stability.
The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. This competition may result in an environment in which pricing falls rapidly, thereby potentially increasing demand for solar energy solutions but constraining the ability for project developers and module manufacturers to sustain meaningful and consistent profitability. Although module average selling prices in many global markets have declined for several years, recent module spot pricing has increased, in part, due to elevated commodity and freight costs. For example, the price of polysilicon has significantly increased in recent months, reaching its highest level in the last 10 years due to higher energy prices and reduced operating capacities of silicon metal production in China and rising global demand for polysilicon. Several other commodities, including aluminum, steel, and natural gas, have experienced similar price increases in recent months. While the duration of this elevated period of pricing is uncertain, module average selling prices in global markets are expected to continue to decline in the long-term.
Competitive pricing for modules and systems, relative to the cost of traditional forms of energy generation, is expected to contribute to diversification in global electricity generation and further demand for solar energy. Over time, however, declining average selling prices may adversely affect our results of operations. Our results of operations could also be adversely affected if competitors reduce pricing to levels below their costs, bid aggressively low prices for module sale agreements, or are able to operate at minimal or negative operating margins for sustained periods of time. For certain of our competitors, including many in China, these practices may be enabled by their direct or indirect access to sovereign capital or other forms of state-owned support. Additionally, in certain markets an oversupply imbalance at the grid level may reduce short-to-medium term demand for new solar installations relative to prior years, lower pricing for power purchase agreements (“PPAs”), 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 and energy storage solutions 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 and implementing certain other cost reduction initiatives.
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We face intense competition from manufacturers of crystalline silicon solar modules. Solar module manufacturers compete with one another on sales price per watt, which may be influenced by several module value attributes, including wattage (through a larger form factor or an improved conversion efficiency), energy yield, degradation, sustainability, and reliability. Sales price per watt may also be influenced by warranty terms and customer payment terms. While conventional solar modules, including the solar modules we currently produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, most module manufacturers offer bifacial modules that also capture diffuse irradiance on the back side of a module. 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 could potentially lower the overall levelized cost of electricity (“LCOE”) of a system when compared to systems using conventional solar modules, including the modules we currently produce. Additionally, certain module manufacturers recently introduced n-type mono-crystalline modules, such as tunnel oxide passivated contact modules, which are expected to provide certain improvements to module efficiency, temperature coefficient, and bifacial performance, and claim to provide certain degradation advantages compared to other mono-crystalline modules.
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 advanced thin-film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing process (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 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.
In terms of performance, in many climates our solar modules provide certain energy production advantages relative to competing crystalline silicon solar modules. For example, our CdTe solar technology provides:
•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);
•a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to standard test conditions;
•a better partial shading response than competing crystalline silicon technologies, which may experience significantly lower energy generation than CdTe solar modules when partial shading occurs; and
•an immunity to cell cracking and its resulting power output loss, a common failure often observed in crystalline silicon modules caused by poor manufacturing, handling, weather, or other conditions.
In addition to these technological advantages, we also warrant that our solar modules will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by a degradation factor between 0.3% and 0.5%, depending on the module series, every year thereafter throughout the limited power output warranty period of up to 30 years. As a result of these and other factors, our solar modules can produce more annual energy in real world operating conditions than conventional crystalline silicon modules with the same nameplate capacity.
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While our modules 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 further declines in the average selling prices of our modules and additional margin compression. We continue to focus on enhancing the competitiveness of our solar modules by accelerating progress along our module technology and cost reduction roadmaps.
Certain Trends and Uncertainties
We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties. See Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 for discussions of other risks (the “Risk Factors”) that may affect us.
Our business is evolving worldwide and is shaped by the varying ways in which our offerings can be compelling and economically viable solutions to energy needs in various markets. In addressing electricity demands, we are focused on providing utility-scale module offerings in key geographic markets that we believe have a compelling need for mass-scale PV solar electricity, including markets throughout the United States, India, Europe, and Japan. We closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. When deployed in utility-scale applications, our modules provide energy at a lower LCOE compared to traditional forms of energy generation, making them an attractive alternative to or replacement for aging fossil fuel-based generation resources. Based on publicly available information, retirements of coal generation plants in the United States alone are expected to approximate 50 GWDC over the next ten years, representing a significant increase in the potential market for solar energy.
This focus on utility-scale module 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 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 markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions.
