FIRST SOLAR, INC.
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
(Mark one)
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[x]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2016
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number: 001-33156
First Solar, Inc
.
(Exact name of registrant as specified in its charter)
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Delaware
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20-4623678
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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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)
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 [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [x]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [ ]
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of
July 29, 2016
,
102,359,553
shares of the registrant’s common stock,
$0.001
par value per share, were outstanding.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM
10-Q
FOR THE
QUARTERLY PERIOD
ENDED
JUNE 30, 2016
TABLE OF CONTENTS
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Page
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2
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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|||||||||||||||
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2016
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2015
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2016
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2015
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|||||||||||||
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Net sales
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$
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934,381
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$
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896,217
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$
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1,782,865
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$
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1,365,426
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Cost of sales
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743,216
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731,734
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1,328,755
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1,161,962
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||||||||
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Gross profit
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191,165
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164,483
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454,110
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203,464
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Operating expenses:
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||||||||||||||||
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Research and development
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32,931
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29,479
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63,118
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64,235
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Selling, general and administrative
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63,776
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70,901
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131,279
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138,589
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Production start-up
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55
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6,970
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55
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13,620
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Restructuring and asset impairments
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85,532
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—
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85,532
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—
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||||||||
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Total operating expenses
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182,294
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107,350
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279,984
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216,444
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Operating income (loss)
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8,871
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57,133
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174,126
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(12,980
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)
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Foreign currency loss, net
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(2,723
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)
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(2,957
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)
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(5,963
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)
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(3,178
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)
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Interest income
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6,529
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6,058
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12,935
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11,122
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Interest expense, net
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(7,151
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)
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(826
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)
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(11,793
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)
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(1,020
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)
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Other income (expense), net
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6,753
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(792
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)
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42,306
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(2,051
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)
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Income (loss) before taxes and equity in earnings of unconsolidated affiliates
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12,279
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58,616
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211,611
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(8,107
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)
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Income tax (expense) benefit
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(9,047
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)
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33,340
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(42,811
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)
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39,320
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Equity in earnings of unconsolidated affiliates, net of tax
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10,176
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1,929
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15,173
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1,755
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Net income
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$
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13,408
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$
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93,885
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$
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183,973
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$
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32,968
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Net income per share:
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Basic
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$
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0.13
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$
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0.93
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$
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1.80
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$
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0.33
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Diluted
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$
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0.13
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$
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0.92
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$
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1.78
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$
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0.33
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Weighted-average number of shares used in per share calculations:
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||||||||||||||||
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Basic
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102,287
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100,852
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102,070
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100,615
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Diluted
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103,875
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101,607
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103,281
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101,631
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See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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|||||||||||||||
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2016
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2015
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2016
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2015
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Net income
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$
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13,408
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$
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93,885
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$
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183,973
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$
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32,968
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Other comprehensive income (loss), net of tax:
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Foreign currency translation adjustments
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(2,325
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)
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2,495
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3,217
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(12,898
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)
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Unrealized gain (loss) on marketable securities and restricted investments
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29,630
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(60,640
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)
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35,596
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(22,353
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)
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Unrealized gain (loss) on derivative instruments
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2,240
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(341
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)
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2,346
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(1,901
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)
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Other comprehensive income (loss), net of tax
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29,545
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(58,486
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)
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41,159
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(37,152
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)
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Comprehensive income (loss)
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$
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42,953
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$
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35,399
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$
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225,132
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$
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(4,184
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)
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See accompanying notes to these condensed consolidated financial statements.
4
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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June 30,
2016 |
December 31,
2015 |
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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916,660
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$
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1,126,826
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Marketable securities
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750,779
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703,454
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Accounts receivable trade, net
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369,135
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500,629
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Accounts receivable, unbilled and retainage
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172,892
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59,171
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Inventories
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384,504
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380,424
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Balance of systems parts
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92,796
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136,889
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Deferred project costs
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112,512
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187,940
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Notes receivable, affiliate
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372
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1,276
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Prepaid expenses and other current assets
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276,971
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248,977
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Total current assets
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3,076,621
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3,345,586
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Property, plant and equipment, net
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1,268,267
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1,284,136
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PV solar power systems, net
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410,759
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93,741
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Project assets and deferred project costs
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1,247,114
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1,111,137
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Deferred tax assets, net
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351,714
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357,693
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Restricted cash and investments
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414,019
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333,878
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Investments in unconsolidated affiliates and joint ventures
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427,243
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399,805
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Goodwill
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78,888
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84,985
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Other intangibles, net
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68,218
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110,002
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Inventories
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103,885
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107,759
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Notes receivable, affiliates
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22,254
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17,887
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Other assets
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75,038
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69,722
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Total assets
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$
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7,544,020
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$
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7,316,331
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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263,062
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$
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337,668
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Income taxes payable
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1,518
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1,330
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Accrued expenses
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354,525
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409,452
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Current portion of long-term debt
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71,591
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38,090
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Billings in excess of costs and estimated earnings
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110,514
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87,942
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Payments and billings for deferred project costs
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94,316
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28,580
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Other current liabilities
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56,503
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57,738
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Total current liabilities
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952,029
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960,800
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||||
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Accrued solar module collection and recycling liability
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167,740
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163,407
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Long-term debt
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161,839
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251,325
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||||
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Other liabilities
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457,767
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392,312
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Total liabilities
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1,739,375
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1,767,844
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Commitments and contingencies
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Stockholders’ equity:
|
||||||||
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Common stock, $0.001 par value per share; 500,000,000 shares authorized; 102,349,660 and 101,766,797 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
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102
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102
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Additional paid-in capital
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2,773,821
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2,742,795
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Accumulated earnings
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2,974,083
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2,790,110
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Accumulated other comprehensive income
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56,639
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15,480
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Total stockholders’ equity
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5,804,645
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5,548,487
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Total liabilities and stockholders’ equity
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$
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7,544,020
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$
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7,316,331
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See accompanying notes to these condensed consolidated financial statements.
5
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended June 30,
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|||||||
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2016
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2015
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Cash flows from operating activities:
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Net income
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$
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183,973
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$
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32,968
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Adjustments to reconcile net income to cash used in operating activities:
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||||||||
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Depreciation, amortization and accretion
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115,079
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129,157
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||||
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Impairment of long-lived assets, intangible assets and goodwill
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82,536
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6,924
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Share-based compensation
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18,571
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20,933
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||||
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Equity in earnings of unconsolidated affiliates, net of tax
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(15,173
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)
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(1,755
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)
|
||||
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Remeasurement of monetary assets and liabilities
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(4,062
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)
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6,283
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||||
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Deferred income taxes
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(3,182
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)
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(24,822
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)
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||||
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Excess tax benefits from share-based compensation arrangements
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(28,108
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)
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(16,352
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)
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||||
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Gain on sales of marketable securities and restricted investments
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(37,804
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)
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—
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||||
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Other, net
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875
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492
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||||
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Changes in operating assets and liabilities:
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||||||||
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Accounts receivable, trade, unbilled and retainage
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8,333
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(135,053
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)
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||||
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Prepaid expenses and other current assets
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(51,921
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)
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(7,116
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)
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||||
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Inventories and balance of systems parts
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42,867
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56,390
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Project assets and deferred project costs
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(344,385
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)
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(421,836
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)
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Other assets
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(9,093
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)
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(13,208
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)
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||||
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Accounts payable
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(74,569
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)
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70,936
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Income taxes payable
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27,723
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(54,149
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)
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||||
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Accrued expenses and other liabilities
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59,644
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(82,740
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)
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Accrued solar module collection and recycling liability
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3,915
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(2,070
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)
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Net cash used in operating activities
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(24,781
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)
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(435,018
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)
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Cash flows from investing activities:
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||||||||
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Purchases of property, plant and equipment
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(130,139
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)
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(94,111
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)
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||||
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Purchases of marketable securities and restricted investments
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(299,719
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)
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(394,313
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)
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||||
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Proceeds from sales and maturities of marketable securities and restricted investments
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253,420
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199,459
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||||
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Distributions received from equity method investments
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1,502
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238,980
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||||
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Investments in notes receivable, affiliates
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(4,600
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)
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(45,288
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)
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||||
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Payments received on notes receivable, affiliate
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52
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|
16,277
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||||
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Change in restricted cash
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35,264
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(13,551
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)
|
||||
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Other investing activities
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(4,928
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)
|
(10,231
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)
|
||||
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Net cash used in investing activities
|
(149,148
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)
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(102,778
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)
|
||||
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Cash flows from financing activities:
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||||||||
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Repayment of long-term debt
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(85,830
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)
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(25,575
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)
|
||||
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Proceeds from borrowings under long-term debt, net of discounts and issuance costs
|
19,829
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|
122,942
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|
||||
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Repayment of sale-leaseback financing
|
(3,502
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)
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(1,904
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)
|
||||
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Proceeds from sale-leaseback financing
|
—
|
|
44,718
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|
||||
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Excess tax benefits from share-based compensation arrangements
|
28,108
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|
16,352
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|
||||
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Contingent consideration payments and other financing activities
|
(111
|
)
|
(12,960
|
)
|
||||
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Net cash (used in) provided by financing activities
|
(41,506
|
)
|
143,573
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|
||||
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Effect of exchange rate changes on cash and cash equivalents
|
5,269
|
|
(12,687
|
)
|
||||
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Net decrease in cash and cash equivalents
|
(210,166
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)
|
(406,910
|
)
|
||||
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Cash and cash equivalents, beginning of the period
|
1,126,826
|
|
1,482,054
|
|
||||
|
Cash and cash equivalents, end of the period
|
$
|
916,660
|
|
$
|
1,075,144
|
|
||
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Supplemental disclosure of noncash investing and financing activities:
|
|
|
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|
||||
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Equity interests retained from the partial sale of project assets
|
$
|
(7,549
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)
|
$
|
126,079
|
|
||
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Property, plant and equipment acquisitions funded by liabilities
|
$
|
20,797
|
|
$
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34,022
|
|
||
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Acquisitions currently or previously funded by liabilities and contingent consideration
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$
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23,803
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|
$
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27,398
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|
||
See accompanying notes to these condensed consolidated financial statements.
6
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted 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. Operating results for the
three
and
six
months ended
June 30, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
or for any other period. The condensed consolidated balance sheet at
December 31, 2015
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, 2015
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,” “our,” “us,” and “First Solar” refer to First Solar, Inc. and its subsidiaries.
Revision of Previously Issued Financial Statements
During the three months ended September 30, 2015, we revised our previously issued financial statements, including periods presented in this Quarterly Report on Form 10-Q, to properly record a liability associated with an uncertain tax position, including penalties, related to income of a foreign subsidiary along with corresponding adjustments in each successive period for the effect of changes in foreign currency exchange rates associated with the liability.
We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to our previously issued financial statements. As part of this evaluation, we considered a number of qualitative factors, including, among others, that the errors did not change a net loss into net income or vice versa, did not have an impact on our long-term debt covenant compliance, and did not mask a change in earnings or other trends when considering the overall competitive and economic environment within the industry during the periods. However, the cumulative effect of the errors, including the uncertain tax position matter identified during the three months ended September 30, 2015, was significant to our financial results for the year ended December 31, 2015. Accordingly, all financial information presented in the accompanying notes to these condensed consolidated financial statements was revised to reflect the correction of these errors.
The following tables present the effect of the aforementioned revisions on our condensed consolidated statements of operations for the three and six months ended June 30, 2015 (in thousands, except per share amounts):
|
Three Months Ended June 30, 2015
|
||||||||||||
|
As Reported
|
Adjustment
|
As Revised
|
||||||||||
|
Foreign currency loss, net
|
$
|
(2,352
|
)
|
$
|
(605
|
)
|
$
|
(2,957
|
)
|
|||
|
Income before taxes and equity in earnings of unconsolidated affiliates
|
59,221
|
|
(605
|
)
|
58,616
|
|
||||||
|
Net income
|
94,490
|
|
(605
|
)
|
93,885
|
|
||||||
|
Comprehensive income
|
36,004
|
|
(605
|
)
|
35,399
|
|
||||||
|
Basic net income per share
|
$
|
0.94
|
|
$
|
(0.01
|
)
|
$
|
0.93
|
|
|||
|
Diluted net income per share
|
$
|
0.93
|
|
$
|
(0.01
|
)
|
$
|
0.92
|
|
|||
7
|
Six Months Ended June 30, 2015
|
||||||||||||
|
As Reported
|
Adjustment
|
As Revised
|
||||||||||
|
Foreign currency loss, net
|
$
|
(3,948
|
)
|
$
|
770
|
|
$
|
(3,178
|
)
|
|||
|
Loss before taxes and equity in earnings of unconsolidated affiliates
|
(8,877
|
)
|
770
|
|
(8,107
|
)
|
||||||
|
Net income
|
32,198
|
|
770
|
|
32,968
|
|
||||||
|
Comprehensive loss
|
(4,954
|
)
|
770
|
|
(4,184
|
)
|
||||||
|
Basic net income per share
|
$
|
0.32
|
|
$
|
0.01
|
|
$
|
0.33
|
|
|||
|
Diluted net income per share
|
$
|
0.32
|
|
$
|
0.01
|
|
$
|
0.33
|
|
|||
The following table presents the effect of the aforementioned revisions on our condensed consolidated statement of cash flows for the six months ended June 30, 2015 (in thousands):
|
Six Months Ended June 30, 2015
|
||||||||||||
|
As Reported
|
Adjustment
|
As Revised
|
||||||||||
|
Net income
|
$
|
32,198
|
|
$
|
770
|
|
$
|
32,968
|
|
|||
|
Adjustments to reconcile net income to cash used in operating activities:
|
||||||||||||
|
Remeasurement of monetary assets and liabilities
|
7,053
|
|
(770
|
)
|
6,283
|
|
||||||
|
Net cash used in operating activities
|
(435,018
|
)
|
—
|
|
(435,018
|
)
|
||||||
2. Summary of Significant Accounting Policies
Use of Estimates.
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 our condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to percentage-of-completion revenue recognition, inventory valuation, recoverability of project assets and photovoltaic (“PV”) solar power systems, estimates of future cash flows from and the economic useful lives of long-lived assets, asset retirement obligations, certain accrued liabilities, income taxes and tax valuation allowances, reportable segment allocations, product warranties and manufacturing excursions, solar module collection and recycling liabilities, and applying the acquisition method of accounting for business combinations and goodwill. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from these estimates and assumptions.
Revenue Recognition – Systems Business
. We recognize revenue for arrangements entered into by our systems business generally using two revenue recognition models, following the guidance in either Accounting Standards Codification (“ASC”) 605-35,
Construction-Type and Production-Type Contracts
,
or ASC 360-20,
Real Estate Sales
, for arrangements which include land or land rights
.
Systems business sales arrangements in which we construct a PV solar power system for a specific customer on land that is controlled by the customer, and has not been previously controlled by First Solar, are accounted for under ASC 605-35. For such sales arrangements, we use the percentage-of-completion method, as described further below, using actual costs incurred over total estimated costs to develop and construct the system (including module costs) as our standard accounting policy.
Systems business sales arrangements in which we convey control of land or land rights as part of the transaction are accounted for under ASC 360-20. Accordingly, we use
one of the following revenue recognition methods, based upon an evaluation of the substance and form of the terms and conditions of such real estate sales:
|
(i)
|
We apply the percentage-of-completion method, as further described below, to certain real estate sales arrangements in which
we convey control of land or land rights,
when a sale has been consummated, we have transferred the usual risks and rewards of ownership to the buyer, the initial and continuing investment criteria have been met, we have the ability to estimate our costs and progress toward completion, and all other revenue recognition criteria have been met. When evaluating whether the usual risks and rewards of ownership have transferred to the buyer, we consider whether we have or may be contingently required to have any prohibited forms of continuing involvement with the project pursuant to ASC 360-20. The initial and continuing investment requirements, which demonstrate a buyer’s commitment to honor its obligations for the sales arrangement, can typically be met through the receipt of cash or an irrevocable letter of credit from a highly creditworthy lending institution.
|
8
|
(ii)
|
Depending on whether the initial and continuing investment requirements have been met and whether collectability from the buyer is reasonably assured, we may align our revenue recognition and release of project assets or deferred project costs to cost of sales with the receipt of payment from the buyer if the sale has been consummated and we have transferred the usual risks and rewards of ownership to the buyer.
|
For any systems business sales arrangements containing multiple deliverables (including our solar modules) not required to be accounted for under ASC 605-35 (long-term construction contracts) or ASC 360-20 (real estate sales), we analyze each activity within the sales arrangement to adhere to the separation guidelines of ASC 605-25 for multiple-element arrangements. We allocate revenue for any transactions involving multiple elements to each unit of accounting based on its relative selling price and recognize revenue for each unit of accounting when all revenue recognition criteria for a unit of accounting have been met.
Revenue Recognition – Percentage-of-Completion.
In applying the percentage-of-completion method, we use the actual costs incurred relative to the total estimated costs (including module costs) in order to determine the progress towards completion and calculate the corresponding amount of revenue and profit to recognize. Costs incurred include direct materials, solar modules, labor, subcontractor costs, and those indirect costs related to contract performance, such as indirect labor and supplies. We recognize direct material and solar module costs as incurred when the direct materials and solar modules have been installed in the project. When contracts specify that title to direct materials and solar modules transfers to the customer before installation has been performed, we will not recognize revenue or the associated costs until those materials are installed and have met all other revenue recognition requirements. We consider direct materials and solar modules to be installed when they are permanently placed or affixed to a PV solar power system as required by engineering designs. Solar modules manufactured and owned by us that will be used in our systems remain within inventory until such modules are installed in a system.
The percentage-of-completion method of revenue recognition requires us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, management judgments are required to evaluate significant assumptions including the amount of net contract revenues, the cost of materials and labor, expected labor productivity, the impact of potential variances in schedule completion, and the impact of any penalties, claims, change orders, or performance incentives.
If estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of the revisions to estimates related to net contract revenues and costs to complete contracts, including penalties, claims, change orders, performance incentives, anticipated losses, and others are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be material depending on the size of the contracts or the changes in estimates.
Revenue Recognition – Operations and Maintenance.
Our operations and maintenance (“O&M”) revenue is billed and recognized as services are performed. Costs of these revenues are expensed in the period in which they are incurred.
Revenue Recognition – Components Business.
Our components business sells solar modules directly to third-party solar power system integrators and operators. We recognize revenue for module sales when persuasive evidence of an arrangement exists, delivery of the modules has occurred and title and risk of loss have passed to the customer, the sales price is fixed or determinable, and the collectability of the resulting receivable is reasonably assured. Under this policy, we record a trade receivable for the selling price of our module and reduce inventory for the cost of goods sold when delivery occurs in accordance with the terms of the sales contract. Our customers typically do not have extended payment terms or rights of return for our products.
Ventures and Variable Interest Entities.
In the normal course of business we establish wholly owned project companies which may be considered variable interest entities (“VIEs”). We consolidate wholly owned variable interest entities when we are considered the primary beneficiary of such entities. Additionally, we have, and may in the future form, joint venture type arrangements, including partnerships and partially owned limited liability companies or similar legal structures, with one or more third parties primarily to develop, construct, own, and/or sell solar power projects. These types of ventures are core to our business and long-term strategy related to providing PV solar generation solutions using our modules to key geographic markets. We analyze all of our ventures and classify them into two groups: (i) ventures that must be consolidated because they are either not VIEs and we hold a majority voting interest, or because they are VIEs and we are the primary beneficiary and (ii) ventures that do not need to be consolidated and are accounted for under either the cost or equity method of accounting because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.
9
Ventures are considered VIEs if (i) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (ii) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses, or the right to receive expected residual returns; or (iii) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are conducted on behalf of that investor. Our venture agreements typically require us to fund some form of capital for the development and construction of a project, depending upon the opportunity and the market in which our ventures are located.
We are considered the primary beneficiary of and are required to consolidate a VIE if we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the entity. If we determine that we do not have the power to direct the activities that most significantly impact the entity, then we are not the primary beneficiary of the VIE.
Cost and Equity Method Investments.
We account for our unconsolidated ventures using either the cost or equity method of accounting depending upon whether we have the ability to exercise significant influence over the venture. As part of this evaluation, we consider our participating and protective rights in the venture as well as its legal form. We record our cost method investments at their historical cost and subsequently record any dividends received from the net accumulated earnings of the investee as income. Dividends received in excess of earnings are considered a return of investment and are recorded as reductions in the cost of the investment. We use the equity method of accounting for our investments when we have the ability to significantly influence the operations or financial activities of the investee. We record our equity method investments at cost and subsequently adjust their carrying amount each period for our share of the earnings or losses of the investee and other adjustments required by the equity method of accounting. Dividends received from our equity method investments are recorded as reductions in the carrying value of such investments.
We monitor our investments, which are included in “
Investments in unconsolidated affiliates and joint ventures
” in the accompanying condensed consolidated balance sheets, for impairment and record reductions in their carrying values if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when such impairment is deemed to be other-than-temporary. To determine whether an impairment is other-than-temporary, we consider our ability and intent to hold the investment until the carrying amount is fully recovered. Circumstances that indicate an other-than-temporary impairment may have occurred include factors such as decreases in quoted market prices or declines in the operations of the investee. The evaluation of an investment for potential impairment requires us to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. We recorded
no
impairment losses related to our cost and equity method investments during the
three
and
six
months ended
June 30, 2016
and
2015
.
See
Note 2. “Summary of Significant Accounting Policies”
to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2015
for a more complete summary of our significant accounting policies.
3. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted for periods beginning after December 15, 2016. We are currently evaluating our method and timing of adoption and the impact ASU 2014-09 will have on our consolidated financial statements and associated disclosures.
In February 2015, the FASB issued ASU 2015-02,
Consolidation (Topic 810) – Amendments to the Consolidation Analysis
. ASU 2015-02 modifies existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of variable interests for fees paid to decision makers or service providers, (iii) the effect of fee arrangements and related parties on the primary beneficiary determination, and (iv) certain investment funds. These changes are expected to limit the number of consolidation models and place more emphasis on risk of loss when determining a controlling financial interest. The adoption of ASU 2015-02 in the first quarter of 2016 did not have a significant impact on our consolidated financial statements and associated disclosures.
10
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted for certain provisions of the guidance. We are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements and associated disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
,
to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning
after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements and associated disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326),
to provide financial statement users with more useful information about expected credit losses. ASU 2016-13 also changes how entities measure credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, and early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and associated disclosures.
4. Restructuring and Asset Impairments
In June 2016, our executive management elected to reallocate our crystalline silicon module production capacity to support a new assembly line dedicated to our recently announced Series 5 cadmium telluride (“CdTe”) module offering. As a result, we are ending production of our crystalline silicon modules to focus on our core CdTe module technology and utility-scale PV solar power systems. The majority of our crystalline silicon module manufacturing associates are expected to be redeployed to the new Series 5 assembly line, which is expected to be operational in early 2017.
In connection with these restructuring activities, we incurred charges of
$84.6 million
during the three months ended June 30, 2016, which included (i)
$35.5 million
of impairment charges related to certain crystalline silicon module manufacturing equipment considered abandoned for accounting purposes; (ii)
$35.8 million
of impairment charges for developed technology intangible assets associated with our crystalline silicon module technology; (iii)
$6.1 million
of goodwill impairment charges from the disposal of our crystalline silicon components reporting unit; and (iv)
$7.2 million
of miscellaneous charges related to certain contract manufacturing agreements and the write-off of operating supplies. All amounts associated with these charges related to our components segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations. We expect to incur up to
$10.0 million
of additional charges as we complete these restructuring activities during the remainder of 2016.
During the three months ended June 30, 2016, we also incurred charges of
$0.9 million
for severance benefits to terminated employees associated with restructuring activities unrelated to the end of our crystalline silicon module production.
