We maintain a website at www.firstsolar.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. The information contained in or connected to our website is not incorporated by reference into this report. We use our website as one means of disclosing material non-public information and for complying with our disclosure obligations under the SEC’s Regulation FD. Such disclosures are typically included within the Investor Relations section of our website at investor.firstsolar.com. Accordingly, investors should monitor such portions of our website in addition to following our press releases, SEC filings, and public conference calls and webcasts. The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports and other information regarding issuers, such as First Solar, that file electronically with the SEC.
Mark R. Widmar was appointed Chief Executive Officer in July 2016. He joined First Solar in April 2011 as Chief Financial Officer and also served as First Solar’s Chief Accounting Officer from February 2012 through June 2015. From March 2015 to June 2016, Mr. Widmar also servesserved as the Chief Financial Officer and through June 2018, served as a director on the board of the general partner of 8point3 Energy Partners LP (“8point3”), the joint yieldco formed by First Solar and SunPower Corporation in 2015 to own and operate a portfolio of selected solar generation assets. From March 2015 to June 2016, Mr. Widmar served as the Chief Financial Officer of the general partner of 8point3 Energy Partners LP. Prior to joining First Solar, Mr. Widmar served as Chief Financial Officer of GrafTech International Ltd., a leading global manufacturer of advanced carbon and graphite materials, from May 2006 through March 2011. Prior to joining GrafTech, Mr. Widmar served as Corporate Controller of NCR Inc. from 2005 to 2006, and was a Business Unit Chief Financial Officer for NCR from November 2002 to his appointment as Controller. He also served as a Division Controller at Dell, Inc. from August 2000 to November 2002 prior to joining NCR.2002. Mr. Widmar also held various financial and managerial positions with Lucent Technologies Inc., Allied Signal, Inc., and Bristol Myers/Squibb, Inc. He began his career in 1987 as an accountant with Ernst & Young. Mr. Widmar holds a Bachelor of Science in Business Accountingbusiness accounting and a MastersMaster of Business Administration from Indiana University.
Alexander R. Bradley was appointed interim Chief Financial Officer in July 2016 and confirmed as Chief Financial Officer in October 2016. Mr. BradleyHe joined First Solar in May 2008, and previously served as Vice President of both Treasury and Project Finance, for First Solar. Mr. Bradley also serves as a director on the board of the general partner of 8point3 Energy Partners LP. From June 2015 to June 2016, Mr. Bradley served as a Vice President of Operations of the general partner of 8point3 Energy Partners LP. Mr. Bradley has ledleading or supportedsupporting the structuring, sale, and financing of over $10 billion and approximately 2.7 GWDC of the Company’s worldwide development assets, including several of the largest PV power plant projects in North America. From June 2016 to June 2018, Mr. Bradley’s professional experience includes more than 10 years in investment banking, mergersBradley also served as an officer and acquisitions, project finance, and business development inboard member of the United States and internationally.general partner of 8point3. Prior to joining the Company in May 2008,First Solar, Mr. Bradley worked at HSBC in investment banking and leveraged finance, in London and New York, covering the energy and utilities sector. He received his Master of Arts from the University of Edinburgh, Scotland.
Georges Antoun was appointed Chief Commercial Officer in July 2016. He joined First Solar in July 2012 as Chief Operating Officer before being appointed as President, U.S. in July 2015. Mr. Antoun has over 2530 years of operational and technical experience, including leadership positions at several global technology companies. Prior to joining First Solar, Mr. Antoun served as Venture Partner at Technology Crossover Ventures (“TCV”), a private equity and venture firm that he joined in July 2011. Before joining TCV, Mr. Antoun was the Head of Product Area IP & Broadband Networks for Ericsson, based in San Jose, California. Mr. Antoun joined Ericsson in 2007, when Ericsson acquired Redback Networks, a telecommunications equipment company, where Mr. Antoun served as the Senior Vice President of World Wide Sales & Operations. After the acquisition, Mr. Antoun was promoted to Chief Executive Officer of the Redback Networks subsidiary. Prior to Redback Networks, Mr. Antoun spent five years at Cisco Systems, where he served as Vice President of Worldwide Systems Engineering and Field Marketing, Vice President of Worldwide Optical Operations, and Vice President of Carrier Sales. Prior to Cisco Systems, he was the Director of Systems Engineering at Newbridge Networks, a data and voice networking company. Mr. Antoun started his career at Nynex (now Verizon Communications), where he was part of its Science and Technology Division. Mr. Antoun also servedserves as a member of the board of directors of Ruckus Wireless, Inc. and Violin Memory, Inc., both publicly-traded companies.Marathon Digital Holdings. He is also the Chairman of the University of Louisiana’s College of Engineering Dean’s Advisory Council board. He earned a Bachelor of Science degree in Engineeringengineering from the University of Louisiana at Lafayette and a Master’s degree in Information Systems Engineeringinformation systems engineering from NYU Poly.
Philip Tymen deJongMichael Koralewski was appointed Chief OperatingSupply Chain Officer in July 2015.November 2022 and is accountable for maintaining executive oversight of First Solar’s strategic global supply chain. He previously served as First Solar’s Chief Manufacturing Operations Officer and provides over 25 years of global operational experience to the executive leadership team. Mr. deJong has comprehensive leadership responsibility for areas including manufacturing, EPC, quality and reliability, supply chain, and product management. Mr. deJongKoralewski joined First Solar in January 2010 as Vice President, Plant Management2006, serving in several senior roles in operations and served in severalquality management, including Senior Vice President, roles in manufacturing and operations prior to being appointed SeniorGlobal Manufacturing since 2015; Vice President, Manufacturing & EPC in January 2015.Global Site Operations and Plant Manager since 2011; and Vice President, Global Quality since 2009. In all of these roles Mr. Koralewski has been significantly involved since the beginning of First Solar’s manufacturing scaling and expansion from site selection through sustaining operations and supply chain development. Prior to joining First Solar, Mr. deJong was Vice President of Assembly/Test Manufacturing for Numonyx Corporation. Prior to that,Koralewski worked at Dana Incorporated where he worked for 25 years at Intel Corporation, holding variousheld several positions with global responsibility in engineering, manufacturing, wafer fabrication management,operations and assembly/test manufacturing. Mr. deJong holds a Bachelor of Science degree in Industrial Engineering/Mechanical Engineering from Oregon State University and has completed advanced study at the University of New Mexico Anderson School of Management.
Raffi Garabedian has been the Chief Technology Officer of First Solar since May 2012 and manages the Company’s technology, PV module, and power plant system products and roadmaps. Mr. Garabedian joined First Solar in June 2008 as Director of Disruptive Technologies. Prior to First Solar, Mr. Garabedian spent over 15 years in the MEMS (micro-electro-mechanical systems) industry, developing new products ranging from automotive engine control sensors to fiber optic telecommunications switching systems.quality management. He was the founding CEO of Touchdown Technologies, Inc., which was acquired by Verigy, as well as Micromachines Inc., which was acquired by Kavlico. Mr. Garabedian is named on approximately 28 issued U.S. patents. Mr. Garabedian earned a Bachelor of Science degree in Electrical Engineeringchemical engineering from Rensselaer Polytechnic InstituteCase Western Reserve University and a Master of Science degreeBusiness Administration from Bowling Green State University.
Kuntal Kumar Verma was appointed Chief Manufacturing Officer in ElectricalNovember 2022 and previously served as First Solar’s Chief Manufacturing Engineering with a focus on semiconductorOfficer. He is responsible for First Solar’s global manufacturing operations and microsystemsengineering, including its performance and improvement roadmap, global technology from the University of California Davis.
Paul Kaletascaling, new plant start-ups, and strategic initiatives. Mr. Verma joined First Solar in March 2014 as Executive2002, serving in progressively more senior roles in engineering and manufacturing, including Vice President, & General Counsel. In February 2017, Mr. Kaleta was appointed as First Solar’s corporate secretary.Global Manufacturing Engineering since 2012. Prior to joining First Solar, Mr. Kaleta was Executive Vice President, General Counsel, Shared Services & Secretary,Verma held several engineering and Chief Compliance Officer for NV Energy, Inc., which
was acquired by Berkshire Hathaway’s Energy Groupoperations positions at Reliance Industries Limited, India. He is a Master Black Belt in December 2013. Before that, he was Vice President and General Counsel for Koch Industries, Inc., one of the world’s largest privately held companiesSix Sigma/Lean Manufacturing with diverse businesses worldwide, including refining, petrochemicals, and commodity trading, among others. He also servedan expert certification in a number of legal and other leadership roles for Koch companies. Before joining Koch, he was Vice President and General Counsel of Niagara Mohawk Power Corporation (now part of National Grid). In private practice, Mr. Kaleta was an equity partner in the Washington D.C. law firm Swidler Berlin LLP and an associate in the Washington D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP. He also served as a federal judicial clerk. Mr. Kaleta is the founding chair of the Southern Nevada Chapter of the “I Have a Dream Foundation” (now “Core Academy-powered by The Rogers Foundation”), a member of the board of directors of Advanced Energy Economy, a member of the client advisory council of Lex Mundi, and has taught both energy law and business ethics and leadership, as an adjunct professor, among other industry professional and community activities. Mr. Kaleta holds a juris doctor degree from Georgetown University Law CenterTaguchi Methods (Robust Engineering) and a bachelor’s degreeCertification in Production and Inventory Management from Hamilton College.
Christopher R. Bueter was appointed Executive Vice President, Human Resources in February 2016. Mr. Bueter joined First Solar in November 2009 as Global Director for Industrial RelationsAmerican Production and also served as Vice President, Human Resources Global Business Development and Corporate Services, Vice President, Global Human Resources and Labor Relations, and Senior Vice President, Human Resources. Prior to joining First Solar, Mr. Bueter served as the Vice President of Global Employee Relations at Dana Corporation, an American-based worldwide supplier of powertrain components. In his 24 years at Dana Corporation, he served in a variety of roles, including Corporate Director of Employee Relations and Distribution Services Division Human Resources Manager. Mr. Bueter holdsInventory Control Society. He earned a Bachelor of Science in human resources managementmechanical engineering from the National Institute of Technology in India, a Master of Science in industrial engineering from the University of Toledo, and a juris doctorMaster of Business Administration from Bowling Green State University.
Patrick Buehler was appointed Chief Product Officer in December 2022, having previously served as Chief Quality and Reliability Officer. Mr. Buehler has over 20 years of operational and technical experience. In his role, Mr. Buehler is responsible for all aspects of product lifecycle management, including understanding market demands, technology trends, and competition to facilitate implementation of new or enhanced products. Mr. Buehler maintains global leadership responsibility for quality and reliability, environmental, health, safety, and security, recycling technology process development and operations, customer service, program management, and strategic initiatives. Mr. Buehler joined First Solar in 2006, serving in progressively more senior technical and operations roles, including Vice President, Quality and Reliability since 2019. Prior to joining First Solar, Mr. Buehler held several roles in manufacturing, engineering, maintenance, and product development at DuPont de Nemours, Inc. and Cummins, Inc. He earned a Bachelor of Science in mechanical engineering from the University of Cincinnati and a Master of Science in mechanical engineering from Purdue University.
Markus Gloeckler was appointed Chief Technology Officer in November 2020 after being appointed Co-Chief Technology Officer in July 2020. He is focused on driving First Solar’s thin film PV module technology. Mr. Gloeckler has extensive experience guiding strategic research and development activities and served First Solar as Vice President and Chief Scientist before being promoted to Senior Vice President, Module Research and Development. He was instrumental in enabling First Solar’s achievement of various world records relating to conversion efficiency for CdTe solar cells. In his role as Vice President of Research, he led the thin film technology transfer from General Electric to First Solar following the intellectual property acquisition in 2013. He joined First Solar in 2005 in an engineering function supporting First Solar’s technology development after the initial launch of the Series 2 module. Mr. Gloeckler holds an undergraduate degree in microsystems engineering from the Regensburg University of Applied Sciences in Germany, and a Doctor of Philosophy in physics from Colorado State University.
Caroline Stockdale joined First Solar in October 2019 as Executive Vice President, Human Resources and Communications and was appointed Chief People and Communications Officer in October 2020. Prior to joining First Solar, she served as the Chief Executive Officer for First Perform, a provider of human resources services for a variety of customers, from Fortune 100 companies to cyber start-ups. Previously, she served as Chief Human Resources Officer for Medtronic from 2010 to 2013 and Warner Music Group from 2005 to 2009. Before joining Warner Music Group, she served as the senior human resources leader in global divisions of American Express from 2002 to 2005 and General Electric from 1997 to 2002. Ms. Stockdale is a member of the Forbes Human Resources Council. Ms. Stockdale holds a Bachelor of Arts in political theories and institutions, and philosophy, from the University of Sheffield, England.
Jason Dymbort joined First Solar in March 2008, serving in a broad range of legal roles before being appointed General Counsel and Secretary in July 2020. Between 2015 and 2018, Mr. Dymbort served as General Counsel and Secretary for the general partner of 8point3 Energy Partners, then a publicly-traded yieldco and affiliate of First Solar. Before joining First Solar, Mr. Dymbort was a corporate attorney at Cravath, Swaine & Moore LLP. He holds a Juris Doctor degree from the University of ToledoPennsylvania Law School.School, where he was a member of the Penn Law Review, and a bachelor’s degree from Brandeis University.
Item 1A. Risk Factors
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.
Summary of Risk Factors
The following is a summary of the principal risks and uncertainties that could materially adversely affect our business, financial condition, and results of operations and make an investment in our stock speculative or risky. You should read this summary together with the more detailed description of each risk factor contained below.
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 2017, over 20 GW of capacity was added by solar module manufacturers, particularly but not exclusively in Asia. We believe theThe solar industry may from time to time experience periods of structural imbalance between global PV module supply and demand (i.e., where production capacity exceeds global demand), and that suchresult in periods will put pressure on pricing. During the past several years, industry average selling prices per watt have declined, 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.of pricing volatility. 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 global demand for PV modules does not grow sufficientlydecreases relative to justify the currentinstalled production supply,capacity, our business, financial condition, and results of operations could be adversely affected.
If PV solar and related technologies are not suitable for widespread 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 widespread 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 widespread 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 non-solar renewable energy sources, such as wind, geothermal, and hydroelectric;
changes in tax, trade remedies, and other public policy, as well as 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 relating to the development of solar in new and emerging market segments such as commercial and industrial customers, community solar, community choice aggregators, and microgrids, among 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 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 adverse public policies such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modulesmodules. The imposition of tariffs on our products could materially increase our costs to perform under our contracts with customers, which could adversely affect our results of operations.
•The loss of any of our large customers, or the inability of our customers and systems and limit our growth or leadcounterparties to a reduction in our net sales, thereby adversely impacting our operating results.
Although we believe that solar energy will experience widespread adoption in those applications where it competes economicallyperform under their contracts with traditional forms of energy without any support programs, in certain marketsus, could significantly reduce our net sales and profit 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.
In addition, policies of the U.S. presidential administration may create regulatory uncertainty in the renewable energy industry, including the solar industry, and our business, financial condition, and results of operations could be adversely affected. Members of the U.S. presidential administration, including representatives of the U.S. Department of Energy, have made public statements that indicate that the administration may not be supportive of various clean energy programs and initiatives designed to curtail climate change. For example, in June 2017, the U.S. President announced that the U.S. would withdraw from participation in the 2015 Paris Agreement on climate change mitigation. In addition, the administration has indicated that it may be supportive of overturning or modifying policies of or regulations enacted by the prior administration that placed limitations on gas and coal electricity generation, mining, and/or exploration. Additionally, in October 2017, the U.S. Environmental Protection Agency Administrator issued a Notice of Proposed Rulemaking, proposing to repeal the previous U.S. presidential administration’s Clean Power Plan, which establishes standards to limit carbon dioxide emissions from existing power generation facilities. If the current U.S. administration and/or the U.S. Congress takes action, or continues to publicly speak out about the need to take action, in furtherance of any such policies, we would be subject to significant risks, including the following:
a reduction or removal of clean energy programs and initiatives and the incentives they provide may diminish the market for future solar energy off-take agreements and reduce the ability for solar developers to compete for future solar energy off-take agreements, which may reduce incentives for project developers to develop solar projects and purchase PV solar modules;
any limitations on the value or availability to potential investors of tax incentives that benefit solar energy projects such as the ITC and accelerated depreciation deductions could result in such investors generating reduced revenues and economic returns and facing a reduction in the availability of affordable financing, thereby reducing demand for PV solar modules. The ITC is a U.S. federal incentive that provides an income tax credit to the owner of the project after the project is placed in service of up to 30% of eligible basis. Under the Modified Accelerated Cost-Recovery System, owners of equipment used in a solar project may claim all of their depreciation deductions with respect to such equipment over five years, even though the useful life of such equipment is generally greater than five years. In addition, in December 2017, the U.S. government enacted comprehensive tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Under the Tax Act, qualified property placed in service after September 22, 2017 and before January 1, 2023 is generally eligible for 100% expensing, and such property placed in service after December 31, 2022 and before January 1, 2027 is generally eligible for expensing at lower percentages. However, the Tax Act also reduces the U.S. corporate income tax rate to 21% for tax years beginning after December 31, 2017, which could diminish the capacity of potential investors to benefit from incentives such as the ITC and reduce the value of accelerated depreciation deductions and expensing, thereby reducing the relative attractiveness of solar projects as an investment; and
any effort to overturn federal and state laws, regulations, or policies that are supportive of solar energy generation or that remove costs or other limitations on other types of electricity generation that compete with solar energy projects could negatively impact our ability to compete with traditional forms of electricity generation and materially and adversely affect our business.
Application of U.S. trade laws, or trade laws of other countries, may also impact, either directly or indirectly, our operating results. For example, in April 2017, a U.S.-based manufacturer of solar cells filed a petition under Sections 201 and 202 of the Trade Act of 1974 for global safeguard relief with the U.S. International Trade Commission (the “USITC”). Such petition requested, among other things, the imposition of certain tariffs on crystalline silicon solar cells imported into the United States and the establishment of a minimum price per watt on imported crystalline silicon solar modules. In September 2017, the USITC determined such products are being imported into the United States in such increased quantities as to be a substantial cause of serious injury to the relevant domestic industry and subsequently recommended various remedies to the U.S. President. In January 2018, the President proclaimed tariffs on imported crystalline silicon modules, and a tariff-rate quota on imported crystalline silicon cells, over a four-year period, with the tariff on modules, and the tariff on cells above the first 2.5 GWDC of imports, starting at 30% for the February 2018 to February 2019 period and declining by five percentage points in each subsequent 12-month period. Thin film solar cell products, such as our CdTe technology, are expressly excluded from the tariffs. Some countries and companies have challenged the tariffs under the rules of the World Trade Organization and U.S. law. It is unknown if such tariffs will be applied as originally proclaimed, or how such tariffs, 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, such as the U.S. market, face uncertainties arising from policy, regulatory, and governmental constraints. While the expected potential of the emerging markets we are targeting is significant, policy promulgation and market development are especially vulnerable to governmental inertia, political instability, the imposition of trade remedies and other trade barriers, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements, and limited available infrastructure.
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 accurately prioritizing geographic markets that we can most effectively and profitably serve with our PV offerings, including miscalculations in overestimating or underestimating addressable market demand;
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 overcoming the inertia involved in changing local electricity ecosystems as necessary to accommodate large-scale PV solar deployment and integration;
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 both in terms of complexity and 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 accuracy;
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; and
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.
In addition, please see 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 adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results.”
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.
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 (including reductions due to a
change in tax related incentives that benefit tax equity investors, such as the reduction of the U.S. corporate income tax rate to 21% for tax years beginning after December 31, 2017 under the Tax Act, which could reduce the value of these incentives), 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 adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results” 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 and the reduction of the U.S. corporate income tax rate as described above 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.
Risks Related to ourOur Operations, Manufacturing, and Technology
Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties.
Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and increase both our manufacturing capacity and production throughput over time in a cost-effective and efficient manner. If we cannot do so, we may be unable to expand our business, decrease our manufacturing cost per watt, maintain our competitive position, satisfy our contractual obligations, sustain profitability, or create long-term shareholder value. Our ability to expand production capacity, or to convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, is subject to significant risks and uncertainties, including the following:
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;
being unable to hire qualified staff;
failure to execute our expansion or conversion plans effectively;
manufacturing concentration risk resulting from a current majority of our production lines worldwide being located in one geographic area, Malaysia, and the possible inability to meet customer demand in the event of compromises to shipping processes, supply chain, or other aspects of such facility;
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.
•We face intense competition from manufacturers of crystalline silicon solar modules, as well as other thin film 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 and other thin film 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, particularly manufacturers of crystalline silicon cells and modules, 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 are transitioning from lower efficiency Back Surface Field (“BSF”) multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency Passivated Emitter Rear Contact (“PERC”) multi-crystalline and mono-crystalline cells at competitive cost structures. As a result, we expect that in the future, our primary competition might transition to multi-crystalline and 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 are pursuing the commercialization of 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 efficiency when applied in certain applications and BoS configurations, which could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce.
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 including our Series 4 modules and Series 6 modules, 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 conditions upon which we base our assessments and warranty of module performance over the duration of the warranty. However, if our thin film solar modules,
including our Series 4 modules and Series 6 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 approximately 10 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% every year thereafter throughout the approximate 25-year performance warranty period. As an alternative form of our standard limited module power output warranty, we also offer 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 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 our warranties, could adversely impact our reputation, financial position, operating results, and cash flows.
Although our module performance warranties extend for 25 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, including our Series 4 modules and Series 6 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 conversion efficiencies as part of our long-term strategic plans and as we transition to Series 6 module manufacturing. In addition, as 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 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. 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.
•Our failure to further refine our technology reduce module manufacturing and BoS costs, and develop and introduce improved PV products, including as a result of delays in implementing planned advancements, 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, our transition to Series 6 module manufacturing, and the resulting changes carry potential risks in the form of delays, performance, additional costs, or other unintended contingencies. In addition, our significant expenditures on 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, 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.
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 each year. We determine the funding requirement, if any, based on estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of 25 years less amounts already funded in prior years. We estimate the cost of our collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; the material, labor, capital costs; 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 conditions 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 upon 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 and components, in particular CdTe and substrate glass, and manufacturing equipment are either single-sourced or sourced from a limited number of third-party suppliers, and their failure to perform could cause manufacturing delays, andespecially as we expand or seek to expand our business, and/or 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 obtaineffectively manage module manufacturing production and selling costs, including costs related to raw materials and components that meetlogistics services, could render our quality, quantity,solar modules uncompetitive and cost requirements in a timely manner could interrupt reduce our net sales, profitability, and/or impairmarket share.
•Our future success depends on our ability to manufactureeffectively balance manufacturing production with market demand, effectively manage our solar modules or increase ourcost per watt, and, when necessary, continue to build new manufacturing costs. Severalplants over time in response to market demand, all of our key raw materialswhich are subject to risks and components are either single-sourced or sourced from a limited number of third-party 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. uncertainties.
•We may be unable to identify new suppliersgenerate sufficient cash flows or qualify their products for use on our production lineshave access to the sources of external financing necessary to fund planned capital investments 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 our committed schedules, it may impair any future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.
If we are unable to systematically replicate our production lines as necessary over time and achieve and sustain similar operating metrics in our future production lines as we have achieved at our existing production lines, such as the future production lines at our manufacturing facility in Ho Chi Minh City, Vietnam, 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 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.product development.
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 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.
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 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 local, state, or federal land-use or regulatory policies;
changes in electric utility procurement practices;
risks arising from transmission grid congestion issues;
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; and
force majeure and other events out of our control.
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 local, county, state, federal, 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 state and federal 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, tribal, state, 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 local, state, federal, 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 and EPC companies, 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, EPC companies, and vertically-
integrated solar 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, large-scale solar systems are still in their relatively early stages of existence, and, 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.
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 would also create 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. Also, 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.
Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other systems 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 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 plan. 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, including the amount of ITC, accelerated depreciation, expensing, and the reduction of the U.S. corporate income tax rate to 21% for tax years beginning after December 31, 2017 under the Tax Act (which could reduce the value of these tax related incentives) may reduce project value or negatively affect our ability to timely secure equity investment for our projects. Even if such financing sources are available, the counterparty to many of our fixed-price EPC contracts, which own the projects we are constructing, are often special purpose vehicles that do not have significant assets other than their interests in the project and have pledged all or substantially all of these assets to secure the project-related debt and certain other sources of financing. If the owner defaults on its payments or other obligations to us, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended or committed to be expended to purchase equipment or supplies (including intercompany purchases of modules), or for termination payments we are entitled to under the terms of the related EPC contract. If we are unable to collect the amounts owed to us, or are unable to complete the project because of an owner default, we may be required to record a charge against earnings related to the project, which could result in a material loss.
In addition, for projects to which we provide EPC services but are not the project developer, our EPC activities are in many cases dependent on the ability of third parties to finance their system projects on acceptable terms. 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.
Our 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, which may not be recognized for several additional months or years following contract signing. 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 unable to accurately estimate costs under fixed-price EPC agreements in which we act as the general contractor for our customers in connection with the construction and installation of their PV solar power systems.
We may enter 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 fiscal 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, particularly if our costs are not 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 the 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
•We expect certain financial benefits as a result of tax incentives provided by the Inflation Reduction Act of 2022. If these expected financial benefits vary significantly from our assumptions, our business, financial condition, and results of operations could be adversely affected.
•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, which may significantly reduce demand for our modules.
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. The solar industry may experience periods of structural imbalance between global PV module supply and demand that result in periods of pricing volatility, 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 2022 approximately 160 GWDC of capacity was added by solar module manufacturers, primarily in China. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand, and that excess capacity will continue to put pressure on pricing. Although module average selling prices in many global markets have declined for several years, recent module spot pricing has increased, in part, due to trade measures and policies, government regulations, raw material availability, and supply chain disruptions. 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 global demand for PV modules decreases relative to installed production capacity, our business, financial condition, and results of operations could be adversely affected.
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 the impact of 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 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 feed-in-tariff structures, 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 down 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, are changed retroactively, or are not renewed, such changes could negatively impact demand and/or price levels for our solar modules, lead to a reduction in our net sales, and adversely impact our operating results.
Current regulatory policies, or any future changes or threatened changes to such policies, 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 manufacturers or potential investors of tax incentives that benefit solar energy production, sales, or projects, such as the Section 45X advanced manufacturing production credit, ITC, and PTC, could result in reducing such manufacturers’ or investors’ economic returns and could cause a reduction in the availability of financing, thereby reducing demand for PV solar modules;
•any incentives contingent upon domestic production of modules, such as tax incentives set forth under the IRA, could limit our ability to sell modules manufactured in certain foreign jurisdictions, which may adversely impact our module average selling prices and could require us to record significant charges to earnings should we determine that the manufacturing equipment in such foreign jurisdictions is impaired; 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 trade laws 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. Recent developments include the following:
•United States — Tariffs on certain imported crystalline silicon PV cells and modules. The United States currently imposes different types of tariffs and/or other trade remedies on certain imported crystalline silicon PV cells and modules from various countries. In February 2022, the U.S. President proclaimed a four-year extension of 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. Thin film solar cell products, such as our CdTe technology, are specifically excluded from the tariffs. Moreover, the extension measure does not apply tariffs to imports of bifacial modules. The extension measure’s tariff rate was originally set at 14.75%, with annual reductions of 0.25 percentage points over the remainder of its four-year term. The current rate is 14.5%. The extension measure also provides an annual tariff-rate quota, whereby tariffs apply to imported crystalline silicon solar cells above the first 5.0 GWDC of imports.