Demand for our solar energy solutions depends, in part, on market factors outside our control, such as the availability of debt and/or equity financing (including, in the United States, tax equity financing), interest rate fluctuations, domestic or international trade policies, government regulations, and government support programs. Many governments have proposed policies or support programs intended to encourage renewable energy investments. Such support programs may include additional incentives over several years for renewable energy projects or manufacturers of renewable energy products. For example, during 2021 legislation was introduced in the U.S. Congress to incentivize domestic solar manufacturing and accelerate the transition to clean energy by providing tax credits for U.S. solar manufacturers and project developers. Among other things, such proposed legislation is expected to (i) extend the investment tax credit up to 40% for 10 years for solar projects that satisfy certain domestic content, labor, and wage requirements; (ii) introduce certain refundable tax credits for solar module components manufactured in the U.S.; (iii) revive certain tax credits for capital investments in the manufacturing of solar module components; and (iv) expand the scope of production tax credits for energy storage projects. At this time, it is unclear whether and to what extent such measures will be enacted into law. If such legislation is successfully signed into law, or other similar policies or support programs are enacted, it could positively impact our business, financial condition, and results of operations. While we compete in many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for our solar modules.
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Our ability to provide solar modules on economically attractive terms is also affected by the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules. For example, the cost of ocean freight throughout many parts of the world has continued to increase due to the limited availability of shipping containers, increased port congestion, an increase in cancellations of shipments by logistics providers, and elevated fuel costs. Such factors may disrupt our supply chain and adversely impact our manufacturing operations as several of our key raw materials and components are either single-sourced or sourced from a limited number of international suppliers. In response to these disruptions, we have accommodated certain requests for delayed shipments to customers in an effort to manage our shipping routes and mitigate our exposure to uncontracted freight rates. Additionally, due to ongoing schedule reliability issues with many ships, we are adjusting our shipping plans to include additional lead time (in many cases, longer than 30 days) for module deliveries and utilizing our U.S. distribution network to better meet our customer commitments. For certain contracts with customers, we have also started employing module contract structures that provide additional consideration to us if the cost of logistics services exceeds a defined threshold. Additionally, our manufacturing capacity expansions in the U.S. and India are expected to bring manufacturing activities closer to customer demand, further mitigating our exposure to the cost of ocean freight. While it is currently unclear how long these issues will persist, they may be further exacerbated by the disruption of major shipping routes or other economic disruptions caused by the COVID-19 pandemic.
We generally price and sell our solar modules on a per watt basis. As of March 31, 2022, we had entered into contracts with customers for the future sale of 25.4 GWDC of solar modules for an aggregate transaction price of $6.9 billion, which we expect to recognize as revenue through 2025 as we transfer control of the modules to the customers. Such volume includes contracts for the sale of 9.8 GWDC of solar modules that include transaction price adjustments associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Based on these potential technology improvements, the contracted module volumes as of March 31, 2022, and the expected timing of module deliveries, such adjustments, if realized, could result in additional revenue of up to $0.3 billion, the majority of which would be recognized in 2023 and 2024. In addition to these price adjustments, certain of our contracts with customers may also include favorable price adjustments for the proposed extension of the U.S. investment tax credit and sales freight described above. Such contracts may also include price adjustments related to potential changes to certain commodity prices.
We continue to invest significant financial resources in R&D initiatives, including efforts to enhance module performance such as our CuRe program, which replaces copper with certain other elements that are expected to enhance module performance. However, the implementation of our CuRe program has been delayed as a result of certain challenges, including in achieving full module performance entitlement in high volume manufacturing conditions and COVID-19 related travel restrictions, quarantine requirements, and government orders impacting our ability to upgrade tooling to support our CuRe program at our manufacturing facilities in Malaysia and Vietnam. In addition to these factors, we have elected to prioritize other aspects of our technology roadmap in the near term, which will further delay our CuRe program beyond 2022. The revised implementation timeline will be based on our ability to improve upon our manufacturing process capabilities in respect of the CuRe program and the outcome of additional production tests, which will inform our lead line implementation timing and subsequent fleet-wide replication schedule. In connection with the aforementioned challenges, we have amended or will endeavor to amend certain customer contracts for modules utilizing CuRe technology, including by potentially making certain price concessions and substituting our other modules for the modules with CuRe technology that were expected to be delivered under the terms of the original customer contracts.