11
5. Cash, Cash Equivalents, and Marketable Securities
Cash, cash equivalents, and marketable securities consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Cash and cash equivalents:
|
||||||||
|
Cash
|
$
|
916,486
|
|
$
|
1,126,496
|
|
||
|
Cash equivalents:
|
||||||||
|
Money market funds
|
174
|
|
330
|
|
||||
|
Total cash and cash equivalents
|
916,660
|
|
1,126,826
|
|
||||
|
Marketable securities:
|
|
|||||||
|
Foreign debt
|
710,779
|
|
663,454
|
|
||||
|
Time deposits
|
40,000
|
|
40,000
|
|
||||
|
Total marketable securities
|
750,779
|
|
703,454
|
|
||||
|
Total cash, cash equivalents, and marketable securities
|
$
|
1,667,439
|
|
$
|
1,830,280
|
|
||
We classify our marketable securities as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as part of “
Accumulated other comprehensive income
” until realized. We record realized gains and losses on the sale of our marketable securities in “
Other income (expense), net
” computed using the specific identification method. During the
three
and
six
months ended
June 30, 2016
and
2015
, we realized
no
gains or losses on the sale of our marketable securities.
See Note 9. “Fair Value Measurements”
to our condensed consolidated financial statements for information about the fair value of our marketable securities.
As of
June 30, 2016
and
December 31, 2015
, we identified
two
investments totaling
$45.1 million
and
$31.5 million
, respectively, that had been in a loss position for a period of time greater than 12 months with unrealized losses of less than
$0.1 million
. The unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell these securities prior to the recovery of our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired. All of our available-for-sale marketable securities are subject to a periodic impairment review. We did not identify any of our marketable securities as other-than-temporarily impaired as of
June 30, 2016
and
December 31, 2015
.
The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
As of June 30, 2016
|
|||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Foreign debt
|
$
|
708,916
|
|
$
|
2,128
|
|
$
|
265
|
|
$
|
710,779
|
|
||||
|
Time deposits
|
40,000
|
|
—
|
|
—
|
|
40,000
|
|
||||||||
|
Total
|
$
|
748,916
|
|
$
|
2,128
|
|
$
|
265
|
|
$
|
750,779
|
|
||||
|
|
As of December 31, 2015
|
|||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Foreign debt
|
$
|
665,900
|
|
$
|
9
|
|
$
|
2,455
|
|
$
|
663,454
|
|
||||
|
Time deposits
|
40,000
|
|
—
|
|
—
|
|
40,000
|
|
||||||||
|
Total
|
$
|
705,900
|
|
$
|
9
|
|
$
|
2,455
|
|
$
|
703,454
|
|
||||
12
The contractual maturities of our marketable securities as of
June 30, 2016
and
December 31, 2015
were as follows (in thousands):
|
|
As of June 30, 2016
|
|||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
One year or less
|
$
|
280,542
|
|
$
|
62
|
|
$
|
124
|
|
$
|
280,480
|
|
||||
|
One year to two years
|
239,539
|
|
525
|
|
82
|
|
239,982
|
|
||||||||
|
Two years to three years
|
228,835
|
|
1,541
|
|
59
|
|
230,317
|
|
||||||||
|
Total
|
$
|
748,916
|
|
$
|
2,128
|
|
$
|
265
|
|
$
|
750,779
|
|
||||
|
|
As of December 31, 2015
|
|||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
One year or less
|
$
|
290,377
|
|
$
|
9
|
|
$
|
406
|
|
$
|
289,980
|
|
||||
|
One year to two years
|
228,492
|
|
—
|
|
1,183
|
|
227,309
|
|
||||||||
|
Two years to three years
|
187,031
|
|
—
|
|
866
|
|
186,165
|
|
||||||||
|
Total
|
$
|
705,900
|
|
$
|
9
|
|
$
|
2,455
|
|
$
|
703,454
|
|
||||
The net unrealized gains of
$1.9 million
and the net unrealized losses of
$2.4 million
on our marketable securities as of
June 30, 2016
and
December 31, 2015
, respectively, were primarily the result of changes in interest rates relative to rates at the time of purchase. Our investment policy requires marketable securities to be highly rated and limits the security types, issuer concentration, and duration to maturity of our marketable securities portfolio.
The following tables show gross unrealized losses and estimated fair values for those marketable securities that were in an unrealized loss position as of
June 30, 2016
and
December 31, 2015
, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
|
|
As of June 30, 2016
|
|||||||||||||||||||||||
|
|
In Loss Position for
Less Than 12 Months
|
In Loss Position for
12 Months or Greater
|
Total
|
|||||||||||||||||||||
|
Estimated
Fair
Value
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||
|
Foreign debt
|
$
|
175,111
|
|
$
|
234
|
|
$
|
45,131
|
|
$
|
31
|
|
$
|
220,242
|
|
$
|
265
|
|
||||||
|
Total
|
$
|
175,111
|
|
$
|
234
|
|
$
|
45,131
|
|
$
|
31
|
|
$
|
220,242
|
|
$
|
265
|
|
||||||
|
|
As of December 31, 2015
|
|||||||||||||||||||||||
|
|
In Loss Position for
Less Than 12 Months
|
In Loss Position for
12 Months or Greater
|
Total
|
|||||||||||||||||||||
|
Estimated
Fair
Value
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||
|
Foreign debt
|
$
|
629,033
|
|
$
|
2,386
|
|
$
|
31,491
|
|
$
|
69
|
|
$
|
660,524
|
|
$
|
2,455
|
|
||||||
|
Total
|
$
|
629,033
|
|
$
|
2,386
|
|
$
|
31,491
|
|
$
|
69
|
|
$
|
660,524
|
|
$
|
2,455
|
|
||||||
6. Restricted Cash and Investments
Restricted cash and investments
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Restricted cash
|
$
|
4,830
|
|
$
|
7,764
|
|
||
|
Restricted investments
|
409,189
|
|
326,114
|
|
||||
|
Total restricted cash and investments (1)
|
$
|
414,019
|
|
$
|
333,878
|
|
||
|
(1)
|
There was an additional
$40.5 million
and
$72.5 million
of restricted cash included within prepaid expenses and other current assets at
June 30, 2016
and
December 31, 2015
, respectively.
|
13
At
June 30, 2016
, our restricted cash consisted of deposits held by various banks to secure certain of our letters of credit and deposits designated for the construction of systems projects and payment of amounts related to project construction credit facilities. Restricted cash for our letters of credit is classified as current or noncurrent based on the maturity date of the corresponding letter of credit.
See Note 13. “Commitments and Contingencies”
to our condensed consolidated financial statements for further discussion relating to letters of credit. Restricted cash for project construction and financing is classified as current or noncurrent based on the projected use of the restricted funds.
At
June 30, 2016
and
December 31, 2015
, our restricted investments consisted of long-term marketable securities that were held in custodial accounts to fund the estimated future costs of collecting and recycling modules covered under our solar module collection and recycling program. We classify our restricted investments as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as a part of “
Accumulated other comprehensive income
” until realized. We record realized gains and losses on the sale of our restricted investments in “
Other income (expense), net
” computed using the specific identification method. During the
three
months ended
June 30, 2016
, we realized
no
gains on the sale of our restricted investments. During the
six
months ended
June 30, 2016
, we realized gains of
$37.8 million
on the sale of certain restricted investments as part of an effort to align the currencies of the investments with those of the corresponding collection and recycling liabilities. Restricted investments are classified as noncurrent as the underlying accrued solar module collection and recycling liabilities are also noncurrent in nature.
See Note 9. “Fair Value Measurements”
to our condensed consolidated financial statements for information about the fair value of our restricted investments.
As necessary, we fund any incremental amounts for our estimated collection and recycling obligations within
90 days
of the end of each year. We determine the funding requirement, if any, based on estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of
25 years
less amounts already funded in prior years. No incremental funding was required in 2016 for covered module sales in 2015. To ensure that these funds will be available in the future regardless of any potential adverse changes in our financial condition (even in the case of our own insolvency), we have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc. (“FSI”), First Solar Malaysia Sdn. Bhd. (“FS Malaysia”), and First Solar Manufacturing GmbH are grantors. Only the trustee can distribute funds from the custodial accounts, and these funds cannot be accessed for any purpose other than to cover qualified costs of module collection and recycling, either by us or a third party performing the required collection and recycling services. Investments in these custodial accounts must meet certain investment quality criteria comparable to highly rated government or agency bonds. We closely monitor our exposure to European markets and maintain holdings primarily consisting of German and French sovereign debt securities that are not currently at risk of default.
The following tables summarize the unrealized gains and losses related to our restricted investments, by major security type, as of
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
As of June 30, 2016
|
|||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Foreign government obligations
|
$
|
116,826
|
|
$
|
90,112
|
|
$
|
—
|
|
$
|
206,938
|
|
||||
|
U.S. government obligations
|
169,847
|
|
32,404
|
|
—
|
|
202,251
|
|
||||||||
|
Total
|
$
|
286,673
|
|
$
|
122,516
|
|
$
|
—
|
|
$
|
409,189
|
|
||||
|
|
As of December 31, 2015
|
|||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Foreign government obligations
|
$
|
177,507
|
|
$
|
75,670
|
|
$
|
—
|
|
$
|
253,177
|
|
||||
|
U.S. government obligations
|
61,228
|
|
11,709
|
|
—
|
|
72,937
|
|
||||||||
|
Total
|
$
|
238,735
|
|
$
|
87,379
|
|
$
|
—
|
|
$
|
326,114
|
|
||||
As of
June 30, 2016
and
December 31, 2015
, the contractual maturities of our restricted investments were between
12 years
and
21 years
.
14
7. Consolidated Balance Sheet Details
Accounts receivable trade, net
Accounts receivable trade, net
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Accounts receivable trade, gross
|
$
|
369,135
|
|
$
|
500,631
|
|
||
|
Allowance for doubtful accounts
|
—
|
|
(2
|
)
|
||||
|
Accounts receivable trade, net
|
$
|
369,135
|
|
$
|
500,629
|
|
||
At
June 30, 2016
and
December 31, 2015
,
$35.1 million
and
$21.5 million
, respectively, of our
accounts receivable trade, net
were secured by letters of credit, bank guarantees, or other forms of financial security issued by creditworthy financial institutions.
Accounts receivable, unbilled and retainage
Accounts receivable, unbilled and retainage
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Accounts receivable, unbilled
|
$
|
153,864
|
|
$
|
40,205
|
|
||
|
Retainage
|
19,028
|
|
18,966
|
|
||||
|
Accounts receivable, unbilled and retainage
|
$
|
172,892
|
|
$
|
59,171
|
|
||
Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. For example, we recognize revenue from contracts for the construction and sale of PV solar power systems, which include the sale of such assets over the construction period using applicable accounting methods. One such method is the percentage-of-completion method, which recognizes revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Under this accounting method, revenue could be recognized under applicable revenue recognition criteria in advance of billing the customer, resulting in an amount recorded to “
Accounts receivable, unbilled and retainage
.” Once we meet the billing criteria under a construction contract, we bill our customer accordingly and reclassify the “
Accounts receivable, unbilled and retainage
” to “
Accounts receivable trade, net
.” Billing requirements vary by contract but are generally structured around completion of certain construction milestones. Retainage refers to the portion of the contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. Retainage included within “
Accounts receivable, unbilled and retainage
” is expected to be billed and collected within the next 12 months.
Inventories
Inventories
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Raw materials
|
$
|
165,046
|
|
$
|
159,078
|
|
||
|
Work in process
|
14,630
|
|
19,736
|
|
||||
|
Finished goods
|
308,713
|
|
309,369
|
|
||||
|
Inventories
|
$
|
488,389
|
|
$
|
488,183
|
|
||
|
Inventories – current
|
$
|
384,504
|
|
$
|
380,424
|
|
||
|
Inventories – noncurrent (1)
|
$
|
103,885
|
|
$
|
107,759
|
|
||
|
(1)
|
As needed, we may purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our normal operating cycle (which is 12 months). We classify such raw materials that we do not expect to consume within our normal operating cycle as noncurrent.
|
15
Balance of systems parts
Balance of systems parts
were
$92.8 million
and
$136.9 million
as of
June 30, 2016
and
December 31, 2015
, respectively, and represented mounting, electrical, and other construction parts purchased for PV solar power systems to be constructed or currently under construction, which we held title to and were not yet installed in a system. Such construction parts included items such as posts, tilt brackets, tables, harnesses, combiner boxes, inverters, cables, tracker equipment, and other parts we may purchase or assemble for the systems we construct. We carry these parts at the lower of cost or net realizable value, with such value being based primarily on recoverability through installation in a system or recoverability through a sales agreement.
Balance of systems parts
do not include any solar modules that we manufacture.
Prepaid expenses and other current assets
Prepaid expenses and other current assets
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Value added tax receivables
|
$
|
69,082
|
|
$
|
51,473
|
|
||
|
Prepaid expenses
|
62,894
|
|
74,990
|
|
||||
|
Derivative instruments
|
4,433
|
|
2,691
|
|
||||
|
Restricted cash
|
40,510
|
|
72,526
|
|
||||
|
Other current assets
|
100,052
|
|
47,297
|
|
||||
|
Prepaid expenses and other current assets
|
$
|
276,971
|
|
$
|
248,977
|
|
||
Property, plant and equipment, net
Property, plant and equipment, net
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Land
|
$
|
8,729
|
|
$
|
12,063
|
|
||
|
Buildings and improvements
|
411,490
|
|
410,898
|
|
||||
|
Machinery and equipment
|
1,809,714
|
|
1,824,717
|
|
||||
|
Office equipment and furniture
|
151,163
|
|
144,773
|
|
||||
|
Leasehold improvements
|
55,515
|
|
50,546
|
|
||||
|
Construction in progress
|
126,749
|
|
37,734
|
|
||||
|
Stored assets (1)
|
138,727
|
|
138,954
|
|
||||
|
Property, plant and equipment, gross
|
2,702,087
|
|
2,619,685
|
|
||||
|
Less: accumulated depreciation
|
(1,433,820
|
)
|
(1,335,549
|
)
|
||||
|
Property, plant and equipment, net
|
$
|
1,268,267
|
|
$
|
1,284,136
|
|
||
|
(1)
|
Consists of machinery and equipment (“stored assets”) that were originally purchased for installation in our previously planned manufacturing capacity expansions. We intend to install and place the stored assets into service when such assets are required or beneficial to our existing installed manufacturing capacity or when market demand supports additional or market-specific manufacturing capacity. During the
six
months ended
June 30, 2016
, we transferred
$0.2 million
of stored assets to our manufacturing facility in Perrysburg, Ohio for use in the production of solar modules. As the remaining stored assets are neither in the condition nor location to produce modules as intended, we will not begin depreciation until such assets are placed into service. The stored assets are evaluated for impairment under a held and used impairment model whenever events or changes in business circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of our long-lived assets may not be recoverable. We ceased the capitalization of interest on our stored assets once they were physically received from the related machinery and equipment vendors.
|
Depreciation of property, plant and equipment was
$52.5 million
and
$107.0 million
for the
three
and
six
months ended
June 30, 2016
, respectively, and
$62.5 million
and
$124.0 million
for the
three
and
six
months ended
June 30, 2015
, respectively.
16
PV solar power systems, net
PV solar power systems, net
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
PV solar power systems, gross
|
$
|
417,486
|
|
$
|
97,991
|
|
||
|
Accumulated depreciation
|
(6,727
|
)
|
(4,250
|
)
|
||||
|
PV solar power systems, net
|
$
|
410,759
|
|
$
|
93,741
|
|
||
During the
six
months ended
June 30, 2016
, we placed
$318.5 million
of projects into service, including certain projects in Chile and India. Depreciation of PV solar power systems was
$1.3 million
and
$2.5 million
for the
three
and
six
months ended
June 30, 2016
, respectively, and
$0.6 million
and
$1.2 million
for the
three
and
six
months ended
June 30, 2015
, respectively.
Capitalized interest
The cost of constructing facilities, equipment, and project assets includes interest costs incurred during the assets’ construction period. The components of interest expense and capitalized interest were as follows during the
three
and
six
months ended
June 30, 2016
and
2015
(in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Interest cost incurred
|
$
|
(8,473
|
)
|
$
|
(4,749
|
)
|
$
|
(14,368
|
)
|
$
|
(8,226
|
)
|
||||
|
Interest cost capitalized – property, plant and equipment
|
831
|
|
295
|
|
1,067
|
|
862
|
|
||||||||
|
Interest cost capitalized – project assets
|
491
|
|
3,628
|
|
1,508
|
|
6,344
|
|
||||||||
|
Interest expense, net
|
$
|
(7,151
|
)
|
$
|
(826
|
)
|
$
|
(11,793
|
)
|
$
|
(1,020
|
)
|
||||
Project assets and deferred project costs
Project assets primarily consist of costs related to solar power projects in various stages of development that are capitalized prior to entering into a definitive sales agreement for the projects, including projects that may have begun commercial operation under power purchase agreements (“PPAs”) and are actively marketed and intended to be sold. These project related costs include costs for land, development, and construction of a PV solar power system. Development costs may include legal, consulting, permitting, interconnection, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred project costs on our condensed consolidated balance sheets until the sale is completed and we have met all of the criteria to recognize the sale as revenue, which is typically subject to real estate revenue recognition requirements. We expense project assets and deferred project costs to cost of sales after each respective project is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). In addition, we present all expenditures related to the development and construction of project assets or deferred project costs, whether fully or partially owned, as a component of cash flows from operating activities. We classify project assets as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months.
Deferred project costs represent (i) costs that we capitalize as project assets for arrangements that we account for as real estate transactions after we have entered into a definitive sales arrangement, but before the sale is completed or before we have met all criteria to recognize the sale as revenue, (ii) recoverable pre-contract costs that we capitalize for arrangements accounted for as long-term construction contracts prior to entering into a definitive sales agreement, or (iii) costs that we capitalize for arrangements accounted for as long-term construction contracts after we have signed a definitive sales agreement, but before all revenue recognition criteria have been met. We classify deferred project costs as current if completion of the sale and the meeting of all revenue recognition criteria are expected within the next 12 months.
If a project is completed and begins commercial operation prior to entering into or the closing of a sales arrangement, the completed project will remain in project assets or deferred project costs until the earliest of the closing of the sale of such project, our decision to temporarily hold such project, or one year from the project’s commercial operations date. Any income generated by a project while it remains within project assets or deferred project costs is accounted for as a reduction to our basis in the project, which at the time of sale and meeting all revenue recognition criteria will be recorded within cost of sales.
17
Project assets and deferred project costs
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Project assets – development costs, including project acquisition and land costs
|
$
|
379,977
|
|
$
|
436,375
|
|
||
|
Project assets – construction costs
|
828,337
|
|
674,762
|
|
||||
|
Project assets
|
1,208,314
|
|
1,111,137
|
|
||||
|
Deferred project costs – current
|
112,512
|
|
187,940
|
|
||||
|
Deferred project costs – noncurrent
|
38,800
|
|
—
|
|
||||
|
Deferred project costs
|
151,312
|
|
187,940
|
|
||||
|
Total project assets and deferred project costs
|
$
|
1,359,626
|
|
$
|
1,299,077
|
|
||
Other assets
Other assets
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Notes receivable (1)
|
$
|
7,782
|
|
$
|
12,648
|
|
||
|
Income taxes receivable
|
4,204
|
|
4,071
|
|
||||
|
Deferred rent
|
33,050
|
|
23,317
|
|
||||
|
Other
|
30,002
|
|
29,686
|
|
||||
|
Other assets
|
$
|
75,038
|
|
$
|
69,722
|
|
||
|
(1)
|
In
April 2009
, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of
€17.5 million
to provide financing for a PV solar power system. The credit facility replaced a bridge loan that we had made to this entity. The credit facility bears interest at
8.0%
per annum payable quarterly with the full amount due in December 2026. As of
June 30, 2016
and
December 31, 2015
, the balance on the credit facility was
€7.0 million
(
$7.8 million
and
$7.6 million
, respectively, at the balance sheet dates). In
February 2014
, we entered into a convertible loan agreement with a strategic entity for an available amount of up to
$5.0 million
. As of
December 31, 2015
, the balance outstanding on the convertible loan was
$5.0 million
, which we converted into an equity interest in the entity in January 2016.
|
Goodwill
Goodwill, summarized by relevant reporting unit, consisted of the following as of
June 30, 2016
and
December 31, 2015
(in thousands):
|
December 31,
2015 |
|
Acquisitions (Impairments)
|
|
June 30, 2016
|
||||||||
|
CdTe components
|
$
|
403,420
|
|
$
|
—
|
|
$
|
403,420
|
|
|||
|
Crystalline silicon components
|
6,097
|
|
—
|
|
6,097
|
|
||||||
|
Systems
|
68,833
|
|
—
|
|
68,833
|
|
||||||
|
Accumulated impairment losses
|
(393,365
|
)
|
(6,097
|
)
|
(399,462
|
)
|
||||||
|
Total
|
$
|
84,985
|
|
$
|
(6,097
|
)
|
$
|
78,888
|
|
|||
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and liabilities assumed. We do not amortize goodwill, but instead are required to test goodwill for impairment at least annually. If necessary, we would record any impairment in accordance with ASC 350,
Intangibles – Goodwill and Other.
We perform impairment tests between scheduled annual tests in the fourth quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. During the three months ended June 30, 2016, we impaired
$6.1 million
of goodwill associated with our crystalline silicon components reporting unit as a result of the decision to end the related manufacturing operations.
See Note 4. “Restructuring and Asset Impairments”
to our condensed consolidated financial statements for further discussion relating to these restructuring activities.
18
Other intangibles, net
Other intangibles, net
consisted of intangible assets acquired as part of our General Electric and TetraSun acquisitions and our internally-generated intangible assets, substantially all of which were patents on technologies related to our products and production processes. We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure them. We amortize intangible assets on a straight-line basis over their estimated useful lives once the intangible assets meet the criteria to be amortized.
The following tables summarize our intangible assets at
June 30, 2016
and
December 31, 2015
(in thousands):
|
June 30, 2016
|
||||||||||||||||
|
|
Gross Amount
|
Accumulated Amortization
|
Accumulated Impairments
|
Net Amount
|
||||||||||||
|
Patents
|
$
|
6,070
|
|
$
|
(2,219
|
)
|
$
|
—
|
|
$
|
3,851
|
|
||||
|
Developed technology
|
114,596
|
|
(14,387
|
)
|
(35,842
|
)
|
64,367
|
|
||||||||
|
Total
|
$
|
120,666
|
|
$
|
(16,606
|
)
|
$
|
(35,842
|
)
|
$
|
68,218
|
|
||||
|
December 31, 2015
|
||||||||||||||||
|
|
Gross Amount
|
Accumulated Amortization
|
Accumulated Impairments
|
Net Amount
|
||||||||||||
|
Patents
|
6,070
|
|
$
|
(1,824
|
)
|
$
|
—
|
|
$
|
4,246
|
|
|||||
|
Developed technology
|
114,565
|
|
(8,809
|
)
|
—
|
|
105,756
|
|
||||||||
|
Total
|
$
|
120,635
|
|
$
|
(10,633
|
)
|
$
|
—
|
|
$
|
110,002
|
|
||||
During the three months ended June 30, 2016, we impaired
$35.8 million
of developed technology intangible assets acquired in our TetraSun acquisition as a result of the decision to end the related crystalline silicon manufacturing operations.
See Note 4. “Restructuring and Asset Impairments”
to our condensed consolidated financial statements for further discussion relating to these restructuring activities. Amortization expense for our intangible assets was
$3.0 million
and
$6.0 million
for the
three
and
six
months ended
June 30, 2016
, respectively, and
$2.2 million
and
$3.2 million
for the
three
and
six
months ended
June 30, 2015
, respectively.
Accrued expenses
Accrued expenses
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Accrued compensation and benefits
|
$
|
37,041
|
|
$
|
63,699
|
|
||
|
Accrued property, plant and equipment
|
10,410
|
|
7,808
|
|
||||
|
Accrued inventory and balance of systems parts
|
33,628
|
|
53,542
|
|
||||
|
Accrued project assets and deferred project costs
|
152,333
|
|
145,695
|
|
||||
|
Product warranty liability (1)
|
37,926
|
|
38,468
|
|
||||
|
Accrued expenses in excess of normal product warranty liability and related expenses (1)
|
4,599
|
|
5,040
|
|
||||
|
Other
|
78,588
|
|
95,200
|
|
||||
|
Accrued expenses
|
$
|
354,525
|
|
$
|
409,452
|
|
||
|
(1)
|
See Note 13. “Commitments and Contingencies”
to our condensed consolidated financial statements for further discussion of “Product warranty liability” and “Accrued expenses in excess of normal product warranty liability and related expenses.”
|
Billings in excess of costs and estimated earnings
Billings in excess of costs and estimated earnings
was
$110.5 million
and
$87.9 million
at
June 30, 2016
and
December 31, 2015
, respectively, and represented billings made or payments received in excess of revenue recognized on contracts accounted for under the percentage-of-completion method. Typically, billings are made based on the completion of certain construction milestones as provided for in the sales arrangement, and the timing of revenue recognition may be different from when we can bill or collect from a customer.
