An investment in our stock involves a high degree of risk. You should carefully consider the following information, together with the other information in this Annual Report on Form 10-K, before buying shares of our stock. If any of the following risks or uncertainties occur, our business, financial condition, and results of operations could be materially and adversely affected and the trading price of our stock could decline.
If our estimates regarding the future costs of collecting and recycling CdTe solar modules covered by our solar module collection and recycling program are incorrect, we could be required to accrue additional expenses and face a significant unplanned cash burden.
As necessary, we fund any incremental amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of 25 years less amounts already funded in prior years. We estimate the cost of our collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; the scale of recycling centers; and an estimated third-party profit margin and return on risk for collection and recycling services. We base these estimates on (i) our experience collecting and recycling our solar modules, (ii) the expected timing of when our solar modules will be returned for recycling, and (iii) the expected economic factors at the time the solar modules will be collected and recycled. If our estimates prove incorrect, we could be required to accrue additional expenses and could also face a significant unplanned cash burden at the time we realize our estimates are incorrect or end users return their modules, which could adversely affect our operating results. In addition, participating end users can return their modules covered under the collection and recycling program at any time. As a result, we could be required to collect and recycle covered CdTe solar modules earlier than we expect.
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.
Protection of our proprietary processes, methods, and other technology is critical to our business. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies. We rely primarily on patents, trademarks, trade secrets, copyrights, and contractual restrictions to protect our intellectual property. We regularly file patent applications to protect certain inventions arising from our R&D and are currently pursuing such patent applications in various countries in accordance with our strategy for intellectual property in that jurisdiction. Our existing patents and future patents could be challenged, invalidated, circumvented, or rendered unenforceable. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not be sufficient to provide meaningful protection against competitors or against competitive technologies.
We also rely on unpatented proprietary manufacturing expertise, continuing technological innovation, and other trade secrets to develop and maintain our competitive position. Although we generally enter into confidentiality agreements with our associates and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets, and proprietary manufacturing expertise, methods, and compounds could have a material adverse effect on our business. In addition, effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in some foreign countries, especially any developing countries into which we may expand our operations. In some countries, we have not applied for patent, trademark, or copyright protection.
Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Policing unauthorized use of proprietary technology can be difficult and expensive. Additionally, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. We cannot ensure that the outcome of such potential litigation will be in our favor, and such litigation may be costly and may divert management attention and other resources away from our business. An adverse determination in any such litigation may impair our intellectual property rights and may harm our business, prospects, and reputation. In addition, we have no insurance coverage against such litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties.
Some of our manufacturing equipment is customized and sole sourced. If our manufacturing equipment fails or if our equipment suppliers fail to perform under their contracts, we could experience production disruptions and be unable to satisfy our contractual requirements.
Some of our manufacturing equipment, including manufacturing equipment related to the production of our Series 6 modules, is customized to our production lines based on designs or specifications that we provide to equipment manufacturers, which then undertake a specialized process to manufacture the custom equipment. As a result, the equipment is not readily available from multiple vendors and would be difficult to repair or replace if it were to become delayed, damaged, or stop working. If any piece of equipment fails, production along the entire production line could be interrupted. In addition, the failure of our equipment manufacturers to supply equipment in a timely manner or on commercially reasonable terms could delay our expansion or conversion plans, otherwise disrupt our production schedule, and/or increase our manufacturing costs, all of which would adversely impact our operating results.
Several of our key raw materials components, particularly CdTe, and componentsmanufacturing equipment are either single-sourced or sourced from a limited number of suppliers, and their failure to perform could cause manufacturing delays and impair our ability to deliver solar modules to customers in the required quality and quantities and at a price that is profitable to us.
Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Several of our key raw materials and components are either single-sourced or sourced from a limited number of suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and adversely impact our operations. In addition, some of our suppliers are smaller companies that may be unable to supply our increasing demand for raw materials and components as we expand our business. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. A constraint on our production may result in our inability to meet our capacity plans and/or our obligations under our customer contracts, which would have an adverse impact on our business. Additionally, reductions in our production volume may put pressure on suppliers, resulting in increased material and component costs.
A disruption in our supply chain for CdTe could interrupt or impair our ability to manufacture solar modules and could adversely impact our profitability and long-term growth prospects.
A key raw material used in our module production process is a CdTe compound. Tellurium, one of the main components of CdTe, is mainly produced as a by-product of copper refining, and therefore, its supply is largely dependent upon demand for copper. Our supply of CdTe could be limited if any of our current suppliers or any of our future suppliers are unable to acquire an adequate supply of tellurium in a timely manner or at commercially reasonable prices. If our current suppliers or any of our future suppliers cannot obtain sufficient tellurium, they could substantially increase prices or be unable to perform under their contracts. Furthermore, if our competitors begin to use or increase their demand for tellurium, our requirements for tellurium increase, new applications for tellurium become available, or adverse trade laws or policies restrict our ability to obtain tellurium from foreign vendors or make doing so cost prohibitive, the supply of tellurium and related CdTe compounds could be reduced and prices could increase. As we may be unable to pass such increases in the costs of our raw materials through to our customers, a substantial increase in tellurium prices or any limitations in the supply of tellurium could adversely impact our profitability and long-term growth objectives.
If any future production lines are not built in line with committed schedules, it may adversely affect our future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.
If we are unable to systematically replicate our production lines over time and achieve operating metrics similar to our existing production lines, our manufacturing capacity could be substantially constrained, our manufacturing costs per watt could increase, and our growth could be limited. Such factors may result in lower net sales and lower net income than we anticipate. For instance, future production lines could produce solar modules that have lower conversion
efficiencies, higher failure rates, and/or higher rates of degradation than solar modules from our existing production lines, and we could be unable to determine the cause of the lower operating metrics or develop and implement solutions to improve performance.
Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in the United States and/or foreign countries.
We have significant manufacturing, development, construction, sales, and marketing operations both within and outside the United States and expect to continue to expand our operations worldwide. As a result, we are subject to the legal, political, social, tax, and regulatory requirements and economic conditions of many jurisdictions.
Risks inherent to international operations include, but are not limited to, the following:
difficulty in enforcing agreements in foreign legal systems;
difficulty in forming appropriate legal entities to conduct business in foreign countries and the associated costs of forming and maintaining those legal entities;
varying degrees of protection afforded to foreign investments in the countries in which we operate and irregular interpretations and enforcement of laws and regulations in such jurisdictions;
foreign countries may impose additional income and withholding taxes or otherwise tax our foreign operations, impose tariffs, or adopt other restrictions on foreign trade and investment, including currency exchange controls;
fluctuations in exchange rates may affect demand for our products and services and may adversely affect our profitability and cash flows in U.S. dollars to the extent that our net sales or our costs are denominated in a foreign currency and the cost associated with hedging the U.S. dollar equivalent of such exposures is prohibitive; the longer the duration of such foreign currency exposure, the greater the risk;
anti-corruption compliance issues, including the costs related to the mitigation of such risk;
risk of nationalization or other expropriation of private enterprises;
changes in general economic and political conditions in the countries in which we operate, including changes in government incentive provisions;
unexpected adverse changes in U.S. or foreign laws or regulatory requirements, including those with respect to environmental protection, import or export duties, and quotas;
opaque approval processes in which the lack of transparency may cause delays and increase the uncertainty of project approvals;
difficulty in staffing and managing widespread operations;
difficulty in repatriating earnings;
difficulty in negotiating a successful collective bargaining agreement in applicable foreign jurisdictions;
trade barriers such as export requirements, tariffs, taxes, local content requirements, anti-dumping regulations and requirements, and other restrictions and expenses, which could increase the effective price of our solar modules and make us less competitive in some countries; and
difficulty of, and costs relating to, compliance with the different commercial and legal requirements of the overseas countries in which we offer and sell our solar modules.
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social, and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.
Risks Related to Our Systems Business
•Project development or construction activities may not be successful; projects under development may not receive required permits, real property rights, PPAs, interconnection, and transmission arrangements; or financing or construction may not commence or proceed as scheduled, which could increase our costs and impair our ability to recover our investments.investments.
The development and construction of solar energy generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for land and interconnection rights, preliminary engineering, permitting, legal services, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. Success in developing a particular project is contingent upon, among other things:
obtaining financeable land rights, including land rights for the project site, transmission lines, and environmental mitigation;
entering into financeable arrangements for the purchase of the electrical output, capacity, ancillary services, and renewable energy attributes generated by the project;
receipt from governmental agencies of required environmental, land-use, and construction and operation permits and approvals;
receipt of tribal government approvals for projects on tribal land;
receipt of governmental approvals related to the presence of any protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources;
negotiation of development agreements, public benefit agreements, and other agreements to compensate local governments for project impacts;
negotiation of state and local tax abatement and incentive agreements;
receipt of rights to interconnect the project to the electric grid or to transmit energy;
negotiation of satisfactory EPC agreements;
securing necessary rights of way for access and transmission lines;
securing necessary water rights for project construction and operation;
securing appropriate title coverage, including coverage for mineral rights, mechanics’ liens, etc.;
obtaining financing, including debt, equity, and funds associated with the monetization of tax credits and other tax benefits;
payment of PPA, interconnection, and other deposits (some of which are non-refundable);
providing required payment and performance security for the development of the project, such as through the provision of letters of credit; and
timely implementation and satisfactory completion of construction.
Successful completion of a particular project may be adversely affected, delayed and/or rendered infeasible by numerous factors, including:
delays in obtaining and maintaining required governmental permits and approvals, including appeals of approvals obtained;
potential permit and litigation challenges from project stakeholders, including local residents, environmental organizations, labor organizations, tribes, and others who may oppose the project;
in connection with any such permit and litigation challenges, grants of injunctive relief to stop development and/or construction of a project;
discovery of unknown impacts to protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources at project sites;
discovery of unknown title defects;
discovery of unknown environmental conditions;
unforeseen engineering problems;
construction delays and contractor performance shortfalls;
work stoppages;
cost over-runs;
labor, equipment, and material supply shortages, failures, or disruptions;
cost or schedule impacts arising from changes in federal, state, or local land-use or regulatory policies;
changes in electric utility procurement practices;
risks arising from potential transmission grid congestion, limited transmission capacity, and grid reliability constraints;
project delays that could adversely impact our ability to maintain interconnection rights;
additional complexities when conducting project development or construction activities in foreign jurisdictions (either on a stand-alone basis or in collaboration with local business partners), including operating in accordance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and applicable local laws and customs;
unfavorable tax treatment or adverse changes to tax policy;
adverse weather conditions;
water shortages;
adverse environmental and geological conditions;
force majeure and other events out of our control;
climate change; and
change in law risks.
If we fail to complete the development of a solar energy project, fail to meet one or more agreed upon target construction milestone dates, fail to achieve system-level capacity, or fail to meet other contract terms, we may be subject to forfeiture of significant deposits under PPAs or interconnection agreements or termination of such agreements, incur significant liquidated damages, penalties, and/or other obligations under other project related agreements, and may not be able to recover our investment in the project. If we are unable to complete the development of a solar energy project, we may impair some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized.
We may be unable to acquire or lease land, obtain necessary interconnection and transmission rights, and/or obtain the approvals, licenses, permits, and electric transmission grid interconnection and transmission rights necessary to build and operate PV solar power systems in a timely and cost effective manner, and regulatory agencies, local communities, labor unions, tribes, or other third parties may delay, prevent, or increase the cost of construction and operation of the system we intend to build.
In order to construct and operate our PV solar power systems, we need to acquire or lease land and rights of way, obtain interconnection rights, negotiate agreements with affected transmission systems, and obtain all necessary federal, state, county, local, and foreign approvals, licenses, and permits, as well as rights to interconnect the systems to the transmission grid and transmit energy generated from the system. We may be unable to acquire the land or lease interests needed, may not obtain or maintain satisfactory interconnection rights, may have difficulty reaching agreements with affected transmission systems and/or incur unexpected network upgrade costs, may not receive or retain the requisite approvals, permits, licenses, and interconnection and transmission rights, or may encounter other problems that could delay or prevent us from successfully constructing and operating such systems.
Many of our proposed projects are located on or require access through public lands administered by federal and state agencies pursuant to competitive public leasing and right-of-way procedures and processes. Our projects may also be located on tribal land pursuant to land agreements that must be approved by tribal governments and federal agencies. The authorization for the use, construction, and operation of systems and associated transmission facilities on federal, state, tribal, and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way, and other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and other federal, state, local, and tribal approvals, and any excessive delays in obtaining such permits and approvals due, for example, to litigation or third-party appeals, could potentially prevent us from successfully constructing and operating such systems in a timely manner and could result in the potential forfeiture of any deposit we have made with respect to a given project. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project. Changing regulatory requirements and the discovery of unknown site conditions could also affect the financial success of a given project.
In addition, local labor unions may increase the cost of project development in California and elsewhere. We may also be subject to labor unavailability and/or increased union labor requirements due to multiple simultaneous projects in a geographic region.
Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations.
The significant decline in PV solar module prices over the last several years continues to create a challenging environment for module manufacturers, but it has also helped drive demand for solar electricity worldwide. Aided by such lower module prices, our customers and potential customers have in many cases been willing and able to bid aggressively for new projects and PPAs, using low cost assumptions for modules, BoS parts, installation, maintenance, and other costs as the basis for such bids. Relatively low barriers to entry for solar project developers, including those we compete with, have led to, depending on the market and other factors, intense competition at the system level, which may result in an environment in which system-level pricing falls rapidly, thereby further increasing demand for solar energy solutions but constraining the ability for project developers, and diversified companies such as First Solar to sustain meaningful and consistent profitability. Accordingly, while we believe our system offerings and experience are positively differentiated in many cases from that of our competitors, we may fail to correctly identify our competitive position, we may be unable to develop or maintain a sufficient magnitude of new system projects worldwide at economically attractive rates of return, and we may not otherwise be able to achieve meaningful profitability under our long-term strategic plans.
Depending on the market opportunity, we may be at a disadvantage compared to potential system-level competitors. For example, certain of our competitors may have a stronger and/or more established localized business presence in a particular geographic region. Certain of our competitors may be larger entities that have greater financial resources and greater overall brand name recognition than we do and, as a result, may be better positioned to impact customer behavior or adapt to changes in the industry or the economy as a whole. Certain competitors may also have direct or indirect access to sovereign capital and/or other incentives, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time.
Additionally, depending on the geographic area, certain potential customers may still be in the process of educating themselves about the points of differentiation among various available providers of PV solar energy solutions, including a company’s proven overall experience and bankability, system design and optimization expertise, grid interconnection and stabilization expertise, and proven O&M capabilities. If we are unable over time to meaningfully differentiate our offerings at scale, or if available competitive pricing is prioritized over the value we believe is added through our system offerings and experience, from the viewpoint of our potential customer base, our business, financial condition, and results of operations could be adversely affected.
Following an evaluation of the long-term sustainable cost structure, competitiveness, and risk-adjusted returns of our U.S. project development business, we have determined it is in the best interest of our stockholders to explore options for this business line. See Item 1. “Business – Business Segments – Systems Business – Project Development�� for additional information.
•We may not be able to obtain long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to attract financing and other investments,; with regard to projects for which electricity is or will be sold on an open contract basis rather than under a PPA, adversely affecting our results of operations could be adversely affected to the extent prevailing spot electricity prices decline in an unexpected manner.operations.
Obtaining long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to us is essential for obtaining financing and commencing construction of our projects. We must compete for PPAs against other developers of solar and renewable energy projects. This intense competition for PPAs has resulted in downward pressure on PPA pricing for newly contracted projects. In addition, we believe the solar industry may experience periods of structural imbalance between supply and demand that put downward pressure on module pricing. This downward pressure on module pricing also creates downward pressure on PPA pricing for newly contracted projects. See the Risk Factor entitled “•Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations” for additional information. If falling PPA pricing results in forecasted project revenue that is insufficient
to generate returns anticipated to be demanded in the project sale market, our business, financial condition, and results of operations could be adversely affected.
Other sources of power, such as natural gas-fired power plants, have historically been cheaper than the cost of solar power, and certain types of generation projects, such as natural gas-fired power plants, can deliver power on a firm basis. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue. In addition, the availability of PPAs is dependent on utility and corporate energy procurement practices that could evolve and shift allocation of market risks over time. In addition, PPA availability and terms are a function of a number of economic, regulatory, tax, and public policy factors, which are also subject to change. Furthermore, certain of our projects may be scheduled for substantial completion prior to the commencement of a long-term PPA with a major off-taker, in which case we would be required to enter into a stub-period PPA for the intervening time period or sell down the project. We may not be able to do either on terms that are commercially attractive to us. Finally, the electricity from certain of our projects is or is expected to be sold on an open contract basis for a period of time rather than under a PPA. If prevailing spot electricity prices relating to any such project were to decline in an unexpected manner, such project may decline in value and our results of operations could otherwise be adversely affected.
Even if we are able to obtain PPAs favorable to us, the ability of our off-take counterparties to fulfill their contractual obligations to us depends, in part, on their creditworthiness. These counterparties, such as our investor-owned utility counterparties in the state of California, which may have liability for damages associated with California’s recent wildfires, could suffer a deterioration of their creditworthiness or become, and in one case has become, subject to bankruptcy, insolvency, or liquidation proceedings or otherwise. For example, in January 2019, PG&E Corporation and Pacific Gas and Electric Company filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the U.S. Bankruptcy Court for the Northern District of California. If one or more of our counterparties becomes subject to bankruptcy, insolvency, or liquidation proceedings, or if the creditworthiness of any counterparty deteriorates, we could experience an underpayment or nonpayment under PPA agreements and our ability to attract debt or equity financing for our projects could be impaired.
Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other system constraints could significantly impact our ability to build PV solar power systems and generate solar electricity power sales.
In order to deliver electricity from our PV solar power systems to our customers, our projects generally need to connect to the transmission grid. The lack of available capacity on the transmission grid could substantially impact our projects and cause reductions in project size, delays in project implementation, increases in costs from transmission upgrades, and potential forfeitures of any deposit we have made with respect to a given project. In addition, there could be unexpected costs required to complete transmission and network upgrades that adversely impact the economic viability of our PV solar power systems. These transmission and network issues and costs, as well as issues relating to the availability of large equipment such as transformers and switchgear, could significantly impact our ability to interconnect our systems to the transmission grid, build such systems, and generate solar electricity sales.
Our systems business is largely dependent on us and third parties arranging financing from various sources, which may not be available or may only be available on unfavorable terms or in insufficient amounts.
The construction of large utility-scale solar power projects in many cases requires project financing, including non-recourse project specific debt financing in the bank loan market and institutional debt capital markets. Uncertainties exist as to whether our planned projects will be able to access the debt markets in a magnitude sufficient to finance their construction. If we, or purchasers of our projects, are unable to arrange such financing or if it is only available on unfavorable terms, we may be unable to fully execute our systems business plans. In addition, we generally expect to sell interests in our projects by raising project equity capital from tax-oriented, strategic industry, and other equity investors. Such equity sources may not be available or may only be available in insufficient amounts or on unfavorable terms, in which case our ability to sell interests in our projects may be delayed or limited, and our business, financial
condition, and results of operations may be adversely affected. Uncertainty in or adverse changes to tax policy or tax law, including the amount of ITC or accelerated depreciation, and any limitations on the value or availability to potential investors of tax incentives that benefit solar energy projects such as the ITC and accelerated depreciation deductions, as well as the reduction of the U.S. corporate income tax rate to 21% under the Tax Act (which could reduce the value of these tax related incentives) may reduce project values or negatively affect our ability to timely secure equity investment for our projects.
Depending on prevailing conditions in the credit markets, interest rates and other factors, such financing may not be available or may only be available on unfavorable terms or in insufficient amounts. If third parties are limited in their ability to access financing to support their purchase of system construction services from us, we may not realize the cash flows that we expect from such sales, which could adversely affect our ability to invest in our business and/or generate revenue. See also the Risk Factor above entitled “An increase in interest rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for customers to finance the cost of a PV solar power system and could reduce the demand for our modules or systems and/or lead to a reduction in the average selling price for such offerings.”
Developing solar power projects may require significant upfront investment prior to the signing of an EPC contract and commencing construction, which could adversely affect our business and results of operations.
Solar power project development cycles, which span the time between the identification of a site location and the construction of a system, vary substantially and can take years to mature. As a result of these long project development cycles, we may need to make significant up-front investments of resources (including, for example, payments for land rights, large transmission and PPA deposits, or other payments, which may be non-refundable) in advance of the signing of EPC contracts, commencing construction, receiving cash proceeds, or recognizing any revenue. Our potential inability to enter into sales contracts with customers on favorable terms after making such upfront investments could cause us to forfeit certain nonrefundable payments or otherwise adversely affect our business and results of operations. Furthermore, we may become constrained in our ability to simultaneously fund our other business operations and these systems investments through our long project development cycles.
Our liquidity may also be adversely affected to the extent the project sales market weakens and we are unable to sell interests in our solar projects on pricing, timing, and other terms commercially acceptable to us. In such a scenario, we may choose to continue to temporarily own and operate certain solar projects for a period of time, after which interests in the projects may be sold to third parties.
Inaccurate estimates of costs under fixed-price EPC agreements in which we are acting as the general contractor for our customers in connection with the construction and installation of their PV solar power systems could adversely affect our business and results of operations.
We have entered into fixed-price EPC contracts in which we act as the general contractor for our customers in connection with the installation of their PV solar power systems. All essential costs are estimated at the time of entering into the EPC contract for a particular project, and these are reflected in the overall fixed-price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the subcontractors, suppliers, and other parties to the project. In addition, we require qualified, licensed subcontractors to install many of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should actual results prove different from our estimates (including those due to unexpected increases in inflation, commodity prices, or labor costs) or we experience delays in execution and we are unable to commensurately increase the EPC sales price, we may not achieve our expected margins or we may be required to record a loss in the relevant period.
We may be subject to unforeseen costs, liabilities, or obligations when providing O&M services. In addition, certain of our O&M agreements include provisions permitting the counterparty to terminate the agreement without cause.
We may provide ongoing O&M services to system owners under separate service agreements, pursuant to which we generally perform standard activities associated with operating a PV solar power system, including 24/7 monitoring and control, compliance activities, energy forecasting, and scheduled and unscheduled maintenance. Our costs to perform these services are estimated at the time of entering into the O&M agreement for a particular project, and these are reflected in the price we charge our customers, including certain agreements which feature fixed pricing. Should our estimates of O&M costs prove inaccurate (including any unexpected serial defects, unavailability of parts, or increases in inflation, labor, or BoS costs), our growth strategy and results of operations could be adversely affected. Because of the potentially long-term nature of these O&M agreements, the adverse impacts on our results of operations could be significant, up to our limitation of liability capped under the terms of the agreements. In addition, certain of our O&M agreements include provisions permitting the counterparty to terminate the agreement without cause or for convenience. The exercise of such termination rights, or the use of such rights as leverage to re-negotiate terms and conditions of an O&M agreement, including pricing terms, could adversely impact our results of operations. We may also be subject to substantial costs in the event we do not achieve certain thresholds under the effective availability guarantees included in our O&M agreements.
Our systems business is subject to regulatory oversight and liability if we fail to operate PV solar power systems in compliance with electric reliability rules.
The ongoing O&M services that we provide for system owners may subject us to regulation by the NERC, or its designated regional representative, as a “generator operator,” or “GOP,” under electric reliability rules filed with FERC. Our failure to comply with the reliability rules applicable to GOPs could subject us to substantial fines by NERC, subject to FERC’s review. In addition, the system owners that receive our O&M services may be regulated by NERC as “generator owners,” or “GOs,” and we may incur liability for GO violations and fines levied by NERC, subject to FERC’s review, based on the terms of our O&M agreements. Finally, as a system owner and operator, we may in the future be subject to regulation by NERC as a GO.
Risks Related to Regulations
•Existing regulations and policies, changes thereto, and new regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of PV solar products or systems, which may significantly reduce demand for our modules, systems, or services.
Risks Related to the COVID-19 Pandemic
•The extent to which the COVID-19 pandemic could impact us is highly uncertain and will depend largely on the severity and duration of the pandemic, measures taken to contain the spread of the virus, and policies implemented by governmental authorities to ease restrictions in a phased manner.
General Risk Factors
•If our long-lived assets or project related assets become impaired, we may be required to record significant charges to earnings.
•Our credit agreements contain covenant restrictions that may limit our ability to operate our business.
Risks Related to Our Markets and Customers
Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time. An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition, and results of operations.
In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. For example, we estimate that in 2020 approximately 50 GWDC of capacity was added by solar module manufacturers, primarily but not exclusively in Asia. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will continue to put pressure on pricing. During the past several years, industry average selling prices per watt have declined in many markets, at times significantly, both at the module and system levels, as competitors have reduced prices to sell inventories worldwide. There may be additional pressure on global demand and average selling prices in the future resulting from fluctuating demand in certain major solar markets, such as China. If our competitors reduce module pricing to levels near or below their manufacturing costs, or are able to operate at minimal or negative operating margins for sustained periods of time, or if demand for PV modules does not grow sufficiently to justify the current production supply, our business, financial condition, and results of operations could be adversely affected.
If PV solar and related technologies are not suitable for continued adoption at economically attractive rates of return or if sufficient additional demand for solar modules, related technologies, and systems does not develop or takes longer to develop than we anticipate, our net sales and profit may flatten or decline and we may be unable to sustain profitability.
In comparison to traditional forms of energy generation, the solar energy market continues to be at a relatively early stage of development. If utility-scale PV solar technology proves unsuitable for continued adoption at economically attractive rates of return or if additional demand for solar modules and systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient net sales to sustain profitability. In addition, demand for solar modules, related technologies, and systems in our targeted markets may develop to a lesser extent than we anticipate. Many factors may affect the viability of continued adoption of utility-scale PV solar technology in our targeted markets, as well as the demand for solar modules and systems generally, including the following:
•cost-effectiveness of the electricity generated by PV solar power systems compared to conventional energy sources, such as natural gas (which fuel source may be subject to significant price fluctuations from time to time), and other renewable energy sources, such as wind, geothermal, and hydroelectric;
•changes in tax, trade remedies, and other public policy, as well as changes in economic, market, and other conditions that affect the price of, and demand for, conventional energy resources, non-solar renewable energy resources (e.g., wind and hydroelectric), and energy efficiency programs and products, including increases or decreases in the prices of natural gas, coal, oil, and other fossil fuels and in the prices of competing renewable resources;
•the extent of competition, barriers to entry, and overall conditions and timing related to the development of solar in new and emerging market segments such as commercial and industrial customers, community solar, community choice aggregators, and other customer segments;
•availability, substance, and magnitude of support programs including federal, state, and local government subsidies, incentives, targets, and renewable portfolio standards, among other policies and programs, to accelerate the development of the solar industry;
•performance, reliability, and availability of energy generated by PV solar power systems compared to conventional and other non-solar renewable energy sources and products, particularly conventional energy generation capable of providing 24-hour, non-intermittent baseload power;
•the development, functionality, scale, cost, and timing of energy storage solutions; and
•changes in the amount and priorities of capital expenditures by end users of solar modules and systems (e.g., utilities), which capital expenditures tend to decrease when the economy slows or when interest rates increase, thereby resulting in redirection away from solar generation to development of competing forms of electric generation and to distribution (e.g., smart grid), transmission, and energy efficiency measures.
The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results.
Although we believe that solar energy will experience widespread adoption in those applications where it competes economically with traditional forms of energy without any support programs, in certain markets our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Federal, state, and local governmental bodies in many countries have provided subsidies in the form of FiTs, rebates, tax incentives, and other incentives to end users, distributors, system integrators, and manufacturers of PV solar products. Many of these support programs expire, phase out over time, require renewal by the applicable authority, or may be amended. A summary of certain recent developments in the major government support programs that may impact our business appears under Item 1. “Business – Support Programs.” To the extent these support programs are reduced earlier than previously expected or are changed retroactively, such changes could negatively impact demand and/or price levels for our solar modules and systems, lead to a reduction in our net sales, and adversely impact our operating results. Another consideration in the U.S. market, and to a lesser extent in other global markets, is the effect of governmental land-use planning policies and environmental policies on utility-scale PV solar development. The adoption of restrictive land-use designations or environmental regulations that proscribe or restrict the siting of utility-scale solar facilities could adversely affect the marginal cost of such development.
Changes or threatened changes in U.S. regulatory policy may subject us to significant risks, including the following:
•a reduction or removal of clean energy programs and initiatives and the incentives they provide may diminish the market for future solar energy off-take agreements, slow the retirement of aging fossil fuel plants, including the retirements of coal generation plants, and reduce the ability for solar project developers to compete for off-take agreements, which may reduce PV solar module sales;
•any limitations on the value or availability to potential investors of tax incentives that benefit solar energy projects such as the ITC and accelerated depreciation deductions could result in reducing such investors’ economic returns, causing a reduction in the availability of affordable financing, thereby reducing demand for PV solar modules; and
•any effort to overturn federal and state laws, regulations, or policies that are supportive of solar energy generation or that remove costs or other limitations on other types of electricity generation that compete with solar energy projects could negatively impact our ability to compete with traditional forms of electricity generation and materially and adversely affect our business.
Application of U.S. trade laws, or trade laws of other countries, may also impact, either directly or indirectly, our operating results. In some instances, the application of trade laws is currently beneficial to the Company, and changes in their application could have an adverse impact.
For example, the United States currently imposes different types of tariffs and/or other trade remedies on certain imported crystalline silicon photovoltaic modules and cells from various countries. These tariffs include a global safeguard measure imposed pursuant to Section 201 of the Trade Act of 1974 that provides for tariffs on imported crystalline silicon solar modules and a tariff-rate quota on imported crystalline silicon solar cells. Between February 2021 and February 2022, the tariff rate is 18% for imported crystalline silicon photovoltaic modules and imported crystalline silicon solar cells above the tariff rate quota. Thin film solar cell products, such as our CdTe technology, are specifically excluded from the tariffs. The positive impact of this measure on our operating results was reduced by a tariff exclusion for imports of bifacial modules that the U.S. Trade Representative granted in June 2019 and that the U.S. President withdrew in October 2020. Further changes to the measure, including as a result of pending litigation challenging the withdrawal of the exclusion, could further impact our operating results. In addition, the United States currently imposes antidumping and countervailing duties on certain imported crystalline silicon photovoltaic cells and modules from China and Taiwan. Such antidumping and countervailing duties can change over time pursuant to annual reviews conducted by the U.S. Department of Commerce, and a decline in duty rates could have an adverse impact on our operating results.
In other instances, the application of U.S. trade laws has had, or could have, an adverse impact on our operating results by increasing our costs or limiting the competitiveness of our products. Examples include tariffs the United States imposes on certain imported aluminum and steel articles, generally at rates of 10% and 25%, respectively, under Section 232 of the Trade Expansion Act of 1962; and potential tariffs on imports of goods from Vietnam under Section 301 of the Tariff Act of 1974. If such tariffs are imposed on solar modules imported from Vietnam, it could negatively affect our business, financial condition, and results of operations.
Internationally, in July 2018, the Indian government imposed a safeguard measure on solar cells and modules imported from various countries, including member countries of the Organisation for Economic Co-operation and Development (“OECD”), China, and Malaysia, for a two-year period, starting at 25% through July 2019 and declining by five percentage points in each subsequent six-month period. In July 2020, the Indian government announced an extension to the safeguard duty regime at a revised rate of 14.9% through December 2020 and declining to 14.5% through July 2021. These duties are applicable to imports from member countries of the OECD, China, Vietnam, and Thailand, but imports from Malaysia have been exempted from the revised safeguard measures.
Such tariffs and policies, or any other U.S. or global trade remedies or other trade barriers, may directly or indirectly affect U.S. or global markets for solar energy and our business, financial condition, and results of operations. These examples show that established markets for PV solar development face uncertainties arising from policy, regulatory, and governmental constraints. While the expected potential of the markets we are targeting is significant, policy promulgation and market development are especially vulnerable to governmental inertia, political instability, the imposition or lowering of trade remedies and other trade barriers, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements, and limited available infrastructure.
An increase in interest rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for customers to finance the cost of a PV solar power system and could reduce the demand for our modules or systems and/or lead to a reduction in the average selling price for such offerings.
Many of our customers and our systems business depend on debt and/or equity financing to fund the initial capital expenditure required to develop, build, and/or purchase a PV solar power system. As a result, an increase in interest rates, or a reduction in the supply of project debt financing or tax equity investments, could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers or our systems business to secure the financing necessary to develop, build, purchase, or install a PV solar power system on favorable terms, or at all, and thus lower demand for our solar modules, which could limit our growth or reduce our net sales. See the Risk Factor entitled “The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other public
policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results” for additional information. In addition, we believe that a significant percentage of our customers install systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates could lower an investor’s return on investment in a system, increase equity return requirements, or make alternative investments more attractive relative to PV solar power systems and, in each case, could cause these customers to seek alternative investments.
We may be unable to fully execute on our long-term strategic plans, which could have a material adverse effect on our business, financial condition, or results of operations.
We face numerous difficulties in executing on our long-term strategic plans, particularly in new foreign jurisdictions, including the following:
•difficulty in competing against companies who may have greater financial resources and/or a more effective or established localized business presence and/or an ability to operate with minimal or negative operating margins for sustained periods of time;
•difficulty in competing successfully with other technologies, such as bifacial modules and n-type mono-crystalline wafers and cells;
•difficulty in accurately prioritizing geographic markets that we can most effectively and profitably serve with our PV solar offerings, including miscalculations in overestimating or underestimating addressable market demand;
•adverse public policies in countries we operate in and/or are pursuing, including local content requirements, the imposition of trade remedies, or capital investment requirements;
•business climates, such as that in China, that may have the effect of putting foreign companies at a disadvantage relative to domestic companies;
•unstable economic, social, and/or operating environments in foreign jurisdictions, including social unrest, currency, inflation, and interest rate uncertainties;
•the possibility of applying an ineffective commercial approach to targeted markets, including product offerings that may not meet market needs;
•difficulty in generating sufficient sales volumes at economically sustainable profitability levels;
•difficulty in timely identifying, attracting, training, and retaining qualified sales, technical, and other personnel in geographies targeted for expansion;
•difficulty in maintaining proper controls and procedures as we expand our business operations in terms of geographical reach, including transitioning certain business functions to low-cost geographies, with any material control failure potentially leading to reputational damage and loss of confidence in our financial reporting;
•difficulty in competing successfully for market share in overall solar markets as a result of the success of companies participating in the global rooftop PV solar market, which is a segment in which we do not have significant historical experience;
•difficulty in establishing and implementing a commercial and operational approach adequate to address the specific needs of the markets we are pursuing;
•difficulty in identifying effective local partners and developing any necessary partnerships with local businesses on commercially acceptable terms;
•difficulty in balancing market demand and manufacturing production in an efficient and timely manner, potentially causing our manufacturing capacity to be constrained in some future periods or over-supplied in others; and
•difficulty in obtaining the necessary regulatory approvals to consummate the sale of our U.S. project development business.
Refer also to the Risk Factors entitled “Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in the United States and/or foreign countries,” and “The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results.”
The loss of any of our large customers, or the inability of our customers and counterparties to perform under their contracts with us, could significantly reduce our net sales and negatively impact our results of operations.