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On occasion, we have elected to temporarily own and operate certain PV solar power systems with the intention to sell them at a later date. As of March 31, 2022 and December 31, 2021, the recoverability of our Luz del Norte PV solar power plant was based, in part, on the likelihood of our continued ownership and operation of the system. However, it is reasonably possible that our intent to hold the asset may change in the near term due to our evaluation of strategic sale opportunities for the system. The pursuit of such opportunities, which require coordination with the system’s lenders, may result in a determination that the carrying value of the system is not recoverable based on the probability-weighted undiscounted future cash flows, which in turn could result in a possible impairment of the system in future periods. Accordingly, any changes in our expected use of the asset or its disposition may result in impairment charges that could be material to our condensed consolidated financial statements and have a significant adverse impact on our results of operations.
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. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. Additionally, we are in the process of expanding our manufacturing capacity by 6.6 GWDC by constructing our third manufacturing facility in the U.S. and our first manufacturing facility in India. Such additional capacity, and any other potential 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.
In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availability of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, R&D activities, the implementation of our technology roadmap (such as certain Series 6 Plus manufacturing upgrades), or construction activities associated with our expanding manufacturing capacity. At this time, such limitations have had a minimal effect on our manufacturing facilities, with the exception of the aforementioned technology roadmap delays, and we have implemented a wide range of safety measures intended to enable the continuity of our operations and inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities. While we continue to work with relevant government agencies in Malaysia and Vietnam to allow the essential travel of personnel that support the implementation of our technology roadmap, such implementation may be delayed due to travel restrictions, quarantine requirements, other government orders, or increases in COVID-19 infection rates. Refer to the Risk Factors for more information related to impacts of COVID-19 on our business.
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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 months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | ||||||||||
Cost of sales | 96.9 | % | 77.0 | % | ||||||||||
Gross profit | 3.1 | % | 23.0 | % | ||||||||||
Selling, general and administrative | 10.0 | % | 6.5 | % | ||||||||||
Research and development | 7.4 | % | 2.5 | % | ||||||||||
Production start-up | 2.0 | % | 1.4 | % | ||||||||||
Gain on sales of businesses, net | 0.5 | % | 18.8 | % | ||||||||||
Operating (loss) income | (15.7) | % | 31.4 | % | ||||||||||
Foreign currency loss, net | (1.1) | % | (0.3) | % | ||||||||||
Interest income | 0.6 | % | 0.1 | % | ||||||||||
Interest expense, net | (0.8) | % | (0.4) | % | ||||||||||
Other (expense) income, net | (0.1) | % | 1.1 | % | ||||||||||
Income tax benefit (expense) | 5.3 | % | (5.8) | % | ||||||||||
Net (loss) income | (11.8) | % | 26.1 | % |
Segment Overview
Our primary segment is our modules business, which involves the design, manufacture, and sale of CdTe solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include developers and operators of PV solar power systems. Our residual business operations include certain project development activities and O&M services, which are primarily concentrated in Japan, as well as the results of operations from PV solar power systems we own and operate in certain international regions.
For the year ended December 31, 2021, we changed our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. Following this change, our modules business represents our only reportable segment. We previously operated our business in two segments, which included our modules and systems businesses. Systems business activities primarily involved (i) project development, (ii) EPC services, and (iii) O&M services, which now comprise our residual business operations and are categorized as “Other” in the tables below. All prior year balances were revised to conform to the current year presentation.
Net sales
We generally price and sell our solar modules on a per watt basis. During the three months ended March 31, 2022, we sold the majority of our solar modules to developers and operators of systems in the United States and India, 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. Net sales from our residual business operations primarily consists of revenue recognized for sales of development projects or completed systems, including any modules installed in such systems and any revenue from energy generated by such systems. In certain prior periods, our residual business operations also included EPC services we provided to third parties.
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The following table shows net sales by reportable segment for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Modules | $ | 354,881 | $ | 534,670 | $ | (179,789) | (34) | % | ||||||||||||||||||
Other | 12,159 | 268,704 | (256,545) | (95) | % | |||||||||||||||||||||
Net sales | $ | 367,040 | $ | 803,374 | $ | (436,334) | (54) | % |
Net sales from our modules segment decreased $179.8 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to a 22% decrease in the volume of watts sold and a 15% decrease in the average selling price per watt. Net sales from our residual business operations decreased $256.5 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to sales of certain projects in the United States in the prior period.
