UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter) | | | | | |
Delaware | 20-4623678 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
350 West Washington Street, Suite 600
Tempe, Arizona 85288
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, $0.001 par value | FSLR | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ | Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 21, 2022, 106,605,61027, 2023, 106,844,212 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
FIRST SOLAR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 20222023
Throughout this Quarterly Report on Form 10-Q, we refer to First Solar, Inc. and its consolidated subsidiaries as “First Solar,” “the Company,” “we,” “us,” and “our.” The unit of electricity is typically stated in megawatts (“MW”) and gigawatts (“GW”).
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net sales | Net sales | | $ | 628,933 | | | $ | 583,504 | | | $ | 1,616,928 | | | $ | 2,016,058 | | Net sales | | $ | 801,090 | | | $ | 628,933 | | | $ | 2,160,049 | | | $ | 1,616,928 | |
Cost of sales | Cost of sales | | 607,951 | | | 458,924 | | | 1,607,683 | | | 1,532,593 | | Cost of sales | | 424,915 | | | 607,951 | | | 1,361,403 | | | 1,607,683 | |
Gross profit | Gross profit | | 20,982 | | | 124,580 | | | 9,245 | | | 483,465 | | Gross profit | | 376,175 | | | 20,982 | | | 798,646 | | | 9,245 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Selling, general and administrative | Selling, general and administrative | | 46,368 | | | 43,476 | | | 121,990 | | | 131,909 | | Selling, general and administrative | | 50,172 | | | 46,368 | | | 140,528 | | | 121,990 | |
Research and development | Research and development | | 29,183 | | | 25,426 | | | 81,520 | | | 69,234 | | Research and development | | 41,190 | | | 29,183 | | | 108,445 | | | 81,520 | |
Production start-up | Production start-up | | 19,768 | | | 2,945 | | | 40,337 | | | 16,014 | | Production start-up | | 12,059 | | | 19,768 | | | 54,930 | | | 40,337 | |
Litigation loss | | Litigation loss | | — | | | — | | | 35,590 | | | — | |
Total operating expenses | Total operating expenses | | 95,319 | | | 71,847 | | | 243,847 | | | 217,157 | | Total operating expenses | | 103,421 | | | 95,319 | | | 339,493 | | | 243,847 | |
Gain on sales of businesses, net | Gain on sales of businesses, net | | 5,984 | | | (1,866) | | | 253,272 | | | 147,284 | | Gain on sales of businesses, net | | 211 | | | 5,984 | | | 329 | | | 253,272 | |
Operating (loss) income | | (68,353) | | | 50,867 | | | 18,670 | | | 413,592 | | |
Operating income (loss) | | Operating income (loss) | | 272,965 | | | (68,353) | | | 459,482 | | | 18,670 | |
Foreign currency loss, net | Foreign currency loss, net | | (4,859) | | | (1,018) | | | (12,041) | | | (4,613) | | Foreign currency loss, net | | (987) | | | (4,859) | | | (11,586) | | | (12,041) | |
Interest income | Interest income | | 9,749 | | | 1,752 | | | 14,954 | | | 3,996 | | Interest income | | 23,254 | | | 9,749 | | | 74,102 | | | 14,954 | |
Interest expense, net | Interest expense, net | | (2,991) | | | (2,958) | | | (9,092) | | | (10,577) | | Interest expense, net | | (3,734) | | | (2,991) | | | (5,897) | | | (9,092) | |
Other income (expense), net | | 4,774 | | | (2,603) | | | 2,679 | | | 2,598 | | |
(Loss) income before taxes | | (61,680) | | | 46,040 | | | 15,170 | | | 404,996 | | |