Our customers include integrators and operators of systems, utilities, independent power producers, commercial and industrial companies, and other system owners, who may experience intense competition at the system level, thereby constraining the ability for such customers to sustain meaningful and consistent profitability. The loss of any of our large customers, their inability to perform under their contracts, or their default in payment could significantly reduce our net sales and/or adversely impact our operating results. While our contracts with customers typically have certain firm purchase commitments and may include provisions for the payment of amounts to us in certain events of contract termination, these contracts may be subject to amendments made by us or requested by our customers. These amendments may reduce the volume of modules to be sold under the contract, adjust delivery schedules, or otherwise decrease the expected revenue under these contracts. Although we believe that we can mitigate this risk, in part, by reallocating modules to other customers if the need arises, we may be unable, in whole or in part, to do so on similar terms or at all. We may also mitigate this risk by requiring some form of payment security from our customers, such as parent guarantees, bank guarantees, surety bonds, or commercial letters of credit. However, in the event the providers of such payment security fail to perform their obligations, our operating results could be adversely impacted.
We may be unable to profitably provide new solar offerings or achieve sufficient market penetration with such offerings.
We may expand our portfolio of offerings to include solutions that build upon our core competencies but for which we have not had significant historical experience, including variations in our traditional product offerings or other offerings related to commercial and industrial customers and community solar. We cannot be certain that we will be able to ascertain and allocate the appropriate financial and human resources necessary to grow these business areas. We could invest capital into growing these businesses but fail to address market or customer needs or otherwise not experience a satisfactory level of financial return. Also, in expanding into these areas, we may be competing against companies that previously have not been significant competitors, such as companies that currently have substantially more experience than we do in the residential, commercial and industrial, or other targeted offerings. If we are
unable to achieve growth in these areas, our overall growth and financial performance may be limited relative to our competitors and our operating results could be adversely impacted.
Risks Related to Our Operations, Manufacturing, and Technology
We face intense competition from manufacturers of crystalline silicon solar modules; if global supply exceeds global demand, it could lead to a further reduction in the average selling price for PV solar modules, which could reduce our net sales and adversely affect our results of operations.
The solar and renewable energy industries are highly competitive and are continually evolving as participants strive to distinguish themselves within their markets and compete with the larger electric power industry. Within the global PV solar industry, we face intense competition from crystalline silicon solar module manufacturers. Existing or future solar module manufacturers might be acquired by larger companies with significant capital resources, thereby further intensifying competition with us. In addition, the introduction of a low cost disruptive technology could adversely affect our ability to compete, which could reduce our net sales and adversely affect our results of operations.
Even if demand for solar modules continues to grow, the rapid manufacturing capacity expansion undertaken by many module manufacturers in China and certain parts of Southeast Asia, particularly manufacturers of crystalline silicon cells, modules, and wafers, has created and may continue to cause periods of structural imbalance in which supply exceeds demand. See the Risk Factor entitled “Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time. An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition, and results of operations,” for additional information. In addition, we believe any significant decrease in the cost of silicon feedstock or polysilicon would reduce the manufacturing cost of crystalline silicon modules and lead to further pricing pressure for solar modules and potentially an oversupply of solar modules. We also believe many crystalline silicon cell and wafer manufacturers have substantially transitioned from lower efficiency BSF multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency PERC mono-crystalline cells at competitive cost structures. As a result, we expect that in the near future, our primary competition will be mono-crystalline PERC based modules with higher conversion efficiencies. Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC solar modules offer bifacial modules that also capture diffuse irradiance on the back side of a module. Such technology can improve the overall energy production of a module relative to nameplate front-side efficiency when applied in certain applications and BoS configurations, which could potentially lower the overall levelized cost of electricity (“LCOE”), meaning the net present value of a system’s total life cycle costs divided by the quantity of energy that is expected to be produced over the system’s life, of a system when compared to systems using conventional solar modules, including the modules we produce. Additionally, we believe that our competitors are evaluating the possibility of transitioning from p-type to n-type mono-crystalline wafers and cells. If successful, such transition would further increase the efficiency and energy yield of their product. Finally, many of our competitors are promoting modules with larger overall area based on the use of larger silicon wafers. While the transition to such larger wafers would increase nameplate wattage, we believe the associated production cost would not improve significantly.
During any such period, our competitors could decide to reduce their sales prices in response to competition, even below their manufacturing costs, in order to generate sales, and may do so for a sustained period. Other competitors may have direct or indirect access to sovereign capital, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time. As a result, we may be unable to sell our solar modules or systems at attractive prices, or for a profit, during any period of excess supply of solar modules, which would reduce our net sales and adversely affect our results of operations. Additionally, we may decide to lower our average selling
prices to certain customers in certain markets in response to competition, which could also reduce our net sales and adversely affect our results of operations.
Problems with product quality or performance may cause us to incur significant and/or unexpected contractual damages and/or warranty and related expenses, damage our market reputation, and prevent us from maintaining or increasing our market share.
We perform a variety of module quality and life tests under different environmental conditions upon which we base our assessments of future module performance over the duration of the warranty. However, if our thin film solar modules perform below expectations, we could experience significant warranty and related expenses, damage to our market reputation, and erosion of our market share. With respect to our modules, we provide a limited warranty covering defects in materials and workmanship under normal use and service conditions for up to 12 years. We also typically warrant that modules installed in accordance with agreed-upon specifications will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by a degradation factor every year thereafter throughout the limited power output warranty period of up to 30 years. Among other things, our solar module warranty also covers the resulting power output loss from cell cracking. As an alternative form of our standard limited module power output warranty, we have also offered an aggregated or system-level limited module performance warranty. This system-level limited module performance warranty is designed for utility-scale systems and provides 25-year system-level energy degradation protection. This warranty represents a practical expedient to address the challenge of identifying, from the potential millions of modules installed in a utility-scale system, individual modules that may be performing below warranty thresholds by focusing on the aggregate energy generated by the system rather than the power output of individual modules. The system-level limited module performance warranty is typically calculated as a percentage of a system’s expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty. As a result of these warranty programs, we bear the risk of product warranty claims long after we have sold our solar modules and recognized net sales.
If any of the assumptions used in estimating our module warranties prove incorrect, we could be required to accrue additional expenses, which could adversely impact our financial position, operating results, and cash flows. Although we have taken significant precautions to avoid a manufacturing excursion from occurring, any manufacturing excursions, including any commitments made by us to take remediation actions in respect of affected modules beyond the stated remedies in our warranties, could adversely impact our reputation, financial position, operating results, and cash flows.
Although our module performance warranties extend for up to 30 years, our oldest solar modules manufactured during the qualification of our pilot production line have only been in use since 2001. Accordingly, our warranties are based on a variety of quality and life tests that enable predictions of durability and future performance. These predictions, however, could prove to be materially different from the actual performance during the warranty period, causing us to incur substantial expense to repair or replace defective solar modules or provide financial remuneration in the future. For example, our solar modules could suffer various failure modes, including breakage, delamination, corrosion, or performance degradation in excess of expectations, and our manufacturing operations or supply chain could be subject to materials or process variations that could cause affected modules to fail or underperform compared to our expectations. These risks could be amplified as we implement design and process changes in connection with our efforts to improve our products and accelerate module wattage as part of our long-term strategic plans. In addition, if we increase the number of installations in extreme climates, we may experience increased failure rates due to deployment into such field conditions. Any widespread product failures may damage our market reputation, cause our net sales to decline, require us to repair or replace the defective modules or provide financial remuneration, and result in us taking voluntary remedial measures beyond those required by our standard warranty terms to enhance customer satisfaction, which could have a material adverse effect on our operating results.
In resolving claims under both the limited defect and power output warranties, we typically have the option of either repairing or replacing the covered modules or, under the limited power output warranty, providing additional
modules to remedy the power shortfall or making certain cash payments; however, historical versions of our module warranty did not provide a refund remedy. Consequently, we may be obligated to repair or replace the covered modules under such historical programs. As our manufacturing process may change from time-to-time in accordance with our technology roadmap, we may elect to stop production of older versions of our modules that would constitute compatible replacement modules. In some jurisdictions, our inability to provide compatible replacement modules could potentially expose us to liabilities beyond the limitations of our module warranties, which could adversely impact our reputation, financial position, operating results, and cash flows.
For PV solar power systems constructed for customers, we typically provide limited warranties for defects in engineering design, installation, and BoS part workmanship for a period of one to two years following the substantial completion of a system or a block within the system. In resolving claims under such BoS warranties, we have the option of remedying the defect through repair or replacement. As with our modules, these warranties are based on a variety of quality and life tests that enable predictions of durability and future performance. Any failures in BoS equipment or system construction beyond our expectations may also adversely impact our reputation, financial position, operating results, and cash flows.
In addition, our contracts with customers may include provisions with particular product specifications, minimum wattage requirements, and specified delivery schedules. These contracts may be terminated, or we may incur significant liquidated damages or other damages, if we fail to perform our contractual obligations. In addition, our costs to perform under these contracts may exceed our estimates, which could adversely impact our profitability. Any failures to comply with our contracts for the sale of our modules could adversely impact our reputation, financial position, operating results, and cash flows.
Our failure to further refine our technology, reduce module manufacturing and BoS costs, and develop and introduce improved PV products could render our solar modules or systems uncompetitive and reduce our net sales, profitability, and/or market share.
We need to continue to invest significant financial resources in R&D to continue to improve our module conversion efficiencies, lower the LCOE of our PV solar power systems, and otherwise keep pace with technological advances in the solar industry. However, R&D activities are inherently uncertain, and we could encounter practical difficulties in commercializing our research results. We seek to continuously improve our products and processes, including, for example, certain planned improvements to our Series 6 module technology and manufacturing capabilities, such as the implementation of our copper replacement (or “CuRe”) program or the increase to our module form factor (which we refer to as “Series 6 Plus”), and the resulting changes carry potential risks in the form of delays, performance, additional costs, or other unintended contingencies. In addition, our significant expenditures for R&D may not produce corresponding benefits. Other companies are developing a variety of competing PV technologies, including advanced multi-crystalline silicon cells, PERC or advanced p-type crystalline silicon cells, high-efficiency n-type crystalline silicon cells, bifacial solar modules, copper indium gallium diselenide thin films, amorphous silicon thin films, and new emerging technologies such as hybrid perovskites, which could produce solar modules or systems that prove more cost-effective or have better performance than our solar modules or systems.
In addition, other companies could potentially develop a highly reliable renewable energy system that mitigates the intermittent power generation drawback of many renewable energy systems, or offer other value-added improvements from the perspective of utilities and other system owners, in which case such companies could compete with us even if the LCOE associated with such new systems is higher than that of our systems. As a result, our solar modules or systems may be negatively differentiated or rendered obsolete by the technological advances of our competitors, which would reduce our net sales, profitability, and/or market share. In addition, we often forward price our products and services in anticipation of future cost reductions and technology improvements, and thus, an inability to further refine our technology and execute our module technology and cost reduction roadmaps could adversely affect our operating results.
Some of our manufacturing equipment is customized and sole sourced. If our manufacturing equipment fails or if our equipment suppliers fail to perform under their contracts, we could experience production disruptions and be unable to satisfy our contractual requirements.
Some of our manufacturing equipment, including manufacturing equipment related to the production of our Series 6 modules, is customized to our production lines based on designs or specifications that we provide to equipment manufacturers, which then undertake a specialized process to manufacture the custom equipment. As a result, the equipment is not readily available from multiple vendors and would be difficult to repair or replace if it were to become delayed, damaged, or stop working. If any piece of equipment fails, production along the entire production line could be interrupted. In addition, the failure of our equipment manufacturers to supply equipment in a timely manner or on commercially reasonable terms could delay our expansion or conversion plans, otherwise disrupt our production schedule, and/or increase our manufacturing costs, all of which would adversely impact our operating results.
Several of our key raw materials and components are either single-sourced or sourced from a limited number of suppliers, and their failure to perform could cause manufacturing delays and impair our ability to deliver solar modules to customers in the required quality and quantities and at a price that is profitable to us.
Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Several of our key raw materials and components are either single-sourced or sourced from a limited number of suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and adversely impact our operations. In addition, some of our suppliers are smaller companies that may be unable to supply our increasing demand for raw materials and components as we expand our business. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. A constraint on our production may result in our inability to meet our capacity plans and/or our obligations under our customer contracts, which would have an adverse impact on our business. Additionally, reductions in our production volume may put pressure on suppliers, resulting in increased material and component costs.
A disruption in our supply chain for CdTe could interrupt or impair our ability to manufacture solar modules and could adversely impact our profitability and long-term growth prospects.
A key raw material used in our module production process is a CdTe compound. Tellurium, one of the main components of CdTe, is mainly produced as a by-product of copper refining, and therefore, its supply is largely dependent upon demand for copper. Our supply of CdTe could be limited if any of our current suppliers or any of our future suppliers fail to perform or are unable to acquire an adequate supply of tellurium in a timely manner or at commercially reasonable prices. If our current suppliers or any of our future suppliers cannot obtain sufficient tellurium, they could substantially increase prices or be unable to perform under their contracts. Furthermore, if our competitors begin to use or increase their demand for tellurium, our requirements for tellurium increase, new applications for tellurium become available, or adverse trade laws or policies restrict our ability to obtain tellurium from foreign vendors or make doing so cost prohibitive, the supply of tellurium and related CdTe compounds could be reduced and prices could increase. As we may be unable to pass such increases in the costs of our raw materials through to our customers, a substantial increase in tellurium prices or any limitations in the supply of tellurium could adversely impact our profitability and long-term growth objectives.
Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, decrease our cost per watt, and, when necessary, continue to build new manufacturing plants over time in response to market demand, all of which are subject to risks and uncertainties.
Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, decrease our cost per watt, and increase our manufacturing capacity in a cost-effective and efficient manner. If we cannot do so, we may be unable to decrease our cost per watt, maintain our competitive position, sustain profitability, expand our business, or create long-term shareholder value. Our ability to decrease our cost per watt, expand production capacity, or convert existing production facilities to support new product lines is subject to significant risks and uncertainties, including the following:
•failure to reduce manufacturing material, labor, or overhead costs;
•an inability to increase production throughput or the average power output per module;
•failure to effectively manage logistics costs associated with the shipping, handling, storage, and distribution of our modules;
•delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as our inability to secure successful contracts with equipment vendors;
•our custom-built equipment taking longer and costing more to manufacture than expected and not operating as designed;
•delays or denial of required approvals by relevant government authorities;
•an inability to hire qualified staff;
•failure to execute our expansion or conversion plans effectively;
•difficulty in balancing market demand and manufacturing production in an efficient and timely manner, potentially causing our manufacturing capacity to be constrained in some future periods or over-supplied in others; and
•incurring manufacturing asset write-downs, write-offs, and other charges and costs, which may be significant, during those periods in which we idle, slow down, shut down, convert, or otherwise adjust our manufacturing capacity.
If our estimates regarding the future costs of collecting and recycling CdTe solar modules covered by our solar module collection and recycling program are incorrect, we could be required to accrue additional expenses and face a significant unplanned cash burden.
As necessary, we fund any incremental amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted marketable securities, and an estimated solar module life of 25 years less amounts already funded in prior years. We estimate the cost of our collection and recycling obligations based on the present value of the expected future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; and by-product credits for certain materials recovered during the recycling process. We base these estimates on our experience collecting and recycling solar modules and certain assumptions regarding costs at the time the
solar modules will be collected and recycled. If our estimates prove incorrect, we could be required to accrue additional expenses and could also face a significant unplanned cash burden at the time we realize our estimates are incorrect or end users return their modules, which could adversely affect our operating results. In addition, participating end users can return their modules covered under the collection and recycling program at any time. As a result, we could be required to collect and recycle covered CdTe solar modules earlier than we expect.
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.
Protection of our proprietary processes, methods, and other technology is critical to our business. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies. We rely primarily on patents, trademarks, trade secrets, copyrights, and contractual restrictions to protect our intellectual property. We regularly file patent applications to protect certain inventions arising from our R&D and are currently pursuing such patent applications in various countries in accordance with our strategy for intellectual property in that jurisdiction. Our existing patents and future patents could be challenged, invalidated, circumvented, or rendered unenforceable. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not be sufficient to provide meaningful protection against competitors or against competitive technologies.
We also rely on unpatented proprietary manufacturing expertise, continuing technological innovation, and other trade secrets to develop and maintain our competitive position. Although we generally enter into confidentiality agreements with our associates and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets, and proprietary manufacturing expertise, methods, and compounds could have a material adverse effect on our business. In addition, effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in some foreign countries, especially any developing countries into which we may expand our operations. In some countries, we have not applied for patent, trademark, or copyright protection.
Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Policing unauthorized use of proprietary technology can be difficult and expensive. Additionally, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. We cannot ensure that the outcome of such potential litigation will be in our favor, and such litigation may be costly and may divert management attention and other resources away from our business. An adverse determination in any such litigation may impair our intellectual property rights and may harm our business, prospects, and reputation. In addition, we have no insurance coverage against such litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties.
If any future production lines are not built in line with committed schedules, it may adversely affect our future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.
If we are unable to systematically replicate our production lines over time and achieve operating metrics similar to our existing production lines, our manufacturing capacity could be substantially constrained, our manufacturing costs per watt could increase, and our growth could be limited. Such factors may result in lower net sales and lower net income than we anticipate. For instance, future production lines could produce solar modules that have lower conversion efficiencies, higher failure rates, and/or higher rates of degradation than solar modules from our existing
production lines, and we could be unable to determine the cause of the lower operating metrics or develop and implement solutions to improve performance.
Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in the United States and/or foreign countries.
We have significant manufacturing, development, sales, and marketing operations both within and outside the United States and expect to continue to expand our operations worldwide. As a result, we are subject to the legal, political, social, tax, and regulatory requirements and economic conditions of many jurisdictions.
Risks inherent to international operations include, but are not limited to, the following:
•difficulty in enforcing agreements in foreign legal systems;
•varying degrees of protection afforded to foreign investments in the countries in which we operate and irregular interpretations and enforcement of laws and regulations in such jurisdictions;
•foreign countries may impose additional income and withholding taxes or otherwise tax our foreign operations, impose tariffs, or adopt other restrictions on foreign trade and investment, including currency exchange controls;
•fluctuations in exchange rates may affect demand for our products and services and may adversely affect our profitability and cash flows in U.S. dollars to the extent that our net sales or our costs are denominated in a foreign currency and the cost associated with hedging the U.S. dollar equivalent of such exposures is prohibitive; the longer the duration of such foreign currency exposure, the greater the risk;
•anti-corruption compliance issues, including the costs related to the mitigation of such risk;
•risk of nationalization or other expropriation of private enterprises;
•changes in general economic and political conditions in the countries in which we operate, including changes in government incentive provisions;
•unexpected adverse changes in U.S. or foreign laws or regulatory requirements, including those with respect to environmental protection, import or export duties, and quotas;
•opaque approval processes in which the lack of transparency may cause delays and increase the uncertainty of project approvals;
•difficulty in staffing and managing widespread operations;
•difficulty in repatriating earnings;
•difficulty in negotiating a successful collective bargaining agreement in applicable foreign jurisdictions;
•trade barriers such as export requirements, tariffs, taxes, local content requirements, anti-dumping regulations and requirements, and other restrictions and expenses, which could increase the effective price of our solar modules and make us less competitive in some countries or increase the costs to perform under our existing contracts; and
•difficulty of, and costs relating to, compliance with the different commercial and legal requirements of the overseas countries in which we offer and sell our solar modules.
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social, and political conditions. We may not be able to timely develop and implement policies and strategies that will be effective in each location where we do business.
Risks Related to Our Systems Business
Project development or construction activities may not be successful; projects under development may not receive required permits, real property rights, PPAs, interconnection, and transmission arrangements; or financing or construction may not commence or proceed as scheduled, which could increase our costs and impair our ability to recover our investments.
The development and construction of solar energy generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for land and interconnection rights, preliminary engineering, permitting, legal services, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. Success in developing a particular project is contingent upon, among other things:
•obtaining financeable land rights, including land rights for the project site, transmission lines, and environmental mitigation;
•entering into financeable arrangements for the purchase of the electrical output, capacity, ancillary services, and renewable energy attributes generated by the project;
•receipt from governmental agencies of required environmental, land-use, and construction and operation permits and approvals;
•receipt of tribal government approvals for projects on tribal land;
•receipt of governmental approvals related to the presence of any protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources;
•negotiation of development agreements, public benefit agreements, and other agreements to compensate local governments for project impacts;
•negotiation of state and local tax abatement and incentive agreements;
•receipt of rights to interconnect the project to the electric grid or to transmit energy;
•negotiation of satisfactory EPC agreements, including agreements with third-party EPC providers;
•securing necessary rights of way for access and transmission lines;
•securing necessary water rights for project construction and operation;
•securing appropriate title coverage, including coverage for mineral rights, mechanics’ liens, etc.;
•obtaining financing, including debt, equity, and funds associated with the monetization of tax credits and other tax benefits;
•payment of PPA, interconnection, and other deposits (some of which are non-refundable);
•providing required payment and performance security for the development of the project, such as through the provision of letters of credit; and
•timely implementation and satisfactory completion of construction.
Successful completion of a particular project may be adversely affected, delayed and/or rendered infeasible by numerous factors, including:
•delays in obtaining and maintaining required governmental permits and approvals, including appeals of approvals obtained;
•potential permit and litigation challenges from project stakeholders, including local residents, environmental organizations, labor organizations, tribes, and others who may oppose the project;
•in connection with any such permit and litigation challenges, grants of injunctive relief to stop development and/or construction of a project;
•discovery of unknown impacts to protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources at project sites;
•discovery of unknown title defects;
•discovery of unknown environmental conditions;
•unforeseen engineering problems;
•construction delays and contractor performance shortfalls;
•work stoppages;
•cost over-runs;
•labor, equipment, and material supply shortages, failures, or disruptions;
•cost or schedule impacts arising from changes in federal, state, or local land-use or regulatory policies;
•changes in electric utility procurement practices;
•risks arising from potential transmission grid congestion, limited transmission capacity, and grid reliability constraints;
•project delays that could adversely impact our ability to maintain interconnection rights;
•additional complexities when conducting project development or construction activities in foreign jurisdictions (either on a stand-alone basis or in collaboration with local business partners), including operating in accordance with the FCPA and applicable local laws and customs;
•unfavorable tax treatment or adverse changes to tax policy;
•adverse weather conditions;
•water shortages;
•adverse environmental and geological conditions;
•force majeure and other events out of our control;
•climate change; and
•change in law risks.
If we fail to complete the development of a solar energy project, fail to meet one or more agreed upon target construction milestone dates, fail to achieve system-level capacity, or fail to meet other contract terms, we may be subject to forfeiture of significant deposits under PPAs or interconnection agreements or termination of such agreements, incur significant liquidated damages, penalties, and/or other obligations under other project related agreements, and may not be able to recover our investment in the project. If we are unable to complete the development of a solar energy project, we may impair some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized.
We may be unable to acquire or lease land, obtain necessary interconnection and transmission rights, and/or obtain the approvals, licenses, permits, and electric transmission grid interconnection and transmission rights necessary to build and operate PV solar power systems in a timely and cost effective manner, and regulatory agencies, local communities, labor unions, tribes, or other third parties may delay, prevent, or increase the cost of construction and operation of the system we intend to build.
In order to construct and operate our PV solar power systems, we need to acquire or lease land and rights of way, obtain interconnection rights, negotiate agreements with affected transmission systems, and obtain all necessary federal, state, county, local, and foreign approvals, licenses, and permits, as well as rights to interconnect the systems to the transmission grid and transmit energy generated from the system. We may be unable to acquire the land or lease interests needed, may not obtain or maintain satisfactory interconnection rights, may have difficulty reaching agreements with affected transmission systems and/or incur unexpected network upgrade costs, may not receive or retain the requisite approvals, permits, licenses, and interconnection and transmission rights, or may encounter other problems that could delay or prevent us from successfully constructing and operating such systems.
Many of our proposed projects are located on or require access through public lands administered by federal and state agencies pursuant to competitive public leasing and right-of-way procedures and processes. Our projects may also be located on tribal land pursuant to land agreements that must be approved by tribal governments and federal agencies. The authorization for the use, construction, and operation of systems and associated transmission facilities on federal, state, tribal, and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way, and other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and other federal, state, local, and tribal approvals, and any excessive delays in obtaining such permits and approvals due, for example, to litigation or third-party appeals, could potentially prevent us from successfully constructing and operating such systems in a timely manner and could result in the potential forfeiture of any deposit we have made with respect to a given project. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project. Changing regulatory requirements and the discovery of unknown site conditions could also affect the financial success of a given project.
In addition, local labor unions may increase the cost of project development in California and elsewhere. We may also be subject to labor unavailability and/or increased union labor requirements due to multiple simultaneous projects in a geographic region.
We may not be able to obtain long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to attract financing and other investments; with regard to projects for which electricity is or will be sold on an open contract basis rather than under a PPA, our results of operations could be adversely affected to the extent prevailing spot electricity prices decline in an unexpected manner.
Obtaining long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to us is essential for obtaining financing and commencing construction of our projects. We must compete for PPAs against other developers of solar and renewable energy projects. This intense competition for PPAs has resulted in downward pressure on PPA pricing for newly contracted projects. In addition, we believe the solar industry may experience periods of structural imbalance between supply and demand that put downward pressure on module pricing. This downward pressure on module pricing also creates downward pressure on PPA pricing for newly contracted projects. See the Risk Factor entitled “Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations” for additional information. If falling PPA pricing results in forecasted project revenue that is insufficient to generate returns anticipated to be demanded in the project sale market, our business, financial condition, and results of operations could be adversely affected.
Other sources of power, such as natural gas-fired power plants, have historically been cheaper than the cost of solar power, and certain types of generation projects, such as natural gas-fired power plants, can deliver power on a firm basis. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue. In addition, the availability of PPAs is dependent on utility and corporate energy procurement practices that could evolve and shift allocation of market risks over time. In addition, PPA availability and terms are a function of a number of economic, regulatory, tax, and public policy factors, which are also subject to change. Furthermore, certain of our projects may be scheduled for substantial completion prior to the commencement of a long-term PPA with a major off-taker, in which case we would be required to enter into a stub-period PPA for the intervening time period or sell down the project. We may not be able to do either on terms that are commercially attractive to us. Finally, the electricity from certain of our projects is or is expected to be sold on an open contract basis for a period of time rather than under a PPA. If prevailing spot electricity prices relating to any such project were to decline in an unexpected manner, such project may decline in value and our results of operations could otherwise be adversely affected.
Even if we are able to obtain PPAs favorable to us, the ability of our off-take counterparties to fulfill their contractual obligations to us depends, in part, on their creditworthiness. These counterparties, such as our investor-owned utility counterparties in the state of California, which may have liability for damages associated with California’s recent wildfires, could suffer a deterioration of their creditworthiness or become, and in one case has become, subject to bankruptcy, insolvency, or liquidation proceedings or otherwise. For example, in January 2019, PG&E Corporation and Pacific Gas and Electric Company filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the U.S. Bankruptcy Court for the Northern District of California. If one or more of our counterparties becomes subject to bankruptcy, insolvency, or liquidation proceedings, or if the creditworthiness of any counterparty deteriorates, we could experience an underpayment or nonpayment under PPA agreements and our ability to attract debt or equity financing for our projects could be impaired.
Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other system constraints could significantly impact our ability to build PV solar power systems and generate solar electricity power sales.
In order to deliver electricity from our PV solar power systems to our customers, our projects generally need to connect to the transmission grid. The lack of available capacity on the transmission grid could substantially impact our projects and cause reductions in project size, delays in project implementation, increases in costs from transmission upgrades, and potential forfeitures of any deposit we have made with respect to a given project. In addition, there could be unexpected costs required to complete transmission and network upgrades that adversely
impact the economic viability of our PV solar power systems. These transmission and network issues and costs, as well as issues relating to the availability of large equipment such as transformers and switchgear, could significantly impact our ability to interconnect our systems to the transmission grid, build such systems, and generate solar electricity sales.
Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations.
The significant decline in PV solar module prices over the last several years continues to create a challenging environment for module manufacturers, but it has also helped drive demand for solar electricity worldwide. Aided by such lower module prices, our customers and potential customers have in many cases been willing and able to bid aggressively for new projects and PPAs, using low cost assumptions for modules, BoS parts, installation, maintenance, and other costs as the basis for such bids. Relatively low barriers to entry for solar project developers, including those we compete with, have led to, depending on the market and other factors, intense competition at the system level, which may result in an environment in which system-level pricing falls rapidly, thereby further increasing demand for solar energy solutions but constraining the ability for project developers, and diversified companies such as First Solar to sustain meaningful and consistent profitability. Accordingly, while we believe our system offerings and experience are positively differentiated in many cases from that of our competitors, we may fail to correctly identify our competitive position, we may be unable to develop or maintain a sufficient magnitude of new system projects at economically attractive rates of return, and we may not otherwise be able to achieve meaningful profitability under our long-term strategic plans.
Depending on the market opportunity, we may be at a disadvantage compared to potential system-level competitors. For example, certain of our competitors may have a stronger and/or more established localized business presence in a particular geographic region. Certain of our competitors may be larger entities that have greater financial resources and greater overall brand name recognition than we do and, as a result, may be better positioned to impact customer behavior or adapt to changes in the industry or the economy as a whole. Certain competitors may also have direct or indirect access to sovereign capital and/or other incentives, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time.
Additionally, depending on the geographic area, certain potential customers may still be in the process of educating themselves about the points of differentiation among various available providers of PV solar energy solutions, including a company’s proven overall experience and bankability, system design and optimization expertise, grid interconnection and stabilization expertise, and proven O&M capabilities. If we are unable over time to meaningfully differentiate our offerings at scale, or if available competitive pricing is prioritized over the value we believe is added through our system offerings and experience, from the viewpoint of our potential customer base, our business, financial condition, and results of operations could be adversely affected.
Following an evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our O&M services business, we received an offer to purchase certain portions of the business and determined it is in the best interest of our stockholders to pursue this transaction. As a result, in August 2020 we entered into an agreement with Clairvest for the sale of our North American O&M operations. The completion of the transaction is contingent on a number of closing conditions, including the receipt of certain third-party consents and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in the first half of 2021.
Following an evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our U.S. project development business, we have determined it is in the best interest of our stockholders to pursue the sale of this business. On January 24, 2021, we entered into an agreement with OMERS for the sale of our U.S. project development operations, which comprises the business of developing, contracting for the construction of, and selling utility-scale PV solar power systems. The transaction includes our approximately 10 GWAC utility-scale solar project pipeline, including the advanced-stage Horizon, Madison, Ridgely, Rabbitbrush, and Oak Trail projects that are
expected to commence construction in the next two years; the 30 MWAC Barilla Solar project, which is operational; and certain other equipment. In addition, OMERS has agreed to certain module purchase commitments. The completion of the transaction is contingent on a number of closing conditions, including the receipt of regulatory approval from FERC, the expiration of the mandatory waiting period under U.S. antitrust laws, a review of the transaction by CFIUS, and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in the first half of 2021.
Our systems business is largely dependent on us and third parties arranging financing from various sources, which may not be available or may only be available on unfavorable terms or in insufficient amounts.
The construction of large utility-scale solar power projects in many cases requires project financing, including non-recourse project specific debt financing in the bank loan market and institutional debt capital markets. Uncertainties exist as to whether our planned projects will be able to access the debt markets in a magnitude sufficient to finance their construction. If we, or purchasers of our projects, are unable to arrange such financing or if it is only available on unfavorable terms, we may be unable to fully execute our systems business plans. In addition, we generally expect to sell interests in our projects by raising project equity capital from tax-oriented, strategic industry, and other equity investors. Such equity sources may not be available or may only be available in insufficient amounts or on unfavorable terms, in which case our ability to sell interests in our projects may be delayed or limited, and our business, financial condition, and results of operations may be adversely affected. Uncertainty in or adverse changes to tax policy or tax law, including the amount of ITC or accelerated depreciation, and any limitations on the value or availability to potential investors of tax incentives that benefit solar energy projects such as the ITC and accelerated depreciation deductions, as well as the reduction of the U.S. corporate income tax rate to 21% under the Tax Cuts and Jobs Act (the “Tax Act”) (which could reduce the value of these tax related incentives) may reduce project values or negatively affect our ability to timely secure equity investment for our projects.
Depending on prevailing conditions in the credit markets, interest rates and other factors, such financing may not be available or may only be available on unfavorable terms or in insufficient amounts. If third parties are limited in their ability to access financing to support their purchase of system construction services from us, we may not realize the cash flows that we expect from such sales, which could adversely affect our ability to invest in our business and/or generate revenue. See also the Risk Factor above entitled “An increase in interest rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for customers to finance the cost of a PV solar power system and could reduce the demand for our modules or systems and/or lead to a reduction in the average selling price for such offerings.”
Developing solar power projects may require significant upfront investment prior to the signing of sales contracts, which could adversely affect our business and results of operations.
Solar power project development cycles, which span the time between the identification of a site location and the construction of a system, vary substantially and can take years to mature. As a result of these long project development cycles, we may need to make significant up-front investments of resources (including, for example, payments for land rights, large transmission and PPA deposits, or other payments, which may be non-refundable) in advance of the signing of sales contracts, receiving cash proceeds, or recognizing any revenue. Our potential inability to enter into sales contracts with customers on favorable terms after making such upfront investments could cause us to forfeit certain nonrefundable payments or otherwise adversely affect our business and results of operations. Furthermore, we may become constrained in our ability to simultaneously fund our other business operations and these systems investments through our long project development cycles.
Our liquidity may also be adversely affected to the extent the project sales market weakens and we are unable to sell interests in our solar projects on pricing, timing, and other terms commercially acceptable to us. In such a scenario, we may choose to continue to temporarily own and operate certain solar projects for a period of time, after which interests in the projects may be sold to third parties.
We may be subject to unforeseen costs, liabilities, or obligations when providing O&M services. In addition, certain of our O&M agreements include provisions permitting the counterparty to terminate the agreement without cause.
We may provide ongoing O&M services to system owners under separate service agreements, pursuant to which we generally perform standard activities associated with operating a PV solar power system, including 24/7 monitoring and control, compliance activities, energy forecasting, and scheduled and unscheduled maintenance. Our costs to perform these services are estimated at the time of entering into the O&M agreement for a particular project, and these are reflected in the price we charge our customers, including certain agreements which feature fixed pricing. Should our estimates of O&M costs prove inaccurate (including any unexpected serial defects, unavailability of parts, or increases in inflation, labor, or BoS costs), our growth strategy and results of operations could be adversely affected. Because of the potentially long-term nature of these O&M agreements, the adverse impacts on our results of operations could be significant, up to our limitation of liability capped under the terms of the agreements. In addition, certain of our O&M agreements include provisions permitting the counterparty to terminate the agreement without cause or for convenience. The exercise of such termination rights, or the use of such rights as leverage to re-negotiate terms and conditions of an O&M agreement, including pricing terms, could adversely impact our results of operations. We may also be subject to substantial costs in the event we do not achieve certain thresholds under the effective availability guarantees included in our O&M agreements.