19
Payments and billings for deferred project costs
Payments and billings for deferred project costs
was
$94.3 million
and
$28.6 million
at
June 30, 2016
and
December 31, 2015
, respectively, and represented customer payments received or customer billings made under the terms of solar power project related sales contracts for which all revenue recognition criteria for real estate transactions have not yet been met. The associated solar power project costs are included within deferred project costs. We classify such amounts as current if all revenue recognition criteria are expected to be met within the next 12 months, consistent with the classification of the associated deferred project costs.
Other current liabilities
Other current liabilities
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Deferred revenue
|
$
|
22,568
|
|
$
|
17,957
|
|
||
|
Derivative instruments
|
8,408
|
|
16,450
|
|
||||
|
Contingent consideration (1)
|
8,930
|
|
9,233
|
|
||||
|
Financing liability (2)
|
5,260
|
|
5,277
|
|
||||
|
Other
|
11,337
|
|
8,821
|
|
||||
|
Other current liabilities
|
$
|
56,503
|
|
$
|
57,738
|
|
||
|
(1)
|
See Note 13. “Commitments and Contingencies”
to our condensed consolidated financial statements for further discussion.
|
|
(2)
|
See Note 10. “Investments in Unconsolidated Affiliates and Joint Ventures”
to our condensed consolidated financial statements for further discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.
|
Other liabilities
Other liabilities
consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30,
2016 |
December 31,
2015 |
||||||
|
Product warranty liability (1)
|
$
|
212,445
|
|
$
|
193,283
|
|
||
|
Other taxes payable
|
66,681
|
|
66,549
|
|
||||
|
Contingent consideration (1)
|
14,873
|
|
8,756
|
|
||||
|
Liability in excess of normal product warranty liability and related expenses (1)
|
15,040
|
|
19,565
|
|
||||
|
Financing liability (2)
|
34,159
|
|
36,706
|
|
||||
|
Other
|
114,569
|
|
67,453
|
|
||||
|
Other liabilities
|
$
|
457,767
|
|
$
|
392,312
|
|
||
|
(1)
|
See Note 13. “Commitments and Contingencies”
to our condensed consolidated financial statements for further discussion on “Product warranty liability,” “Contingent consideration,” and “Liability in excess of normal product warranty liability and related expenses.”
|
|
(2)
|
See Note 10. “Investments in Unconsolidated Affiliates and Joint Ventures”
to our condensed consolidated financial statements for further discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.
|
20
8. Derivative Financial Instruments
As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our financial position, results of operations, and cash flows. We use derivative instruments to hedge against these risks and only hold such instruments for hedging purposes, not for speculative or trading purposes.
Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “
Accumulated other comprehensive income
” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings.
See Note 9. “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
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
June 30, 2016
|
|||||||||||
|
|
Prepaid Expenses and Other Current Assets
|
Other Current Liabilities
|
Other Liabilities
|
|||||||||
|
Derivatives designated as hedging instruments:
|
|
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
—
|
|
$
|
181
|
|
$
|
319
|
|
|||
|
Total derivatives designated as hedging instruments
|
$
|
—
|
|
$
|
181
|
|
$
|
319
|
|
|||
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
||||||||
|
Foreign exchange forward contracts
|
$
|
4,433
|
|
$
|
8,227
|
|
$
|
—
|
|
|||
|
Total derivatives not designated as hedging instruments
|
$
|
4,433
|
|
$
|
8,227
|
|
$
|
—
|
|
|||
|
Total derivative instruments
|
$
|
4,433
|
|
$
|
8,408
|
|
$
|
319
|
|
|||
|
|
December 31, 2015
|
|||||||||||
|
|
Prepaid Expenses and Other Current Assets
|
Other Current Liabilities
|
Other Liabilities
|
|||||||||
|
Derivatives designated as hedging instruments:
|
|
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
—
|
|
$
|
132
|
|
$
|
285
|
|
|||
|
Cross-currency swap contract
|
—
|
|
6,909
|
|
13,835
|
|
||||||
|
Interest rate swap contract
|
—
|
|
16
|
|
—
|
|
||||||
|
Total derivatives designated as hedging instruments
|
$
|
—
|
|
$
|
7,057
|
|
$
|
14,120
|
|
|||
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
||||||||
|
Foreign exchange forward contracts
|
$
|
2,691
|
|
$
|
9,393
|
|
$
|
—
|
|
|||
|
Total derivatives not designated as hedging instruments
|
$
|
2,691
|
|
$
|
9,393
|
|
$
|
—
|
|
|||
|
Total derivative instruments
|
$
|
2,691
|
|
$
|
16,450
|
|
$
|
14,120
|
|
|||
The impact of offsetting balances associated with derivative instruments designated as hedging instruments is shown below (in thousands):
|
June 30, 2016
|
||||||||||||||||||||
|
Gross Amounts Not Offset in Consolidated Balance Sheet
|
||||||||||||||||||||
|
Gross Asset (Liability)
|
Gross Offset in Consolidated Balance Sheet
|
Net Amount Recognized in Financial Statements
|
Financial Instruments
|
Cash Collateral Pledged
|
Net Amount
|
|||||||||||||||
|
Foreign exchange forward contracts
|
$
|
(500
|
)
|
—
|
|
(500
|
)
|
—
|
|
—
|
|
$
|
(500
|
)
|
||||||
21
|
December 31, 2015
|
||||||||||||||||||||
|
Gross Amounts Not Offset in Consolidated Balance Sheet
|
||||||||||||||||||||
|
Gross Asset (Liability)
|
Gross Offset in Consolidated Balance Sheet
|
Net Amount Recognized in Financial Statements
|
Financial Instruments
|
Cash Collateral Pledged
|
Net Amount
|
|||||||||||||||
|
Foreign exchange forward contracts
|
$
|
(417
|
)
|
—
|
|
(417
|
)
|
—
|
|
—
|
|
$
|
(417
|
)
|
||||||
|
Cross-currency swap contract
|
$
|
(20,744
|
)
|
—
|
|
(20,744
|
)
|
—
|
|
—
|
|
$
|
(20,744
|
)
|
||||||
|
Interest rate swap contract
|
$
|
(16
|
)
|
—
|
|
(16
|
)
|
—
|
|
—
|
|
$
|
(16
|
)
|
||||||
The following tables present the effective 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
six
months ended
June 30, 2016
and
2015
(in thousands):
|
Foreign Exchange Forward Contracts
|
Interest Rate Swap Contract
|
Cross Currency Swap Contract
|
Total
|
|||||||||||||
|
Balance in accumulated other comprehensive income (loss) at December 31, 2015
|
$
|
162
|
|
$
|
(16
|
)
|
$
|
(2,017
|
)
|
$
|
(1,871
|
)
|
||||
|
Amounts recognized in other comprehensive income (loss)
|
371
|
|
(2
|
)
|
5,108
|
|
5,477
|
|
||||||||
|
Amounts reclassified to earnings impacting:
|
||||||||||||||||
|
Foreign currency loss, net
|
—
|
|
—
|
|
(4,896
|
)
|
(4,896
|
)
|
||||||||
|
Interest expense, net
|
—
|
|
18
|
|
1,805
|
|
1,823
|
|
||||||||
|
Balance in accumulated other comprehensive income (loss) at June 30, 2016
|
$
|
533
|
|
$
|
—
|
|
$
|
—
|
|
$
|
533
|
|
||||
|
Balance in accumulated other comprehensive income (loss) at December 31, 2014
|
$
|
6,621
|
|
$
|
(210
|
)
|
$
|
(3,399
|
)
|
$
|
3,012
|
|
||||
|
Amounts recognized in other comprehensive income (loss)
|
973
|
|
23
|
|
(4,268
|
)
|
(3,272
|
)
|
||||||||
|
Amounts reclassified to earnings impacting:
|
||||||||||||||||
|
Net sales
|
(352
|
)
|
—
|
|
—
|
|
(352
|
)
|
||||||||
|
Cost of sales
|
(4,599
|
)
|
—
|
|
—
|
|
(4,599
|
)
|
||||||||
|
Foreign currency loss, net
|
—
|
|
—
|
|
4,766
|
|
4,766
|
|
||||||||
|
Interest expense, net
|
—
|
|
109
|
|
134
|
|
243
|
|
||||||||
|
Balance in accumulated other comprehensive income (loss) at June 30, 2015
|
$
|
2,643
|
|
$
|
(78
|
)
|
$
|
(2,767
|
)
|
$
|
(202
|
)
|
||||
We recorded
no
amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the
three
and
six
months ended
June 30, 2016
and
2015
. We recognized unrealized losses of
$0.2 million
and
$0.4 million
related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “
Other income (expense), net
” during the
three
and
six
months ended
June 30, 2016
, respectively. We recognized unrealized gains of
$0.2 million
and
$0.5 million
related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “
Other income (expense), net
” during the
three
and
six
months ended
June 30, 2015
, respectively.
The following table presents amounts related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the
three
and
six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
Amount of Gain (Loss) Recognized in Income
|
|||||||||||||||||
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||
|
Derivatives Not Designated as Hedging Instruments
|
Location of Gain (Loss) Recognized in Income
|
2016
|
2015
|
2016
|
2015
|
|||||||||||||
|
Foreign exchange forward contracts
|
Foreign currency loss, net
|
$
|
(5,596
|
)
|
$
|
333
|
|
$
|
(22,977
|
)
|
$
|
(7,984
|
)
|
|||||
|
Foreign exchange forward contracts
|
Cost of sales
|
$
|
—
|
|
$
|
(4,553
|
)
|
$
|
—
|
|
$
|
9,963
|
|
|||||
22
Interest Rate Risk
We use cross-currency swap and interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments. We do not use such swap contracts for speculative or trading purposes.
On September 30, 2011, we entered into a cross-currency swap contract to hedge the floating rate foreign currency denominated loan under our Malaysian Ringgit Facility Agreement. This swap had an initial notional value of Malaysian ringgit (“MYR”)
MYR 465.0 million
and entitled us to receive a three-month floating Kuala Lumpur Interbank Offered Rate (“KLIBOR”) interest rate while requiring us to pay a U.S. dollar fixed rate of
3.495%
. Additionally, this swap hedged the foreign currency risk of the Malaysian ringgit denominated principal and interest payments as we made swap payments in U.S. dollars and received swap payments in Malaysian ringgits at a fixed exchange rate of
3.19
MYR to USD. This swap qualified for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. The notional amount of the swap declined in line with our scheduled principal payments on the underlying hedged debt. In June 2016, we paid the remaining principal on the Malaysian Ringgit Facility Agreement and closed the corresponding cross-currency swap contract. As of
December 31, 2015
, the notional value of this cross-currency swap contract was
MYR 232.6 million
(
$54.2 million
).
On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our Malaysian Credit Facility, which became effective on September 30, 2009 with an initial notional value of
€57.3 million
and pursuant to which we were entitled to receive a six-month floating Euro Interbank Offered Rate (“EURIBOR”) interest rate while being required to pay a fixed rate of
2.80%
. The derivative instrument qualified for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. The notional amount of the interest rate swap contract declined in line with our scheduled principal payments on the underlying hedged debt. In March 2016, we paid the remaining principal on the Malaysian Credit Facility and closed the corresponding interest rate swap contract. As of
December 31, 2015
, the notional value of the interest rate swap contract was
€2.2 million
(
$2.4 million
).
Foreign Currency Exchange 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
June 30, 2016
and
December 31, 2015
, these foreign exchange forward contracts hedged our forecasted cash flows for
27 months
and
33 months
, respectively. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of a derivative
’
s unrealized gain or loss in “
Accumulated other comprehensive income
” and subsequently reclassify 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
June 30, 2016
and
December 31, 2015
. As of
June 30, 2016
and
December 31, 2015
, 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):
|
June 30, 2016
|
||||
|
Currency
|
Notional Amount
|
USD Equivalent
|
||
|
Indian rupee
|
INR 1,290.0
|
$19.1
|
||
|
December 31, 2015
|
||||
|
Currency
|
Notional Amount
|
USD Equivalent
|
||
|
Indian rupee
|
INR 1,290.0
|
$19.4
|
||
As of
June 30, 2016
and
December 31, 2015
, the unrealized gains on these contracts were
$0.5 million
and
$0.2 million
, respectively.
In the following 12 months, we expect to reclassify to earnings
$0.2 million
of net unrealized gains related to these forward contracts that are included in “
Accumulated other comprehensive income
” at
June 30, 2016
as we realize the earnings effect 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.
23
Transaction Exposure and Economic Hedging
Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, payables, debt, 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 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. We recognize gains or losses from the fluctuation in foreign exchange rates and the fair value of these derivative contracts in “
Foreign currency loss, net
” on our condensed consolidated statements of operations. As of
June 30, 2016
and
December 31, 2015
, the total net unrealized loss on our economic hedge foreign exchange forward contracts was
$3.8 million
and
$6.7 million
, respectively. As these amounts do not qualify for hedge accounting, changes in the fair value of such derivative instruments are recorded directly to earnings. These contracts mature at various dates within the next
1.5 years
.
As of
June 30, 2016
and
December 31, 2015
, 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):
|
June 30, 2016
|
||||||
|
Transaction
|
Currency
|
Notional Amount
|
USD Equivalent
|
|||
|
Purchase
|
Euro
|
€63.7
|
$70.8
|
|||
|
Sell
|
Euro
|
€117.3
|
$130.4
|
|||
|
Sell
|
Australian dollar
|
AUD 16.4
|
$12.2
|
|||
|
Purchase
|
Malaysian ringgit
|
MYR 36.4
|
$9.0
|
|||
|
Sell
|
Malaysian ringgit
|
MYR 83.1
|
$20.6
|
|||
|
Sell
|
Canadian dollar
|
CAD 19.1
|
$14.7
|
|||
|
Sell
|
Chilean Peso
|
CLP 16,233.6
|
$24.6
|
|||
|
Sell
|
Japanese yen
|
JPY 9,356.2
|
$91.1
|
|||
|
Sell
|
British pound
|
GBP 1.9
|
$2.6
|
|||
|
Purchase
|
Singapore dollar
|
SGD 48.2
|
$35.8
|
|||
|
Sell
|
Indian rupee
|
INR 13,500.9
|
$199.5
|
|||
|
Purchase
|
South African rand
|
ZAR 41.4
|
$2.8
|
|||
|
Sell
|
South African rand
|
ZAR 100.2
|
$6.7
|
|||
|
December 31, 2015
|
||||||
|
Transaction
|
Currency
|
Notional Amount
|
USD Equivalent
|
|||
|
Purchase
|
Euro
|
€42.0
|
$45.9
|
|||
|
Sell
|
Euro
|
€150.1
|
$164.0
|
|||
|
Purchase
|
Australian dollar
|
AUD 41.1
|
$29.9
|
|||
|
Sell
|
Australian dollar
|
AUD 89.0
|
$64.8
|
|||
|
Purchase
|
Malaysian ringgit
|
MYR 61.4
|
$14.3
|
|||
|
Sell
|
Malaysian ringgit
|
MYR 80.7
|
$18.8
|
|||
|
Sell
|
Canadian dollar
|
CAD 4.5
|
$3.2
|
|||
|
Sell
|
Japanese yen
|
JPY 8,448.7
|
$70.1
|
|||
|
Purchase
|
British pound
|
GBP 11.1
|
$16.5
|
|||
|
Sell
|
British pound
|
GBP 16.0
|
$23.7
|
|||
|
Sell
|
Indian rupee
|
INR 8,939.0
|
$134.6
|
|||
|
Purchase
|
South African rand
|
ZAR 41.1
|
$2.7
|
|||
|
Sell
|
South African rand
|
ZAR 81.5
|
$5.3
|
|||
24
9. Fair Value Measurements
The following is a description of the valuation techniques that we use to measure the fair value of assets and liabilities that we measure and report at fair value on a recurring basis:
|
•
|
Cash equivalents.
At
June 30, 2016
and
December 31, 2015
, our cash equivalents consisted of money market funds. We value our money market cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.
|
|
•
|
Marketable securities and restricted investments.
At
June 30, 2016
and
December 31, 2015
, our marketable securities consisted of foreign debt and time deposits, and our restricted investments consisted of foreign and U.S. government obligations. We value our marketable securities and restricted investments using observable inputs that reflect quoted prices for securities with identical characteristics or quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals). Accordingly, we classify the valuation techniques that use these inputs as either Level 1 or Level 2 depending on the inputs used. We also consider the effect of our counterparties’ credit standings in these fair value measurements.
|
|
•
|
Derivative assets and liabilities
. At
June 30, 2016
and
December 31, 2015
, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies. At
December 31, 2015
, our derivative assets and liabilities also consisted of a cross-currency swap contract involving certain currencies and interest rates and an interest rate swap. Since our derivative assets and liabilities are not traded on an exchange, we value them using standard industry valuation models. Where applicable, these models project future cash flows and discount the amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. In evaluating credit risk, we consider the effect of our counterparties’ and our own credit standing in the fair value measurements of our derivative assets and liabilities, respectively.
|
At
June 30, 2016
and
December 31, 2015
, the fair value measurements of our assets and liabilities that we measure on a recurring basis were as follows (in thousands):
|
|
June 30, 2016
|
|||||||||||||||
|
|
|
Fair Value Measurements at Reporting
Date Using
|
||||||||||||||
|
|
Total Fair
Value and
Carrying
Value on Our
Balance Sheet
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash equivalents:
|
||||||||||||||||
|
Money market funds
|
$
|
174
|
|
$
|
174
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
Marketable securities:
|
|
|
|
|
|
|
||||||||||
|
Foreign debt
|
710,779
|
|
—
|
|
710,779
|
|
—
|
|
||||||||
|
Time deposits
|
40,000
|
|
40,000
|
|
—
|
|
—
|
|
||||||||
|
Restricted investments
|
409,189
|
|
—
|
|
409,189
|
|
—
|
|
||||||||
|
Derivative assets
|
4,433
|
|
—
|
|
4,433
|
|
—
|
|
||||||||
|
Total assets
|
$
|
1,164,575
|
|
$
|
40,174
|
|
$
|
1,124,401
|
|
$
|
—
|
|
||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$
|
8,727
|
|
$
|
—
|
|
$
|
8,727
|
|
$
|
—
|
|
||||
25
|
|
December 31, 2015
|
|||||||||||||||
|
|
|
Fair Value Measurements at Reporting
Date Using
|
||||||||||||||
|
|
Total Fair
Value and
Carrying
Value on Our
Balance Sheet
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||
|
Cash equivalents:
|
|
|
|
|
|
|||||||||||
|
Money market funds
|
$
|
330
|
|
$
|
330
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
Marketable securities:
|
||||||||||||||||
|
Foreign debt
|
663,454
|
|
—
|
|
663,454
|
|
—
|
|
||||||||
|
Time deposits
|
40,000
|
|
40,000
|
|
—
|
|
—
|
|
||||||||
|
Restricted investments
|
326,114
|
|
—
|
|
326,114
|
|
—
|
|
||||||||
|
Derivative assets
|
2,691
|
|
—
|
|
2,691
|
|
—
|
|
||||||||
|
Total assets
|
$
|
1,032,589
|
|
$
|
40,330
|
|
$
|
992,259
|
|
$
|
—
|
|
||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$
|
30,570
|
|
$
|
—
|
|
$
|
30,570
|
|
$
|
—
|
|
||||
Fair Value of Financial Instruments
The carrying values and fair values of our financial and derivative instruments at
June 30, 2016
and
December 31, 2015
were as follows (in thousands):
|
|
June 30, 2016
|
December 31, 2015
|
||||||||||||||
|
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||
|
Marketable securities
|
$
|
750,779
|
|
$
|
750,779
|
|
$
|
703,454
|
|
$
|
703,454
|
|
||||
|
Foreign exchange forward contract assets
|
4,433
|
|
4,433
|
|
2,691
|
|
2,691
|
|
||||||||
|
Restricted investments
|
409,189
|
|
409,189
|
|
326,114
|
|
326,114
|
|
||||||||
|
Notes receivable – noncurrent
|
7,782
|
|
7,921
|
|
12,648
|
|
18,382
|
|
||||||||
|
Notes receivable, affiliates – noncurrent
|
22,254
|
|
25,162
|
|
17,887
|
|
19,932
|
|
||||||||
|
Liabilities:
|
|
|
|
|
|
|
|
|
||||||||
|
Long-term debt, including current maturities
|
$
|
232,614
|
|
$
|
238,867
|
|
$
|
288,350
|
|
$
|
294,449
|
|
||||
|
Interest rate swap contract liabilities
|
—
|
|
—
|
|
16
|
|
16
|
|
||||||||
|
Cross-currency swap contract liabilities
|
—
|
|
—
|
|
20,744
|
|
20,744
|
|
||||||||
|
Foreign exchange forward contract liabilities
|
8,727
|
|
8,727
|
|
9,810
|
|
9,810
|
|
||||||||
The carrying values on our condensed consolidated balance sheets of our cash and cash equivalents, trade accounts receivable, unbilled accounts receivable and retainage, current affiliate notes receivable, restricted cash, accounts payable, income taxes payable, and accrued expenses approximated their fair values due to their nature and relatively short maturities; therefore, we excluded them from the foregoing table.
We estimated the fair value of our notes receivable and long-term debt using a discounted cash flow approach (an income approach) or a market approach based on observable market inputs. We incorporated the credit risk of our counterparty for all asset fair value measurements and our own credit risk for all liability fair value measurements. Such fair value measurements are considered Level 2 under the fair value hierarchy.
26
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, marketable securities, trade accounts receivable, restricted cash and investments, notes receivable, and foreign exchange forward contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, marketable securities, restricted cash and investments, and foreign exchange forward contracts with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty financial institutions. Our net sales are primarily concentrated among a limited number of customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. Depending upon the sales arrangement, we may require some form of payment security from our customers, including bank guarantees or commercial letters of credit.
10. Investments in Unconsolidated Affiliates and Joint Ventures
We have joint ventures or other strategic arrangements with partners in several markets, which are generally used to expedite our penetration of those markets and establish relationships with potential customers. We also enter into joint ventures or strategic arrangements with customers or other entities to maximize the value of particular projects. Some of these arrangements involve and are expected in the future to involve significant investments or other allocations of capital. Investments in unconsolidated entities for which we have significant influence, but not control, over the entities’ operating and financial activities are accounted for under the equity method of accounting. Investments in entities for which we do not have the ability to exert such significant influence are accounted for under the cost method of accounting. The following table summarizes our equity and cost method investments as of
June 30, 2016
and
December 31, 2015
(in thousands):
|
June 30,
2016 |
December 31,
2015 |
|||||||
|
Equity method investments
|
$
|
402,629
|
|
$
|
375,355
|
|
||
|
Cost method investments
|
24,614
|
|
24,450
|
|
||||
|
Investments in unconsolidated affiliates and joint ventures
|
$
|
427,243
|
|
$
|
399,805
|
|
||
8point3 Energy Partners LP
In June 2015, 8point3 Energy Partners LP (the “Partnership”), a limited partnership formed by First Solar and SunPower Corporation (the “Sponsors”), completed its initial public offering (the “IPO”) pursuant to a Registration Statement on Form S-1, as amended. As part of the IPO, the Sponsors contributed various projects to 8point3 Operating Company, LLC (“OpCo”) in exchange for voting and economic interests in the entity, and the Partnership acquired an economic interest in OpCo using proceeds from the IPO. The Partnership owns and operates a portfolio of solar energy generation projects and is expected to acquire additional projects from the Sponsors.