•United States — Antidumping and countervailing duties on certain imported crystalline silicon PV cells and modules. The United States currently imposes antidumping and countervailing duties on certain imported crystalline silicon PV 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 (“USDOC”), and a decline in duty rates or USDOC failure to fully enforce U.S. antidumping and countervailing duty laws could have an adverse impact on our operating results. In March 2022, the USDOC initiated inquiries concerning alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed in Cambodia, Malaysia, Thailand, and Vietnam. In June 2022, the U.S. President declared an emergency with respect to threats to electricity generation capacity and authorized the U.S. Secretary of Commerce to consider permitting the importation of crystalline silicon PV products from those four countries free of antidumping and countervailing duties for 24 months, or until the emergency has terminated. The USDOC has issued regulations implementing that moratorium on antidumping and countervailing duties in the event that it finds circumvention with respect to crystalline silicon PV products assembled and completed in those four countries. In December 2022, the USDOC issued affirmative preliminary determinations finding “country-wide” circumvention with respect to those four countries, but it also found that certain companies were not circumventing the antidumping and countervailing duties. The USDOC is scheduled to issue its final circumvention determinations in May 2023, subject to possible extension. We cannot predict what further actions the USDOC will take with respect to these circumvention inquiries. Our operating results could be adversely impacted if the USDOC makes negative circumvention determinations or refrains from imposing antidumping and countervailing duties on imports covered by affirmative circumvention determinations. Conversely, affirmative final circumvention determinations could positively impact our operating results.
•United States — Tariffs on certain Chinese imports. The United States currently imposes tariffs on various articles imported from China at a rate of 25%, including crystalline silicon solar cells and modules, based on an investigation under Section 301 of the Trade Act of 1974. In May 2022, the Office of the United States Trade Representative initiated a statutory four-year review of those tariff actions, which could result in the termination or modification of the tariffs. The review remains pending, and we cannot predict its outcome. Our operating results could be adversely impacted if the review results in a termination or reduction in tariffs on crystalline silicon solar cells and modules from China.
•United States — Tariffs on certain foreign-imported aluminum and steel. The United States currently imposes tariffs on certain imported aluminum and steel articles from certain foreign jurisdictions, generally at rates of 10% and 25%, respectively, under Section 232 of the Trade Expansion Act of 1962. 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.
•India — Domestic and foreign imports. India maintains an Approved List of Module Manufacturers (“ALMM”), which is set by the MNRE. Only PV modules and module manufacturers listed on the ALMM can be used for certain solar projects in India, including government projects or government-assisted projects. Our ability to sell modules in the Indian market depends on the inclusion of our modules on the ALMM, and we currently expect that we will be included in the ALMM once we begin manufacturing solar panels in India. However, our operating results could be adversely impacted if the ALMM restriction is significantly relaxed to allow modules to be imported from countries that are part of the Association of Southeast Asian Nations.
•European Union — Foreign subsidies. In January 2023, the EU adopted the Foreign Subsidies Regulation (“FSR”), which was established to provide the European Commission with authority to investigate financial contributions granted by foreign governments to businesses operating within the EU. Because the FSR is not effective until July 2023 and the European Commission has not yet issued any application guidance, it is not currently clear whether, and to what extent, the FSR could impact our business, financial condition, or results of operations.
These examples show that established markets for PV solar development face uncertainties arising from policy, regulatory, and governmental actions. 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.
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 developers 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 cash deposits, 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.
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 and/or lead to a reduction in the average selling price for our modules.
Many of our customers 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 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. For additional information, 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 the impact of 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 limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results.” 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 hybrid perovskites, tandem solar cells, or other thin films;
•difficulty in accurately prioritizing geographic markets that we can most effectively and profitably serve with our solar module 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, the removal of trade barriers, 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 or adverse economic, social, and/or operating environments, 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 talent 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 other solar segments in which we do not have significant historical experience, such as residential;
•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; and
•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.
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,” “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 the impact of 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 limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results,” and “We may be unable to generate sufficient cash flows or have access to the sources of external financing necessary to fund planned capital investments in manufacturing capacity and product development.”
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 module manufacturers. Existing or future 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.
We expect to compete with future entrants into the PV solar industry and existing market participants that offer new or differentiated technological solutions. For example, while conventional solar modules are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, most module manufacturers offer bifacial modules that also capture diffuse irradiance on the back side of a module. Such technology can improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we currently produce. Additionally, certain module manufacturers have introduced n-type mono-crystalline modules, such as tunnel oxide passivated contact (“TOPCon”) modules, which are expected to provide certain improvements to module efficiency, temperature coefficient, and bifacial performance, and claim to provide certain degradation advantages compared to other mono-crystalline modules. 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.
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 wafers, cells, and modules, has created and may continue to cause periods of structural imbalances between supply and demand. For additional information, 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. The solar industry may experience periods of structural imbalance between global PV module supply and demand that result in periods of pricing volatility, which could have a material adverse effect on our business, financial condition, and results of operations.” 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.
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. Certain competitors, including many in China, may have direct or indirect access to sovereign capital or other forms of state support, 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 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 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 12.5 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 failures, 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.
In addition to our limited solar module warranties described above, for PV solar power systems we have constructed for customers in prior periods, we have provided limited warranties for defects in engineering design, installation, and balance of systems (“BoS”) part workmanship for a period of one to two years following the substantial completion of a system or a block within the system. BoS parts represent mounting, electrical, and other parts used in PV solar power systems. 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 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 and develop and introduce improved PV products, including as a result of delays in implementing planned advancements, could render our solar modules 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 and otherwise keep pace with technological advances in the solar industry. However, R&D activities are inherently uncertain, and we could encounter difficulties in commercializing our research results. We seek to continuously improve our products and processes, including, for example, certain planned improvements to our CdTe module technology and manufacturing capabilities, such as the increase to our module form factor (which we refer to as Series 7), and the resulting changes carry potential risks in the form of delays, performance, additional costs, or other unintended contingencies. For example, the successful launch of our Series 7 module technology, which we began producing at our third manufacturing facility in the U.S. and we expect to produce at our first manufacturing facility in India, is sensitive to changes in the final product size and module mounting structure, among others. While we believe that we will be able to manage these uncertainties, we may encounter unanticipated challenges as we implement design and process changes in connection with this new module series.
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 certain markets. There can be no guarantee that our significant R&D expenditures will produce corresponding benefits. Other companies are developing a variety of competing PV technologies, including advanced mono-crystalline silicon cells, advanced p-type crystalline silicon cells, high-efficiency n-type crystalline silicon cells, and new emerging technologies such as hybrid perovskites, tandem solar cells, or other thin films, which could result in solar modules that prove to be more cost-effective or have better performance than our solar modules. If we are unable to achieve the necessary technology improvements to remain competitive, our overall growth and financial performance may be limited relative to our competitors and our operating results could be adversely impacted.
We often forward price our products in anticipation of future technology improvements. Furthermore, certain of our contracts with customers may include transaction price adjustments associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Accordingly, an inability to further refine our technology and execute our module technology roadmap, or changes to the expected timing such technology improvements are incorporated into our manufacturing process, 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 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, in particular CdTe and substrate glass, 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 or seek to 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, other key raw materials, or equipment 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. If our competitors begin to use or increase their demand for tellurium, our requirements for tellurium increase, new applications for tellurium emerge, 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.
Furthermore, our supply chain could be limited if any of our current or future suppliers fail to perform or are unable to acquire an adequate supply in a timely manner or at commercially reasonable prices. If our current or future suppliers cannot obtain sufficient raw materials or key equipment, they could substantially increase prices or be unable to perform under their contracts. Additionally, we may also be unable to effectively manage fluctuations in the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process. If we are unable to pass such cost increases to our customers, a substantial increase in
prices or any limitations or disruptions in our supply chain could adversely impact our profitability and long-term growth objectives.
Our failure to effectively manage module manufacturing production and selling costs, including costs related to raw materials and logistics services, could render our solar modules uncompetitive and reduce our net sales, profitability, and/or market share.
Certain of our key raw material purchase contracts include variable pricing terms, which are driven by underlying indices for certain commodities, including aluminum, steel, and natural gas, among others. Fluctuations in such underlying commodity indices may increase our raw material costs. Additionally, an increase in price levels generally, such as inflation related to the cost of raw materials, key manufacturing equipment, labor, and logistics services, could adversely impact our profitability. From time to time, we may utilize derivative hedging instruments to mitigate price changes related to our raw materials or key manufacturing equipment. Our profitability could be adversely impacted if we are unable to effectively hedge such prices or pass these cost increases through to our customers. We often forward price our products in anticipation of future cost reductions, and thus, an inability to execute our cost reduction roadmap could adversely affect our operating results.
Our future success depends on our ability to effectively balance manufacturing production with market demand, effectively manage 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, effectively manage our cost per watt, and increase our manufacturing capacity in a cost-effective and efficient manner. If we cannot do so, we may incur damages under our contracts with our customers or 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 effectively manage our cost per watt or successfully expand production capacity 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, or minimize manufacturing yield losses;
•failure to effectively manage the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules;
•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 economical 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;
•capital expenditures exceeding our initial estimates with respect to expanding and building our manufacturing and R&D facilities;
•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, or otherwise adjust our manufacturing capacity.
We may be unable to generate sufficient cash flows or have access to the sources of external financing necessary to fund planned capital investments in manufacturing capacity and product development.
Our business and our future plans for expansion are capital-intensive, and we anticipate that our operating and capital expenditure requirements may increase. To develop new products, support future growth, and maintain product quality, we may need to make significant capital investments in manufacturing technology, facilities and capital equipment, and research and development. Consequently, we may seek to raise additional funds through the issuance of equity, equity-related, or debt securities or through obtaining credit from financial institutions to fund, together with our traditional sources of liquidity, the costs of developing and manufacturing our current or future products. We cannot be certain that we will be able to generate sufficient cash flows, or that additional funds will be available to us on favorable terms when required, or at all. If we cannot fund the required investments from our operating cash flows or raise additional funds when we need them, we may be unable to fully execute our business plan and our financial condition, results of operations, and business prospects could be materially and adversely affected.
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; by-product credits for certain materials recovered during the recycling process; the estimated useful lives of modules covered by the program; and the number of modules expected to be recycled. 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. 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 or successfully commercialize 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 or to successfully commercialize future 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, our growth could be limited, and we may be in breach of our contracts with customers for failure to deliver modules. Such factors may result in lower net sales, and/or lower net income than we anticipate. 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.
We are in the process of expanding our manufacturing capacity by approximately 11 GWDC including the construction of our third manufacturing facility in the United States, which commenced commercial production of modules in early 2023; our first manufacturing facility in India, which is expected to commence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in late 2024; and the expansion of our manufacturing footprint at our existing facilities in Ohio. If we cannot successfully execute on our current capacity expansion plans, we may incur significant costs in excess of our current plans to invest approximately $2.7 billion in the aggregate for these new facilities. If we are not able to effectively manage current or future expansion activities or realize their anticipated benefits, it may adversely impact our results of operations.
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, sales, and marketing operations both within and outside the United States and expect to continue to expand our operations worldwide. Our global business requires us to respond to rapid changes in market conditions worldwide. Our overall success 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 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.
Risks Related to Regulations
We expect certain financial benefits as a result of tax incentives provided by the Inflation Reduction Act of 2022. If these expected financial benefits vary significantly from our assumptions, our business, financial condition, and results of operations could be adversely affected.
In August 2022, the U.S. President signed the IRA into law, which is intended to accelerate the country’s ongoing transition to clean energy. The provisions of the IRA are generally effective for tax years beginning after 2022. We continue to evaluate the extent of benefits available to us, which we expect will favorably impact our results of operations in future periods. For example, we currently expect to qualify for the advanced manufacturing production credit under Section 45X of the IRC, which provides certain specified benefits for solar modules and solar module components manufactured in the United States and sold to third parties. For eligible components, the credit is equal to (i) $12 per square meter for a PV wafer, (ii) 4 cents multiplied by the capacity of a PV cell, and (iii) 7 cents multiplied by the capacity of a PV module. Based on the current form factor of our modules, we expect to qualify for a credit of approximately 17 cents per watt for each module produced in the United States and sold to a third party. Such credit may be refundable or transferable to a third party and is available from 2023 to 2032, subject to phase down beginning in 2030.
There are currently several critical and complex aspects of the IRA pending technical guidance and regulations from the Internal Revenue Service (“IRS”) and U.S. Treasury Department, including, but not limited to, the following:
•Total credit under Section 45X. The guidance is expected to confirm that a vertically-integrated solar module manufacturer is entitled to the sum of the credit amounts for each eligible component that is integrated into the solar module, including the credit amounts for the PV wafer, cell, and module, provided such components are produced in the United States. This clarification may impact to what extent we qualify for a credit of approximately 17 cents per watt based on the current form factor of our modules.
•Standardization of per-watt measurements. The guidance is expected to confirm and/or clarify the method by which wattage is calculated to determine the applicable credit amounts for PV cells and modules. Our current evaluation of the benefits available to us is based on the use of industry-wide standard test conditions to determine the nameplate capacity of PV cells and modules. The guidance is expected to create meaningful consistency for credit calculation by standardizing the process for determining solar module nameplate capacity. These clarifications may impact the extent of the credit available to us for eligible PV cells and modules.
•Direct payment and transfer elections. The guidance is expected to clarify whether a taxpayer’s direct payment election with respect to the Section 45X credit applies only to a single 5-year period or whether the taxpayer is entitled to make a second direct payment election for a subsequent 5-year period during the 10-year credit period. This clarification will impact whether we can monetize the credit in the form of cash payments directly from the government throughout the 10-year credit period, or whether we would be required to monetize the credit through a sale to another taxpayer or taxpayers during the subsequent 5-year period. The guidance is also expected to clarify whether the taxpayer is entitled to make the direct payment election on a facility-by-facility basis, especially with respect to new manufacturing facilities that commence production after the taxpayer has made the initial direct payment election. Such clarification may impact the extent to which we will be able to make additional direct payment elections across multiple years for multiple manufacturing facilities. Furthermore, the guidance is expected to address (i) how and when the credit is claimed by the taxpayer, including the type of information necessary to verify the credit amount, (ii) whether the credit must be applied as a reduction to any quarterly estimated tax payments or as an offset to any taxes that are reported on the taxpayer’s income tax return for any taxable year in which a direct payment election is made, and (iii) the degree of review or examination by the IRS or any other agency, including whether such review or examination would be a condition to receiving any direct payment. These clarifications may impact the timing and extent of cash benefits available to us and, if the
direct payment election cannot be made a second time, our ability to transfer the tax credits to another taxpayer or taxpayers, which depends on the future demand for such credits.
•Domestic content requirements. The guidance is expected to confirm that domestic content rules are applied separately with respect to steel and iron as compared to manufactured products, which would require that only a certain percentage of the total costs of such manufactured product components are of U.S. origin. These clarifications may impact whether our modules meet domestic content requirements, which is a key value proposition for current and future customers. Alternatively, if the domestic content rules as defined by the final guidance are defined broadly, we may face significant additional competition for module sales within the U.S. If our modules manufactured in the U.S. do not meet the domestic content requirements as defined by the final guidance or if the guidance definition is defined broadly, this may adversely impact demand and/or price levels for our solar modules and future expansion plans within the United States.
Any modifications to the law or its effects arising, for example, through (i) technical guidance and regulations from the IRS and U.S. Treasury Department, including the certain aspects disclosed above, (ii) subsequent amendments to or interpretations of the law, and/or (iii) future laws or regulations rendering certain provisions of the IRA less effective or ineffective, in whole or in part, could result in changes to the expected and/or actual benefits in the future, which could have a material adverse effect on demand and/or price levels for our solar modules, our net sales, and future expansion plans within the United States, and/or otherwise adversely impact our business, financial condition, and results of operations.
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.modules.
The market for electricity generation products is heavily influenced by local,federal, state, federal,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 ofcertain other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policiesfuture, which could deter end-user purchases of PV products or systems and investment in the R&D of PV solar technology.products. For example, without a mandated regulatory exception for PV solar power systems, utility customerssystem owners are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. IfTo the extent these interconnection standby fees wereare applicable to PV solar power systems, it is likely that they would increase the cost of using such systems, for end-users, 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 wherebyAnother example is the priceeffect of electricity is adjusted basedgovernmental land-use planning policies and environmental policies on electricity supply and demand, electricity generated byutility-scale PV solar power systems currently benefits from competing primarily with expensive peak-hour electricity, rather thandevelopment. The adoption of restrictive land-use designations or environmental regulations that proscribe or restrict the less expensive average pricesiting of electricity. Modifications toutility-scale solar facilities could adversely affect the peak-hour pricing policiesmarginal cost of utilities, such as to a flat rate for all times of the day, would require PV solar power systems to achieve lower prices in order to compete with the price of electricity from other sources and would adversely impact our operating results.development.
Our modules systems, and services (such as O&M) 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.products. 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 U.S. Foreign Corrupt Practices Act (the “FCPA”),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 of their country of origin. Our policies mandate compliance with all applicable anti-bribery laws. We currently operate in, and pursuant to our long-term strategic plans 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 where norms can differ from U.S. standards, including China, India, China, 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, cash flows, and results of 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 local,national, state, national,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 execute our long-term strategic plans and 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 subjectedsubject 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 reviewreviews 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,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, Examples of such regulations include the following:
•European Union Directive 2011/65/EU on the Restriction of the Use of Hazardous
Substances (“RoHS”) in electrical and electronic equipment (recast RoHS Directive)(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.all electronic equipment sold into the European market, unless excluded from the law. Currently, PV solar modules are explicitly excluded from the scope of recast RoHS (Article 2), as adopted by the European Parliament and the Council in June 2011. Other jurisdictions have adopted similar legislation or are considering doing so. The next general reviewrevision 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 Commissionexpected 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.2025. 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•In November 2022, the government of India, through its Ministry of Environment, Forest and operatorClimate Change and MNRE, introduced legislation intended to expand the scope of existing electronic waste (“e-waste”) regulations, including PV solar modules. This regulation, as subsequently amended in January 2023, will also create extended producer obligations for mandatory recycling of PV solar power systems that deliver electricitywaste at the end of its useful life. These regulations are expected to the grid, certain of our affiliated entities may be regulated as public utilities under U.S. federal 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 adversecome into effect on our resultsApril 1, 2023. At this time, the recycling targets, monitoring mechanism, and determination of operations. In addition towho finances the risks described above, we may be subject to additional regulatory regimes at state or foreign levels torecycling costs are unclear, and, depending on the extent we own and operate PV solar power systems in such jurisdictions.
Other Risks
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, 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. The risks associated with such transactions 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,final 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; for example, our ability to effectively manage 8point3 Energy Partners, LP (the “YieldCo” or the “Partnership”), the limited partnership formed with SunPower Corporation (“SunPower” and together with First Solar, the “Sponsors”);
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 thatrules, such regulations could negatively 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.
We may be unable to complete the sale of our interests in 8point3 Energy Partners LP on the terms and in the timeframe anticipated, or at all, and if we are unable to complete such sale, we may continue to hold the interests and may not be able to achieve the full strategic and financial benefits expected to result from the formation of the Partnership, or the sale could result in shareholder litigation.
In June 2015, the Partnership formed by the Sponsors completed its initial public offering (the “IPO”). The YieldCo is a joint venture vehicle into which we and SunPower each contributed a portfolio of selected solar generation assets from our existing portfolios of assets. Since the formation of the Partnership, we and SunPower have, from time to time, sold interests in solar projects to the Partnership. We launched the YieldCo to enable a competitive cost of capital and greater optionality in the project sales process for a portion of our future project sales.
In February 2018, we entered into an agreement (the “Merger Agreement”) with CD Clean Energy and Infrastructure V JV, LLC, an equity fund managed by Capital Dynamics and certain other co-investors and certain other parties, pursuant to which such parties agreed to acquire our interests in the Partnership and its subsidiaries (the “Transaction”). The closing of the Transaction is subject to various conditions, including, among others, approval by the YieldCo’s shareholders, and the receipt of consents from third parties and governmental approvals, including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, FERC Section 203 approval, and the approval of the Committee on Foreign Investment in the United States. Known and unknown risks, uncertainties, and other factors could impact the satisfaction of these conditions and therefore the expected timing and likelihood of completion of the Transaction. Failure or delay to satisfy these or other conditions may have adverse consequences, including that the market price of the YieldCo’s shares may decline, to the extent that their current market price reflects a market assumption that the Transaction will be completed, certain costs relating to the Transaction, such as certain financial advisor and legal fees, must be paid even if the Transaction is not completed, and our business, financial condition and results of operations could be materially adversely affected. The YieldCo and Capital Dynamics also have the ability to terminate the Merger Agreement in certain circumstances. If we are unable to close the Transaction, we may continue to hold the interests and may not be able to realize the strategic and financial benefits that we expect to derive from our YieldCo strategy and our investment in the Yieldco. If the Transaction is not completed, we will have to reassess our long-term strategy with respect to our continued ownershipIndia.
General Risk Factors
Cyber-attacks or other breaches of our interests in the YieldCo.
In addition, we may be subject to class action lawsuits relating to the Transaction, and other additional lawsuits that may be filed. Such litigation is common in connectioninformation systems, or those of third parties with acquisitions of public companies, regardless of any merits related to the underlying acquisition. While we will evaluate and defend against any actions vigorously, the costs of the defense of such lawsuits and other effects of such litigation could have an adverse effect on our business, financial condition, and operating results.
The viability of the YieldCo strategy and the Transaction are also subject to the risks described in the YieldCo’s Annual Report on Form 10-K. In addition, due to the joint venture nature of the YieldCo,which we do not exercise control over the YieldCo in the same manner that we could over our wholly-owned subsidiaries, and, as such, the viability of the YieldCo strategy and the Transaction also depend, in part, on our ability to effectively manage our business, relationships with SunPower. If we are unable to achieve the strategic and financial benefits expected to result from the YieldCo strategy and the Transaction, our business, financial condition, and results of operations could be materially adversely affected. See Note 12. “Investments in Unconsolidated Affiliates and Joint Ventures” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding the Partnership.
We are subject to litigation risks, 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 attention of our management and our resources in general. In addition, our projects may be subject to litigation or other adverse proceedings that may adversely impact our ability to proceed with construction or sell a given project, which may adversely affect our ability to recognize revenue with respect to such project. The results of complex legal proceedings are difficult to predict. Moreover, 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. 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 in a significant monetary judgment or award against us or a significant monetary payment by us, and could have a material adverse effect on our business, financial condition, and results of operations.
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 and personally identifiable information. We also rely heavily on these information systems to operate our manufacturing lines. 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 and procured insurance to mitigate 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 operations may be disrupted; we may be unable to fulfill our customer obligations; and our reputation may suffer. Additionally, 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.
The severity and duration of public health threats (including pandemics such as COVID-19 or similarly infectious diseases) could materially impact our business, financial condition, and results of operations.
The COVID-19 pandemic continues to impact various countries throughout the world, including those in which we do business or have operations, though the scope and severity of COVID-19 continues to evolve. With the exception of certain manufacturing charges incurred in 2020 and 2021, the COVID-19 pandemic and its effects on the economy did not materially impact our business, financial condition, and/or results of operations. Even if these lawsuits,However, the extent to which public health threats (including pandemics such as COVID-19 or any future lawsuits, are not resolved against us, the costs of defending such lawsuits may be significant and may not be covered 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 againstsimilarly infectious diseases) could impact us in the future. See Note 15. “Commitmentsfuture is highly uncertain and Contingencies – Legal Proceedings”cannot be predicted, and will depend largely on subsequent developments, including but not limited to (i) the severity and duration of any public health threat, (ii) measures taken to contain the spread of any public health threat, such as restrictions on travel and gatherings of people and temporary closures of or limitations on businesses and other commercial activities, (iii) the timing and nature of policies implemented by governmental authorities, and (iv) any future variants of any public health threat, which may surge over time.
As a result of any public health threat and any related containment measures and reopening policies, we may be subject to significant risks, which have the potential to materially and adversely impact our consolidatedbusiness, financial statements included in this Annual Report on Form 10-K for more informationcondition, and results of operations, including the following:
•we may at any time be ordered by governmental authorities, or we may determine, based on our legal proceedings,understanding of the recommendations or orders of governmental authorities, that we have to curtail or cease business operations or activities, including manufacturing and R&D activities; and
•the failure of our securities class actionsuppliers or vendors to supply materials or equipment, or the failure of our vendors to install, repair, or replace our specialized equipment, due to any public health threat and derivative actions.related containment measures, may idle, slowdown, shutdown, or otherwise cause us to adjust our manufacturing capacity, and the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules may require us to adjust our module manufacturing plans or module delivery commitments, which may result in additional unplanned charges.
If we are unable to attract, train, retain, and successfully integrate key talent into our management team, 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 talent, including associates in foreign jurisdictions. Recruiting and retaining capable individuals, particularly those with expertise in the PV solar industry across a variety of technologies, are vital to our key associates and to successfully integrate them into our management team.
success. We are also 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. WeAlthough we have a succession planning process in place, we may not be able to retain or replace these key associates and may not have adequate succession plans in place.a timely manner. 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. In addition, on January 5, 2023, the U.S. Federal Trade Commission (“FTC”) voted to issue a notice of proposed rulemaking that, if adopted, would ban non-competition provisions. The proposed rule would make it illegal for an employer to enter into, attempt to enter into, or maintain a non-competition provision. It would also require an employer to rescind any existing non-competition provisions. The proposed rule is subject to a public comment period through March 10, 2023, after which the FTC may vote to implement the proposed rule or may update or revise it based on the comments received and the enforceabilityFTC’s further analysis of the issue. Although it is uncertain if the rule will be adopted or what the final language of the rule, if adopted, will be, the implementation of a ban on non-competition provisions in certain jurisdictions is uncertain.could make it more difficult for us to retain qualified associates.
If we are unable to attract, train, and retain key personnel, our business may be materially and adversely affected; any regulatory compliance failure with respect to applicable labor laws and regulations, including the Davis-Bacon and Related Acts, could have an adverse effect on us.
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 and manufacturing personnel, and while we continue to benchmark our organization against thea broad spectrum of businessbusinesses 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. As we continue to expand domestically and internationally, we may encounter regional laws that mandate union representation or associates who desire union representation or a collective bargaining agreement. 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.
Labor used on some of our job sites may be subject to the Davis-Bacon and Related Acts (collectively, “Davis-Bacon”). Davis-Bacon requires that personnel assigned to the project be paid at least the prevailing wage and fringe benefits, as established by and in accordance with the regulations promulgated by the U.S. Department of Labor (“DOL”). We have an established policy pursuant to which we evaluate Davis-Bacon requirements in conjunction with our subcontractors and ensure our collective compliance with these requirements. If it is determined that any person working under Davis-Bacon requirements on First Solar projects is not properly classified, is being paid the incorrect prevailing wage, or has not been paid fringe benefits to which he or she was entitled, we could incur additional liability with respect to such worker or be exposed to other adverse outcomes.
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. For example, during 2022, we received various indemnification demands from certain customers, for whom we provided EPC services, regarding claims that such customers’ PV tracker systems infringe, in part, on patents owned by Rovshan Sade (“Sade”), the owner of a company called Trabant Solar, Inc. See Note 12. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements for more information on our legal proceedings. 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 20172022 were denominated in foreign currencies, such as EurosJapanese yen and Indian rupees,Euro, and we expect to continue to have net sales denominated in foreign currencies in the future. Joint ventures or otherfuture, such as Indian rupee. Certain business arrangements with strategic partners outside of 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 22% of our outstanding common stock as of December 31, 2017. 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.