Following an evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our O&M services business, we received an offer to purchase certain portions of the business and determined it is in the best interest of our stockholders to pursue this transaction. As a result, in August 2020 we entered into an agreement with Clairvest for the sale of our North American O&M operations. The completion of the transaction is contingent on a number of closing conditions, including the receipt of certain third-party consents and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in the first half of 2021.
Our systems business is subject to regulatory oversight and liability if we fail to operate PV solar power systems in compliance with electric reliability rules.
The ongoing O&M services that we provide for system owners may subject us to regulation by the North American Electric Reliability Corporation (“NERC”), or its designated regional representative, as a generator operator (“GOP”) under electric reliability rules filed with FERC. Our failure to comply with the reliability rules applicable to GOPs could subject us to substantial fines by NERC, subject to FERC’s review. In addition, the system owners that receive our O&M services may be regulated by NERC as generator owners (“GO”) and we may incur liability for GO violations and fines levied by NERC, subject to FERC’s review, based on the terms of our O&M agreements. As a system owner and operator, we may in the future be subject to regulation by NERC as a GO.
Risks Related to Regulations
Existing regulations and policies, changes thereto, and new regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of PV solar products or systems, which may significantly reduce demand for our modules, systems, or services.
The market for electricity generation products is heavily influenced by federal, state, local, and foreign government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of PV solar products or systems and investment in the R&D of PV solar technology. For example, without a mandated regulatory exception for PV solar power systems, system owners are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. To the extent these interconnection standby fees are applicable to PV solar power systems, it is likely that they would increase the cost of such systems, which could make the systems less desirable, thereby adversely affecting our business, financial condition, and results of operations. In addition, with respect to utilities that utilize a peak-hour pricing policy or time-of-use pricing methods whereby the price of electricity is adjusted based on electricity supply and demand, electricity generated by PV solar power systems currently benefits from competing primarily with expensive peak-hour electricity, rather than the less expensive average price of electricity. Modifications to the peak-hour pricing policies of utilities, such as to a flat rate for all times of the day, would require PV solar power systems to have lower prices in order to compete with the price of electricity from other sources, which could adversely impact our operating results.
Our modules, systems, and services are often subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering, and other matters, and tracking the requirements of individual jurisdictions is complex. Any new government regulations or utility policies pertaining to our modules, systems, or services may result in significant additional expenses to us or our customers and, as a result, could cause a significant reduction in demand for our modules, systems, or services. In addition, any regulatory compliance failure could result in significant management distraction, unplanned costs, and/or reputational damage.
We could be adversely affected by any violations of the FCPA, the U.K. Bribery Act, and other foreign anti-bribery laws.
The FCPA generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities, and others (e.g., the FCPA and the U.K. Bribery Act) extend their application to activities outside their country of origin. Our policies mandate compliance with all applicable anti-bribery laws. We currently operate in, and may further expand into, key parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our operations in certain jurisdictions, including China, India, South America, and the Middle East, require substantial government contact, either directly by us or through intermediaries over whom we have less direct control, such as subcontractors, agents, and partners (such as joint venture partners), where norms can differ from U.S. standards. Although we have implemented policies, procedures, and, in certain cases, contractual arrangements designed to facilitate compliance with these anti-bribery laws, our officers, directors, associates, subcontractors, agents, and partners may take actions in violation of our policies, procedures, contractual arrangements, and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us and such persons to criminal and/or civil penalties or other sanctions potentially by government prosecutors from more than one country, which could have a material adverse effect on our business, financial condition, cash flows, and reputation.
Environmental obligations and liabilities could have a substantial negative impact on our business, financial condition, and results of operations.operations.
Our operations involve the use, handling, generation, processing, storage, transportation, and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local, and international levels. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, the cleanup of contaminated sites, and occupational health and safety. As we expand our business into foreign jurisdictions worldwide, our environmental compliance burden may continue to increase both in terms of magnitude and complexity. We have incurred and may continue to incur significant costs in complying with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subject to substantial fines, penalties, criminal proceedings, third-party property damage or personal injury claims, cleanup costs, or other costs. Such solutions could also result in substantial delay or termination of projects under construction within our systems business, which could adversely impact our results of operations. While we believe we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, financial condition, and results of operations.
Our solar modules contain CdTe and other semiconductor materials. Elemental cadmium and certain of its compounds are regulated as hazardous materials due to the adverse health effects that may arise from human exposure. Based on existing research, the risks of exposure to CdTe are not believed to be as serious as those relating to exposure to elemental cadmium.cadmium due to CdTe’s limited bioavailability. In our manufacturing operations, we maintain engineering controls to minimize our associates’ exposure to cadmium or cadmium compounds and require our associates who handle cadmium compounds to follow certain safety
procedures, including the use of personal protective equipment such as respirators, chemical goggles, and protective clothing. Relevant studies and third-party peer reviews of our technology have concluded that the risk of exposure to cadmium or cadmium compounds from our end-products is negligible. In addition, the risk of exposure is further minimized by the encapsulated nature of these materials in our products, the physical properties of cadmium compounds used in our products, and the recycling or responsible disposal of our modules. While we believe that these factors and procedures are sufficient to protect our associates, end users, and the general public from adverse health effects that may arise from cadmium exposure, we cannot ensure that human or environmental exposure to cadmium or cadmium compounds used in our products will not occur. Any such exposure could result in future third-party claims against us, damage to our reputation, and heightened regulatory scrutiny, which could limit or impair our ability to sell and distribute our products. The occurrence of future events such as these could have a material adverse effect on our business, financial condition, and results of operations.
The use of cadmium or cadmium compounds in various products is also coming under increasingly stringent governmental regulation. Future regulation in this area could impact the manufacturing, sale, collection, and recycling of solar modules and could require us to make unforeseen environmental expenditures or limit our ability to sell and distribute our products. For example, European Union Directive 2011/65/EU on the Restriction of the Use of Hazardous Substances (“RoHS”) in electrical and electronic equipment (the “RoHS Directive”) restricts the use of certain hazardous substances, including cadmium and its compounds, in specified products. Other jurisdictions, such as China, have adopted similar legislation or are considering doing so. Currently, PV solar modules are explicitly excluded from the scope of RoHS (Article 2), as adopted by the European Parliament and the Council in June 2011. The next general review of the RoHS Directive is scheduled for 2021, involving a broader discussion of the existing scope. A scope review focusing on additional exclusions was proposed by the European Commission in 2017 under the EU’s co-decision process which allows the European Parliament and the European Council to amend the European Commission’s proposal on exclusions. The co-decision procedure was completed in 2017 and the existing exclusion of PV modules was maintained. In preparation for the next RoHS revision, the European Commission has started a number of pre-regulatory studies and assessments relating to the addition of new substances to the existing RoHS framework, as well as the revision and optimization of the exemption process. It is unclear to what extent the existing scope exclusions will be discussed or maintained in future directives. If PV modules were to be included in the scope of future RoHS revisions without an exemption or exclusion, we would be required to redesign our solar modules to reduce cadmium and other affected hazardous substances to the maximum allowable concentration thresholds in the RoHS Directive in order to continue to offer them for sale within the EU. As such actions would be
impractical, this type of regulatory development would effectively close the EU market to us, which could have a material adverse effect on our business, financial condition, and results of operations.
As an owner and operator of PV solar power systems that deliver electricityRisks Related to the grid, certain ofCOVID-19 Pandemic
The COVID-19 pandemic could materially impact our affiliated entities may be regulated as public utilities under U.S. federalbusiness, financial condition, and state law, which could adversely affect the cost of doing business and limit our growth.
As an owner and operator of PV solar power systems that deliver electricity to the grid, certain of our affiliated entities may be considered public utilities for purposes of the Federal Power Act, as amended (the “FPA”), and public utility companies for purposes of the Public Utility Holding Company Act of 2005 (“PUHCA 2005”), and are subject to regulation by the FERC, as well as various local and state regulatory bodies. Some of our affiliated entities may be exempt wholesale generators or qualifying facilities under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”), and as such are exempt from regulation under PUHCA 2005. In addition, our affiliated entities may be exempt from most provisions of the FPA, as well as state laws regarding the financial or organizational regulation of public utilities. We are not directly subject to FERC regulation under the FPA. However, we are considered to be a “holding company” for purposes of Section 203 of the FPA, which regulates certain transactions involving public utilities, and such regulation could adversely affect our ability to grow the business through acquisitions. Likewise, investors seeking to acquire our public utility subsidiaries or acquire ownership interests in our securities sufficient to give them control over us and our public utility subsidiaries may require prior FERC approval to do so. Such approval could result in transaction delays or uncertainties.
Public utilities under the FPA are required to obtain FERC acceptance of their rate schedules for wholesale sales of electricity and to comply with various regulations. The FERC may grant our affiliated entities the authority to sell electricity at market-based rates and may also grant them certain regulatory waivers, such as waivers from compliance with FERC’s accounting regulations. These FERC orders reserve the right to revoke or revise market-based sales authority if the FERC subsequently determines that our affiliated entities can exercise market power in the sale of generation products, the provision of transmission services, or if it finds that any of the entities can create barriers to entry by competitors. In addition, if the entities fail to comply with certain reporting obligations, the FERC may revoke their power sales tariffs. Finally, if the entities were deemed to have engaged in manipulative or deceptive practices concerning their power sales transactions, they would be subject to potential fines, disgorgement of profits, and/or suspension or revocation of their market-based rate authority. If our affiliated entities were to lose their market-based rate authority, such companies would be required to obtain the FERC’s acceptance of a cost-of-service rate schedule and could become subject to the accounting, record-keeping, and reporting requirements that are imposed on utilities with cost-based rate schedules, which would impose cost and compliance burdens on us and have an adverse effect on our results of operations. In addition
The COVID-19 pandemic has continued to have an unprecedented impact on the risks described above,United States, Malaysia, and other countries throughout the world, including those in which we do business or have operations. Although as of the date of this filing, we have not been materially impacted by the COVID-19 pandemic, the pandemic could materially impact our business, financial condition, and results of operations in the future. The extent to which the COVID-19 pandemic could impact us continues to be highly uncertain and cannot be predicted, and will depend largely on subsequent developments, including the severity and duration of the pandemic, measures taken to contain the spread of the virus, such as restrictions on travel and gatherings of people and temporary closures of or limitations on businesses and other commercial activities, and the timing and nature of policies implemented by governmental authorities to ease such measures.
As a result of the COVID-19 pandemic and these related containment measures and reopening policies, we may be subject to additional regulatory regimes at statesignificant risks, which have the potential to materially and adversely impact our business, financial condition, and results of operations, including the following:
•the continued economic disruption caused by the COVID-19 pandemic may result in a long-term tightening of the supply of capital in global financial markets (including, in the United States, a reduction in total tax equity availability), which could make it difficult for purchasers of our modules or foreign levelsour development projects to secure the debt or equity capital necessary to finance a PV solar power system, thereby delaying or reducing demand for our modules or these projects;
•purchasers of PV modules may delay module procurement in response to the extent COVID-19 pandemic, which may result in additional pressure on global demand and average selling prices for modules, and may exacerbate structural imbalances between global PV module supply and demand;
•we ownmay at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities, that we have to curtail or cease business operations or activities, including manufacturing;
•the failure of our suppliers or vendors to supply materials or equipment, or the failure of our vendors to install, repair, or replace our specialized equipment, due to the COVID-19 pandemic, related containment measures, or limitations on logistics providers’ ability to operate, may idle, slowdown, shutdown, or otherwise cause us to adjust our manufacturing capacity. We have incurred manufacturing charges associated with the ongoing COVID-19 pandemic;
•the COVID-19 pandemic and operaterelated containment measures may result in us incurring delays in obtaining, or failing to obtain, the approvals or rights that are required for our development projects to proceed, such as permitting, interconnection, or land usage approvals or rights, and the COVID-19 pandemic and related containment measures may delay or prevent the performance by third parties of activities related to the development of these projects, such as interconnection, engineering, procurement, construction, and other activities;
•we perform substantial R&D to continue to improve our module wattage (or conversion efficiency), lower our module cost per watt, lower the overall LCOE of our PV solar power systems, and otherwise keep pace with technological advances in such jurisdictions.the solar industry. The COVID-19 pandemic and related containment
Other Risks
We are subject to litigation risks,measures, including securities class actions and stockholder derivative actions, which may be costly to defend and the outcome of which is uncertain.
From time to time, we are subject to legal claims, with and without merit, that may be costly and which may divert the attentionunavailability of our managementpersonnel and third-party partners who are engaged in R&D activities, may inhibit our resources in general. In addition, our projects may be subject to litigationR&D efforts or other adverse proceedings that may adversely impact our ability to proceedtimely advance or commercialize these efforts; and
•in response to the COVID-19 pandemic, the vast majority of our associates who are capable of performing their function remotely are telecommuting (i.e., working from home). While we have instituted security measures to minimize the likelihood and impact of a cybersecurity incident with constructionrespect to associates utilizing technological communications tools, these measures may be inadequate to prevent a cybersecurity breach because of the unprecedented number of associates continuously using these tools. Recently, there have been reports of a surge in widespread cyber-attacks during the COVID-19 pandemic. Any increase in the frequency or sellscope of cyber-attacks during the COVID-19 pandemic may exacerbate the aforementioned cybersecurity risks. In addition, while we have, among other things, established enhanced cleaning procedures at our facilities and protocols for responding when our associates are infected, we cannot assure these will be sufficient to mitigate the risks faced by our work force or the liability we may face as a given project. The resultsresult of complex legal proceedingsany outbreaks of COVID-19.
If the severity and duration of the COVID-19 pandemic does not abate and related containment measures are difficult to predict. Moreover,not lifted, are eased more slowly than anticipated, or are reinstituted, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. Even if we are able to estimate losses related to these actions, the ultimate amount of lossother risks described herein may be materially higher than our estimates. Certain of these lawsuits assert types of claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of one or more of these lawsuits, or any future lawsuits, may result inhave a significant monetary judgment or award against us or a significant monetary payment by us, and could have a material adverse effectimpact on our business, financial condition, or results of operations. Even if these lawsuits, or any future lawsuits, are not resolved against us, the costs of defending such lawsuits and of any settlement may be significant. These costs may exceed the dollar limits of our insurance policies or may not be covered at all by our insurance policies. Because the price of our common stock has been, and may continue to be, volatile, we can provide no assurance that additional securities or other litigation will not be filed against us in the future. See Note 14. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements for more information on our legal proceedings, including our securities class action and derivative actions.
We may not realize the anticipated benefits of past or future business combinations or acquisition transactions, and integration of business combinations may disrupt our business and management.
We have made several acquisitions in prior years and in the future we may acquire additional companies, project pipelines, products, equity interests, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of such business combinations or acquisitions, and each transaction has numerous risks, which may include the following:
difficulty in assimilating the operations and personnel of the acquired or partner company;
difficulty in effectively integrating the acquired products or technologies with our current products or technologies;
difficulty in achieving profitable commercial scale from acquired technologies;
difficulty in maintaining controls, procedures, and policies during the transition and integration;
disruption of our ongoing business and distraction of our management and associates from other opportunities and challenges due to integration issues;
difficulty integrating the acquired or partner company’s accounting, management information, and other administrative systems;
difficulty managing joint ventures with our partners, potential litigation with joint venture partners, and reliance upon joint ventures that we do not control;
inability to retain key technical and managerial personnel of the acquired business;
inability to retain key customers, vendors, and other business partners of the acquired business;
inability to achieve the financial and strategic goals for the acquired and combined businesses, as a result of insufficient capital resources or otherwise;
incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
potential impairment of our relationships with our associates, customers, partners, distributors, or third-party providers of products or technologies;
potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things;
potential inability to assert that internal controls over financial reporting are effective;
potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and
potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings.
Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations. In addition, we may seek to dispose of our interests in acquired companies, project pipelines, products, or technologies. We may not recover our initial investment in such interests, in part or at all, which could adversely affect our business, financial condition, or results of operations.
Our future success depends on our ability to retain our key associates and to successfully integrate them into our management team.General Risk Factors
We are dependent on the services of our executive officers and other members of our senior management team. The loss of one or more of these key associates or any other member of our senior management team could have a material adverse effect on our business. We may not be able to retain or replace these key associates and may not have adequate succession plans in place. Several of our current key associates including our executive officers are subject to employment conditions or arrangements that contain post-employment non-competition provisions. However, these arrangements permit the associates to terminate their employment with us upon little or no notice.
If we are unable to attract, train, and retain key personnel, our business may be materially and adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train, and retain management, operations, sales, training, and technical personnel, including personnel in foreign jurisdictions. Recruiting and retaining capable personnel, particularly those with expertise in the PV solar industry across a variety of technologies, are vital to our success. There is substantial competition for qualified technical personnel, and while we continue to benchmark our organization against the broad spectrum of business in our market space to remain economically competitive, there can be no assurances that we will be able to attract and retain our technical personnel. If we are unable to attract and retain qualified associates, or otherwise experience unexpected labor disruptions within our business, we may be materially and adversely affected.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards or prohibit us from the manufacture and sale of our solar modules or the use of our technology.
Our success depends largely on our ability to use and develop our technology and know-how without infringing or misappropriating the intellectual property rights of third parties. The validity and scope of claims relating to PV solar technology patents involve complex scientific, legal, and factual considerations and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, which may not be available on reasonable terms, or at all, or pay ongoing royalties, require us to redesign our solar modules, or subject us to injunctions prohibiting the manufacture and sale of our solar modules or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our solar modules until the resolution of such litigation.
Currency translation and transaction risk may negatively affect our results of operations.
Although our reporting currency is the U.S. dollar, we conduct certain business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. For example, certain of our net sales in 2019 were denominated in foreign currencies, such as Australian dollar and Euro, and we expect to continue to have net sales denominated in foreign currencies in the future. Joint ventures or other business arrangements with strategic partners outside the United States have involved, and in the future may involve, significant investments denominated in local currencies. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our results of operations and result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.
We could also expand our business into emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such emerging markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds.
Our ability to hedge foreign currency exposure is dependent on our credit profile with the banks that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposures; and therefore, result in exchange gains or losses.
Our largest stockholder has significant influence over us and his interests may conflict with or differ from interests of other stockholders.
Our largest stockholder, Lukas T. Walton (the “Significant Stockholder”), owned approximately 21% of our outstanding common stock as of December 31, 2019. As a result, the Significant Stockholder has substantial influence over all matters requiring stockholder approval, including the election of our directors and the approval of significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets. The interests of the Significant Stockholder could conflict with or differ from interests of other stockholders. For example, the concentration of ownership held by the Significant Stockholder could delay, defer, or prevent a change of control of our company or impede a merger, takeover, or other business combination, which other stockholders may view favorably.
If our long-lived assets or project related assets become impaired, we may be required to record significant charges to earnings.
We may be required to record significant charges to earnings should we determine that our long-lived assets or project related assets are impaired. Such charges may have a material impact on our financial position and results of operations. We review long-lived and project related assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed or if the expected operating cash flows from future power generation exceed the cost basis of the asset. If our projects are not considered commercially viable, we would be required to impair the respective assets.
UnanticipatedOur credit agreements contain covenant restrictions that may limit our ability to operate our business.
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, and obtain additional financing, if needed, because the senior secured credit facility made available under our tax provision, the enactmentamended and restated credit agreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent (the “Revolving Credit Facility”) and certain of new tax legislation, or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the jurisdictions in which we operate. In December 2017, the United States enacted the Tax Act. The changes included in the Tax Act are broadproject financing arrangements contain, and complex, and the final effects of the Tax Actother future debt agreements may differ from the amounts provided elsewhere in this Annual Report on Form 10-K, possibly materially, duecontain, covenant restrictions that limit our ability to, among other things, changesthings:
•incur additional debt, assume obligations in regulations relatedconnection with letters of credit, or issue guarantees;
•create liens;
•enter into certain transactions with our affiliates;
•sell certain assets; and
•declare or pay dividends, make other distributions to stockholders, or make other restricted payments.
Under our Revolving Credit Facility and certain of our project financing arrangements, we are also subject to certain financial covenants. Our ability to comply with covenants under our credit agreements is dependent on our future performance or the Tax Act,performance of specifically financed projects, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under these agreements and any legislative actionof our other future debt agreements, which if not cured or waived, could permit the holders thereof to address questionsaccelerate such debt and could cause cross-defaults under our other facility agreements and the possible acceleration of debt under such agreements, as well as cross-defaults under certain of our key project and operational agreements and could also result in requirements to post additional security instruments to secure future obligations. In addition, certain events that arise becauseoccur within the Company, or in the industry or the economy as a whole, may constitute material adverse effects under these agreements. If it is determined that a material adverse effect has occurred, the lenders can, under certain circumstances, restrict future borrowings or accelerate the due date of the Tax Act,outstanding amounts. If any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or actionsof our debt is accelerated, we may take as a result of the Tax Act. Additionally, longstanding international tax laws that determine each country’s jurisdictional tax rights in cross-border international trade continue to evolve as a result of the base erosionexperience cross-defaults under our other debt or operational agreements, which could materially and profit shifting reporting requirements recommended by the OECD. As these and other tax laws and regulations change,adversely affect our business, financial condition, and results of operations could be adversely affected.
We are subject to potential tax examinations in various jurisdictions, and taxing authorities may disagree with our interpretations of U.S. and foreign tax laws and may assess additional taxes. We regularly assess the likely outcomes of these examinations in order to determine the appropriateness of our tax provision; however, the outcome of tax examinations cannot be predicted with certainty. Therefore, the amounts ultimately paid upon resolution of such examinations could be materially different from the amounts previously included in our income tax provision, which could have a material impact on our results of operations and cash flows.
In addition, our future effective tax rate could be adversely affected by changes to our operating structure, losses of tax holidays, changes in the jurisdictional mix of earnings among countries with tax holidays or differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. Any changes in our effective tax rate may materially and adversely impact our results of operations.
Cyber-attacks or other breaches of our information systems, or those of third parties with which we do business, could have a material adverse effect on our business, financial condition, and results of operations.
Our operations rely on our computer systems, hardware, software, and networks, as well as those of third parties with which we do business, to securely process, store, and transmit proprietary, confidential, and other information, including intellectual property. We also rely heavily on these information systems to operate our manufacturing lines and PV solar power plants. These information systems may be compromised by cyber-attacks, computer viruses, and other events that could be materially disruptive to our business operations and could put the security of our information, and that of the third parties with which we do business, at risk of misappropriation or destruction. In recent years, such cyber incidents have become increasingly frequent and sophisticated, targeting or otherwise affecting a wide range of companies. While we have instituted security measures to minimize the likelihood and impact of a cyber incident, there is no assurance that these measures, or those of the third parties with which we do business, will be adequate in the future. If these measures fail, valuable information may be lost; our manufacturing, development, construction, O&M, and other operations may be disrupted; we may be unable to fulfill our customer obligations; and our reputation may suffer. For example, any cyber incident affecting our automated manufacturing lines could adversely affect our ability to produce solar modules or otherwise affect the quality and performance of the modules produced. We may also be subject to litigation, regulatory action, remedial expenses, and financial losses beyond the scope or limits of our insurance coverage. These consequences of a failure of security measures could, individually or in the aggregate, have a material adverse effect on our business, financial condition, and results of operations.
As a result of the COVID-19 pandemic, the vast majority of our associates who are capable of performing their function remotely are telecommuting, which may exacerbate the aforementioned cybersecurity risks. See the Risk Factor entitled “The COVID-19 pandemic could materially impact our business, financial condition, and results of operations.”
We may not realize the anticipated benefits of past or future business combinations or acquisition transactions, and integration of business combinations may disrupt our business and management.
We have made several acquisitions in prior years and in the future we may acquire additional companies, project pipelines, products, equity interests, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of such business combinations or acquisitions, and each transaction has numerous risks, which may include the following:
•difficulty in assimilating the operations and personnel of the acquired or partner company;
•difficulty in effectively integrating the acquired products or technologies with our current products or technologies;
•difficulty in achieving profitable commercial scale from acquired technologies;
•difficulty in maintaining controls, procedures, and policies during the transition and integration;
•disruption of our ongoing business and distraction of our management and associates from other opportunities and challenges due to integration issues;
•difficulty integrating the acquired or partner company’s accounting, management information, and other administrative systems;
•difficulty managing joint ventures with our partners, potential litigation with joint venture partners, and reliance upon joint ventures that we do not control;
•inability to retain key technical and managerial personnel of the acquired business;
•inability to retain key customers, vendors, and other business partners of the acquired business;
•inability to achieve the financial and strategic goals for the acquired and combined businesses, as a result of insufficient capital resources or otherwise;
•incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
•potential impairment of our relationships with our associates, customers, partners, distributors, or third-party providers of products or technologies;
•potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things;
•potential inability to assert that internal controls over financial reporting are effective;
•potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and
•potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings.
Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations. In addition, we may seek to dispose of our interests in acquired companies, project pipelines, products, or technologies. We may not recover our initial investment in such interests, in part or at all, which could adversely affect our business, financial condition, or results of operations.
Our future success depends on our ability to retain our key associates and to successfully integrate them into our management team.
We are dependent on the services of our executive officers and other members of our senior management team. The loss of one or more of these key associates or any other member of our senior management team could have a
material adverse effect on our business. We may not be able to retain or replace these key associates and may not have adequate succession plans in place. Several of our current key associates including our executive officers are subject to employment conditions or arrangements that contain post-employment non-competition provisions. However, these arrangements permit the associates to terminate their employment with us upon little or no notice.
If we are unable to attract, train, and retain key personnel, our business may be materially and adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train, and retain management, operations, sales, and technical personnel, including personnel in foreign jurisdictions. Recruiting and retaining capable personnel, particularly those with expertise in the PV solar industry across a variety of technologies, are vital to our success. There is substantial competition for qualified technical personnel, and while we continue to benchmark our organization against the broad spectrum of business in our market space to remain economically competitive, there can be no assurances that we will be able to attract and retain our technical personnel. If we are unable to attract and retain qualified associates, or otherwise experience unexpected labor disruptions within our business, we may be materially and adversely affected.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards or prohibit us from the manufacture and sale of our solar modules or the use of our technology.
Our success depends largely on our ability to use and develop our technology and know-how without infringing or misappropriating the intellectual property rights of third parties. The validity and scope of claims relating to PV solar technology patents involve complex scientific, legal, and factual considerations and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, which may not be available on reasonable terms, or at all, or pay ongoing royalties, require us to redesign our solar modules, or subject us to injunctions prohibiting the manufacture and sale of our solar modules or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our solar modules until the resolution of such litigation.
Currency translation and transaction risk may negatively affect our results of operations.
Although our reporting currency is the U.S. dollar, we conduct certain business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. For example, certain of our net sales in 2020 were denominated in foreign currencies, such as Japanese yen and Euro, and we expect to continue to have net sales denominated in foreign currencies in the future. Joint ventures or other business arrangements with strategic partners outside the United States have involved, and in the future may involve, significant investments denominated in local currencies. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our results of operations and result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.
We could also expand our business into emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such emerging markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds.
Our ability to hedge foreign currency exposure is dependent on our credit profile with the banks that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market
conditions could limit our ability to hedge our foreign currency exposures; and therefore, result in exchange gains or losses.
Unanticipated changes in our tax provision, the enactment of new tax legislation, or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the jurisdictions in which we operate. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The changes included in the CARES Act are broad and complex, and the final effects of the CARES Act may differ from the amounts provided elsewhere in this Annual Report on Form 10-K, possibly materially, due to, among other things, changes in regulations related to the CARES Act, any legislative action to address questions that arise because of the CARES Act, any changes in accounting standards for income taxes or related interpretations in response to the CARES Act, or actions we may take as a result of the CARES Act. Additionally, longstanding international tax laws that determine each country’s jurisdictional tax rights in cross-border international trade continue to evolve as a result of the base erosion and profit shifting reporting requirements recommended by the OECD. As these and other tax laws and regulations change, our business, financial condition, and results of operations could be adversely affected.
We are subject to potential tax examinations in various jurisdictions, and taxing authorities may disagree with our interpretations of U.S. and foreign tax laws and may assess additional taxes. We regularly assess the likely outcomes of these examinations in order to determine the appropriateness of our tax provision; however, the outcome of tax examinations cannot be predicted with certainty. Therefore, the amounts ultimately paid upon resolution of such examinations could be materially different from the amounts previously included in our income tax provision, which could have a material impact on our results of operations and cash flows.
In addition, our future effective tax rate could be adversely affected by changes to our operating structure, losses of tax holidays, changes in the jurisdictional mix of earnings among countries with tax holidays or differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. Any changes in our effective tax rate may materially and adversely impact our results of operations.
We have been and may be subject to or involved in litigation or threatened litigation, the outcome of which may be difficult to predict, and which may be costly to defend, divert management attention, require us to pay damages, or restrict the operation of our business.
From time to time, we have been and may be subject to disputes and litigation, with and without merit, that may be costly and which may divert the attention of our management and our resources in general, whether or not any dispute actually proceeds to litigation. The results of complex legal proceedings are difficult to predict. Moreover, complaints filed against us may not specify the amount of damages that plaintiffs seek, and we therefore may be unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. Even if we are able to estimate losses related to these actions, the ultimate amount of loss may be materially higher than our estimates. Any resolution of litigation, or threatened litigation, could involve the payment of damages or expenses by us, which may be significant, involve an agreement with terms that restrict the operation of our business, or adversely impact our ability to proceed with the construction or sale of a given project. Even if any future lawsuits are not resolved against us, the costs of defending such lawsuits may be significant. These costs may exceed the dollar limits of our insurance policies or may not be covered at all by our insurance policies. Because the price of our common stock has been, and may continue to be, volatile, we can provide no assurance that additional securities or other litigation will not be filed against us in the future. See Note 13. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements for more information on our legal proceedings.
Changes in, or any failure to comply with, privacy laws, regulations, and standards may adversely affect our business.
Personal privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions in which we operate. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Furthermore, federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy, all of which may be subject to invalidation by relevant foreign judicial bodies. Industry organizations also regularly adopt and advocate for new standards in this area.
In the United States, these include rules and regulations promulgated or pending under the authority of federal agencies, state attorneys general, legislatures, and consumer protection agencies. Internationally, many jurisdictions in which we operate have established their own data security and privacy legal framework with which we, relevant suppliers, and customers must comply. For example, the General Data Protection Regulation, a broad-based data privacy regime enacted by the European Parliament, which became effective in May 2018, imposes new requirements on how we collect, process, transfer, and store personal data, and also imposes additional obligations, potential penalties, and risk upon our business. Additionally, the California Consumer Privacy Act, which becomesbecame effective in January 2020, imposes similar data privacy requirements. In many jurisdictions, enforcement actions and consequences for noncompliance are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Although we have implemented policies, procedures, and, in certain cases, contractual arrangements designed to facilitate compliance with applicable privacy and data security laws and standards, any inability or perceived inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies, could result in additional fines, costs, and liabilities to us, damage our reputation, inhibit sales, and adversely affect our business.
Our credit agreements contain covenant restrictions that may limit our ability to operate our business.
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, and obtain additional financing, if needed, because the senior secured credit facility made available under our amended and restated credit agreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent (the “Revolving Credit Facility”) and certain of our project financing
arrangements contain, and other future debt agreements may contain, covenant restrictions that limit our ability to, among other things:
incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;
create liens;
enter into certain transactions with our affiliates;
sell certain assets; and
declare or pay dividends, make other distributions to stockholders, or make other restricted payments.
Under our Revolving Credit Facility and certain of our project financing arrangements, we are also subject to certain financial covenants. Our ability to comply with covenants under our credit agreements is dependent on our future performance or the performance of specifically financed projects, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under these agreements and any of our other future debt agreements, which if not cured or waived, could permit the holders thereof to accelerate such debt and could cause cross-defaults under our other facility agreements and the possible acceleration of debt under such agreements, as well as cross-defaults under certain of our key project and operational agreements and could also result in requirements to post additional security instruments to secure future obligations. In addition, certain events that occur within the Company, or in the industry or the economy as a whole, may constitute material adverse effects under these agreements. If it is determined that a material adverse effect has occurred, the lenders can, under certain circumstances, restrict future borrowings or accelerate the due date of outstanding amounts. If any of our debt is accelerated, we may experience cross-defaults under our other debt or operational agreements, which could materially and adversely affect our business, financial condition, and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019,2020, our principal properties consisted of the following:
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| | | | | | | | | | | | | | | | | | | |
Nature | | Primary Segment(s) Using Property | | Location | | Held |
Corporate headquarters | | Modules & Systems | | Tempe, Arizona, United States | | Lease |
Manufacturing plant, R&D facility, and administrative offices (1) | | Modules | | Perrysburg, Ohio, United States | | Own |
Administrative offices | | Systems | | San Francisco, California, United States | | Lease |
R&D facility | | Modules & Systems | | Santa Clara, California, United States | | Lease |
Manufacturing plant and administrative offices | | Modules | | Kulim, Kedah, Malaysia | | Lease land, own buildings |
Administrative offices | | Modules & Systems | | Georgetown, Penang, Malaysia | | Lease |
Manufacturing plant | | Modules | | Ho Chi Minh City, Vietnam | | Lease land, own buildings |
Manufacturing plant (2) | | Modules | | Frankfurt/Oder, Germany | | Own |
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(1) | Includes our manufacturing plant located in Lake Township, Ohio, a short distance from our plant in Perrysburg, Ohio. |
| |
(2) | In December 2012, we ceased manufacturing at our German plant. Since its closure, we have continued to market such property for sale. |
(1)Includes our manufacturing plant located in Lake Township, Ohio, a short distance from our plant in Perrysburg, Ohio.
(2)In December 2012, we ceased manufacturing at our German plant. Since its closure, we have, from time to time, marketed such property for sale.
Item 3. Legal Proceedings
See Note 14.13. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements for information regarding legal proceedings and related matters.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on The Nasdaq Stock Market LLC under the symbol FSLR.
Holders
As of February 14, 2020,19, 2021, there were 4647 record holders of our common stock, which does not reflect beneficial owners of our shares.
Dividend Policy
We have never paid and do not expect to pay dividends on our common stock for the foreseeable future. Furthermore, our Revolving Credit Facility imposes restrictions on our ability to declare or pay dividends. The declaration and payment of dividends is subject to the discretion of our board of directors and depends on various factors, including our net income, financial condition, cash requirements, and future prospects as well as the restrictions under our Revolving Credit Facility and other factors considered relevant by our board of directors. We expect to prioritize our working capital requirements, capacity expansion and other capital expenditure needs, project development and construction, and merger and acquisition opportunities prior to returning capital to our shareholders.
Stock Price Performance Graph
The following graph compares the five-year cumulative total return on our common stock relative to the cumulative total returns of the S&P 500 Index and the Invesco Solar ETF, which represents a peer group of solar companies. For purposes of the graph, an investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, the S&P 500 Index, and the Invesco Solar ETF on December 31, 2014,2015, and its relative performance is tracked through December 31, 2019.2020. This graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof, and irrespective of any general incorporation language in any such filing. The stock price performance shown in the graph represents past performance and is not necessarily indicative of future stock price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among First Solar, the S&P 500 Index,
and the Invesco Solar ETF
——————————
* $100 invested on December 31, 2015 in stock or index, including reinvestment of dividends. Index calculated on a month-end basis.
| |
* | $100 invested on December 31, 2014 in stock or index, including reinvestment of dividends. Index calculated on a month-end basis. |
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliate Purchases
None.