Income tax benefit (expense) | | 12,512 | | | (837) | | | (51,788) | | | (67,673) | | |
Net (loss) income | | $ | (49,168) | | | $ | 45,203 | | | $ | (36,618) | | | $ | 337,323 | | |
Other (expense) income, net | | Other (expense) income, net | | (1,033) | | | 4,774 | | | (1,492) | | | 2,679 | |
Income (loss) before taxes | | Income (loss) before taxes | | 290,465 | | | (61,680) | | | 514,609 | | | 15,170 | |
Income tax (expense) benefit | | Income tax (expense) benefit | | (22,067) | | | 12,512 | | | (33,071) | | | (51,788) | |
Net income (loss) | | Net income (loss) | | $ | 268,398 | | | $ | (49,168) | | | $ | 481,538 | | | $ | (36,618) | |
| Net (loss) income per share: | | |
Net income (loss) per share: | | Net income (loss) per share: | |
Basic | Basic | | $ | (0.46) | | | $ | 0.43 | | | $ | (0.34) | | | $ | 3.18 | | Basic | | $ | 2.51 | | | $ | (0.46) | | | $ | 4.51 | | | $ | (0.34) | |
Diluted | Diluted | | $ | (0.46) | | | $ | 0.42 | | | $ | (0.34) | | | $ | 3.16 | | Diluted | | $ | 2.50 | | | $ | (0.46) | | | $ | 4.49 | | | $ | (0.34) | |
Weighted-average number of shares used in per share calculations: | Weighted-average number of shares used in per share calculations: | | | | | | | | | Weighted-average number of shares used in per share calculations: | | | | | | | | |
Basic | Basic | | 106,596 | | | 106,320 | | | 106,532 | | | 106,241 | | Basic | | 106,834 | | | 106,596 | | | 106,795 | | | 106,532 | |
Diluted | Diluted | | 106,596 | | | 106,899 | | | 106,532 | | | 106,879 | | Diluted | | 107,498 | | | 106,596 | | | 107,326 | | | 106,532 | |
See accompanying notes to these condensed consolidated financial statements.
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income | | $ | (49,168) | | | $ | 45,203 | | | $ | (36,618) | | | $ | 337,323 | |
Other comprehensive loss: | | | | | | | | |
Foreign currency translation adjustments | | (12,403) | | | (1,915) | | | (40,698) | | | (11,341) | |
Unrealized loss on marketable securities and restricted marketable securities, net of tax of $697, $47, $2,624 and $1,134 | | (13,884) | | | (3,486) | | | (53,372) | | | (19,961) | |
Unrealized (loss) gain on derivative instruments, net of tax of $905, $153, $2,540 and $(545) | | (3,333) | | | 118 | | | (9,418) | | | 4,284 | |
Other comprehensive loss | | (29,620) | | | (5,283) | | | (103,488) | | | (27,018) | |
Comprehensive (loss) income | | $ | (78,788) | | | $ | 39,920 | | | $ | (140,106) | | | $ | 310,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Net income (loss) | | $ | 268,398 | | | $ | (49,168) | | | $ | 481,538 | | | $ | (36,618) | |
Other comprehensive loss: | | | | | | | | |
Foreign currency translation adjustments | | (4,942) | | | (12,403) | | | (7,635) | | | (40,698) | |
Unrealized loss on marketable securities and restricted marketable securities, net of tax of $340, $697, $23, and $2,624 | | (8,696) | | | (13,884) | | | (3,045) | | | (53,372) | |
Unrealized gain (loss) on derivative instruments, net of tax of $(214), $905, $(1,087), and $2,540 | | 719 | | | (3,333) | | | 3,527 | | | (9,418) | |
Other comprehensive loss | | (12,919) | | | (29,620) | | | (7,153) | | | (103,488) | |
Comprehensive income (loss) | | $ | 255,479 | | | $ | (78,788) | | | $ | 474,385 | | | $ | (140,106) | |
See accompanying notes to these condensed consolidated financial statements.