Cost of sales
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). Cost of sales for our residual business operations primarily consists of project-related costs, such as 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 months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Modules | $ | 343,692 | $ | 434,230 | $ | (90,538) | (21) | % | ||||||||||||||||||
Other | 11,885 | 184,377 | (172,492) | (94) | % | |||||||||||||||||||||
Total cost of sales | $ | 355,577 | $ | 618,607 | $ | (263,030) | (43) | % | ||||||||||||||||||
% of net sales | 96.9 | % | 77.0 | % |
Cost of sales decreased $263.0 million, or 43%, and increased 19.9 percentage points as a percent of net sales for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The decrease in cost of sales was driven by a $172.5 million decrease in our residual business operations cost of sales primarily due to the higher volume of projects sold during the prior period. The decrease in cost of sales was also driven by a $90.5 million decrease in our modules segment cost of sales primarily due to lower costs of $90.2 million from a decrease in the volume of modules sold; continued module cost reductions, which decreased cost of sales by $14.7 million; and manufacturing related charges of $5.3 million in the prior period associated with the ongoing COVID-19 pandemic; partially offset by higher sales freight of $19.1 million.
Gross profit
Gross profit may be affected by numerous factors, including the selling prices of our modules and the selling prices of projects and services included in our residual business operations, our manufacturing costs, project development 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 business and residual business operations.
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The following table shows gross profit for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Gross profit | $ | 11,463 | $ | 184,767 | $ | (173,304) | (94) | % | ||||||||||||||||||
% of net sales | 3.1 | % | 23.0 | % |
Gross profit decreased 19.9 percentage points to 3.1% during the three months ended March 31, 2022 from 23.0% during the three months ended March 31, 2021 primarily due to the volume of higher gross profit projects sold during the prior period, a decrease in the average selling price per watt of our modules, and an increase in sales freight, partially offset by continued module cost reductions and manufacturing related charges associated with the COVID-19 pandemic in the prior period.
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 months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Selling, general and administrative | $ | 36,728 | $ | 52,087 | $ | (15,359) | (29) | % | ||||||||||||||||||
% of net sales | 10.0 | % | 6.5 | % |
Selling, general and administrative expense for the three months ended March 31, 2022 decreased compared to the three months ended March 31, 2021 primarily due to a decrease in employee compensation expense driven by reductions in headcount from the sales of our North American O&M operations and U.S. project development business in the prior period, lower expected credit losses for our accounts receivable, higher charges for impairments of certain project assets in the prior period, and lower 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.
The following table shows research and development expense for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Research and development | $ | 27,108 | $ | 19,873 | $ | 7,235 | 36 | % | ||||||||||||||||||
% of net sales | 7.4 | % | 2.5 | % |
Research and development expense for the three months ended March 31, 2022 increased compared to the three months ended March 31, 2021 primarily due to increased material and module testing costs and lower share-based compensation expense in the prior period driven by the forfeiture of unvested shares by our former Chief Technology Officer, who retired in March 2021.
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Production start-up
Production start-up expense consists of costs associated with operating a production line before it is qualified for commercial production, including the cost of raw materials for solar modules run through the production line during the qualification phase, employee compensation for individuals supporting production start-up activities, and applicable facility related costs. Production start-up expense also includes costs related to the selection of a new site and implementation costs for manufacturing process improvements to the extent we cannot capitalize these expenditures.
The following table shows production start-up expense for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Production start-up | $ | 7,338 | $ | 11,354 | $ | (4,016) | (35) | % | ||||||||||||||||||
% of net sales | 2.0 | % | 1.4 | % |
During the three months ended March 31, 2022, we incurred production start-up expense primarily for our third manufacturing facility in the U.S. and for certain manufacturing upgrades at our Malaysian facilities. During the three months ended March 31, 2021, we incurred production start-up expense primarily for the transition to Series 6 module manufacturing at our second facility in Kulim, Malaysia, which commenced commercial production in early 2021.
Gain on sales of businesses, net
The following table shows gain on sales of businesses, net for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Gain on sales of businesses, net | $ | 1,907 | $ | 150,895 | $ | (148,988) | (99) | % | ||||||||||||||||||
% of net sales | 0.5 | % | 18.8 | % |
In January 2022, we completed the sale of certain international O&M operations to a subsidiary of Clairvest for consideration of $1.9 million. As a result of this transaction, we recognized a gain of $1.9 million, net of transaction costs and post-closing adjustments, during the three months ended March 31, 2022.