Unanticipated changes in our tax provisions,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 various jurisdictions in which we operate. In December 2017,Accordingly, we are subject to a variety of tax laws and interpretations of such laws by local tax authorities. For example, in January 2022, the U.S. government enacted the Tax Act. The changes includedpublished new regulations in the Tax ActU.S. Federal Register to address various aspects of foreign tax credit regimes, including, among other things, guidance related to the disallowance of credits or deductions for foreign income taxes. These regulations, which became effective in March 2022, contain certain provisions that are broad and complex,applicable for periods prior to the effective date, and the final effects of the Tax Act, including those related to the mandatory one-time transitioncould result in material income tax on certain accumulated earnings and profits of foreign corporate subsidiaries that may electively be paid over eight years, may differ from the estimates provided elsewhereexpense in this Annual Report on Form 10-K, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to estimates utilized to calculate provisional amounts, or actions we may take as a result of the Tax Act. Additionally,future periods. Furthermore, longstanding international tax laws that determine each country’s jurisdictional tax rights in cross-border international trade are evolvingcontinue to evolve as a result of the base erosion and profit shifting reporting requirements and the introduction of the global minimum tax recommended by the OrganisationOrganization for Economic Co-operation and Development. As theseAdditionally, in August 2022, the U.S. President signed into law the IRA, which revised U.S. tax law by, among other things, including a new corporate alternative minimum tax (the “CAMT”) of 15% on certain large corporations, imposing a 1% excise tax on stock buybacks, and otherproviding various incentives to address climate change, including the introduction of the advanced manufacturing production credit. The provisions of the IRA are generally effective for tax lawsyears beginning after 2022. Given the complexities of the IRA, which is pending technical guidance and regulations change,from the IRS and U.S. Treasury Department, we will continue to monitor these developments and evaluate the potential future impact to our results of operations. For further information, see the Risk Factor entitled, “We expect certain financial benefits as a result of tax incentives provided by the Inflation Reduction Act of 2022. If these expected financial benefits vary significantly from our assumptions, our business, financial condition, and results of operations could be adversely affected.” Changes to these and other tax laws and regulations could have a material adverse impact on our business, financial condition, and results of operations.
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 adverse impact on our business, financial condition, and results of operations and cash flows.operations.
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 effectimpact on our business, financial conditionconditions, and results of operations.
Our operations rely on our computer systems, hardware, software,We have been and networks, as well as those of the third parties with which we do business, to securely process, store, and transmit proprietary, confidential, and other information, including intellectual property. Such 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; and our reputation may suffer. We may also be subject to or involved in litigation regulatory action, remedialor 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 and financial losses beyondby us, which may be significant or involve an agreement with terms that restrict the scope oroperation of our business. 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 coverage. These consequencespolicies or may not be covered at all by our
insurance policies. Because the price of security measures could, individuallyour 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 aggregate, have a material adverse effectfuture. See Note 12. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements for more information on our financial condition and results of operations.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, India, 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. For example, in 2015 the Court of Justice of the European Union ruled that the U.S.-EU Safe Harbor framework, which provided U.S. companies with a streamlined means of complying with the EU’s Data Protection Directive regarding the treatment of customers’ and employees’ personal information and other privacy matters, and upon which we relied for the transfer of personal data from the EU to the U.S., was invalid. As a result of such invalidation, we have implemented data transfer agreements between certain of our U.S. and EU based entities. Furthermore, federal, state, federal, 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, and state attorneys general, and 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, or ourrelevant suppliers, and customers must comply, including but not limited to,comply. For example, the Data Protection Directive established in the EU and data protection legislation of the individual member states subject to such directive. The Data Protection Directive will be replaced in May 2018 by the pending European General Data Protection Regulation, a broad-based data privacy regime that will imposeenacted by the European Parliament, which became effective in May 2018, imposed new requirements on how we collect, process, transfer, and store personal data, and also imposed additional obligations, potential penalties, and risk upon our business. Additionally, the California Consumer Privacy Act, which became effective in January 2020, imposed 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. AnyAlthough 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 costfines, costs, and liabilityliabilities to us, damage our reputation, inhibit sales, and adversely affect our business.
Our credit agreements contain covenant restrictions that mayAmended and Restated Bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, and the federal district courts of the United States as the exclusive forum for the resolution of any complaint asserting a cause of action under the Securities Act of 1933, which could limit our stockholders’ ability to operatechoose the judicial forum for disputes with us or our business.directors, officers, employees, agents or stockholders.
We may be unableOur Amended and Restated Bylaws (“Bylaws”) provide that, unless we consent in writing to respond to changes in businessthe selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, the federal district court for the District of Delaware) is the sole and economic conditions, engage in transactions that might otherwise be beneficialexclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, other employees, agents or stockholders to us and obtain additional financing, if needed, because the senior secured credit facility made available underor 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 certainstockholders, (iii) any action or proceeding against us or any of our project financing arrangements contain,directors, officers, other employees, agents or stockholders arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”), our Amended and Restated Certificate of Incorporation or our Bylaws, (iv) any action or proceeding against us or any of our directors, officers or other future debt agreements may contain, covenant restrictionsemployees asserting a claim that limitis governed by the internal affairs doctrine, or (v) any action or proceeding asserting an “internal corporate claim,” as defined in the DGCL. Our Bylaws also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States are the exclusive forum for resolving any complaint asserting a cause of action under the Securities Act. Nothing in our abilityBylaws precludes stockholders that assert claims under the Exchange Act from bringing such claims in any court, subject to among other things:applicable law.
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 performanceAny person 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 resultentity holding, owning or otherwise acquiring any interest in a default under these agreements and any of our securities shall be deemed to have notice of and consented to these provisions. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers, other future debt agreements,employees, agents or stockholders, which if not curedmay discourage lawsuits against us and our directors, officers, other employees, agents or waived, could permit the holders thereof to accelerate such debtstockholders. The enforceability of similar choice of forum provisions in other companies’ governing documents has been challenged in legal proceedings, 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, we cannot assure you that events that occur within the Company, or in the industry or the economy as a whole, will not constitute material adverse effects under these agreements. If it is possible that a court could find these types of provisions to be inapplicable or unenforceable. For example, in December 2018, the Court of Chancery of the State of Delaware determined that a material adverse effect has occurred,provision stating that federal district courts of the lenders can,United States are the exclusive forum for resolving any complaint asserting a cause of action arising under certain circumstances, restrict future borrowingsthe Securities Act is not enforceable. Although this decision was reversed by the Delaware Supreme Court in March 2020, courts in other states may still find these provisions to be inapplicable or accelerateunenforceable. If a court were to find the due date of outstanding amounts. If any ofexclusive forum provisions in our debt is accelerated,Bylaws to be inapplicable or unenforceable in an action, we may not have sufficient funds available to repay such debt and may experience cross-defaults under ourincur additional costs associated with resolving the dispute in other debt or operational agreements,jurisdictions, 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, 2017,2022, our principal properties consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
Nature | | Primary Segment(s) Using Property | | Location | | Held |
Corporate headquarters | | Modules & SystemsOther | | Tempe, Arizona, United States | | Lease |
Manufacturing plant,plants, R&D facility,facilities, and administrative offices | | Modules | | Perrysburg and Lake Township, 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 & SystemsOther | | Georgetown, Penang, Malaysia | | Lease |
Manufacturing plant (1) | | Modules | | Ho Chi Minh City, Vietnam | | Lease land, own buildings |
Manufacturing plant (1) | | Modules | | Tamil Nadu, India | | Lease land, own buildings |
Manufacturing plant (2) | | Modules | | Frankfurt/Oder, Germany | | Own |
Manufacturing plant (3) | | Modules | | Trinity, Alabama, United States | | Own |
——————————
| |
(1) | In July 2017, we announced our plans to utilize our manufacturing plant in Vietnam for production of our next generation Series 6 module technology. |
| |
(2) | In December 2012, we ceased manufacturing at our German plant. Since its closure, we have continued to market such property for sale. |
(1)Manufacturing plant currently under construction; operations are expected to commence in the second half of 2023.
(2)In addition,December 2012, we lease small amounts of office and warehouse spaceceased manufacturing at our German plant. Since its closure, we have, from time to time, marketed such property for sale.
(3)Manufacturing plant currently under construction; operations are expected to commence in several other U.S. and international locations.late 2024.
Item 3. Legal Proceedings
See Note 15.12. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements included in this Annual Report on Form 10-K for information regarding legal proceedings and related matters.
Item 4. Mine Safety Disclosures
None.
46
PART II
Item 5. Market for Registrant’s Common Equity, Related StockholderMatters, and Issuer Purchases of Equity Securities
Price Range of Common StockMarket Information
Our common stock is listed on NASDAQThe Nasdaq Stock Market LLC under the symbol FSLR. The following table sets forth the range of high and low closing prices per share as reported on NASDAQ for the periods indicated:
|
| | | | | | | | |
| | High | | Low |
2017 | | | | |
First quarter | | $ | 37.90 |
| | $ | 27.10 |
|
Second quarter | | 40.49 |
| | 26.33 |
|
Third quarter | | 51.41 |
| | 38.67 |
|
Fourth quarter | | 70.63 |
| | 46.91 |
|
2016 | | |
| | |
|
First quarter | | $ | 73.21 |
| | $ | 60.99 |
|
Second quarter | | 67.48 |
| | 44.23 |
|
Third quarter | | 49.24 |
| | 34.00 |
|
Fourth quarter | | 42.25 |
| | 29.21 |
|
Holders
The closing price of our common stock on NASDAQ was $65.85 per share on February 16, 2018. As of February 16, 2018,24, 2023, there were 4844 record holders of our common stock, which does not reflect the beneficial ownershipowners of shares held in nominee names.our shares.
Dividend Policy
We have never paid and it is our present intention for the foreseeable futuredo not expect to pay dividends on our common stock. Our Revolving Credit Facility imposes restrictions on our ability to declare or pay dividends.stock for the foreseeable future. The declaration and payment of dividends is subject to the discretion of our board of directors and depends on various factors, including the continued applicability of the above-referenced restrictions under our Revolving Credit Facility, our net income, financial condition, cash requirements, future prospects, 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 developmentR&D and construction,technology investments, 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 GuggenheimInvesco Solar ETF, which represents a peer group of solar companies. InFor purposes of the stock price performance graph, included below, 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 GuggenheimInvesco Solar ETF on December 31, 2012,2017, and its relative performance is tracked through December 31, 2017.2022. This performance 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 onin the graph represents past performance and shouldis not be considered an indicationnecessarily indicative of future stock price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among First Solar, the S&P 500 Index,
and the Guggenheim Solar ETF
——————————
| |
* | $100 invested on December 31, 2012 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 DataReserved
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, 2017, 2016, and 2015 and the selected financial data from the consolidated balance sheets as of December 31, 2017 and 2016 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, 2014 and 2013 and the selected financial data from the consolidated balance sheets as of December 31, 2015, 2014, and 2013 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 None.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
For the years ended December 31, 2016 and 2015, we have recast certain of the following financial data as a result of the adoption of ASU 2014-09. See Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K for further information regarding these changes.
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| | (In thousands, except per share amounts) |
Net sales | | $ | 2,941,324 |
| | $ | 2,904,563 |
| | $ | 4,112,650 |
| | $ | 3,391,187 |
| | $ | 3,309,616 |
|
Gross profit | | 548,947 |
| | 638,418 |
| | 1,132,762 |
| | 824,941 |
| | 864,632 |
|
Operating income (loss) | | 177,851 |
| | (568,151 | ) | | 730,159 |
| | 421,999 |
| | 370,407 |
|
Net (loss) income | | (165,615 | ) | | (416,112 | ) | | 593,406 |
| | 395,964 |
| | 350,718 |
|
Net (loss) income per share: | | |
| | |
| | |
| | |
| | |
|
Basic | | $ | (1.59 | ) | | $ | (4.05 | ) | | $ | 5.88 |
| | $ | 3.96 |
| | $ | 3.74 |
|
Diluted | | $ | (1.59 | ) | | $ | (4.05 | ) | | $ | 5.83 |
| | $ | 3.90 |
| | $ | 3.67 |
|
Cash dividends declared per common share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 1,340,677 |
| | $ | 206,753 |
| | $ | (325,209 | ) | | $ | 735,516 |
| | $ | 856,126 |
|
Net cash (used in) provided by investing activities | | (626,802 | ) | | 144,520 |
| | (156,177 | ) | | (387,818 | ) | | (537,106 | ) |
Net cash provided by (used in) financing activities | | 192,045 |
| | (136,393 | ) | | 101,207 |
| | (46,907 | ) | | 101,164 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| | (In thousands) |
Cash and cash equivalents | | $ | 2,268,534 |
| | $ | 1,347,155 |
| | $ | 1,126,826 |
| | $ | 1,482,054 |
| | $ | 1,325,072 |
|
Marketable securities | | 720,379 |
| | 607,991 |
| | 703,454 |
| | 509,032 |
| | 439,102 |
|
Total assets | | 6,864,501 |
| | 6,824,368 |
| | 7,360,392 |
| | 6,720,991 |
| | 6,876,586 |
|
Total long-term debt | | 393,540 |
| | 188,388 |
| | 289,415 |
| | 213,473 |
| | 223,323 |
|
Total liabilities | | 1,765,804 |
| | 1,606,019 |
| | 1,741,996 |
| | 1,729,504 |
| | 2,408,516 |
|
Total stockholders’ equity | | 5,098,697 |
| | 5,218,349 |
| | 5,618,396 |
| | 4,991,487 |
| | 4,468,070 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition andResults 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 consolidated 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, 2020. 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, 2021 for comparative discussions of our results of operations and liquidity and capital resources for the years ended December 31, 2021 and 2020.
Executive Overview
We are a leading American solar technology company and global provider of comprehensive PV solar energy solutions. We design,Developed at our R&D labs in California and Ohio, we manufacture and sell PV solar modules with an advanced thin film semiconductor technology and also develop, design, construct, and sellthat provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar power systems that primarily usemodules. From raw material sourcing through end-of-life module recycling, we are committed to reducing the modules we manufacture. Additionally, we provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on moduleenvironmental impacts and system-level innovations.enhancing the social and economic benefits of our products across their life cycle. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our mission is to provide cost-advantaged solar technology through innovation, customer engagement, industry leadership, and operational excellence.manufacturer in the Western Hemisphere.
Certain highlights of our financial results and other key operational developments for the year ended December 31, 20172022 include the following:
•Net sales for 2022 decreased by 10% to $2.6 billion compared to $2.9 billion in 2017 were $2.9 billion, which was consistent with2021. The decrease in net sales was primarily attributable to sales of certain projects in 2016. Such results were primarily driven bythe United States and Japan in the prior period, the prior period settlement of an outstanding indemnification arrangement associated with the sale of one of our projects, and a decrease in the Moapa, California Flats, Switch Station, and Cuyama projects in 2017, together withaverage selling price per watt, partially offset by an increase in third-party module sales in 2017 comparedthe volume of modules sold to 2016, offset by the completion of substantially all construction activities on a number of projects in 2016, including the Desert Stateline, Astoria, Taylor, East Pecos, Silver State South, Butler, and McCoy projects.
third parties.
•Gross profit decreased 3.322.3 percentage points to 18.7% during 20172.7% in 2022 from 22.0% during 201625.0% in 2021 primarily due to a mix of lower gross profit projects sold and under construction during the period and reductionsdecrease in the average selling price per watt of our modules, the volume of higher gross profit projects sold directlyduring the prior period, an increase in sales freight, demurrage, and detention charges, an impairment loss for our Luz del Norte PV solar power plant, and the prior period settlement of the indemnification matter mentioned above. These decreases to third parties,gross profit were partially offset by reductions in our product warranty liabilitythe higher volume of modules sold and ourcontinued module collection and recycling liability.cost reductions.
•As of December 31, 2017,2022, we had 18approximately 9.8 GWDC of total installed nameplate module production lines atcapacity across all our manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia.facilities. We produced 2.39.1 GWDC of solar modules during 2017,2022, which represented a 26% decrease15% increase in module production from 2016.2021. The decreaseincrease in production was primarily driven by higher throughput at our previously announced plans to ramp down production of our Series 4 modules and transition to Series 6 module manufacturing over the next several years.facilities. We expect to produce approximately 3.1between 11.5 GWDC and 12.2 GWDC of solar modules during 2018, including approximately 1 GW of Series 6 modules.
2023.
In November 2017,•During 2022, we produced our initial Series 6 modules atannounced plans to expand our manufacturing facility in Perrysburg, Ohio. We continue to qualify such modules for commercial production and expect the Ohio facility to begin commercial production in early 2018. In late 2017, we also began installing Series 6 production lines atcapacity by an additional 4.4 GWDC by constructing our facility in Kulim, Malaysia.
During 2017, we ran ourfourth manufacturing facilities at approximately 99% capacity utilization, which represented a 2.0 percentage point increase from 2016.
The average conversion efficiency of our modules produced in 2017 was 16.9%, which represented an improvement of 0.5 percentage points from our average conversion efficiency of 16.4% in 2016.
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 pricesfacility in the United States and several other key markets have experienced an accelerated declineincreasing our manufacturing footprint at our existing facilities in recent years, and module average selling pricesOhio. Such expansion plans, in combination with our previously announced expansion plans, are expected to continueincrease our manufacturing capacity by approximately 11 GWDC by 2025.
•In May 2022, we entered into various agreements with certain subsidiaries of PAG Real Assets (“PAG”), a private investment firm, for the sale of our Japan project development business. In June 2022, we completed the sale and, following certain customary post-closing adjustments, received total consideration of ¥66.4 billion ($490.8 million) and transferred cash and restricted cash of ¥8.4 billion ($61.9 million) to PAG. As a result of this transaction, we recognized a gain of $245.2 million, net of transaction costs, which was included in “Gain on sales of businesses, net” in our consolidated statements of operations for the year ended December 31, 2022. In September 2022, we also completed the sale of our Japanese O&M operations to a subsidiary of PAG and, following certain customary post-closing adjustments, received total consideration of ¥692.7 million ($4.8 million). As a result of this transaction, we recognized a gain of $1.4 million, net of transaction costs and post-closing adjustments, which was included in “Gain on sales of businesses, net” in our consolidated statements of operations for the year ended December 31, 2022.
Market Overview
Solar energy is one of the fastest growing forms of renewable energy with numerous economic and environmental benefits that make it an attractive complement to and/or substitute for traditional forms of energy generation. In recent years, the cost of producing electricity from PV solar power systems has decreased to levels that are competitive with or below the wholesale price of electricity in many markets. This price decline globallyhas opened new possibilities to some degreedevelop systems in many locations with limited or no financial incentives, thereby promoting the widespread adoption of solar energy. Additionally, recently enacted government support programs, such as the IRA discussed above, have contributed to this momentum by providing solar module manufacturers, project developers, and project owners with various incentives to accelerate the ongoing transition to clean energy. For more information about these support programs, see Item 1. “Business - Support Programs.”
Supply and demand. As a result of the market opportunities described above, we are in the future.process of expanding our manufacturing capacity by approximately 11 GWDC, including the construction of our third manufacturing facility in the United States, which commenced commercial production of modules in early 2023; our first manufacturing facility in India, which is expected to commence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in late 2024; and the expansion of our manufacturing footprint at our existing facilities in Ohio. In the aggregate, we believe manufacturers of solar cells and modules, particularly those in China, have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. 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),which could lead to periods of pricing volatility. In light of such market realities, we continue to focus on our strategies and that such periods will put pressure on pricing. Additionally,points of differentiation, which include our advanced module technology, our manufacturing process, our R&D capabilities, the sustainability advantage of our modules, and our financial stability.
Pricing competition. The solar industry has been characterized by intense pricing competition, both at the module and system levellevels. This competition may result in an environment in which pricing falls rapidly, thereby further
potentially increasing demand for solar energy solutions but constraining the ability for project developers EPC companies, and vertically-integrated solar companies such as First Solarmodule manufacturers to sustain meaningful and consistent profitability. In light of such market realities, we are focusing on our strategies and points of differentiation, which include our advanced module and system technologies, our manufacturing process, our vertically-integrated business model, our financial viability, and the sustainability of our modules and systems.
Worldwide solar markets continue to develop, in part aided by demand elasticity resulting from declining industry average selling prices, both at the module and system levels, which make solar power more affordable. We are developing, constructing, and operating multiple solar projects around the world as we continue to execute on our advanced-stage utility-scale project pipeline. We expect a significant portion of our future consolidated net sales, operating income, and cash flows to be derived from such projects. 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 project 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 project pipeline.
Lower industry module and system pricing, while currently challenging for certain solar manufacturers (particularly manufacturers with higher cost structures), is expected to continue to contribute to diversification in global electricity generation and further demand for solar energy solutions. Over time, we believe that solar energy generation will experience widespread adoption in those applications where it competes economically with traditional forms of energy generation. In the near term, however, declining average selling prices are expected to adversely affect ourOur results of operations relative to prior years. Ifcould be adversely affected if competitors reduce pricing to levels below their costs;costs, bid aggressively low prices for module sale agreements, EPC agreements, and PPAs; or are able to operate at minimal or negative operating margins for sustained periods of time,time. For certain of our resultscompetitors, including many in China, these practices may be enabled by their direct or indirect access to sovereign capital or other forms of operations could be further adversely affected. In certainstate support. Although module average selling prices in many global markets have declined for several years, recent module spot pricing has increased, in Californiapart, due to trade measures and elsewhere, an oversupply imbalance atpolicies, government regulations, raw material availability, and supply chain disruptions. For example, module spot pricing in the grid level may further contributeUnited States has increased, in part, due to reduce short-to-medium termelevated commodity and logistics costs and, more recently, due to the rising demand for new solar installations relative to prior years, lower PPAmodules manufactured in the United States as a result of the IRA. The duration of this elevated period of pricing and lower margins on module and system sales to such markets. We continue to mitigate these uncertainties in part by executing on our module technology improvements, including our transition to Series 6 module manufacturing, continuing the development of key markets, and implementing certain other cost reduction initiatives, including both manufacturing, BoS, and other operating costs.is uncertain.
Diverse offerings. We face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects.other emerging technologies. Solar module manufacturers compete with one another on sales price and onper watt, which may be influenced by several module value attributes, including wattage (through a larger form factor or an improved conversion efficiency,efficiency), energy yield, degradation, sustainability, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and LCOE. As noted above, competition on the basis of sellingreliability. Sales price per watt has intensified in recent years, which has contributed to declines in module average selling prices in several key markets. Many crystalline silicon cellmay also be influenced by warranty terms and wafer manufacturers are transitioning from lower efficiency BSF multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency PERC multi-crystalline and mono-crystalline cells at competitive cost structures. Additionally, whilecustomer payment terms. 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, certainmost module manufacturers of mono-crystalline PERC solar modules are pursuing the commercialization ofoffer bifacial modules that also capture diffuse irradiance on the back side of a module. We believecurrently produce monofacial solar modules and, based on recent R&D activities, expect to produce bifacial solar modules in the cost effective manufacture of bifacial PERC modules is being enabled by the expansion of inexpensive crystal growth and diamond wire saw capacity in China.near term. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology canmay improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, and BoS configurations, which could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we currently produce. Additionally, certain module manufacturers have introduced n-type mono-crystalline modules, such as TOPCon modules, which are expected to provide certain improvements to module efficiency, temperature coefficient, and bifacial performance, and claim to provide certain degradation advantages compared to other mono-crystalline modules.
Product efficiencies. We believe we are among the lowest cost PV module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and fully integrated PV solar power systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin film semiconductor technology, module wattage (or conversion efficiency,efficiency), proprietary manufacturing technologyprocess (which enables us to
produce a CdTe module in less than 3.5a 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%2% to 3% of the amount of semiconductor material that is used to manufacture traditionalconventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. Polysilicon costs have had periods of decline over the past severalIn recent years, and polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, contributingwhich have contributed to a declinedeclines in our relative manufacturing cost competitiveness over traditionalconventional crystalline silicon module manufacturers.
Given the smaller size (sometimes referred to as form factor) of our current Series 4 modules compared to certain types of crystalline silicon modules, we may incur higher labor and BoS costs associated with the construction of systems using our Series 4 modules. Thus, to compete effectively on an LCOE basis, our Series 4 modules may need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules with larger form factors. We recently introduced our next generation Series 6 module technology, which is expected to enable the production of modules with a larger form factor along with better product attributes and a lower manufacturing cost structure. Accordingly, the larger form factor of our Series 6 modules is expected to reduce the number of electrical connections and hardware required for system installation. The resulting labor and material savings are expected to represent a significant improvement compared to current technologies and a substantial reduction in total installed system costs resulting in improved project returns as BoS costs represent a significant portion of the costs associated with the construction of a typical utility-scale system.
Energy performance. In terms of energy yield, in many climates our CdTesolar modules provide a significantcertain energy production advantage over most conventionaladvantages relative to competing crystalline silicon solar modules (including BSF and PERC technologies) of equivalent efficiency rating. For example, our CdTe solar modules provide a superior temperature coefficient, which results in stronger system performance in typical high insolation climates as the majority of a system’s generation, on average, occurs when module temperatures are well above 25°C (standard test conditions). In addition, our CdTe modules provide a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to laboratory standards. Our CdTe solar modules also provide a better shading response than conventional crystalline silicon solar modules, which may lose up to three times as much power as CdTe solar modules when shading occurs.modules. As a result, of these and other factors, our PV solar power systems typicallymodules can produce more annual energy in real world fieldoperating conditions than competing systemsconventional crystalline silicon modules with the same nameplate capacity. For more information about these advantages, see Item 1. “Business – Business Strategy.” Additionally, we warrant that our solar modules will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by a degradation factor between 0.3% and 0.5%, depending on the module series, every year thereafter throughout the limited power output warranty period of up to 30 years.
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 alongthrough our module technology and cost reduction roadmaps, continuing to make technological advances at the system level, using innovative installation techniques and know-how, and leveraging volume procurement around standardized hardware platforms.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 a discussiondiscussions of other risks that may affect our financial condition and results of operations.us.
Our long-term strategic plansbusiness is evolving worldwide and is shaped by the varying ways in which our offerings can be compelling and economically viable solutions to energy needs in various markets. In addressing electricity demands, we are focused on 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 modulesmodule offerings in key geographic markets that we believe have a compellingsignificant need for mass-scale PV solar electricity, including markets throughout the Americas,United States, India, and Europe. We closely evaluate and monitor the Asia-Pacific region,appropriate level of resources required to support such markets and certain other strategic markets. Additionally,
we are focusing on opportunitiestheir associated sales opportunities. When deployed in whichutility-scale applications, our PV solarmodules provide energy solutions can compete directly withat a lower LCOE compared to traditional forms of energy generation, onmaking them an LCOEattractive alternative to or similar basis, or complement suchreplacement for aging fossil fuel-based generation offerings. Suchresources. Accordingly, future retirements of aging energy generation resources represent a significant increase in the potential market for solar energy.
This focus on our coreutility-scale 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 in the next several years, wesolar. We believe that utility-scale solar will continue to be a compelling solar offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. Additionally,However, our abilitymodule offerings in certain markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions. For example, we continue to provide utility-scaleevaluate opportunities to develop and leverage other solar cell technologies in multi-junction applications that utilize our thin film PV technology. We believe such applications have the potential to enable our module conversion efficiency to reach 28% by 2030.
Demand for our PV solar module offerings on economically attractive terms depends, in part, on certain market factors outside our control. For example, many governments have proposed or enacted policies or support programs intended to encourage renewable energy investments to achieve decarbonization objectives and/or establish greater energy independence. While we compete in 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 our control, such as interest rate fluctuations, domestic or international trade policies,government subsidies and government support programs.economic incentives. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for such systemsour solar modules. Recent developments to government support programs include the following:
•United States. In August 2022, the U.S. President signed the IRA into law, which is intended to accelerate the country’s ongoing transition to clean energy. The provisions of the IRA are generally effective for tax years beginning after 2022. Among other things, the financial incentives provided by the IRA are expected to significantly increase demand for modules manufactured in the United States. Accordingly, the demand for these solar modules is expected to increase domestic manufacturing in the near term, which may result in localized supply chain constraints and limit the numberperiods of potential buyers.