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited) | | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current assets: | Current assets: | | | Current assets: | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 1,150,982 | | | $ | 1,450,654 | | Cash and cash equivalents | | $ | 1,492,958 | | | $ | 1,481,269 | |
Marketable securities | Marketable securities | | 776,213 | | | 375,389 | | Marketable securities | | 329,516 | | | 1,096,712 | |
Accounts receivable trade, net | Accounts receivable trade, net | | 325,421 | | | 429,436 | | Accounts receivable trade, net | | 753,520 | | | 324,337 | |
Accounts receivable unbilled, net | | 35,149 | | | 25,273 | | |
Accounts receivable unbilled | | Accounts receivable unbilled | | 33,603 | | | 30,654 | |
Inventories | Inventories | | 810,660 | | | 666,299 | | Inventories | | 882,787 | | | 636,312 | |
Other current assets | Other current assets | | 240,325 | | | 244,192 | | Other current assets | | 331,618 | | | 222,137 | |
Total current assets | Total current assets | | 3,338,750 | | | 3,191,243 | | Total current assets | | 3,824,002 | | | 3,791,421 | |
Property, plant and equipment, net | Property, plant and equipment, net | | 3,124,079 | | | 2,649,587 | | Property, plant and equipment, net | | 4,072,857 | | | 3,536,902 | |
PV solar power systems, net | | 153,915 | | | 217,293 | | |
Project assets | | 27,827 | | | 315,488 | | |
Deferred tax assets, net | Deferred tax assets, net | | 64,101 | | | 59,162 | | Deferred tax assets, net | | 133,407 | | | 78,680 | |
Restricted marketable securities | Restricted marketable securities | | 182,208 | | | 244,726 | | Restricted marketable securities | | 183,700 | | | 182,070 | |
Government grants receivable | | Government grants receivable | | 582,202 | | | — | |
Goodwill | Goodwill | | 14,462 | | | 14,462 | | Goodwill | | 28,473 | | | 14,462 | |
Intangible assets, net | Intangible assets, net | | 36,631 | | | 45,509 | | Intangible assets, net | | 66,379 | | | 31,106 | |
Inventories | Inventories | | 239,644 | | | 237,512 | | Inventories | | 261,359 | | | 260,395 | |
Other assets | Other assets | | 311,200 | | | 438,764 | | Other assets | | 430,266 | | | 356,192 | |
Total assets | Total assets | | $ | 7,492,817 | | | $ | 7,413,746 | | Total assets | | $ | 9,582,645 | | | $ | 8,251,228 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | | | |
Accounts payable | Accounts payable | | $ | 188,280 | | | $ | 193,374 | | Accounts payable | | $ | 110,795 | | | $ | 341,409 | |
Income taxes payable | Income taxes payable | | 25,771 | | | 4,543 | | Income taxes payable | | 33,583 | | | 29,397 | |
Accrued expenses | Accrued expenses | | 333,140 | | | 288,450 | | Accrued expenses | | 600,421 | | | 382,782 | |
Current portion of long-term debt | Current portion of long-term debt | | 5,435 | | | 3,896 | | Current portion of long-term debt | | 35,409 | | | — | |
Deferred revenue | Deferred revenue | | 235,293 | | | 201,868 | | Deferred revenue | | 372,167 | | | 263,215 | |
Other current liabilities | Other current liabilities | | 28,349 | | | 34,747 | | Other current liabilities | | 46,730 | | | 21,245 | |
Total current liabilities | Total current liabilities | | 816,268 | | | 726,878 | | Total current liabilities | | 1,199,105 | | | 1,038,048 | |
Accrued solar module collection and recycling liability | Accrued solar module collection and recycling liability | | 120,173 | | | 139,145 | | Accrued solar module collection and recycling liability | | 130,131 | | | 128,114 | |
Long-term debt | Long-term debt | | 254,224 | | | 236,005 | | Long-term debt | | 464,040 | | | 184,349 | |
Deferred revenue | | Deferred revenue | | 1,349,602 | | | 944,725 | |
Other liabilities | Other liabilities | | 473,815 | | | 352,167 | | Other liabilities | | 137,391 | | | 119,937 | |
Total liabilities | Total liabilities | | 1,664,480 | | | 1,454,195 | | Total liabilities | | 3,280,269 | | | 2,415,173 | |
Commitments and contingencies | Commitments and contingencies | | | | | Commitments and contingencies | | | | |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 106,605,913 and 106,332,315 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 107 | | | 106 | | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 106,844,040 and 106,609,094 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | | Common stock, $0.001 par value per share; 500,000,000 shares authorized; 106,844,040 and 106,609,094 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | | 107 | | | 107 | |
Additional paid-in capital | Additional paid-in capital | | 2,880,243 | | | 2,871,352 | | Additional paid-in capital | | 2,879,412 | | | 2,887,476 | |
Accumulated earnings | Accumulated earnings | | 3,147,837 | | | 3,184,455 | | Accumulated earnings | | 3,621,827 | | | 3,140,289 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (199,850) | | | (96,362) | | Accumulated other comprehensive loss | | (198,970) | | | (191,817) | |
Total stockholders’ equity | Total stockholders’ equity | | 5,828,337 | | | 5,959,551 | | Total stockholders’ equity | | 6,302,376 | | | 5,836,055 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 7,492,817 | | | $ | 7,413,746 | | Total liabilities and stockholders’ equity | | $ | 9,582,645 | | | $ | 8,251,228 | |
See accompanying notes to these condensed consolidated financial statements.