In August 2020, we entered into an agreement with a separate subsidiary of Clairvest for the sale of our North American O&M operations. In March 2021, we completed the transaction and received initial consideration of $146.0 million. As a result of this transaction, we recognized a gain of $119.2 million, net of transaction costs, during the three months ended March 31, 2021.In January 2021, we entered into an agreement with Leeward for the sale of our U.S. project development business. In March 2021, we completed the transaction and received consideration of $151.4 million for the sale of such business. As a result of this transaction, we recognized a gain of $31.8 million, net of transaction costs, during the three months ended March 31, 2021.
See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information related to these transactions.
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Foreign currency loss, net
Foreign currency 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, net for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Foreign currency loss, net | $ | (4,198) | $ | (2,595) | $ | (1,603) | 62 | % |
Foreign currency loss, net for the three months ended March 31, 2022 increased compared to the three months ended March 31, 2021 primarily due to higher costs associated with hedging activities related to our subsidiaries in India.
Interest income
Interest income is earned on our cash, marketable securities, restricted cash, and restricted marketable securities. Interest income also includes interest earned from late customer payments.
The following table shows interest income for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Interest income | $ | 2,325 | $ | 956 | $ | 1,369 | 143 | % |
Interest income for the three months ended March 31, 2022 increased compared to the three months ended March 31, 2021 primarily due to higher interest rates on restricted marketable securities and time deposits, partially offset by lower average balances associated with 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 to 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 months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Interest expense, net | $ | (2,865) | $ | (2,996) | $ | 131 | (4) | % |
Interest expense, net for the three months ended March 31, 2022 was consistent with the three months ended March 31, 2021.
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Other (expense) income, net
Other (expense) income, net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted marketable securities.
The following table shows other (expense) income, net for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Other (expense) income, net | $ | (212) | $ | 8,448 | $ | (8,660) | (103) | % |
Other income, net for the three months ended March 31, 2022 decreased compared to the three months ended March 31, 2021 primarily due to higher realized gains from sales of restricted marketable securities in the prior period.
Income tax benefit (expense)
Income tax benefit or expense, 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 Japan, Malaysia, and Vietnam. 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 Japan, Malaysia, and Vietnam are 30.6%, 24%, and 20%, 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. In Vietnam, we have been granted a tax incentive, scheduled to expire at the end of 2025, pursuant to which income earned in Vietnam is subject to reduced annual tax rates.
The following table shows income tax benefit (expense) for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | Three Month Change | |||||||||||||||||||||||
Income tax benefit (expense) | $ | 19,499 | $ | (46,490) | $ | 65,989 | (142) | % | ||||||||||||||||||
Effective tax rate | 31.1 | % | 18.1 | % |
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 benefit increased by $66.0 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to our pretax loss in the current period.
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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 accrued solar module collection and recycling, product warranties, accounting for income taxes, and long-lived asset impairments 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, 2021. There have been no material changes to our accounting policies during the three months ended March 31, 2022.
Recent Accounting Pronouncements
None.
Liquidity and Capital Resources
As of March 31, 2022, we believe that our cash, marketable securities, cash flows from operating activities, and contracts with customers for the future sale of solar modules will be sufficient to meet our working capital, capital expenditure, and project asset investment needs for at least the next 12 months. As necessary, we also believe we will have adequate access to the capital markets. 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, such as construction activities and purchases of manufacturing equipment for our recently announced manufacturing facility in India and ongoing development activities for certain projects in Japan. However, our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to company-specific, industry-wide, or broader market concerns. Any incremental debt financings could result in increased debt service expenses and/or restrictive covenants, which could limit our ability to pursue our strategic plans. Additionally, given the duration of these and other capital investments and the currency risk relative to the U.S. dollar in certain international markets in which we operate, 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.
As of March 31, 2022, we had $1.5 billion in cash and marketable securities compared to $1.8 billion as of December 31, 2021. The decrease in cash and marketable securities was primarily driven by purchases of property, plant and equipment; expenditures for the construction of certain projects in Japan; and other operating expenditures; partially offset by net proceeds from the sales and maturities of marketable securities; and cash receipts from module sales. As of March 31, 2022, $0.7 billion of our cash and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Japanese yen, and Indian rupee denominated holdings.
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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 and ability to permanently reinvest our accumulated earnings outside 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.