Item 6. Selected Financial Data
The following tables set forth our selected financial data for the periods and at the dates indicated. The selected financial data from the consolidated statements of operations and consolidated statements of cash flows for the years ended December 31, 2020, 2019, 2018, and 20172018 and the selected financial data from the consolidated balance sheets as of December 31, 20192020 and 20182019 have been derived from the audited consolidated financial statements included in this Annual Report on Form 10-K. The selected financial data from the consolidated statements of operations and consolidated statements of cash flows for the years ended December 31, 20162017 and 20152016 and the selected financial data from the consolidated balance sheets as of December 31, 2018, 2017, 2016, and 20152016 have been derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The information presented below should also be read in conjunction with our consolidated financial statements and the related notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (In thousands, except per share amounts) |
Net sales | | $ | 2,711,332 | | | $ | 3,063,117 | | | $ | 2,244,044 | | | $ | 2,941,324 | | | $ | 2,904,563 | |
Gross profit | | 680,673 | | | 549,212 | | | 392,177 | | | 548,947 | | | 638,418 | |
Operating income (loss) | | 317,489 | | | (161,785) | | | 40,113 | | | 177,851 | | | (568,151) | |
Net income (loss) | | 398,355 | | | (114,933) | | | 144,326 | | | (165,615) | | | (416,112) | |
Net income (loss) per share: | | | | | | | | | | |
Basic | | $ | 3.76 | | | $ | (1.09) | | | $ | 1.38 | | | $ | (1.59) | | | $ | (4.05) | |
Diluted | | $ | 3.73 | | | $ | (1.09) | | | $ | 1.36 | | | $ | (1.59) | | | $ | (4.05) | |
Cash dividends declared per common share | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 37,120 | | | $ | 174,201 | | | $ | (326,809) | | | $ | 1,340,677 | | | $ | 206,753 | |
Net cash (used in) provided by investing activities | | (131,227) | | | (362,298) | | | (682,714) | | | (626,802) | | | 144,520 | |
Net cash (used in) provided by financing activities | | (82,587) | | | 74,943 | | | 255,228 | | | 192,045 | | | (136,393) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (In thousands) |
Cash and cash equivalents | | $ | 1,227,002 | | | $ | 1,352,741 | | | $ | 1,403,562 | | | $ | 2,268,534 | | | $ | 1,347,155 | |
Marketable securities | | 520,066 | | | 811,506 | | | 1,143,704 | | | 720,379 | | | 607,991 | |
Total assets | | 7,108,931 | | | 7,515,689 | | | 7,121,362 | | | 6,864,501 | | | 6,824,368 | |
Total long-term debt | | 279,231 | | | 471,697 | | | 466,791 | | | 393,540 | | | 188,388 | |
Total liabilities | | 1,588,003 | | | 2,418,922 | | | 1,908,959 | | | 1,765,804 | | | 1,606,019 | |
Total stockholders’ equity | | 5,520,928 | | | 5,096,767 | | | 5,212,403 | | | 5,098,697 | | | 5,218,349 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (In thousands, except per share amounts) |
Net sales | | $ | 3,063,117 |
| | $ | 2,244,044 |
| | $ | 2,941,324 |
| | $ | 2,904,563 |
| | $ | 4,112,650 |
|
Gross profit | | 549,212 |
| | 392,177 |
| | 548,947 |
| | 638,418 |
| | 1,132,762 |
|
Operating (loss) income | | (161,785 | ) | | 40,113 |
| | 177,851 |
| | (568,151 | ) | | 730,159 |
|
Net (loss) income | | (114,933 | ) | | 144,326 |
| | (165,615 | ) | | (416,112 | ) | | 593,406 |
|
Net (loss) income per share: | | |
| | |
| | |
| | |
| | |
|
Basic | | $ | (1.09 | ) | | $ | 1.38 |
| | $ | (1.59 | ) | | $ | (4.05 | ) | | $ | 5.88 |
|
Diluted | | $ | (1.09 | ) | | $ | 1.36 |
| | $ | (1.59 | ) | | $ | (4.05 | ) | | $ | 5.83 |
|
Cash dividends declared per common share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 174,201 |
| | $ | (326,809 | ) | | $ | 1,340,677 |
| | $ | 206,753 |
| | $ | (325,209 | ) |
Net cash (used in) provided by investing activities | | (362,298 | ) | | (682,714 | ) | | (626,802 | ) | | 144,520 |
| | (156,177 | ) |
Net cash provided by (used in) financing activities | | 74,943 |
| | 255,228 |
| | 192,045 |
| | (136,393 | ) | | 101,207 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Cash and cash equivalents | | $ | 1,352,741 |
| | $ | 1,403,562 |
| | $ | 2,268,534 |
| | $ | 1,347,155 |
| | $ | 1,126,826 |
|
Marketable securities | | 811,506 |
| | 1,143,704 |
| | 720,379 |
| | 607,991 |
| | 703,454 |
|
Total assets | | 7,515,689 |
| | 7,121,362 |
| | 6,864,501 |
| | 6,824,368 |
| | 7,360,392 |
|
Total long-term debt | | 471,697 |
| | 466,791 |
| | 393,540 |
| | 188,388 |
| | 289,415 |
|
Total liabilities | | 2,418,922 |
| | 1,908,959 |
| | 1,765,804 |
| | 1,606,019 |
| | 1,741,996 |
|
Total stockholders’ equity | | 5,096,767 |
| | 5,212,403 |
| | 5,098,697 |
| | 5,218,349 |
| | 5,618,396 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the “Note Regarding Forward-Looking Statements” that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under Item 1A. “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. This discussion and analysis does not address certain items in respect of the year ended December 31, 20172018 in reliance on amendments to disclosure requirements adopted by the SEC in 2019. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 20182019 for comparative discussions of our results of operations and liquidity and capital resources for the years ended December 31, 20182019 and 2017.2018.
Executive Overview
We are a leading global provider of comprehensive PV solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin film semiconductor technology and also develop and sell PV solar power systems that primarily use the modules we manufacture. Additionally, in certain markets we provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on various technology innovations. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers.
Certain of our financial results and other key operational developments for the year ended December 31, 20192020 include the following:
•Net sales for 2019 increased2020 decreased by 36%11% to $2.7 billion compared to $3.1 billion compared to $2.2 billion in 2018.2019. The increasedecrease in net sales was primarily attributable to an increase in third-party module sales, the sale of the Sun Streams, Sunshine Valley, and Beryl projects, and ongoing construction activities at the Phoebe and GA Solar 4 projects, partially offset by the sale of the Mashiko and certain Indian projects in 2018 and the completion of substantially all construction activities at the California Flats, Willow Springs,Sun Streams, Phoebe, Sunshine Valley, Rosamond, Seabrook, and various otherLake Hancock projects in Florida2019, the sale of the Beryl and Little Bear projects in late 20182019, and early 2019.lower construction activities at the GA Solar 4 project in the current period, partially offset by the sale of the Ishikawa, American Kings, Miyagi, Anamizu, Tungabhadra, and Anantapur projects in 2020 and an increase in the volume of modules sold to third parties.
•Gross profit increased 0.47.2 percentage points to 25.1% during 2020 from 17.9% during 2019 from 17.5% during 2018 primarily as a result ofdue to higher gross profit on third-party module sales and improved utilizationthroughput of our manufacturing facilities and a reductionfrom the successful ramp of various Series 6 manufacturing lines, partially offset by the higher benefit from reductions to our product warranty liability due to revisedin the prior period and an impairment loss for certain module return rates, partially offsetmanufacturing equipment.
•During late 2020, we completed the capacity expansion of our manufacturing facility in Perrysburg, Ohio. As of December 31, 2020 we had 6.3 GWDC of total installed Series 6 nameplate production capacity across all our facilities. We produced 6.1 GWDC of solar modules during 2020, which represented a 59% increase in Series 6 module production from 2019. The increase in Series 6 production was primarily driven by the mixproduction capacity added in 2019 at our second facility in Ho Chi Minh City, Vietnam and our facility in Lake Township, Ohio as well as higher throughput at various facilities. We expect to produce between 7.4 GWDC and 7.6 GWDC of lower gross profit projects soldSeries 6 modules during 2021.
•In response to the COVID-19 pandemic, governmental authorities have recommended or under construction duringordered the period and the settlementlimitation or cessation of a tax examination with the state of Californiacertain business or commercial activities in 2018,jurisdictions in which affected our estimates of sales and use taxes due for certain projects.
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• | During 2019, we commenced commercial production of Series 6 modules at our second manufacturing facility in Ho Chi Minh City, Vietnam and our manufacturing facility in Lake Township, Ohio, bringing our total installed Series 6 nameplate production capacity across all our facilities to 5.5 GWDC. We produced 5.7 GWDC of Series 4 and Series 6 modules during 2019, which represented a 111% increase from 2018. The increase in production was primarily driven by the incremental Series 6 production capacity added at our manufacturing facilities as described above. We expect to produce approximately 5.7 GWDC of solar modules during 2020, substantially all of which will be Series 6 modules.
|
In September 2019, we announced our transition from an internal EPC service model inoperate, including the United States, to an external model, in which we expect to leverage the capabilities of third-party EPC services in providing power plant solutions to our systems segment customers. This transition is not expected to affect any projects currently under construction. The shift to an external EPC service model in the United States aligns with our typical model in international marketsMalaysia, and is facilitated, in part, byVietnam. At this time, such limitations have had limited effect on our Series 6 module technologymanufacturing facilities. However, these orders are subject to continuous revision, and its
our
understanding of the applicability of these orders and any potential exemptions may change at any time. To enable the continuity of our operations, we have implemented a wide range of safety measures intended to inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities.
improved BoS compatibility. See Note 21.“Segment and Geographical Information” to our consolidated financial statements for more information on our operating segments.
•Following an evaluation of the long-term sustainablecost structure, competitiveness, and risk-adjusted returns of our O&M services business, we received an offer to purchase certain portions of the business and determined it is in the best interest of our stockholders to pursue this transaction. As a result, in August 2020 we entered into an agreement with Clairvest for the sale of our North American O&M operations. The completion of the transaction is contingent on a number of closing conditions, including the receipt of certain third-party consents and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in the first half of 2021.
•Following an evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our U.S. project development business, we have determined it is in the best interest of our stockholders to explore options for this business line. This exploration may result in, among other possibilities, a partnership with a third party who possesses complimentary competencies or apursue the sale of all or a portionthis business. On January 24, 2021, we entered into an agreement with OMERS for the sale of our U.S. project development business. This explorationoperations, which comprises the business of optionsdeveloping, contracting for the construction of, and selling utility-scale PV solar power systems. The transaction includes our approximately 10 GWAC utility-scale solar project pipeline, including the advanced-stage Horizon, Madison, Ridgely, Rabbitbrush, and Oak Trail projects that are expected to commence construction in the next two years; the 30 MWAC Barilla Solar project, which is operational; and certain other equipment. In addition, OMERS has agreed to certain module purchase commitments. The completion of the transaction is contingent on a number of closing conditions, including the receipt of regulatory approval from FERC, the expiration of the mandatory waiting period under U.S. project development business is not subjectantitrust laws, a review of the transaction by CFIUS, and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to any definitive timetable and there can be no assurances that this process will resultcompleted in any transaction.the first half of 2021.
•In January 2020, we entered into a Memorandum of Understanding (“MOU”) to settle a class action lawsuit filed in 2012 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 officers and directors.directors (the “Class Action”). Pursuant to the MOU, we agreed to paypaid a total of $350 million to settle the claims brought on behalf of all persons who purchased or otherwise acquired the Company’s shares during a specified period, in exchange for mutual releases and a dismissal with prejudice of the complaint upon court approval of the settlement. The proposed settlement containscontained no admission of liability, wrongdoing, or responsibility by any of the parties. The Arizona District Court entered an order in June 2020 that granted final approval of the settlement and dismissed the Class Action with prejudice.
•In June 2020, we entered into an agreement in principle to settle certain claims filed in 2015 in the Arizona District Court by putative stockholders that opted out of the Class Action (the “Opt-Out Action”). In July 2020, the parties executed a definitive settlement agreement pursuant to which we agreed to pay a total of $19 million in exchange for mutual releases and a dismissal with prejudice of the Opt-Out Action. The agreement contained no admission of liability, wrongdoing, or responsibility by any of the parties. In July 2020, First Solar funded the settlement and the parties filed a joint stipulation of dismissal. In September 2020, the Arizona District Court entered an order dismissing the case with prejudice.
Market Overview
The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. In particular, module average selling prices in many global markets have declined in recent years and are expected to continue to decline to some degree in the future. Furthermore, the COVID-19 pandemic has adversely affected certain purchasers of modules and systems, which may result in additional pressure on demand and average selling prices. In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. WeAccordingly, we believe the solar
industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will continue toalso put pressure on pricing.pricing, which may be exacerbated by the COVID-19 pandemic’s disruption of the global economy. Additionally, intense competition at the system level may result in an environment in which pricing falls rapidly, thereby furtherpotentially increasing demand for solar energy solutions but constraining the ability for project developers and diversified module manufacturers to sustain meaningful and consistent profitability. In light of such market realities, we are focusingcontinue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process, our diversified capabilities, our financial viability, and the sustainability advantage of our modules and systems.
Global solar markets continue to expand and develop, in part aided by demand elasticity resulting from declining industry average selling prices, both at the module and system levels, which have promoted the widespread adoption of solar energy. As a result of such market opportunities, we are expanding our manufacturing capacity while alsoand developing and operating multiple solar projects around the worldin certain markets as we execute on our advanced-stage utility-scale project pipeline. We also continue to develop our early-to-mid-stage project pipeline and evaluate acquisitions of projects to further expand both our early-to-mid-stage and advanced-stage pipelines. See the tables under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for additional information about projects within our advanced-stage pipeline. Although we expect a meaningful portion of our future consolidated net sales, operating income, and cash flows to be derived from such projects, we expect third-party module sales to continue to have a more significant impact on our operating results as we continue to expand our manufacturing capacity and leverage the benefits of our Series 6 module technology.
Lower industry module and system pricing is expected to continue to contribute to diversification in global electricity generation and further demand for solar energy solutions as such solutions compete economically with traditional forms of energy generation.energy. Over time, however, declining average selling prices may adversely affect our results of operations to the extent we have not already entered into contracts for future module or system sales. IfOur results of operations could also be adversely affected if competitors reduce pricing to levels below their costs;costs, bid aggressively low prices for module sale agreements or PPAs;PPAs, or are able to operate at minimal or negative operating margins for sustained periods of time,time. For certain of our resultscompetitors, such actions may be enabled by their direct or indirect access to sovereign capital or other forms of operations could be further adversely affected.state-owned support. In certain markets in California and elsewhere, an oversupply imbalance at the grid level may reduce short-
to-mediumshort-to-medium term demand for new solar installations relative to prior years, lower PPA pricing, and lower margins on module and system sales to such markets. However, we believe the effects of such imbalance can be mitigated by modern solar power plants and energy storage solutions that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements, continuing the development of key markets, partnering with grid operators and utility companies, and implementing certain other cost reduction initiatives.
We face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects. Solar module manufacturers compete with one another on price and on several module value attributes, including wattage (or(through a larger form factor or an improved conversion efficiency), energy yield, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and LCOE. Many crystalline silicon cell and wafer manufacturers continue to transitionhave transitioned from lower efficiency BSF multi-crystalline cells (the legacy technology against which we have generally competed in our markets)competed) to higher efficiency PERC mono-crystalline cells at competitive cost structures. Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC modules are promotingoffer bifacial modules that also capture diffuse irradiance on the back side of a module. The cost effective manufacture of bifacial PERC modules has been enabled, in part, by the expansion of inexpensive crystal growth and diamond wire saw capacity in China. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which, after considering the incremental BoS and other costs, could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce.
We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets
where pricing for modules and systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin-film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing technologyprocess (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers.
In terms of energy yield, in many climates our CdTe solar modules provide an energy production advantage over most monofacial crystalline silicon solar modules of equivalent efficiency rating. For example, our CdTe solar modules provide a superior temperature coefficient, which results in stronger system performance in typical high insolation climates as the majority of a system’s generation, on average, occurs when module temperatures are well above 25°C (standard test conditions). In addition, our CdTe solar modules provide a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to laboratory standards. Our CdTe solar modules also provide a better partial shading response than conventional crystalline silicon solar modules, which may lose up to three times as much power asexperience significantly lower energy generation than CdTe solar modules when partial shading occurs. As a result of these and other factors, our PV solar modules typically produce more annual energy in real world field conditions than conventional modules with the same nameplate capacity. Furthermore, our thin-film CdTe semiconductor technology is immune to cell cracking and its resulting power output loss, a common failure often observed in crystalline silicon modules caused by poor manufacturing, handling, weather, or other conditions.
While our modules and systems are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in additional margin compression, further declines in the average selling prices of our modules and systems erosion in our market share for modules and systems, and/or declines in overall net
sales.additional margin compression. We continue to focus on enhancing the competitiveness of our solar modules and systems by accelerating progress along our module technology and cost reduction roadmaps.
Certain Trends and Uncertainties
We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations.uncertainties. See Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K for discussions of other risks that may affect our business, financial condition, results of operations, and cash flows.us.
Our long-term strategic plans are focused on our goal to create long-term shareholder value through a balance of growth, profitability, and liquidity. In executing such plans, we are focusing on providing utility-scale PV solar energy solutions using our modules in key geographic markets that we believe have a compelling need for mass-scale PV solar electricity, including markets throughout the Americas, the Asia-Pacific region,United States, Japan, Europe, India, and certain other strategic markets. Additionally,While these markets are expected to exhibit strong long-term demand for solar energy, the economic disruption caused by the COVID-19 pandemic has adversely affected near-term demand for electricity at the grid level. As a result, such temporary decline in load may adversely affect demand for specific forms of generation, such as our PV solar energy solutions, depending on the severity and duration of the economic disruption. Given these market dynamics, we are focusingcontinue to focus on opportunities in which our PV solar energy solutions can compete directly with traditional forms of energy generation on an LCOE or similar basis, or complement such generation offerings. SuchThese opportunities include the retirement and replacement of aging fossil fuel-based generation resources with utility-scale PV solar energy solutions. For example, cumulative global retirements of coal generation plants are expected to approximate 900 GWDCDCby 2040, representing a significant increase in the potential market for solar energy.
This focus on our core module and utility-scale offerings exists within a current market environment that includes rooftop and distributed generation solar, particularly in the United States. While it is unclear how rooftop and distributed generation solar might impact our core utility-scale based offerings over the next several years, we believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain international markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions.
Our ability to provide utility-scale offerings on economically attractive terms depends, in part, on market factors outside our control, such as the availability of debt and/or equity financing (including, in the United States, tax equity financing), interest rate fluctuations, domestic or international trade policies, and government support programs. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for such systems and limit the number of potential buyers. For example, we generally sell projects we have developed within our systems business to purchasers that depend on financing to fund the initial capital expenditures required to develop, build, and/or purchase a system. Although governments and central banks around the world have implemented significant measures to support capital markets, the economic disruption caused by the COVID-19 pandemic may result in a long-term tightening of the supply of capital in global financial markets (including, in the United States, a reduction in total tax equity availability). A reduction in the supply of project debt or equity financing (including, in the United States, tax equity financing) caused by the COVID-19 pandemic could make it difficult for our customers to secure the financing necessary to develop, build, purchase, or install systems. Similarly, purchasers of modules may cease or significantly reduce business operations, cease or delay module procurement, encounter an inability to obtain financing, including due to a reduction in the supply of project debt financing or equity investments (including, in the United States, tax equity financing), conserve capital resources, or take other actions in response to the COVID-19 pandemic, which may reduce demand and average selling prices for our modules.
In certain markets, demand for our utility-scale offerings may be affected by specific regulations or policies of governmental bodies or utility regulators. For example, in June 2020, the Japanese legislature enacted an amendment to the Electricity Business Law Enforcement Order for the Ministry of Economy, Trade and Industry of Japan which, among other things, is expected to invalidate the feed-in-tariff certificates for projects that fail to achieve construction plan acceptance, submit an interconnection application, and/or achieve commercial operation within a set period of time following dates specified in their respective certificates. The amendment, which becomes effective in April 2022, applies to all projects regardless of generation type and is intended to release grid capacity reserved for delayed projects to enable other newly developed projects to utilize such capacity at a lower cost of electricity to consumers. The deadline by which a project must achieve construction plan acceptance, submit an interconnection application, and/or achieve commercial operation varies by project, but is no earlier than March 2023. Any deadlines that precede the expected construction plan acceptance and/or commercial operation dates of our various projects in Japan could adversely affect the value of such projects and our ability to secure any related project financing.
We closely evaluate and monitor the appropriate level of resources required as we pursue the most advantageous and cost effective projects and partnerships in our key markets. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. We expect that, over time, the majority of our consolidated net sales, operating income, and cash flows will come from solar offerings in the key geographic markets described above. The timing, execution, and financial impacts of our long-term strategic plans are subject to risks and uncertainties, as described in Item 1A. “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. We are focusingfocus our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with significant current or projected electricity demand, relatively high existing electricity prices, strong demand for renewable energy generation, and high solar resources. As a result, we closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market.
Creating or maintaining a market position in certain strategically targeted markets and energy applications also requires us to adapt to new and changing market conditions. For example, our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins, which may adversely affect our results of operations. We expect the profitability associated with our various sales offerings to vary from one another over time, and possibly vary from our internal long-range profitability expectations and targets, depending on the market opportunity and the relative competitiveness of our offerings compared with other energy solutions, traditional or otherwise, that are available to potential customers. In addition, as we execute on our long-term strategic plans, we will continue to monitor and adapt to any changing dynamics in emerging technologies, such as commercially viable energy storage solutions, which are expected to further enable PV solar power systems to compete with traditional forms of
energy generation by shifting the delivery of energy generated by such systems to periods of greater demand. Storage solutions continue to evolve in terms of technology and cost, and cumulative global deployments of storage capacity are expected to exceed 900 GWDCby 2040, representing a significant increase in the potential market for renewable energy. We will also continue to monitor and adapt to changing dynamicsconditions, including changes in the market set of potential buyers of our modules and solar projects. Market environments with few potential project buyers and a higher cost of capital would generally exert downward pressure on the potential revenue from the solar projects we are developing,such offerings, 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 offerings. For example, the emergence of utility-owned generation has increased the number of potential project buyers as such utility customers benefit from a potentially low cost of capital available through rate-based utility investments. Given their long-term ownership profile, utility-owned generation customers typically seek to partner with diversified and stable companies that can provide a broad spectrum of utility-scale generation solutions, including reliable PV solar projects.technology, thereby mitigating their long-term ownership risks.
On occasion, we may temporarily own and operate certain systems with the intention to sell them at a later date. We may also enter into business arrangements with strategic partners that result in us temporarily retaining an ownership interest in the underlying systems projects we develop, supply modules to, or construct, potentially for a period of up to several years. In these situations, we may retain such ownership interests in a consolidated or unconsolidated separate entity. We may also elect to construct and temporarily retain ownership interests indevelop partially contracted or uncontracted systems for which there is a partial or no PPA with an off-taker, such as a utility, but rather an intent to sell some portion of the electricity produced by the system on an open contract basis until the system is sold. Expected revenue from projects without a PPA for the full off-take of the system is subject to greater variability and uncertainty based on market factors and is typically lower than projects with a PPA for the full off-take of the system. Furthermore, all system pricing is effectedaffected by the pricing of energy to be sold on an open contract basis following the termination of the PPA (i.e., merchant pricing curves), and changes in market assumptions regarding future open contract sales, including potential changes in energy demand caused by the COVID-19 pandemic, may also result in significant variability and uncertainty in the value of our systems projects.
We continually evaluate forecasted global demand, competition, and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. During 2019,We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. As we commenced commercial production of Series 6 modules at our second manufacturing facility in Ho Chi Minh City, Vietnam andevaluate the potential for future capacity expansion, we may also seek to further diversify our manufacturing facility in Lake Township, Ohio, a short distance from our plant in Perrysburg, Ohio. Thesepresence, although we have made no decisions to do so at this time. Such additional manufacturing plants,capacity, and any other potential investments to add or otherwise modify our existing manufacturing capacity in response to market demand and competition, may require significant internal and possibly external sources of capital, and may be subject to certain risks and uncertainties described in Item 1A. “Risk Factors,” including those described under the headings “Our“Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, decrease our manufacturing cost per watt, and, when necessary, continue to build new manufacturing plants over time in response to market demand, all of which are subject to risks and uncertainties”uncertainties” and “If“If any future production lines are not built in line with committed schedules, it may adversely affect our future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.”
”
In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. In addition, due to contraction of the virus, or concerns about becoming ill from the virus, we may experience reductions in the availability of our operational workforce, such as our manufacturing personnel. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availability of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, project development, construction, operating or maintenance operations, or research and development activities. At this time, such limitations have had a limited effect on our manufacturing facilities and certain project construction activities, and we have implemented a wide range of safety measures intended to enable the continuity of our operations and inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities, including those in the United States, Malaysia, and Vietnam.
To address the near-term business disruption caused by the COVID-19 pandemic, many governments have proposed policies or support programs intended to stimulate their respective economies. Such support programs may include additional incentives for renewable energy projects, including PV solar power systems, over several years. While we
compete in many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives.
Systems Project Pipeline
The following tables summarize, as of February 20, 2020,25, 2021, our approximately 1.3 GWAC advanced-stage project pipeline. The actual volume of modules installed in our projects will be greater than the project size in MWAC as module volumes required for a project are based upon MWDC, which will be greater than the MWAC size pursuant to a DC-AC ratio typically ranging from 1.1 to 1.4. Such ratio varies across different projects due to many factors, including PPA pricing and the location, design, and costs of the system. Projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized. A project, or a portion of a project, may also be removed from the tables below in the event athe project is not able to be sold due to the changing economics of the project or other factors or we decide to temporarily own and operate or retain interests in, athe project based on strategic opportunities or market factors.
As part of our transition to an external EPC service model in the United States, we no longer expect to provide EPC services for the customer developed 51 MWAC Troy Solar project for which construction had not commenced.
Accordingly, we removed such project from the tables below as our arrangement with the customer now represents a third-party module sale.
Projects under Sales Agreements
The following table includes uncompleted sold projects and projects under sales contracts subject to conditions precedent, and EPC agreements:precedent:
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Project/Location | | Project Size in MWAC | | PPA Contracted Partner | | Customer | | Expected Year Revenue Recognition Will Be Completed | | % of Revenue Recognized as of December 31, 2020 |
Horizon, Texas | | 200 | | | (2) | | (4) | | (4) | | (4) |
Madison, Ohio (1) | | 196 | | | Verizon Communications | | (4) | | (4) | | (4) |
Ridgely, Tennessee | | 177 | | | Tennessee Valley Authority | | (4) | | (4) | | (4) |
Sun Streams 2, Arizona | | 150 | | | Microsoft Corporation | | (5) | | 2021 (5) | | —% |
Rabbitbrush, California | | 100 | | | (3) | | (4) | | (4) | | (4) |
Oak Trail, North Carolina | | 100 | | | Verizon Communications | | (4) | | (4) | | (4) |
Total | | 923 | | | | | | | | | |
|
| | | | | | | | | | | |
Project/Location | | Project Size in MWAC | | PPA Contracted Partner | | Customer | | Expected Year Revenue Recognition Will Be Completed | | % of Revenue Recognized as of December 31, 2019 |
GA Solar 4, Georgia | | 200 |
| | Georgia Power Company | | Origis Energy USA | | 2020 | | 67% |
Sun Streams, Arizona | | 150 |
| | SCE | | (1) | | 2020 | | 94% |
Sunshine Valley, Nevada | | 100 |
| | SCE | | (1) | | 2020 | | 96% |
Seabrook, South Carolina | | 72 |
| | South Carolina Electric and Gas Company | | Dominion Energy | | 2020 | | 94% |
Japan (multiple locations) | | 52 |
| | TEPCO Energy | | (2) | | 2020 | | —% |
Windhub A, California | | 20 |
| | SCE | | (1) | | 2020 | | 96% |
Total | | 594 |
| | | | | | | | |
Projects with Executed PPAsConfirmed Offtake Agreements Not under Sales Agreements
| | Project/Location | | Project Size in MWAC | | PPA Contracted Partner | | Fully Permitted | | Expected or Actual Substantial Completion Year | | % Complete as of December 31, 2019 | Project/Location | | Project Size in MWAC | | PPA Contracted Partner | | Primary Permits Obtained | | Expected or Actual Substantial Completion Year | | % Complete as of December 31, 2020 |
Sun Streams 2, Arizona | | 150 |
| | Microsoft Corporation | | Yes | | 2020/2021 | | 10% | |
Luz del Norte, Chile | | 141 |
| | (3) | | Yes | | 2016 | | 100% | Luz del Norte, Chile | | 141 | | | (6) | | Yes | | 2016 | | 100% |
American Kings Solar, California | | 123 |
| | SCE | | Yes | | 2020 | | 27% | |
Sun Streams PVS, Arizona | | 65 |
| | APS | | No | | 2022 | | 3% | Sun Streams PVS, Arizona | | 65 | | | (7) | | Yes | | 2022 | | 8% |
Ishikawa, Japan | | 59 |
| | Hokuriku Electric Power Company | | Yes | | 2018 | | 100% | |
Kyoto, Japan | | Kyoto, Japan | | 38 | | | Chubu Electric Power Company | | Yes | | 2022 | | 33% |
Japan (multiple locations) | | 55 |
| | (4) | | Yes | | 2021/2022 | | 17% | Japan (multiple locations) | | 160 | | | (8) | | Yes | | 2021/2023 | | 22% |
Miyagi, Japan | | 40 |
| | Tohoku Electric Power Company | | Yes | | 2021 | | 42% | |
India (multiple locations) | | 40 |
| | (5) | | Yes | | 2017 | | 100% | |
Total | | 673 |
| | Total | | 404 | | |
——————————
| |
(1) | EDP Renewables and ConnectGen |
| |
(2) | Contracted but not specified |
| |
(3) | Approximately 70 MW(1)Previously known as the Big Plain Solar projectAC of the plant’s capacity is contracted under various PPAs
|
| |
(4) | Chubu Electric Power Company – 38 MWAC and Hokuriku Electric Power Company – 17 MWAC
|
| |
(5) | Gulbarga Electricity Supply Co. – 20 MWAC and Chamundeshwari Electricity Supply Co. – 20 MWAC
|
(2)150 MWAC of the plant’s capacity is contracted with Dow Pipeline Company; remaining capacity to be sold on an open contract basis
(3)Central Coast Community Energy – 60 MWAC and Silicon Valley Clean Energy – 40 MWAC
(4)Project included in the sale of our U.S. project development business. Refer to Item 1. “Business – Offerings and Capabilities” for further information.
(5)Contracted but not specified. Project sale completed in February 2021.
(6)Approximately 70 MWAC of the plant’s capacity is contracted under various PPAs; remaining capacity to be sold on an open contract basis
(7)The project’s PPA was terminated in February 2021. We continue to market the project for sale.
(8)11 MWAC has been contracted with Tokyo Electric Power Company. The remaining 149 MWAC has secured feed-in-tariff rights, and the related PPAs for such projects will be executed at a later date.
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended December 31, 2020, 2019,, 2018, and 2017:2018:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | 74.9 | % | | 82.1 | % | | 82.5 | % |
Gross profit | | 25.1 | % | | 17.9 | % | | 17.5 | % |
Selling, general and administrative | | 8.2 | % | | 6.7 | % | | 7.9 | % |
Research and development | | 3.5 | % | | 3.2 | % | | 3.8 | % |
Production start-up | | 1.5 | % | | 1.5 | % | | 4.0 | % |
Litigation loss | | 0.2 | % | | 11.9 | % | | — | % |
Operating income (loss) | | 11.7 | % | | (5.3) | % | | 1.8 | % |
Foreign currency (loss) income, net | | (0.2) | % | | 0.1 | % | | — | % |
Interest income | | 0.6 | % | | 1.6 | % | | 2.7 | % |
Interest expense, net | | (0.9) | % | | (0.9) | % | | (1.2) | % |
Other (expense) income, net | | (0.4) | % | | 0.6 | % | | 1.8 | % |
Income tax benefit (expense) | | 4.0 | % | | 0.2 | % | | (0.2) | % |
Equity in earnings, net of tax | | (0.1) | % | | — | % | | 1.5 | % |
Net income (loss) | | 14.7 | % | | (3.8) | % | | 6.4 | % |
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | 82.1 | % | | 82.5 | % | | 81.3 | % |
Gross profit | | 17.9 | % | | 17.5 | % | | 18.7 | % |
Selling, general and administrative | | 6.7 | % | | 7.9 | % | | 6.9 | % |
Research and development | | 3.2 | % | | 3.8 | % | | 3.0 | % |
Production start-up | | 1.5 | % | | 4.0 | % | | 1.4 | % |
Litigation loss | | 11.9 | % | | — | % | | — | % |
Restructuring and asset impairments | | — | % | | — | % | | 1.3 | % |
Operating (loss) income | | (5.3 | )% | | 1.8 | % | | 6.0 | % |
Foreign currency income (loss), net | | 0.1 | % | | — | % | | (0.3 | )% |
Interest income | | 1.6 | % | | 2.7 | % | | 1.2 | % |
Interest expense, net | | (0.9 | )% | | (1.2 | )% | | (0.9 | )% |
Other income, net | | 0.6 | % | | 1.8 | % | | 0.8 | % |
Income tax benefit (expense) | | 0.2 | % | | (0.2 | )% | | (12.6 | )% |
Equity in earnings, net of tax | | — | % | | 1.5 | % | | 0.1 | % |
Net (loss) income | | (3.8 | )% | | 6.4 | % | | (5.6 | )% |
Segment Overview
We operate our business in two segments. Our modules segment involves the design, manufacture, and sale of CdTe solar modules to third parties, and our systems segment includes the development, construction contracting and management, operation, maintenance, and sale of PV solar power systems, including any modules installed in such systems and any revenue from energy generated by such systems.
Net sales
Modules Business
We generally price and sell our solar modules on a per watt basis. During 2019, Cypress Creek Renewables, 2020, Longroad Energy, NextEra Energy, and NextEra EnergySoftbank each accounted for more than 10% of our modules business net sales, and the majority of our solar modules were sold to integrators and operators of systems in the United States and France.France. Substantially all of our modules business net sales during 20192020 were denominated in U.S. dollars and Euro. We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. The revenue recognition
policies for module sales are further described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements.
Systems Business
During 2019, EDP Renewables, ConnectGen,2020, Goldman Sachs Renewable Power, SMFL Mirai Partners, and Innergex Renewable EnergyMitsui & Co. each accounted for more than 10% of our systems business net sales, and the majority of our systems business net sales were in the United States and Australia.Japan. Substantially all of our systems business net sales during 20192020 were denominated in U.S. dollars and Australian dollars.Japanese yen. We typically recognize revenue for sales of solar power systems using cost based input methods, which result in revenue being recognized as work is performed based on the relationship between actual costs incurred compared to the total estimated costs for a given contract. We may also recognize revenue for the sale of a development project, which excludes EPC services, or for the sale of a completed system when we enter into the associated sales contract with the customer. The revenue recognition policies for our systems business are further described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements.