We are closely evaluating and managing the appropriate levelinflationary pricing for certain of resources required as we pursue the most advantageous and cost effective projects and partnerships in our key markets. We have dedicated,raw materials, including substrate glass and intendcover glass. The financial incentives provided by the IRA are also expected to significantly increase demand for solar modules in general due to the incremental tax credit available for the qualified production of clean hydrogen that is powered by renewable resources. Given the complexities of the IRA, which is pending technical guidance and regulations from the IRS and U.S. Treasury Department, we continue to dedicate, significant capitalevaluate the extent of benefits available to us, which we expect will favorably impact our results of operations in future periods. For example, we currently expect to qualify for the advanced manufacturing production credit under Section 45X of the IRC, which provides certain specified
benefits for solar modules and human resourcessolar module components manufactured in the United States and sold to third parties. Such credit, which may be refundable to us or transferable to a third party, is available through 2032, subject to phase down beginning in 2030. For more information about certain risks associated with the benefits available to us under the IRA, see Item 1A. “Risk Factors – We expect certain financial benefits as a result of tax incentives provided by the Inflation Reduction Act of 2022. If these expected financial benefits vary significantly from our assumptions, our business, financial condition, and results of operations could be adversely affected.”
•India. In September 2022, the government of India approved an expansion to its PLI scheme to INR 195 billion ($2.5 billion), which is intended to promote the manufacturing of high efficiency solar modules in India and to reduce India’s dependency on foreign imports of solar modules. Under the total installed costPLI scheme, manufacturers are selected through a competitive bid process and receive certain cash incentives over a five-year period following the commissioning of PV solar energy,their manufacturing facilities. Among other things, such incentives are based on the efficiency and temperature coefficient of the modules produced, the proportion of raw materials sourced from the domestic market, the extent to optimizewhich the designmanufacturer’s operations are fully integrated within India, and logistics aroundthe quantity of modules sold from such manufacturing operations. At this time, it is uncertain whether and to what extent we may qualify for such incentives.
Demand for our PV solar energy solutions also depends on domestic or international trade policies and government regulations, which may be proposed, revised, and/or enacted across short- and long-term time horizons with varying degrees of impact to ensureour net sales, profit, and manufacturing operations. Changes in these policies and regulations could adversely impact the competitive landscape of solar markets, which could reduce demand for our solar modules. Recent revisions or proposed changes to trade policy and government regulations include the following:
•United States. In June 2022, the U.S. President authorized the U.S. Secretary of Commerce to provide a 24-month antidumping and countervailing duty tariff exemption for imported solar panels from certain Southeast Asian countries. For more information about this development, see Item 1A. “Risk Factors – 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 the impact of 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 limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results.” Separately, the U.S. President also authorized the use of the Defense Production Act to expand domestic production of clean energy technologies. At this time, it is uncertain what impact, if any, these developments will have on future investments in solar module manufacturing in the United States.
•United States. In June 2022, the U.S. Supreme Court issued a ruling in West Virginia, et al. v. Environmental Protection Agency, et al., which limited the Environmental Protection Agency’s (“EPA”) ability to regulate greenhouse gas (“GHG”) emissions under the Clean Air Act using a “generation shifting” approach from coal-fired power plants to renewable energy sources over time. At this time, it is unclear what effect this ruling will have on future EPA regulation of GHG emissions, the U.S. President’s climate change initiatives, internationally agreed-upon climate goals, the extent and timing of future coal plant retirements in the United States, and/or future investments in renewable energy.
•India. The ALMM was introduced in 2021 as a non-tariff barrier to incentivize domestic manufacturing of PV modules by approving the list of models and manufacturers who can participate in certain solar development projects. The ALMM is approved by the MNRE, and any modifications to the ALMM and its application may affect future investments in solar module manufacturing in India. For more information about the ALMM, see Item 1A. “Risk Factors – 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 the impact of 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 limit our growth or lead to a reduction in our net sales or increase our costs, thereby adversely impacting our operating results.”
Our ability to provide solar modules on economically attractive terms is also affected by the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules. For example, although the cost of ocean freight throughout many parts of the world has recently decreased, such costs remain at elevated levels relative to pre-COVID-19 pandemic rates. Such factors may disrupt our supply chain and adversely impact our manufacturing operations as several of our key raw materials and components are either single-sourced or sourced from a limited number of international suppliers. We may also incur additional logistics costs, such as demurrage and detention, to the extent we are unable to retrieve or return our shipping containers in a timely manner. To mitigate such costs and better meet our customer commitments, we may adjust our shipping plans to include additional lead times for module deliveries and/or utilize our network of U.S. distribution centers. We are also employing module contract structures that provide additional consideration to us if the cost of logistics services, excluding demurrage and detention, exceeds a defined threshold. Additionally, our solutions integrate wellmanufacturing capacity expansions in the U.S. and India are expected to bring manufacturing activities closer to customer demand, further mitigating our exposure to the cost of ocean freight. While it is currently unclear how long these issues will persist, they may be further exacerbated by the disruption of major shipping routes or other economic disruptions.
We generally price and sell our solar modules on a per watt basis. As of December 31, 2022, we had entered into contracts with customers for the overall electricity ecosystemfuture sale of each specific market. We61.4 GWDC of solar modules for an aggregate transaction price of $17.7 billion, which we expect to recognize as revenue through 2029 as we transfer control of the modules to the customers. Such volume includes contracts for the sale of 31.5 GWDC of solar modules that over time,include transaction price adjustments associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Based on these potential technology improvements, the contracted module volumes as of December 31, 2022, the expected timing such technology improvements are incorporated into our manufacturing process, and the expected timing of module deliveries, such adjustments, if realized, could result in additional revenue of up to $0.5 billion, the majority of which would be recognized in 2025, 2026, and 2027. In addition to these price adjustments, certain of our consolidated netcontracts with customers may include favorable price adjustments associated with the extension of the ITC and/or sales operating income,freight in excess of a defined threshold. Certain of our contracts with customers may also include favorable or unfavorable price adjustments associated with changes to certain commodity prices and/or the module wattage committed for delivery. As a result, the revenue recognized from such contracts may increase or decrease in future periods relative to the original transaction price.
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 cash flows will come from solar offeringsreducing manufacturing yield losses. Additionally, we are in the key geographic markets described above. The timing, execution, and financial impactsprocess of expanding our manufacturing capacity by approximately 11 GWDC, including the construction 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 focusing our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with significant current or projected electricity demand, relatively high existing electricity prices, strong demand for renewable energy generation, and high solar resources.
Creating or maintaining a market position in certain strategically targeted markets and energy applications also requires us to adapt to new and changing market conditions. For example, our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins, which may adversely affect our results of operations. We expect the profitability associated with our various sales offerings to vary from one another over time, and possibly vary from our internal long-range profitability expectations and targets, depending on the market opportunity and the relative competitiveness of our offerings compared with other energy solutions, traditional or otherwise, that are available to potential customers. In addition, as we execute on our long-term strategic plans, we will continue to monitor and adapt to any changing dynamics in emerging technologies, such as commercially viable energy storage solutions, which are expected to further enable PV solar power systems to compete with traditional forms of energy generation by shifting the delivery of energy generated by such systems to periods of greater demand. Such storage solutions continue to evolve in terms of technology and cost, and global deployments of storage capacity are expected to exceed 100 GW by 2030, representing a significant increasethird manufacturing facility in the potential market for renewable energy. We will also continue to monitor and adapt to any changing dynamics in the market set of potential buyers of solar projects. Market environments with few potential project buyers and a higher cost of capital would generally exert downward pressure on the potential revenue from the solar projects we are developing, whereas, conversely, market environments with many potential project buyers and a lower cost of capital would likely have a favorable impact on the potential revenue from such solar projects.
On occasion, we may temporarily own and operate certain systems with the intention to sell them at a later date. We may also elect to construct and temporarily retain ownership interests in partially contracted or uncontracted systems forUnited States, which there is a partial or no PPA with an off-taker, such as a utility, but rather an intent to sell a portion of or all the electricity produced by the system on an open contract basis until the system is sold. Expected revenue from projects without a PPA for the full offtake of the system is subject to greater variability and uncertainty based on market factors and is typically lower than projects with a fully contracted PPA. Additionally, our joint ventures and other business arrangements with strategic partners have and may in the future result in us temporarily retaining a noncontrolling ownership interest in the underlying systems projects we develop, supply modules to, or construct, potentially for a period of up to several years. In each of the above mentioned examples, we may retain such ownership interests in a consolidated or unconsolidated separate entity.
We continually evaluate forecasted global demand, competition, and our addressable market, and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. In July 2017, we announced our plans to utilize our idled Vietnamese manufacturing plant forcommenced commercial production of modules in early 2023; our next generation Series 6 module technology. This decision is expected to provide us with several operational benefits, including (i) the ability to add additional Series 6 production lines without ramping down current Series 4 production, (ii) flexibilityfirst manufacturing facility in production capacity during our Series 6 transition period, and (iii) installing Series 6 production lines in a facility that is substantially identical to our Malaysian manufacturing plant where such lines are currently being installed,India, which is expected to acceleratecommence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in late 2024; and facilitate a cost-effective installation. Our Vietnamese plant, including the recently announced expansion of a second Series 6 production lineour manufacturing footprint at the facility,our existing facilities in Ohio. This additional capacity, and any other potential investments to add to or otherwise modify our existing manufacturing capacity in response to market demand and competition, may require significant internal and possibly external sources of liquiditycapital, 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, such aseffectively manage our transition to Series 6 module manufacturing,cost per watt, and, when necessary, continue to build new manufacturing plants over time in response to suchmarket demand, and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties”uncertainties” and “If“If any future production lines are not built in line with our committed schedules, it may impair anyadversely 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.”
8point3 Energy Partners LP
In June 2015, the 8point Energy Partners LP or “the Partnership” completed its IPO. As part of the offering, we contributed interests in various projects to a subsidiary of the Partnership in exchange for an ownership interest in the entity. Since the formation of the Partnership, the Sponsors have, from time to time, sold interests in solar projects to the Partnership, which owns and operates a portfolio of solar energy generation projects.
In February 2018, we entered into an agreement with CD Clean Energy and Infrastructure V JV, LLC, an equity fund managed by Capital Dynamics and certain other co-investors and certain other parties, pursuant to which such parties agreed to acquire our interests in the Partnership and its subsidiaries. In connection with the Transaction, we entered into an agreement with Capital Dynamics and certain other parties, whereby we and SunPower have agreed, among other things, to vote to approve the Merger Agreement at any meeting of shareholders of the Partnership for such purpose, as shareholders of the Partnership and holders of equity units in OpCo.
For additional information on the Partnership, see Item 1A. “Risk Factors – We may be unable to complete the sale of our interests in 8point3 Energy Partners LP on the terms and in the timeframe anticipated, or at all, and if we are unable to complete such sale, we may continue to hold the interests and may not be able to achieve the full strategic and financial benefits expected to result from the formation of the Partnership, or the sale could result in shareholder litigation” and Note 12. “Investments in Unconsolidated Affiliates and Joint Ventures – 8point3 Energy Partners LP” to our consolidated financial statements included in this Annual Report on Form 10-K.
Systems Project Pipeline
The following tables summarize, as of February 22, 2018, our approximately 2.2 GW advanced-stage project pipeline. The actual volume of modules installed in our projects will be greater than the project size in MWAC as module volumes required for a project are based upon MWDC, which will be greater than the MWAC size pursuant to a DC-AC ratio typically ranging from 1.2 to 1.3. Such ratio varies across different projects due to various system design factors. Projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized. Projects, or portions of projects, may also be removed from the tables below in the event an EPC-contracted or partner-developed project does not obtain permitting or financing, a project is not able to be sold due to the changing economics of the project or other factors, or we decide to temporarily own and operate, or retain interests in, such projects based on strategic opportunities or market factors.
54
Projects under Sales Agreements
(Includes uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements, including partner developed projects that we will be or are constructing.)
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| | | | | | | | | | | |
Project/Location | | Project Size in MWAC | | PPA Contracted Partner | | EPC Contract/Partner Developed Project | | Expected Year Revenue Recognition Will Be Completed | | % of Revenue Recognized as of December 31, 2017 |
California Flats, California | | 280 |
| | PG&E / Apple (1) | | Capital Dynamics | | 2018 | | 69% |
Florida (multiple locations) | | 206 |
| | (2) | | Tampa Electric Company | | 2018/2019 | | —% |
India (multiple locations) | | 155 |
| | (3) | | (5) | | 2018 | | —% |
Cuyama, California | | 40 |
| | PG&E | | D.E. Shaw Renewable Investments | | 2018 | | 98% |
Japan (multiple locations) | | 15 |
| | (4) | | (6) | | 2018 | | —% |
Total | | 696 |
| | | | | | | | |
Projects with Executed PPA Not under Sales Agreements
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| | | | | | | | | | | |
Project/Location | | Project Size in MWAC | | PPA Contracted Partner | | Fully Permitted | | Expected or Actual Substantial Completion Year | | % Complete as of December 31, 2017 |
Twiggs County Solar, Georgia | | 200 |
| | Georgia Power Company | | No | | 2019/2020 | | 5% |
Rosamond, California | | 150 |
| | SCE | | Yes | | 2018 | | 15% |
Sun Streams, Arizona | | 150 |
| | SCE | | Yes | | 2019 | | 10% |
Southwestern U.S. | | 150 |
| | (6) | | Yes | | 2020/2021 | | 4% |
Luz del Norte, Chile | | 141 |
| | (7) | | Yes | | 2016 | | 100% |
American Kings Solar, California | | 123 |
| | SCE | | No | | 2020 | | 16% |
Willow Springs, California | | 100 |
| | SCE | | Yes | | 2018 | | 21% |
Sunshine Valley, Nevada | | 100 |
| | SCE | | Yes | | 2019 | | 3% |
Sun Streams 3, Arizona | | 65 |
| | APS | | Yes | | 2020 | | —% |
Beryl, Australia | | 61 |
| | (6) | | Yes | | 2019 | | 2% |
Ishikawa, Japan | | 59 |
| | Hokuriku Electric Power Company | | Yes | | 2018 | | 62% |
Japan (multiple locations) | | 84 |
| | (8) | | No | | 2020 | | 18% |
Manildra, Australia | | 49 |
| | EnergyAustralia | | Yes | | 2018 | | 29% |
Little Bear, California | | 40 |
| | Marin Clean Energy (9) | | No | | 2020 | | 5% |
Miyagi, Japan | | 40 |
| | Tohoku Electric Power Company | | No | | 2020 | | 12% |
India (multiple locations) | | 40 |
| | (10) | | Yes | | 2017 | | 100% |
Total | | 1,552 |
| | | | | | | | |
——————————
| |
(1) | PG&E – 150 MWAC and Apple Energy, LLC – 130 MWAC
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| |
(2) | Utility-owned generation |
| |
(3) | Southern Power Distribution Company of Telangana State Ltd – 75 MWAC and Andhra Pradesh Southern Power Distribution Company Ltd – 80 MWAC
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| |
(4) | Hokuriku Electric Power Company, Tokyo Electric Power Company, and Tohoku Electric Power Company |
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(5) | Vector Green Energy Private Limited and India Infrastructure Fund II |
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(6) | Contracted but not specified |
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(7) | PPAs executed for approximately 70 MWAC; remaining electricity to be sold on an open contract basis
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(8) | Hokuriku Electric Power Company and Tokyo Electric Power Company |
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(9) | Expandable to 160 MWAC, subject to satisfaction of certain PPA contract conditions
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(10) | Gulbarga Electricity Supply Co. – 20 MWAC and Chamundeshwari Electricity Supply Co. – 20 MWAC
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Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | 97.3 | % | | 75.0 | % | | 74.9 | % |
Gross profit | | 2.7 | % | | 25.0 | % | | 25.1 | % |
Selling, general and administrative | | 6.3 | % | | 5.8 | % | | 8.2 | % |
Research and development | | 4.3 | % | | 3.4 | % | | 3.5 | % |
Production start-up | | 2.8 | % | | 0.7 | % | | 1.5 | % |
Litigation loss | | — | % | | — | % | | 0.2 | % |
Gain on sales of businesses, net | | 9.7 | % | | 5.0 | % | | — | % |
Operating (loss) income | | (1.0) | % | | 20.1 | % | | 11.7 | % |
Foreign currency loss, net | | (0.6) | % | | (0.3) | % | | (0.2) | % |
Interest income | | 1.3 | % | | 0.2 | % | | 0.6 | % |
Interest expense, net | | (0.5) | % | | (0.4) | % | | (0.9) | % |
Other income (expense), net | | 1.2 | % | | — | % | | (0.4) | % |
Income tax (expense) benefit | | (2.0) | % | | (3.5) | % | | 4.0 | % |
Net (loss) income | | (1.7) | % | | 16.0 | % | | 14.7 | % |
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| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | 81.3 | % | | 78.0 | % | | 72.5 | % |
Gross profit | | 18.7 | % | | 22.0 | % | | 27.5 | % |
Selling, general and administrative | | 6.9 | % | | 9.0 | % | | 6.2 | % |
Research and development | | 3.0 | % | | 4.3 | % | | 3.2 | % |
Production start-up | | 1.4 | % | | — | % | | 0.4 | % |
Restructuring and asset impairments | | 1.3 | % | | 25.6 | % | | — | % |
Goodwill impairment | | — | % | | 2.6 | % | | — | % |
Operating income (loss) | | 6.0 | % | | (19.6 | )% | | 17.8 | % |
Foreign currency loss, net | | (0.3 | )% | | (0.5 | )% | | (0.2 | )% |
Interest income | | 1.2 | % | | 0.9 | % | | 0.5 | % |
Interest expense, net | | (0.9 | )% | | (0.7 | )% | | (0.2 | )% |
Other income (expense), net | | 0.8 | % | | 1.4 | % | | (0.1 | )% |
Income tax expense | | (12.6 | )% | | (0.8 | )% | | (0.8 | )% |
Equity in earnings of unconsolidated affiliates, net of tax | | 0.1 | % | | 5.0 | % | | (2.6 | )% |
Net (loss) income | | (5.6 | )% | | (14.3 | )% | | 14.4 | % |
Segment Overview
We operate
Our primary segment is our modules business, in two segments. Our modules segmentwhich involves the design, manufacture, and sale of CdTe solar modules, to third parties,which convert sunlight into electricity. Third-party customers of our modules segment include developers and ouroperators of systems, segment includesutilities, independent power producers, commercial and industrial companies, and other system owners. Our residual business operations include certain project development activities, O&M services, the development, construction, operation, maintenance, and saleresults of operations from PV solar power systems including any modules installedwe owned and operated in such systemscertain international regions, and any revenue from energy generated by such systems. See Note 22.“Segment and Geographical Information” to our consolidated financial statements included in this Annual Report on Form 10-K for more information on our operating segments. See also Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for a description of the system projects in our advanced-stage project pipeline.
Beginning with the three months ended December 31, 2017, we changed the composition of our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. As a result of this change, our modules segment, which was historically referred to as our components segment, includes module sales to third parties and excludes any module sales to our systems segment. Previously, we included an allocation of net sales value for all solar modules manufactured by our modules segment and installed in projects sold or built by our systems segment in the net sales of our modules segment. Our systems segment now includes all net sales from the sale of solar power systems and related products and services, including any modules installed in such systems and any revenue from energy generated by such systems. All prior year balances were revised to conform to the current year presentation.third-party customers.
Net sales
Modules Business
We generally price and sell our solar modules on a per watt of nameplate power.basis. During 2017, Zorlu Enerji2022, Intersect Power, Lightsource BP, and RCR O’Donnell Griffin Pty, LtdNextEra Energy each accounted for more than 10% of our modules business net sales, and the majority of our solar modules were sold to integratorsdevelopers and operators of systems in the United States, India, and Turkey.States. Substantially all of our modules business net sales during 20172022 were denominated in U.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of such productsthe 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 included in this Annual Report on Form 10-K.
Systems Business
Throughstatements. Net sales from our fully integrated systemsresidual business we provide complete turn-key PV solar power systems, or solar solutions, that draw upon our capabilities, which include (i) project development, (ii) EPC services, and (iii) O&M services. Additionally within our systems segment, we may temporarily own and operate certainoperations primarily consists of our systems for a period of time based on strategic opportunities or market factors. We typically recognize revenue recognized for sales of solar powerdevelopment projects or completed systems, using cost based input methods, which resultincluding any modules installed in such systems and any revenue being recognized as work is performed based on the relationship between actual costs incurred comparedfrom energy generated by such systems. In certain prior periods, our residual business operations also included O&M services we provided to the total estimated costs for a given contract. We may also recognize revenue for the salethird parties.
During 2017, the majority of our systems business net sales were in North America, and the principal customer of our systems business was Capital Dynamics, which accounted for more than 10% of our systems business net sales.
The following table shows net sales by reportable segment for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Modules | | $ | 2,428,278 | | | $ | 2,331,380 | | | $ | 1,736,060 | | | $ | 96,898 | | | 4 | % | | $ | 595,320 | | | 34 | % |
Other | | 191,041 | | | 591,997 | | | 975,272 | | | (400,956) | | | (68) | % | | (383,275) | | | (39) | % |
Net sales | | $ | 2,619,319 | | | $ | 2,923,377 | | | $ | 2,711,332 | | | $ | (304,058) | | | (10) | % | | $ | 212,045 | | | 8 | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Modules | | $ | 806,398 |
| | $ | 675,452 |
| | $ | 227,461 |
| | $ | 130,946 |
| | 19 | % | | $ | 447,991 |
| | 197 | % |
Systems | | 2,134,926 |
| | 2,229,111 |
| | 3,885,189 |
| | (94,185 | ) | | (4 | )% | | (1,656,078 | ) | | (43 | )% |
Net sales | | $ | 2,941,324 |
| | $ | 2,904,563 |
| | $ | 4,112,650 |
| | $ | 36,761 |
| | 1 | % | | $ | (1,208,087 | ) | | (29 | )% |
Net sales from our modules segment increased by $130.9$96.9 million in 20172022 primarily due to a 68%20% increase in the volume of watts sold, partially offset by a 29%13% decrease in the average selling price per watt. Net sales from our systems segmentresidual business operations decreased by $94.2$401.0 million in 20172022 primarily as a resultdue to sales of certain projects in the United States and Japan in the prior period and the settlement of an outstanding indemnification arrangement associated with the sale of one of our projects. Under the terms of the completionindemnification arrangement, we received $65.1 million for our portion of substantially all construction activities on a number of projectsthe settlement payment, which we recorded as revenue in 2016, including the Desert Stateline, Astoria, Taylor, East Pecos, Silver State South, Butler, and McCoy projects,prior period. These decreases in net sales from our residual business operations were partially offset by the sale of the Moapa, California Flats, Switch Station, and Cuyama projects in 2017.
Net sales from our modules segment increased by $448.0 million in 2016 primarily due to a 211% increaseLuz del Norte PV solar power plant in the volumecurrent period. See Note 12. “Commitments and Contingencies” to our consolidated financial statements for discussion of watts sold, partially offset by a 5% decrease in the average selling price per watt. Net sales from our systems segment decreased by $1.7 billion in 2016 primarily from the sale of majority interests in the Desert Stateline, North Star, and Lost Hills projects in 2015, the completion of substantially all construction activities on the Imperial Solar Energy Center West and Decatur projects in 2015, the completion of substantially all construction activities on the Silver State South and McCoy projects in the first half of 2016, and lower module plus sales transactions. This decrease in revenue was partially offset by higher revenue from the commencement of construction on the Taylor and Butler projects in late 2015, the commencement of construction on the East Pecos project in early 2016, and completion of substantially all construction activities on the Astoria project.indemnification arrangements.
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, and edge seal materials.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, environmental health and safety, quality and production control, and information technology, and procurement costs.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 Cost of sales for our systemsresidual business operations primarily consists of project-related costs, includesuch as development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPCengineering, procurement, and construction (“EPC”) costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering, costs, and construction labor costs)labor), and site specific costs.
The following table shows cost of sales by reportable segment for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Modules | | $ | 2,312,881 | | | $ | 1,858,454 | | | $ | 1,306,929 | | | $ | 454,427 | | | 24 | % | | $ | 551,525 | | | 42 | % |
Other | | 236,580 | | | 334,969 | | | 723,730 | | | (98,389) | | | (29) | % | | (388,761) | | | (54) | % |
Cost of sales | | $ | 2,549,461 | | | $ | 2,193,423 | | | $ | 2,030,659 | | | $ | 356,038 | | | 16 | % | | $ | 162,764 | | | 8 | % |
% of net sales | | 97.3 | % | | 75.0 | % | | 74.9 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Modules | | $ | 694,060 |
| | $ | 564,942 |
| | $ | 175,530 |
| | $ | 129,118 |
| | 23 | % | | $ | 389,412 |
| | 222 | % |
Systems | | 1,698,317 |
| | 1,701,203 |
| | 2,804,358 |
| | (2,886 | ) | | — | % | | (1,103,155 | ) | | (39 | )% |
Cost of sales | | $ | 2,392,377 |
| | $ | 2,266,145 |
| | $ | 2,979,888 |
| | $ | 126,232 |
| | 6 | % | | $ | (713,743 | ) | | (24 | )% |
% of net sales | | 81.3 | % | | 78.0 | % | | 72.5 | % | | |
| | | | | | |
Cost of salesincreased $126.2$356.0 million, or 6%16%, and increased 3.322.3 percentage points as a percent of net sales when comparing 20172022 with 2016.2021. The increase in cost of sales was driven by a $129.1$454.4 million increase in our modules segment cost of sales primarily due to as a result of the following:
•higher costs of $366.2$350.9 million from an increase in the increased volume of modules sold directlysold;
•higher sales freight, demurrage, and detention charges of $167.2 million; and
•a reduction to third parties,our product warranty liability of $33.1 million in 2021 due to reductions to our projected module return rates; partially offset by
•continued module cost reductions, in the cost per watt of our solar modules, which decreased cost of sales by $182.4$60.9 million;
•manufacturing charges of $15.7 million a reduction in our product warranty liabilitythe prior period associated with the COVID-19 pandemic;
•an increase to lower estimated module replacement costs, a reduction in our module collection and recycling liability of $13.5$10.8 million fromin 2021 due to lower estimated by-product credits for certain semiconductor materials recovered during the recycling process and updates to severalcertain valuation assumptions, including assumptions;
•a decreasereduction to our product warranty liability of $10.2 million in certain inflation rates, and lower inventory write-downs of $9.2 million.
Cost of sales decreased $713.7 million, or 24%, and increased 5.5 percentage points as a percentage of net sales when comparing 2016 with 2015. The decrease in cost of sales was primarily the result of a $1.1 billion decrease in our systems segment cost of sales primarily2022 due to the volumereductions to our projected module return rates; and
•a reduction to our module collection and recycling liability of projects under construction$7.5 million in 2022 due to lower estimated capital and the timing of when all revenue recognition criteria were met. This net decrease was partially offset by a $389.4 millionchemical costs resulting from improvements to our module recycling technology.