We continually evaluate forecasted global demand and seek to balance our manufacturing capacity with such demand. We recently announced our plans to invest approximately $1.4 billion to expand our solar manufacturing capacity by 6.6 GWDC by constructing our third manufacturing facility in the U.S. and our first manufacturing facility in India. These new facilities are currently under construction and are expected to commence operations in the first half of 2023 and the second half of 2023, respectively. In addition, we continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. During 2022, we expect to spend $0.9 billion to $1.1 billion for capital expenditures, including the new facilities mentioned above and upgrades to machinery and equipment that we believe will further increase our module wattage and expand capacity and throughput at our manufacturing facilities.
We also expect to commit significant working capital to purchase various raw materials used in our module manufacturing process. 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. Our remaining purchases under these supply agreements are expected to be approximately $1.6 billion of substrate glass and approximately $359 million of cover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which, in aggregate, are up to $307 million as of March 31, 2022 and decline over the remaining supply periods).
We have also committed certain financial resources to fulfill our solar module collection and recycling obligations, and have established a trust under which these funds are put into custodial accounts with an established and reputable bank. As of March 31, 2022, such funds were comprised of restricted marketable securities of $220.2 million and restricted cash balances of $3.5 million. As of March 31, 2022, our module collection and recycling liability was $137.5 million. 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 overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. As necessary, we adjust the funded 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 marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years.
Our residual business operations include certain project development activities and O&M services, which are primarily concentrated in Japan. Solar power project development 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 of certain projects using our working capital, we may need to make significant investments of resources in advance of the receipt of any cash from the sale of such projects. In late 2021, we received an offer to purchase our project development and O&M services businesses in Japan and determined it was in the best interest of our stockholders to pursue this transaction. As a result, we expect to complete the sale of these businesses in the first half of 2022. To the extent the sale is not completed in the near term, our residual business operations may continue to have
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significant liquidity requirements in the future for project development and construction costs, commitments under land lease arrangements associated with project sites, and commitments under certain project debt arrangements. The net amount of our project assets and related portions of long-term debt and deferred revenue, which approximates our net capital investment in the development and construction of solar power projects, was $306.1 million as of March 31, 2022. Additionally, from time to time we have elected to retain an ownership interest in certain PV solar power systems after they became operational. The decision to retain ownership of a system impacts our liquidity depending upon the size and cost of the project. The net amount of our PV solar power systems and related portions of long-term debt, which approximates our net capital investment in our operating power plants, was $31.3 million as of March 31, 2022.
As of March 31, 2022, 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.
Cash Flows
The following table summarizes key cash flow activity for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||
Net cash used in operating activities | $ | (138,839) | $ | (279,478) | ||||||||||
Net cash (used in) provided by investing activities | (2,944) | 271,838 | ||||||||||||
Net cash provided by (used in) financing activities | 5,764 | (31,451) | ||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 15,162 | (652) | ||||||||||||
Net decrease in cash, cash equivalents and restricted cash | $ | (120,857) | $ | (39,743) |
Operating Activities
The decrease in net cash used in operating activities was primarily driven by higher cash receipts from module sales and higher operating expenditures in the prior period, partially offset by certain advance payments for raw materials in the current period.
Investing Activities
The increase in net cash used in investing activities was primarily due to proceeds from the sale of our North American O&M operations and U.S. project development business in the prior period, lower net sales and maturities of marketable securities and restricted marketable securities, and higher purchases of property, plant and equipment.
Financing Activities
The increase in net cash provided by financing activities was primarily due to the repayment of the Tochigi credit agreement in the prior period.
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, 2021.
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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 March 31, 2022 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 March 31, 2022 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 March 31, 2022 despite the fact that many of our associates continue to work remotely due to the COVID-19 pandemic. We continue to monitor and assess the COVID-19 situation on our internal controls to minimize potential impacts on their design and operating effectiveness.
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, 2021, 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. There have been no material changes in the risk factors contained in our Annual Report on Form 10-K.
Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibit Number | Exhibit Description | |||||||
3.1 | ||||||||
3.2 | ||||||||
10.1* | ||||||||
10.2* | ||||||||
10.3* | ||||||||
10.4* | ||||||||
10.5* | ||||||||
10.6* | ||||||||
10.7* | ||||||||
31.1* | ||||||||
31.2* | ||||||||
32.1† | ||||||||
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 | |||||||
104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
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——————————
* Filed herewith.
† Furnished herewith. 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: April 28, 2022 | By: | /s/ BYRON JEFFERS | |||||||||
Name: | Byron Jeffers | ||||||||||
Title: | Chief Accounting Officer |
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