The following table shows net sales by reportable segment for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Modules | | $ | 1,736,060 | | | $ | 1,460,116 | | | $ | 502,001 | | | $ | 275,944 | | | 19 | % | | $ | 958,115 | | | 191 | % |
Systems | | 975,272 | | | 1,603,001 | | | 1,742,043 | | | (627,729) | | | (39) | % | | (139,042) | | | (8) | % |
Net sales | | $ | 2,711,332 | | | $ | 3,063,117 | | | $ | 2,244,044 | | | $ | (351,785) | | | (11) | % | | $ | 819,073 | | | 36 | % |
|
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Modules | | $ | 1,460,116 |
| | $ | 502,001 |
| | $ | 806,398 |
| | $ | 958,115 |
| | 191 | % | | $ | (304,397 | ) | | (38 | )% |
Systems | | 1,603,001 |
| | 1,742,043 |
| | 2,134,926 |
| | (139,042 | ) | | (8 | )% | | (392,883 | ) | | (18 | )% |
Net sales | | $ | 3,063,117 |
| | $ | 2,244,044 |
| | $ | 2,941,324 |
| | $ | 819,073 |
| | 36 | % | | $ | (697,280 | ) | | (24 | )% |
Net sales from our modules segment increased by $958.1$275.9 million in 20192020 primarily due to a 180%21% increase in the volume of watts sold, andpartially offset by a 4% increase2% decrease in the average selling price per watt. Net sales from our systems segment decreased by $139.0$627.7 million in 20192020 primarily as a result of the sale of the Mashiko and certain India projects in 2018 anddue to the completion of substantially all construction activities at the California Flats, Willow Springs,Sun Streams, Phoebe, Sunshine Valley, Rosamond, Seabrook, and various otherLake Hancock projects in Florida2019, the sale of the Beryl and Little Bear projects in late 20182019, and early 2019,lower construction activities at the GA Solar 4 project in the current period, partially offset by the sale of the Sun Streams, Sunshine Valley,Ishikawa, American Kings, Miyagi, Anamizu, Tungabhadra, and Beryl projects and ongoing construction activities at the Phoebe and GA Solar 4Anantapur projects in 2019.2020.
Cost of sales
Modules Business
Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion).
Systems Business
For our systems business, project-related costs include development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPC costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering, and construction labor), and site specific costs.
The following table shows cost of sales by reportable segment for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Modules | | $ | 1,306,929 | | | $ | 1,170,037 | | | $ | 552,468 | | | $ | 136,892 | | | 12 | % | | $ | 617,569 | | | 112 | % |
Systems | | 723,730 | | | 1,343,868 | | | 1,299,399 | | | (620,138) | | | (46) | % | | 44,469 | | | 3 | % |
Cost of sales | | $ | 2,030,659 | | | $ | 2,513,905 | | | $ | 1,851,867 | | | $ | (483,246) | | | (19) | % | | $ | 662,038 | | | 36 | % |
% of net sales | | 74.9 | % | | 82.1 | % | | 82.5 | % | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Modules | | $ | 1,170,037 |
| | $ | 552,468 |
| | $ | 694,060 |
| | $ | 617,569 |
| | 112 | % | | $ | (141,592 | ) | | (20 | )% |
Systems | | 1,343,868 |
| | 1,299,399 |
| | 1,698,317 |
| | 44,469 |
| | 3 | % | | (398,918 | ) | | (23 | )% |
Cost of sales | | $ | 2,513,905 |
| | $ | 1,851,867 |
| | $ | 2,392,377 |
| | $ | 662,038 |
| | 36 | % | | $ | (540,510 | ) | | (23 | )% |
% of net sales | | 82.1 | % | | 82.5 | % | | 81.3 | % | | |
| | | | | | |
Cost of sales increased $662.0decreased $483.2 million, or 36%19%, and decreased 0.47.2 percentage points as a percent of net sales when comparing 20192020 with 2018.2019. The increasedecrease in cost of sales was driven by a $44.5$620.1 million increasedecrease in our systems segment cost of sales primarily due to the mixlower volume of lower gross profit projects sold or under construction during the period. The increaseSuch decrease in our systems segment cost of sales was also drivenpartially offset by a $617.6$136.9 million increase in our modules segment cost of sales primarily as a result of the following:
•higher costs of $817.5$247.4 million from an increase in the volume of modules sold;
•an impairment loss of $17.4 million for certain module manufacturing equipment, including framing and assembly tools, which were no longer compatible with our long-term module technology roadmap;
a reduction in our module collection•manufacturing related charges of $15.1 million associated with the ongoing COVID-19 pandemic; and recycling liability of $25.4 million in 2018 due to higher by-product credits for glass, lower capital costs, and adjustments to certain valuation assumptions; partially offset by
•a reduction to our product warranty liability of $80.0 million in 2019 due to revised module return rates; partially offset by
•a reduction to our product warranty liability of $19.7 million in 2020 due to lower-than-expected settlements for our older series of module technology and revisions to projected settlements;
•lower under-utilization and certain other charges associated with the initial ramp of certain Series 6 manufacturing lines, which decreased cost of sales by $40.3 million;$61.7 million compared to 2019;
•a reduction in our module collection and recycling liability of $18.9 million primarily due to changes to the estimated timing of cash flows associated with capital, labor, and maintenance costs and updates to certain valuation assumptions; and
•continued reductions in themodule cost per watt of our solar modules,reductions, which decreased cost of sales by $107.1$157.2 million.
Gross profit
Gross profit may be affected by numerous factors, including the selling prices of our modules and systems, our manufacturing costs, project development costs, BoS costs, the capacity utilization of our manufacturing facilities, and foreign exchange rates. Gross profit may also be affected by the mix of net sales from our modules and systems businesses.
The following table shows gross profit for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Gross profit | | $ | 680,673 | | | $ | 549,212 | | | $ | 392,177 | | | $ | 131,461 | | | 24 | % | | $ | 157,035 | | | 40 | % |
% of net sales | | 25.1 | % | | 17.9 | % | | 17.5 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Gross profit | | $ | 549,212 |
| | $ | 392,177 |
| | $ | 548,947 |
| | $ | 157,035 |
| | 40 | % | | $ | (156,770 | ) | | (29 | )% |
% of net sales | | 17.9 | % | | 17.5 | % | | 18.7 | % | | | | | | |
| | |
|
Gross profit increased 0.47.2 percentage points to 25.1% during 2020 from 17.9% during 2019 from 17.5% during 2018 primarily as a result ofdue to higher gross profit on third-party module sales and improved utilizationthroughput of our manufacturing facilities andfrom the reductionsuccessful ramp of various Series 6 manufacturing lines, partially offset by the lower benefit from reductions to our product warranty liability described above, partially offset byand the mix of lower gross profit projects sold or under construction during the period, the settlement of a tax examination with the state of California in 2018, which affected our estimates of sales and use taxes dueimpairment loss for certain projects, and the reduction to our module collection and recycling liability in 2018manufacturing equipment described above.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.
The following table shows selling, general and administrative expense for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Selling, general and administrative | | $ | 222,918 | | | $ | 205,471 | | | $ | 176,857 | | | $ | 17,447 | | | 8 | % | | $ | 28,614 | | | 16 | % |
% of net sales | | 8.2 | % | | 6.7 | % | | 7.9 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Selling, general and administrative | | $ | 205,471 |
| | $ | 176,857 |
| | $ | 202,699 |
| | $ | 28,614 |
| | 16 | % | | $ | (25,842 | ) | | (13 | )% |
% of net sales | | 6.7 | % | | 7.9 | % | | 6.9 | % | | |
| | |
| | | | |
Selling, general and administrative expense in 20192020 increased compared to 20182019 primarily due to higher employee compensation expense,charges for impairments of certain project assets and an increase in professional fees, partially offset by lower accretion expense in 2018 associated with the reduction in our module collectionproject development and recycling liability described above, and higher professional fees.travel expenses.
Research and development
Research and development expense consists primarily of salaries and other personnel-related costs; the cost of products, materials, and outside services used in our R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules.
The following table shows research and development expense for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Research and development | | $ | 93,738 | | | $ | 96,611 | | | $ | 84,472 | | | $ | (2,873) | | | (3) | % | | $ | 12,139 | | | 14 | % |
% of net sales | | 3.5 | % | | 3.2 | % | | 3.8 | % | | | | | | | | |
|
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Research and development | | $ | 96,611 |
| | $ | 84,472 |
| | $ | 88,573 |
| | $ | 12,139 |
| | 14 | % | | $ | (4,101 | ) | | (5 | )% |
% of net sales | | 3.2 | % | | 3.8 | % | | 3.0 | % | | |
| | |
| | | | |
Research and development expense in 2019 increased2020 decreased compared to 20182019 primarily as a result of lower employee compensation expense due to reductions in R&D headcount for our systems business, partially offset by increased material and module testing costs and higher employee compensation expense.costs.
Production start-up
Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it is qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase and applicable facility related costs. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in production start-up expense as well as costs related to the selection of a new site, related legal and regulatory costs, and costs to maintain our plant replication program to the extent we cannot capitalize these expenditures. In general, we expect production start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition or replacement of production lines at an existing manufacturing facility, primarily due to the additional infrastructure investment required when building an entirely new facility.
The following table shows production start-up expense for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Production start-up | | $ | 40,528 | | | $ | 45,915 | | | $ | 90,735 | | | $ | (5,387) | | | (12) | % | | $ | (44,820) | | | (49) | % |
% of net sales | | 1.5 | % | | 1.5 | % | | 4.0 | % | | | | | | | | |
|
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Production start-up | | $ | 45,915 |
| | $ | 90,735 |
| | $ | 42,643 |
| | $ | (44,820 | ) | | (49 | )% | | $ | 48,092 |
| | 113 | % |
% of net sales | | 1.5 | % | | 4.0 | % | | 1.4 | % | | |
| | |
| | | | |
During 2019, we incurred production start-up expense at our new facility in Lake Township, Ohio. We also incurred production start-up expense at our second facility in Ho Chi Minh City, Vietnam in early 2019. During 2018,2020, we incurred production start-up expense for the transition to Series 6 module manufacturing at our facilitiessecond facility in Kulim, Malaysia and the capacity expansion of our manufacturing facility in Perrysburg, Ohio. During 2019, we incurred production start-up expense at our new facility in Lake Township, Ohio and our second facility in Ho Chi Minh City, Vietnam. We also incurredVietnam, which commenced commercial production start-up expense for the transition to Series 6 module manufacturing at our facility in Perrysburg, Ohio in early 2018.2019.
Litigation loss
The following table shows litigation loss for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Litigation loss | | $ | 6,000 | | | $ | 363,000 | | | $ | — | | | $ | (357,000) | | | (98) | % | | $ | 363,000 | | | 100 | % |
% of net sales | | 0.2 | % | | 11.9 | % | | — | % | | | | | | | | |
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Litigation loss | | $ | 363,000 |
| | $ | — |
| | $ | — |
| | $ | 363,000 |
| | 100 | % | | $ | — |
| | — | % |
% of net sales | | 11.9 | % | | — | % | | — | % | | |
| | |
| | | | |
In January 2020, we entered into an MOU to settle a class action lawsuit filed in 2012 in the United StatesArizona District Court for the District of Arizona against the Company and certain of our current and former officers and directors.
Pursuant to the MOU, we agreed to pay a total of $350 million to settle the claims brought on behalf of all persons who purchased or otherwise acquired the Company’s shares during a specified period, in exchange for mutual releases and a dismissal with prejudice of the complaint upon court approval of the settlement. The proposed settlement contains no admission of liability, wrongdoing, or responsibility by any of the parties. As a result of the entry into the MOU, we accrued a loss for the above-referenced settlement in 2019, and paid the $350 million settlement in January 2020. In June 2020, the Arizona District Court entered an order that granted final approval of the settlement and dismissed the Class Action with prejudice.
We are also partyIn June 2020, we entered into an agreement in principle to a lawsuitsettle the claims in the Opt-Out Action filed in 2015 in the Arizona District Court by putative stockholders that opted out of the class action lawsuit described above. DuringClass Action. In July 2020, the parties executed a definitive settlement agreement pursuant to which we agreed to pay a total of $19 million in exchange for mutual releases and a dismissal with prejudice of the Opt-Out Action. The agreement contains no admission of liability, wrongdoing, or responsibility by any of the parties. In July 2020, First Solar funded the settlement and the parties filed a joint stipulation of dismissal. In September 2020, the Arizona District Court entered an order dismissing the case with prejudice. As of December 31, 2019, we had accrued $13 million of estimated losses for this action, which represents our best estimateaction. As a result of the lower bound of the costs to resolve this case. The ultimate amount ofsettlement, we accrued an incremental $6 million litigation loss may be materially higher.during 2020.
See Note 14.13. “Commitments and Contingencies” to our consolidated financial statements for additional information on these matters.
Restructuring and asset impairments
Restructuring and asset impairmentsconsist of expenses incurred related to significant restructuring initiatives and includes any associated asset impairments, costs for employee termination benefits, costs for contract terminations and penalties, and other restructuring related costs.
The following table shows restructuring and asset impairments for the years ended December 31, 2019, 2018, and 2017:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Restructuring and asset impairments | | $ | — |
| | $ | — |
| | $ | 37,181 |
| | $ | — |
| | — | % | | $ | (37,181 | ) | | (100 | )% |
% of net sales | | — | % | | — | % | | 1.3 | % | | |
| | |
| | | | |
In November 2016, our board of directors approved a set of initiatives intended to accelerate our transition to Series 6 module manufacturing and restructure our operations. As part of these actions, we recorded restructuring and asset impairment charges of $41.8 million during 2017. In 2017, we also reversed a customs tax liability associated with a prior restructuring activity, which reduced our restructuring charges by $4.7 million during the period. See Note 4. “Restructuring and Asset Impairments” to our consolidated financial statements for additional information on these matters.
Foreign currency (loss) income, (loss), net
Foreign currency (loss) income, (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) income, (loss), net for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Foreign currency (loss) income, net | | $ | (4,890) | | | $ | 2,291 | | | $ | (570) | | | $ | (7,181) | | | 313 | % | | $ | 2,861 | | | 502 | % |
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Foreign currency income (loss), net | | $ | 2,291 |
| | $ | (570 | ) | | $ | (9,640 | ) | | $ | 2,861 |
| | 502 | % | | $ | 9,070 |
| | 94 | % |
Foreign currency incomeloss increased in 20192020 compared to 20182019 primarily due to lowerhigher costs associated with hedging activities related to our subsidiaries in Japan and India.Europe and differences between our economic hedge positions and the underlying exposures.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash, and investments.restricted marketable securities. Interest income also includes interest earned from notes receivable and late customer payments.
The following table shows interest income for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Interest income | | $ | 16,559 | | | $ | 48,886 | | | $ | 59,788 | | | $ | (32,327) | | | (66) | % | | $ | (10,902) | | | (18) | % |
|
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Interest income | | $ | 48,886 |
| | $ | 59,788 |
| | $ | 35,704 |
| | $ | (10,902 | ) | | (18 | )% | | $ | 24,084 |
| | 67 | % |
Interest income during 20192020 decreased compared to 20182019 primarily due to lower average balances of cash, cash equivalents, and time deposits and lower interest rates associated with restricted investments, partially offset by higher interest rates on cash and cash equivalents.equivalents and lower average balances and interest rates associated with time deposits and marketable securities.
Interest expense, net
Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with Accounting Standards Codification (“ASC”) 815. We may capitalize interest expense to our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period.
The following table shows interest expense, net for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Interest expense, net | | $ | (24,036) | | | $ | (27,066) | | | $ | (25,921) | | | $ | 3,030 | | | (11) | % | | $ | (1,145) | | | 4 | % |
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Interest expense, net | | $ | (27,066 | ) | | $ | (25,921 | ) | | $ | (25,765 | ) | | $ | (1,145 | ) | | 4 | % | | $ | (156 | ) | | 1 | % |
Interest expense, net in 2020 decreased compared to 2019 was consistent withprimarily due to lower interest expense netassociated with project debt, partially offset by higher amortization of debt discounts and issuance costs and a decrease in 2018.capitalized interest.
Other (expense) income, net
Other (expense) income, net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted investments.marketable securities.
The following table shows other (expense) income, net for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Other (expense) income, net | | $ | (11,932) | | | $ | 17,545 | | | $ | 39,737 | | | $ | (29,477) | | | (168) | % | | $ | (22,192) | | | (56) | % |
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Other income, net | | $ | 17,545 |
| | $ | 39,737 |
| | $ | 23,965 |
| | $ | (22,192 | ) | | (56 | )% | | $ | 15,772 |
| | 66 | % |
Other income,expense, net decreasedincreased in 20192020 compared to 20182019 primarily due to lower realized gains from the sales of restricted investments, the impairment of a strategic investment,marketable securities and netexpected credit losses associated with certain notes receivable, partially offset by prior period charges associated with certain letter of credit arrangements.arrangements and the impairment of a strategic investment. See Note 7. “Consolidated Balance Sheet Details” to our consolidated financial statements for further information about the allowance for credit losses for our notes receivable.
Income tax benefit (expense)
Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions in which we operate, principally Australia, Japan, Malaysia, and Malaysia.Vietnam. Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate in the United States is 21%, and the tax rates in Australia, Japan, Malaysia, and MalaysiaVietnam are 30%, 30.6%, 24%, and 24%20%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax, conditional upon our continued compliance with certain employment and investment thresholds. In Vietnam, we have been granted a tax incentive, scheduled to expire at the end of 2025, pursuant to which income earned in Vietnam is subject to reduced tax rates.
The following table shows income tax benefit (expense) for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Income tax benefit (expense) | | $ | 107,294 | | | $ | 5,480 | | | $ | (3,441) | | | $ | 101,814 | | | 1,858 | % | | $ | 8,921 | | | (259) | % |
Effective tax rate | | (36.6) | % | | 4.6 | % | | 3.0 | % | | | | | | | | |
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Income tax benefit (expense) | | $ | 5,480 |
| | $ | (3,441 | ) | | $ | (371,996 | ) | | $ | 8,921 |
| | (259 | )% | | $ | 368,555 |
| | (99 | )% |
Effective tax rate | | 4.6 | % | | 3.0 | % | | 184.1 | % | | |
| | |
| | | | |
Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. The rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period. Income tax expense decreasedbenefit increased by $8.9$101.8 million during 20192020 compared to 20182019 primarily due to a tax benefit from the effect of tax law changes associated with the CARES Act, the reversal of uncertain tax positions due to the expiration of the statute of limitations, and the release of the valuation allowance associated with our pretax loss in theVietnamese subsidiary due to its current period,year operating income, partially offset by discrete tax expenses associated with filing tax returns in certain foreign jurisdictions.higher pretax income.
Equity in earnings, net of tax
Equity in earnings, net of tax represents our proportionate share of the earnings or losses from equity method investments as well as any gains or losses on the sale or disposal of such investments.
The following table shows equity in earnings, net of tax for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Equity in earnings, net of tax | | $ | (2,129) | | | $ | (284) | | | $ | 34,620 | | | $ | (1,845) | | | 650 | % | | $ | (34,904) | | | (101) | % |
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| | Years Ended | | Change |
(Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Equity in earnings, net of tax | | $ | (284 | ) | | $ | 34,620 |
| | $ | 4,266 |
| | $ | (34,904 | ) | | (101 | )% | | $ | 30,354 |
| | 712 | % |
Equity in earnings, net of tax decreased in 2019 compared to 2018 primarily due to the sale of our ownership interests2020 was consistent with equity in 8point3 Operating Company, LLC (“OpCo”), which resulted in a gain of $40.3 million,earnings, net of tax in 2018. See Note 8. “Consolidated Balance Sheet Details” to our consolidated financial statements for additional information.2019.
62
Liquidity and Capital Resources
As of December 31, 2019,2020, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, contracts with customers for the future sale of solar modules, and advanced-stage project pipeline availability under our Revolving Credit Facility (considering the minimum liquidity covenant requirements therein), and access to the capital markets will be sufficient to meet our working capital, capital expenditure, and systems project investment and capital expenditure needs for at least the next 12 months. As needed, we also believe we will have adequate access to the capital markets. In addition, we have availability under our Revolving Credit Facility, under which we have made no borrowings as of December 31, 2020. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally.
We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, capital expenditures, and strategic discretionary spending. In the future, we may also engagesuch as systems project development activities 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, althoughcertain international regions. However, our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to company-specific, industry-wide, or company-specific concerns. Suchbroader market concerns, such as a tightening of the supply of capital due to the COVID-19 pandemic and related containment measures. Any incremental debt financings could result in increased debt service expenses dilution to our existing stockholders, and/or restrictive covenants, which could limit our ability to pursue our strategic plans.
As of December 31, 2019,2020, we had $2.2$1.7 billion in cash, cash equivalents, and marketable securities compared to $2.5$2.2 billion as of December 31, 2018. Cash,2019. The decrease in cash, cash equivalents, and marketable securities as of December 31, 2019 decreasedwas primarily as a result ofdriven by purchases of property, plant and equipment and operating expendituresequipment; the $350 million settlement payment associated with our prior class action lawsuit; the initial ramptiming of cash receipts from certain third-party module sales, for which proceeds were received in late 2019 prior to the step down in the U.S. investment tax credit from 30% to 26%; and other operating expenditures; partially offset by cash proceeds from the sale and construction of certain Series 6 manufacturing lines.systems projects. As of December 31, 2020 and 2019, and 2018, $0.9$1.1 billion and $1.2$0.9 billion, respectively, of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Euro,Japanese yen, and Japanese yenIndian rupee denominated holdings.
We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations in the United States, we may be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. We maintain the intent and ability to permanently reinvest our accumulated earnings outside the United States, with the exception of our subsidiaries in Canada and Germany. In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources.
We continually evaluate forecasted global demand and seek to balance our manufacturing capacity with such demand. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. During 2021, we expect to spend $425 million to $475 million for capital expenditures, including upgrades to machinery and equipment that we believe will further increase our module wattage and expand capacity and throughput at our manufacturing facilities.
We also expect to commit significant working capital to purchase various raw materials used in our module manufacturing process. Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Accordingly, we may enter into long-term supply agreements to mitigate potential risks related to the procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules. Our remaining purchases under these supply agreements are expected to be approximately $1.8 billion of substrate glass and $410 million of cover glass. We have the right to terminate these agreements upon payment of specified
termination penalties (which, in aggregate, are up to $390 million as of December 31, 2020 and decline over the remaining supply periods).
Our systems business requires significant liquidity and is expected to continue to have significant liquidity requirements in the future. From time to time, 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, the majority of which support our systems projects. Our Revolving Credit Facility provides us with a sub-limit of $400.0 million to issue letters of credit, subject to certain additional limits depending on the currencies of such letters of credit. The net amount of our project assets and related portionportions of deferred revenue and long-term debt, which approximates our net capital investment in the development and construction of systems projects, was $324.8$260.6 million as of December 31, 2019.2020. Solar power project development cycles, which span the time between the identification of a site location and the commercial operation of a system, vary substantially and can take many years to mature. As a result of these long project cycles and strategic decisions to finance the development of certain projects using our working capital, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale of such projects. Delays in construction or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. In certain circumstances, we may need to finance construction costs exclusively using working capital, if project financing becomes unavailable due to market-wide, regional, or other concerns.
From time to time, we may develop projects in certain markets around the world where we may hold all or a significant portion of the equity in a project for several years. Given the duration of these investments and the currency risk relative to the U.S. dollar in some of these markets, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted.
Additionally, we may elect to retain an ownership interest in certain systems projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a systems projectsystem 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 projectsystem until we can sell it on economically attractive terms. The decision to retain ownership of a system impacts our liquidity depending upon the size and cost of the project. As of December 31, 2019,2020, we had $477.0$243.4 million of net PV solar power systems that had been placed in service, primarily in international markets. We have elected, and may in the future elect, to enter into temporary or long-term project financing to reduce the impact on our liquidity and working capital with regardsregard to such projectssystems.
From time to time, we may be party to legal matters and systems. We may also consider entering into tax equity or other arrangements with respect to ownership interests in certain of our projects, which could cause a portion of the economics of such projects to be realized over time.
The following additional considerations have impacted or may impact our liquidity in 2020 and beyond:
During 2020, we expect to spend $450 million to $550 million for capital expenditures, including amounts related to the conversion of our second manufacturing facility in Kulim, Malaysia from Series 4 to Series 6 module technology and upgrades to other machinery and equipment, which we believe will further increase our module wattage and/or production cost structure.
As described above, inclaims against us. In January 2020, we entered into an MOU to settle a class action lawsuit filed in the Arizona District Court. Pursuant to the MOU, among other things, we agreed to pay a total of $350 million to settle the claims in the lawsuit in exchange for mutual releases and dismissal with prejudice of the complaint upon court approval of the settlement. In February 2020, we subsequently entered into a Stipulation and Agreement of Settlement (the “Settlement Agreement”) with certain named plaintiffs on terms and conditions that were consistent with the MOU. Pursuant to the Settlement Agreement, among other things, (i) we contributed $350 million in cash to a settlement fund that will be used to pay all settlement fees and expenses, attorneys’ fees and expenses, and cash payments to members of the settlement class and (ii) the settlement class has agreed to release us, the other defendants named in the class action, and certain of their respective related parties from any and all claims concerning, based on, arising out of, or in connection with the class action. The Settlement Agreement contained no admission of liability, wrongdoing, or responsibility by any of the parties.
The settlement, including such payment and release described above, is subject to court approval. If On June 30, 2020, the court preliminarily approves the settlement, membersArizona District Court entered an order granting final approval of the settlement class will be provided notice of, and an opportunity to object to,dismissed the settlement at a fairness hearing to be held by the court to determine whether the settlement should be finally approved and whether the proposed order and final judgment should be entered. If the court approves the settlement and enters such order and final judgment, and such judgment is no longer subject to further appeal or other review, the settlement fund will be disbursed in accordanceClass Action with a plan of allocation approved by the court and the release will be effective to all members of the settlement class.prejudice.
Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Accordingly, we may enter into long-term supply agreements to mitigate potential risks related to the procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules. Our actual purchases under these supply agreements are expected to be approximately $2.4 billion of substrate glass and $500 million of cover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which are up to $430 million in the aggregate and decline over time during the respective supply periods).
The balance of our solar module inventories and BoS parts was $349.1 million as of December 31, 2019. As we continue to develop our advanced-stage project pipeline, we must produce solar modules in volumes sufficient to support our planned construction schedules. As part of this construction cycle, we typically produce these inventories in advance of receiving payment for such materials, which may temporarily reduce our
liquidity. Once solar modules and BoS parts are installed in a project, they are classified as either project assets, PV solar power systems, or cost of sales depending on whether the project is subject to a definitive sales contract and whether other revenue recognition criteria have been met. We also produce significant volumes of modules for sale directly to third-parties, which requires us to carry inventories at levels sufficient to satisfy the demand of our customers and the needs of their projects, which may also temporarily reduce our liquidity.
We may commit significant working capital over the next several years to advance the construction of various U.S. systems projects or procure the associated modules or BoS parts, by specified dates, for such projects to qualify for certain federal investment tax credits. Among other requirements, such credits require projects to have commenced construction in 2019, which may have been achieved by certain qualifying procurement activities, to receive a 30% investment tax credit. Such credits will step down to 26% for projects that commence construction in 2020, and will further step down to 22% for projects that commence construction in 2021 and 10% for projects that commence construction thereafter.
We may also commit working capital to acquire solar power projects in various stages of development, including advanced-stage projects with PPAs, and to continue developing those projects, as necessary. Depending upon the size and stage of development, the costs to acquire such solar power projects could be significant. When evaluating project acquisition opportunities, we consider both the strategic and financial benefits of any such acquisitions.
Cash Flows
The following table summarizes key cash flow activity for the years ended December 31, 2020, 2019, 2018, and 20172018 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
Net cash provided by (used in) operating activities | | $ | 37,120 | | | $ | 174,201 | | | $ | (326,809) | |
Net cash used in investing activities | | (131,227) | | | (362,298) | | | (682,714) | |
Net cash (used in) provided by financing activities | | (82,587) | | | 74,943 | | | 255,228 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 3,778 | | | (2,959) | | | (13,558) | |
Net decrease in cash, cash equivalents and restricted cash | | $ | (172,916) | | | $ | (116,113) | | | $ | (767,853) | |
|
| | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
Net cash provided by (used in) operating activities | | $ | 174,201 |
| | $ | (326,809 | ) | | $ | 1,340,677 |
|
Net cash used in investing activities | | (362,298 | ) | | (682,714 | ) | | (626,802 | ) |
Net cash provided by financing activities | | 74,943 |
| | 255,228 |
| | 192,045 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (2,959 | ) | | (13,558 | ) | | 8,866 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | (116,113 | ) | | $ | (767,853 | ) | | $ | 914,786 |
|
Operating Activities
The increasedecrease in net cash provided by operating activities during 20192020 was primarily driven by higherthe $350 million settlement payment associated with our prior class action lawsuit as described above and the timing of cash receipts from certain third-party module sales, for which proceeds from sales of systems projects, including the Sunshine Valley, Sun Streams, and California Flats projects, and advance paymentswere received for sales of solar modulesin late 2019 prior to the step down in the U.S. investment tax credit, as discussed above. These increases were partially offset by operating expenditures associated with initial ramphigher cash proceeds from the sale of certain Series 6 manufacturing linessystems projects in Japan and expenditures for the construction of certain projects.United States.
Investing Activities
The decrease in net cash used in investing activities during 20192020 was primarily due to higher net saleslower purchases of marketable securitiesproperty, plant and restricted investments, partially offset by proceeds associated with the sale of our interests in 8point3 and its subsidiaries in 2018.equipment.
Financing Activities
The decreaseincrease in net cash provided byused in financing activities during 20192020 was primarily due to the resultrepayment of lower netthe Ishikawa Credit Agreement, partially offset by proceeds from borrowings under project specific debt financings associated with the construction of certain projects in Australia, Japan, and India.Japan.
Contractual Obligations
The following table presents the payments due by fiscal year for our outstanding contractual obligations as of December 31, 20192020 (in thousands):, excluding certain obligations we expect to transfer to Clairvest upon the closing of the sale of our North American O&M business and to OMERS upon the closing of the sale of our U.S. project development business:
| | | | | | Payments Due by Year | | | | | Payments Due by Year |
| | Total | | Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years | | Total | | Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years |
Long-term debt obligations | | $ | 482,892 |
| | $ | 17,684 |
| | $ | 98,571 |
| | $ | 37,496 |
| | $ | 329,141 |
| Long-term debt obligations | | $ | 287,149 | | | $ | 41,801 | | | $ | 23,932 | | | $ | 62,287 | | | $ | 159,129 | |
Interest payments (1) | | 168,040 |
| | 17,276 |
| | 29,533 |
| | 27,409 |
| | 93,822 |
| Interest payments (1) | | 116,030 | | | 11,433 | | | 21,881 | | | 19,818 | | | 62,898 | |
Operating lease obligations | | 162,913 |
| | 15,153 |
| | 28,771 |
| | 26,708 |
| | 92,281 |
| Operating lease obligations | | 252,771 | | | 17,858 | | | 34,861 | | | 33,884 | | | 166,168 | |
Purchase obligations (2) | | 1,424,267 |
| | 900,200 |
| | 221,888 |
| | 187,277 |
| | 114,902 |
| Purchase obligations (2) | | 1,058,664 | | | 590,516 | | | 198,993 | | | 161,730 | | | 107,425 | |
Recycling obligations | | 137,761 |
| | — |
| | — |
| | — |
| | 137,761 |
| Recycling obligations | | 130,688 | | | — | | | — | | | — | | | 130,688 | |
Contingent consideration (3) | | 6,895 |
| | 2,395 |
| | 4,500 |
| | — |
| | — |
| Contingent consideration (3) | | 2,243 | | | 2,243 | | | — | | | — | | | — | |
Transition tax obligations (4) | | 76,667 |
| | 6,620 |
| | 14,747 |
| | 32,259 |
| | 23,041 |
| |
Other obligations (5) | | 10,527 |
| | 2,933 |
| | 5,164 |
| | 2,430 |
| | — |
| |
Other obligations (4) | | Other obligations (4) | | 3,541 | | | 2,122 | | | 1,119 | | | 300 | | | — | |
Total | | $ | 2,469,962 |
| | $ | 962,261 |
| | $ | 403,174 |
| | $ | 313,579 |
| | $ | 790,948 |
| Total | | $ | 1,851,086 | | | $ | 665,973 | | | $ | 280,786 | | | $ | 278,019 | | | $ | 626,308 | |
——————————
| |
(1) | Includes estimated cash interest to be paid over the remaining terms of the underlying debt. Interest payments are based on fixed and floating rates as of December 31, 2019. |
(1)Includes estimated cash interest to be paid over the remaining terms of the underlying debt. Interest payments are based on fixed and floating rates as of December 31, 2020.
(2)Purchase obligations represent agreements to purchase goods or services, including open purchase orders and contracts with fixed volume commitments, that are noncancelable or cancelable with a significant penalty. Purchase obligations for our long-term supply agreements for the purchase of substrate glass and cover glass represent specified termination penalties, which are up to $390 million in the aggregate under the agreements. Our remaining purchases under these supply agreements are expected to be approximately $1.8 billion of substrate glass and $410 million of cover glass.
| |
(2) | Purchase obligations represent agreements to purchase goods or services, including open purchase orders and contracts with fixed volume commitments, that are noncancelable or cancelable with a significant penalty. Purchase obligations for our long-term supply agreements for the purchase of substrate glass and cover glass represent specified termination penalties, which are up to $430 million in the aggregate under the agreements. Our actual purchases under these supply agreements are expected to be approximately $2.4 billion of substrate glass and $500 million of cover glass. |
(3)In connection with business or project acquisitions, we may agree to pay additional amounts to the selling parties upon achievement of certain milestones. See Note 13. “Commitments and Contingencies” to our consolidated financial statements for further information.
| |
(3) | In connection with business or project acquisitions, we may agree to pay additional amounts to the selling parties upon achievement of certain milestones. See Note 14. “Commitments and Contingencies” to our consolidated financial statements for further information. |
(4)Includes expected letter of credit fees and unused revolver fees.
| |
(4) | Transition tax obligations represent estimated payments for U.S. federal taxes associated with accumulated earnings and profits of our foreign corporate subsidiaries. See Note 18. “Income Taxes” to our consolidated financial statements for further information. |
| |
(5) | Includes expected letter of credit fees and unused revolver fees. |
We have excluded $72.2$5.4 million of unrecognized tax benefits from the amounts presented above as the timing of such obligations is uncertain.
Off-Balance Sheet Arrangements
As of December 31, 2019,2020, we had 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 14.13. “Commitments and Contingencies” to our consolidated financial statements for further information about our financial assurance related instruments.
Recent Accounting Pronouncements
See Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements for a summary of recent accounting pronouncements.