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited) | | | | Three Months Ended September 30, 2023 |
| | | | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | | | Shares | | Amount | |
Balance at June 30, 2023 | | Balance at June 30, 2023 | | 106,831 | | | $ | 107 | | | $ | 2,872,153 | | | $ | 3,353,429 | | | $ | (186,051) | | | $ | 6,039,638 | |
Net income | | Net income | | — | | | — | | | — | | | 268,398 | | | — | | | 268,398 | |
Other comprehensive loss | | Other comprehensive loss | | — | | | — | | | — | | | — | | | (12,919) | | | (12,919) | |
Common stock issued for share-based compensation | | Common stock issued for share-based compensation | | 18 | | | — | | | — | | | — | | | — | | | — | |
Tax withholding related to vesting of restricted stock | | Tax withholding related to vesting of restricted stock | | (5) | | | — | | | (853) | | | — | | | — | | | (853) | |
Share-based compensation expense | | Share-based compensation expense | | — | | | — | | | 8,112 | | | — | | | — | | | 8,112 | |
Balance at September 30, 2023 | | Balance at September 30, 2023 | | 106,844 | | | $ | 107 | | | $ | 2,879,412 | | | $ | 3,621,827 | | | $ | (198,970) | | | $ | 6,302,376 | |
| | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2022 |
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | | Shares | | Amount | | | | Shares | | Amount | |
Balance at June 30, 2022 | Balance at June 30, 2022 | | 106,594 | | | $ | 107 | | | $ | 2,868,945 | | | $ | 3,197,005 | | | $ | (170,230) | | | $ | 5,895,827 | | Balance at June 30, 2022 | | 106,594 | | | $ | 107 | | | $ | 2,868,945 | | | $ | 3,197,005 | | | $ | (170,230) | | | $ | 5,895,827 | |
| Net loss | Net loss | | — | | | — | | | — | | | (49,168) | | | — | | | (49,168) | | Net loss | | — | | | — | | | — | | | (49,168) | | | — | | | (49,168) | |
Other comprehensive loss | Other comprehensive loss | | — | | | — | | | — | | | — | | | (29,620) | | | (29,620) | | Other comprehensive loss | | — | | | — | | | — | | | — | | | (29,620) | | | (29,620) | |
Common stock issued for share-based compensation | Common stock issued for share-based compensation | | 15 | | | — | | | — | | | — | | | — | | | — | | Common stock issued for share-based compensation | | 15 | | | — | | | — | | | — | | | — | | | — | |
Tax withholding related to vesting of restricted stock | Tax withholding related to vesting of restricted stock | | (3) | | | — | | | (457) | | | — | | | — | | | (457) | | Tax withholding related to vesting of restricted stock | | (3) | | | — | | | (457) | | | — | | | — | | | (457) | |
Share-based compensation expense | Share-based compensation expense | | — | | | — | | | 11,755 | | | — | | | — | | | 11,755 | | Share-based compensation expense | | — | | | — | | | 11,755 | | | — | | | — | | | 11,755 | |
Balance at September 30, 2022 | Balance at September 30, 2022 | | 106,606 | | | $ | 107 | | | $ | 2,880,243 | | | $ | 3,147,837 | | | $ | (199,850) | | | $ | 5,828,337 | | Balance at September 30, 2022 | | 106,606 | | | $ | 107 | | | $ | 2,880,243 | | | $ | 3,147,837 | | | $ | (199,850) | | | $ | 5,828,337 | |
| | Three Months Ended September 30, 2021 | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | |
| | Shares | | Amount | | |
Balance at June 30, 2021 | | 106,319 | | | $ | 106 | | | $ | 2,859,108 | | | $ | 3,007,882 | | | $ | (83,461) | | | $ | 5,783,635 | | |
Net income | | — | | | — | | | — | | | 45,203 | | | — | | | 45,203 | | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (5,283) | | | (5,283) | | |
Common stock issued for share-based compensation | | 8 | | | — | | | — | | | — | | | — | | | — | | |
Tax withholding related to vesting of restricted stock | | (1) | | | — | | | (67) | | | — | | | — | | | (67) | | |
Share-based compensation expense | | — | | | — | | | 6,587 | | | — | | | — | | | 6,587 | | |
Balance at September 30, 2021 | | 106,326 | | | $ | 106 | | | $ | 2,865,628 | | | $ | 3,053,085 | | | $ | (88,744) | | | $ | 5,830,075 | | |
See accompanying notes to these condensed consolidated financial statements.