As of
June 30, 2016
, we owned an aggregate of
22,116,925
Class B shares representing a
31%
voting interest in the Partnership, and an aggregate of
6,721,810
common units and
15,395,115
subordinated units in OpCo together representing a
31%
economic and voting interest in the entity. Future quarterly distributions from OpCo are subject to a subordination period in which holders of the subordinated units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages in the payment of minimum distributions from prior quarters. The subordination period will end after OpCo has earned and paid minimum quarterly distributions for three years ending on or after August 31, 2018 and there are no outstanding arrearages on common units. Notwithstanding the foregoing, the subordination period could end after OpCo has earned and paid
150%
of minimum quarterly distributions, plus the related distributions to incentive distribution right holders, for
one year
ending on or after August 31, 2016 and there are no outstanding arrearages on common units. At the end of the subordination period, all subordinated units will convert to common units on a one-for-one basis. We also hold certain incentive distribution rights in OpCo, which represent a right to incremental distributions after certain distribution thresholds are met.
The Partnership is managed and controlled by its general partner, 8point3 General Partner, LLC (“General Partner”), and we account for our interest in OpCo, a subsidiary of the Partnership, under the equity method of accounting as we are able to exercise significant influence over the Partnership due to our representation on the board of directors of its General Partner. Under the equity method of accounting, we recognize equity in earnings for our proportionate share of OpCo’s net income or loss, including adjustments for the amortization of a
$45.5 million
basis difference resulting from the cost of our investment differing from our proportionate share of OpCo’s equity. We recognized equity in earnings, net of tax, from our investment in OpCo of
$11.2 million
and
$17.3 million
for the
three
and
six
months ended
June 30, 2016
, respectively. As of
June 30, 2016
and
December 31, 2015
, the carrying value of our investment in OpCo was
$182.7 million
and
$152.5 million
, respectively.
27
In connection with the IPO, we also entered into an agreement with a subsidiary of the Partnership to lease back one of our originally contributed projects, Maryland Solar, until December 31, 2019. Under the terms of the agreement, we make fixed rent payments to the Partnership’s subsidiary and are entitled to all of the energy generated by the project. Due to our continuing involvement with the project, we account for the leaseback agreement as a financing transaction. As of
June 30, 2016
and
December 31, 2015
, our financing obligation associated with the leaseback was
$39.4 million
and
$42.0 million
, respectively.
In May 2016, we completed the sale of our two 20 MW Kingbird projects (“Kingbird”) located in Kern County, California to OpCo and a third-party investor for net revenue of
$57.4 million
and accounted for the transaction as a partial sale of real estate pursuant to ASC 360-20. Due to certain continuing involvement associated with tax related indemnifications to the third-party investor, we did not recognize any profit on the sale as our maximum exposure to loss exceeded the profit on the transaction. All of the cash proceeds from the sale of the Kingbird project were classified as cash flows from operating activities on our condensed consolidated statements of cash flows.
We provide O&M services to certain of the Partnership’s partially owned project entities, including SG2 Holdings, LLC; Lost Hills Blackwell Holdings, LLC; NS Solar Holdings, LLC; Kingbird Solar A, LLC; and Kingbird Solar B, LLC. During the
three
and
six
months ended
June 30, 2016
, we recognized revenue of
$1.5 million
and
$2.8 million
, respectively, for such O&M services.
In June 2015, OpCo entered into a
$525.0 million
senior secured credit facility, consisting of a
$300.0 million
term loan facility, a
$25.0 million
delayed draw term loan facility, and a
$200.0 million
revolving credit facility (the “OpCo Credit Facility”). The OpCo Credit Facility is secured by a pledge of the Sponsors’ equity interests in OpCo.
Desert Stateline Holdings, LLC
In August 2015, we sold
51%
of our partially constructed 300 MW Desert Stateline project (“Desert Stateline”) to a subsidiary of Southern Power Company. In March 2016, we amended the original sale agreement with Southern Power Company to include an additional
15%
of the partially constructed project. Electricity generated by the system is contracted to serve a
20
-year PPA with a local utility company. Our remaining
34%
membership interest in the project holding company, Desert Stateline Holdings, LLC, is accounted for under the equity method of accounting as we are able to exercise significant influence over the project due to our representation on its management committee. Under the terms of the project LLC agreement, each member is entitled to receive cash distributions based on their respective membership interests, and Southern Power Company is entitled to substantially all of the project’s federal tax benefits. During the
three
and
six
months ended
June 30, 2016
, we recognized
no
equity in earnings from our investment in Desert Stateline Holdings, LLC. As of
June 30, 2016
and
December 31, 2015
, the carrying value of our investment was
$191.3 million
and
$196.9 million
, respectively.
Clean Energy Collective, LLC
In November 2014, we entered into various agreements to purchase a minority ownership interest in Clean Energy Collective, LLC (“CEC”). This investment provided us with additional access to the distributed generation market and a partner to develop and market community solar offerings to North American residential customers and businesses directly on behalf of client utility companies. As part of the investment, we also received a warrant, valued at
$1.8 million
, to purchase additional ownership interests at prices at or above our initial investment price per unit.
In addition to our equity investment in CEC, we also entered into a loan agreement to provide CEC with term loan advances up to
$15.0 million
. All term loans are due in November 2017 on the third anniversary of the initial loan agreement. Interest is payable semiannually at rates ranging from
7%
to
16%
depending on CEC’s current capital structure. As of
June 30, 2016
and
December 31, 2015
, the balance outstanding on the term loans was
$15.0 million
. In February 2016, we entered into a convertible loan agreement with CEC for
$4.6 million
, which was funded in April 2016. The convertible loan bears interest at
10%
per annum, and the outstanding principal and interest are due in February 2018 on the second anniversary of the initial loan agreement unless converted earlier pursuant to a qualified equity financing by CEC.
28
CEC is considered a variable interest entity, and our
27%
ownership interest in and loans to the company are considered variable interests. We account for our investment in CEC under the equity method of accounting as we concluded we are not the primary beneficiary of the company given that we do not have the power to make decisions over the activities that most significantly impact the company’s economic performance. Under the equity method of accounting, we recognize equity in earnings for our proportionate share of CEC’s net income or loss including adjustments for the amortization of a basis difference resulting from the cost of our investment differing from our proportionate share of CEC’s equity. During the
three
and
six
months ended
June 30, 2016
we recognized losses, net of tax, of
$1.0 million
and
$2.3 million
, respectively, from our investment in CEC. During the
three
and
six
months ended
June 30, 2015
, we recognized losses, net of tax, of
$0.2 million
and
$1.0 million
, respectively, from our investment in CEC. As of
June 30, 2016
and
December 31, 2015
, the carrying value of our investment was
$12.7 million
and
$16.1 million
, respectively.
11. Percentage-of-Completion Changes in Estimates
We recognize revenue for certain systems business sales arrangements under the percentage-of-completion method. The percentage-of-completion method of revenue recognition requires us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, management judgments are required to evaluate significant assumptions including the amount of net contract revenues, the cost of materials and labor, expected labor productivity, the impact of potential variances in schedule completion, and the impact of any penalties, claims, or performance incentives. If estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of the revisions to estimates related to net contract revenues and costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
Changes in estimates for systems business sales arrangements accounted for under the percentage-of-completion method occur for a variety of reasons, including but not limited to (i) construction plan accelerations or delays, (ii) module cost forecast changes, and (iii) changes in other information used to estimate costs. Changes in estimates could have a material effect on our condensed consolidated statements of operations. The table below outlines the impact on gross profit of the aggregate net change in systems business contract estimates (both increases and decreases) for the
three
and
six
months ended
June 30, 2016
and
2015
as well as the number of projects that comprise such aggregate net change. For purposes of the following table, we only include projects with changes in estimates that have a net impact on gross profit of at least
$1.0 million
during the periods presented. Also included in the table is the net change in estimate as a percentage of the aggregate gross profit for such projects.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Number of projects
|
8
|
|
7
|
|
9
|
|
6
|
|
||||||||
|
Increase in gross profit resulting from net change in estimate (in thousands)
|
$
|
22,777
|
|
$
|
20,209
|
|
$
|
53,575
|
|
$
|
37,603
|
|
||||
|
Net change in estimate as a percentage of aggregate gross profit for associated projects
|
1.5
|
%
|
1.6
|
%
|
6.0
|
%
|
4.1
|
%
|
||||||||
29
Our long-term debt consisted of the following at
June 30, 2016
and
December 31, 2015
(in thousands):
|
Balance (USD)
|
||||||||||||
|
Loan Agreement
|
Maturity
|
Loan Denomination
|
June 30,
2016 |
December 31,
2015 |
||||||||
|
Revolving credit facility
|
July 2018
|
USD
|
$
|
—
|
|
$
|
—
|
|
||||
|
Project construction credit facilities
|
Various
|
Various
|
241,912
|
|
218,183
|
|
||||||
|
Malaysian ringgit facility agreement
|
September 2018
|
MYR
|
—
|
|
54,175
|
|
||||||
|
Malaysian euro facility agreement
|
April 2018
|
EUR
|
—
|
|
21,869
|
|
||||||
|
Malaysian facility agreement
|
March 2016
|
EUR
|
—
|
|
5,100
|
|
||||||
|
Capital lease obligations
|
Various
|
Various
|
816
|
|
1,065
|
|
||||||
|
Long-term debt principal
|
242,728
|
|
300,392
|
|
||||||||
|
Less: unamortized discount and issuance costs
|
(9,298
|
)
|
(10,977
|
)
|
||||||||
|
Total long-term debt
|
233,430
|
|
289,415
|
|
||||||||
|
Less: current portion
|
(71,591
|
)
|
(38,090
|
)
|
||||||||
|
Noncurrent portion
|
$
|
161,839
|
|
$
|
251,325
|
|
||||||
Revolving Credit Facility
Our amended and restated credit agreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent provides us with a senior secured credit facility (the “Revolving Credit Facility”) with an aggregate available amount of
$700.0 million
, with the right to request an increase up to
$900.0 million
, subject to certain conditions.
Borrowings under the Revolving Credit Facility bear interest at (i) LIBOR (adjusted for Eurocurrency reserve requirements) plus a margin of 2.25% or (ii) a base rate as defined in the credit agreement plus a margin of 1.25%, depending on the type of borrowing requested
. These margins are subject to adjustment depending on our consolidated leverage ratio. We had no borrowings under our Revolving Credit Facility as of
June 30, 2016
and
December 31, 2015
. We had issued
$222.8 million
and
$191.6 million
of letters of credit using availability under our Revolving Credit Facility, leaving
$477.2 million
and
$508.4 million
of availability at
June 30, 2016
and
December 31, 2015
, respectively. Loans and letters of credit issued under the Revolving Credit Facility are jointly and severally guaranteed by First Solar, Inc.; First Solar Electric, LLC; First Solar Electric (California), Inc.; and First Solar Development, LLC and are secured by interests in substantially all of the guarantors’ tangible and intangible assets other than certain excluded assets.
The credit agreement contains financial covenants including: a leverage ratio covenant, a minimum EBITDA covenant, and a minimum liquidity covenant. Additionally, the credit agreement contains customary non-financial covenants and certain restrictions on our ability to pay dividends. We were in compliance with all covenants of the facility as of
June 30, 2016
.
In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee at a rate of
0.375%
per annum, based on the average daily unused commitments under the facility. The commitment fee may also be adjusted due to changes in our consolidated leverage ratio. We also pay a letter of credit fee based on the applicable margin for Eurocurrency revolving loans on the face amount of each letter of credit and a fronting fee of
0.125%
.
Project Construction Credit Facilities
Chile
In August 2014, Parque Solar Fotovoltaico Luz del Norte SpA (“Luz del Norte”), our indirect wholly-owned subsidiary, entered into credit facilities with the Overseas Private Investment Corporation (“OPIC”) and the International Finance Corporation (“IFC”) to provide limited-recourse senior secured debt financing in an aggregate principal amount of up to
$290.0 million
for the design, development, financing, construction, testing, commissioning, operation, and maintenance of a 141 MW PV solar power plant located near Copiapó, Chile. In September 2015, Luz del Norte reduced the borrowing capacity on the credit facilities to
$238.0 million
.
30
Up to
$178.0 million
of the aggregate principal amount of the loans will be funded by OPIC. The OPIC commitment is comprised of fixed rate loans in an aggregate principal amount of up to
$133.3 million
and variable rate loans in an aggregate principal amount of up to
$44.7 million
. The fixed rate loans mature in September 2029, and the variable rate loans mature in September 2032. As of
June 30, 2016
and
December 31, 2015
, the balance outstanding on the OPIC loans was
$125.1 million
.
Up to
$60.0 million
of the aggregate principal amount of the loans will be funded by IFC. The IFC commitment is comprised of fixed rate loans in an aggregate principal amount of up to
$44.9 million
and variable rate loans in an aggregate principal amount of up to
$15.1 million
. The fixed rate loans mature in September 2029, and the variable rate loans mature in September 2032. As of
June 30, 2016
and
December 31, 2015
, the balance outstanding on the IFC loans was
$42.2 million
.
In August 2014, Luz del Norte also entered into a Chilean peso facility (“VAT facility” and together with the OPIC and IFC loans, the “Luz del Norte Credit Facilities”) equivalent to
$65.0 million
with Banco de Crédito e Inversiones to fund Chilean value added tax associated with the construction of the Luz del Norte project described above. In connection with the VAT facility, which matures in February 2017, FSI provided a guaranty of substantially all payment obligations of Luz del Norte thereunder. As of
June 30, 2016
and
December 31, 2015
, the balance outstanding on the VAT facility was
$58.5 million
and
$40.4 million
, respectively.
The OPIC and IFC loans are secured by liens over all of Luz del Norte’s assets, which had an aggregate book value of
$403.4 million
, including intercompany charges, as of
June 30, 2016
and by a pledge of all of the equity interests in the entity. The Luz del Norte Credit Facilities contain customary representations and warranties, covenants, and events of default for comparable credit facilities. We were in compliance with all covenants related to the Luz del Norte Credit Facilities as of
June 30, 2016
.
Japan
In September 2015, First Solar Japan GK, our wholly-owned subsidiary, entered into a construction loan facility with Mizuho Bank Ltd. for borrowings up to
¥4.0 billion
(
$38.9 million
) for the development and construction of utility-scale PV solar power plants in Japan (the “Japan Credit Facility”). The facility matures in September 2016 and is renewable for an additional one-year period at the option of First Solar Japan GK, subject to certain conditions including timely payment of interest and compliance with all covenants. The facility is guaranteed by FSI and secured by pledges of certain projects’ cash accounts and other rights in the projects. As of
June 30, 2016
and
December 31, 2015
, the balance outstanding on the facility was
$11.6 million
and
$5.3 million
, respectively. The facility contains customary representations and warranties, covenants, and events of default for comparable construction loan facilities in Japan. We were in compliance with all covenants related to the Japan Credit Facility as of
June 30, 2016
.
India
In March 2015, Marikal Solar Parks Private Limited and Mahabubnagar Solar Parks Private Limited, our indirect wholly-owned subsidiaries, entered into term loan facilities with Axis Bank, as administrative agent, for combined aggregate borrowings up to
₨1.1 billion
(
$16.3 million
) for the development and construction of two 10 MW PV solar power plants located in Telangana, India. The term loan facilities have a combined letter of credit sub-limit of
₨0.8 billion
(
$11.8 million
), which may also be used to support construction activities. As of
June 30, 2016
, we had issued
₨0.7 billion
(
$11.2 million
) of letters of credit under the facilities. The term loan facilities mature in December 2028 and are secured by certain assets of the borrowers, which had an aggregate book value of
$89.3 million
as of
June 30, 2016
, including intercompany charges, and a pledge of a portion of the equity interests in the borrowers. As of
June 30, 2016
and
December 31, 2015
, the balance outstanding on the term loan facilities was
$4.6 million
and
$5.2 million
, respectively. The credit facilities contain various financial covenants including a leverage ratio covenant, a debt service ratio covenant, and a fixed asset coverage ratio covenant. We were in compliance with all covenants related to the credit facilities as of
June 30, 2016
.
In March 2016, Polepally Solar Parks Private Limited, our indirect wholly-owned subsidiary, entered into a term loan facility (together with the Marikal and Mahabubnagar term loans, the “India Credit Facilities”) with Axis Bank, as administrative agent, for borrowings up to
₨1.3 billion
(
$19.2 million
) for costs related to a 25 MW PV solar power plant located in Telangana, India. The term loan facility has a letter of credit sub-limit of
₨1.1 billion
(
$16.3 million
), which may also be used for project related costs. The term loan facility matures in September 2029 and is secured by certain assets of the borrower, which had an aggregate book value of
$31.0 million
as of
June 30, 2016
, including intercompany charges, and a pledge of a portion of the equity interests in the borrower. The term loan facility contains various covenants including a leverage ratio covenant, a debt service ratio covenant, and a fixed asset ratio covenant.
31
Malaysian Ringgit Facility Agreement
FS Malaysia, our indirect wholly-owned subsidiary, entered into a credit facility agreement (“Malaysian Ringgit Facility Agreement”), among FSI as guarantor, CIMB Investment Bank Berhad, Maybank Investment Bank Berhad, and RHB Investment Bank Berhad as arrangers with CIMB Investment Bank Berhad also acting as facility agent and security agent, and the original lenders party thereto. The loans made to FS Malaysia were secured by, among other things, FS Malaysia’s leases for the lots on which our fifth and sixth manufacturing plants in Kulim, Malaysia (“Plants 5 and 6”) are located and all plant, machinery, and equipment purchased by FS Malaysia with the proceeds of the facility or otherwise installed in or utilized in Plants 5 and 6, to the extent not financed, or subject to a negative pledge under a separate financing facility related to Plants 5 and 6. In June 2016, we repaid the remaining
$47.3 million
principal balance on the Malaysian Ringgit Facility Agreement. There were no prepayment penalties associated with this early repayment.
Malaysian Euro Facility Agreement
FS Malaysia entered into a credit facility agreement (“Malaysian Euro Facility Agreement”) with Commerzbank Aktiengesellschaft and Natixis Zweigniederlassung Deutschland as arrangers and original lenders, and Commerzbank Aktiengesellschaft, Luxembourg Branch as facility agent and security agent. In connection with the Malaysian Euro Facility Agreement, FSI concurrently entered into a first demand guarantee agreement in favor of the lenders. Under this agreement, FS Malaysia’s obligations related to the credit facility were guaranteed, on an unsecured basis, by FSI. At the same time, FS Malaysia and FSI also entered into a subordination agreement, pursuant to which any payment claims of FSI against FS Malaysia were subordinated to the claims of the lenders. In April 2016, we repaid the remaining
$22.7 million
principal balance on the Malaysian Euro Facility Agreement. There were no prepayment penalties associated with this early repayment.
Variable Interest Rate Risk
Certain of our long-term debt agreements bear interest at prime, London Interbank Offered Rate (“LIBOR”), Tokyo Interbank Offered Rate (“TIBOR”), or equivalent variable rates. A disruption of the credit environment, as previously experienced, could negatively impact interbank lending and, therefore, negatively impact these floating rates. An increase in prime, LIBOR, TIBOR, or equivalent variable rates would increase the cost of borrowing under our Revolving Credit Facility and various project construction credit facilities.
Our long-term debt borrowing rates as of
June 30, 2016
were as follows:
|
Loan Agreement
|
Borrowing Rate at June 30, 2016
|
|
|
Revolving Credit Facility
|
2.90%
|
|
|
Luz del Norte Credit Facilities
|
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%
|
||
|
VAT loans at bank rate plus 1.30%
|
||
|
Japan Credit Facility
|
TIBOR plus 0.5%
|
|
|
India Credit Facilities
|
Bank rate plus 2.35%
|
|
|
Capital lease obligations
|
Various
|
|
Future Principal Payments
At
June 30, 2016
, the future principal payments on our long-term debt, excluding payments related to capital leases, were due as follows (in thousands):
|
Total Debt
|
||||
|
Remainder of 2016
|
$
|
12,065
|
|
|
|
2017
|
61,066
|
|
||
|
2018
|
4,801
|
|
||
|
2019
|
5,777
|
|
||
|
2020
|
11,922
|
|
||
|
Thereafter
|
146,281
|
|
||
|
Total long-term debt future principal payments
|
$
|
241,912
|
|
|
32
13. Commitments and Contingencies
Commercial Commitments
During the normal course of business, we enter into commercial commitments in the form of letters of credit, bank guarantees, and surety bonds to provide financial and performance assurance to third parties. Our Revolving Credit Facility provides us with a sub-limit of
$500.0 million
to issue letters of credit subject to certain additional limits depending on the currencies of the letters of credit, at a fee based on the applicable margin for Eurocurrency revolving loans and a fronting fee. As of
June 30, 2016
, we had
$222.8 million
in letters of credit issued under our Revolving Credit Facility, leaving
$277.2 million
of availability for the issuance of letters of credit. The majority of these letters of credit were supporting our systems business projects. As of
June 30, 2016
, we also had
$7.1 million
in bank guarantees and letters of credit under separate agreements that were posted by certain of our foreign subsidiaries,
$105.8 million
of letters of credit issued under three bilateral facilities, of which
$33.1 million
was secured with cash, and
$208.0 million
in surety bonds outstanding primarily for our systems business projects. The available bonding capacity under our surety lines was
$612.3 million
as of
June 30, 2016
.
Product Warranties
When we recognize revenue for module or systems sales, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations for both modules and the balance of the systems. We make and revise these estimates based primarily on the number of our solar modules under warranty installed at customer locations, our historical experience with warranty claims, our monitoring of field installation sites, our internal testing of and the expected future performance of our solar modules and balance of systems (“BoS”) components, and our estimated replacement costs.
From time to time, we have taken remediation actions with respect to affected modules beyond our limited warranties, and we 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 could be material to our condensed consolidated statements of operations if we commit to any such remediation actions.
Product warranty activities during the
three
and
six
months ended
June 30, 2016
and
2015
were as follows (in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Product warranty liability, beginning of period
|
$
|
242,136
|
|
$
|
220,404
|
|
$
|
231,751
|
|
$
|
223,057
|
|
||||
|
Accruals for new warranties issued
|
12,794
|
|
11,268
|
|
20,696
|
|
18,008
|
|
||||||||
|
Settlements
|
(4,050
|
)
|
(2,346
|
)
|
(6,432
|
)
|
(5,095
|
)
|
||||||||
|
Changes in estimate of product warranty liability
|
(509
|
)
|
(7,022
|
)
|
4,356
|
|
(13,666
|
)
|
||||||||
|
Product warranty liability, end of period
|
$
|
250,371
|
|
$
|
222,304
|
|
$
|
250,371
|
|
$
|
222,304
|
|
||||
|
Current portion of warranty liability
|
$
|
37,926
|
|
$
|
50,973
|
|
$
|
37,926
|
|
$
|
50,973
|
|
||||
|
Noncurrent portion of warranty liability
|
$
|
212,445
|
|
$
|
171,331
|
|
$
|
212,445
|
|
$
|
171,331
|
|
||||
We have historically estimated our limited product warranty liability for power output and defects in materials and workmanship under normal use and service conditions to have a warranty return rate of approximately
3%
of modules covered under warranty. As of
June 30, 2016
, a
1%
change in the estimated warranty return rate would change our module warranty liability by
$74.0 million
, and a
1%
change in the estimated warranty return rate for BoS components would not have a material impact on the associated warranty liability.
Accrued Expenses in Excess of Product Warranty
We may also accrue expenses for the cost of any voluntary remediation programs beyond our normal product warranty. As of
June 30, 2016
and
December 31, 2015
, accrued expenses in excess of our product warranty were
$19.6 million
and
$24.6 million
, respectively, of which
$4.6 million
and
$5.0 million
, respectively, were classified as current and included in “Accrued expenses” on our condensed consolidated balance sheets and
$15.0 million
and
$19.6 million
, respectively, were classified as noncurrent and included in “Other liabilities” on our condensed consolidated balance sheets. Our estimates for such remediation programs are based on an evaluation of available information including the estimated number of potentially affected solar modules, historical experience related to our remediation efforts, customer-provided data related to potentially affected systems, estimated costs for performing removal, replacement, and logistical services, and any post-sale expenses covered under the voluntary remediation program. If any of our estimates prove incorrect, we may be required to accrue additional expenses.