Critical Accounting Estimates
In preparing our consolidated financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”), we make estimates and assumptions that affect the amounts of reported assets, liabilities, revenues, and expenses, as well as the disclosure of contingent liabilities. Some of our accounting policies require the application of significant judgment in the selection of the appropriate assumptions for making these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our judgments and estimates on our historical experience, our forecasts, and other available information as appropriate. 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. Our significant accounting policies are described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements. The accounting policies that require the most significant judgment and estimates include the following:
Revenue Recognition – Solar Power System Sales and/or EPC Services. We generally recognize revenue for the sale of a development project, which excludes EPC services, or for the sale of a completed system when we enter into the associated sales contract with the customer. For EPC services, or sales of solar power systems and/orwith EPC services, we generally recognize revenue over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such arrangements, we recognize revenue and gross profit as work is performed using cost based input methods, throughfor which we determine our progress toward contract completion based on the relationship between actual costs incurred and total estimated costs (including solar module costs) of the contract. Such revenue recognition is also dependent, in part, on our customers’ commitment to perform their obligations under the contract, which is typically measured through the receipt of cash deposits or other forms of financial security issued by creditworthy financial institutions or parent entities. For sales
Estimating the fair value of a noncontrolling interest we obtain begins with the valuation of the entire solar project (i.e., solar power system) being sold to the customer. Such valuation generally uses an income based valuation technique in which relevant cash flows are discounted to estimate the expected economic earnings capacity of the project. Typical factors considered in a project’s valuation include expected energy generation, the duration and pricing of the PPA, the pricing of energy to be sold on an open contract basis following the termination of the PPA (i.e., merchant pricing curves), other off-take agreements, the useful life of the system, tax attributes such as accelerated depreciation and tax credits, sales of renewable energy certificates, interconnection rights, operating agreements, and the cost of capital. Once the overall project valuation is agreed upon with the customer, we determine the relative value related to our specific ownership interests conveyed through the transaction agreements, including the membership interest purchase and sale agreement and the limited liability company agreement (or equivalent) of the project or its holding company.
Cost based input methods of revenue recognition are considered a faithful depiction of our efforts to satisfy long-term construction contracts and therefore reflect the transfer of goods to a customer under such contracts. Costs incurred that do not contribute to satisfying our performance obligations (“inefficient costs”) are excluded from our input methods of revenue recognition as the amounts are not reflective of our transferring control of the system to the customer. Costs incurred toward contract completion may include costs associated with solar modules, direct materials, labor, subcontractors, and other indirect costs related to contract performance. We recognize solar module and direct material costs as incurred when such items have been installed in a system.
Cost based input methods of revenue recognition require us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other payments to customers. Significant judgment is also required to evaluate assumptions related to the costs to complete our projects, including materials, labor, contingencies, and other system costs. If the estimated total costs on any contract,
including any inefficient costs, are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. 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.
As part of our solar power system sales, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable period meets or exceeds the modeled energy expectation, after certain adjustments. These tests are based on meteorological, energy, and equipment performance data measured at the system’s location as well as certain projections of such data over the remaining measurement period. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. Conversely, if there is an underperformance event with regards to these tests, we may incur liquidated damages as a percentage of the EPC contract price. Such performance guarantees represent a form of variable consideration and are estimated at contract inception at their most likely amount and updated at the end of each reporting period as additional performance data becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
Revenue Recognition – Operations and Maintenance. We recognize revenue for standard, recurring O&M services over time as customers receive and consume the benefits of such services. Costs of O&M services are expensed in the period in which they are incurred. 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 our control as the service provider. These tests are based on meteorological, energy, and equipment performance data measured at the system’s location as well as certain projections of such data over the remaining measurement period. If system availability exceeds a contractual threshold, we may receive a bonus payment, or if system availability falls below a separate threshold, we may incur liquidated damages for certain lost energy under the PPA. Such bonuses or liquidated damages represent a form of variable consideration and are estimated and recognized over time as customers receive and consume the benefits of the O&M services.
Accrued Solar Module Collection and Recycling Liability. When applicable,We previously established a module collection and recycling program, which has since been discontinued, to collect and recycle modules sold and covered under such program once the modules reach the end of their service lives. For legacy customer sales contracts that were covered under this program, we recognizerecognized expense at the time of sale for the estimated cost of our obligations to collect and recycle solar modules covered by our solar module collection and recycling program.such modules. We estimate the cost of our collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of
packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; and by-product credits for certain materials recovered during the scale of recycling centers; and an estimated third-party profit margin and return on risk for collection and recycling services.process. 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) the expected economic factorscertain assumptions regarding costs at the time the solar modules will be collected and recycled. In the periods between the time of sale and the related settlement of the collection and recycling obligation, we accrete the carrying amount of the associated liability by applyingand classify the discount rate used for its initial measurement.corresponding expense within “Selling, general and administrative” expense on our consolidated statements of operations. We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly.
Product Warranties. We provide a limited PV solar module warranty covering defects in materials and workmanship under normal use and service conditions for approximately 10up to 12 years. We also typically warrant that modules installed in accordance with agreed-upon specifications will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by 0.5%a degradation factor every year thereafter throughout the approximate 25-year limited power output warranty period.period of up to 30 years. Among other things, our solar module warranty also covers the resulting power output loss from cell cracking.
As an alternative form of our standard limited module power output warranty, we have also offeroffered an aggregated or system-level limited module performance warranty. This system-level limited module performance warranty is designed for
utility-scale systems and provides 25-year system-level energy degradation protection. This warranty represents a practical expedient to address the challenge of identifying, from the potential millions of modules installed in a utility-scale system, individual modules that may be performing below warranty thresholds by focusing on the aggregate energy generated by the system rather than the power output of individual modules. The system-level limited module performance warranty is typically calculated as a percentage of a system’s expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty.
In addition to our limited solar module warranties described above, for PV solar power systems we construct, we typically provide limited warranties for defects in engineering design, installation, and BoS part workmanship for a period of one to two years following the substantial completion of a system or a block within the system.
When we recognize revenue for module or system sales, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations. 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 and projections of warranty claims, and our estimated per-module replacement costs. We also monitor our expected future module performance through certain quality and reliability testing and actual performance in certain field installation sites. In general, we expect the return rates for our newer series of module technology to be lower than our older series. We estimate that the return rate for such newer series of module technology will be less than 1%.
Income Taxes. We are subject to the income tax laws of the United States, its states and municipalities, and those of the foreign jurisdictions in which we have significant business operations. Such tax laws are complex and subject to different interpretations by the taxpayer and the relevant taxing authorities. We make judgments and interpretations regarding the application of these inherently complex tax laws when determining our provision for income taxes and also make estimates about when in the future certain items are expected to affect taxable income in the various tax jurisdictions. Disputes over interpretations of tax laws may be settled with the relevant taxing authority upon examination or audit. We regularly evaluate the likelihood of assessments in each of our taxing jurisdictions resulting from current and future examinations, and we record tax liabilities as appropriate.
In preparing our consolidated financial statements, we calculate our income tax provision based on our interpretation of the tax laws and regulations in the various jurisdictions where we conduct business. This requires us to estimate our current tax obligations, assess uncertain tax positions, and assess temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. These temporary differences result in deferred tax assets and liabilities. We must also assess the likelihood that each of our deferred tax assets will be realized. To
the extent we believe that realization of any of our deferred tax assets is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in a reporting period, we generally record a corresponding tax expense. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally reduces our overall income tax expense.
We establish liabilities for potential additional taxes based on our assessment of the outcome of our tax positions. Once established, we adjust these liabilities when additional information becomes available or when an event occurs requiring an adjustment. Significant judgment is required in making these estimates and the actual cost of a tax assessment, fine, or penalty may ultimately be materially different from our recorded liabilities, if any.
We continually explore initiatives to better align our tax and legal entity structure with the footprint of our global operations and recognize the tax impact of these initiatives, including changes in the assessment of uncertain tax positions, indefinite reinvestment exception assertions, and the realizability of deferred tax assets, in the period when we believe all necessary internal and external approvals associated with such initiatives have been obtained, or when the initiatives are materially complete.
Asset Impairments. We assess long-lived assets classified as “held and used,” including our property, plant and equipment; project assets; PV solar power systems; project assets; operating lease assets; and intangible assets for impairment whenever events or changes in circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of such assets may not be recoverable, and these assessments require significant judgment in determining whether such events or changes have occurred. Relevant considerationsThese events or changes in circumstances may include a significant decrease in the market price of a long-lived asset; a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; a significant adverse change in the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; a current-period operating or cash flow loss combined with a history of such losses or a projection of future losses associated with the use of a long-lived asset; or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, and we must also exercise judgment in assessing such groupings and levels.
When impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If the carrying value of the asset group exceeds the undiscounted future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted cash flows for the asset group, (ii) third-party valuations, and/or (iii) information available regarding the current market value for such assets. If the fair value of an asset group is determined to be less than its carrying value, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs. Estimating future cash flows requires significant judgment, and such projections may vary from the cash flows eventually realized.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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. 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 gaingains or losslosses for such contracts in “Accumulated other comprehensive loss” and subsequently reclassify amounts into earnings when the hedged transaction occurs and impacts earnings. For additional details on our derivative hedging instruments and activities, see Note 9.8. “Derivative Financial Instruments” to our consolidated financial statements.
Certain of our international operations, such as our manufacturing facilities in Malaysia and Vietnam, pay a portion of their operating expenses, including associate wages and utilities, in local currencies, which exposes us to foreign currency exchange risk for such expenses. Our manufacturing facilities are also exposed to foreign currency exchange risk for purchases of certain equipment from international vendors. AsTo the extent we expand into new markets, worldwide, particularly emerging markets, our total foreign currency exchange risk, in terms of both size and exchange rate volatility, and the number of foreign currencies we are exposed to could increase significantly.
For the year ended December 31, 2019, 8%2020, 22% of our net sales were denominated in foreign currencies, including Australian dollarJapanese yen and Euro. As a result, we have exposure to foreign currencies with respect to our net sales, which has historically represented one of our primary foreign currency exchange risks. A 10% change in the U.S. dollar to Australian dollarJapanese yen and U.S dollar to Euro exchange rates would have had an aggregate impact on our net sales of $18.0$53.8 million, excluding the effect of our hedging activities.
Transaction Exposure. Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, deferred taxes, payables, accrued expenses, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported 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. For additional details on our economic hedging instruments and activities, see Note 9.8. “Derivative Financial Instruments” to our consolidated financial statements.
As of December 31, 2019,2020, a 10% change in the U.S. dollar relative to our primary foreign currency exposures would not have had a significant impact to our net foreign currency income or loss, including the effect of our hedging activities.
Interest Rate Risk
Variable Rate Debt Exposure. We are exposed to interest rate risk as certain of our project specific debt financings have variable interest rates, exposing us to variability in interest expense and cash flows. See Note 13.12. “Debt” to our consolidated financial statements for additional information on our long-term debt borrowing rates. An increase in relevant interest rates would increase the cost of borrowing under certain of our project specific debt financings. If such variable interest rates changed by 100 basis points, our interest expense for the year ended December 31, 20192020 would have changed by $1.1$1.2 million,, including the effect of our hedging activities.
Customer Financing Exposure. We are also indirectly exposed to interest rate risk because many of our customers depend on debt financings to purchase modules or systems. An increase in interest rates could make it challenging for our customers to obtain the capital necessary to make such purchases on favorable terms, or at all. Such factors could reduce demand or lower the price we can charge for our modules and systems, thereby reducing our net sales and gross profit. In addition, we believe that a significant percentage of our customers purchase systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates could lower an investor’s return on investment in a system or make alternative investments more attractive relative to PV solar power systems, which, in either case, could cause these end-users to seek alternative investments with higher risk-adjusted returns.
Marketable Securities and Restricted InvestmentsMarketable Securities Exposure. We invest in various debt securities, which exposes us to interest rate risk. The primary objectives of our investment activities are to preserve principal and provide liquidity, while at the same time maximizing the return on our investments. Many of the securities in which we invest may be subject to market risk. Accordingly, a change in prevailing interest rates may cause the market value of such investments to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate subsequently rises, the market value of our investment may decline.
For the year ended December 31, 2019,2020, our marketable securities earned a return of 3%2%, including the impact of fluctuations in the price of the underlying securities, and had a weighted-average maturity of 58 months as of the end of the period. Based on our investment positions as of December 31, 2019,2020, a hypothetical 100 basis point change in interest rates would have resulted in a $3.2$0.8 million change in the market value of our investment portfolio. For the year ended December 31, 2019,2020, our restricted investmentsmarketable securities earned a return of 12%19%, including the impact of fluctuations in the price of the underlying securities, and had a weighted-average maturity of approximately 1615 years as of the end of the period. Based on our restricted investmentmarketable securities positions as of December 31, 2019,2020, a hypothetical 100 basis point change in interest rates would have resulted in a $36.1$40.2 million change in the market value of our restricted investmentmarketable securities portfolio.
Commodity and Component Risk
We are exposed to price risks for the raw materials, components, services, and energy costs used in the manufacturing and transportation of our solar modules and BoS parts used in our systems. Also,Additionally, some of our raw materials and components are sourced from a limited number of suppliers or a single supplier. We endeavor to qualify multipleevaluate our suppliers using a robust qualification process. In some cases, we also enter into long-term supply contracts for raw materials and components. Accordingly, we are exposed to price changes in the raw materials and components used in our solar modules and systems. From time to time, we may utilize derivative hedging instruments to mitigate such raw material price changes. In addition, the failure of a key supplier could disrupt our supply chain, which could result in higher prices and/or a disruption in our manufacturing or construction processes. We may be unable to pass along changes in the costs of the raw materials and components for our modules and systems to our customers and may be in default of our delivery obligations if we experience a manufacturing or construction disruption.
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, marketable securities, accounts receivable, restricted cash and investments, notes receivable, and foreign exchange forward contracts, and commodity swap contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, marketable securities, restricted cash, and investments, andrestricted marketable securities, foreign exchange forward contracts, and commodity swap 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. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. Depending upon the sales arrangement, we may require some form of payment security from our customers, including, but not limited to, advance payments, parent guarantees, standby letters of credit, bank guarantees, surety bonds, or commercial letters of credit. We also have PPAs that subject us to credit risk in the event our off-take counterparties are unable to fulfill their contractual obligations, which may adversely affect our project assets and certain receivables. Accordingly, we closely monitor the credit standing of existing and potential off-take counterparties to limit such risks.
72
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements
Our consolidated financial statements as required by this item are included in Item 15. “Exhibits and Financial Statement Schedules.” See Item 15(a) for a list of our consolidated financial statements.
Selected Quarterly Financial Data (Unaudited)
The following selected quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This information has been derived from our unaudited consolidated financial statements that, in our opinion, reflect all recurring adjustments necessary to fairly present the information when read in conjunction with our consolidated financial statements. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarters Ended |
| | Dec 31, 2020 | | Sep 30, 2020 | | Jun 30, 2020 | | Mar 31, 2020 | | Dec 31, 2019 | | Sep 30, 2019 | | Jun 30, 2019 | | Mar 31, 2019 |
| | (In thousands, except per share amounts) |
Net sales | | $ | 609,232 | | | $ | 927,565 | | | $ | 642,411 | | | $ | 532,124 | | | $ | 1,399,377 | | | $ | 546,806 | | | $ | 584,956 | | | $ | 531,978 | |
Gross profit | | 159,860 | | | 293,015 | | | 137,460 | | | 90,338 | | | 333,555 | | | 138,363 | | | 77,182 | | | 112 | |
Production start-up | | 16,716 | | | 13,019 | | | 6,311 | | | 4,482 | | | 7,351 | | | 18,605 | | | 10,437 | | | 9,522 | |
Litigation loss | | — | | | — | | | 6,000 | | | — | | | 363,000 | | | — | | | — | | | — | |
Operating income (loss) | | 57,774 | | | 207,163 | | | 50,896 | | | 1,656 | | | (117,866) | | | 41,304 | | | (8,584) | | | (76,639) | |
Net income (loss) | | 115,703 | | | 155,037 | | | 36,911 | | | 90,704 | | | (59,408) | | | 30,622 | | | (18,548) | | | (67,599) | |
Net income (loss) per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.09 | | | $ | 1.46 | | | $ | 0.35 | | | $ | 0.86 | | | $ | (0.56) | | | $ | 0.29 | | | $ | (0.18) | | | $ | (0.64) | |
Diluted | | $ | 1.08 | | | $ | 1.45 | | | $ | 0.35 | | | $ | 0.85 | | | $ | (0.56) | | | $ | 0.29 | | | $ | (0.18) | | | $ | (0.64) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarters Ended |
| | Dec 31, 2019 | | Sep 30, 2019 | | Jun 30, 2019 | | Mar 31, 2019 | | Dec 31, 2018 | | Sep 30, 2018 | | Jun 30, 2018 | | Mar 31, 2018 |
| | (In thousands, except per share amounts) |
Net sales | | $ | 1,399,377 |
| | $ | 546,806 |
| | $ | 584,956 |
| | $ | 531,978 |
| | $ | 691,241 |
| | $ | 676,220 |
| | $ | 309,318 |
| | $ | 567,265 |
|
Gross profit (loss) | | 333,555 |
| | 138,363 |
| | 77,182 |
| | 112 |
| | 98,310 |
| | 129,127 |
| | (8,058 | ) | | 172,798 |
|
Production start-up | | 7,351 |
| | 18,605 |
| | 10,437 |
| | 9,522 |
| | 14,576 |
| | 14,723 |
| | 24,352 |
| | 37,084 |
|
Litigation loss | | 363,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Operating (loss) income | | (117,866 | ) | | 41,304 |
| | (8,584 | ) | | (76,639 | ) | | 11,008 |
| | 58,475 |
| | (103,634 | ) | | 74,264 |
|
Net (loss) income | | (59,408 | ) | | 30,622 |
| | (18,548 | ) | | (67,599 | ) | | 52,116 |
| | 57,750 |
| | (48,491 | ) | | 82,951 |
|
Net (loss) income per share: | | | | |
| | | | | | |
| | |
| | |
| | |
|
Basic | | $ | (0.56 | ) | | $ | 0.29 |
| | $ | (0.18 | ) | | $ | (0.64 | ) | | $ | 0.50 |
| | $ | 0.55 |
| | $ | (0.46 | ) | | $ | 0.79 |
|
Diluted | | $ | (0.56 | ) | | $ | 0.29 |
| | $ | (0.18 | ) | | $ | (0.64 | ) | | $ | 0.49 |
| | $ | 0.54 |
| | $ | (0.46 | ) | | $ | 0.78 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 December 31, 20192020 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). 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 the
effectiveness of our internal control over financial reporting as of December 31, 20192020 based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Based on such evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.2020. The effectiveness of our internal control over financial reporting as of December 31, 20192020 has also been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears herein.
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” to determine whether any changes in our internal control over financial reporting occurred during the quarter ended December 31, 20192020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2019.2020.
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 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
For information with respect to our executive officers, see Item 1. “Business – Information about Our Executive Officers.” Information concerning our board of directors and audit committee of our board of directors will appear in our 20202021 Proxy Statement, under the sections “Directors” and “Corporate Governance,” and information concerning Section 16(a) beneficial ownership reporting compliance will appear in our 20202021 Proxy Statement under the section “Section 16(a) Beneficial Ownership Reporting Compliance.” We have adopted a Code of Business Conduct and Ethics that applies to all directors, officers, and associates of First Solar. Information concerning this code will appear in our 20202021 Proxy Statement under the section “Corporate Governance.” The information in such sections of the Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
Item 11. Executive Compensation
Information concerning executive compensation and related information will appear in our 20202021 Proxy Statement under the section “Executive Compensation,” and information concerning the compensation committee of our board of directors (the “compensation committee”) will appear under the sections “Corporate Governance” and “Compensation Committee Report.” The information in such sections of the 20202021 Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning the security ownership of certain beneficial owners and management and related stockholder matters, including certain information regarding our equity compensation plans, will appear in our 20202021 Proxy Statement under the section “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” The information in such section of the Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
Equity Compensation Plans
The following table sets forth certain information as of December 31, 20192020 concerning securities authorized for issuance under our equity compensation plans:
| | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (a)(1) | | Weighted-Average Exercise Price of Outstanding Options and Rights (b)(2) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)(3) | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (a)(1) | | Weighted-Average Exercise Price of Outstanding Options and Rights (b)(2) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) |
Equity compensation plans approved by stockholders | | 2,411,436 |
| | $ | — |
| | 3,039,630 |
| Equity compensation plans approved by stockholders | | 1,852,256 | | $ | — | | | 6,608,877 |
Equity compensation plans not approved by stockholders | | — |
| | — |
| | — |
| Equity compensation plans not approved by stockholders | | — | | | — | | | — | |
Total | | 2,411,436 |
| | $ | — |
| | 3,039,630 |
| Total | | 1,852,256 | | $ | — | | | 6,608,877 |
——————————
| |
(1) | Includes 2,411,436 shares issuable upon vesting of restricted stock units (“RSUs”) granted under our 2015 Omnibus Incentive Compensation Plan. |
(1)Includes 1,852,256 shares issuable upon vesting of restricted stock units (“RSUs”) granted under our 2020 Omnibus Incentive Compensation Plan (“2020 Omnibus Plan”).
| |
(2) | The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price. |
(2)The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price.
| |
(3) | Includes 515,288 shares of common stock reserved for future issuance under our stock purchase plan for employees. |
See Note 17.16. “Share-Based Compensation” to our consolidated financial statements for further discussion on our equity compensation plans.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related party transactions will appear in our 20202021 Proxy Statement under the section “Certain Relationships and Related Party Transactions,” and information concerning director independence will appear in our 20202021 Proxy Statement under the section “Corporate Governance.” The information in such sections of the Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
Information concerning principal accounting fees and services and the audit committee of our board of directors’ pre-approval policies and procedures for these items will appear in our 20202021 Proxy Statement under the section “Principal Accounting Fees and Services.” The information in such section of the Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) | (a)Documents. The following documents are filed as part of this Annual Report on Form 10-K:
The following documents are filed as part of this Annual Report on Form 10-K:
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
| |
(b) | (b)Exhibits. Unless otherwise noted, the exhibits listed on the accompanying Index to Exhibits are filed with or incorporated by reference into this Annual Report on Form 10-K.
(c)Financial Statement Schedules. All financial statement schedules have been omitted as the required information is not applicable or is not material to require presentation of the schedule, or because the information required is included in the consolidated financial statements and notes thereto of this Annual Report on Form 10-K.
Unless otherwise noted, the exhibits listed on the accompanying Index to Exhibits are filed with or incorporated by reference into this Annual Report on Form 10-K.
|
| |
(c) | Financial Statement Schedules. All financial statement schedules have been omitted as the required information is not applicable or is not material to require presentation of the schedule, or because the information required is included in the consolidated financial statements and notes thereto of this Annual Report on Form 10-K.
|
76
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of First Solar, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of First Solar, Inc. and its subsidiaries (“the Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Solar Module Collection and Recycling Liability
As described in Note 1211 to the consolidated financial statements, certain of the Company’s legacy sales were covered by a module collection and recycling program, which was previously established to collect and recycle modules sold and covered under such program once the modules reach the end of their useful lives. The Company’s accrued solar module collection and recycling liability was $137.8$130.7 million as of December 31, 2019.2020. Management estimates the cost of collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; and by-product credits for certain materials recovered during the recycling process; and an estimated third-party profit margin and return on risk for collection and recycling services.process. Management bases these estimates on experience collecting and recycling the solar modules and certain assumptions regarding costs at the time the solar modules will be collected and recycled.
The principal considerations for our determination that performing procedures relating to the solar module collection and recycling liability is a critical audit matter are there was(i) the significant judgment by management when developing the estimated costs of this program. This in turn led toprogram; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate audit evidence related to management’s expected probability-weighted future cost of collecting and recycling the solar modules and significant assumptions includingrelated to the cost of freight from the solar module installation sites to a recycling center, capital costs, present value assumptions, by-product credits for certain materials recovered during the recycling process, and the assumption regarding costs at the time the solar modules will be collected and recycled, and evaluating audit evidence related to the results of those procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to valuation of the solar module collection and recycling liability. These procedures also included, among others, testing management’s process for developing the expected probability-weighted future cost of collecting and recycling the solar modules including evaluating the reasonableness of the significant assumptions used by management includingrelated to the cost of freight from the solar module installation sites to a recycling center, capital costs,
present value assumptions, by-product credits for certain materials recovered during the recycling process, and the assumption regarding costs at the time the solar modules will be collected and recycled. Evaluating the reasonableness of the significant assumptions involved (i) testing actual recycling costs incurred, (ii) obtaining and evaluating evidence from third parties, and (iii) evaluating other underlying input data considered by management in the development of its recycling liability.
Product Warranty Liability
As described in Notes 2 and 1413 to the consolidated financial statements, the Company provides a limited PV solar module warranty which covers defects in materials and workmanship for approximately 10up to 12 years and warrants that modules will produce at least a specified minimum percentage of their labeled power output rating, on either an individual module or system-level basis, for approximately 25up to 30 years. The Company’s product warranty liability was $129.8$95.1 million as of December 31, 2019.2020. Product warranty estimates are based primarily on the number of solar modules under warranty installed at customer locations, historical experience with and projections of warranty claims, and estimated per-module replacement costs.
The principal considerations for our determination that performing procedures relating to the product warranty liability is a critical audit matter are there was(i) the significant judgment by management in estimating the projections of warranty claims. This in turn led toclaims; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate the projections of warranty claims and related audit evidence. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to valuation of the product warranty liability. These procedures also included, among others, testing the appropriateness of the methodology used and the reasonableness of the significant assumptions used by management in developing these estimates includingrelated to projections of warranty claims. Evaluating whether the significant assumptions relating to the product warranty liability waswere reasonable involved (i) testing historical warranty claims and settlements, (ii) evaluating the reasonableness and appropriateness of factors considered by management in estimating the final settlement of open customer claims, and (iii) evaluating the reasonableness and appropriateness of the methodology used by management to determine return rates used in the valuation of the product warranty liability. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness and appropriateness of the methodology.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 20, 202025, 2021
We have served as the Company’s or its predecessor’s auditor since 2000, which includes periods before the Company became subject to SEC reporting requirements.
79
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,227,002 | | | $ | 1,352,741 | |
Marketable securities (amortized cost of $519,844 and allowance for credit losses of $121 at December 31, 2020) | | 520,066 | | | 811,506 | |
Accounts receivable trade | | 269,095 | | | 476,425 | |
Less: allowance for credit losses | | (3,009) | | | (1,386) | |
Accounts receivable trade, net | | 266,086 | | | 475,039 | |
Accounts receivable, unbilled and retainage | | 26,673 | | | 183,473 | |
Less: allowance for credit losses | | (303) | | | 0 | |
Accounts receivable, unbilled and retainage, net | | 26,370 | | | 183,473 | |
Inventories | | 567,587 | | | 443,513 | |
Balance of systems parts | | 30 | | | 53,583 | |
Project assets | | 0 | | | 3,524 | |
Assets held for sale | | 155,685 | | | 0 | |
Prepaid expenses and other current assets | | 251,709 | | | 276,455 | |
Total current assets | | 3,014,535 | | | 3,599,834 | |
Property, plant and equipment, net | | 2,402,285 | | | 2,181,149 | |
PV solar power systems, net | | 243,396 | | | 476,977 | |
Project assets | | 373,377 | | | 333,596 | |
Deferred tax assets, net | | 104,099 | | | 130,771 | |
Restricted marketable securities (amortized cost of $247,628 and allowance for credit losses of $13 at December 31, 2020) | | 265,280 | | | 223,785 | |
Goodwill | | 14,462 | | | 14,462 | |
Intangible assets, net | | 56,138 | | | 64,543 | |
Inventories | | 201,229 | | | 160,646 | |
Other assets | | 434,130 | | | 329,926 | |
Total assets | | $ | 7,108,931 | | | $ | 7,515,689 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 183,349 | | | $ | 218,081 | |
Income taxes payable | | 14,571 | | | 17,010 | |
Accrued expenses | | 310,467 | | | 351,260 | |
Current portion of long-term debt | | 41,540 | | | 17,510 | |
Deferred revenue | | 188,813 | | | 323,217 | |
Accrued litigation | | 0 | | | 363,000 | |
Liabilities held for sale | | 25,621 | | | 0 | |
Other current liabilities | | 83,037 | | | 28,130 | |
Total current liabilities | | 847,398 | | | 1,318,208 | |
Accrued solar module collection and recycling liability | | 130,688 | | | 137,761 | |
Long-term debt | | 237,691 | | | 454,187 | |
Other liabilities | | 372,226 | | | 508,766 | |
Total liabilities | | 1,588,003 | | | 2,418,922 | |
Commitments and contingencies | | 0 | | 0 |
Stockholders’ equity: | | | | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 105,980,466 and 105,448,921 shares issued and outstanding at December 31, 2020 and 2019, respectively | | 106 | | | 105 | |
Additional paid-in capital | | 2,866,786 | | | 2,849,376 | |
Accumulated earnings | | 2,715,762 | | | 2,326,620 | |
Accumulated other comprehensive loss | | (61,726) | | | (79,334) | |
Total stockholders’ equity | | 5,520,928 | | | 5,096,767 | |
Total liabilities and stockholders’ equity | | $ | 7,108,931 | | | $ | 7,515,689 | |
|
| | | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,352,741 |
| | $ | 1,403,562 |
|
Marketable securities | | 811,506 |
| | 1,143,704 |
|
Accounts receivable trade, net | | 475,039 |
| | 128,282 |
|
Accounts receivable, unbilled and retainage | | 183,473 |
| | 458,166 |
|
Inventories | | 443,513 |
| | 387,912 |
|
Balance of systems parts | | 53,583 |
| | 56,906 |
|
Project assets | | 3,524 |
| | 37,930 |
|
Prepaid expenses and other current assets | | 276,455 |
| | 243,061 |
|
Total current assets | | 3,599,834 |
| | 3,859,523 |
|
Property, plant and equipment, net | | 2,181,149 |
| | 1,756,211 |
|
PV solar power systems, net | | 476,977 |
| | 308,640 |
|
Project assets | | 333,596 |
| | 460,499 |
|
Deferred tax assets, net | | 130,771 |
| | 77,682 |
|
Restricted cash and investments | | 303,857 |
| | 318,390 |
|
Goodwill | | 14,462 |
| | 14,462 |
|
Intangible assets, net | | 64,543 |
| | 74,162 |
|
Inventories | | 160,646 |
| | 130,083 |
|
Notes receivable, affiliate | | — |
| | 22,832 |
|
Other assets | | 249,854 |
| | 98,878 |
|
Total assets | | $ | 7,515,689 |
| | $ | 7,121,362 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | |
| | |
|
Accounts payable | | $ | 218,081 |
| | $ | 233,287 |
|
Income taxes payable | | 17,010 |
| | 20,885 |
|
Accrued expenses | | 351,260 |
| | 441,580 |
|
Current portion of long-term debt | | 17,510 |
| | 5,570 |
|
Deferred revenue | | 323,217 |
| | 129,755 |
|
Accrued litigation | | 363,000 |
| | — |
|
Other current liabilities | | 28,130 |
| | 14,380 |
|
Total current liabilities | | 1,318,208 |
| | 845,457 |
|
Accrued solar module collection and recycling liability | | 137,761 |
| | 134,442 |
|
Long-term debt | | 454,187 |
| | 461,221 |
|
Other liabilities | | 508,766 |
| | 467,839 |
|
Total liabilities | | 2,418,922 |
| | 1,908,959 |
|
Commitments and contingencies | |
|
| |
|
|
Stockholders’ equity: | | | | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 105,448,921 and 104,885,261 shares issued and outstanding at December 31, 2019 and 2018, respectively | | 105 |
| | 105 |
|
Additional paid-in capital | | 2,849,376 |
| | 2,825,211 |
|
Accumulated earnings | | 2,326,620 |
| | 2,441,553 |
|
Accumulated other comprehensive loss | | (79,334 | ) | | (54,466 | ) |
Total stockholders’ equity | | 5,096,767 |
| | 5,212,403 |
|
Total liabilities and stockholders’ equity | | $ | 7,515,689 |
| | $ | 7,121,362 |
|
See accompanying notes to these consolidated financial statements.
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Net sales | | $ | 2,711,332 | | | $ | 3,063,117 | | | $ | 2,244,044 | |
Cost of sales | | 2,030,659 | | | 2,513,905 | | | 1,851,867 | |
Gross profit | | 680,673 | | | 549,212 | | | 392,177 | |
Operating expenses: | | | | | | |
Selling, general and administrative | | 222,918 | | | 205,471 | | | 176,857 | |
Research and development | | 93,738 | | | 96,611 | | | 84,472 | |
Production start-up | | 40,528 | | | 45,915 | | | 90,735 | |
Litigation loss | | 6,000 | | | 363,000 | | | 0 | |
Total operating expenses | | 363,184 | | | 710,997 | | | 352,064 | |
Operating income (loss) | | 317,489 | | | (161,785) | | | 40,113 | |
Foreign currency (loss) income, net | | (4,890) | | | 2,291 | | | (570) | |
Interest income | | 16,559 | | | 48,886 | | | 59,788 | |
Interest expense, net | | (24,036) | | | (27,066) | | | (25,921) | |
Other (expense) income, net | | (11,932) | | | 17,545 | | | 39,737 | |
Income (loss) before taxes and equity in earnings | | 293,190 | | | (120,129) | | | 113,147 | |
Income tax benefit (expense) | | 107,294 | | | 5,480 | | | (3,441) | |
Equity in earnings, net of tax | | (2,129) | | | (284) | | | 34,620 | |
Net income (loss) | | $ | 398,355 | | | $ | (114,933) | | | $ | 144,326 | |
| | | | | | |
Net income (loss) per share: | | | | | | |
Basic | | $ | 3.76 | | | $ | (1.09) | | | $ | 1.38 | |
Diluted | | $ | 3.73 | | | $ | (1.09) | | | $ | 1.36 | |
Weighted-average number of shares used in per share calculations: | | | | | | |
Basic | | 105,867 | | | 105,310 | | | 104,745 | |
Diluted | | 106,686 | | | 105,310 | | | 106,113 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Net sales | | $ | 3,063,117 |
| | $ | 2,244,044 |
| | $ | 2,941,324 |
|
Cost of sales | | 2,513,905 |
| | 1,851,867 |
| | 2,392,377 |
|
Gross profit | | 549,212 |
| | 392,177 |
| | 548,947 |
|
Operating expenses: | | | | | | |
Selling, general and administrative | | 205,471 |
| | 176,857 |
| | 202,699 |
|
Research and development | | 96,611 |
| | 84,472 |
| | 88,573 |
|
Production start-up | | 45,915 |
| | 90,735 |
| | 42,643 |
|
Litigation loss | | 363,000 |
| | — |
| | — |
|
Restructuring and asset impairments | | — |
| | — |
| | 37,181 |
|
Total operating expenses | | 710,997 |
| | 352,064 |
| | 371,096 |
|
Operating (loss) income | | (161,785 | ) | | 40,113 |
| | 177,851 |
|
Foreign currency income (loss), net | | 2,291 |
| | (570 | ) | | (9,640 | ) |
Interest income | | 48,886 |
| | 59,788 |
| | 35,704 |
|
Interest expense, net | | (27,066 | ) | | (25,921 | ) | | (25,765 | ) |
Other income, net | | 17,545 |
| | 39,737 |
| | 23,965 |
|
(Loss) income before taxes and equity in earnings | | (120,129 | ) | | 113,147 |
| | 202,115 |
|
Income tax benefit (expense) | | 5,480 |
| | (3,441 | ) | | (371,996 | ) |
Equity in earnings, net of tax | | (284 | ) | | 34,620 |
| | 4,266 |
|
Net (loss) income | | $ | (114,933 | ) | | $ | 144,326 |
| | $ | (165,615 | ) |
| | | | | | |
Net (loss) income per share: | | | | | | |
Basic | | $ | (1.09 | ) | | $ | 1.38 |
| | $ | (1.59 | ) |
Diluted | | $ | (1.09 | ) | | $ | 1.36 |
| | $ | (1.59 | ) |
Weighted-average number of shares used in per share calculations: | | | | | | |
Basic | | 105,310 |
| | 104,745 |
| | 104,328 |
|
Diluted | | 105,310 |
| | 106,113 |
| | 104,328 |
|
See accompanying notes to these consolidated financial statements.