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited) | | | | Nine Months Ended September 30, 2023 |
| | | | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Equity |
| | | | Shares | | Amount | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | | 106,609 | | | $ | 107 | | | $ | 2,887,476 | | | $ | 3,140,289 | | | $ | (191,817) | | | $ | 5,836,055 | |
Net income | | Net income | | — | | | — | | | — | | | 481,538 | | | — | | | 481,538 | |
Other comprehensive loss | | Other comprehensive loss | | — | | | — | | | — | | | — | | | (7,153) | | | (7,153) | |
Common stock issued for share-based compensation | | Common stock issued for share-based compensation | | 389 | | | — | | | — | | | — | | | — | | | — | |
Tax withholding related to vesting of restricted stock | | Tax withholding related to vesting of restricted stock | | (154) | | | — | | | (31,100) | | | — | | | — | | | (31,100) | |
Share-based compensation expense | | Share-based compensation expense | | — | | | — | | | 23,036 | | | — | | | — | | | 23,036 | |
Balance at September 30, 2023 | | Balance at September 30, 2023 | | 106,844 | | | $ | 107 | | | $ | 2,879,412 | | | $ | 3,621,827 | | | $ | (198,970) | | | $ | 6,302,376 | |
| | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Equity |
| | Shares | | Amount | | | Shares | | Amount | |
Balance at December 31, 2021 | Balance at December 31, 2021 | | 106,332 | | | $ | 106 | | | $ | 2,871,352 | | | $ | 3,184,455 | | | $ | (96,362) | | | $ | 5,959,551 | | Balance at December 31, 2021 | | 106,332 | | | $ | 106 | | | $ | 2,871,352 | | | $ | 3,184,455 | | | $ | (96,362) | | | $ | 5,959,551 | |
Net loss | Net loss | | — | | | — | | | — | | | (36,618) | | | — | | | (36,618) | | Net loss | | — | | | — | | | — | | | (36,618) | | | — | | | (36,618) | |
Other comprehensive loss | Other comprehensive loss | | — | | | — | | | — | | | — | | | (103,488) | | | (103,488) | | Other comprehensive loss | | — | | | — | | | — | | | — | | | (103,488) | | | (103,488) | |
Common stock issued for share-based compensation | Common stock issued for share-based compensation | | 441 | | | 1 | | | — | | | — | | | — | | | 1 | | Common stock issued for share-based compensation | | 441 | | | 1 | | | — | | | — | | | — | | | 1 | |
Tax withholding related to vesting of restricted stock | Tax withholding related to vesting of restricted stock | | (167) | | | — | | | (12,048) | | | — | | | — | | | (12,048) | | Tax withholding related to vesting of restricted stock | | (167) | | | — | | | (12,048) | | | — | | | — | | | (12,048) | |
Share-based compensation expense | Share-based compensation expense | | — | | | — | | | 20,939 | | | — | | | — | | | 20,939 | | Share-based compensation expense | | — | | | — | | | 20,939 | | | — | | | — | | | 20,939 | |
Balance at September 30, 2022 | Balance at September 30, 2022 | | 106,606 | | | $ | 107 | | | $ | 2,880,243 | | | $ | 3,147,837 | | | $ | (199,850) | | | $ | 5,828,337 | | Balance at September 30, 2022 | | 106,606 | | | $ | 107 | | | $ | 2,880,243 | | | $ | 3,147,837 | | | $ | (199,850) | | | $ | 5,828,337 | |
| | Nine Months Ended September 30, 2021 | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | |
| Shares | | Amount | | |
Balance at December 31, 2020 | | 105,980 | | | $ | 106 | | | $ | 2,866,786 | | | $ | 2,715,762 | | | $ | (61,726) | | | $ | 5,520,928 | | |
Net income | | — | | | — | | | — | | | 337,323 | | | — | | | 337,323 | | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (27,018) | | | (27,018) | | |
Common stock issued for share-based compensation | | 554 | | | — | | | — | | | — | | | — | | | — | | |
Tax withholding related to vesting of restricted stock | | (208) | | | — | | | (15,877) | | | — | | | — | | | (15,877) | | |
Share-based compensation expense | | — | | | — | | | 14,719 | | | — | | | — | | | 14,719 | | |
Balance at September 30, 2021 | | 106,326 | | | $ | 106 | | | $ | 2,865,628 | | | $ | 3,053,085 | | | $ | (88,744) | | | $ | 5,830,075 | | |
See accompanying notes to these condensed consolidated financial statements.