33
Performance Guarantees
As part of our systems business, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the engineering, procurement, and construction (“EPC”) agreement. In addition, we may provide an energy performance test during the first year of a system’s operation to demonstrate that the actual energy generation for the first year meets or exceeds the modeled energy expectation, after certain adjustments. If there is an underperformance event with regards to these tests, we may incur liquidated damages as a percentage of the EPC contract price. In certain instances, a bonus payment may be received at the end of the first year if the system performs above a specified level. As of
June 30, 2016
and
December 31, 2015
, we accrued
$0.3 million
of estimated obligations under such arrangements, which were classified as “Other current liabilities” in the condensed consolidated balance sheets.
As part of our O&M service offerings, we typically offer an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside of our control as the service provider, such as weather, curtailment, outages, force majeure, and other conditions that may affect system availability. Effective availability guarantees are only offered as part of our O&M services and terminate at the end of an O&M arrangement. If we fail to meet the contractual threshold for these guarantees, we may incur liquidated damages for certain lost energy under the PPA. Our O&M agreements typically contain provisions limiting our total potential losses under an agreement, including amounts paid for liquidated damages, to a percentage of O&M fees. Many of our O&M agreements also contain provisions whereby we may receive a bonus payment if system availability exceeds a separate threshold. As of
June 30, 2016
and
December 31, 2015
, we did not accrue any estimated obligations under our effective availability guarantees.
Repurchase of Systems Projects
From time to time under sales agreements for a limited number of our solar power projects, we may be required to repurchase the projects if certain events occur, such as not achieving commercial operation of the project within a certain timeframe. For any sales agreements that have such conditional repurchase clauses, we will not recognize revenue on such sales agreements until the conditional repurchase clauses are of no further force or effect and all other necessary revenue recognition criteria have been met.
Indemnifications
In certain limited circumstances, we have provided indemnifications to customers or project tax equity investors under which we are contractually obligated to compensate such parties for losses they may suffer as a result of reductions in tax benefits received, including investment tax credits. Project related tax benefits are, in part, based on guidance provided by the Internal Revenue Service and U.S. Treasury Department, which includes assumptions regarding the fair value of qualifying PV solar power systems. For any sales agreements that have such indemnification provisions, we reduce the profit recognized, if any, by the maximum exposure to loss until the indemnification provisions are of no further force or effect and all other necessary revenue recognition criteria have been met.
Contingent Consideration
In connection with our previous TetraSun acquisition, we agreed to pay additional amounts to the sellers contingent upon achievement by the acquired business of certain negotiated goals, such as targeted module shipment volumes. In June 2016, we reversed the outstanding contingent consideration associated with our TetraSun acquisition of
$7.4 million
as a result of our executive management’s decision to end production of our crystalline silicon modules, which adversely affected the likelihood of achieving certain module shipment volume milestones. Such reversal resulted in a corresponding gain recorded within “
Other income (expense), net
” on our condensed consolidated statements of operations for the for the
three
and
six
months ended
June 30, 2016
.
See Note 4. “Restructuring and Asset Impairments”
to our condensed consolidated financial statements for further discussion related to these restructuring activities. As of
December 31, 2015
, we had recorded
$2.5 million
of current liabilities and
$4.9 million
of long-term liabilities for such contingent obligations based on their estimated fair values.
34
We continually seek to make additions to our advanced-stage project pipeline and are also actively developing our early to mid-stage project pipeline in order to secure PPAs and are also pursuing opportunities to acquire advanced-stage projects, which already have PPAs in place. In connection with such project acquisitions, we may agree to pay additional amounts to project sellers upon achievement of certain project-related milestones, such as obtaining a PPA, obtaining financing, and selling to a new owner. We recognize an estimated project acquisition contingent liability when we determine that such liability is both probable and reasonably estimable, and the carrying amount of the related project asset is correspondingly increased. As of
June 30, 2016
and
December 31, 2015
, we had recorded
$8.9 million
and
$6.7 million
of current liabilities, respectively, and
$14.9 million
and
$3.9 million
of long-term liabilities, respectively, for such contingent obligations. Any future differences between the acquisition-date contingent obligation estimate and the ultimate settlement of the obligations will be recognized primarily as an adjustment to project assets, as contingent payments are considered direct and incremental to the underlying value of the related projects.
Solar Module Collection and Recycling Liability
We voluntarily established a module collection and recycling program to collect and recycle modules sold and covered under such program once the modules reach the end of their useful lives. For customer sales contracts that include modules covered under this program, we agree to pay the costs for the collection and recycling of qualifying solar modules, and the end-users agree 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 record our 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. During the three and six months ended
June 30, 2016
and
2015
, substantially all of our modules sold were not subject to our collection and recycling program.
We estimate the cost of our collection and recycling obligations based on the present value of the expected probability weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials, the cost of freight from the solar module installation sites to a recycling center, the material, labor, capital costs, and scale of recycling centers, and an estimated third-party profit margin and return on risk for collection and recycling services. We base these estimates on (i) our experience collecting and recycling our solar modules, (ii) the expected timing of when our solar modules will be returned for recycling, and (iii) expected economic conditions at the time the solar modules will be collected and recycled. In the periods between the time of sale and the related settlement of the collection and recycling obligation, we accrete the carrying amount of the associated liability by applying the discount rate used for its initial measurement. We classify accretion as an operating expense within “Selling, general and administrative” expense on our condensed consolidated statement of operations. We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly.
Our module collection and recycling liability was
$167.7 million
and
$163.4 million
as of
June 30, 2016
and
December 31, 2015
, respectively. As of
June 30, 2016
, a
1%
increase in the annualized inflation rate used in our estimated future collection and recycling cost per module would increase our liability by
$37.9 million
, and a
1%
decrease in that rate would decrease our liability by
$31.1 million
.
See
Note 6. “Restricted Cash and Investments”
to our condensed consolidated financial statements for more information about our arrangements for funding this liability.
Legal Proceedings
We are party to legal matters and claims that are normal in the course of our operations. While we believe that the ultimate outcome of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows, the outcome of these matters is not determinable with certainty, and negative outcomes may adversely affect us.
Class Action
On March 15, 2012, a purported class action lawsuit titled Smilovits v. First Solar, Inc., et al., Case No. 2:12-cv-00555-DGC, was filed in the United States District Court for the District of Arizona (hereafter “Arizona District Court”) against the Company and certain of our current and former directors and officers. The complaint was filed on behalf of persons who purchased or otherwise acquired the Company’s publicly traded securities between April 30, 2008 and February 28, 2012 (the “Class Action”). The complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for damages, including interest, and an award of reasonable costs and attorneys’ fees to the putative class. The Company believes it has meritorious defenses and will vigorously defend this action.
35
On July 23, 2012, the Arizona District Court issued an order appointing as lead plaintiffs in the Class Action the Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme (collectively “Pension Schemes”). The Pension Schemes filed an amended complaint on August 17, 2012, which contains similar allegations and seeks similar relief as the original complaint. Defendants filed a motion to dismiss on September 14, 2012. On December 17, 2012, the court denied defendants’ motion to dismiss. On October 8, 2013, the Arizona District Court granted the Pension Schemes’ motion for class certification, and certified a class comprised of all persons who purchased or otherwise acquired publicly traded securities of the Company between April 30, 2008 and February 28, 2012 and were damaged thereby, excluding defendants and certain related parties. Merits discovery closed on February 27, 2015.
Defendants filed a motion for summary judgment on March 27, 2015. On August 11, 2015, the Arizona District Court granted defendants’ motion in part and denied it in part, and certified an issue for immediate appeal to the Ninth Circuit Court of Appeals (the “Ninth Circuit”). First Solar filed a petition for interlocutory appeal with the Ninth Circuit, and that petition was granted on November 18, 2015. On May 20, 2016, the Pension Schemes moved to vacate the order granting the petition, dismiss the appeal, and stay the merits briefing schedule. Briefing on the Pension Schemes’ motion is now complete. The Arizona District Court has entered a stay of the proceedings in district court until the appeal is decided.
Given the pending appeal, the need for further expert discovery, and the uncertainties of trial, we are not in a position to assess whether any loss or adverse effect on our financial condition is probable or remote or to estimate the range of potential loss, if any.
Opt-Out Action
On June 23, 2015, a suit titled Maverick Fund, L.D.C. v. First Solar, Inc., et al., Case No. 2:15-cv-01156-ROS, was filed in Arizona District Court by putative stockholders that opted out of the Class Action. The complaint names the Company and certain of our current and former directors and officers as defendants, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and violated state law, by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for recessionary and actual damages, interest, punitive damages, and an award of reasonable attorneys’ fees, expert fees, and costs. The Company believes it has meritorious defenses and will vigorously defend this action.
The Arizona District Court has extended the deadline for responding to the complaint until after the Ninth Circuit resolves the appeal in the Smilovits matter described above. Accordingly, we are not in a position to assess whether any loss or adverse effect on our financial condition is probable or remote or to estimate the range of potential loss, if any.
Derivative Actions
On April 3, 2012, a derivative action titled Tsevegmid v. Ahearn, et al., Case No. 1:12-cv-00417-CJB, was filed by a putative stockholder on behalf of the Company in the United States District Court for the District of Delaware (hereafter “Delaware District Court”) against certain current and former directors and officers of the Company, alleging breach of fiduciary duties and unjust enrichment. The complaint generally alleges that from June 1, 2008, to March 7, 2012, the defendants caused or allowed false and misleading statements to be made concerning the Company’s financial performance and prospects. The action includes claims for, among other things, damages in favor of the Company, certain corporate actions to purportedly improve the Company’s corporate governance, and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees. On April 10, 2012, a second derivative complaint was filed in the Delaware District Court. The complaint, titled Brownlee v. Ahearn, et al., Case No. 1:12-cv-00456-CJB, contains similar allegations and seeks similar relief to the Tsevegmid action. By court order on April 30, 2012, pursuant to the parties’ stipulation, the Tsevegmid action and the Brownlee action were consolidated into a single action in the Delaware District Court. On May 15, 2012, defendants filed a motion to challenge Delaware as the appropriate venue for the consolidated action. On March 4, 2013, the magistrate judge issued a Report and Recommendation recommending to the court that defendants’ motion be granted and that the case be transferred to the District of Arizona. On July 12, 2013, the court adopted the magistrate judge’s Report and Recommendation and ordered the case transferred to the District of Arizona. The transfer was completed on July 15, 2013.
36
On April 12, 2012, a derivative complaint was filed in the Arizona District Court, titled Tindall v. Ahearn, et al., Case No. 2:12-cv-00769-ROS. In addition to alleging claims and seeking relief similar to the claims and relief asserted in the Tsevegmid and Brownlee actions, the Tindall complaint alleges violations of Sections 14(a) and 20(b) of the Securities Exchange Act of 1934. On April 19, 2012, a second derivative complaint was filed in the Arizona District Court, titled Nederhood v. Ahearn, et al., Case No. 2:12-cv-00819-JWS. The Nederhood complaint contains similar allegations and seeks similar relief to the Tsevegmid and Brownlee actions. On May 17, 2012 and May 30, 2012, respectively, two additional derivative complaints, containing similar allegations and seeking similar relief as the Nederhood complaint, were filed in Arizona District Court: Morris v. Ahearn, et al., Case No. 2:12-cv-01031-JAT and Tan v. Ahearn, et al., 2:12-cv-01144-NVW.
On July 17, 2012, the Arizona District Court issued an order granting First Solar’s motion to transfer the derivative actions to Judge David Campbell, the judge to whom the Smilovits class action is assigned. On August 8, 2012, the court consolidated the four derivative actions pending in Arizona District Court, and on August 31, 2012, plaintiffs filed an amended complaint. Defendants filed a motion to stay the action on September 14, 2012. On December 17, 2012, the Arizona District Court granted defendants’ motion to stay pending resolution of the Smilovits class action. On August 13, 2013, Judge Campbell consolidated the two derivative actions transferred from the Delaware District Court with the stayed Arizona derivative actions. On February 19, 2016, the Arizona District Court issued an order lifting the stay in part. Pursuant to the February 19, 2016 order, the plaintiffs filed an amended complaint on March 11, 2016, and defendants filed a motion to dismiss the amended complaint on April 1, 2016. On June 30, 2016, the Arizona District Court granted defendants’ motion to dismiss the insider trading and unjust enrichment claims with prejudice, and further granted defendants’ motion to dismiss the claims for alleged breaches of fiduciary duties, with leave to amend by September 16, 2016. On July 15, 2016, plaintiffs filed a motion to reconsider certain aspects of the order granting defendants’ motion to dismiss. The motion to reconsider remains pending.
On July 16, 2013, a derivative complaint was filed in the Superior Court of Arizona, Maricopa County, titled Bargar, et al. v. Ahearn, et al., Case No. CV2013-009938, by a putative stockholder against certain current and former directors and officers of the Company. The complaint contains similar allegations to the Delaware and Arizona derivative cases, and includes claims for, among other things, breach of fiduciary duties, insider trading, unjust enrichment, and waste of corporate assets. By court order on October 3, 2013, the Superior Court of Arizona, Maricopa County granted the parties’ stipulation to defer defendants’ response to the complaint pending resolution of the Smilovits class action or expiration of the stay issued in the consolidated derivative actions in the Arizona District Court. On November 5, 2013, the matter was placed on the court’s inactive calendar. The parties have jointly sought and obtained multiple requests to continue the action on the inactive calendar. Most recently, on June 30, 2016, the court entered an order continuing the action on the inactive calendar until November 30, 2016.
The Company believes that plaintiffs in the derivative actions lack standing to pursue litigation on behalf of First Solar. The derivative actions are still in the initial stages and there has been no discovery. Accordingly, we are not in a position to assess whether any loss or adverse effect on our financial condition is probable or remote or to estimate the range of potential loss, if any.
Department of Labor Proceeding
In March 2015, the Wage and Hour Division of the U.S. Department of Labor (the “DOL”) notified our wholly-owned subsidiary First Solar Electric, LLC (“FSE”) of the DOL’s findings following a labor standards compliance review under the Davis Bacon and Related Acts at the Agua Caliente project in southwestern Arizona. FSE served as the general contractor for the project. The DOL alleges that certain workers at the project were misclassified and, as a result of that misclassification, were not paid the required prevailing wage. We disagree with certain of the DOL’s investigative findings and are currently reviewing those issues of disagreement with the DOL. Possible adverse outcomes include the payment of back wages and debarment of FSE and its affiliates from doing certain business with the U.S. federal government. We cannot predict the ultimate outcome of the DOL proceeding.
37
14. Share-Based Compensation
We measure share-based compensation cost at the grant date based on the fair value of the award and recognize this cost as share-based compensation expense over the required or estimated service period for awards expected to vest. The share-based compensation expense that we recognized in our condensed consolidated statements of operations for the
three
and
six
months ended
June 30, 2016
and
2015
was as follows (in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Cost of sales
|
$
|
2,288
|
|
$
|
2,087
|
|
$
|
4,643
|
|
$
|
5,491
|
|
||||
|
Research and development
|
805
|
|
933
|
|
1,855
|
|
2,102
|
|
||||||||
|
Selling, general and administrative
|
4,000
|
|
5,825
|
|
12,073
|
|
13,319
|
|
||||||||
|
Production start-up
|
—
|
|
9
|
|
—
|
|
21
|
|
||||||||
|
Total share-based compensation expense
|
$
|
7,093
|
|
$
|
8,854
|
|
$
|
18,571
|
|
$
|
20,933
|
|
||||
The following table presents our share-based compensation expense by type of award for the
three
and
six
months ended
June 30, 2016
and
2015
(in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Restricted and performance stock units
|
$
|
5,814
|
|
$
|
7,819
|
|
$
|
17,030
|
|
$
|
18,771
|
|
||||
|
Unrestricted stock
|
419
|
|
332
|
|
838
|
|
663
|
|
||||||||
|
Stock purchase plan
|
348
|
|
354
|
|
694
|
|
669
|
|
||||||||
|
6,581
|
|
8,505
|
|
18,562
|
|
20,103
|
|
|||||||||
|
Net amount released from inventory
|
512
|
|
349
|
|
9
|
|
830
|
|
||||||||
|
Total share-based compensation expense
|
$
|
7,093
|
|
$
|
8,854
|
|
$
|
18,571
|
|
$
|
20,933
|
|
||||
Share-based compensation expense capitalized in inventory was
$3.4 million
at
June 30, 2016
and
December 31, 2015
, respectively. As of
June 30, 2016
, we had
$38.5 million
of unrecognized share-based compensation expense related to unvested restricted stock units and rights under our stock purchase plan, which we expect to recognize as expense over a weighted-average period of approximately
1.5 years
.
The estimated forfeiture rate used to record compensation expense is based primarily on historical forfeitures and is adjusted periodically based on actual results. At
June 30, 2016
and
December 31, 2015
, our forfeiture rate was
9.5%
.
15. Income Taxes
Our effective tax rate was
20.2%
and
485.0%
for the
six
months ended
June 30, 2016
and
2015
, respectively. The change in our effective tax rate was primarily driven by a
$41.7 million
discrete tax benefit recorded during the six months ended June 30, 2015 as a result of a private letter ruling in a foreign jurisdiction related to the timing of the deduction for certain of our obligations and the relative size of our pretax loss in the period. In accordance with the private letter ruling, we will begin treating these obligations as deductible when we actually make payments on the obligations, which are expected to occur subsequent to the expiration of our tax holiday. The provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate of
35.0%
primarily due to the benefit associated with foreign income taxed at lower rates, including the beneficial impact of our Malaysian tax holiday, partially offset by additional tax expense attributable to losses in jurisdictions for which no tax benefits could be recorded.
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 meeting 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 July 2016, we received a letter from a foreign tax authority confirming our residency status in that jurisdiction. In accordance with the letter, we will reverse a liability associated with an uncertain tax position related to the income of a foreign subsidiary. Accordingly, we expect to record a benefit of approximately
$35 million
through the tax provision from the reversal of such liability during the three months ended September 30, 2016.
38
We account for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740. It is reasonably possible that
$47.8 million
of uncertain tax positions, including the matter discussed above, will be recognized within the next 12 months.
We use the deferral method of accounting for investment tax credits under which the credits are recognized as reductions in the carrying value of the related assets. The use of the deferral method also results in a basis difference from the recognition of a deferred tax asset and an immediate income tax benefit for the future tax depreciation of the related assets. Such basis differences are accounted for pursuant to the income statement method.
We are subject to audit by U.S. federal, state, local, and foreign tax authorities. During the six months ended June 30, 2015, we settled a tax audit in Spain, which resulted in a discrete tax expense of
$3.0 million
. We are currently under examination in Chile and Germany. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed by our tax audits 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.
16. Net Income per Share
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potentially dilutive common shares, including restricted and performance stock units and stock purchase plan shares, unless there is a net loss for the period. In computing diluted net income per share, we utilize the treasury stock method.
The calculation of basic and diluted net income per share for the
three
and
six
months ended
June 30, 2016
and
2015
was as follows (in thousands, except per share amounts):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||||||
|
Basic net income per share
|
|
|
||||||||||||||
|
Numerator:
|
|
|
||||||||||||||
|
Net income
|
$
|
13,408
|
|
$
|
93,885
|
|
$
|
183,973
|
|
$
|
32,968
|
|
||||
|
Denominator:
|
||||||||||||||||
|
Weighted-average common shares outstanding
|
102,287
|
|
100,852
|
|
102,070
|
|
100,615
|
|
||||||||
|
Diluted net income per share
|
||||||||||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted-average common shares outstanding
|
102,287
|
|
100,852
|
|
102,070
|
|
100,615
|
|
||||||||
|
Effect of restricted and performance stock units and stock purchase plan shares
|
1,588
|
|
755
|
|
1,211
|
|
1,016
|
|
||||||||
|
Weighted-average shares used in computing diluted net income per share
|
103,875
|
|
101,607
|
|
103,281
|
|
101,631
|
|
||||||||
|
Net income per share:
|
|
|
||||||||||||||
|
Basic
|
$
|
0.13
|
|
$
|
0.93
|
|
$
|
1.80
|
|
$
|
0.33
|
|
||||
|
Diluted
|
$
|
0.13
|
|
$
|
0.92
|
|
$
|
1.78
|
|
$
|
0.33
|
|
||||
The following table summarizes the potential shares of common stock that were excluded from the computation of diluted net income per share for the
three
and
six
months ended
June 30, 2016
and
2015
as they would have had an anti-dilutive effect (in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Anti-dilutive shares
|
435
|
|
12
|
|
218
|
|
73
|
|
||||
39
17. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Comprehensive income (loss)
, which includes foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, and unrealized gains and losses on derivative instruments designated and qualifying as cash flow hedges, the impact of which has been excluded from net income (loss) and reflected as components of stockholders’ equity, was as follows for the
three
and
six
months ended
June 30, 2016
and
2015
(in thousands):
|
Three Months Ended June 30,
|
||||||||
|
|
2016
|
2015
|
||||||
|
Net income
|
$
|
13,408
|
|
$
|
93,885
|
|
||
|
Other comprehensive income (loss), net of tax:
|
||||||||
|
Foreign currency translation adjustments
|
(2,325
|
)
|
2,495
|
|
||||
|
Unrealized gain (loss) on marketable securities and restricted investments for the period, net of tax of $(1,783) and $3,842
|
29,631
|
|
(60,640
|
)
|
||||
|
Less: reclassification for gains included in net income, net of tax of $0
|
(1
|
)
|
—
|
|
||||
|
Unrealized gain (loss) on marketable securities and restricted investments
|
29,630
|
|
(60,640
|
)
|
||||
|
Unrealized (loss) gain on derivative instruments for the period, net of tax of $(69) and $(1,837)
|
(1,751
|
)
|
3,577
|
|
||||
|
Less: reclassification for losses (gains) included in net income, net of tax of $0 and $2,343
|
3,991
|
|
(3,918
|
)
|
||||
|
Unrealized gain (loss) on derivative instruments
|
2,240
|
|
(341
|
)
|
||||
|
Other comprehensive income (loss), net of tax
|
29,545
|
|
(58,486
|
)
|
||||
|
Comprehensive income
|
$
|
42,953
|
|
$
|
35,399
|
|
||
|
Six Months Ended June 30,
|
||||||||
|
2016
|
2015
|
|||||||
|
Net income
|
$
|
183,973
|
|
$
|
32,968
|
|
||
|
Other comprehensive income (loss), net of tax:
|
||||||||
|
Foreign currency translation adjustments
|
3,217
|
|
(12,898
|
)
|
||||
|
Unrealized gain (loss) on marketable securities and restricted investments for the period, net of tax of $(4,079) and $1,785
|
70,497
|
|
(22,353
|
)
|
||||
|
Less: reclassification for gains included in net income, net of tax of $2,904 and $0
|
(34,901
|
)
|
—
|
|
||||
|
Unrealized gain (loss) on marketable securities and restricted investments
|
35,596
|
|
(22,353
|
)
|
||||
|
Unrealized gain (loss) on derivative instruments for the period, net of tax of $(59) and $(200)
|
5,419
|
|
(3,472
|
)
|
||||
|
Less: reclassification for (gains) losses included in net income, net of tax of $0 and $1,513
|
(3,073
|
)
|
1,571
|
|
||||
|
Unrealized gain (loss) on derivative instruments
|
2,346
|
|
(1,901
|
)
|
||||
|
Other comprehensive income (loss), net of tax
|
41,159
|
|
(37,152
|
)
|
||||
|
Comprehensive income (loss)
|
$
|
225,132
|
|
$
|
(4,184
|
)
|
||
The following tables reflect the changes in accumulated other comprehensive income, net of tax, for the
six months ended
June 30, 2016
and
2015
(in thousands):
|
Foreign Currency Translation Adjustment
|
Unrealized Gain (Loss) on Marketable Securities and Restricted Investments
|
Unrealized Gain (Loss) on Derivative Instruments
|
Total
|
|||||||||||||
|
Balance as of December 31, 2015
|
$
|
(69,769
|
)
|
$
|
86,884
|
|
$
|
(1,635
|
)
|
$
|
15,480
|
|
||||
|
Other comprehensive income before reclassifications
|
3,217
|
|
70,497
|
|
5,419
|
|
79,133
|
|
||||||||
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
(34,901
|
)
|
(3,073
|
)
|
(37,974
|
)
|
||||||||
|
Net other comprehensive income
|
3,217
|
|
35,596
|
|
2,346
|
|
41,159
|
|
||||||||
|
Balance as of June 30, 2016
|
$
|
(66,552
|
)
|
$
|
122,480
|
|
$
|
711
|
|
$
|
56,639
|
|
||||
40
|
Foreign Currency Translation Adjustment
|
Unrealized Gain (Loss) on Marketable Securities and Restricted Investments
|
Unrealized Gain (Loss) on Derivative Instruments
|
Total
|
|||||||||||||
|
Balance as of December 31, 2014
|
$
|
(53,337
|
)
|
$
|
102,299
|
|
$
|
1,178
|
|
$
|
50,140
|
|
||||
|
Other comprehensive loss before reclassifications
|
(12,898
|
)
|
(22,353
|
)
|
(3,472
|
)
|
(38,723
|
)
|
||||||||
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
—
|
|
1,571
|
|
1,571
|
|
||||||||
|
Net other comprehensive loss
|
(12,898
|
)
|
(22,353
|
)
|
(1,901
|
)
|
(37,152
|
)
|
||||||||
|
Balance as of June 30, 2015
|
$
|
(66,235
|
)
|
$
|
79,946
|
|
$
|
(723
|
)
|
$
|
12,988
|
|
||||
|
Amount Reclassified for the
|
||||||||||
|
Details of Accumulated Other Comprehensive Income
|
Six Months Ended June 30,
|
Income Statement Line Item
|
||||||||
|
2016
|
2015
|
|||||||||
|
Gains and (losses) on marketable securities and restricted investments:
|
||||||||||
|
$
|
37,805
|
|
$
|
—
|
|
Other income (expense), net
|
||||
|
(2,904
|
)
|
—
|
|
Tax expense
|
||||||
|
$
|
34,901
|
|
$
|
—
|
|
Total, net of tax
|
||||
|
Gains and (losses) on derivative contracts:
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
—
|
|
$
|
352
|
|
Net sales
|
|||
|
Foreign exchange forward contracts
|
—
|
|
4,599
|
|
Cost of sales
|
|||||
|
Cross currency swap contract
|
4,896
|
|
(4,766
|
)
|
Foreign currency loss, net
|
|||||
|
Interest rate and cross currency swap contracts
|
(1,823
|
)
|
(243
|
)
|
Interest expense, net
|
|||||
|
3,073
|
|
(58
|
)
|
Total before tax
|
||||||
|
—
|
|
(1,513
|
)
|
Tax expense
|
||||||
|
$
|
3,073
|
|
$
|
(1,571
|
)
|
Total net of tax
|
||||
18. Segment Reporting
We operate our business in
two
segments. Our components segment involves the design, manufacture, and sale of CdTe solar modules, which convert sunlight into electricity. Third-party customers of our components segment include integrators and operators of PV solar power systems. Our second segment is our fully integrated systems business (“systems segment”), through which we provide complete turn-key PV solar power systems, or solar solutions, that draw upon our capabilities, which include (i) project development, (ii) EPC services, and (iii) O&M services. We may provide our full EPC services or any combination of individual products and services within our EPC capabilities depending upon the customer and market opportunity. All of our systems segment products and services are for PV solar power systems, which primarily use our solar modules, and we sell such products and services to utilities, independent power producers, commercial and industrial companies, and other system owners. Additionally within our systems segment, we may temporarily own and operate certain of our PV solar power systems for a period of time based on strategic opportunities.