Such increase in our modules segment cost of sales was partially offset by a $98.4 million decrease in our residual business operations cost of sales primarily due to higher coststhe sales of $510.8 million associated withcertain projects in the increased volume of modules sold directly to third parties, a reductionUnited States and Japan in our module collection and recycling liability of $69.6 million in 2015 resulting from certain recycling technology advancements, which significantly increased the throughput of modules able to be recycled at a point in time, along with other material and labor cost reductions, and higher inventory write-downs of $22.3 million primarily related to our remaining crystalline silicon module inventories,prior period, partially offset by continued cost reductionsthe impairment loss in the cost per wattcurrent period for our Luz del Norte PV solar power plant. See Note 7. “Consolidated Balance Sheet Details” to our consolidated financial statements for discussion of the impairment of our solar modules, which decreased our cost of sales by $217.3 million.Luz del Norte project.
Gross profit
Gross profit may be affected by numerous factors, including the selling prices of our modules and systems,the selling prices of projects and services included in our residual business operations, 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 business and systems businesses.residual business operations.
The following table shows gross profit for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Gross profit | | $ | 69,858 | | | $ | 729,954 | | | $ | 680,673 | | | $ | (660,096) | | | (90) | % | | $ | 49,281 | | | 7 | % |
% of net sales | | 2.7 | % | | 25.0 | % | | 25.1 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Gross profit | | $ | 548,947 |
| | $ | 638,418 |
| | $ | 1,132,762 |
| | $ | (89,471 | ) | | (14 | )% | | $ | (494,344 | ) | | (44 | )% |
% of net sales | | 18.7 | % | | 22.0 | % | | 27.5 | % | | | | | | |
| | |
|
Gross profit decreased 3.322.3 percentage points to 18.7% during 20172.7% in 2022 from 22.0% during 201625.0% in 2021 primarily due to a mix of lower gross profit projects sold and under construction during the period and reductionsdecrease in the average selling price per watt of our modules, the volume of higher gross profit projects sold directlyduring the prior period, an increase in sales freight, demurrage, and detention charges, the impairment loss in the current period for our Luz del Norte PV solar power plant described above, and the prior period indemnification matter descried above. These decreases to third parties,gross profit were partially offset by the reductions in our product warranty liability and our module collection and recycling liability as described above.
Gross profit decreased 5.5 percentage points to 22.0% during 2016 from 27.5% during 2015 primarily as a resulthigher volume of a mix of lower gross profit projectsmodules sold and under construction, the reduction in ourcontinued module collection and recycling liability in 2015 as described above, and higher inventory write-downs, partially offset by continued cost reductions in the cost per watt of our solar modules.reductions.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expenses, and other business development and selling expenses.
The following table shows selling, general and administrative expense for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Selling, general and administrative | | $ | 164,724 | | | $ | 170,320 | | | $ | 222,918 | | | $ | (5,596) | | | (3) | % | | $ | (52,598) | | | (24) | % |
% of net sales | | 6.3 | % | | 5.8 | % | | 8.2 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Selling, general and administrative | | $ | 202,699 |
| | $ | 261,994 |
| | $ | 255,192 |
| | $ | (59,295 | ) | | (23 | )% | | $ | 6,802 |
| | 3 | % |
% of net sales | | 6.9 | % | | 9.0 | % | | 6.2 | % | | |
| | |
| | | | |
Selling, general and administrative expense in 20172022 decreased compared to 20162021 primarily due to higher charges for impairments of certain project assets in 2016, lowerthe prior period, a decrease in employee compensation expense due to various restructuring activities, lower professional fees, lower infrastructure related expenses,primarily driven by reductions in headcount from the sales of our North American O&M operations and lowerU.S. project development business development expenses. Selling, general and administrative expense in 2016 increased compared to 2015 primarily from higher development costs for early-stage projects and impairments of certain project assets, partially offset by lower employee compensation expense due to various restructuring activities,the prior period, and lower professional fees, associated with the formationpartially offset by an increase in employee compensation expense driven by higher share-based compensation and IPO of the Partnership.employee bonus 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 process and product R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules and systems.modules.
The following table shows research and development expense for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Research and development | | $ | 112,804 | | | $ | 99,115 | | | $ | 93,738 | | | $ | 13,689 | | | 14 | % | | $ | 5,377 | | | 6 | % |
% of net sales | | 4.3 | % | | 3.4 | % | | 3.5 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Research and development | | $ | 88,573 |
| | $ | 124,762 |
| | $ | 130,593 |
| | $ | (36,189 | ) | | (29 | )% | | $ | (5,831 | ) | | (4 | )% |
% of net sales | | 3.0 | % | | 4.3 | % | | 3.2 | % | | |
| | |
| | | | |
Research and development expense in 2017 decreased2022 increased compared to 20162021 primarily due to lower costs for third-party contracted services, reduced material and module testing costs, the termination of certain R&D programs for legacy module technologies, and lowerhigher employee compensation expense resulting from reductions to our R&Dan increase in headcount, as part of various restructuring activities. During 2017, the average conversion efficiency of our CdTe solar modules produced was 16.9% compared to 16.4% in 2016. Research and developmentlower share-based compensation expense in 2016 decreased compared to 2015 primarily due to reductionsthe prior period driven by the forfeiture of unvested shares by our former Chief Technology Officer, who retired in our R&D headcountMarch 2021, increased freight costs, and employee compensation expense resulting from various restructuring activities. During 2016, the average conversion efficiency of our CdTe solar modules was 16.4% compared to 15.6% in 2015.increased material and module testing costs.
Production start-up
Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it has beenis qualified for fullcommercial production, including the cost of raw materials for solar modules run through the production line during the qualification phase, employee compensation for individuals supporting production start-up activities, and applicable facility related costs. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in productionProduction start-up expense as well asalso includes costs related to the selection of a new site related legal and regulatoryimplementation costs and costs to maintain our plant replication programfor manufacturing process improvements 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, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Production start-up | | $ | 73,077 | | | $ | 21,052 | | | $ | 40,528 | | | $ | 52,025 | | | 247 | % | | $ | (19,476) | | | (48) | % |
% of net sales | | 2.8 | % | | 0.7 | % | | 1.5 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Production start-up | | $ | 42,643 |
| | $ | 1,021 |
| | $ | 16,818 |
| | $ | 41,622 |
| | 4,077 | % | | $ | (15,797 | ) | | (94 | )% |
% of net sales | | 1.4 | % | | — | % | | 0.4 | % | | |
| | |
| | | | |
During 2017 and 2016,2022, we primarily incurred production start-up expense primarily for our third manufacturing facility in the U.S. and for certain manufacturing upgrades at our Malaysian facilities. During 2021, we incurred production start-up expense primarily for the transition to Series 6 module manufacturing at our facilitiessecond facility in Perrysburg, OhioKulim, Malaysia, which commenced commercial production in early 2021, and Kulim, Malaysia. Production start-up expense for 2015 was primarily driven bycertain manufacturing upgrades at our previous crystalline silicon module manufacturing operations, which we ended in 2016 as further described in Note 4. “Restructuring and Asset Impairments” to our consolidated financial statements included in this Annual Report on Form 10-K.Malaysian facilities.
Restructuring and asset impairments
Restructuring and asset impairmentsconsists of expenses incurred related to material restructuring initiatives and includes any associated asset impairments, costs for employee termination benefits, costs for contract terminations and penalties, and other restructuring related costs. Such restructuring initiatives are intended to align the organization with then current business conditions and to reduce costs.
Gain on sales of businesses, net
The following table shows restructuring and asset impairmentsgain on sales of businesses, net for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | Years Ended | | Change | | | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 | (Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Restructuring and asset impairments | | $ | 37,181 |
| | $ | 743,862 |
| | $ | — |
| | $ | (706,681 | ) | | (95 | )% | | $ | 743,862 |
| | 100 | % | |
Gain on sales of businesses, net | | Gain on sales of businesses, net | | $ | 253,511 | | | $ | 147,284 | | | $ | — | | | $ | 106,227 | | | 72 | % | | $ | 147,284 | | | 100 | % |
% of net sales | | 1.3 | % | | 25.6 | % | | — | % | | |
| | |
| | | | | % of net sales | | 9.7 | % | | 5.0 | % | | — | % | | | | | |
In November 2016, our board of directors approved a set of initiatives to accelerate our transition to Series 6 module manufacturing and restructure our operations. In June 2016,2022, we ended productioncompleted the sales of our crystalline silicon modulesJapan project development business and our Japan O&M operations to focus onPAG and the sales of certain other international O&M operations to a subsidiary of Clairvest Group, Inc. (“Clairvest”). During 2021, we completed the sales of our core CdTe moduleNorth American O&M operations to a subsidiary of Clairvest and utility-scale systems. As a result of these decisions, we recorded restructuring and asset impairment charges of $41.8 million and $743.9 million during 2017 and 2016, respectively. 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.U.S. project development business to Leeward Renewable Energy Development, LLC (“Leeward”). See Note 4. “Restructuring and Asset Impairments”3. “Sales of Businesses” to our consolidated financial statements included in this Annual Report on Form 10-K for additionalfurther information onrelated to these matters.transactions.
Goodwill impairment
The following table shows goodwill impairments for the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Goodwill impairment | | $ | — |
| | $ | 74,930 |
| | $ | — |
| | $ | (74,930 | ) | | (100 | )% | | $ | 74,930 |
| | 100 | % |
% of net sales | | — | % | | 2.6 | % | | — | % | | |
| | |
| | | | |
As a result of our annual impairment analysis in the fourth quarter of 2016, we impaired the remaining $68.8 million of goodwill of our systems reporting unit primarily due to a strategic shift in the mix of our module and system net sales, which was approved by our board of directors in November 2016 as part of the restructuring activities described above. This shift involved an expected reduction in the annual megawatts sold through systems business projects. Other factors that contributed to the impairment included our reduced market capitalization and the challenging conditions within the solar industry as of the date of our testing. In June 2016, we also impaired the remaining $6.1 million of goodwill associated with our crystalline silicon modules reporting unit due to the decision to end the related manufacturing operations as described above. See Note 6. “Goodwill and Intangible Assets” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Foreign currency loss, net
Foreign currency loss, net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries’ functional currencies.
The following table shows foreign currency loss, net for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Foreign currency loss, net | | $ | (16,414) | | | $ | (7,975) | | | $ | (4,890) | | | $ | (8,439) | | | 106 | % | | $ | (3,085) | | | 63 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Foreign currency loss, net | | $ | (9,640 | ) | | $ | (14,007 | ) | | $ | (6,868 | ) | | $ | 4,367 |
| | (31 | )% | | $ | (7,139 | ) | | 104 | % |
Foreign currency loss net decreasedincreased in 20172022 compared to 2016 primarily as a result of lower costs associated with hedging activities related to our subsidiaries in India, the weakening of the U.S. dollar relative to certain foreign currencies, and differences between our economic hedge positions and the underlying exposures. Foreign currency loss, net increased in 2016 compared to 20152021 primarily due to higher costs for hedging activities related to our subsidiaries in India,the differences between our economic hedge positions and the underlying exposures and changeshigher costs associated with hedging activities related to our subsidiaries in certain foreign currency rates.India.
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, 2017, 2016,2022, 2021, and 2015:2020:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Interest income | | $ | 33,284 | | | $ | 6,179 | | | $ | 16,559 | | | $ | 27,105 | | | 439 | % | | $ | (10,380) | | | (63) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Interest income | | $ | 35,704 |
| | $ | 25,193 |
| | $ | 22,516 |
| | $ | 10,511 |
| | 42 | % | | $ | 2,677 |
| | 12 | % |
Interest income during 20172022 increased compared to 2016 primarily due to higher cash balances during the period, higher interest rates associated with such cash balances, and a promissory note with an affiliate issued in late 2016. Interest income during 2016 increased compared to 20152021 primarily due to higher interest rates on ourcash, marketable securities, and restricted 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 ASCAccounting Standards Codification (“ASC”) 815. We may capitalize interest expense intoto 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, 2017, 2016,2022, 2021, and 2015:2020:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Interest expense, net | | $ | (12,225) | | | $ | (13,107) | | | $ | (24,036) | | | $ | 882 | | | (7) | % | | $ | 10,929 | | | (45) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Interest expense, net | | $ | (25,765 | ) | | $ | (20,538 | ) | | $ | (6,975 | ) | | $ | (5,227 | ) | | 25 | % | | $ | (13,563 | ) | | 194 | % |
Interest expense, net increased in 2017 compared to 2016 primarily due to changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting and higher levels of project specific debt financings, partially offset by lower interest expense associated2022 was consistent with certain Malaysian credit facilities that were fully repaid in 2016. Interest expense, net increased in 2016 compared to 2015 primarily as a result of lower interest costs capitalized to certain projects that were substantially completed in 2016 and higher levels of project specific debt financings outstanding during the period.2021.
Other income (expense), net
Other income (expense), net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and cost method investments.restricted marketable securities.
The following table shows other income (expense), net for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Other income (expense), net | | $ | 31,189 | | | $ | 314 | | | $ | (11,932) | | | $ | 30,875 | | | >100% | | $ | 12,246 | | | 103 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Other income (expense), net | | $ | 23,965 |
| | $ | 40,252 |
| | $ | (5,502 | ) | | $ | (16,287 | ) | | (40 | )% | | $ | 45,754 |
| | 832 | % |
Other income, (expense), net decreasedincreased in 20172022 compared to 20162021 primarily due to realized gainsthe partial loan forgiveness of $41.3 millionthe Luz del Norte Credit Facilities in 2016 fromconnection with the sale of certain restricted investments driven by an effortour Luz del Norte PV solar power plant. See Note 11. “Debt” to align the currencies of the investments with those of the corresponding collection and recycling liabilities and a $7.4 million reversal of the outstanding contingent consideration associated with our TetraSun acquisition as the result of our crystalline silicon module manufacturing restructuring in 2016, partially offset by an incremental settlement in 2017consolidated financial statements for the resolution of an outstanding matter with a former customer. The increase in other income (expense), net in 2016 comparedfurther information related to 2015 was primarily attributable to the transactions described above, partially offset by the impairment of a cost method investment in 2016.this transaction.
Income tax expense(expense) benefit
In December 2017, the U.S. President signed into law the Tax Act, which significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing a mandatory one-time transition tax on certain accumulated earnings and profits of foreign corporate subsidiaries (the “transition tax”) that may electively be paid over eight years, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Tax Act also includes many new provisions, such as changes to bonus depreciation, changes to deductions for executive compensation, net operating loss deduction limitations, a tax on global intangible low-taxed income (“GILTI”) earned by foreign corporate subsidiaries, a base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). Many of these provisions, including the tax on GILTI, the BEAT, and the deduction for FDII, are not applicable to us until 2018, and we continue to evaluate the impact of such provisions of the Tax Act.
During the year ended December 31, 2017, we recognized an aggregate provisional tax expense of $408.1 million, which included an amount for the transition tax of $401.5 million and a net deferred tax expense of $6.6 million for the remeasurement of deferred tax assets and liabilities taking into account the lower U.S. corporate income tax rate of 21%. The final effects of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to estimates utilized to calculate provisional amounts, or actions we may take as a result of the Tax Act. The associated accounting for the Tax Act is expected to be completed when our 2017 U.S. corporate income tax return is filed in 2018.
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 U.S.United States and numerous foreign jurisdictions in which we operate, principally Australia, India,Singapore, Malaysia, and Malaysia.Vietnam. Significant judgments and estimates are required in determiningto determine our consolidated income tax expense. The statutory federal corporate income tax rate in the U.S. will decrease from 35% toUnited States is 21% beginning in January 2018, while, and the tax rates in Australia, India,Singapore, Malaysia, and MalaysiaVietnam are 30%17%, 34.6%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.tax, conditional upon our continued compliance with certain employment and investment thresholds. In Vietnam, we have been granted a long-term tax incentive, scheduled to expire at the end of 2036, pursuant to which income earned in Vietnam is subject to reduced annual tax rates, conditional upon our continued compliance with certain revenue and R&D spending thresholds.
The following table shows income tax expense(expense) benefit for the years ended December 31, 2017, 2016,2022, 2021, and 2015:2020:
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| | Years Ended | | Change |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2022 over 2021 | | 2021 over 2020 |
Income tax (expense) benefit | | $ | (52,764) | | | $ | (103,469) | | | $ | 107,294 | | | $ | 50,705 | | | 49 | % | | $ | (210,763) | | | (196) | % |
Effective tax rate | | 613.7 | % | | 18.1 | % | | (36.6) | % | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Income tax expense | | $ | (371,996 | ) | | $ | (23,167 | ) | | $ | (32,329 | ) | | $ | (348,829 | ) | | 1,506 | % | | $ | 9,162 |
| | (28 | )% |
Effective tax rate | | 184.1 | % | | (4.3 | )% | | 4.4 | % | | |
| | |
| | | | |
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 increaseddecreased by $348.8$50.7 million during 20172022 compared to 20162021 primarily due to provisionallower pretax income in the current year, partially offset by higher tax expense of $408.1$37.3 million related to the Tax Act as described above, higher pretax income, a $35.4 million reversal of an uncertain tax position in 2016 related to the income of a foreign subsidiary, and lower excess tax benefits associated with share-based compensation, partially offset by certain U.S. taxes in 2016 on a cash distribution received from a foreign subsidiary and a $42.1 million discrete tax benefit associated with the acceptance of our election to classify certain of our German subsidiaries as disregarded entities of First Solar, Inc.
Income tax expense decreased by $9.2 million during 2016 compared to 2015 primarily as a result of lower pretax income and the $35.4 million reversal of an uncertain tax position as described above, partially offset by certain U.S. taxes on a cash distribution received from a foreign subsidiary and a $41.7 million discrete tax benefit associated with the receipt of a private letter ruling during 2015. See Note 19. “Income Taxes” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Equity in earnings of unconsolidated affiliates, net of tax
Equity in earnings of unconsolidated affiliates, net of taxrepresents our proportionate share of the earnings or losses of unconsolidated affiliates with whom we have made 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 of unconsolidated affiliates, net of tax for the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
Equity in earnings of unconsolidated affiliates, net of tax | | $ | 4,266 |
| | $ | 144,306 |
| | $ | (107,595 | ) | | $ | (140,040 | ) | | (97 | )% | | $ | 251,901 |
| | 234 | % |
Equity in earnings of unconsolidated affiliates, net of tax decreased in 2017 compared to 2016 primarily due to the recognition of a gain of $125.1 million, net of tax, in December 2016 from the sale of our residual interest in the Desert Stateline project to 8point3 Operating Company, LLC (“OpCo”), a subsidiaryLuz del Norte PV solar power plant during 2022.
Liquidity and Capital Resources
As of December 31, 2017,2022, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, advanced-stage project pipeline, availability under our senior secured revolving credit facility considering minimum liquidity covenant requirements, and access tocontracts with customers for the capital marketsfuture sale of solar modules will be sufficient to meet our working capital systems project investment, and capital expenditure needs for at least the next 12 months. As necessary, we also believe we will have adequate access to the capital markets. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally.
We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, capital expenditures,including near-term construction activities and strategic discretionary spending. Inpurchases of manufacturing equipment for our newest manufacturing and R&D facilities in India and the future, we may also engage in additional debt or equity financings, including project specific debt financings. We believe that when necessary, we will have adequate access to the capital markets, althoughUnited States. 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-specificbroader market concerns. SuchAny incremental debt financings could result in increased debt service expenses dilution to our existing stockholders, and/or restrictive covenants, which require uscould limit our ability to maintain certain financial conditions.pursue our strategic plans.
As of December 31, 2017,2022, we had $3.0$2.6 billion in cash, cash equivalents, and marketable securities compared to $2.0$1.8 billion as of December 31, 2016. Cash,2021. The increase in cash, cash equivalents, and marketable securities as of December 31, 2017 increasedwas primarily driven by cash receipts from module sales, including advance payments for future sales, proceeds from the salesales of the Moapa, California Flats, Switch Station,our Japan project development business and Cuyama projectscertain international O&M operations, and proceeds from borrowings, under project specific debt financings, partially offset by purchases of property, plant and equipment.equipment, expenditures for the construction of certain projects in Japan, and other operating expenditures. As of December 31, 2017, $1.62022 and 2021, $1.2 billion and $0.8 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, and Japanese yen, denominated holdings. As of December 31, 2016, $1.2 billion of our cash, cash equivalents,Indian rupee, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Euro and Malaysian ringgit 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 U.S.,United States, we may be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. Although weWe maintain the intent and ability to permanently reinvest our accumulated earnings outside of the U.S.,United States, with the exception of our subsidiaries in Canada and Germany, we continue to evaluate how the Tax Act may affect our plans to repatriate additional amounts
to fund our domestic operations or otherwise deploy our worldwide cash.Germany. In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources.
Our systems business requires significantAlthough we compete in markets that do not require solar-specific government subsidies or support programs, such incentives continue to influence the demand for PV solar energy around the world. For example, the financial incentives provided by the IRA are expected to increase both the demand for and the domestic manufacturing of solar modules in the United States. We continue to evaluate the extent of benefits available to us by the IRA, which are expected to favorably impact our liquidity and capital resources in future periods. For example, we currently expect to qualify for the advanced manufacturing production credit under Section 45X of the IRC, which provides certain specified benefits for solar modules and solar module components manufactured in the United States and sold to third parties. Such credit may be refundable or transferable to a third party and is available from 2023 to 2032, subject to phase down beginning in 2030. Based on the current form factor of our modules, we expect to qualify for a credit of approximately 17 cents per watt for each module produced in the United States and sold to a third party. Accordingly, we expect the advanced manufacturing production credit will provide us with a significant source of funding throughout its 10-year period. For more information about certain risks associated with the benefits available to us under the IRA, see Item 1A. “Risk Factors – “We expect certain financial benefits as a result of tax incentives provided by the Inflation Reduction Act of 2022. If these expected financial benefits vary significantly from our assumptions, our business, financial condition, and results of operations could be adversely affected.”
As a result of such market opportunities and increased demand for our products, we are in the process of expanding our capacity by approximately 11 GWDC, including the construction of our third manufacturing facility in the United States, which commenced commercial production of modules in early 2023; our first manufacturing facility in India, which is expected to commence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in late 2024; and the expansion of our manufacturing footprint at our existing facilities in Ohio. Our newest factory in the United States began producing and our newest factory in India is expected to produce our next generation Series 7 modules, which combine our thin film CdTe technology with a larger form factor and an innovative steel back rail mounting structure that reduces module installation time. In aggregate, we currently expect to invest approximately $2.7 billion for these facilities and upgrades. As we expand our manufacturing capacity, we expect to continue to receive advance payments from customers for the future sale of modules. Such advance payments are reflected as deferred revenue in our consolidated balance sheets. As of December 31, 2022, our deferred revenue was approximately $1.2 billion. Accordingly, the capital expenditures necessary to expand our capacity in the near term are expected to be financed, in part, by advance payments for module sales in future periods and by the advanced manufacturing production credit described above.
In addition to the expansion plans described above, 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 reducing manufacturing yield losses. We have a demonstrated history of innovation, continuous improvement, and manufacturing success driven by our significant liquidityinvestments in various R&D initiatives. We continue to invest significant financial resources in such initiatives, including approximately $0.3 billion for a dedicated R&D facility in the United States to support the implementation of our technology roadmap. We expect such R&D facility to feature a high-tech pilot manufacturing line, allowing for the production of full-sized prototypes of thin film and tandem PV modules. Such R&D facility is expected to be completed in 2024. During 2023, we expect to spend $1.9 billion to $2.1 billion for capital expenditures, including the new facilities mentioned above and upgrades to machinery and equipment that we believe will further increase our module wattage and expand capacity and throughput at our manufacturing facilities.
We have also committed and expect to continue committing 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 future. The net amountprocurement 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 project assetsPV solar modules. Our remaining purchases under these supply agreements are expected to be approximately $3.7 billion of substrate glass and related portionapproximately $301 million of deferred revenue, which approximates our net capital investmentcover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which, in the development and construction of systems projects, was $0.5 billionaggregate, are up to $251 million as of December 31, 2017. Solar power project development2022 and construction cycles, which spandecline over 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 andremaining supply periods). Additionally, for certain strategic decisions to finance the construction of certain projects using our working capital,suppliers, 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 progress or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. We have historically financed these up-front systems project investments primarily using working capital. In certain circumstances, we may need to finance construction costs exclusively using working capital, if project financing becomes unavailable due to market-wide, regional, or other concerns.
From time to time, we develop projects in certain markets around the world where we may hold all or a significant portion of the equity in a project for several years. Given the duration of these investments and the currency risk relative to the U.S. dollar in some of these markets, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted.
Additionally, we may elect to retain an ownership interest in certain systems projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a systems project at economics that are attractive to us or potential customers are unwilling to assume the risks and rewards typical of PV solar power system ownership, we may instead elect to temporarily own and operate such systems until we can sell the systems on economically attractive terms. The decision to retain ownership of a system impacts liquidity depending upon the size and cost of the project. As of December 31, 2017, we had $0.4 billion of net PV solar power systems that had been placed in service, primarily in international markets. We have elected,made, and may in the future elect,be required to enter into temporary or long-term project financingmake, certain advance payments to reducesecure the impact onraw materials necessary for our liquidity and working capital with regards to such projects and systems. We may also consider entering into tax equity or other arrangements with respect to ownership interests in certain of our projects, which could cause a portion of the economics of such projects to be realized over time.module manufacturing.
The following additional considerations have impacted or may impact our liquidity in 2018 and beyond:
We expecthave also committed certain financial resources to make significant capital investments over the next several years as we transitionfulfill our production to Series 6solar module technologycollection and purchase the related manufacturing equipmentrecycling obligations and infrastructure. Such investments also include the commencementhave established a trust under which these funds are put into custodial accounts with an established and expansion of operations at our previously announced manufacturing plant in Vietnam. We expect the aggregate capital investment for currently planned Series 6 related programs to be approximately $1.4 billion, including $0.5 billion of capital expenditures already made asreputable bank. As of December 31, 2017. Such programs are expected to provide an annual Series 6 manufacturing capacity2022, such funds were comprised of approximately 5 GW once completed. During 2018, we expect to spend $650restricted marketable securities of $182.1 million to $750 million for capital expenditures, the majorityand restricted cash and cash equivalents balances of which is associated with the Series 6 transition. We believe these capital expenditures will increase our aggregate manufacturing capacity, increase our solar module conversion efficiencies, reduce our manufacturing costs, and reduce the overall cost of systems using our modules.
The balance of our solar module inventories and BoS parts was $151.4 million as$6.7 million. As of December 31, 2017. As we continue2022, our module collection and recycling liability was $128.1 million. Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to developcustomers for assuming collection and construct our advanced-stage project pipeline, we must produce solar modulesrecycling obligations, and procure BoS partsreimbursements of any overfunded amounts. Investments in the required volumestrust must meet certain investment quality criteria comparable to supporthighly rated government or agency bonds. As necessary, we adjust the funded amounts for our planned construction schedules. As part ofestimated collection and recycling obligations based on the construction cycle, we typically produce or procure such 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
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.
project, they
As of December 31, 2022, we had no off-balance sheet debt or similar obligations, other than financial assurance related instruments, which are not 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.debt. 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 utility-scale projects, which may also temporarily reduce our liquidity.
We may commit working capital during 2018 and beyond to acquire solar power projects in various stages of development, including advanced-stage projects with PPAs, and to continue developing those projects as necessary. Depending upon the size and stage of development, costs to acquire such solar power projects could be significant. When evaluating project acquisition opportunities, we consider both the strategic and financial benefits of any such acquisitions.
We have initiatives in several markets to expedite our penetration of those markets and establish relationships with potential customers. Some of these arrangements may involve significant investments or other allocations of capital that could reduce our liquidity or require us to pursue additional sources of financing, assuming such sources are available to us.Additionally, we have elected and may in the future elect or be required to temporarily retain a noncontrolling ownership interest in certain underlying systems projects we develop, supply modules to, or construct. Any such retained ownership interest is expected to impact our liquidity to the extent we do not obtain new sources of capitalguarantee any third-party debt. See Note 12. “Commitments and Contingencies” to fund such investments.
our consolidated financial statements for further information about our financial assurance related instruments.