81
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Net income (loss) | | $ | 398,355 | | | $ | (114,933) | | | $ | 144,326 | |
Other comprehensive income (loss): | | | | | | |
Foreign currency translation adjustments | | (2,810) | | | (7,049) | | | (1,034) | |
Unrealized gain (loss) on marketable securities and restricted marketable securities, net of tax of $(1,231), $3,046, and $3,735 | | 21,659 | | | (15,670) | | | (57,747) | |
Unrealized (loss) gain on derivative instruments, net of tax of $(31), $142, and $(996) | | (1,241) | | | (2,149) | | | 2,056 | |
Other comprehensive income (loss) | | 17,608 | | | (24,868) | | | (56,725) | |
Comprehensive income (loss) | | $ | 415,963 | | | $ | (139,801) | | | $ | 87,601 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Net (loss) income | | $ | (114,933 | ) | | $ | 144,326 |
| | $ | (165,615 | ) |
Other comprehensive (loss) income: | | | | | | |
Foreign currency translation adjustments | | (7,049 | ) | | (1,034 | ) | | 11,832 |
|
Unrealized (loss) gain on marketable securities and restricted investments, net of tax of $3,046, $3,735, and $(588) | | (15,670 | ) | | (57,747 | ) | | 3,217 |
|
Unrealized (loss) gain on derivative instruments, net of tax of $142, $(996), and $1,396 | | (2,149 | ) | | 2,056 |
| | (2,883 | ) |
Other comprehensive (loss) income | | (24,868 | ) | | (56,725 | ) | | 12,166 |
|
Comprehensive (loss) income | | $ | (139,801 | ) | | $ | 87,601 |
| | $ | (153,449 | ) |
See accompanying notes to these consolidated financial statements.
82
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Equity |
| | Shares | | Amount | | | | |
Balance at December 31, 2017 | | 104,468 | | | $ | 104 | | | $ | 2,799,107 | | | $ | 2,297,227 | | | $ | 2,259 | | | $ | 5,098,697 | |
Net income | | — | | | — | | | — | | | 144,326 | | | — | | | 144,326 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (56,725) | | | (56,725) | |
Common stock issued for share-based compensation | | 588 | | | 1 | | | 3,425 | | | — | | | — | | | 3,426 | |
Tax withholding related to vesting of restricted stock | | (171) | | | 0 | | | (11,175) | | | — | | | — | | | (11,175) | |
Share-based compensation expense | | — | | | — | | | 33,854 | | | — | | | — | | | 33,854 | |
Balance at December 31, 2018 | | 104,885 | | | 105 | | | 2,825,211 | | | 2,441,553 | | | (54,466) | | | 5,212,403 | |
Net loss | | — | | | — | | | — | | | (114,933) | | | — | | | (114,933) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (24,868) | | | (24,868) | |
Common stock issued for share-based compensation | | 869 | | | 1 | | | 3,433 | | | — | | | — | | | 3,434 | |
Tax withholding related to vesting of restricted stock | | (305) | | | (1) | | | (16,089) | | | — | | | — | | | (16,090) | |
Share-based compensation expense | | — | | | — | | | 36,821 | | | — | | | — | | | 36,821 | |
Balance at December 31, 2019 | | 105,449 | | | 105 | | | 2,849,376 | | | 2,326,620 | | | (79,334) | | | 5,096,767 | |
Cumulative-effect adjustment for the adoption of ASU 2016-13 | | — | | | — | | | — | | | (9,213) | | | — | | | (9,213) | |
Net income | | — | | | — | | | — | | | 398,355 | | | — | | | 398,355 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 17,608 | | | 17,608 | |
Common stock issued for share-based compensation | | 814 | | | 1 | | | 1,362 | | | — | | | — | | | 1,363 | |
Tax withholding related to vesting of restricted stock | | (283) | | | 0 | | | (13,118) | | | — | | | — | | | (13,118) | |
Share-based compensation expense | | — | | | — | | 29,166 | | | — | | | — | | | 29,166 | |
Balance at December 31, 2020 | | 105,980 | | | $ | 106 | | | $ | 2,866,786 | | | $ | 2,715,762 | | | $ | (61,726) | | | $ | 5,520,928 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Equity |
| | Shares | | Amount | | | | |
Balance at December 31, 2016 | | 104,035 |
| | $ | 104 |
| | $ | 2,765,310 |
| | $ | 2,462,842 |
| | $ | (9,907 | ) | | $ | 5,218,349 |
|
Net loss | | — |
| | — |
| | — |
| | (165,615 | ) | | — |
| | (165,615 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 12,166 |
| | 12,166 |
|
Common stock issued for share-based compensation | | 580 |
| | — |
| | 4,474 |
| | — |
| | — |
| | 4,474 |
|
Tax withholding related to vesting of restricted stock | | (147 | ) | | — |
| | (5,137 | ) | | — |
| | — |
| | (5,137 | ) |
Share-based compensation expense | | — |
| | — |
| | 34,460 |
| | — |
| | — |
| | 34,460 |
|
Balance at December 31, 2017 | | 104,468 |
| | 104 |
| | 2,799,107 |
| | 2,297,227 |
| | 2,259 |
| | 5,098,697 |
|
Net income | | — |
| | — |
| | — |
| | 144,326 |
| | — |
| | 144,326 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (56,725 | ) | | (56,725 | ) |
Common stock issued for share-based compensation | | 588 |
| | 1 |
| | 3,425 |
| | — |
| | — |
| | 3,426 |
|
Tax withholding related to vesting of restricted stock | | (171 | ) | | — |
| | (11,175 | ) | | — |
| | — |
| | (11,175 | ) |
Share-based compensation expense | | — |
| | — |
| | 33,854 |
| | — |
| | — |
| | 33,854 |
|
Balance at December 31, 2018 | | 104,885 |
| | 105 |
| | 2,825,211 |
| | 2,441,553 |
| | (54,466 | ) | | 5,212,403 |
|
Net loss | | — |
| | — |
| | — |
| | (114,933 | ) | | — |
| | (114,933 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (24,868 | ) | | (24,868 | ) |
Common stock issued for share-based compensation | | 869 |
| | 1 |
| | 3,433 |
| | — |
| | — |
| | 3,434 |
|
Tax withholding related to vesting of restricted stock | | (305 | ) | | (1 | ) | | (16,089 | ) | | — |
| | — |
| | (16,090 | ) |
Share-based compensation expense | | — |
| | — |
| | 36,821 |
| | — |
| | — |
| | 36,821 |
|
Balance at December 31, 2019 | | 105,449 |
| | $ | 105 |
| | $ | 2,849,376 |
| | $ | 2,326,620 |
| | $ | (79,334 | ) | | $ | 5,096,767 |
|
See accompanying notes to these consolidated financial statements.
83
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | Years Ended December 31, | | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 |
Cash flows from operating activities: | | | | | | | Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (114,933 | ) | | $ | 144,326 |
| | $ | (165,615 | ) | |
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: | | | | | | | |
Net income (loss) | | Net income (loss) | | $ | 398,355 | | | $ | (114,933) | | | $ | 144,326 | |
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | | Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | |
Depreciation, amortization and accretion | | 205,475 |
| | 130,736 |
| | 115,313 |
| Depreciation, amortization and accretion | | 232,925 | | | 205,475 | | | 130,736 | |
Impairments and net losses on disposal of long-lived assets | | 7,577 |
| | 8,065 |
| | 35,364 |
| Impairments and net losses on disposal of long-lived assets | | 35,806 | | | 7,577 | | | 8,065 | |
Share-based compensation | | 37,429 |
| | 34,154 |
| | 35,121 |
| Share-based compensation | | 29,267 | | | 37,429 | | | 34,154 | |
Equity in earnings, net of tax | | 284 |
| | (34,620 | ) | | (4,266 | ) | Equity in earnings, net of tax | | 2,129 | | | 284 | | | (34,620) | |
Distributions received from equity method investments | | — |
| | 12,394 |
| | 23,042 |
| Distributions received from equity method investments | | 0 | | | 0 | | | 12,394 | |
Remeasurement of monetary assets and liabilities | | 919 |
| | 8,740 |
| | (15,823 | ) | Remeasurement of monetary assets and liabilities | | 1,359 | | | 919 | | | 8,740 | |
Deferred income taxes | | (59,917 | ) | | (10,112 | ) | | 173,368 |
| Deferred income taxes | | 36,013 | | | (59,917) | | | (10,112) | |
Gains on sales of marketable securities and restricted investments | | (40,621 | ) | | (55,405 | ) | | (49 | ) | |
Gains on sales of marketable securities and restricted marketable securities | | Gains on sales of marketable securities and restricted marketable securities | | (15,346) | | | (40,621) | | | (55,405) | |
Liabilities assumed by customers for the sale of systems | | (88,050 | ) | | (240,865 | ) | | (24,203 | ) | Liabilities assumed by customers for the sale of systems | | (136,745) | | | (88,050) | | | (240,865) | |
Other, net | | 759 |
| | 2,121 |
| | 2,339 |
| Other, net | | 15,809 | | | 759 | | | 2,121 | |
Changes in operating assets and liabilities: | | | | | | | Changes in operating assets and liabilities: | |
Accounts receivable, trade, unbilled and retainage | | (73,594 | ) | | (202,298 | ) | | 85,760 |
| Accounts receivable, trade, unbilled and retainage | | 345,150 | | | (73,594) | | | (202,298) | |
Prepaid expenses and other current assets | | (34,528 | ) | | (53,488 | ) | | 26,680 |
| Prepaid expenses and other current assets | | (992) | | | (34,528) | | | (53,488) | |
Inventories and balance of systems parts | | (83,528 | ) | | (257,229 | ) | | 212,758 |
| Inventories and balance of systems parts | | (145,396) | | | (83,528) | | | (257,229) | |
Project assets and PV solar power systems | | (20,773 | ) | | 49,939 |
| | 981,273 |
| Project assets and PV solar power systems | | 106,867 | | | (20,773) | | | 49,939 | |
Other assets | | 28,728 |
| | (11,920 | ) | | (1,269 | ) | Other assets | | (32,073) | | | 28,728 | | | (11,920) | |
Income tax receivable and payable | | 8,035 |
| | (49,169 | ) | | 169,079 |
| Income tax receivable and payable | | (177,431) | | | 8,035 | | | (49,169) | |
Accounts payable | | (336 | ) | | 96,443 |
| | (47,191 | ) | Accounts payable | | (43,285) | | | (336) | | | 96,443 | |
Accrued expenses and other liabilities | | 397,527 |
| | 132,382 |
| | (258,028 | ) | Accrued expenses and other liabilities | | (606,111) | | | 397,527 | | | 132,382 | |
Accrued solar module collection and recycling liability | | 3,748 |
| | (31,003 | ) | | (2,976 | ) | Accrued solar module collection and recycling liability | | (9,181) | | | 3,748 | | | (31,003) | |
Net cash provided by (used in) operating activities | | 174,201 |
| | (326,809 | ) | | 1,340,677 |
| Net cash provided by (used in) operating activities | | 37,120 | | | 174,201 | | | (326,809) | |
Cash flows from investing activities: | | | | | | | Cash flows from investing activities: | | | | | | |
Purchases of property, plant and equipment | | (668,717 | ) | | (739,838 | ) | | (514,357 | ) | Purchases of property, plant and equipment | | (416,635) | | | (668,717) | | | (739,838) | |
Purchases of marketable securities and restricted investments | | (1,177,336 | ) | | (1,369,036 | ) | | (580,971 | ) | |
Proceeds from sales and maturities of marketable securities and restricted investments | | 1,486,631 |
| | 1,135,984 |
| | 466,309 |
| |
Purchases of marketable securities and restricted marketable securities | | Purchases of marketable securities and restricted marketable securities | | (901,924) | | | (1,177,336) | | | (1,369,036) | |
Proceeds from sales and maturities of marketable securities and restricted marketable securities | | Proceeds from sales and maturities of marketable securities and restricted marketable securities | | 1,192,832 | | | 1,486,631 | | | 1,135,984 | |
Proceeds from sales of equity method investments | | — |
| | 247,595 |
| | — |
| Proceeds from sales of equity method investments | | 0 | | | 0 | | | 247,595 | |
Payments received on notes receivable, affiliates | | — |
| | 48,729 |
| | 1,740 |
| Payments received on notes receivable, affiliates | | 0 | | | 0 | | | 48,729 | |
Other investing activities | | (2,876 | ) | | (6,148 | ) | | 477 |
| Other investing activities | | (5,500) | | | (2,876) | | | (6,148) | |
Net cash used in investing activities | | (362,298 | ) | | (682,714 | ) | | (626,802 | ) | Net cash used in investing activities | | (131,227) | | | (362,298) | | | (682,714) | |
Cash flows from financing activities: | | | | | | | Cash flows from financing activities: | | | | | | |
Repayment of long-term debt | | (30,099 | ) | | (18,937 | ) | | (24,078 | ) | Repayment of long-term debt | | (225,344) | | | (30,099) | | | (18,937) | |
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | | 120,132 |
| | 290,925 |
| | 215,415 |
| Proceeds from borrowings under long-term debt, net of discounts and issuance costs | | 156,679 | | | 120,132 | | | 290,925 | |
Payments of tax withholdings for restricted shares | | (16,089 | ) | | (11,175 | ) | | (5,137 | ) | Payments of tax withholdings for restricted shares | | (13,118) | | | (16,089) | | | (11,175) | |
Proceeds from commercial letters of credit | | — |
| | — |
| | 43,025 |
| |
Contingent consideration payments and other financing activities | | 999 |
| | (5,585 | ) | | (37,180 | ) | |
Net cash provided by financing activities | | 74,943 |
| | 255,228 |
| | 192,045 |
| |
Other financing activities | | Other financing activities | | (804) | | | 999 | | | (5,585) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (82,587) | | | 74,943 | | | 255,228 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (2,959 | ) | | (13,558 | ) | | 8,866 |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 3,778 | | | (2,959) | | | (13,558) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | (116,113 | ) | | (767,853 | ) | | 914,786 |
| |
Net decrease in cash, cash equivalents and restricted cash | | Net decrease in cash, cash equivalents and restricted cash | | (172,916) | | | (116,113) | | | (767,853) | |
Cash, cash equivalents and restricted cash, beginning of the period | | 1,562,623 |
| | 2,330,476 |
| | 1,415,690 |
| Cash, cash equivalents and restricted cash, beginning of the period | | 1,446,510 | | | 1,562,623 | | | 2,330,476 | |
Cash, cash equivalents and restricted cash, end of the period | | $ | 1,446,510 |
| | $ | 1,562,623 |
| | $ | 2,330,476 |
| Cash, cash equivalents and restricted cash, end of the period | | $ | 1,273,594 | | | $ | 1,446,510 | | | $ | 1,562,623 | |
Supplemental disclosure of noncash investing and financing activities: | | |
| | |
| | |
| Supplemental disclosure of noncash investing and financing activities: | | | | | | |
Property, plant and equipment acquisitions funded by liabilities | | $ | 76,148 |
| | $ | 138,270 |
| | $ | 164,946 |
| Property, plant and equipment acquisitions funded by liabilities | | $ | 110,576 | | | $ | 76,148 | | | $ | 138,270 | |
Sale of system previously accounted for as sale-leaseback financing | | $ | — |
| | $ | 31,992 |
| | $ | — |
| Sale of system previously accounted for as sale-leaseback financing | | $ | 0 | | | $ | 0 | | | $ | 31,992 | |
Accrued interest capitalized to long-term debt | | $ | — |
| | $ | 3,512 |
| | $ | 18,401 |
| Accrued interest capitalized to long-term debt | | $ | 0 | | | $ | 0 | | | $ | 3,512 | |
See accompanying notes to these consolidated financial statements.
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. First Solar and Its Business
We are a leading global provider of comprehensive PV solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin film semiconductor technology andtechnology. In certain markets, we also develop and sell PV solar power systems that primarily use the modules we manufacture. Additionally, wemanufacture and provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on various technology innovations. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers.manufacturer in the Western Hemisphere.
2. Summary of Significant Accounting Policies
Basis of Presentation. These consolidated financial statements include the accounts of First Solar, Inc. and its subsidiaries and are prepared in accordance with U.S. GAAP. We eliminated all intercompany transactions and balances during consolidation. Certain prior year balances were reclassified to conform to the current year presentation.
Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to inputs used to recognize revenue over time, accrued solar module collection and recycling liabilities, product warranties, accounting for income taxes, and long-lived asset impairments. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions.
Fair Value Measurements. We measure certain assets and liabilities at fair value, which is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. Our fair value measurements use the following hierarchy, which prioritizes valuation inputs based on the extent to which the inputs are observable in the market.
•Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
•Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs are observable in active markets are Level 2 valuation techniques.
•Level 3 – Valuation techniques in which one or more significant inputs are unobservable. Such inputs reflect our estimate of assumptions that market participants would use to price an asset or liability.
Cash and Cash Equivalents. We consider highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents with the exception of time deposits, which are presented as marketable securities.
Restricted Cash. Restricted cash consists of cash and cash equivalents held by various banks to secure certain of our letters of credit and other such deposits designated for the construction or operation of systems projects as well as the payment of amounts related to project specific debt financings. Restricted cash also includes cash and cash equivalents held in custodial accounts to fund the estimated future costs of our solar module collection and recycling obligations.
Restricted cash for our letters of credit is classified as current or noncurrent based on the maturity date of the corresponding letter of credit. Restricted cash for project construction, operation, and financing is classified as current or noncurrent based on the intended use of the restricted funds. Restricted cash held in custodial accounts is classified as noncurrent to align with the nature of the corresponding collection and recycling liabilities.
Marketable Securities and Restricted Investments.Marketable Securities. We determine the classification of our marketable securities and restricted investmentsmarketable securities at the time of purchase and reevaluate such designation at each balance sheet date. As of December 31, 20192020 and 2018,2019, all of our marketable securities and restricted investmentsmarketable securities were classified as available-for-sale debt securities. Accordingly, we record them at fair value and account for the net unrealized gains and losses as part of “Accumulated other comprehensive loss” until realized. We record realized gains and losses on the sale of our marketable securities and restricted investmentsmarketable securities in “Other (expense) income, net” computed using the specific identification method.
We may sell marketable securities prior to their stated maturities after consideration of our liquidity requirements. We view unrestricted securities with maturities beyond 12 months as available to support our current operations and, accordingly, classify such securities as current assets under “Marketable securities” in the consolidated balance sheets. Restricted investmentsmarketable securities consist of long-term duration marketable securities that we hold in custodial accounts to fund the estimated future costs of our solar module collection and recycling obligations. Accordingly, we classify restricted investmentsmarketable securities as noncurrent assets under “Restricted cash and investments”marketable securities” in the consolidated balance sheets.
All of our available-for-sale marketable securities and restricted investments are subject to a periodic impairment review. We consider a marketable security or restricted investment to be impaired when its fair value is less than its cost basis, in which case we would further review the security or investment to determine if it is other-than-temporarily impaired. In performing such an evaluation, we review factors such as the length of time and the extent to which its fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more likely than not that we will be required to sell the marketable security or restricted investment before we have recovered its cost basis. If a marketable security or restricted investment were other-than-temporarily impaired, we write it down through “Other income, net” to its impaired value and establish that value as its new cost basis.
Accounts Receivable Trade and Allowance for Doubtful Accounts. We record trade accounts receivable for our unconditional rights to consideration arising from our performance under contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts,credit losses, represents their estimated net realizable value. We estimate our allowance for doubtful accounts for specific trade receivable balances based on historical collection trends, the age of outstanding trade receivables, existing economic conditions, and the financial security, if any, associated with the receivables. Past-due trade receivable balances are written off when our internal collection efforts have been unsuccessful.
Our module and other equipment sales generally include up to 45-day payment terms following the transfer of control of the products to the customer. In addition, certain module and equipment sale agreements may require a down payment for a portion of the transaction price upon or shortly after entering into the agreement or related purchase order. Payment terms for sales of our solar power systems, EPC services, and operations and maintenance services vary by contract but are generally due upon demand or within several months of satisfying the associated performance obligations. As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We typically do not include extended payment terms in our contracts with customers.
Accounts Receivable, Unbilled. Accounts receivable, unbilled represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. For example, we typically recognize revenue from contracts for the construction and sale of PV solar power systems over time using cost based input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract. Accordingly, revenue could be
recognized in advance of billing the customer, resulting in an amount recorded to “Accounts receivable, unbilled and retainage.”retainage” or “Other assets” depending on the expected timing of payment for such unbilled receivables. Once we have an unconditional right to consideration under a construction contract, we typically bill our customer and reclassify the “Accounts receivable, unbilled and retainage” to “Accounts receivable trade, net.trade.” Billing requirements vary by contract but are generally structured around the completion of certain development, construction, or other specified milestones. We assess our unbilled accounts receivable for impairment in accordance with the allowance for doubtful accounts policy described above.
Retainage. Certain of our EPC contracts for PV solar power systems we build contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones. We consider whether collectibility of such retainage is reasonably assured in connection with our overall assessment of the collectibility of amounts due or that will become due under our EPC contracts. Retainage included within “Accounts receivable, unbilled and retainage” is expected to be billed and collected within the next 12 months. After we satisfy the EPC contract requirements and have an unconditional right to consideration, we typically bill our customer for retainage and reclassify such amount to “Accounts receivable trade, net.trade.”
Allowance for Credit Losses. The allowance for credit losses is a valuation account that is deducted from a financial asset’s amortized cost to present the net amount we expect to collect from such asset. We estimate allowances for credit losses using relevant available information from both internal and external sources. We monitor the estimated credit losses associated with our trade accounts receivable and unbilled accounts receivable based primarily on our collection history and the delinquency status of amounts owed to us, which we determine based on the aging of such receivables. For our notes receivable, we determine estimated credit losses through an assessment of the borrower’s credit quality based primarily on quarterly reviews of certain financial information, including financial statements and forecasts. We estimate credit losses associated with our marketable securities and restricted marketable securities based on the external credit rating for such investments and the historical loss rates associated with such credit ratings, which we obtain from third parties. Such methods and estimates are adjusted, as appropriate, for relevant past events, current conditions, such as the COVID-19 pandemic and related containment measures, and reasonable and supportable forecasts. We recognize writeoffs within the allowance for credit losses when cash receipts associated with our financial assets are deemed uncollectible.
Inventories – Current and Noncurrent. We report our inventories at the lower of cost or net realizable value. We determine cost on a first-in, first-out basis and include both the costs of acquisition and manufacturing in our inventory costs. These costs include direct materials, direct labor, and indirect manufacturing costs, including depreciation and amortization. Our capitalization of indirect costs is based on the normal utilization of our plants. If our plant utilization is abnormally low, the portion of our indirect manufacturing costs related to the abnormal utilization level is expensed as incurred. Other abnormal manufacturing costs, such as wasted materials or excess yield losses, are also expensed as incurred. Finished goods inventory is comprised exclusively of solar modules that have not yet been installed in a PV solar power plant under construction or sold to a third-party customer.
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.
We regularly review the cost of inventories, including noncurrent inventories, against their estimated net realizable value and record write-downs if any inventories have costs in excess of their net realizable values. We also regularly evaluate the quantities and values of our inventories, including noncurrent inventories, in light of current market conditions and trends, among other factors, and record write-downs for any quantities in excess of demand or for any obsolescence. This evaluation considers the use of modules in our systems business or product warranties, module selling prices, product obsolescence, strategic raw material requirements, and other factors.
Balance of Systems Parts. BoS parts represent mounting, electrical, and other parts purchased for the construction and maintenance of PV solar power systems. These parts, which are not yet installed in a system, may include posts, tilt brackets, tables, harnesses, combiner boxes, inverters, cables, tracker equipment, and other items that we may purchase or assemble for the systems we construct. We carry BoS parts at the lower of cost or net realizable value and determine their costs on a weighted-average basis. BoS parts do not include any solar modules that we manufacture.
Property, Plant and Equipment. We report our property, plant and equipment at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the assets, required installation costs, interest capitalized during the construction period, and any expenditures that substantially add to the value of or substantially extend the useful life of the assets. We capitalize costs related to computer software obtained or developed for internal use, which generally includes enterprise-level business and finance software that we customize to meet our specific operational requirements. We expense repair and maintenance costs at the time we incur them.
We begin depreciation for our property, plant and equipment when the assets are placed in service. We consider such assets to be placed in service when they are both in the location and condition for their intended use. We compute depreciation expense using the straight-line method over the estimated useful lives of assets, as presented in the table
below. We depreciate leasehold improvements over the shorter of their estimated useful lives or the remaining term of the lease. The estimated useful life of an asset is reassessed whenever applicable facts and circumstances indicate a change in the estimated useful life of such asset has occurred.
|
| | | | | | | |
| | Useful Lives in Years
|
Buildings and building improvements | | 25 – 40 |
Manufacturing machinery and equipment | | 5 – 15 |
Furniture, fixtures, computer hardware, and computer software | | 3 – 7 |
Leasehold improvements | | up to 15 |
PV Solar Power Systems. PV solar power systems represent project assets that we may temporarily own and operate after being placed in service. We report our PV solar power systems at cost, less accumulated depreciation. When we are entitled to incentive tax credits for our systems, we reduce the related carrying value of the assets by the amount of the tax credits, which reduces future depreciation. We begin depreciation for PV solar power systems when they are placed in service. We compute depreciation expense for the systems using the straight-line method over the shorter of the term of the related PPA or 25 years. Accordingly, our current PV solar power systems have estimated useful lives ranging from 19 to 25 years.
Project Assets. Project assets primarily consist of costs related to solar power projects in various stages of development that are capitalized prior to the completion of the sale of the project, including projects that may have begun commercial operation under 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, transmission upgrade, interconnection, and other similar costs. We typically classify project assets as noncurrent due to the nature of solar power projects (as long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months. Once we enter into a definitive sales agreement, we classify project assets as current until the sale is completed and we have recognized the sale as revenue. Any income generated by a project while it remains within project assets is accounted for as a reduction to our basis in the project. If a project is completed and begins commercial operation prior to the closing of a sales arrangement, the completed project will remain in project assets until placed in service. We present all expenditures related to the development and construction of project assets, whether fully or partially owned, as a component of cash flows from operating activities.
We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project is expected to be recoverable, including whether there are any changes in environmental, permitting, market pricing, regulatory, or other conditions that may impact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project
assets and adjust the carrying value to the estimated fair value, with the resulting impairment recorded within “Selling, general and administrative” expense.
Interest Capitalization. We capitalize interest as part of the historical cost of acquiring, developing, or constructing certain assets, including property, plant and equipment; project assets; and PV solar power systems. Interest capitalized for property, plant and equipment or PV solar power systems is depreciated over the estimated useful life of the related assets when they are placed in service. We charge interest capitalized for project assets to cost of sales when such assets are sold. We capitalize interest to the extent that interest has been incurred and payments have been made to acquire, construct, or develop an asset. We cease capitalization of interest for assets in development or under construction if the assets are substantially complete or if we have sold such assets.
Asset Impairments. We assess long-lived assets classified as “held and used,” including our property, plant and equipment; PV solar power systems; project assets; operating lease assets; and intangible assets, for impairment whenever events or changes in circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of such assets may not be recoverable. These events and changes in circumstances may include a significant decrease in the market price of a long-lived asset; a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; a significant adverse change in the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; a current-period operating or cash flow loss combined with a history of such losses or a projection of future losses associated with the use of a long-lived asset; or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
When impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If the carrying value of the asset group exceeds the undiscounted future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted cash flows for the asset group, (ii) third-party valuations, and/or (iii) information available regarding the current market value for such assets. If the fair value of an asset group is determined to be less than its carrying value, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs. Estimating future cash flows requires significant judgment, and such projections may vary from the cash flows eventually realized.
We consider a long-lived asset to be abandoned after we have ceased use of the asset and we have no intent to use or repurpose it in the future. Abandoned long-lived assets are recorded at their salvage value, if any.
We classify long-lived assets or asset groups we plan to sell, excluding project assets and PV solar power systems to be sold as part of our ongoing operations, as held for sale on our consolidated balance sheets only after certain criteria have been met including: (i) management has the authority and commits to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and the plan to sell the asset have been initiated, (iv) the sale of the asset is probable within 12 months, (v) the asset is being actively marketed at a reasonable sales price relative to its current fair value, and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made. We record assets or asset groups held for sale at the lower of their carrying value or fair value less costs to sell. If, due to unanticipated circumstances, such assets or asset groups are not sold in the 12 months after being classified as held for sale, then held for sale classification would continue as long as the above criteria are still met.
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 VIEs 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. 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 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.
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.
Equity Method Investments. We use the equity method of accounting for our investments when we have the ability to significantly influence, but not control, the operations or financial activities of the investee. As part of this evaluation, we consider our participating and protective rights in the venture as well as its legal form. 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. We present our equity method investments within “Other assets.”
Distributions received from our equity method investments are recorded as reductions in the carrying value of such investments and are classified on the consolidated statements of cash flows pursuant to the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and are classified as cash inflows from operating activities unless our cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our cumulative equity in earnings recognized from the investment. When such an excess occurs, the current period distributions up to this excess are considered returns of investment and are classified as cash inflows from investing activities.
We monitor equity method investments for impairment and record reductions in their carrying values if the carrying amount of an 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 impairment losses related to our equity method investments of $3.5 million and $2.0 million, net of tax, during the years ended December 31, 2018 and 2017, respectively.
Goodwill. 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. We perform impairment tests between the scheduled annual test 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.
We may first make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value to determine whether it is necessary to perform a quantitative goodwill impairment test. Such qualitative impairment test considers various factors, including macroeconomic conditions, industry and market considerations, cost factors, the overall financial performance of a reporting unit, and any other relevant events affecting our company or a reporting unit. If we determine through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the quantitative impairment test is not required. If the qualitative assessment indicates it is more likely than not that a reporting unit’s fair value is less than its carrying value, we perform a quantitative impairment test. We may also elect to proceed directly to the quantitative impairment test without considering qualitative factors.
The quantitative impairment test is the comparison of the fair value of a reporting unit with its carrying amount, including goodwill. Our reporting units consist of our modules and systems businesses. We define the fair value of a reporting unit as the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. We primarily use an income approach to estimate the fair value of our reporting units. Significant
judgment is required when estimating the fair value of a reporting unit, including the forecasting of future operating results and the selection of discount and expected future growth rates used to determine projected cash flows. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired, and no further analysis is required. Conversely, if the carrying value of a reporting unit exceeds its estimated fair value, we record an impairment loss equal to the excess, not to exceed the total amount of goodwill allocated to the reporting unit.
Intangible Assets. Intangible assets primarily include developed technologies, certain PPAs acquired after the associated PV solar power systems were placed in service, 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 it. We amortize intangible assets on a straight-line basis over their estimated useful lives, which generally range from 10 to 20 years.
Leases. Upon commencement of a lease, we recognize a lease liability for the present value of the lease payments not yet paid, discounted using an interest rate that represents our ability to borrow on a collateralized basis over a period that approximates the lease term. We also recognize a lease asset, which represents our right to control the use of the underlying property, plant or equipment, at an amount equal to the lease liability, adjusted for prepayments and initial direct costs.
We subsequently recognize the cost of operating leases on a straight-line basis over the lease term, and any variable lease costs, which represent amounts owed to the lessor that are not fixed per the terms of the contract, are recognized in the period in which they are incurred. Any costs included in our lease arrangements that are not directly related to the leased assets, such as maintenance charges, are included as part of the lease costs. Leases with an initial term of one year or less are considered short-term leases and are not recognized as lease assets and liabilities. We also recognize the cost of such short-term leases on a straight-line basis over the term of the underlying agreement.
Many of our leases, in particular those related to systems project land, contain renewal or termination options that are exercisable at our discretion. At the commencement date of a lease, we include in the lease term any periods covered by a renewal option, and exclude from the lease term any periods covered by a termination option, to the extent we are reasonably certain to exercise such options. In making this determination, we seek to align the lease term with the expected economic life of the underlying asset.
Deferred Revenue. When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs incurred on long-term construction contracts and advance payments received on sales of solar modules. As a
practical expedient, we do not adjust the consideration in a contract for the effects of a significant financing component when we expect, at contract inception, that the period between a customer’s advance payment and our transfer of a promised product or service to the customer will be one year or less. Additionally, we do not adjust the consideration in a contract for the effects of a significant financing component when the consideration is received as a form of performance security.
Product Warranties. We provide a limited PV solar module warranty covering defects in materials and workmanship under normal use and service conditions for approximately 10up to 12 years. We also typically warrant that modules installed in accordance with agreed-upon specifications will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by 0.5%a degradation factor every year thereafter throughout the approximate 25-year limited power output warranty period.period of up to 30 years. Among other things, our solar module warranty also covers the resulting power output loss from cell cracking. In resolving claims under both the limited defect and power output warranties, we typically have the option of either repairing or replacing the covered modules or, under the limited power output warranty, providing additional modules to remedy the power shortfall. Our limited module warranties also include an option for us to remedy claims under such warranties, generally exercisable only after the second year of the warranty period, by making certain cash payments. Under the limited workmanship warranty, the optional cash payment will be equal to the original purchase price of the module, reduced by a degradation factor, and under the limited power output warranty, the cash payment will be equal to the shortfall in power output. Such limited module warranties are standard
for module sales and may be transferred from the original purchasers of the solar modules to subsequent purchasers upon resale.
As an alternative form of our standard limited module power output warranty, we have also offeroffered an aggregated or system-level limited module performance warranty. This system-level limited module performance warranty is designed for utility-scale systems and provides 25-year system-level energy degradation protection. This warranty represents a practical expedient to address the challenge of identifying, from the potential millions of modules installed in a utility-scale system, individual modules that may be performing below warranty thresholds by focusing on the aggregate energy generated by the system rather than the power output of individual modules. The system-level limited module performance warranty is typically calculated as a percentage of a system’s expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty. In resolving claims under the system-level limited module performance warranty to restore the system to warranted performance levels, we first must validate that the root cause of the issue is due to module performance; we then have the option of either repairing or replacing the covered modules, providing supplemental modules, or making a cash payment. Consistent with our limited module power output warranty, when we elect to satisfy a warranty claim by providing replacement or supplemental modules under the system-level module performance warranty, we do not have any obligation to pay for the labor to remove or install modules.