In our reportable segment financial disclosures, we include an allocation of net sales value for all solar modules manufactured by our components segment and installed in projects sold or built by our systems segment in the net sales of our components segment. In the gross profit of our reportable segment disclosures, we include the corresponding cost of sales value for the solar modules installed in projects sold or built by our systems segment in the components segment. The cost of solar modules is comprised of the manufactured cost incurred by our components segment.
See Note 23. “Segment and Geographical Information” in our Annual Report on Form 10-K for the year ended
December 31, 2015
for a complete discussion of our segment reporting.
41
Financial information about our reportable segments during the
three
and
six
months ended
June 30, 2016
and
2015
was as follows (in thousands):
|
|
Three Months Ended June 30, 2016
|
Three Months Ended June 30, 2015
|
||||||||||||||||||||||
|
|
Components
|
Systems
|
Total
|
Components
|
Systems
|
Total
|
||||||||||||||||||
|
Net sales
|
$
|
449,405
|
|
$
|
484,976
|
|
$
|
934,381
|
|
$
|
321,444
|
|
$
|
574,773
|
|
$
|
896,217
|
|
||||||
|
Gross profit
|
108,146
|
|
83,019
|
|
191,165
|
|
57,836
|
|
106,647
|
|
164,483
|
|
||||||||||||
|
Depreciation and amortization expense
|
53,274
|
|
3,403
|
|
56,677
|
|
61,967
|
|
3,379
|
|
65,346
|
|
||||||||||||
|
Income (loss) before taxes (1)
|
(6,566
|
)
|
18,845
|
|
12,279
|
|
7,056
|
|
51,560
|
|
58,616
|
|
||||||||||||
|
Six Months Ended June 30, 2016
|
Six Months Ended June 30, 2015
|
|||||||||||||||||||||||
|
Components
|
Systems
|
Total
|
Components
|
Systems
|
Total
|
|||||||||||||||||||
|
Net sales
|
$
|
739,909
|
|
$
|
1,042,956
|
|
$
|
1,782,865
|
|
$
|
547,061
|
|
$
|
818,365
|
|
$
|
1,365,426
|
|
||||||
|
Gross profit
|
191,127
|
|
262,983
|
|
454,110
|
|
77,225
|
|
126,239
|
|
203,464
|
|
||||||||||||
|
Depreciation and amortization expense
|
108,566
|
|
6,849
|
|
115,415
|
|
121,778
|
|
6,797
|
|
128,575
|
|
||||||||||||
|
Income (loss) before taxes (1)
|
74,614
|
|
136,997
|
|
211,611
|
|
(21,001
|
)
|
12,894
|
|
(8,107
|
)
|
||||||||||||
|
June 30, 2016
|
December 31, 2015
|
|||||||||||||||||||||||
|
Components
|
Systems
|
Total
|
Components
|
Systems
|
Total
|
|||||||||||||||||||
|
Goodwill (1)
|
$
|
10,055
|
|
$
|
68,833
|
|
$
|
78,888
|
|
$
|
16,152
|
|
$
|
68,833
|
|
$
|
84,985
|
|
||||||
|
Total assets
|
4,333,923
|
|
3,210,097
|
|
7,544,020
|
|
4,037,955
|
|
3,278,376
|
|
7,316,331
|
|
||||||||||||
|
(1)
|
The operating results for our components segment for the
three
and
six
months ended
June 30, 2016
include
$84.6 million
of restructuring and asset impairment charges associated with the end of our crystalline silicon module production.
See Note 4. “Restructuring and Asset Impairments”
to our condensed consolidated financial statements for more information regarding these restructuring activities.
|
Product Revenue
The following table sets forth the total amounts of solar module and solar power system net sales recognized for the
three
and
six
months ended
June 30, 2016
and
2015
. For the purposes of the following table, (i) solar module revenue is composed of revenue from the sale of solar modules to third parties, which does not include any modules sold as part of our PV solar power systems, and (ii) solar power system revenue is composed of revenue from the sale of PV solar power systems and related products and services, including any modules installed in such systems and any revenue generated by such systems (in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||||||
|
Solar module revenue
|
$
|
157,464
|
|
$
|
18,823
|
|
$
|
212,731
|
|
$
|
119,956
|
|
||||
|
Solar power system revenue
|
776,917
|
|
877,394
|
|
1,570,134
|
|
1,245,470
|
|
||||||||
|
Net sales
|
$
|
934,381
|
|
$
|
896,217
|
|
$
|
1,782,865
|
|
$
|
1,365,426
|
|
||||
42
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 (the “Exchange Act”) and the Securities Act of 1933, 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: 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 efficiency and balance of systems (“BoS”) cost reduction roadmaps, restructuring, product reliability, investments in unconsolidated affiliates, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; our ability to reduce the costs to construct PV solar power systems; research and development programs and our ability to improve the conversion efficiency of our solar modules; our ability to expand manufacturing capacity worldwide; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “seek,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” “continue,” and the negative or plural of these words and other comparable terminology. Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. 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. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the matters discussed in Part I, Item 1A: “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2015
and elsewhere in this Quarterly Report on Form 10-Q, Current Reports on Form 8-K, and other reports filed with the Securities and Exchange Commission (the “SEC”). You should carefully consider the risks and uncertainties described under this section.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “First Solar,” “the Company,” “we,” “us,” and “our” refer to First Solar, Inc. and its subsidiaries. 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”) unless otherwise noted. When referring to our PV solar power systems, the unit of electricity in watts for MW and GW is alternating current (“AC”) unless otherwise noted.
43
Executive Overview
We are a leading global provider of comprehensive photovoltaic (“PV”) solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin-film semiconductor technology and also develop, design, construct, and sell PV solar power systems that primarily use the modules we manufacture. Additionally, we provide operations and maintenance (“O&M”) services to system owners that use solar modules manufactured by us or by other third-party manufacturers. We have substantial, ongoing research and development efforts focused on module and system-level innovations. We are the world’s largest thin-film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our mission is to create enduring value by enabling a world powered by clean, affordable solar energy.
Certain highlights of our financial results and other key operational developments for three months ended June 30, 2016 include the following:
|
•
|
Net sales for the
three
months ended
June 30, 2016
increased
by
4%
to
$934.4 million
compared to
$896.2 million
for the same period in
2015
. The
increase
in net sales was primarily driven by an increase in the volume of modules sold to third parties, higher revenue from construction on the Desert Stateline project, and the commencement of construction on the Astoria and Butler projects in late 2015 and early 2016. This increase in net sales was partially offset by the sale of majority interests in the North Star and Lost Hills projects in 2015 and the substantial completion of the Imperial Solar Energy Center West project in 2015.
|
|
•
|
Gross profit for the
three
months ended
June 30, 2016
increased
2.1 percentage points
to
20.5%
from
18.4%
for the same period in
2015
. The
increase
in gross profit was primarily the result of higher gross margins on modules sold directly to third parties and as part of our systems business projects, driven mainly by reductions in the cost per watt of our modules.
|
|
•
|
As of
June 30, 2016
, we had
30
installed production lines with an annual global manufacturing capacity of approximately
3.2 GW
at our manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia. We produced
0.8 GW
of solar modules during the
three
months ended
June 30, 2016
, which represented a
39%
increase
from the same period in
2015
. This
increase
in production was primarily driven by higher capacity utilization, improved module conversion efficiencies, and additional manufacturing capacity. We expect to produce approximately
3.1 GW
of solar modules during
2016
.
|
|
•
|
In June 2016, our executive management elected to reallocate our crystalline silicon module production capacity to support a new assembly line dedicated to our cadmium telluride (“CdTe”) Series 5 module offering. As a result, we are ending production of our crystalline silicon modules to focus on our core CdTe module technology and utility-scale PV solar power systems. In connection with these restructuring activities, we incurred charges of $84.6 million during the three months ended June 30, 2016. We also incurred charges of $0.9 million for severance benefits to terminated employees associated with other restructuring activities.
|
|
•
|
During the
three
months ended
June 30, 2016
, we ran our manufacturing facilities at
100%
capacity utilization, which represented a
15 percentage point
increase
from the same period in
2015
.
|
|
•
|
The average conversion efficiency of our modules was
16.2%
for the
three
months ended
June 30, 2016
, which was an improvement of
0.8 percentage points
from the
three
months ended
June 30, 2015
.
|
|
•
|
New bookings during the period from April 28, 2016 to
August 3, 2016
included
a 126 MW AC solar power project in California and 60 MW AC of solar power projects in India
.
|
Market Overview
The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. In the aggregate, we believe manufacturers of solar modules and cells have, relative to global demand, significant installed production capacity and the ability for additional capacity expansion. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing. Additionally, intense competition at the system level can result in an environment in which pricing falls rapidly, thereby further increasing demand for solar energy solutions but constraining the ability for project developers; engineering, procurement, and construction (“EPC”) companies; and vertically-integrated solar companies such as First Solar to sustain meaningful and consistent profitability. In light of such market realities, we are executing our Long Term Strategic Plan, Vision 2020 (“Long Term Strategic Plan”) as described below, under which we are focusing on our competitive strengths. Such strengths include our advanced module and system technologies as well as our differentiated, vertically-integrated business model that enables us to provide utility-scale PV solar energy solutions to key geographic markets with immediate electricity needs.
44
Worldwide solar markets continue to develop, in part aided by demand elasticity resulting from declining industry average selling prices, both at the module and system level, which make solar power more affordable to new markets, and we have continued to develop our localized presence and expertise in such markets. We are developing, constructing, or operating multiple solar projects around the world, many of which are the largest or among the largest in their regions. In North America, we continue to execute on our advanced-stage utility-scale project pipeline, which includes the construction of some of the world’s largest PV solar power systems. We expect a substantial portion of our consolidated net sales, operating income, and cash flows through the end of 2016 to be derived from these projects. We continue to advance the development and selling efforts for the other projects included in our advanced-stage utility-scale project pipeline, develop our early-to-mid stage project pipeline, and evaluate acquisitions of projects to expand our advanced-stage utility-scale project pipeline.
Lower industry module and system pricing, while currently challenging for certain solar manufacturers (particularly manufacturers with high cost structures), is expected to continue to contribute to global market diversification and volume elasticity. Over time, declining average selling prices are consistent with the erosion of one of the primary historical constraints to widespread solar market penetration, its affordability. In the near term, however, declining average selling prices could adversely affect our results of operations. If competitors reduce pricing to levels below their costs, bid aggressively low prices for power purchase agreements (“PPAs”) and EPC agreements, or are able to operate at negative or minimal operating margins for sustained periods of time, our results of operations could be further adversely affected. We continue to mitigate this uncertainty in part by executing on and building our advanced-stage utility-scale systems pipeline, executing on our module efficiency improvement and BoS cost reduction roadmaps, continuing the development of key geographic markets, and implementing certain cost reduction initiatives.
We continue to face intense competition from manufacturers of crystalline silicon solar modules and other types of solar modules and PV solar power systems. Solar module manufacturers compete with one another in several module performance attributes, including conversion efficiency, energy density, reliability, and selling price per watt, and, with respect to PV solar power systems, net present value, return on equity, and levelized cost of electricity (“LCOE”), meaning the net present value of total life cycle costs of the system divided by the quantity of energy which is expected to be produced over the system’s life.
We believe we are among the lowest cost PV module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness is reflected in the price at which we sell our modules and fully integrated PV solar power systems and enables our systems to compete favorably. Our cost competitiveness is based in large part on our module conversion efficiency, proprietary manufacturing technology (which enables us to produce a CdTe module in less than 3.5 hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), our scale, and our operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of the semiconductor material that is used to manufacture traditional 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. Polysilicon costs have had periods of decline over the past several years, contributing to a decline in our relative manufacturing cost competitiveness over traditional crystalline silicon module manufacturers.
Given the smaller size (sometimes referred to as form factor) of our current CdTe modules compared to certain types of crystalline silicon modules, we may incur higher labor and BoS costs associated with the construction of systems using our modules. Thus, to compete effectively on an LCOE basis, our current modules may need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules with larger form factors. As part of our BoS cost reduction roadmap, we recently introduced our Series 5 module technology, which includes a larger form factor and substantially higher wattage, thereby reducing the number of electrical connections and hardware required for installation. The resulting labor and material savings are expected to represent a significant improvement versus current technologies and a substantial reduction in total installed costs, once Series 5 production begins, resulting in improved project returns as BoS costs represent a significant portion of the costs associated with the construction of a typical utility-scale system.
In terms of energy density, in many climates, our CdTe modules provide a significant energy yield advantage over conventional crystalline silicon solar modules of equivalent efficiency rating. For example, in humid climates, our CdTe modules provide a superior spectral response, and in hot climates, our CdTe modules provide a superior temperature coefficient. As a result, at temperatures above 25°C (standard test conditions), our CdTe modules produce more energy than competing conventional crystalline silicon solar modules with an equivalent efficiency rating. This advantage provides stronger system performance in high temperature climates, which is particularly advantageous as the vast majority of a system’s generation, on average (in typical high insolation climates), occurs when module temperatures are above 25°C. In addition, our CdTe modules provide a better shading response than competing conventional crystalline silicon solar modules, which may lose up to three times as much power as CdTe modules when shading occurs. As a result of these factors, our PV solar power systems can produce more annual energy at a lower LCOE than competing systems with the same nameplate capacity.
45
While our modules and PV solar power systems are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in additional margin compression, further declines in the average selling prices of our modules and systems, erosion in our market share for modules and systems, decreases in the rate of net sales growth, and/or declines in overall net sales. We continue to focus on enhancing the competitiveness of our solar modules and PV solar power systems by accelerating progress along our module efficiency improvement and BoS cost reduction roadmaps, continuing to make technological advances at the system level, using innovative installation techniques and know-how, and leveraging volume procurement around standardized hardware platforms. Such procurement efforts include the use of high-quality, conventional BoS components as we have recently begun phasing out the use of our proprietary trackers and fixed mounting structures to further reduce system costs and streamline our operations.
As we continue to expand our systems business into key geographic markets, we can offer value beyond solar modules, reduce our exposure to module-only competition, provide differentiated product offerings to minimize the impact of solar module commoditization, and provide comprehensive utility-scale PV solar power system solutions that reduce solar electricity costs. Thus, our systems business allows us to play a more active role than many of our competitors in managing the demand for our solar modules. Finally, we continue to form and develop strong relationships with our customers and strategic partners around the world and continue to refine our product offerings, including EPC capabilities and O&M services, in order to enhance the competitiveness of systems using our modules. For example, we have formed, and expect in the future to form, joint ventures or other business arrangements with project developers in certain strategic markets in order to provide our modules and utility-scale PV solar energy solutions to the projects developed by such ventures.
Certain Trends and Uncertainties
We believe that our operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations. See Part I, Item 1A: “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2015
filed with the SEC on
February 24, 2016
for a discussion of other risks (the “Risk Factors”) that may affect our financial condition and results of operations.
Long Term Strategic Plan, Vision 2020
Our Long Term Strategic Plan is a long-term roadmap to achieve our technology, growth, and cost leadership objectives. In executing our Long Term Strategic Plan, we are focusing on providing utility-scale PV solar energy solutions using our modules to key geographic markets that we believe have a compelling need for mass-scale PV electricity, including markets throughout the Americas, Asia, the Middle East, and Africa. As part of our Long Term Strategic Plan, we are focusing on opportunities in which our PV solar energy solutions can compete directly with fossil fuel offerings on an LCOE or similar basis, or complement such fossil fuel electricity offerings. Execution of the Long Term Strategic Plan entails a prioritization of market opportunities worldwide relative to our core strengths and a corresponding allocation of resources around the globe. This prioritization involves a focus on our core module and utility-scale offerings and exists within a current market environment that includes rooftop and distributed generation solar, particularly in the U.S. While it is unclear how rooftop and distributed generation solar might impact our core utility-scale offerings in the next several years, we believe that utility-scale solar will continue to be a compelling solar offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix.
We are closely evaluating and managing the appropriate level of resources required as we pursue the most advantageous and cost effective projects and partnerships in our target markets. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy, to optimize the design and logistics around our PV solar energy solutions, and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. We expect that, over time, an increasing portion of our consolidated net sales, operating income, and cash flows may come from solar offerings in the key geographic markets described above as we execute on our Long Term Strategic Plan. The timing, execution, and financial impacts of our Long Term Strategic Plan are subject to risks and uncertainties, as described in the Risk Factors. We are focusing our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with high solar resources, significant current or projected electricity demand, and/or relatively high existing electricity prices. As part of these efforts, we continue to optimize resources globally, including business development, sales personnel, and other supporting professional staff in target markets.
46
Joint ventures or other strategic arrangements with partners are a key part of our Long Term Strategic Plan, and we generally use such arrangements to expedite our penetration of various key markets and establish relationships with potential customers. We also enter into joint ventures or strategic arrangements with customers or other entities to maximize the value of particular projects. Some of these arrangements involve and are expected in the future to involve significant investments or other allocations of capital. We continue to develop relationships with customers in these strategic markets with a view to creating opportunities for utility-scale PV solar power systems. We sell such systems directly to end customers, including utilities, independent power producers, commercial and industrial companies, and other system owners. Depending on the market opportunity, our sales offerings may range from module-only sales, to module sales with a range of development, EPC services, and other solutions, to full turn-key PV solar power system sales. We expect these offerings to continue to evolve over time as we work with our customers to optimize how our PV solar energy solutions can best meet our customers’ energy and economic needs.
In order to create or maintain a market position in certain strategically targeted markets, our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins, which may adversely affect our results of operations. We expect the profitability associated with our various sales offerings to vary from one another over time, and possibly vary from our internal long-range profitability expectations and targets, depending on the market opportunity and the relative competitiveness of our offerings compared with other energy solutions, fossil fuel-based or otherwise, that are available to potential customers. In addition, as we execute on our Long Term Strategic Plan, we will continue to monitor and adapt to any changing dynamics in the market set of potential buyers of solar project assets. Market environments with few potential project buyers and a higher cost of capital would generally exert downward pressure on the potential revenue from the uncontracted solar project assets we are developing, whereas, conversely, market environments with many potential project buyers and a lower cost of capital would likely have a favorable impact on the potential revenue from such uncontracted solar project assets.
We expect to use our working capital, project financing, or availability under our Revolving Credit Facility to finance the construction of certain PV solar power systems for strategic purposes or to maximize the value of such systems at the time of sale. From time to time, we may temporarily own and operate certain PV solar power systems, often with the intention to sell at a later date. We may also elect to construct and temporarily retain ownership interests in systems for which there is no PPA with an off-taker, such as a utility, but rather an intent to sell the electricity produced by the system on an open contract basis until the system is sold. Additionally, our joint ventures and other business arrangements with strategic partners have and may in the future result in us temporarily retaining a noncontrolling ownership interest in the underlying systems projects we develop, supply modules to, or construct potentially for a period of up to several years. Such business arrangements could become increasingly important to our competitive profile in markets globally, including North America. In each of the above mentioned examples, we may retain such ownership interests in a consolidated or unconsolidated separate entity.
In terms of our growth objectives, we continually evaluate forecasted global demand and our addressable market, and seek to effectively balance manufacturing capacity with market demand. We have the potential to increase our annual manufacturing capacity through capital investments to more than 6 GW by 2020. To the extent we invest in additional manufacturing capacity over the next several years in response to market demand, such capacity expansion would require significant internal and possibly external sources of liquidity and would be subject to certain risks and uncertainties described in the Risk Factors, including those described under the headings “Our future success depends on our ability to effectively balance manufacturing production with market demand and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties” and “If any future production lines are not built in line with our committed schedules it may impair any future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.”
8point3 Energy Partners LP
In June 2015, 8point3 Energy Partners LP (the “Partnership”), a limited partnership formed by First Solar and SunPower Corporation (the “Sponsors”), completed its initial public offering (the “IPO”). As part of the IPO, we contributed various projects to a subsidiary of the Partnership in exchange for a 31% interest in the entity. The Partnership owns and operates a portfolio of solar energy generation projects and is expected to acquire additional projects from the Sponsors. In addition, the Partnership is expected to provide the Sponsors with a competitive cost of capital and greater optionality in the project sales process. Given the broader economic factors currently impacting the yieldco sector in general, including yieldco equity valuations generally, the timing and execution of project sales to the Partnership are subject to market conditions. For additional information, see the Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2015
and
“Note 10. Investments in Unconsolidated Affiliates and Joint Ventures – 8point3 Energy Partners LP”
of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
47
Construction of Some of the World’s Largest PV Solar Power Systems
We continue to execute on our advanced-stage utility-scale project pipeline and expect a substantial portion of our consolidated net sales, operating income, and cash flows through 2016 to be derived from several large projects in this pipeline, including the following contracted projects which will be among the world’s largest PV solar power systems: the 300 MW Desert Stateline project, located in San Bernardino County, California; the 175 MW Astoria Project, located in Kern County, California; and the 147 MW Taylor project in Taylor County, Georgia. Our advanced-stage utility-scale project pipeline also includes the following projects which are not yet sold or contracted: the 310 MW Tribal Solar project; the 280 MW California Flats project, located in Monterey County, California; the 250 MW Moapa project, located in Clark County, Nevada; the 150 MW Rosamond project located in Kern County, California; the 150 MW Sun Streams project, located in Maricopa County, Arizona; and the 141 MW Luz del Norte project located near Copiapó, Chile. Please see the tables under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for additional information about these and other projects within our systems business advanced-stage project pipeline.