Cash Flows
The following table summarizes key cash flow activity for the years ended December 31, 2017, 2016,2022, 2021, and 20152020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Net cash provided by operating activities | | $ | 873,369 | | | $ | 237,559 | | | $ | 37,120 | |
Net cash used in investing activities | | (1,192,574) | | | (99,040) | | | (131,227) | |
Net cash provided by (used in) financing activities | | 309,392 | | | 40,550 | | | (82,587) | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | | 47,438 | | | 3,174 | | | 3,778 | |
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 37,625 | | | $ | 182,243 | | | $ | (172,916) | |
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Net cash provided by (used in) operating activities | | $ | 1,340,677 |
| | $ | 206,753 |
| | $ | (325,209 | ) |
Net cash (used in) provided by investing activities | | (626,802 | ) | | 144,520 |
| | (156,177 | ) |
Net cash provided by (used in) financing activities | | 192,045 |
| | (136,393 | ) | | 101,207 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 8,866 |
| | (6,306 | ) | | (19,272 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 914,786 |
| | $ | 208,574 |
| | $ | (399,451 | ) |
Operating Activities
The increase in net cash provided by operating activities during 20172022 was primarily driven by the sale of the Moapa, California Flats, Switch Station, and Cuyama projects,higher cash receipts from module sales, including advance payments for future sales, partially offset by higher expenditures for the construction of certain projects. The increaseprojects in net cash provided by operating activities during 2016 was primarily due toJapan and certain advance payments for raw materials in the lower volume of solar power projects under development and construction, which generally require significant liquidity when such projects are financed using working capital. The increase in net cash provided by operating activities during 2016 was also driven by the sale of certain other solar power projects at or near substantial completion.current year.
Investing Activities
The increase in net cash used in investing activities during 20172022 was primarily due to (i) proceeds from saleshigher net purchases of equity and cost method investments of $291.5 million in 2016, including the sale of our remaining interest in the Desert Stateline project, (ii) an increase inmarketable securities, higher purchases of property, plant and equipment, driven by our transition to Series 6 module manufacturing, and (iii) net purchases of marketable securities and restricted investments of $114.7 million in 2017 compared to net proceeds from sales and maturities of marketable securities and restricted investments of $102.9 million in 2016. The increase in net cash provided by investing activities during 2016 was primarily due to (i) proceeds fromthe sales of equityour North American O&M operations and cost method investments described above and (ii) higher net proceeds from sales and maturities of marketable securities and restricted investments also described above compared to net purchases of marketable
securities and restricted investments of $203.1 millionU.S. project development business in 2015,the prior year, partially offset by the receipt of $239.0 millionproceeds from the IPOsales of our Japan project development business and certain international O&M operations in the Partnership in 2015.current year.
Financing Activities
The increase in net cash provided by financing activities during 20172022 was primarily the result ofdue to higher net proceeds from borrowings under long-termproject specific debt arrangements associated with the construction of certain projects in Japan, India, and Australia of $191.3 million in 2017 compared to net repayments on such debt arrangements of $110.6 million in 2016 and proceeds from commercial letters of creditfinancings for the construction of certain projects in IndiaJapan. Such project specific debt financings were assumed by PAG when we completed the sale of $43.0 million. Cash usedour Japan project development business in financing activities during 2016 was primarily driven by the net repayments of long-term debt arrangements described above comparedJune 2022. The increase is also due to net proceeds from borrowings under such debt arrangements of $98.9 millionthe India Credit Facility in 2015.
Contractual Obligations
The following table presents the payments due by fiscalcurrent year for the development and construction of our outstanding contractual obligations as of December 31, 2017 (in thousands):first manufacturing facility in India.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Year |
| | Total | | Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years |
Long-term debt obligations | | $ | 406,388 |
| | $ | 13,062 |
| | $ | 30,776 |
| | $ | 69,077 |
| | $ | 293,473 |
|
Interest payments (1) | | 211,420 |
| | 19,104 |
| | 37,301 |
| | 33,571 |
| | 121,444 |
|
Capital lease obligations | | 162 |
| | 97 |
| | 65 |
| | — |
| | — |
|
Operating lease obligations | | 262,450 |
| | 13,487 |
| | 22,261 |
| | 20,154 |
| | 206,548 |
|
Sale-leaseback payments (2) | | 9,115 |
| | 5,161 |
| | 3,954 |
| | — |
| | — |
|
Purchase obligations (3) | | 708,148 |
| | 635,553 |
| | 46,447 |
| | 10,246 |
| | 15,902 |
|
Recycling obligations | | 166,609 |
| | — |
| | — |
| | — |
| | 166,609 |
|
Contingent consideration (4) | | 9,315 |
| | 6,162 |
| | 3,153 |
| | — |
| | — |
|
Transition tax obligations (5) | | 101,340 |
| | 8,107 |
| | 16,214 |
| | 16,214 |
| | 60,805 |
|
Other obligations (6) | | 22,330 |
| | 4,752 |
| | 9,138 |
| | 8,440 |
| | — |
|
Total | | $ | 1,897,277 |
| | $ | 705,485 |
| | $ | 169,309 |
| | $ | 157,702 |
| | $ | 864,781 |
|
——————————
| |
(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, 2017. |
| |
(2) | Sale-leaseback payments represent the fixed rent payments associated with our leaseback of the Maryland Solar project from a subsidiary of the Partnership. See Note 12. “Investments in Unconsolidated Affiliates and Joint Ventures” to our consolidated financial statements included in this Annual Report on Form 10-K for further information. |
| |
(3) | 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. |
| |
(4) | 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 15. “Commitments and Contingencies” to our consolidated financial statements included in this Annual Report on Form 10-K for further information. |
| |
(5) | Transition tax obligations represent estimated payments for U.S. federal taxes associated with accumulated earnings and profits of our foreign corporate subsidiaries. See Note 19. “Income Taxes” to our consolidated financial statements included in this Annual Report on Form 10-K for further information. |
| |
(6) | Includes expected letter of credit fees and unused revolver fees. |
We have excluded $84.2 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, 2017, 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 15. “Commitments and Contingencies” to our consolidated financial statements included in this Annual Report on Form 10-K for further information about our financial assurance related instruments.
Recent Accounting Pronouncements
See Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K for a summaryNone.
Critical Accounting Estimates
In preparing our consolidated financial statements in conformity with generally accepted accounting principles generally accepted 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 included in this Annual Report on Form 10-K.statements. The accounting policies that require the most significant judgment and estimates include the following:
Revenue Recognition – Solar Power System Sales and/or Engineering, Procurement, and Construction Services. We generally recognize revenue for sales of solar power systems and/or EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system when combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such sales arrangements, we recognize revenue 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. For sales of solar power systems in which we obtain an interest in the project sold to the customer, we recognize all of the revenue for the consideration received, including the fair value of the noncontrolling interest we obtained. We may also recognize revenue for the sale of a solar power system after it has been completed due to the timing of when we enter into the associated sales contract with the customer.
Estimating the fair value of the 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 offtake 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.
In applying cost based input methods of revenue recognition, we use the actual costs incurred relative to the total estimated costs (including solar module costs) to determine our progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. 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 towards 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 year 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 of 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.We recognizepreviously 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 recognized 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; the 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)and certain assumptions regarding the estimated useful lives of modules covered by the program and the number of modules expected timing of when our solar modules willto be returned for recycling, and (iii) the expected
economic conditions at the time the solar modules will be collected and recycled. In the periods between the time of sale and the related settlement of the collection and recycling obligation, we accrete the carrying amount of the associated liability by 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.
Such adjustments are presented within “Cost of Sales” on our consolidated statements of operations. During the year ended December 31, 2022, we completed our annual cost study of obligations under our module collection and recycling program and reduced the associated liability by $7.5 million primarily due to lower estimated capital and chemical costs resulting from improvements to our module recycling technology. As of December 31, 2017, our estimated liability for collecting and recycling solar modules covered by our collection and recycling program was $166.6 million. A 1%2022, a 10% increase in the annualized inflation rate used in our estimatedexpected future collection and recycling cost per modulecosts would increase ourthe liability by $33.5 million, and a 1% decrease in that rate would decrease our liability by $28.1$13.7 million.
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 12.5 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 performancelimited 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
When we recognize revenue for modulesales of modules or system sales,projects, 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, our monitoring of field installation sites, our internal testing of and the expected future performance of our solar modules and BoS parts, and our estimated per-module replacement costs. As a result of such factors,We also monitor our expected future module performance through certain quality and reliability testing and actual performance in certain field installation sites. During the year ended December 31, 2022, we revised this estimate our limited product warranties based on updated information regarding our warranty return rates of approximately 1% to 3%claims, which reduced our product warranty liability by $10.2 million. This updated information reflected lower-than-expected warranty claims for modules covered under warranty, depending on theour older series of module technology.
technology as well as the evolving claims profile of our newest series of module technology, resulting in reductions to our projected module return rates. In general, we expect the return rates for our Series 6 modules to be lower than our older series, and we estimate that the return rate for such newer series of module technology will be less than 1%. As of December 31, 2017,2022, a 1% increase in the return rate across all series of module technology would increase our accrued liabilities for product warranties were $224.3 million. A 1% change in estimated warranty return rates would change our module warranty liability by $71.0 million, and a 1% change in the estimated warranty return rate for BoS parts would not have a material impact on the associated warranty liability.$147.0 million.
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 governmental 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.
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.
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, evaluate our ability and intent to permanently reinvest our accumulated earnings in jurisdictions outside the United States, 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 non-U.S.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. It is possible that the completion of one or more of these initiatives may occur within the next 12 months.
Asset Impairments. We assess long-lived assets classified as “held and used,” including our property, plant and equipment; operating lease assets; intangible assets; project assets; and PV solar power systems; and intangible assets,systems, 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.
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 scheduled annual tests in the fourth quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value.
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 CdTe module manufacturing (or “modules”) business and our fully integrated systems business. 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.
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 Accounting Standards Codification (“ASC”)ASC 815Derivatives and Hedging, 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 income (loss)”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 10.8. “Derivative Financial Instruments” to our consolidated financial statements included in this Annual Report on Form 10-K.statements.
Certain of our international operations, such as our manufacturing facilityfacilities 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 and raw materials 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, 2017, our international customers accounted for 23% of our net sales, and2022, 5% of our net sales during the period were denominated in foreign currencies, including EurosJapanese yen and Indian rupees.Euro. As a result, we may, from time to time, have exposure to foreign currency exchange riskcurrencies 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 EuroJapanese yen and U.S. dollar to Indian rupeeEuro exchange rates would have had an aggregate impact on our net sales of $10.1$9.1 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, long-term debt, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between
the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported 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 10.8. “Derivative Financial Instruments” to our consolidated financial statements included in this Annual Report on Form 10-K.statements.
For the year endedAs of December 31, 2017,2022, a 10% change in the U.S. dollar relative to Japanese yen and U.S. dollarour primary foreign currency exposures would not have had a significant impact to Vietnamese dong exchange rates would have impacted our net foreign currency income or loss, by $2.6 million, including the effect of our hedging activities. Other than such exposures, we did not have material transaction exposure to other foreign currencies as of December 31, 2017.
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 14. “Debt” to our consolidated financial statements included in this Annual Report on Form 10-K 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, 2017 would have changed by $0.7 million.
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.modules. 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 lowerreduce 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 that promise higher 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, 2017,2022, our marketable securities earned a return of 1%2%, including the impact of fluctuations in the price of the underlying securities, and had a weighted-average maturity of 126 months as of the end
of the period. Based on our investment positions as of December 31, 2017,2022, a hypothetical 100 basis point change in interest rates would have resulted in a $4.6$0.5 million change in the market value of our marketable securities investment portfolio. For the year ended December 31, 2017,2022, our restricted investmentsmarketable securities incurred a loss of 3%22%, including the impact of fluctuations in the price of the underlying securities, and had a weighted-average maturity of approximately 1712 years as of the end of the period. Based on our restricted investmentmarketable securities positions as of December 31, 2017,2022, a hypothetical 100 basis point change in interest rates would have resulted in a $62.8$17.6 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, someSome of our raw materials and components are sourced from a limited number of suppliers or a single supplier. We endeavor to qualify multiple suppliers using a robust qualification process. In some cases,Although we alsomay enter into long-term supply contracts for certain raw materials and components. As a result,components, we remainmay be exposed to price changes in thefor certain raw materials and components used into manufacture our solar modules and systems.for which we are unable to secure long-term supply contracts or if our demand exceeds our committed supply. 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 andprocess. As a result, we may be in default of our delivery obligations if we experience a manufacturing disruption. In addition to price changes in the raw materials and components used in our manufacturing process, we are also exposed to price changes associated with the shipping, handling, storage, and distribution of our modules. To mitigate such price changes, we have used and expect to continue using module contract structures that provide additional consideration to us if the cost of certain raw materials or construction disruption.logistics services
exceeds a defined threshold. However, we may be unable to pass along the full amount of cost increases we experience for such raw materials, components, and logistics services to our customers.
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, marketable securities, trade accounts receivable, restricted cash, and investments, notes receivable, andrestricted cash equivalents, restricted marketable securities, foreign exchange forward contracts, and commodity swap contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, marketable securities, restricted cash and investments, and foreign exchange forward contractsthese instruments with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluatemonitor the credit standing of our counterparty financial institutions. Our net sales are primarily concentrated among a limited number of customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. Depending upon the sales arrangement, we mayWe typically require some form of payment security from our customers, including, but not limited to, advance payments, parent guarantees, letters of credit, bank guarantees, or commercial letters of credit.surety bonds.
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 this information when read in conjunction with our consolidated financial statements. The interim periods presented below for the year ended December 31, 2016 reflect the adoption of ASU 2014-09. See Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K further information regarding these changes. 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, 2017 | | Sep 30, 2017 | | Jun 30, 2017 | | Mar 31, 2017 | | Dec 31, 2016 | | Sep 30, 2016 | | Jun 30, 2016 | | Mar 31, 2016 |
| | (In thousands, except per share amounts) |
Net sales | | $ | 339,181 |
| | $ | 1,087,026 |
| �� | $ | 623,326 |
| | $ | 891,791 |
| | $ | 330,795 |
| | $ | 681,276 |
| | $ | 1,016,424 |
| | $ | 876,068 |
|
Gross profit | | 62,070 |
| | 291,800 |
| | 110,893 |
| | 84,184 |
| | 7,848 |
| | 170,908 |
| | 182,051 |
| | 277,611 |
|
Production start-up | | 20,488 |
| | 12,624 |
| | 8,381 |
| | 1,150 |
| | 214 |
| | 752 |
| | 55 |
| | — |
|
Restructuring and asset impairments | | (1,927 | ) | | 791 |
| | 18,286 |
| | 20,031 |
| | 660,113 |
| | 4,314 |
| | 79,435 |
| | — |
|
Goodwill impairment | | — |
| | — |
| | — |
| | — |
| | 68,833 |
| | — |
| | 6,097 |
| | — |
|
Operating (loss) income | | (35,071 | ) | | 206,989 |
| | 13,928 |
| | (7,995 | ) | | (821,153 | ) | | 73,324 |
| | (243 | ) | | 179,921 |
|
Net (loss) income | | (432,454 | ) | | 205,747 |
| | 51,963 |
| | 9,129 |
| | (750,790 | ) | | 150,457 |
| | (11,415 | ) | | 195,636 |
|
Net (loss) income per share: | | | | |
| | | | | | |
| | |
| | |
| | |
|
Basic | | $ | (4.14 | ) | | $ | 1.97 |
| | $ | 0.50 |
| | $ | 0.09 |
| | $ | (7.22 | ) | | $ | 1.46 |
| | $ | (0.11 | ) | | $ | 1.92 |
|
Diluted | | $ | (4.14 | ) | | $ | 1.95 |
| | $ | 0.50 |
| | $ | 0.09 |
| | $ | (7.22 | ) | | $ | 1.45 |
| | $ | (0.11 | ) | | $ | 1.90 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial 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, 20172022 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, 20172022 based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (or “COSO”(“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 generally accepted accounting principles in the United States of America (“U.S. GAAP”).GAAP. Based on such evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2022. The
effectiveness of our internal control over financial reporting as of December 31, 20172022 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“internal control over financial reportingreporting” to determine whether any changes in our internal control over financial reporting occurred during the quarter ended December 31, 20172022 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, 2017.2022.
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 Companycompany 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.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Information concerning our board of directors and audit committee will appear in our 2018 Proxy Statement, under the sections entitled “Directors” and “Corporate Governance.” The information in such sections of the Proxy Statement is incorporated by reference into in this Annual Report on Form 10-K. For information with respect to our executive officers, see Item 1. “Business – Information about Our Executive OfficersOfficers.” Information concerning our board of directors and audit committee of our board of directors will appear in our 2023 Proxy Statement, under the Registrant.sections “Directors” and “Corporate Governance,”
Information and information concerning Section 16(a) beneficial ownership reporting compliance will appear in our 20182023 Proxy Statement under the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance.” The information in such section of the 2018 Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
We have adopted a Codecode of Business Conductbusiness conduct and Ethicsethics that applies to all directors, officers, and associates of First Solar. Information concerning this code will appear in our 20182023 Proxy Statement under the section entitled “Corporate Governance.” The information in such sectionsections 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 20182023 Proxy Statement under the section entitled “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 20182023 Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Managementand 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 20182023 Proxy Statement under the section entitled “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, 20172022 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 | | 2,302,906 |
| | $ | — |
| | 4,128,595 |
| Equity compensation plans approved by stockholders | | 1,310,887 | | | $ | — | | | 6,500,832 |
Equity compensation plans not approved by stockholders | | — |
| | — |
| | — |
| Equity compensation plans not approved by stockholders | | — | | | — | | | — | |
Total | | 2,302,906 |
| | $ | — |
| | 4,128,595 |
| Total | | 1,310,887 | | | $ | — | | | 6,500,832 |
——————————
| |
(1) | Includes 2,302,906 shares issuable upon vesting of restricted stock units (“RSUs”) granted under our 2010 and 2015 Omnibus Incentive Compensation Plans. |
| |
(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 645,774 shares of common stock reserved for future issuance under our stock purchase plan for employees. |
(1)Includes 1,310,887 shares issuable upon vesting of restricted stock units (“RSUs”) granted under our 2020 Omnibus Incentive Compensation Plan (“2020 Omnibus Plan”). These RSUs include the maximum amount of performance units available for issuance under our long-term incentive program for key executive officers and associates.
(2)The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price.
See Note 18.15. “Share-Based Compensation” to our consolidated financial statements included in this Annual Report on Form 10-K for further discussion on our equity compensation plans.
Item 13.Certain Relationships and Related Transactions, and DirectorIndependence
Information concerning certain relationships and related party transactions will appear in our 20182023 Proxy Statement under the section entitled “Certain Relationships and Related Party Transactions.Transactions,” and information concerning director independence will appear in our 2023 Proxy Statement under the section “Corporate Governance.” The information in such sectionsections of the 2018 Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
Item 14. Principal Accountant Fees and Services
Information concerning director independenceprincipal 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 20182023 Proxy Statement under the section entitled “Corporate Governance.“Principal Accountant Fees and Services.” The information in such section 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’s pre-approval policies and procedures for these items will appear in our 2018 Proxy Statement under the section entitled “Principal Accounting Fees and Services.” The information in such section of the 2018 Proxy Statement is incorporated by reference into this Annual Report on Form 10-K.
77
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) | Documents. The following documents are filed as part of this Annual Report on Form 10-K:
|
(a)Documents. The following documents are filed as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 238)
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) | Exhibits. The exhibits listed on the accompanying Index to Exhibits are filed with or incorporated by reference into this Annual Report on Form 10-K.
|
(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.
|
(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.
78
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, 20172022 and 2016,2021, 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, 2017,2022, 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, 2017,2022, 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, 20172022 and 2016,2021, and the results oftheir its operations and theirits cash flows for each of the three years in the period ended December 31, 20172022 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, 2017,2022, based on criteria established in Internal Control -– Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2017.
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 ControlsControl over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial 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 consolidatedfinancial 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 matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Product Warranty Liability
As described in Notes 2 and 12 to the consolidated financial statements, the Company provides a limited PV solar module warranty which covers defects in materials and workmanship for up to 12.5 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 up to 30 years. The Company’s product warranty liability was $33.8 million as of December 31, 2022. 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 (i) the significant judgment by management in estimating the projections of warranty claims 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.
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 related to projections of warranty claims. Evaluating whether the significant assumptions relating to the product warranty liability were 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.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 22, 201828, 2023
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.
80
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,481,269 | | | $ | 1,450,654 | |
Marketable securities | | 1,096,712 | | | 375,389 | |
Accounts receivable trade, net | | 324,337 | | | 429,436 | |
Accounts receivable unbilled, net | | 30,654 | | | 25,273 | |
Inventories | | 621,376 | | | 666,299 | |
Other current assets | | 237,073 | | | 244,192 | |
Total current assets | | 3,791,421 | | | 3,191,243 | |
Property, plant and equipment, net | | 3,536,902 | | | 2,649,587 | |
PV solar power systems, net | | 6,242 | | | 217,293 | |
Project assets | | 30,108 | | | 315,488 | |
Deferred tax assets, net | | 78,680 | | | 59,162 | |
Restricted marketable securities | | 182,070 | | | 244,726 | |
Goodwill | | 14,462 | | | 14,462 | |
Intangible assets, net | | 31,106 | | | 45,509 | |
Inventories | | 260,395 | | | 237,512 | |
Other assets | | 319,842 | | | 438,764 | |
Total assets | | $ | 8,251,228 | | | $ | 7,413,746 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 341,409 | | | $ | 193,374 | |
Income taxes payable | | 29,397 | | | 4,543 | |
Accrued expenses | | 382,782 | | | 288,450 | |
Current portion of long-term debt | | — | | | 3,896 | |
Deferred revenue | | 263,215 | | | 201,868 | |
Other current liabilities | | 21,245 | | | 34,747 | |
Total current liabilities | | 1,038,048 | | | 726,878 | |
Accrued solar module collection and recycling liability | | 128,114 | | | 139,145 | |
Long-term debt | | 184,349 | | | 236,005 | |
Deferred revenue | | 944,725 | | | 95,943 | |
Other liabilities | | 119,937 | | | 256,224 | |
Total liabilities | | 2,415,173 | | | 1,454,195 | |
Commitments and contingencies | | | | |
Stockholders’ equity: | | | | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 106,609,094 and 106,332,315 shares issued and outstanding at December 31, 2022 and 2021, respectively | | 107 | | | 106 | |
Additional paid-in capital | | 2,887,476 | | | 2,871,352 | |
Accumulated earnings | | 3,140,289 | | | 3,184,455 | |
Accumulated other comprehensive loss | | (191,817) | | | (96,362) | |
Total stockholders’ equity | | 5,836,055 | | | 5,959,551 | |
Total liabilities and stockholders’ equity | | $ | 8,251,228 | | | $ | 7,413,746 | |
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 2,268,534 |
| | $ | 1,347,155 |
|
Marketable securities | | 720,379 |
| | 607,991 |
|
Accounts receivable trade, net | | 211,797 |
| | 266,687 |
|
Accounts receivable, unbilled and retainage | | 174,608 |
| | 206,739 |
|
Inventories | | 172,370 |
| | 363,219 |
|
Balance of systems parts | | 28,840 |
| | 62,776 |
|
Project assets | | 77,931 |
| | 700,800 |
|
Notes receivable, affiliate | | 20,411 |
| | 15,000 |
|
Prepaid expenses and other current assets | | 157,902 |
| | 217,462 |
|
Total current assets | | 3,832,772 |
| | 3,787,829 |
|
Property, plant and equipment, net | | 1,154,537 |
| | 629,142 |
|
PV solar power systems, net | | 417,108 |
| | 448,601 |
|
Project assets | | 424,786 |
| | 762,148 |
|
Deferred tax assets, net | | 51,417 |
| | 255,152 |
|
Restricted cash and investments | | 424,783 |
| | 371,307 |
|
Investments in unconsolidated affiliates and joint ventures | | 219,503 |
| | 234,610 |
|
Goodwill | | 14,462 |
| | 14,462 |
|
Intangibles assets, net | | 80,227 |
| | 87,970 |
|
Inventories | | 113,277 |
| | 100,512 |
|
Notes receivable, affiliates | | 48,370 |
| | 54,737 |
|
Other assets | | 83,259 |
| | 77,898 |
|
Total assets | | $ | 6,864,501 |
| | $ | 6,824,368 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | |
| | |
|
Accounts payable | | $ | 120,220 |
| | $ | 148,730 |
|
Income taxes payable | | 19,581 |
| | 12,562 |
|
Accrued expenses | | 366,827 |
| | 262,977 |
|
Current portion of long-term debt | | 13,075 |
| | 27,966 |
|
Deferred revenue | | 81,816 |
| | 308,704 |
|
Other current liabilities | | 48,757 |
| | 146,942 |
|
Total current liabilities | | 650,276 |
| | 907,881 |
|
Accrued solar module collection and recycling liability | | 166,609 |
| | 166,277 |
|
Long-term debt | | 380,465 |
| | 160,422 |
|
Other liabilities | | 568,454 |
| | 371,439 |
|
Total liabilities | | 1,765,804 |
| | 1,606,019 |
|
Commitments and contingencies | |
|
| |
|
|
Stockholders’ equity: | | | | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 104,468,460 and 104,034,731 shares issued and outstanding at December 31, 2017 and 2016, respectively | | 104 |
| | 104 |
|
Additional paid-in capital | | 2,799,107 |
| | 2,765,310 |
|
Accumulated earnings | | 2,297,227 |
| | 2,462,842 |
|
Accumulated other comprehensive income (loss) | | 2,259 |
| | (9,907 | ) |
Total stockholders’ equity | | 5,098,697 |
| | 5,218,349 |
|
Total liabilities and stockholders’ equity | | $ | 6,864,501 |
| | $ | 6,824,368 |
|
See accompanying notes to these consolidated financial statements.