In addition to our limited solar module warranties described above, for PV solar power systems we construct, we typically provide limited warranties for defects in engineering design, installation, and BoS part workmanship for a period of one to two years following the substantial completion of a system or a block within the system. In resolving claims under such BoS warranties, we have the option of remedying the defect through repair or replacement.
When we recognize revenue for module or system sales, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations. We make and revise these estimates based primarily on the number of solar modules under warranty installed at customer locations, our historical experience with and projections of warranty claims, and our estimated per-module replacement costs. We also monitor our expected future module performance through certain quality and reliability testing and actual performance in certain field installation sites.
Accrued Solar Module Collection and Recycling Liability. Historically, we recognized expense at the time of sale for the estimated cost of our future obligations for collecting and recycling solar modules covered by our solar module
collection and recycling program. See Note 12.11. “Solar Module Collection and Recycling Liability” to our consolidated financial statements for further information.
Derivative Instruments. We recognize derivative instruments on our consolidated balance sheets at their fair value. On the date that we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a derivative instrument that will not be accounted for using hedge accounting methods. As of December 31, 20192020 and 2018,2019, all of our derivative instruments were designated either as cash flow hedges or as derivative instruments not accounted for using hedge accounting methods.
We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge in “Accumulated other comprehensive loss” until our earnings are affected by the variability of the cash flows from the underlying hedged item. We record any amounts excluded from effectiveness testing in current period earnings in the same income statement line item in which the earnings effect of the hedged item is reported. We report changes in the fair value of derivative instruments that are not designated or do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments on the consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument.
At the inception of a hedge, we formally document all relationships between hedging instruments and the underlying hedged items as well as our risk-management objective and strategy for undertaking the hedge transaction. We also formally assess (both at inception and on an ongoing basis) whether our derivative instruments are highly effective in offsetting changes in the fair value or cash flows of the underlying hedged items and whether those derivatives are
expected to remain highly effective in future periods. When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we carry the derivative instrument at its fair value on our consolidated balance sheets and recognize subsequent changes in its fair value in current period earnings.
Accumulated Other Comprehensive Income or Loss. Our accumulated other comprehensive income or loss includes foreign currency translation adjustments, unrealized gains and losses on available-for-sale debt securities, and unrealized gains and losses on derivative instruments designated and qualifying as cash flow hedges. We record these components of accumulated other comprehensive income or loss net of tax and release such tax effects when the underlying components affect earnings.
Revenue Recognition – Module and Other Equipment Sales. We recognize revenue for module and other equipment sales (e.g., module plus arrangements) at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For module and other equipment sales contracts that contain multiple performance obligations, such as the shipment or delivery of solar modules and other BoS parts, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.
Revenue Recognition – Solar Power System Sales and/or EPC Services. We recognize revenue for the sale of a development project, which excludes EPC services, or for the sale of a completed system when we enter into the associated sales contract with the customer. For otherEPC services, or sales of solar power systems and/orwith EPC services, we generally recognize revenue over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such arrangements, we recognize revenue and gross profit as work is performed using cost based input methods, for which we determine our progress toward contract completion based on the relationship between the actual costs incurred and the total estimated costs (including solar module costs) of the contract.
Such revenue recognition is dependent, in part, on our customers’ commitment to perform their obligations under the contract, which is typically measured through the receipt of cash deposits or other forms of financial security issued by creditworthy financial institutions or parent entities. For sales
Cost based input methods of revenue recognition are considered a faithful depiction of our efforts to satisfy long-term construction contracts and therefore reflect the transfer of goods to a customer under such contracts. Costs incurred that do not contribute to satisfying our performance obligations (i.e., “inefficient costs”) are excluded from our input methods of revenue recognition as the amounts are not reflective of our transferring control of the system to the customer. Costs incurred toward contract completion may include costs associated with solar modules, direct materials, labor, subcontractors, and other indirect costs related to contract performance. We recognize solar module and direct material costs as incurred when such items are installed in a system.
Cost based input methods of revenue recognition require us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other payments to customers. Significant judgment is also required to evaluate assumptions related to the costs to complete our projects, including materials, labor, contingencies, and other system costs. If the estimated total costs on any contract, including any inefficient costs, are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. 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.
As part of our solar power system sales, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable period meets or exceeds the modeled energy expectation, after certain adjustments. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. Conversely, if there is an underperformance event with regards to these tests, we may incur liquidated damages as a percentage of the EPC contract price. Such performance guarantees represent a form of variable consideration and are estimated at contract inception at their most likely amount and updated at the end of each reporting period as additional performance data becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
Revenue Recognition – Operations and Maintenance. We recognize revenue for standard, recurring O&M services over time as customers receive and consume the benefits of such services, which typically include 24/7 system monitoring, certain PPA and other agreement compliance, NERC compliance, large generator interconnection agreement compliance, energy forecasting, performance engineering analysis, regular performance reporting, turn-key maintenance services including spare parts and corrective maintenance repair, warranty management, and environmental services. Other ancillary O&M services, such as equipment replacement, weed abatement, landscaping, or solar module cleaning, are recognized as revenue as the services are provided to the customer. Costs of O&M services are expensed in the period in which they are incurred.
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 our control as the service provider. If system availability exceeds a contractual threshold, we may receive a bonus payment, or if system availability falls below a separate threshold, we may incur liquidated damages for certain lost energy under the PPA. Such bonuses or liquidated damages represent a form of variable consideration and are estimated and recognized over time as customers receive and consume the benefits of the O&M services.
Revenue Recognition – Energy Generation. We sell energy generated by PV solar power systems under PPAs or on an open contract basis. For energy sold under PPAs, we recognize revenue each period based on the volume of energy delivered to the customer (i.e., the PPA off-taker) and the price stated in the PPA. For energy sold on an open contract basis, we recognize revenue at the point in time the energy is delivered to the grid based on the prevailing spot market prices.
Shipping and Handling Costs. We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales, and classify such costs as a component of cost of sales.
Taxes Collected from Customers and Remitted to Governmental Authorities. We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of net sales or cost of sales.
Research and Development Expense.Development. We incur research and development costs during the process of researching and developing new products and enhancing our existing products, technologies, and manufacturing processes. Our research and development costs consist primarily of employee compensation, materials, outside services, and depreciation. We expense these costs as incurred until the resulting product has been completed, tested, and made ready for commercial manufacturing.
Production Start-Up. Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it is qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase and applicable facility related costs. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in
production start-up expense as well as costs related to the selection of a new site, related legal and regulatory costs, and costs to maintain our plant replication program to the extent we cannot capitalize these expenditures.
Restructuring and Exit Activities.
We record costs associated with significant exit activities when management approves and commits to a plan of termination or over the future service period for certain employee termination benefits. Such exit activities represent programs that materially change our scope of business or the manner in which we conduct our business. Costs associated with these programs may include one-time employee termination benefits, contract termination costs, including costs related to leased facilities to be abandoned or subleased, and asset impairment charges.
Share-Based Compensation. We recognize share-based compensation expense for the estimated grant-date fair value of equity awards issued as compensation to employees over the requisite service period, which is generally four years. For awards with performance conditions, we recognize share-based compensation expense if it is probable that the performance conditions will be achieved. We account for forfeitures of share-based awards as such forfeitures occur. Accordingly, when an associate’s employment is terminated, all previously unvested awards granted to such associate are forfeited, which results in a benefit to share-based compensation expense in the period of such associate’s termination equal to the cumulative expense recorded through the termination date for the unvested awards. We recognize share-based compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service periods for each separately vesting portion of the award as if each award was in substance multiple awards.
Foreign Currency Translation. The functional currencies of certain of our foreign subsidiaries are their local currencies. Accordingly, we apply period-end exchange rates to translate their assets and liabilities and daily transaction exchange rates to translate their revenues, expenses, gains, and losses into U.S. dollars. We include the associated translation adjustments as a separate component of “Accumulated other comprehensive loss” within stockholders’ equity. The functional currency of our subsidiaries in Canada, Chile, Malaysia, Singapore, and Vietnam is the U.S. dollar; therefore, we do not translate their financial statements. Gains and losses arising from the remeasurement of monetary assets and liabilities denominated in currencies other than a subsidiary’s functional currency are included in “Foreign currency (loss) income, (loss), net” in the period in which they occur.
Income Taxes. We use the asset and liability method to account for income taxes whereby we calculate deferred tax assets or liabilities using the enacted tax rates and tax law applicable to when any temporary differences are expected to reverse. We establish valuation allowances, when necessary, to reduce deferred tax assets to the extent it is more likely than not that such deferred tax assets will not be realized. We do not provide deferred taxes related to the U.S. GAAP basis in excess of the outside tax basis in the investment in our foreign subsidiaries to the extent such amounts relate to indefinitely reinvested earnings and profits of such foreign subsidiaries.
Income tax expense includes (i) deferred tax expense, which generally represents the net change in deferred tax assets or liabilities during the year plus any change in valuation allowances, and (ii) current tax expense, which represents the amount of tax currently payable to or receivable from taxing authorities. We only recognize tax benefits related to uncertain tax positions that are more likely than not of being sustained upon examination. For those positions that satisfy such recognition criteria, the amount of tax benefit that we recognize is the largest amount of tax benefit that is more likely than not of being sustained on ultimate settlement of the uncertain tax position.
Per Share Data. Basic net income or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potentially dilutive common shares, including restricted and performance stock units and stock purchase plan shares, unless there is a net loss for the period. In computing diluted net income per share, we utilize the treasury stock method.
Accumulated Other Comprehensive Income or Loss. Our accumulated other comprehensive income or loss includes foreign currency translation adjustments, unrealized gains and losses on available-for-sale debt securities, and unrealized gains and losses on derivative instruments designated and qualifying as cash flow hedges. We record these components of accumulated other comprehensive income or loss net of tax and release such tax effects when the underlying components affect earnings.
3. Recent Accounting Pronouncements
In August 2017,June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, to simplify certain aspects of hedge accounting for both non-financial and financial risks and better align the recognition and measurement of hedge results with an entity’s risk management activities. ASU 2017-12 also amends certain presentation and disclosure requirements for hedging activities and changes how an entity assesses hedge effectiveness. The adoption of ASU 2017-12 in the first quarter of 2019 did not have a significant impact on our consolidated financial statements and associated disclosures.
In June 2016, the FASB issued ASUStandards Update (“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 entitiesreplaces the historical incurred loss model with a model that reflects current expected credit losses (“CECL”), which requires consideration of a broader range of information to measure credit losses on financial instruments and determine the timing of when such losses are recorded. The CECL model is applicable to certain financial assets measured at amortized cost that subject us to credit risk, including cash equivalents, trade accounts receivable, unbilled accounts receivable and retainage, and notes receivable. In addition, ASU 2016-13 amended certain aspects of the accounting for available-for-sale debt securities, including the presentation of credit losses as an allowance against, rather than a write-down of, the fair value of such securities. Furthermore, a credit loss is effective for fiscal yearsonly considered when a security is in an unrealized loss position, is limited to the difference between such security’s fair value and interim periods within those years beginning after December 15, 2019,amortized cost basis, and early adoption is permitted for periods beginning after December 15, 2018. recorded directly to “Other expense, net.” Any remaining unrealized loss is recorded to “Accumulated other comprehensive loss” until realized.
We expect to adoptadopted ASU 2016-13 in the first quarter of 2020 and are currently evaluating its impact on our consolidated financial statements and associated disclosures.
In February 2016,using the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and disclosing key information about leasing transactions. Leases are classified as either operating or financing, with such classification affecting the pattern of expense recognitionmodified-retrospective approach, which resulted in the income statement. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) – Targeted Improvements, which providedrecognition of an optional transition method to apply the new lease requirementsinitial allowance for credit losses for our various financial assets through a cumulative-effect adjustment in the periodthat decreased retained earnings by $9.2 million, net of adoption.
We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected certain practical expedients permitted under the transition guidance, which, among other things, allowed us to not reassess prior conclusions related to contracts containing leases or lease classification. The adoption primarily affected our condensed consolidated balance sheet through the recognition of $140.7 million of right-of-use assets and $119.9 million of lease liabilitiestax, as of January 1, 2019 and the derecognition of historical prepaid and deferred rent balances. The adoption did not have a significant impact on our results of operations or cash flows. 2020.
See Note 10. "Leases"5. “Cash, Cash Equivalents, and Marketable Securities,” Note 6. “Restricted Marketable Securities,” and Note 7. “Consolidated Balance Sheet Details” to our consolidated financial statements for further discussion ofinformation about the effects of the adoption of ASU 2016-02 and theallowance for credit losses associated disclosures.
4. Restructuring and Asset Impairments
Cadmium Telluride Module Manufacturing and Corporate Restructuring
In November 2016, our board of directors approved a set of initiatives intended to accelerate our transition to Series 6 module manufacturing and restructure our operations to reduce costs and better align the organization with our long-term strategic plans. As a result of these initiatives, we incurred net charges of $41.8 million during the year ended December 31, 2017, which included (i) $27.6 million of charges, primarily related to net losses on the disposition of previously impaired Series 4 and Series 5 manufacturing equipment, (ii) $7.6 million of severance benefits to terminated employees, and (iii) $6.7 million of net miscellaneous charges, primarily related to contract terminations, the write-off of operating supplies, and other Series 4 manufacturing exit costs.various financial assets.
Substantially all amounts associated with these restructuring and asset impairment charges related to our modules segment and were classified as “Restructuring and asset impairments” on the consolidated statements of operations, and substantially all of the associated liabilities were paid or settled as of December 31, 2017.
96
Other Restructuring
During the year ended December 31, 2012, we recognized a liability for the expected repayment of certain customs tax benefits as part of a prior restructuring activity. In December 2017, we reversed this liability as a result of meeting certain investment certificate criteria associated with the commencement of operations at our previously announced manufacturing plant in Vietnam and recorded a $4.7 million benefit to “Restructuring and asset impairments.”
5.4. Goodwill and Intangible Assets
Goodwill
The changes inGoodwill for the carrying amount of goodwill, byrelevant reporting unit forconsisted of the years endedfollowing at December 31, 20192020 and 2018 were as follows2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | Acquisitions (Impairments) | | December 31, 2020 |
Modules | | $ | 407,827 | | | $ | 0 | | | $ | 407,827 | |
Accumulated impairment losses | | (393,365) | | | 0 | | | (393,365) | |
Total | | $ | 14,462 | | | $ | 0 | | | $ | 14,462 | |
| | | | Balance at December 31, 2018 | | Acquisitions (Impairments) | | Balance at December 31, 2019 | | December 31, 2018 | | Acquisitions (Impairments) | | December 31, 2019 |
Modules | | $ | 407,827 |
| | $ | — |
| | $ | 407,827 |
| Modules | | $ | 407,827 | | | $ | 0 | | | $ | 407,827 | |
Accumulated impairment losses | | (393,365 | ) | | — |
| | (393,365 | ) | Accumulated impairment losses | | (393,365) | | | 0 | | | (393,365) | |
Total | | $ | 14,462 |
| | $ | — |
| | $ | 14,462 |
| Total | | $ | 14,462 | | | $ | 0 | | | $ | 14,462 | |
|
| | | | | | | | | | | | |
| | Balance at December 31, 2017 | | Acquisitions (Impairments) | | Balance at December 31, 2018 |
Modules | | $ | 407,827 |
| | $ | — |
| | $ | 407,827 |
|
Accumulated impairment losses | | (393,365 | ) | | — |
| | (393,365 | ) |
Total | | $ | 14,462 |
| | $ | — |
| | $ | 14,462 |
|
We performed our annual impairment analysis in the fourth quarter of 2020, 2019, 2018, and 2017.2018. ASC 350-20 allows companies to perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value to determine whether it is necessary to perform a quantitative goodwill impairment test. Such qualitative assessment considers various factors, including macroeconomic conditions, industry and market considerations, cost factors, the overall financial performance of a reporting unit, and any other relevant events affecting our company or a reporting unit.
We performed a qualitative assessment for our modules reporting unit in each respective period and concluded that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount. Accordingly, a quantitative goodwill impairment test for this reporting unit was not required in either period.any period presented.
Intangible Assets, Netassets, net
The following tables summarize our intangible assets at December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Gross Amount | | Accumulated Amortization | | Net Amount |
Developed technology | | $ | 99,964 | | | $ | (52,115) | | | $ | 47,849 | |
Power purchase agreements | | 6,486 | | | (1,296) | | | 5,190 | |
Patents | | 8,173 | | | (5,074) | | | 3,099 | |
Total | | $ | 114,623 | | | $ | (58,485) | | | $ | 56,138 | |
| | | | December 31, 2019 | | December 31, 2019 |
| | Gross Amount | | Accumulated Amortization | | Net Amount | | | Gross Amount | | Accumulated Amortization | | Net Amount |
Developed technology | | $ | 97,964 |
| | $ | (42,344 | ) | | $ | 55,620 |
| Developed technology | | $ | 97,964 | | | $ | (42,344) | | | $ | 55,620 | |
Power purchase agreements | | 6,486 |
| | (972 | ) | | 5,514 |
| Power purchase agreements | | 6,486 | | | (972) | | | 5,514 | |
Patents | | 7,780 |
| | (4,371 | ) | | 3,409 |
| Patents | | 7,780 | | | (4,371) | | | 3,409 | |
Total | | $ | 112,230 |
| | $ | (47,687 | ) | | $ | 64,543 |
| Total | | $ | 112,230 | | | $ | (47,687) | | | $ | 64,543 | |
|
| | | | | | | | | | | | |
| | December 31, 2018 |
| | Gross Amount | | Accumulated Amortization | | Net Amount |
Developed technology | | $ | 97,714 |
| | $ | (33,093 | ) | | $ | 64,621 |
|
Power purchase agreements | | 6,486 |
| | (648 | ) | | 5,838 |
|
Patents | | 7,408 |
| | (3,705 | ) | | 3,703 |
|
Total | | $ | 111,608 |
| | $ | (37,446 | ) | | $ | 74,162 |
|
Amortization expense for our intangible assets was $10.8 million, $10.2 million, $9.9 million, and $8.3$9.9 million for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively.
Estimated future amortization expense for our definite-lived intangible assets was as follows at December 31, 20192020 (in thousands):
| | | | | | | | |
| | Amortization Expense |
2021 | | $ | 10,935 | |
2022 | | 10,911 | |
2023 | | 10,626 | |
2024 | | 10,497 | |
2025 | | 4,026 | |
Thereafter | | 9,143 | |
Total amortization expense | | $ | 56,138 | |
|
| | | | |
| | Amortization Expense |
2020 | | $ | 10,498 |
|
2021 | | 10,496 |
|
2022 | | 10,471 |
|
2023 | | 10,187 |
|
2024 | | 10,057 |
|
Thereafter | | 12,834 |
|
Total amortization expense | | $ | 64,543 |
|
6.5. Cash, Cash Equivalents, and Marketable Securities
Cash, cash equivalents, and marketable securities consisted of the following at December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Cash and cash equivalents: | | | | |
Cash | | $ | 1,227,000 | | | $ | 1,345,419 | |
Money market funds | | 2 | | | 7,322 | |
Total cash and cash equivalents | | 1,227,002 | | | 1,352,741 | |
Marketable securities: | | | | |
Foreign debt | | 214,254 | | | 387,820 | |
Foreign government obligations | | 0 | | | 22,011 | |
U.S. debt | | 14,543 | | | 66,134 | |
Time deposits | | 291,269 | | | 335,541 | |
Total marketable securities | | 520,066 | | | 811,506 | |
Total cash, cash equivalents, and marketable securities | | $ | 1,747,068 | | | $ | 2,164,247 | |
|
| | | | | | | | |
| | 2019 | | 2018 |
Cash and cash equivalents: | | | | |
Cash | | $ | 1,345,419 |
| | $ | 1,202,774 |
|
Money market funds | | 7,322 |
| | 200,788 |
|
Total cash and cash equivalents | | 1,352,741 |
| | 1,403,562 |
|
Marketable securities: | | | | |
Foreign debt | | 387,820 |
| | 318,646 |
|
Foreign government obligations | | 22,011 |
| | 98,621 |
|
U.S. debt | | 66,134 |
| | 44,468 |
|
Time deposits | | 335,541 |
| | 681,969 |
|
Total marketable securities | | 811,506 |
| | 1,143,704 |
|
Total cash, cash equivalents, and marketable securities | | $ | 2,164,247 |
| | $ | 2,547,266 |
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance sheets as of December 31, 20192020 and 20182019 to the total of such amounts as presented in the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Line Item | | 2020 | | 2019 |
Cash and cash equivalents | | Cash and cash equivalents | | $ | 1,227,002 | | | $ | 1,352,741 | |
Restricted cash – current | | Prepaid expenses and other current assets | | 1,745 | | | 13,697 | |
Restricted cash – noncurrent | | Other assets | | 44,847 | | | 80,072 | |
Total cash, cash equivalents, and restricted cash | | | | $ | 1,273,594 | | | $ | 1,446,510 | |
|
| | | | | | | | | | |
| | Balance Sheet Line Item | | 2019 | | 2018 |
Cash and cash equivalents | | Cash and cash equivalents | | $ | 1,352,741 |
| | $ | 1,403,562 |
|
Restricted cash – current (1) | | Prepaid expenses and other current assets | | 13,697 |
| | 19,671 |
|
Restricted cash – noncurrent (1) | | Restricted cash and investments | | 80,072 |
| | 139,390 |
|
Total cash, cash equivalents, and restricted cash | | | | $ | 1,446,510 |
| | $ | 1,562,623 |
|
——————————
| |
(1) | See Note 7. “Restricted Cash and Investments” to our consolidated financial statements for discussion of our “Restricted cash” arrangements. |
During the year ended December 31, 2020, we sold marketable securities for proceeds of $188.1 million and realized gains of $0.2 million on such sales. During the year ended December 31, 2019, we sold marketable securities for proceeds of $52.0 million and realized 0 gain or loss on such sales. During the yearsyear ended December 31, 2018, and 2017, we sold marketable securities for proceeds of $10.8 million and $118.3 million, respectively, and realized gains of less than $0.1 million on such sales in each respective period.sales. See Note 11.10. “Fair Value Measurements” to our consolidated financial statements for information about the fair value of our marketable securities.
The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign debt | | $ | 213,949 | | | $ | 367 | | | $ | 46 | | | $ | 16 | | | $ | 214,254 | |
U.S. debt | | 14,521 | | | 22 | | | 0 | | | 0 | | | 14,543 | |
Time deposits | | 291,374 | | | 0 | | | 0 | | | 105 | | | 291,269 | |
Total | | $ | 519,844 | | | $ | 389 | | | $ | 46 | | | $ | 121 | | | $ | 520,066 | |
| | | | | | | | | | |
| | | | As of December 31, 2019 | | | As of December 31, 2019 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Foreign debt | | $ | 387,775 |
| | $ | 551 |
| | $ | 506 |
| | $ | 387,820 |
| Foreign debt | | $ | 387,775 | | | $ | 551 | | | $ | 506 | | | $ | 387,820 | |
Foreign government obligations | | 21,991 |
| | 20 |
| | — |
| | 22,011 |
| Foreign government obligations | | 21,991 | | | 20 | | | 0 | | | 22,011 | |
U.S. debt | | 65,970 |
| | 176 |
| | 12 |
| | 66,134 |
| U.S. debt | | 65,970 | | | 176 | | | 12 | | | 66,134 | |
Time deposits | | 335,541 |
| | — |
| | — |
| | 335,541 |
| Time deposits | | 335,541 | | | 0 | | | 0 | | | 335,541 | |
Total | | $ | 811,277 |
| | $ | 747 |
| | $ | 518 |
| | $ | 811,506 |
| Total | | $ | 811,277 | | | $ | 747 | | | $ | 518 | | | $ | 811,506 | |
|
| | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Foreign debt | | $ | 320,056 |
| | $ | 468 |
| | $ | 1,878 |
| | $ | 318,646 |
|
Foreign government obligations | | 99,189 |
| | — |
| | 568 |
| | 98,621 |
|
U.S. debt | | 44,625 |
| | 53 |
| | 210 |
| | 44,468 |
|
Time deposits | | 681,969 |
| | — |
| | — |
| | 681,969 |
|
Total | | $ | 1,145,839 |
| | $ | 521 |
| | $ | 2,656 |
| | $ | 1,143,704 |
|
As ofThe following table presents the change in allowance for credit losses related to our available-for-sale marketable securities for the year ended December 31, 2019, we had 0 investments in a loss position for a period of time greater than 12 months. As of December 31, 2018, we identified 15 investments totaling $207.2 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $1.8 million. 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 generally hold such securities until we recover our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired.
The following tables show unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of December 31, 2019 and 2018, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position2020 (in thousands):
| | | | | | | | |
| | Marketable Securities |
Balance as of December 31, 2019 | | $ | 0 | |
Cumulative-effect adjustment for the adoption of ASU 2016-13 | | 207 | |
Provision for credit losses, net | | 326 | |
Sales and maturities of marketable securities | | (412) | |
Balance as of December 31, 2020 | | $ | 121 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | In Loss Position for Less Than 12 Months | | In Loss Position for 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Foreign debt | | $ | 178,174 |
| | $ | 506 |
| | $ | — |
| | $ | — |
| | $ | 178,174 |
| | $ | 506 |
|
U.S. debt | | 30,566 |
| | 12 |
| | — |
| | — |
| | 30,566 |
| | 12 |
|
Total | | $ | 208,740 |
| | $ | 518 |
| | $ | — |
| | $ | — |
| | $ | 208,740 |
| | $ | 518 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | In Loss Position for Less Than 12 Months | | In Loss Position for 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Foreign debt | | $ | 150,842 |
| | $ | 802 |
| | $ | 94,446 |
| | $ | 1,076 |
| | $ | 245,288 |
| | $ | 1,878 |
|
Foreign government obligations | | — |
| | — |
| | 98,621 |
| | 568 |
| | 98,621 |
| | 568 |
|
U.S. debt | | $ | 15,356 |
| | $ | 32 |
| | $ | 14,085 |
| | $ | 178 |
| | $ | 29,441 |
| | $ | 210 |
|
Total | | $ | 166,198 |
| | $ | 834 |
| | $ | 207,152 |
| | $ | 1,822 |
| | $ | 373,350 |
| | $ | 2,656 |
|
The contractual maturities of our marketable securities as of December 31, 20192020 were as follows (in thousands):
| | | | | | | | |
| | Fair Value |
One year or less | | $ | 407,491 | |
One year to two years | | 109,553 | |
Two years to three years | | 3,022 | |
Total | | $ | 520,066 | |
|
| | | | |
| | Fair Value |
One year or less | | $ | 488,118 |
|
One year to two years | | 164,410 |
|
Two years to three years | | 158,978 |
|
Total | | $ | 811,506 |
|
6. Restricted Marketable Securities 7. Restricted Cash and Investments
Restricted cash and investmentsmarketable securities consisted of the following at as of December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Foreign government obligations | | $ | 149,700 | | | $ | 126,066 | |
U.S. government obligations | | 115,580 | | | 97,719 | |
Total restricted marketable securities | | $ | 265,280 | | | $ | 223,785 | |
|
| | | | | | | | |
| | 2019 | | 2018 |
Restricted cash | | $ | 80,072 |
| | $ | 139,390 |
|
Restricted investments | | 223,785 |
| | 179,000 |
|
Total restricted cash and investments (1) | | $ | 303,857 |
| | $ | 318,390 |
|
——————————
| |
(1) | There was an additional $13.7 millionand $19.7 million of restricted cash included within “Prepaid expenses and other current assets” at December 31, 2019 and 2018, respectively.
|
At December 31, 2019 and 2018, ourOur restricted cash consisted of deposits held by various banks to secure certain of our letters of credit and other deposits designated for the construction or operation of systems projects as well as the payment of amounts related to project specific debt financings. At December 31, 2018, our restricted cash also included certain depositsmarketable securities represent long-term marketable securities held in custodial accounts to fund the estimated future costs of our solar module collection and recycling obligations.
At December 31, 2019 and 2018, our restricted investments consisted of long-term marketable securities that were also held in custodial accounts to fund the estimated future costscost of collecting and recycling modules covered under our solar module collection and recycling program. As of December 31, 2020 and 2019, such custodial accounts also included noncurrent restricted cash
balances of $0.7 million and less than $0.1 million, respectively, which were reported within “Other assets.” As necessary, we fund any incremental amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments,marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years. To ensure that amounts previously funded will be available in the future regardless of potential adverse changes in our financial condition (even in the case of our own insolvency), weWe have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc.; First Solar Malaysia Sdn. Bhd.; and First Solar Manufacturing GmbH are grantors. Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds.
During the year ended December 31, 2019,2020, we sold certain restricted investmentsmarketable securities for proceeds of $115.2 million and realized gains of $15.1 million on such sales, and repurchased $114.5 million of restricted marketable securities as part of our ongoing management of the custodial accounts. During the years ended December 31, 2019 and 2018, we sold certain restricted marketable securities for proceeds of $281.6 million and $231.1 million, respectively, and realized gains of $40.6 million on such sales as part of efforts to align the currencies of the investments with those of the corresponding collection and recycling liabilities and disburse $22.2 million of overfunded amounts. During the year ended December 31, 2018, we sold certain restricted investments for proceeds of $231.1 million and realized gains of $55.4 million, respectively, on such sales as part of an effort to align the currencies of the investments with those corresponding collection and recycling liabilities and disburse $22.2 million and $143.1 million, respectively, of overfunded amounts. See Note 11.10. “Fair Value Measurements” to our consolidated financial statements for information about the fair value of our restricted investments.
marketable securities.
The following tables summarize the unrealized gains and losses related to our restricted investments,marketable securities, by major security type, as of December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign government obligations | | $ | 131,980 | | | $ | 17,720 | | | $ | 0 | | | $ | 0 | | | $ | 149,700 | |
U.S. government obligations | | 115,648 | | | 133 | | | 188 | | | 13 | | | 115,580 | |
Total | | $ | 247,628 | | | $ | 17,853 | | | $ | 188 | | | $ | 13 | | | $ | 265,280 | |
| | | | As of December 31, 2019 | | | As of December 31, 2019 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Foreign government obligations | | $ | 129,499 |
| | $ | — |
| | $ | 3,433 |
| | $ | 126,066 |
| Foreign government obligations | | $ | 129,499 | | | $ | 0 | | | $ | 3,433 | | | $ | 126,066 | |
U.S. government obligations | | 99,700 |
| | — |
| | 1,981 |
| | 97,719 |
| U.S. government obligations | | 99,700 | | | 0 | | | 1,981 | | | 97,719 | |
Total | | $ | 229,199 |
| | $ | — |
| | $ | 5,414 |
| | $ | 223,785 |
| Total | | $ | 229,199 | | | $ | 0 | | | $ | 5,414 | | | $ | 223,785 | |
|
| | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Foreign government obligations | | $ | 73,798 |
| | $ | 14,234 |
| | $ | 235 |
| | $ | 87,797 |
|
U.S. government obligations | | 97,223 |
| | 416 |
| | 6,436 |
| | 91,203 |
|
Total | | $ | 171,021 |
| | $ | 14,650 |
| | $ | 6,671 |
| | $ | 179,000 |
|
The following table represents the change in the allowance for credit losses related to our restricted marketable securities for the year ended December 31, 2020 (in thousands):
| | | | | | | | |
| | Restricted Marketable Securities |
Balance as of December 31, 2019 | | $ | 0 | |
Cumulative-effect adjustment for the adoption of ASU 2016-13 | | 54 | |
Provision for credit losses, net | | (16) | |
Sales of restricted marketable securities | | (25) | |
Balance as of December 31, 2020 | | $ | 13 | |
As of December 31, 2019, we had 0 restricted investments in a loss position for a period of time greater than 12 months. As of December 31, 2018, we identified 6 restricted investments totaling $87.4 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $6.4 million. 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 generally hold such securities until we recover our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired.
The following tables show unrealized losses and fair values for those restricted investments that were in an unrealized loss position as of December 31, 2019 and 2018, aggregated by major security type and the length of time the restricted investments have been in a continuous loss position (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | In Loss Position for Less Than 12 Months | | In Loss Position for 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Foreign government obligations | | $ | 126,066 |
| | $ | 3,433 |
| | $ | — |
| | $ | — |
| | $ | 126,066 |
| | $ | 3,433 |
|
U.S. government obligations | | 97,719 |
| | 1,981 |
| | — |
| | — |
| | 97,719 |
| | 1,981 |
|
Total | | $ | 223,785 |
| | $ | 5,414 |
| | $ | — |
| | $ | — |
| | $ | 223,785 |
| | $ | 5,414 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | In Loss Position for Less Than 12 Months | | In Loss Position for 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Foreign government obligations | | $ | 41,335 |
| | $ | 235 |
| | $ | — |
| | $ | — |
| | $ | 41,335 |
| | $ | 235 |
|
U.S. government obligations | | — |
| | — |
| | 87,401 |
| | 6,436 |
| | 87,401 |
| | 6,436 |
|
Total | | $ | 41,335 |
| | $ | 235 |
| | $ | 87,401 |
| | $ | 6,436 |
| | $ | 128,736 |
| | $ | 6,671 |
|
As of December 31, 2019,2020, the contractual maturities of our restricted investmentsmarketable securities were between 109 years and 21 yearsyears.
.
8.7. Consolidated Balance Sheet Details
Accounts receivable trade, net
Accounts receivable trade, net consisted of the following at December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Accounts receivable trade, gross | | $ | 269,095 | | | $ | 476,425 | |
Allowance for credit losses | | (3,009) | | | (1,386) | |
Accounts receivable trade, net | | $ | 266,086 | | | $ | 475,039 | |
|
| | | | | | | | |
| | 2019 | | 2018 |
Accounts receivable trade, gross | | $ | 476,425 |
| | $ | 129,644 |
|
Allowance for doubtful accounts | | (1,386 | ) | | (1,362 | ) |
Accounts receivable trade, net | | $ | 475,039 |
| | $ | 128,282 |
|
At December 31, 2020 and 2019, and 2018, $44.9$24.4 million and $8.5$44.9 million, respectively, of our trade accounts receivable trade, net were secured by letters of credit, bank guarantees, surety bonds, or other forms of financial security issued by creditworthy financial institutions.
Accounts receivable, unbilled and retainage,
net
Accounts receivable, unbilled and retainage, net consisted of the following at December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Accounts receivable, unbilled | | $ | 26,673 | | | $ | 162,057 | |
Retainage | | 0 | | | 21,416 | |
Allowance for credit losses | | (303) | | | 0 | |
Accounts receivable, unbilled and retainage, net | | $ | 26,370 | | | $ | 183,473 | |
|
| | | | | | | | |
| | 2019 | | 2018 |
Accounts receivable, unbilled | | $ | 162,057 |
| | $ | 441,666 |
|
Retainage | | 21,416 |
| | 16,500 |
|
Accounts receivable, unbilled and retainage | | $ | 183,473 |
| | $ | 458,166 |
|
Prepaid expenses and other current assets consisted of the following at December 31, 20192020 and 20182019 (in thousands):