The construction progress and sales of these projects are subject to risks and delays as described in the Risk Factors. A delay in the substantial completion and/or sale of certain of these projects beyond the end of 2016 could have a significant adverse impact on such projects’ value and expected revenue. Furthermore, the revenue recognition of our system projects is in many cases not linear in nature due to the timing of when all revenue recognition criteria are met, and consequently, period-over-period comparisons of results of operations may not be meaningful. Expected revenue from projects without a PPA, for which electricity will be sold on an open contract basis, may be subject to greater variability and uncertainty based on market factors compared to projects with a PPA.
Systems Project Pipeline
The following tables summarize, as of
August 3, 2016
, our approximately
3.2 GW
systems business advanced-stage project pipeline. As of
June 30, 2016
, for the Projects Sold/Under Contract in our advanced-stage project pipeline of approximately
1.0 GW
, we have recognized revenue with respect to the equivalent of approximately
0.8 GW
. Such MW equivalent amount refers to the ratio of revenue recognized for the Projects Sold/Under Contract compared to the total contracted revenue for such projects, multiplied by the total MW for such projects. The remaining revenue to be recognized subsequent to
June 30, 2016
for the Projects Sold/Under Contract is expected to be approximately
$0.6 billion
. The majority of such amount is expected to be recognized as revenue through the later of the substantial completion or closing dates of the projects. The remaining revenue to be recognized does not have a direct correlation to expected remaining module shipments for such Projects Sold/Under Contract as expected module shipments do not represent total systems revenues and do not consider the timing of when all revenue recognition criteria are met, including the timing of module installation. The actual volume of modules installed in our Projects Sold/Under Contract will be greater than the project size in MW AC as module volumes required for a project are based upon MW DC, which will be greater than the MW AC size pursuant to a DC-AC ratio typically ranging from
1.2 to 1.3
. Such ratio varies across different projects due to various system design factors. Projects are removed from our advanced-stage project pipeline tables below once we have substantially completed construction and after substantially all revenue has been recognized. Projects, or portions of projects, may also be removed from the tables below in the event an EPC-contracted or partner-developed project does not obtain permitting or financing, an unsold or uncontracted project is not sold or contracted due to the changing economics of the project or other factors, or we decide to temporarily own and operate such projects based on strategic opportunities or market factors.
We continually seek to make additions to our advanced-stage project pipeline. We are actively developing our early to mid-stage project pipeline in order to secure PPAs and are also pursuing opportunities to acquire advanced-stage projects, which already have PPAs in place. New additions to our project pipeline during the period from April 28, 2016 to
August 3, 2016
included
a 126 MW AC solar power project in California and 60 MW AC of solar power projects in India
.
48
Projects Sold/Under Contract
(Includes uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements, including partner developed projects that we will be or are constructing.)
|
As of June 30, 2016
|
|||||||
|
Project/Location
|
Project Size in MW AC (1)
|
PPA Contracted Partner
|
EPC Contract/Partner Developed Project
|
Expected Year Revenue Recognition Will Be Completed By
|
Percentage Complete
|
Percentage of Revenue Recognized
|
|
|
Stateline, California
|
300
|
|
SCE
|
(2)
|
2016
|
96%
|
94%
|
|
Astoria, California
|
175
|
|
(3)
|
Recurrent
|
2016
|
80%
|
80%
|
|
Taylor, Georgia
|
147
|
|
(4)
|
Southern Company
|
2016
|
62%
|
62%
|
|
East Pecos Solar, Texas
|
119
|
|
Austin Energy
|
Southern Company
|
2016
|
39%
|
39%
|
|
Butler, Georgia
|
103
|
|
Georgia Power
|
Southern Company
|
2016
|
68%
|
68%
|
|
Decatur Parkway Solar, Georgia
|
83
|
|
Georgia Power
|
Southern Company
|
2016
|
97%
|
97%
|
|
Shams Ma’an, Jordan
|
53
|
|
NEPCO (5)
|
(3)
|
2016
|
88%
|
—%
|
|
Elm City, North Carolina
|
40
|
|
UOG (6)
|
Duke Energy
|
2016
|
97%
|
97%
|
|
Helios, Honduras
|
25
|
|
ENEE (7)
|
Grupo Terra
|
2017
|
1%
|
—%
|
|
Total
|
1,045
|
|
|||||
Projects with Executed PPA Not Sold/Not Contracted
|
Project/Location
|
Project Size in MW AC (1)
|
Fully Permitted
|
PPA Contracted Partner
|
Expected or Actual Substantial Completion Year
|
Percentage Complete as of June 30, 2016
|
|
|
Tribal Solar
|
310
|
|
No
|
SCE
|
2019
|
1%
|
|
California Flats, California
|
280
|
|
No
|
PG&E / Apple Inc. (8)
|
2018
|
23%
|
|
Moapa, Nevada
|
250
|
|
Yes
|
LADWP
|
2016
|
93%
|
|
India (Multiple Locations)
|
250
|
|
No
|
(9)
|
2016/2017
|
59%
|
|
Rosamond, California
|
150
|
|
Yes
|
SCE
|
2019
|
11%
|
|
Sun Streams, Arizona
|
150
|
|
Yes
|
SCE
|
2019
|
4%
|
|
Luz del Norte, Chile
|
141
|
|
Yes
|
(10)
|
2016
|
98%
|
|
American Kings Solar, California
|
126
|
|
No
|
(3)
|
2020
|
3%
|
|
Willow Springs, California
|
100
|
|
Yes
|
SCE
|
2019
|
16%
|
|
Sunshine Valley, Nevada
|
100
|
|
Yes
|
SCE
|
2019
|
1%
|
|
Switch Station 1, Nevada
|
100
|
|
No
|
Nevada Power Company
|
2017
|
15%
|
|
Switch Station 2, Nevada
|
79
|
|
No
|
Nevada Power Company / Sierra Pacific Power Company
|
2017
|
2%
|
|
Japan
|
59
|
|
Yes
|
(3)
|
2017/2018
|
4%
|
|
Miyagi, Japan
|
40
|
|
No
|
Tohoku Electric Power Company
|
2018
|
8%
|
|
Cuyama, California
|
40
|
|
Yes
|
PG&E
|
2017
|
23%
|
|
Total
|
2,175
|
|
||||
49
|
(1)
|
The volume of modules installed in MW DC will be higher than the MW AC size pursuant to a DC-AC ratio typically ranging from
1.2 to 1.3
; such ratio varies across different projects due to various system design factors
|
|
(2)
|
Southern Company holds a 66% controlling interest in the project
|
|
(3)
|
Contracted but not specified
|
|
(4)
|
PPA contracted partners include Cobb Electric Membership Corporation, Flint Electric Membership Corporation, and Sawnee Electric Membership Corporation
|
|
(5)
|
NEPCO is defined as National Electric Power Company, the country of Jordan’s regulatory authority for power generation and distribution and a consortium of investors
|
|
(6)
|
UOG is defined as Utility Owned Generation
|
|
(7)
|
ENEE is defined as Empresa Nacional de Energía Eléctrica
|
|
(8)
|
PG&E 150 MW AC and Apple Inc. 130 MW AC
|
|
(9)
|
Southern Power Distribution Company of Telangana State Ltd – 110 MW AC; Andhra Pradesh Southern Power Distribution Company Ltd – 80 MW AC; Gulbarga Electricity Supply Co. – 20 MW AC; Bengaluru Electricity Supply Co. – 20 MW AC; and Chamundeshwari Electricity Supply Co. – 20 MW AC
|
|
(10)
|
PPAs executed for approximately 70 MW AC of capacity; remaining electricity to be sold on an open contract basis
|
Results of Operations
During the three months ended September 30, 2015, we revised our previously issued financial statements, including periods presented in this Quarterly Report on Form 10-Q, to properly record a liability associated with an uncertain tax position related to income of a foreign subsidiary. All financial information presented herein was revised to reflect the correction of such items. See “Note 1. Basis of Presentation – Revision of Previously Issued Financial Statements” to our condensed consolidated financial statements for additional information.
The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Net sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost of sales
|
79.5
|
%
|
81.6
|
%
|
74.5
|
%
|
85.1
|
%
|
||||
|
Gross profit
|
20.5
|
%
|
18.4
|
%
|
25.5
|
%
|
14.9
|
%
|
||||
|
Research and development
|
3.5
|
%
|
3.3
|
%
|
3.5
|
%
|
4.7
|
%
|
||||
|
Selling, general and administrative
|
6.8
|
%
|
7.9
|
%
|
7.4
|
%
|
10.1
|
%
|
||||
|
Production start-up
|
—
|
%
|
0.8
|
%
|
—
|
%
|
1.0
|
%
|
||||
|
Restructuring and asset impairments
|
9.2
|
%
|
—
|
%
|
4.8
|
%
|
—
|
%
|
||||
|
Operating income (loss)
|
0.9
|
%
|
6.4
|
%
|
9.8
|
%
|
(1.0
|
)%
|
||||
|
Foreign currency loss, net
|
(0.3
|
)%
|
(0.3
|
)%
|
(0.3
|
)%
|
(0.2
|
)%
|
||||
|
Interest income
|
0.7
|
%
|
0.7
|
%
|
0.7
|
%
|
0.8
|
%
|
||||
|
Interest expense, net
|
(0.8
|
)%
|
(0.1
|
)%
|
(0.7
|
)%
|
(0.1
|
)%
|
||||
|
Other income (expense), net
|
0.7
|
%
|
(0.1
|
)%
|
2.4
|
%
|
(0.2
|
)%
|
||||
|
Income tax (expense) benefit
|
(1.0
|
)%
|
3.7
|
%
|
(2.4
|
)%
|
2.9
|
%
|
||||
|
Equity in earnings of unconsolidated affiliates, net of tax
|
1.1
|
%
|
0.2
|
%
|
0.9
|
%
|
0.1
|
%
|
||||
|
Net income
|
1.4
|
%
|
10.5
|
%
|
10.3
|
%
|
2.4
|
%
|
||||
50
Segment Overview
We operate our business in two segments. Our components segment involves the design, manufacture, and sale of CdTe solar modules, which convert sunlight into electricity, and our systems segment includes the development, construction, operation, and maintenance of PV solar power systems, which primarily use our solar modules.
See
Note 18. “Segment Reporting”
to our condensed consolidated financial statements included with this Quarterly Report on Form 10-Q for more information. See also Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for a description of the systems projects in our advanced-stage project pipeline.
Product Revenue
The following table sets forth the total amounts of solar module and solar power system net sales for the
three
and
six
months ended
June 30, 2016
and
2015
. For the purposes of the following table, (i) solar module revenue is composed of revenue from the sale of solar modules to third parties, which does not include any modules sold as part of our PV solar power systems, and (ii) solar power system revenue is composed of revenue from the sale of PV solar power systems and related products and services, including any modules installed in such systems and any revenue generated by such systems (in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
|||||||||||||||||||||||||
|
Solar module revenue
|
$
|
157,464
|
|
$
|
18,823
|
|
$
|
138,641
|
|
737
|
%
|
$
|
212,731
|
|
$
|
119,956
|
|
$
|
92,775
|
|
77
|
%
|
||||||||
|
Solar power system revenue
|
776,917
|
|
877,394
|
|
(100,477
|
)
|
(11
|
)%
|
1,570,134
|
|
1,245,470
|
|
324,664
|
|
26
|
%
|
||||||||||||||
|
Net sales
|
$
|
934,381
|
|
$
|
896,217
|
|
$
|
38,164
|
|
4
|
%
|
$
|
1,782,865
|
|
$
|
1,365,426
|
|
$
|
417,439
|
|
31
|
%
|
||||||||
Solar module revenue to third parties
increased
$138.6 million
for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
primarily due to a 740% increase in the volume of watts sold driven by several large module supply arrangements. Solar power system revenue
decreased
$100.5 million
for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
primarily due to lower revenue from module plus transactions, the sale of majority interests in the North Star and Lost Hills projects in 2015, and the substantial completion of the Imperial Solar Energy Center West project in 2015. This decrease in revenue was partially offset by higher revenue from construction on the Desert Stateline project and the commencement of construction on the Astoria and Butler projects in late 2015 and early 2016. See Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for the percentage complete and percentage of revenue recognized for current projects.
Solar module revenue to third parties
increased
$92.8 million
for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily as a result of a 66% increase in the volume of watts sold and a 7% increase in the average selling price per watt. Solar power system revenue
increased
$324.7 million
for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily from the sale of an additional interest in and construction on the Desert Stateline project, and the commencement of construction on the Astoria, Taylor, and Butler projects in late 2015 and early 2016. This increase in revenue was partially offset by lower revenue from the sale of majority interests in the North Star and Lost Hills projects in 2015, the substantial completion of the Imperial Solar Energy Center West project in 2015, and lower revenue from module plus transactions. See Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for the percentage complete and percentage of revenue recognized for current projects.
Three
and
Six
Months Ended
June 30, 2016
and
2015
Net sales
Components Business
We generally price and sell our solar modules per watt of nameplate power. During the
three
and
six
months ended
June 30, 2016
, a significant portion of net sales for our components business included modules installed in our PV solar power systems described below under “Net sales – Systems Business.” Other than the modules included in our systems, we sold the majority of our solar modules to integrators and operators of systems in the United States, India, and the United Arab Emirates.
51
From time to time, we enter into module sales agreements with customers worldwide for specific projects or volumes of modules. Such agreements are generally short-term in nature. During the
three
months ended
June 30, 2016
and
2015
, less than
1%
and
33%
, respectively, of our components business net sales, excluding modules installed in our PV solar power systems, were denominated in Euro and were subject to fluctuations in the exchange rate between the Euro and the U.S. dollar. During the
six
months ended
June 30, 2016
and
2015
,
1%
and
13%
, respectively, of our components business net sales, excluding modules installed in our PV solar power systems, were denominated in Euro and were subject to fluctuations in the exchange rate between the Euro and the U.S. dollar.
We transfer title and risk of loss to the customer and recognize revenue upon shipment or delivery, depending on the terms of the underlying sales contracts. Pricing is typically fixed or determinable at the time of shipment, and our customers generally do not have extended payment terms or rights of return under these contracts. The revenue recognition policies for our components business are described further in
Note 2. “Summary of Significant Accounting Policies”
to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Systems Business
Through our fully integrated systems business, we provide complete turn-key PV solar power systems, or solar solutions, which may include project development, EPC services, and O&M services. Additionally, we may temporarily own and operate certain of our PV solar power systems, which are also included within our systems business. We typically use the percentage-of-completion method using actual costs incurred over total estimated costs to construct a project (including module costs) as our standard accounting policy and apply this method after all revenue recognition criteria have been met. There are also instances in which we recognize revenue after a project has been completed, primarily due to a project not being sold prior to completion or because all revenue recognition criteria have not been met. The revenue recognition policies for our systems business are described in further detail in
Note 2. “Summary of Significant Accounting Policies”
to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
The following table shows net sales by reportable segment for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Components
|
$
|
449,405
|
|
$
|
321,444
|
|
$
|
127,961
|
|
40
|
%
|
$
|
739,909
|
|
$
|
547,061
|
|
$
|
192,848
|
|
35
|
%
|
||||||||
|
Systems
|
484,976
|
|
574,773
|
|
(89,797
|
)
|
(16
|
)%
|
1,042,956
|
|
818,365
|
|
224,591
|
|
27
|
%
|
||||||||||||||
|
Net sales
|
$
|
934,381
|
|
$
|
896,217
|
|
$
|
38,164
|
|
4
|
%
|
$
|
1,782,865
|
|
$
|
1,365,426
|
|
$
|
417,439
|
|
31
|
%
|
||||||||
Net sales from our components segment, which includes solar modules used in our systems projects,
increased
$128.0 million
for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
primarily due to a 48% increase in the volume of watts sold, partially offset by a 5% decrease in the average selling price per watt. Net sales from our systems segment, which excludes solar modules used in our systems projects,
decreased
by
$89.8 million
for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
primarily due the sale of majority interests in the North Star and Lost Hills projects in 2015 and the substantial completion of the Imperial Solar Energy Center West project in 2015. This decrease in revenue was partially offset by higher revenue from construction on the Desert Stateline project and the commencement of construction on the Astoria and Butler projects in late 2015 and early 2016.
Net sales from our components segment, which includes solar modules used in our systems projects,
increased
$192.8 million
for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily as a result of a 35% increase in the volume of watts sold. Net sales from our systems segment, which excludes solar modules used in our systems projects,
increased
by
$224.6 million
for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily from the sale of an additional interest in and construction on the Desert Stateline project and the commencement of construction on the Astoria, Taylor, and Butler projects in late 2015 and early 2016. This increase in revenue was partially offset by lower revenue from the sale of majority interests in the North Star and Lost Hills projects in 2015 and the substantial completion of the Imperial Solar Energy Center West project in 2015.
52
Cost of sales
Components Business
Our cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, cadmium telluride and other thin-film semiconductors, laminate materials, connector assemblies, edge seal materials, and other materials and components. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead such as engineering, equipment maintenance, environmental health and safety, quality and production control, information technology, and procurement costs. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, and costs associated with shipping and warranties.
We include the sale of solar modules manufactured by our components business and used by our systems business within net sales of our components business. Therefore, the related cost of sales is also included within our components business.
Systems Business
For our systems business, project-related costs include development costs (including transmission upgrade costs, interconnection fees, and permitting costs), standard EPC costs (consisting primarily of BoS costs for inverters, electrical and mounting hardware, project management and engineering costs, and construction labor costs), and site specific costs.
The following table shows cost of sales
by reportable segment for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Components
|
$
|
341,259
|
|
$
|
263,608
|
|
$
|
77,651
|
|
29
|
%
|
$
|
548,782
|
|
$
|
469,836
|
|
$
|
78,946
|
|
17
|
%
|
||||||||
|
Systems
|
401,957
|
|
468,126
|
|
(66,169
|
)
|
(14
|
)%
|
779,973
|
|
692,126
|
|
87,847
|
|
13
|
%
|
||||||||||||||
|
Total cost of sales
|
$
|
743,216
|
|
$
|
731,734
|
|
$
|
11,482
|
|
2
|
%
|
$
|
1,328,755
|
|
$
|
1,161,962
|
|
$
|
166,793
|
|
14
|
%
|
||||||||
|
% of net sales
|
79.5
|
%
|
81.6
|
%
|
|
|
|
|
74.5
|
%
|
85.1
|
%
|
||||||||||||||||||
Our cost of sales
increased
$11.5 million
, or
2%
, and
decreased
2.1 percentage points
as a percent of net sales for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
. The
increase
in cost of sales was primarily driven by an
$77.7 million
increase
in our components segment cost of sales as a result of the following:
|
•
|
Higher costs of $125.4 million associated with the increased volume of modules sold directly to third parties and as part of our systems business projects; and
|
|
•
|
Higher inventory write-downs of $10.1 million primarily due to the end of our crystalline silicon module production; partially offset by
|
|
•
|
Continued reductions in the cost per watt of our solar modules, which decreased cost of sales by $62.1 million.
|
This net increase was partially offset by a
$66.2 million
decrease
in our systems segment cost of sales associated with the volume of projects under construction and the timing of when all revenue recognition criteria were met.
Our cost of sales
increased
$166.8 million
, or
14%
, and
decreased
10.6 percentage points
as a percent of net sales for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
. The
increase
in cost of sales was primarily the result of a
$78.9 million
increase
in our components segment cost of sales due to the following:
|
•
|
Higher costs of $161.5 million associated with the increased volume of modules sold directly to third parties and as part of our systems business projects and
|
|
•
|
Higher inventory write-downs of $14.7 million primarily due to the end of our crystalline silicon module production; partially offset by
|
•
Continued reductions in the cost per watt of our solar modules, which decreased cost of sales by $102.5 million.
Our systems segment cost of sales
increased
$87.8 million
due to the volume of projects under construction and the timing of when all revenue recognition criteria were met, partially offset by a favorable mix of lower cost projects.
53
Gross profit
Gross profit is affected by numerous factors, including the selling prices of our modules and systems, our manufacturing costs, BoS costs, project development costs, the capacity utilization of our manufacturing facilities, and foreign exchange rates. Gross profit is also affected by the mix of net sales generated by our components and systems businesses. Gross profit for our systems business excludes the net sales and cost of sales for solar modules used in our systems projects as these amounts are included in the gross profit of our components business.
The following table shows gross profit for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Gross profit
|
$
|
191,165
|
|
$
|
164,483
|
|
$
|
26,682
|
|
16
|
%
|
$
|
454,110
|
|
$
|
203,464
|
|
$
|
250,646
|
|
123
|
%
|
||||||||
|
% of net sales
|
20.5
|
%
|
18.4
|
%
|
|
|
|
|
25.5
|
%
|
14.9
|
%
|
||||||||||||||||||
Gross profit
increased
2.1 percentage points
to
20.5%
during the
three
months ended
June 30, 2016
from
18.4%
during the
three
months ended
June 30, 2015
, primarily as a result of higher gross margins on modules sold directly to third parties and as part of our systems business projects, driven mainly by reductions in the cost per watt of our modules. Gross profit
increased
10.6 percentage points
to
25.5%
during the
six
months ended
June 30, 2016
from
14.9%
during the
six
months ended
June 30, 2015
, primarily due to the favorable mix of higher gross profit projects sold and under construction during the period and the higher gross margins on modules sold directly to third parties and as part of our systems business projects as described above.
Research and development
Research and development expense consists primarily of salaries and personnel-related costs, the cost of products, materials, and outside services used in our process and product research and development activities for both the components and systems businesses, and depreciation and amortization expense associated with research and development specific facilities and equipment. The majority of our research and development expense is attributable to our components segment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules and PV solar power systems using our modules.
The following table shows research and development expense for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Research and development
|
$
|
32,931
|
|
$
|
29,479
|
|
$
|
3,452
|
|
12
|
%
|
$
|
63,118
|
|
$
|
64,235
|
|
$
|
(1,117
|
)
|
(2
|
)%
|
||||||||
|
% of net sales
|
3.5
|
%
|
3.3
|
%
|
|
|
|
|
3.5
|
%
|
4.7
|
%
|
||||||||||||||||||
The
increase
in research and development expense for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
was primarily due to higher costs for outside services and equipment related expenses, partially offset by lower employee compensation expense. During the
three
months ended
June 30, 2016
, the average conversion efficiency of our CdTe solar modules produced was
16.2%
compared to
15.4%
for the
three
months ended
June 30, 2015
.
The
decrease
in research and development expense for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
was primarily due to lower employee compensation expense and reduced material and module testing costs, partially offset by higher costs for outside services. During the
six
months ended
June 30, 2016
, the average conversion efficiency of our CdTe solar modules produced was
16.2%
compared to
15.1%
for the
six
months ended
June 30, 2015
.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expenses, and other business development and selling expenses. Our components and systems businesses each have their own administrative functions, such as accounting, legal, finance, project finance, and procurement. Costs for these functions are recorded and included within selling, general and administrative expense of the respective segment. Our key corporate support functions consist primarily of company-wide tax, treasury, accounting, human resources, marketing, legal, finance, investor relations, information technology, communications, government relations, and executive management. These corporate functions and the assets supporting such functions benefit both the components and systems segments. We allocate corporate costs to the
54
components and systems segments as part of selling, general and administrative costs based upon the estimated benefits provided to each segment from these corporate functions. We determine the estimated benefits provided to each segment for these corporate costs based upon a combination of the estimated time spent by corporate employees supporting each segment and the average relative selling, general and administrative costs incurred by each segment before such corporate allocations.