81
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net sales | | $ | 2,619,319 | | | $ | 2,923,377 | | | $ | 2,711,332 | |
Cost of sales | | 2,549,461 | | | 2,193,423 | | | 2,030,659 | |
Gross profit | | 69,858 | | | 729,954 | | | 680,673 | |
Operating expenses: | | | | | | |
Selling, general and administrative | | 164,724 | | | 170,320 | | | 222,918 | |
Research and development | | 112,804 | | | 99,115 | | | 93,738 | |
Production start-up | | 73,077 | | | 21,052 | | | 40,528 | |
Litigation loss | | — | | | — | | | 6,000 | |
Total operating expenses | | 350,605 | | | 290,487 | | | 363,184 | |
Gain on sales of businesses, net | | 253,511 | | | 147,284 | | | — | |
Operating (loss) income | | (27,236) | | | 586,751 | | | 317,489 | |
Foreign currency loss, net | | (16,414) | | | (7,975) | | | (4,890) | |
Interest income | | 33,284 | | | 6,179 | | | 16,559 | |
Interest expense, net | | (12,225) | | | (13,107) | | | (24,036) | |
Other income (expense), net | | 31,189 | | | 314 | | | (11,932) | |
Income before taxes and equity in earnings | | 8,598 | | | 572,162 | | | 293,190 | |
Income tax (expense) benefit | | (52,764) | | | (103,469) | | | 107,294 | |
Equity in earnings, net of tax | | — | | | — | | | (2,129) | |
Net (loss) income | | $ | (44,166) | | | $ | 468,693 | | | $ | 398,355 | |
| | | | | | |
Net (loss) income per share: | | | | | | |
Basic | | $ | (0.41) | | | $ | 4.41 | | | $ | 3.76 | |
Diluted | | $ | (0.41) | | | $ | 4.38 | | | $ | 3.73 | |
Weighted-average number of shares used in per share calculations: | | | | | | |
Basic | | 106,551 | | | 106,263 | | | 105,867 | |
Diluted | | 106,551 | | | 106,924 | | | 106,686 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net sales | | $ | 2,941,324 |
| | $ | 2,904,563 |
| | $ | 4,112,650 |
|
Cost of sales | | 2,392,377 |
| | 2,266,145 |
| | 2,979,888 |
|
Gross profit | | 548,947 |
| | 638,418 |
| | 1,132,762 |
|
Operating expenses: | | | | | | |
Selling, general and administrative | | 202,699 |
| | 261,994 |
| | 255,192 |
|
Research and development | | 88,573 |
| | 124,762 |
| | 130,593 |
|
Production start-up | | 42,643 |
| | 1,021 |
| | 16,818 |
|
Restructuring and asset impairments | | 37,181 |
| | 743,862 |
| | — |
|
Goodwill impairment | | — |
| | 74,930 |
| | — |
|
Total operating expenses | | 371,096 |
| | 1,206,569 |
| | 402,603 |
|
Operating income (loss) | | 177,851 |
| | (568,151 | ) | | 730,159 |
|
Foreign currency loss, net | | (9,640 | ) | | (14,007 | ) | | (6,868 | ) |
Interest income | | 35,704 |
| | 25,193 |
| | 22,516 |
|
Interest expense, net | | (25,765 | ) | | (20,538 | ) | | (6,975 | ) |
Other income (expense), net | | 23,965 |
| | 40,252 |
| | (5,502 | ) |
Income (loss) before taxes and equity in earnings of unconsolidated affiliates | | 202,115 |
| | (537,251 | ) | | 733,330 |
|
Income tax expense | | (371,996 | ) | | (23,167 | ) | | (32,329 | ) |
Equity in earnings of unconsolidated affiliates, net of tax | | 4,266 |
| | 144,306 |
| | (107,595 | ) |
Net (loss) income | | $ | (165,615 | ) | | $ | (416,112 | ) | | $ | 593,406 |
|
| | | | | | |
Net (loss) income per share: | | | | | | |
Basic | | $ | (1.59 | ) | | $ | (4.05 | ) | | $ | 5.88 |
|
Diluted | | $ | (1.59 | ) | | $ | (4.05 | ) | | $ | 5.83 |
|
Weighted-average number of shares used in per share calculations: | | | | | | |
Basic | | 104,328 |
| | 102,866 |
| | 100,886 |
|
Diluted | | 104,328 |
| | 102,866 |
| | 101,815 |
|
See accompanying notes to these consolidated financial statements.
82
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net (loss) income | | $ | (44,166) | | | $ | 468,693 | | | $ | 398,355 | |
Other comprehensive (loss) income: | | | | | | |
Foreign currency translation adjustments | | (32,021) | | | (13,213) | | | (2,810) | |
Unrealized (loss) gain on marketable securities and restricted marketable securities, net of tax of $2,639, $1,497, and $(1,231) | | (56,744) | | | (24,666) | | | 21,659 | |
Unrealized (loss) gain on derivative instruments, net of tax of $1,678, $(55), and $(31) | | (6,690) | | | 3,243 | | | (1,241) | |
Other comprehensive (loss) income | | (95,455) | | | (34,636) | | | 17,608 | |
Comprehensive (loss) income | | $ | (139,621) | | | $ | 434,057 | | | $ | 415,963 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net (loss) income | | $ | (165,615 | ) | | $ | (416,112 | ) | | $ | 593,406 |
|
Other comprehensive income (loss): | | | | | | |
Foreign currency translation adjustments | | 11,832 |
| | (7,409 | ) | | (16,432 | ) |
Unrealized gain (loss) on marketable securities and restricted investments, net of tax of $(588), $2,518, and $1,248 | | 3,217 |
| | (21,713 | ) | | (15,415 | ) |
Unrealized (loss) gain on derivative instruments, net of tax of $1,396, $(691), and $2,071 | | (2,883 | ) | | 3,735 |
| | (2,813 | ) |
Other comprehensive income (loss) | | 12,166 |
| | (25,387 | ) | | (34,660 | ) |
Comprehensive (loss) income | | $ | (153,449 | ) | | $ | (441,499 | ) | | $ | 558,746 |
|
See accompanying notes to these consolidated financial statements.
83
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 Stockholders’ Equity |
| | Shares | | Amount | | | | |
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) | | | — | | | (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 | |
Net income | | — | | | — | | | — | | | 468,693 | | | — | | | 468,693 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (34,636) | | | (34,636) | |
Common stock issued for share-based compensation | | 561 | | | — | | | — | | | — | | | — | | | — | |
Tax withholding related to vesting of restricted stock | | (209) | | | — | | | (15,989) | | | — | | | — | | | (15,989) | |
Share-based compensation expense | | — | | | — | | | 20,555 | | | — | | | — | | | 20,555 | |
Balance at December 31, 2021 | | 106,332 | | | 106 | | | 2,871,352 | | | 3,184,455 | | | (96,362) | | | 5,959,551 | |
Net loss | | — | | | — | | | — | | | (44,166) | | | — | | | (44,166) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (95,455) | | | (95,455) | |
Common stock issued for share-based compensation | | 444 | | | 1 | | | — | | | — | | | — | | | 1 | |
Tax withholding related to vesting of restricted stock | | (167) | | | — | | | (12,092) | | | — | | | — | | | (12,092) | |
Share-based compensation expense | | — | | | — | | | 28,216 | | | — | | | — | | | 28,216 | |
Balance at December 31, 2022 | | 106,609 | | | $ | 107 | | | $ | 2,887,476 | | | $ | 3,140,289 | | | $ | (191,817) | | | $ | 5,836,055 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Equity |
| | Shares | | Amount | | | | |
Balance at December 31, 2014 | | 100,288 |
| | $ | 100 |
| | $ | 2,697,558 |
| | $ | 2,243,689 |
| | $ | 50,140 |
| | $ | 4,991,487 |
|
Cumulative-effect adjustment for the adoption of ASU 2014-09 | | — |
| | — |
| | 40 |
| | 16,825 |
| | — |
| | 16,865 |
|
Net income | | — |
| | — |
| | — |
| | 593,406 |
| | — |
| | 593,406 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (34,660 | ) | | (34,660 | ) |
Common stock issued for share-based compensation | | 1,782 |
| | 2 |
| | 5,886 |
| | — |
| | — |
| | 5,888 |
|
Share-based compensation tax benefits | | — |
| | — |
| | 20,626 |
| | — |
| | — |
| | 20,626 |
|
Tax withholding related to vesting of restricted stock | | (303 | ) | | — |
| | (18,189 | ) | | — |
| | — |
| | (18,189 | ) |
Share-based compensation expense | | — |
| | — |
| | 42,973 |
| | — |
| | — |
| | 42,973 |
|
Balance at December 31, 2015 | | 101,767 |
| | 102 |
| | 2,748,894 |
| | 2,853,920 |
| | 15,480 |
| | 5,618,396 |
|
Cumulative-effect adjustment for the adoption of ASU 2016-09 | | — |
| | — |
| | 2,420 |
| | 25,034 |
| | — |
| | 27,454 |
|
Net loss | | — |
| | — |
| | — |
| | (416,112 | ) | | — |
| | (416,112 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (25,387 | ) | | (25,387 | ) |
Common stock issued for share-based compensation | | 2,574 |
| | 2 |
| | 6,318 |
| | — |
| | — |
| | 6,320 |
|
Tax withholding related to vesting of restricted stock | | (306 | ) | | — |
| | (20,407 | ) | | — |
| | — |
| | (20,407 | ) |
Share-based compensation expense | | — |
| | — |
| | 28,085 |
| | — |
| | — |
| | 28,085 |
|
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 |
|
See accompanying notes to these consolidated financial statements.
84
FIRST SOLAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (165,615 | ) | | $ | (416,112 | ) | | $ | 593,406 |
|
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: | | | | | | |
Depreciation, amortization and accretion | | 115,313 |
| | 230,940 |
| | 257,825 |
|
Impairments and net losses on disposal of long-lived assets | | 35,364 |
| | 838,467 |
| | 14,593 |
|
Share-based compensation | | 35,121 |
| | 28,712 |
| | 44,899 |
|
Equity in earnings of unconsolidated affiliates, net of tax | | (4,266 | ) | | (144,306 | ) | | 107,595 |
|
Distributions received from equity method investments | | 23,042 |
| | 18,562 |
| | — |
|
Remeasurement of monetary assets and liabilities | | (15,823 | ) | | 5,442 |
| | (4,229 | ) |
Deferred income taxes | | 173,368 |
| | 90,555 |
| | 5,882 |
|
Gains on sales of marketable securities and restricted investments | | (49 | ) | | (41,632 | ) | | — |
|
Noncash consideration from the sale of systems | | — |
| | (20,091 | ) | | (457,596 | ) |
Liabilities assumed by customers for the sale of systems | | (24,203 | ) | | — |
| | — |
|
Other, net | | 2,339 |
| | 13,863 |
| | 520 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, trade, unbilled and retainage | | 85,760 |
| | 178,894 |
| | (427,648 | ) |
Prepaid expenses and other current assets | | 26,680 |
| | 9,269 |
| | (38,823 | ) |
Inventories and balance of systems parts | | 212,758 |
| | 95,785 |
| | 113,537 |
|
Project assets and PV solar power systems | | 981,273 |
| | (571,655 | ) | | (525,551 | ) |
Other assets | | (1,269 | ) | | (19,245 | ) | | (1,163 | ) |
Income tax receivable and payable | | 169,079 |
| | (61,383 | ) | | 1,788 |
|
Accounts payable | | (47,191 | ) | | (191,642 | ) | | 143,872 |
|
Accrued expenses and other liabilities | | (258,028 | ) | | 158,693 |
| | (74,890 | ) |
Accrued solar module collection and recycling liability | | (2,976 | ) | | 3,637 |
| | (79,226 | ) |
Net cash provided by (used in) operating activities | | 1,340,677 |
| | 206,753 |
| | (325,209 | ) |
Cash flows from investing activities: | | | | | | |
Purchases of property, plant and equipment | | (514,357 | ) | | (229,452 | ) | | (166,438 | ) |
Purchases of marketable securities and restricted investments | | (580,971 | ) | | (422,609 | ) | | (556,479 | ) |
Proceeds from sales and maturities of marketable securities and restricted investments | | 466,309 |
| | 525,515 |
| | 353,359 |
|
Proceeds from sales of equity and cost method investments | | — |
| | 291,502 |
| | — |
|
Distributions received from equity method investments | | 720 |
| | 1,502 |
| | 238,980 |
|
Investments in notes receivable, affiliates | | — |
| | (4,760 | ) | | (55,163 | ) |
Payments received on notes receivable, affiliates | | 1,740 |
| | 3,053 |
| | 57,866 |
|
Other investing activities | | (243 | ) | | (20,231 | ) | | (28,302 | ) |
Net cash (used in) provided by investing activities | | (626,802 | ) | | 144,520 |
| | (156,177 | ) |
Cash flows from financing activities: | | | | | | |
Repayment of borrowings under revolving credit facility | | — |
| | (550,000 | ) | | — |
|
Proceeds from borrowings under revolving credit facility | | — |
| | 550,000 |
| | — |
|
Repayment of long-term debt | | (24,078 | ) | | (137,367 | ) | | (47,078 | ) |
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | | 215,415 |
| | 26,816 |
| | 146,027 |
|
Repayment of sale-leaseback financing | | (5,218 | ) | | (5,276 | ) | | (3,702 | ) |
Proceeds from sale-leaseback financing | | — |
| | — |
| | 44,718 |
|
Payments of tax withholdings for restricted shares | | (5,137 | ) | | (20,407 | ) | | (18,189 | ) |
Proceeds from commercial letters of credit | | 43,025 |
| | — |
| | 11,200 |
|
Contingent consideration payments and other financing activities | | (31,962 | ) | | (159 | ) | | (31,769 | ) |
Net cash provided by (used in) financing activities | | 192,045 |
| | (136,393 | ) | | 101,207 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 8,866 |
| | (6,306 | ) | | (19,272 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 914,786 |
| | 208,574 |
| | (399,451 | ) |
Cash, cash equivalents and restricted cash, beginning of the period | | 1,415,690 |
| | 1,207,116 |
| | 1,606,567 |
|
Cash, cash equivalents and restricted cash, end of the period | | $ | 2,330,476 |
| | $ | 1,415,690 |
| | $ | 1,207,116 |
|
Supplemental disclosure of noncash investing and financing activities: | | |
| | |
| | |
|
Property, plant and equipment acquisitions funded by liabilities | | $ | 164,946 |
| | $ | 28,687 |
| | $ | 17,749 |
|
Acquisitions currently or previously funded by liabilities and contingent consideration | | $ | 9,315 |
| | $ | 30,092 |
| | $ | 17,988 |
|
Sale of equity method investment funded by note receivable, affiliate | | $ | — |
| | $ | 50,000 |
| | $ | — |
|
Accrued interest capitalized to long-term debt | | $ | 18,401 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (44,166) | | | $ | 468,693 | | | $ | 398,355 | |
Adjustments to reconcile net (loss) income to cash provided by operating activities: | | | | | | |
Depreciation, amortization and accretion | | 269,724 | | | 259,900 | | | 232,925 | |
Impairments and net losses on disposal of long-lived assets | | 63,338 | | | 22,876 | | | 35,806 | |
Share-based compensation | | 28,656 | | | 20,902 | | | 29,267 | |
Deferred income taxes | | (12,799) | | | 49,847 | | | 36,013 | |
Gain on sales of businesses, net | | (253,511) | | | (147,284) | | | — | |
Gains on sales of marketable securities and restricted marketable securities | | — | | | (11,696) | | | (15,346) | |
Liabilities assumed by customers for the sale of systems | | (145,281) | | | (85,490) | | | (136,745) | |
Gain on debt forgiveness | | (30,201) | | | — | | | — | |
Other, net | | (1,029) | | | (3,484) | | | 19,297 | |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, trade and unbilled | | 118,724 | | | (96,951) | | | 345,150 | |
Inventories | | 16,693 | | | (136,365) | | | (145,396) | |
Project assets and PV solar power systems | | (14,336) | | | 23,402 | | | 106,867 | |
Other assets | | (72,602) | | | (69,942) | | | (33,065) | |
Income tax receivable and payable | | 43,592 | | | (13,062) | | | (177,431) | |
Accounts payable and accrued expenses | | 5,569 | | | 48,968 | | | (109,583) | |
Deferred revenue | | 912,946 | | | 47,062 | | | (157,284) | |
Other liabilities | | (11,948) | | | (139,817) | | | (391,710) | |
Net cash provided by operating activities | | 873,369 | | | 237,559 | | | 37,120 | |
Cash flows from investing activities: | | | | | | |
Purchases of property, plant and equipment | | (903,605) | | | (540,291) | | | (416,635) | |
Purchases of marketable securities and restricted marketable securities | | (3,375,008) | | | (2,147,136) | | | (901,924) | |
Proceeds from sales and maturities of marketable securities and restricted marketable securities | | 2,646,787 | | | 2,294,595 | | | 1,192,832 | |
Proceeds from sales of businesses, net of cash and restricted cash sold | | 442,302 | | | 300,499 | | | — | |
Other investing activities | | (3,050) | | | (6,707) | | | (5,500) | |
Net cash used in investing activities | | (1,192,574) | | | (99,040) | | | (131,227) | |
Cash flows from financing activities: | | | | | | |
Repayment of long-term debt | | (75,896) | | | (72,676) | | | (225,344) | |
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | | 397,380 | | | 129,215 | | | 156,679 | |
Payments of tax withholdings for restricted shares | | (12,092) | | | (15,989) | | | (13,118) | |
Other financing activities | | — | | | — | | | (804) | |
Net cash provided by (used in) financing activities | | 309,392 | | | 40,550 | | | (82,587) | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | | 47,438 | | | 3,174 | | | 3,778 | |
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | | 37,625 | | | 182,243 | | | (172,916) | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of the period | | 1,455,837 | | | 1,273,594 | | | 1,446,510 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of the period | | $ | 1,493,462 | | | $ | 1,455,837 | | | $ | 1,273,594 | |
Supplemental disclosure of noncash investing and financing activities: | | | | | | |
Property, plant and equipment acquisitions funded by liabilities | | $ | 315,961 | | | $ | 61,598 | | | $ | 110,576 | |
See accompanying notes to these consolidated financial statements.
85
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. First Solar and Its Business
We are a leading American solar technology company and global provider of comprehensive PV solar energy solutions. We design,Developed at our R&D labs in California and Ohio, we manufacture and sell PV solar modules with an advanced thin film semiconductor technology and also develop, design, construct, and sellthat provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar power systems that primarily usemodules. From raw material sourcing through end-of-life module recycling, we are committed to reducing the modules we manufacture. Additionally, we provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on moduleenvironmental impacts and system-level innovations.enhancing the social and economic benefits of our products across their life cycle. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our mission is to provide cost-advantaged solar technology through innovation, customer engagement, industry leadership, and operational excellence.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. Investments in unconsolidated affiliates in which we have less than a controlling interest are accounted for using the cost or equity method of accounting. Certain prior year balances were reclassified to conform to the current year presentation. Such reclassifications primarily related to the adoption of Accounting Standards Update (“ASU”) 2014-09 as further described in Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements.
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, and testing goodwill.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 all highly liquid investments with original maturities of 90 daysthree months or less at the time of purchase to be cash equivalents.equivalents with the exception of time deposits, which are presented as marketable securities.
Restricted Cash and Restricted Cash Equivalents. Restricted cash consistsand restricted cash equivalents consist 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 deposits held in custodial accounts to fund the paymentestimated future costs of amounts related to project specific debt financings.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 isrestricted cash equivalents held in custodial accounts are classified as current or noncurrent based onto align with the intended usenature of the restricted funds.corresponding module 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. We classifyAs of December 31, 2022 and 2021, all of our marketable securities and restricted investmentsmarketable securities were classified as available-for-sale.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 income (loss)”loss” until realized. We record realized gains and losses on the sale of our marketable securities and restricted investmentsmarketable securities in “Other income (expense), 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 theour consolidated balance sheets. Restricted investmentsmarketable securities consist of long-term duration marketable securities that we hold through ain custodial accountaccounts 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 theour 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 it’s 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 (expense), 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 salesales 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 iswas common for long-term constructionour project-related sales 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 couldRevenue may be
recognized in advance of billing the customer, resulting in an amount recorded to “Accounts receivable unbilled, and retainage.”net” 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 accordingly and reclassify the “Accounts receivable unbilled, and retainage”net” to “Accounts receivable trade, net.” Billing requirements vary by contract but are generally structured around the completion of certain development, construction, or other specified milestones.
Retainage. CertainAllowance 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, which we review annually, and the delinquency status of our EPC contracts for PV solar power systemsamounts owed to us, which we build contain retainage provisions. Retainage represents a contract asset fordetermine based on 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 collectibilityaging of such retainage is reasonably assured in connectionreceivables. We estimate credit losses associated with our overall assessment ofmarketable securities and restricted marketable securities based on the collectibility of amounts due or that will become due under our EPC contracts. Retainage included within “Accounts receivable, unbilledexternal credit ratings for such investments and retainage” is expected to be billedthe historical loss rates associated with such credit ratings, which we obtain from third parties. Such methods and collectedestimates are adjusted, as appropriate, for relevant past events, current conditions, and reasonable and supportable forecasts. We recognize writeoffs within the next 12 months. After we satisfy the EPC contract requirements and have an unconditional right to consideration, we typically billallowance for retainage and reclassify such amounts to “Accounts receivable trade, net.”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 the costs of manufacturing in our inventory costs. These costs include direct material,materials, direct labor, and indirect manufacturing costs, including depreciation and amortization. Our capitalization of indirect costs into inventory 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. Finished goods inventory is comprised exclusively of solar modules that have not yet been installed in a PV solar power plant under constructionOther abnormal manufacturing costs, such as wasted materials or sold to a third-party customer.excess yield losses, are also expensed as incurred.
As needed, we may purchase a critical raw materialmaterials that isare used in our core production process in quantities that exceed anticipated consumption within our normal operating cycle, (whichwhich is 12 months).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, expected demand, anticipated salesproduct warranties, module selling prices, product obsolescence, strategic raw material requirements, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, product merchantability, and other factors. Market conditions are subject to change, and actual consumption of our inventory could differ from forecasted demand.
Balance of Systems Parts. BoS parts represent mounting, electrical, and other construction parts purchased for PV solar power systems to be constructed or currently under construction, which we hold title to and are not yet installed in a system. Such construction parts include items such as posts, tilt brackets, tables, harnesses, combiner boxes, inverters, cables, tracker equipment, and other parts that we may purchase or assemble for the systems we construct. We carry these parts at the lower of cost or net realizable value, with such value being based primarily on recoverability through installation in a system or recoverability through a sales agreement. 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 theythe 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 – 1015 |
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 shortestshorter of the term of the related PPA the lease on the land, or 25 years. Our current PV solar power systems have estimated useful lives ranging from 15 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.projects. 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 (long-lived(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 such project assets as current until the sale is completed and we have met all of the criteria to recognize 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, which at the time of sale and meeting all revenue recognition criteria will be recorded within cost of sales. 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, ecological, permitting, market pricing, or regulatory 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 or constructing certain assets, including property, plant and equipment; project assets; and PV solar power systems, during the period of time required to place the assets in service or, in the case of project assets, to sell the assets to customers. 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 and we have met all revenue recognition criteria. We capitalize interest to the extent that interest cost 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; 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. 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 suchthe asset and we have no intent to use or repurpose the assetit 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 willwould 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 and are accounted for under either the cost or equity method of accounting because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.
Ventures are considered VIEs if (i) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (ii) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses, or the right to receive expected residual returns; or (iii) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are conducted on behalf of that investor. Our venture agreements typically require us to fund some form of capital for the development and construction of a project, depending upon the opportunity and the market in which our ventures are located.
We are considered the primary beneficiary of and are required to consolidate a VIE if we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the entity. If we determine that we do not have the power to direct the activities that most significantly impact the entity, then we are not the primary beneficiary of the VIE.
Cost and Equity Method Investments. We account for our unconsolidated ventures using either the cost or equity method of accounting depending upon whether we have the ability to exercise significant influence over the venture. As part of this evaluation, we consider our participating and protective rights in the venture as well as its legal form. We use the cost method of accounting for our investments when we do not have the ability to significantly influence the operations or financial activities of the investee. We record our cost method investments at their historical cost and subsequently record any distributions received from the net accumulated earnings of such investments as income. Distributions received from our cost method investments in excess of their earnings are considered returns of investment and are recorded as reductions in the cost of the 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. 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. 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 our cost and equity method investments, which are included in “Investments in unconsolidated affiliates and joint ventures” in the accompanying consolidated balance sheets, 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 cost and equity method investments of $2.0 million, $15.3 million, and zero during the years ended December 31, 2017, 2016, and 2015, 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 teststest 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 business which was also historically referred to asrepresents our components business, and our fully integrated systems business.only reporting unit. 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.unit. 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.
In-Process ResearchIntangible Assets. Intangible assets primarily include developed technologies and Development. In-process researchour internally-generated intangible assets, substantially all of which are patents on technologies related to our products and development (“IPR&D”) is initially capitalized at fair value asproduction 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 asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified asassets on a definite-lived intangible asset and amortizedstraight-line basis over itstheir estimated useful life. If an IPR&D project is abandoned,lives, which generally range from 5 to 20 years.
Leases. Upon commencement of a lease, we record an impairment chargerecognize a lease liability for the carryingpresent value of the related intangiblelease 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 it is abandoned.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 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. We recognizeSuch deferred revenue results from advance payments received on sales of solar modules. Deferred revenue is classified as netcurrent or noncurrent based on the expected date that module shipments commence for each sales after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met.contract. 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 downadvance 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 12.5 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 performancelimited 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 purchaseprevailing market 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,have constructed, we typically providehave provided 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 modulesales of modules or system sales,projects, 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, our monitoring of field installation sites, our internal testing of and the expected future performance of our solar modules and BoS parts, 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. We recognize 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 13. “Solar Module Collection12. “Commitments and Recycling Liability”Contingencies” to our consolidated financial statements for further information.
Asset Retirement Obligations. We develop, construct, and operate certain project assets and PV solar power systems with land lease or other agreements that include a requirement for the removal of the assets at the end of the term of the agreement. We also lease certain manufacturing facilities or administrative offices under agreements that require the removal of our leasehold improvements or other property upon termination of the lease.
We recognize such asset retirement obligations (“AROs”) in the period in which they are incurred based on the present value of estimated third-party decommissioning costs, and we capitalize the associated asset retirement costs as part of the carrying amount of the related assets. Once an asset is placed in service, the asset retirement cost is subsequently depreciated on a straight-line basis over the estimated useful life of the asset. Changes in AROs resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense. Our AROs were included within “Other liabilities” at December 31, 2017 and 2016 and totaled $16.7 million and $22.4 million, respectively.
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, 20172022 and 2016,2021, 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 “Other“Accumulated other comprehensive income (loss)”loss” until our earnings are affected by the variability of the cash flows from the underlying hedge.hedged item. We record any hedge ineffectiveness and amounts excluded from effectiveness testing in current period earnings within “Otherin the same income (expense), net.”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.
Business Combinations.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 account for business combinations usingrecord these components of accumulated other comprehensive income or loss net of tax and release such tax effects when the acquisition method of accounting and record intangible assets separate from goodwill. Such intangible assets are recorded at fair value based on estimates as of the date of acquisition. Goodwill is recorded as the residual amount of the purchase price consideration less the fair value assigned to the individual assets acquired and liabilities assumed as of the date of acquisition. We charge acquisition related costs that are not part of the purchase price consideration to “Selling, general and administrative” as they are incurred. These costs typically include transaction and integration costs, such as legal, accounting, and other professional fees. We account for any contingent consideration, which represents an obligation of the acquirer to transfer additional assets or equity interests to the former owner as part of the exchange if specified future events occur or conditions are met, at fair value either as a liability or as equity depending on the terms of the acquisition agreement.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 productsthe modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For module and other equipment salesSuch contracts may contain provisions that contain multiple performance obligations, such as the shipment or delivery of solar modules and other BoS parts, we allocate the transaction pricerequire us 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 transferredmake liquidated damage payments to the customer if we fail to ship or deliver modules by scheduled dates. We recognize these liquidated damages as a reduction of revenue in satisfactionthe period we transfer control of the corresponding performance obligations.modules to the customer.
Revenue Recognition – Solar Power SystemProject Sales and/or Engineering, Procurement, and Construction Services. We generally recognize revenue for sales of solar power systems and/or EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system, including those in which we may receive considerationdevelopment project or for the sale of a noncontrolling interest,completed system when combinedwe enter into the associated sales contract with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such sales arrangements, we recognizecustomer. Such revenue using cost based input methods, which recognize revenue and gross profit as workrecognition is performed baseddependent, in part, on the relationship between actual costs incurred compared to the total estimated costs of the contract, after consideration of our customers’ commitment to perform itstheir 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 of solar power systems in which we obtain an interest in the project sold to the customer, we recognize all of the revenue for the consideration received, including the fair value of the noncontrolling interest we obtained, and defer any profit associated with the interest obtained through “Equity in earnings of unconsolidated affiliates, net of tax.” We may also recognize revenue for the sale of a solar power system after it has been completed due to the timing of when we enter into the associated sales contract with the customer.