The following table shows selling, general and administrative expense for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Selling, general and administrative
|
$
|
63,776
|
|
$
|
70,901
|
|
$
|
(7,125
|
)
|
(10
|
)%
|
$
|
131,279
|
|
$
|
138,589
|
|
$
|
(7,310
|
)
|
(5
|
)%
|
||||||||
|
% of net sales
|
6.8
|
%
|
7.9
|
%
|
|
|
|
|
7.4
|
%
|
10.1
|
%
|
||||||||||||||||||
Our selling, general and administrative expense for the
three
and
six
months ended
June 30, 2016
decreased
compared to the
three
and
six
months ended
June 30, 2015
. This decrease was primarily driven by lower professional fees associated with the initial public offering of 8point3 Energy Partners LP and other administrative and legal matters, partially offset by higher business development expense in North America.
Production start-up
Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in production start-up expense as well as costs related to the selection of a new site, including related legal and regulatory costs, to the extent we cannot capitalize these expenditures. In general, we expect production start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition of new production lines at an existing manufacturing facility, primarily due to the additional infrastructure investment required when building an entirely new facility. Production start-up expense is attributable to our components segment.
The following table shows production start-up expense for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Production start-up
|
$
|
55
|
|
$
|
6,970
|
|
$
|
(6,915
|
)
|
(99
|
)%
|
$
|
55
|
|
$
|
13,620
|
|
$
|
(13,565
|
)
|
(100
|
)%
|
||||||||
|
% of net sales
|
—
|
%
|
0.8
|
%
|
|
|
|
|
—
|
%
|
1.0
|
%
|
||||||||||||||||||
During the
three
and
six
months ended
June 30, 2016
we began incurring production start-up expense related to our recently announced Series 5 module offering. During the
three
and
six
months ended
June 30, 2015
, we incurred
$7.0 million
and
$13.6 million
, respectively, of production start-up expense related to the commencement of our TetraSun operations at our manufacturing facility in Kulim, Malaysia and the addition of two production lines at our manufacturing facility in Perrysburg, Ohio.
Restructuring and asset impairments
Restructuring and asset impairments includes those expenses incurred related to material restructuring initiatives and includes any associated asset impairments, costs for employee termination benefits, costs for contract terminations and penalties, and other restructuring related costs. Such restructuring initiatives are intended to align the organization with current business strategies and conditions and to reduce costs.
The following table shows restructuring and asset impairments for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Restructuring and asset impairments
|
$
|
85,532
|
|
$
|
—
|
|
$
|
85,532
|
|
100
|
%
|
$
|
85,532
|
|
$
|
—
|
|
$
|
85,532
|
|
100
|
%
|
||||||||
|
% of net sales
|
9.2
|
%
|
—
|
%
|
|
|
|
|
4.8
|
%
|
—
|
%
|
||||||||||||||||||
55
During the
three
and
six
months ended
June 30, 2016
we incurred
$85.5 million
of restructuring and asset impairment charges primarily related to our decision to end our crystalline silicon module production and reallocate associated resources to our recently announced Series 5 module offering. These charges included impairments of certain crystalline silicon module manufacturing equipment, impairments of developed technology intangible assets for our crystalline silicon module technology, impairments of goodwill from the disposal of our crystalline silicon components reporting unit, and other miscellaneous charges.
See Note 4. “Restructuring and Asset Impairments”
to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
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
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Foreign currency loss, net
|
$
|
(2,723
|
)
|
$
|
(2,957
|
)
|
$
|
234
|
|
8
|
%
|
$
|
(5,963
|
)
|
$
|
(3,178
|
)
|
$
|
(2,785
|
)
|
(88
|
)%
|
||||||||
Foreign currency loss, net for the
three
months ended
June 30, 2016
was consistent with the
three
months ended
June 30, 2015
. Foreign currency loss, net increased during the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily as a result of hedging activities related to our subsidiaries in India and differences between our economic hedge positions and the underlying exposures along with changes in foreign currency rates.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest income also includes interest earned from notes receivable and late customer payments.
The following table shows interest income for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Interest income
|
$
|
6,529
|
|
$
|
6,058
|
|
$
|
471
|
|
8
|
%
|
$
|
12,935
|
|
$
|
11,122
|
|
$
|
1,813
|
|
16
|
%
|
||||||||
Interest income for the
three
and
six
months ended
June 30, 2016
was consistent with the
three
and
six
months ended
June 30, 2015
, respectively.
Interest expense, net
Interest expense is incurred on various debt financings. We capitalize interest expense into our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period.
The following table shows interest expense, net
for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Interest expense, net
|
$
|
(7,151
|
)
|
$
|
(826
|
)
|
$
|
(6,325
|
)
|
766
|
%
|
$
|
(11,793
|
)
|
$
|
(1,020
|
)
|
$
|
(10,773
|
)
|
1,056
|
%
|
||||||||
Interest expense, net of amounts capitalized, for the
three
and
six
months ended
June 30, 2016
increased compared to the
three
and
six
months ended
June 30, 2015
primarily due to higher levels of project specific debt financings and lower interest costs capitalized to certain projects, which were substantially completed during 2016.
56
Other income (expense), net
Other income (expense), net is primarily comprised of miscellaneous items, amounts excluded from hedge effectiveness, and realized gains and losses on the sale of marketable securities and restricted investments.
The following table shows other income (expense), net for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Other income (expense), net
|
$
|
6,753
|
|
$
|
(792
|
)
|
$
|
7,545
|
|
953
|
%
|
$
|
42,306
|
|
$
|
(2,051
|
)
|
$
|
44,357
|
|
2,163
|
%
|
||||||||
Other income (expense), net for the
three
months ended
June 30, 2016
increased compared to the
three
months ended
June 30, 2015
primarily due to the $7.4 million reversal of the outstanding contingent consideration associated with our TetraSun acquisition as a result of our executive management’s decision to end production of our crystalline silicon modules, which adversely affected the likelihood of achieving certain module shipment volume milestones.
See Note 4. “Restructuring and Asset Impairments”
to our condensed consolidated financial statements for further discussion relating to these restructuring activities.
Other income (expense), net for the
six
months ended
June 30, 2016
increased compared to the
six
months ended
June 30, 2015
primarily due to gains of
$37.8 million
on the sale of certain restricted investments as part of an effort to align the currencies of the investments with those of the corresponding collection and recycling liabilities and the reversal of the outstanding contingent consideration associated with our TetraSun acquisition as described above.
Income (loss) before taxes and equity in earnings of unconsolidated affiliates
The following table shows income before taxes and equity in earnings of unconsolidated affiliates for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Components
|
$
|
(6,566
|
)
|
$
|
7,056
|
|
$
|
(13,622
|
)
|
(193
|
)%
|
$
|
74,614
|
|
$
|
(21,001
|
)
|
$
|
95,615
|
|
455
|
%
|
||||||||
|
Systems
|
18,845
|
|
51,560
|
|
(32,715
|
)
|
(63
|
)%
|
136,997
|
|
12,894
|
|
124,103
|
|
962
|
%
|
||||||||||||||
|
Total income before taxes
|
$
|
12,279
|
|
$
|
58,616
|
|
$
|
(46,337
|
)
|
(79
|
)%
|
$
|
211,611
|
|
$
|
(8,107
|
)
|
$
|
219,718
|
|
2,710
|
%
|
||||||||
Components segment income before taxes decreased for the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
primarily as a result of restructuring and asset impairment charges associated with the end of our crystalline silicon module production, partially offset by increases in modules sold directly to third parties and as part of our systems business projects along with reductions in the cost per watt of modules sold. Systems segment income before taxes for the
three
months ended
June 30, 2016
decreased
compared to the
three
months ended
June 30, 2015
primarily due to a lower volume of projects sold and under construction and the timing of when all revenue recognition criteria were met.
Components segment income before taxes increased for the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily as a result of higher gross margins on modules sold directly to third parties and as part of our systems business projects, gains on the sale of certain restricted investments, and the reversal of outstanding contingent consideration associated with our TetraSun acquisition, partially offset by higher restructuring and asset impairment charges associated with the end of our crystalline silicon module production. Systems segment income before taxes for the
six
months ended
June 30, 2016
increased
compared to the
six
months ended
June 30, 2015
primarily due to a higher volume of projects sold and under construction and the timing of when all revenue recognition criteria were met along with a favorable mix of higher gross profit projects.
57
Income tax (expense) benefit
Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions in which we operate; principally Australia, India, and Malaysia. Significant judgments and estimates are required in determining our consolidated income tax expense. The statutory federal corporate income tax rate in the United States is
35.0%
, while the tax rates in Australia, India, and Malaysia are approximately
30.0%
,
30.9%
, and
25.0%
, 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.
The following table shows consolidated income tax (expense) benefit for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Income tax (expense) benefit
|
$
|
(9,047
|
)
|
$
|
33,340
|
|
$
|
(42,387
|
)
|
(127
|
)%
|
$
|
(42,811
|
)
|
$
|
39,320
|
|
$
|
(82,131
|
)
|
(209
|
)%
|
||||||||
|
Effective tax rate
|
73.7
|
%
|
(56.9
|
)%
|
|
|
|
|
20.2
|
%
|
485.0
|
%
|
||||||||||||||||||
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 year, but are not consistent from year to year. Income tax expense increased by
$42.4 million
during the
three
months ended
June 30, 2016
compared to the
three
months ended
June 30, 2015
primarily due to a
$41.7 million
discrete tax benefit associated with the receipt of a private letter ruling in April 2015. Income tax expense increased by
$82.1 million
during the
six
months ended
June 30, 2016
compared to the
six
months ended
June 30, 2015
primarily due to the discrete tax benefit mentioned above and an increase in pretax income.
Equity in earnings of unconsolidated affiliates, net of tax
Equity in earnings of unconsolidated affiliates, net of tax represents our proportionate share of the earnings and losses of unconsolidated affiliates with whom we have made equity method investments.
The following table shows equity in earnings of unconsolidated affiliates, net of tax for the
three
and
six
months ended
June 30, 2016
and
2015
:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Three Month Change
|
2016
|
2015
|
Six Month Change
|
||||||||||||||||||||||||
|
Equity in earnings of unconsolidated affiliates, net of tax
|
$
|
10,176
|
|
$
|
1,929
|
|
$
|
8,247
|
|
428
|
%
|
$
|
15,173
|
|
$
|
1,755
|
|
$
|
13,418
|
|
765
|
%
|
||||||||
Equity in earnings of unconsolidated affiliates, net of tax for the
three
and
six
months ended
June 30, 2016
increased compared to the
three
and
six
months ended
June 30, 2015
primarily due to equity in earnings from our investment in 8point3 Operating Company, LLC, a subsidiary of 8point3 Energy Partners LP.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States, 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 that the judgments and estimates involved in the accounting for percentage-of-completion revenue recognition, accrued solar module collection and recycling, product warranties and manufacturing excursions, performance guarantees, accounting for income taxes, long-lived asset impairments, and goodwill 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.
58
For a complete description of our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended
December 31, 2015
filed with the SEC. There have been no material changes in our critical accounting policies during the
six
months ended
June 30, 2016
.
Recent Accounting Pronouncements
See Note 3. “Recent Accounting Pronouncements”
to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a summary of recent accounting pronouncements.
Liquidity and Capital Resources
As of
June 30, 2016
, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities including the contracted portion of our advanced-stage project pipeline, availability under our Revolving Credit Facility considering minimum liquidity covenant requirements, and access to the capital markets will be sufficient to meet our working capital, systems project investment, and capital expenditure needs for at least the next 12 months. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally.
We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, capital expenditures, and discretionary strategic spending. In the future, we may also engage in additional debt or equity financings, including project specific debt financings. We believe that when necessary, we will have adequate access to the capital markets, although our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to industry-wide or company-specific concerns. Such financings could result in increased debt service expenses or dilution to our existing stockholders.
As of
June 30, 2016
, we had
$1.7 billion
in
cash, cash equivalents, and marketable securities
compared to
$1.8 billion
as of
December 31, 2015
. Cash, cash equivalents, and marketable securities as of
June 30, 2016
decreased
primarily as a result of financing the construction of certain projects with our working capital and expenditures for property, plant, and equipment, partially offset by the increase in net sales. As of
June 30, 2016
and
December 31, 2015
,
$1.6 billion
and
$1.5 billion
, respectively of our
cash, cash equivalents, and marketable securities
were held by foreign subsidiaries and were generally based in U.S. dollar and Euro denominated holdings. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.
Our systems business requires significant liquidity and is expected to continue to have significant liquidity requirements in the future. The net amount of our project assets, deferred project costs, billings in excess of costs and estimated earnings, and payments and billings for deferred project costs, which approximates our net capital investment in the development and construction of systems projects was
$1.2 billion
as of
June 30, 2016
. Solar power project development and construction cycles, which span the time between the identification of a site location and the commercial operation of a system, vary substantially and can take many years to mature. As a result of these long project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale of such projects. These up-front investments may include using our working capital, project financing, or availability under our Revolving Credit Facility to finance the construction of such projects. For example, we may have to complete, or substantially complete, the construction of a systems project before such project is sold. Delays in construction progress or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. We have historically financed these up-front systems project investments primarily using working capital. In certain circumstances, we may need to finance construction costs exclusively using working capital, if project financing becomes unavailable due to market-wide, regional, or other concerns.
We are partnering with local developers on project development in markets around the world where we may take an equity stake in a project for a number of years. We are also self-developing projects in such markets where we may hold all or a significant portion of the equity in the projects for several years. Given the duration of these investments and the currency risk relative to the U.S. dollar in some of these new markets, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted.
Additionally, we may elect to retain an ownership interest in certain systems projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a systems project at economics that are attractive to us or potential customers are unwilling to assume the risks and rewards typical of PV solar power system ownership, we may instead elect to temporarily own and operate such systems until we can sell the systems on economically attractive terms. As with traditional electricity generation assets, the selling price of a PV solar power system could be higher at
59
or post-completion to reflect the elimination of construction and performance risks and other uncertainties. The decision to retain ownership of a system impacts liquidity depending upon the size and cost of the project. As of
June 30, 2016
, we had
$410.8 million
of PV solar power systems that have been placed in service. We may elect to enter into temporary or long-term project financing to reduce the impact on our liquidity and working capital with regards to such projects and systems. We may also consider entering into tax equity or other arrangements with respect to ownership interests in certain of our projects, including selling interests in our projects to our limited partnership YieldCo vehicle described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Certain Trends and Uncertainties – 8point3 Energy Partners LP,” which could cause a portion of the economics of such projects to be recognized over time.
The following additional considerations have impacted or may impact our liquidity for the remainder of
2016
and beyond:
|
•
|
The amount of solar module inventory and BoS parts as of
June 30, 2016
was
$401.5 million
. As we continue with the construction of our advanced-stage project pipeline, we must produce solar modules and procure BoS parts in the required volumes to support our planned construction schedules. As part of this construction cycle, we typically must manufacture modules or acquire the necessary BoS parts for construction activities in advance of receiving payment for such materials, which may temporarily reduce our liquidity. Once solar modules and BoS parts are installed in a project, such installed amounts are classified as either project assets, deferred project costs, PV solar power systems, or cost of sales depending upon whether the project is subject to a definitive sales contract and whether all revenue recognition criteria have been met. As of
June 30, 2016
,
$202.9 million
,
or
66%
, of our solar module inventory was either on-site or in-transit to our systems projects. All BoS parts are for our systems business projects.
|
|
•
|
The amount of accounts receivable, unbilled and retainage as of
June 30, 2016
was
$172.9 million
, which included
$153.9 million
of unbilled amounts. These unbilled accounts receivable represent revenue that has been recognized in advance of billing the customer under the terms of the underlying construction contracts. Such construction costs have been funded with working capital, and the unbilled amounts are expected to be billed and collected from customers during the next 12 months. Once we meet the billing criteria under a construction contract, we bill our customers accordingly and reclassify the
accounts receivable, unbilled and retainage
to
accounts receivable trade, net
. The amount of accounts receivable, unbilled and retainage as of
June 30, 2016
also included
$19.0 million
of retainage, which represents the portion of a systems project contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. Such retainage amounts relate to construction costs incurred and construction work already performed.
|
|
•
|
We may commit working capital during the remainder of
2016
and beyond to acquire solar power projects in various stages of development, including advanced-stage projects with PPAs, and to continue developing those projects as necessary. Depending upon the size and stage of development, costs to acquire such solar power projects could be significant. When evaluating project acquisition opportunities, we consider both the strategic and financial benefits of any such acquisitions.
|
|
•
|
Joint ventures or other strategic arrangements with partners are a key part of our strategy. We have initiatives in several markets to expedite our penetration of those markets and establish relationships with potential customers. Some of these arrangements involve and are expected to involve significant investments or other allocations of capital that could reduce our liquidity or require us to pursue additional sources of financing, assuming such sources are available to us.
Additionally, we have elected and may in the future elect or be required to temporarily retain a noncontrolling ownership interest in certain underlying systems projects we develop, supply modules to, or construct. Any such retained ownership interest is expected to impact our liquidity to the extent we do not obtain new sources of capital to fund such investments.
|
|
•
|
During the remainder of
2016
, we expect to spend
$150 million
to
$200 million
for capital expenditures, including expenditures related to the manufacturing of new module technologies, such as our Series 5 module offering, and upgrades to our existing machinery and equipment, which we believe will further increase our solar module conversion efficiencies.
|
|
•
|
Under sales agreements for certain of our solar power projects, we may be required to repurchase such projects if certain events occur, such as not achieving commercial operation of the project within a certain time frame. Although we consider the possibility that we would be required to repurchase any of our solar power projects to be remote, our current working capital and other available sources of liquidity may not be sufficient to make any required repurchase. If we are required to repurchase a solar power project, we would have the ability to market and sell such project at then current market pricing, which could be at a lower than expected price to the extent the event requiring the repurchase impacts the project’s marketability. Our liquidity may also be impacted as the time between the repurchase of a project and the potential sale of such repurchased project could take several months.
|
60
Cash Flows
The following table summarizes the key cash flow metrics for the
six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
Six Months Ended June 30,
|
|||||||
|
|
2016
|
2015
|
||||||
|
Net cash used in operating activities
|
$
|
(24,781
|
)
|
$
|
(435,018
|
)
|
||
|
Net cash used in investing activities
|
(149,148
|
)
|
(102,778
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(41,506
|
)
|
143,573
|
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
5,269
|
|
(12,687
|
)
|
||||
|
Net decrease in cash and cash equivalents
|
$
|
(210,166
|
)
|
$
|
(406,910
|
)
|
||
Operating Activities
The decrease in cash used in operating activities was primarily driven by an increase in the volume of systems projects sold and under construction during the period and an increase in the volume of modules sold to third parties. The decrease was also attributable to improved collections on our trade accounts receivable and lower expenditures for project assets and deferred project costs associated with financing the construction of certain projects with our working capital.
Investing Activities
The increase in cash used in investing activities was primarily due to lower distributions received from equity method investments of
$237.5 million
, partially offset by lower net purchases of marketable securities of
$46.3 million
during the
six
months ended
June 30, 2016
compared to
$194.9 million
during the same period in
2015
and an increase in restricted cash.
Financing Activities
The decrease in cash provided by financing activities was primarily the result of proceeds from long-term debt arrangements of
$122.9 million
during the
six
months ended
June 30, 2015
compared to proceeds of
$19.8 million
during the same period in
2016
. The decrease was also attributable to higher payments on long-term debt and lower net proceeds from sale-leaseback financing arrangements during the
six
months ended
June 30, 2016
.
Contractual Obligations
Our contractual obligations have not materially changed since the end of
2015
with the exception of the repayment of the remaining principal balances on our Malaysian Ringgit Facility and Malaysian Euro Facility long-term debt arrangements, the reversal of the outstanding contingent consideration associated with our TetraSun acquisition, and other changes in the ordinary course of business.
See Note 12. “Debt”
to our condensed consolidated financial statements for information related to the repayments of long-term debt and
Note 13. “Commitments and Contingencies”
for information related to contingent consideration. See also our Annual Report on Form 10-K for the year ended
December 31, 2015
for additional information regarding our contractual obligations.
Off-Balance Sheet Arrangements
As of
June 30, 2016
, we have no off-balance sheet debt or similar obligations, other than financial assurance related instruments and operating leases, which are not classified as debt. We do not guarantee any third-party debt.
See Note 13. “Commitments and Contingencies”
to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information about our financial assurance related instruments.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the information previously provided under Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2015
.
61
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
June 30, 2016
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
June 30, 2016
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 materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the
three
months ended
June 30, 2016
.
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.
Item 1.
Legal Proceedings
See Note 13. “Commitments and Contingencies”
under the heading “Legal Proceedings” of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q 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 Part I, Item 1A: “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2015
, 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 for the year ended
December 31, 2015
are not the only risks facing the Company. 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 for the year ended
December 31, 2015
.
62
Item 5.
Other Information
As previously disclosed in a Quarterly Report on Form 10-Q filed with the SEC on May 4, 2012, the Compensation Committee (the “Committee”) of the Board of Directors of the Company adopted in May 2012 the key senior talent equity performance program (“KSTEPP”), a performance unit program under the Company’s 2010 Omnibus Incentive Compensation Plan that is intended to link the compensation of the Company’s senior executives with the success of its Long Term Strategic Plan. For KSTEPP awards to vest, the Committee must certify that the Company achieved a threshold performance goal, which was the achievement of a specified level of KSTEPP adjusted operating income
1
(as provided in the applicable award agreement) for any 12-month period beginning and ending on a calendar quarter (which we refer to as a “rolling annual period”) during the performance period applicable to such awards. The Committee has certified successful achievement of this threshold goal for all KSTEPP participants. In addition, in order for KSTEPP awards to vest in whole or in part, two additional vesting conditions must be satisfied: (i) one third of the KSTEPP may vest (subject to any applicable proration) upon the Company’s achievement in any rolling annual period during the performance period of at least 1.35 gigawatts DC of modules sold in sustainable markets and 13% cash adjusted return on invested capital
2
(which we refer to as the “partial vesting condition”) and (ii) the KSTEPP awards may vest in full, reduced by any previously vested portion and subject to any applicable proration, upon the Company’s achievement in any rolling annual period during the performance period of at least 2.8 gigawatts DC of modules sold in sustainable markets and 15% cash adjusted return on invested capital (which we refer to as the “full vesting condition”). On November 9, 2015, the Committee certified the Company’s achievement of the partial vesting condition for the rolling annual period ended September 30, 2015, and on July 21, 2016, the Committee certified the Company’s achievement of the full vesting condition for the rolling annual period ended June 30, 2016. Accordingly, each KSTEPP participant will receive one share of Company common stock for each vested KSTEPP performance unit (which, for participants who incurred a qualifying termination of employment prior to the vesting date, will be prorated in accordance with the applicable award agreements), less any previously vested units. The specific number of shares to be issued in respect of vested KSTEPP performance units for each executive officer subject to the beneficial ownership reporting requirements of Section 16 of the Exchange Act have been reflected in Form 4 filings made with the SEC in accordance with the applicable rules, and additional Form 4 filings will be made as necessary to reflect shares sold pursuant to previously adopted Rule 10b5-1 trading plans established by the holders (including for the purposes of selling shares to satisfy the tax liability associated with such vesting) or otherwise.
|
1
In order to determine “KSTEPP adjusted operating income,” we take the Company’s operating income (as defined by U.S. GAAP) for a rolling annual period during the KSTEPP performance period and adjust for (i) extraordinary, unusual, and nonrecurring items including restructuring expenses and (ii) KSTEPP related share-based compensation expense.
|
||||
|
2
“Cash adjusted return on invested capital” for the Company is calculated as follows (i) “KSTEPP adjusted operating income” as defined above minus income tax expense for such “KSTEPP adjusted operating income” plus depreciation and amortization expense divided by (ii) stockholders’ equity plus debt plus accumulated depreciation minus cash and cash equivalents and marketable securities.
|
||||
63
Item 6.
Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
|
Exhibit Number
|
Exhibit Description
|
|
|
31.01
|
Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.02
|
Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.01*
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
*
|
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
|
64
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: August 3, 2016
|
By:
|
/s/ BRYAN SCHUMAKER
|
|
|
Name:
|
Bryan Schumaker
|
||
|
Title:
|
Chief Accounting Officer
|
||
65
TABLE OF CONTENTS
Part IItem 1. Condensed Consolidated Financial Statements (unaudited)Note 2. Summary Of Significant Accounting PoliciesNote 6. Restricted Cash and InvestmentsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsNote 18. Segment ReportingNote 13. Commitments and ContingenciesItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 5. Other InformationItem 6. Exhibits