In applying cost based input methods of revenue recognition, we use the actual costs incurred relative to the total estimated costs (including solar module costs) to determine our progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. 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 towards 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 systemcertain prior project sales, we conduct performance testing of a system prior to substantial completion to confirm the systemit meets itsthe operational and capacity expectations noted in theits 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 yearperiod 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 regardsregard to these tests, we may incur liquidated damages as a percentage ofspecified in the applicable EPC contract price.agreement. 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 and billed 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 of 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 typically recognize revenue forsell energy generated and sold by PV solar power systems under ASC 840, Leases, consistent with the classification of the associated PPAs. Accordingly,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 generated and sold by PV solar power systems on an open contract basis, we recognize revenue at the point in time the energy is delivered to the grid.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 has beenis qualified for fullcommercial production, including the cost of raw materials for solar modules run through the production line during the qualification phase, employee compensation for individuals supporting production start-up activities, and applicable facility related costs. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in productionProduction start-up expense as well asalso includes costs related to the selection of a new site related legal and regulatoryimplementation costs and costs to maintain our plant replication programfor manufacturing process improvements to the extent we cannot capitalize these expenditures.
Restructuring and Exit Activities. We record costs associated with exit activities, such as one-time employee termination benefits, when management approves and commits to a plan
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 or five 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 suchthe 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 income (loss)”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, 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 be recovered or settled.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 or loss per share is computed giving effect to all potentially dilutive common shares, including restricted stock 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.
Comprehensive Income. Our comprehensive income consists of our net income, the effects on our consolidated financial statements of translating the financial statements of our subsidiariesGovernment Grants. We account for government assistance that operate in foreign currencies, the unrealized gains or losses on available-for-sale marketable securities and restricted investments, and the unrealized gains or losses on derivative instruments that qualify for and have been designated as cash flow hedges.
3. Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standard Board (“FASB”) issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to allow entities to reclassify the income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2018-02 will have on our consolidated financial statements and associated disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvementsnot subject 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. ASU 2017-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2017-12 will have on our consolidated financial statements and associated disclosures.
In January 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. As a result of our adoption of ASU 2017-04 in the first quarter of 2017, we eliminated Step 2 of our goodwill impairment tests.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 230) – Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires the recognition of income tax consequences of intra-entity transfers of assets, other than inventory, when the transfer occurs. Two common examples of assets included in the scope of ASU 2016-16 are intellectual propertyASC 740 using a grant accounting model, by analogy to International Accounting Standards 20, Accounting for Government Grants and long-lived assets. ASU 2016-16 is effective for fiscal yearsDisclosure of Government Assistance, and interim periods within those years beginning after December 15, 2017. We are currently evaluatingrecognize such grants when we have reasonable assurance that we will comply with the impact ASU 2016-16 will have on our consolidated financial statementsgrant’s conditions and associated disclosures.
In June 2016,that the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), to provide financial statement users with more useful information about expected credit losses. ASU 2016-13 also changes how entities measure credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective
for fiscal years and interim periods within those years beginning after December 15, 2019, and early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and associated disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leasesgrant will be classifiedreceived. Government grants whose primary condition is the purchase, construction, or acquisition of a long-lived asset are considered asset-based grants and are recognized as either operating or financing, witha reduction to such classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal yearsasset’s cost basis, which reduces future depreciation. Other government grants not related to long-lived assets are considered income-based grants, which are initially recognized as “Government grants receivable” and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We do not expect the adoption of ASU 2016-01 to haverecognized as a significant impact on our consolidated financial statements and associated disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We adopted ASU 2014-09 in the first quarter of 2017 using the full retrospective method. This adoption primarily affected our systems business sales arrangements previously accounted for under ASC 360-20, which had required us to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement. When such forms of continuing involvement were present, we reduced the potential profit on the applicable project sale by our maximum exposure to loss.
Our adoption of ASU 2014-09, which supersedes the real estate sales guidance under ASC 360-20, generally requires us to recognize revenue and profit from our systems business sales arrangements earlier and in a more linear fashion than our historical practice under ASC 360-20, including the estimation of certain profits that would otherwise have been deferred. Additionally, for systems business sales arrangements in which we obtain an interest in the project soldreduction to the customer, we recognize allrelated cost of activities that generated the revenue forbenefit. Proceeds received from asset-based grants are presented as cash inflows from investing activities on the consideration received, including the fair value of the noncontrolling interest we obtained, and defer any profit associated with the interest obtained through “Equity in earnings of unconsolidated affiliates, net of tax.” Following the adoption of ASU 2014-09, the revenue recognition for our other sales arrangements, including sales of solar modules and O&M services, remained materially consistent with our historical practice.
See Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements for further discussion of the effects of the adoption of ASU 2014-09 on our significant accounting policies. The adoption of ASU 2014-09 also affected the cumulative-effect adjustment to retained earnings for the prior year adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting, by reducing the deferred tax assets for excess tax benefits that had previously not been recognized by $6.1 million.
The following table presents the effect of the adoption of ASU 2014-09 on our consolidated balance sheet as of December 31, 2016 (in thousands):
|
| | | | | | | | | | | | |
| | December 31, 2016 |
| | As Reported | | Adoption of ASU 2014-09 | | As Adjusted |
Accounts receivable, unbilled and retainage | | $ | 205,530 |
| | $ | 1,209 |
| | $ | 206,739 |
|
Deferred project costs | | 701,105 |
| | (701,105 | ) | | — |
|
Project assets, current | | — |
| | 700,800 |
| | 700,800 |
|
Prepaid expenses and other current assets | | 217,157 |
| | 305 |
| | 217,462 |
|
Total current assets | | 3,786,620 |
| | 1,209 |
| | 3,787,829 |
|
Project assets and deferred project costs | | 800,770 |
| | (800,770 | ) | | — |
|
Project assets, noncurrent | | — |
| | 762,148 |
| | 762,148 |
|
Deferred tax assets, net | | 252,655 |
| | 2,497 |
| | 255,152 |
|
Investments in unconsolidated affiliates and joint ventures | | 242,361 |
| | (7,751 | ) | | 234,610 |
|
Other assets | | 78,076 |
| | (178 | ) | | 77,898 |
|
Total assets | | 6,867,213 |
| | (42,845 | ) | | 6,824,368 |
|
Income taxes payable | | 5,288 |
| | 7,274 |
| | 12,562 |
|
Billings in excess of costs and estimated earnings | | 115,623 |
| | (115,623 | ) | | — |
|
Payments and billings for deferred project costs | | 284,440 |
| | (284,440 | ) | | — |
|
Deferred revenue | | — |
| | 308,704 |
| | 308,704 |
|
Other current liabilities | | 54,683 |
| | 92,259 |
| | 146,942 |
|
Total current liabilities | | 899,707 |
| | 8,174 |
| | 907,881 |
|
Other liabilities | | 428,120 |
| | (56,681 | ) | | 371,439 |
|
Total liabilities | | 1,654,526 |
| | (48,507 | ) | | 1,606,019 |
|
Additional paid-in capital | | 2,759,211 |
| | 6,099 |
| | 2,765,310 |
|
Accumulated earnings | | 2,463,279 |
| | (437 | ) | | 2,462,842 |
|
Total stockholders’ equity | | 5,212,687 |
| | 5,662 |
| | 5,218,349 |
|
Total liabilities and stockholders’ equity | | 6,867,213 |
| | (42,845 | ) | | 6,824,368 |
|
The following tables present the effect of the adoption of ASU 2014-09 on our consolidated statements of operations for the years ended December 31, 2016 and 2015 (in thousands, except per share amounts):
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Reported | | Adoption of ASU 2014-09 | | As Adjusted |
Net sales | | $ | 2,951,328 |
| | $ | (46,765 | ) | | $ | 2,904,563 |
|
Cost of sales | | 2,247,349 |
| | 18,796 |
| | 2,266,145 |
|
Gross profit | | 703,979 |
| | (65,561 | ) | | 638,418 |
|
Operating loss | | (502,590 | ) | | (65,561 | ) | | (568,151 | ) |
Loss before taxes and equity in earnings of unconsolidated affiliates | | (471,690 | ) | | (65,561 | ) | | (537,251 | ) |
Income tax expense | | (58,219 | ) | | 35,052 |
| | (23,167 | ) |
Equity in earnings of unconsolidated affiliates, net of tax | | 171,945 |
| | (27,639 | ) | | 144,306 |
|
Net loss | | (357,964 | ) | | (58,148 | ) | | (416,112 | ) |
Comprehensive loss | | (383,351 | ) | | (58,148 | ) | | (441,499 | ) |
| | | | | | |
Basic net loss per share | | $ | (3.48 | ) | | $ | (0.57 | ) | | $ | (4.05 | ) |
Diluted net loss per share | | $ | (3.48 | ) | | $ | (0.57 | ) | | $ | (4.05 | ) |
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | As Reported | | Adoption of ASU 2014-09 | | As Adjusted |
Net sales | | $ | 3,578,995 |
| | $ | 533,655 |
| | $ | 4,112,650 |
|
Cost of sales | | 2,659,728 |
| | 320,160 |
| | 2,979,888 |
|
Gross profit | | 919,267 |
| | 213,495 |
| | 1,132,762 |
|
Operating income | | 516,664 |
| | 213,495 |
| | 730,159 |
|
Income before taxes and equity in earnings of unconsolidated affiliates | | 519,835 |
| | 213,495 |
| | 733,330 |
|
Income tax benefit (expense) | | 6,156 |
| | (38,485 | ) | | (32,329 | ) |
Equity in earnings of unconsolidated affiliates, net of tax | | 20,430 |
| | (128,025 | ) | | (107,595 | ) |
Net income | | 546,421 |
| | 46,985 |
| | 593,406 |
|
Comprehensive income | | 511,761 |
| | 46,985 |
| | 558,746 |
|
| | | | | | |
Basic net income per share | | $ | 5.42 |
| | $ | 0.46 |
| | $ | 5.88 |
|
Diluted net income per share | | $ | 5.37 |
| | $ | 0.46 |
| | $ | 5.83 |
|
The following tables present the effect of the adoption of ASU 2014-09 on our consolidated statements of cash flows, for the years ended December 31, 2016 and 2015 (in thousands):whereas proceeds received from income-based grants are presented as cash inflows from operating activities.
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Reported | | Adoption of ASU 2014-09 | | As Adjusted |
Net loss | | $ | (357,964 | ) | | $ | (58,148 | ) | | $ | (416,112 | ) |
Adjustments to reconcile net loss to cash provided by operating activities: | | | | | | |
Equity in earnings of unconsolidated affiliates, net of tax | | (171,945 | ) | | 27,639 |
| | (144,306 | ) |
Deferred income taxes | | 123,864 |
| | (33,309 | ) | | 90,555 |
|
Noncash consideration from the sale of systems
| | — |
| | (20,091 | ) | | (20,091 | ) |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, trade, unbilled and retainage | | 92,747 |
| | 86,147 |
| | 178,894 |
|
Prepaid expenses and other current assets | | 9,574 |
| | (305 | ) | | 9,269 |
|
Project assets and PV solar power systems | | (592,204 | ) | | 20,549 |
| | (571,655 | ) |
Other assets | | (19,423 | ) | | 178 |
| | (19,245 | ) |
Income tax receivable and payable | | (59,640 | ) | | (1,743 | ) | | (61,383 | ) |
Accrued expenses and other liabilities | | 179,610 |
| | (20,917 | ) | | 158,693 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | As Reported | | Adoption of ASU 2014-09 | | As Adjusted |
Net income | | $ | 546,421 |
| | $ | 46,985 |
| | $ | 593,406 |
|
Adjustments to reconcile net income to cash used in operating activities: | | | | | | |
Equity in earnings of unconsolidated affiliates, net of tax | | (20,430 | ) | | 128,025 |
| | 107,595 |
|
Deferred income taxes | | (17,534 | ) | | 23,416 |
| | 5,882 |
|
Noncash consideration from the sale of systems
| | — |
| | (457,596 | ) | | (457,596 | ) |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, trade, unbilled and retainage | | (340,292 | ) | | (87,356 | ) | | (427,648 | ) |
Prepaid expenses and other current assets | | (38,635 | ) | | (188 | ) | | (38,823 | ) |
Project assets and PV solar power systems | | (857,529 | ) | | 331,978 |
| | (525,551 | ) |
Other assets | | (8,484 | ) | | 7,321 |
| | (1,163 | ) |
Income tax receivable and payable | | (13,281 | ) | | 15,069 |
| | 1,788 |
|
Accrued expenses and other liabilities | | (67,236 | ) | | (7,654 | ) | | (74,890 | ) |
3. Sales of Businesses
4. Restructuring
Sale of Japan Project Development Business
In May 2022, we entered into various agreements with certain subsidiaries of PAG, a private investment firm, for the sale of our Japan project development business. The transaction included our approximately 293 MWDC utility-scale solar project development platform, which comprised the business of developing, contracting for the construction of, and Asset Impairmentsselling utility-scale PV solar power systems. Additionally, PAG agreed to certain module purchase commitments.
Cadmium Telluride Module Manufacturing and Corporate Restructuring
In November 2016,June 2022, we completed the sale of our boardJapan project development business and, following certain customary post-closing adjustments, received total consideration of directors approved¥66.4 billion ($490.8 million) and transferred cash and restricted cash of ¥8.4 billion ($61.9 million) to PAG. As a setresult of initiatives intended to accelerate our transition to Series 6 module manufacturing and restructure our operations to reducethis transaction, we recognized a gain of $245.2 million, net of transaction costs, and better align the organization with our long-term strategic plans. Accordingly, we expect to upgrade and replace our legacy manufacturing fleet over the next several years with Series 6 manufacturing equipment, thereby enabling the production of solar modules with a larger form factor, better product attributes, and a lower cost structure.
As part of these initiatives, we incurred net charges of $41.8 million during the year ended December 31, 2017,2022, which was included (i) $27.6 millionin “Gain on sales of charges, primarily related to net losses onbusinesses, net” in our consolidated statements of operations.
Sales of North American and International O&M Operations
In August 2020, we entered into an agreement with a subsidiary of Clairvest for 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.
The commencement of this operational transition in November 2016 represented an expectation that certainsale of our module manufacturing assets would be sold or otherwise disposedNorth American O&M operations. In March 2021, we completed the transaction and, following certain customary post-closing adjustments, received total consideration of significantly before the end of their previously estimated useful lives.$149.1 million. As a result of this transaction, we compared the undiscounted future cash flowsrecognized a gain of our module manufacturing assets to the carrying value$115.8 million, net of the asset grouptransaction costs and determined that the group was not recoverable. Accordingly, we measured the fair value of the asset group using a combination of income and cost valuation techniques and recorded impairment losses of $640.3 million for the year ended December 31, 2016. Such impairment losses included $120.7 million of charges related to stored Series 4 manufacturing equipment originally intended for use in previously planned manufacturing capacity expansions. During the year ended December 31, 2016, we also incurred charges of $14.1 million for severance benefits to terminated employees as we substantially reduced our workforce at our domestic and international facilities, including reductions in administrative and other staff, and $8.1 million for the closure of ancillary foreign operations, the write-off of operating supplies, and other miscellaneous charges.
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. The following table summarizes our CdTe module manufacturing and corporate restructuring activity for the years ended December 31, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Asset Impairments | | Severance | | Other | | Total |
Charges to income | | $ | 640,340 |
| | $ | 14,056 |
| | $ | 8,111 |
| | $ | 662,507 |
|
Cash payments | | — |
| | (6,191 | ) | | (151 | ) | | (6,342 | ) |
Non-cash amounts | | (640,340 | ) | | — |
| | (7,410 | ) | | (647,750 | ) |
Ending liability balance at December 31, 2016 | | — |
| | 7,865 |
| | 550 |
| | 8,415 |
|
Charges to income | | 27,606 |
| | 7,577 |
| | 6,664 |
| | 41,847 |
|
Cash payments | | — |
| | (14,986 | ) | | (6,442 | ) | | (21,428 | ) |
Non-cash amounts | | (27,606 | ) | | — |
| | (772 | ) | | (28,378 | ) |
Ending liability balance at December 31, 2017 | | $ | — |
| | $ | 456 |
| | $ | — |
| | $ | 456 |
|
Crystalline Silicon Module Manufacturing Restructuring
In June 2016, our executive management elected to reallocate our crystalline silicon module production capacity to support next generation CdTe module offerings. As a result, we ended production of our crystalline silicon modules to focus on our core CdTe module technology and utility-scale PV solar power systems. The majority of our crystalline silicon module manufacturing associates were expected to be redeployed in other manufacturing operations.
In connection with these restructuring activities, we incurred charges of $81.4 millionpost-closing adjustments, during the year ended December 31, 2016,2021, which was included (i) $35.9 millionin “Gain on sales of impairment charges related to certain crystalline silicon module manufacturing equipment considered abandoned for accounting purposes, (ii) $35.8 million of impairment charges for developed technology intangible assets associated withbusinesses, net” in our crystalline silicon module technology, (iii) $8.4 million of miscellaneous charges related to certain contract manufacturing agreements and the write-off of operating supplies, and (iv) $1.3 million of charges for severance benefits to terminated employees. All amounts associated with these charges related to our modules segment and were classified as “Restructuring and asset impairments” on the consolidated statements of operations.
Other Restructuring
DuringIn January 2022, we completed the sale of our Chilean O&M operations to a separate subsidiary of Clairvest and, following certain customary post-closing adjustments, received total consideration of $1.9 million. As a result of this transaction, we recognized a gain of $1.6 million, net of transaction costs and post-closing adjustments, during the year ended December 31, 2012,2022, which was included in “Gain on sales of businesses, net” in our consolidated statements of operations.
In September 2022, we completed the sale of our Australian O&M operations to a separate subsidiary of Clairvest and, following certain customary post-closing adjustments, received total consideration of $6.0 million. As a result of this transaction, we recognized a liability forgain of $4.4 million, net of transaction costs and post-closing adjustments, during the expected repaymentyear ended December 31, 2022, which was included in “Gain on sales of businesses, net” in our consolidated statements of operations.
In September 2022, we also completed the sale of our Japanese O&M operations to a subsidiary of PAG and, following certain customs tax benefits as partcustomary post-closing adjustments, received total consideration of a prior restructuring activity. In December 2017, we reversed this liability as¥692.7 million ($4.8 million). As a result of meeting certain investment certificate criteria associated with the commencementthis transaction, we recognized a gain of operations at our previously announced manufacturing plant in Vietnam and recorded a $4.7 million benefit to “Restructuring and asset impairments.”
5. Business Acquisitions
Enki Technology
In October 2016, we acquired 100% of the shares of Enki Technology, Inc. (“Enki”), a developer of advanced coating materials for the PV solar industry, for cash payments of $10.3$1.4 million, net of cash acquiredtransaction costs and post-closing adjustments, during the year ended December 31, 2022, which was included in “Gain on sales of $0.3 million,businesses, net” in our consolidated statements of operations.
Sale of U.S. Project Development Business
In January 2021, we entered into an agreement with Leeward, a subsidiary of the Ontario Municipal Employees Retirement System, for the sale of our U.S. project development business. In March 2021, we completed the transaction and a promise to pay additionalreceived consideration of up to $7.0$151.4 million contingentfor the sale of such business. As a result of this transaction, we recognized a gain of $31.5 million, net of transaction costs and post-closing adjustments, during the year ended December 31, 2021, which was included in “Gain on the achievementsales of certain production and module performance milestones. In connection with applying the acquisition methodbusinesses, net” in our consolidated statements of accounting, $17.3 millionoperations.
6.4. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill, by reporting unit,Goodwill for the years endedmodules business consisted of the following at December 31, 20172022 and 2016 were as follows2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Acquisitions (Impairments) | | December 31, 2022 |
Gross amount | | $ | 407,827 | | | $ | — | | | $ | 407,827 | |
Accumulated impairment losses | | (393,365) | | | — | | | (393,365) | |
Total | | $ | 14,462 | | | $ | — | | | $ | 14,462 | |
| | | | | | | | | | December 31, 2020 | | Acquisitions (Impairments) | | December 31, 2021 |
| | Balance at December 31, 2016 | | Acquisitions (Impairments) | | Balance at December 31, 2017 | |
Modules | | $ | 407,827 |
| | $ | — |
| | $ | 407,827 |
| |
Gross amount | | Gross amount | | $ | 407,827 | | | $ | — | | | $ | 407,827 | |
Accumulated impairment losses | | (393,365 | ) | | — |
| | (393,365 | ) | Accumulated impairment losses | | (393,365) | | | — | | | (393,365) | |
Total | | $ | 14,462 |
| | $ | — |
| | $ | 14,462 |
| Total | | $ | 14,462 | | | $ | — | | | $ | 14,462 | |
|
| | | | | | | | | | | | |
| | Balance at December 31, 2015 | | Acquisitions (Impairments) | | Balance at December 31, 2016 |
Modules | | $ | 403,420 |
| | $ | 4,407 |
| | $ | 407,827 |
|
Crystalline silicon modules | | 6,097 |
| | — |
| | 6,097 |
|
Systems | | 68,833 |
| | — |
| | 68,833 |
|
Accumulated impairment losses | | (393,365 | ) | | (74,930 | ) | | (468,295 | ) |
Total | | $ | 84,985 |
| | $ | (70,523 | ) | | $ | 14,462 |
|
Accumulated impairment losses at December 31, 2017 were entirely for our modules reporting unit. Accumulated impairment losses at December 31, 2016 were $393.4 million for our modules, $68.8 million for our systems, and $6.1 million for our crystalline silicon modules reporting units.
2017 Goodwill Impairment Testing
We performed our annual impairment analysis in the fourth quarterquarters of 2017.2022, 2021, and 2020. ASC 350-20 provides that prior to performing a quantitative goodwill impairment test,allows companies are permitted 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 impairment testassessment 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 unitbusiness in each respective period and concluded that it was not more likely than not that the fair value of the reporting unitmodules business was less than its carrying amount. Accordingly, a quantitative goodwill impairment test for this reporting unitthe modules business was not required.required in any period presented.
2016 Goodwill Impairment Testing
As part of our annual impairment analysis in the fourth quarter of 2016, we elected to perform a quantitative goodwill impairment test instead of first performing a qualitative goodwill impairment test. Such quantitative impairment test represented the comparison of the fair value of our reporting units with their carrying amounts, including goodwill. As of the date of our testing, our reporting units were consistent with our reportable segments: modules and systems. In determining the fair value of our reporting units, we used a combination of income and market based valuation techniques.
Significant estimates used in our income based fair value calculations included: (i) future sales volumes and average selling prices per watt; (ii) cost per watt projections for module and system sales; (iii) future effective tax rates, which we estimated to be between 10% and 35%; (iii) forecasts of capital expenditures and working capital requirements; (iv) discount rates, which we estimated to range between 11.5% and 18%; and (v) future terminal values of our reporting units, which are based on their ability to exist into perpetuity. Significant estimates used in our market based fair value calculations included business enterprise values and revenue multiples of various publicly traded companies. The underlying assumptions used in the quantitative impairment test also considered our market capitalization as of the date of our testing and then-current solar industry market conditions.
As a result of our testing, we determined that the estimated fair value of our modules reporting unit exceeded its carrying value indicating no impairment was necessary for this reporting unit. However, we determined that the estimated fair value of our systems reporting unit was less than its carrying value, which required us to determine the implied fair value of goodwill for the systems reporting unit by allocating the fair value of the systems reporting unit to its individual assets and liabilities, including any unrecognized intangible assets. Based on such calculation, the implied fair value of goodwill for the systems reporting unit was zero, and we recorded an impairment loss of $68.8 million. Such impairment was primarily driven by a strategic shift in the mix of our module and system net sales, which was approved by our board of directors in November 2016. This shift involved an expected reduction in the annual megawatts sold through systems business projects from approximately two gigawatts per year over the prior several years to approximately one gigawatt per year going forward. Other factors that contributed to the impairment included our reduced market capitalization and the challenging conditions within the solar industry as of the date of our testing.
In June 2016, we impaired $6.1 million of goodwill associated with our crystalline silicon modules reporting unit as a result of the decision to end the related manufacturing operations and dispose of the reporting unit. See Note 4. “Restructuring and Asset Impairments” to our consolidated financial statements for further discussion related to this restructuring activity.
Intangible Assets, Net
Intangible assets, primarily include developed technologies from prior business acquisitions, certain PPAs acquired after the associated PV solar power systems were placed in service, our internally-generated intangible assets, substantially all of which were patents on technologies related to our products and production processes, and IPR&D related to our Enki acquisition as described in Note 5. “Business Acquisitions.” We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure them. We amortize intangible assets on a straight-line basis over their estimated useful lives once the intangible assets meet the criteria to be amortized.net
The following tables summarize our intangible assets at December 31, 20172022 and 20162021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Gross Amount | | Accumulated Amortization | | Net Amount |
Developed technology | | $ | 97,347 | | | $ | (68,650) | | | $ | 28,697 | |
Patents | | 8,970 | | | (6,561) | | | 2,409 | |
Total | | $ | 106,317 | | | $ | (75,211) | | | $ | 31,106 | |
| | | | December 31, 2017 | | December 31, 2021 |
| | Gross Amount | | Accumulated Amortization | | Accumulated Impairments | | Net Amount | | | Gross Amount | | Accumulated Amortization | | Net Amount |
Developed technology | | $ | 114,612 |
| | $ | (25,578 | ) | | $ | (36,215 | ) | | $ | 52,819 |
| Developed technology | | $ | 99,964 | | | $ | (61,985) | | | $ | 37,979 | |
Power purchase agreements | | 6,486 |
| | (324 | ) | | — |
| | 6,162 |
| Power purchase agreements | | 6,486 | | | (1,621) | | | 4,865 | |
Patents | | 7,068 |
| | (3,077 | ) | | — |
| | 3,991 |
| Patents | | 8,480 | | | (5,815) | | | 2,665 | |
In-process research and development | | 17,255 |
| | — |
| | — |
| | 17,255 |
| |
Total | | $ | 145,421 |
| | $ | (28,979 | ) | | $ | (36,215 | ) | | $ | 80,227 |
| Total | | $ | 114,930 | | | $ | (69,421) | | | $ | 45,509 | |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Gross Amount | | Accumulated Amortization | | Accumulated Impairments | | Net Amount |
Developed technology | | $ | 114,612 |
| | $ | (18,208 | ) | | $ | (36,215 | ) | | $ | 60,189 |
|
Power purchase agreements | | 6,486 |
| | — |
| | — |
| | 6,486 |
|
Patents | | 6,538 |
| | (2,498 | ) | | — |
| | 4,040 |
|
In-process research and development | | 17,255 |
| | — |
| | — |
| | 17,255 |
|
Total | | $ | 144,891 |
| | $ | (20,706 | ) | | $ | (36,215 | ) | | $ | 87,970 |
|
Amortization expense for ourof intangible assets was $8.3$10.9 million, $10.1$10.9 million, and $9.2$10.8 million for the years ended December 31, 2017, 2016,2022, 2021, and 2015,2020, respectively.
Estimated future amortization expense for our definite-lived intangible assets was as follows at December 31, 20172022 (in thousands):
| | | | | | | | |
| | Amortization Expense |
2023 | | $ | 10,510 | |
2024 | | 10,380 | |
2025 | | 3,910 | |
2026 | | 2,526 | |
2027 | | 2,426 | |
Thereafter | | 1,354 | |
Total amortization expense | | $ | 31,106 | |
Cash, cash equivalents, and marketable securities consisted of the following at December 31, 20172022 and 20162021 (in thousands):
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, 20172022 and 20162021 (in thousands):