FIRST SOLAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) | | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net (loss) income | | $ | (36,618) | | | $ | 337,323 | | |
Adjustments to reconcile net (loss) income to cash provided by operating activities: | | |
Net income (loss) | | Net income (loss) | | $ | 481,538 | | | $ | (36,618) | |
Adjustments to reconcile net income (loss) to cash provided by operating activities: | | Adjustments to reconcile net income (loss) to cash provided by operating activities: | |
Depreciation, amortization and accretion | Depreciation, amortization and accretion | | 199,183 | | | 194,606 | | Depreciation, amortization and accretion | | 218,303 | | | 199,183 | |
Impairments and net losses on disposal of long-lived assets | Impairments and net losses on disposal of long-lived assets | | 62,793 | | | 9,083 | | Impairments and net losses on disposal of long-lived assets | | 304 | | | 62,793 | |
Share-based compensation | Share-based compensation | | 21,121 | | | 14,974 | | Share-based compensation | | 23,209 | | | 21,121 | |
Deferred income taxes | Deferred income taxes | | (4,600) | | | (13,450) | | Deferred income taxes | | (46,053) | | | (4,600) | |
Gain on sales of businesses, net | Gain on sales of businesses, net | | (253,272) | | | (147,284) | | Gain on sales of businesses, net | | (329) | | | (253,272) | |
Gains on sales of marketable securities and restricted marketable securities | | — | | | (11,696) | | |
| | Other, net | Other, net | | (6,998) | | | (2,909) | | Other, net | | 89 | | | (6,998) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable, trade and unbilled | Accounts receivable, trade and unbilled | | 177,020 | | | 79,565 | | Accounts receivable, trade and unbilled | | (385,046) | | | 177,020 | |
Other current assets | | (28,615) | | | (52,275) | | |
Inventories | Inventories | | (161,725) | | | (116,017) | | Inventories | | (247,729) | | | (164,205) | |
Project assets and PV solar power systems | Project assets and PV solar power systems | | (160,300) | | | 11,945 | | Project assets and PV solar power systems | | 8,626 | | | (160,300) | |
Government grants receivable | | Government grants receivable | | (429,744) | | | — | |
Other assets | Other assets | | (22,936) | | | (39,264) | | Other assets | | (149,635) | | | (49,071) | |
Income tax receivable and payable | Income tax receivable and payable | | 40,902 | | | 22,615 | | Income tax receivable and payable | | (16,809) | | | 40,902 | |
Accounts payable | | (15,057) | | | 879 | | |
Accrued expenses and other liabilities | | 282,398 | | | (95,685) | | |
Accrued solar module collection and recycling liability | | (15,142) | | | 10,682 | | |
Accounts payable and accrued expenses | | Accounts payable and accrued expenses | | 121,382 | | | (42,809) | |
Deferred revenue | | Deferred revenue | | 472,934 | | | 293,872 | |
Other liabilities | | Other liabilities | | (9,889) | | | 1,136 | |
Net cash provided by operating activities | Net cash provided by operating activities | | 78,154 | | | 203,092 | | Net cash provided by operating activities | | 41,151 | | | 78,154 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Purchases of property, plant and equipment | Purchases of property, plant and equipment | | (576,704) | | | (345,399) | | Purchases of property, plant and equipment | | (1,039,863) | | | (576,704) | |
Purchases of marketable securities and restricted marketable securities | | (2,278,125) | | | (1,107,704) | | |
Proceeds from sales and maturities of marketable securities and restricted marketable securities | | 1,870,973 | | | 1,075,768 | | |
Purchases of marketable securities | | Purchases of marketable securities | | (3,220,467) | | | (2,278,125) | |
Proceeds from sales and maturities of marketable securities | | Proceeds from sales and maturities of marketable securities | | 3,996,439 | | | 1,870,973 | |
Proceeds from sales of businesses, net of cash and restricted cash sold | Proceeds from sales of businesses, net of cash and restricted cash sold | | 363,898 | | | 300,499 | | Proceeds from sales of businesses, net of cash and restricted cash sold | | — | | | 363,898 | |
Acquisitions, net of cash acquired | | Acquisitions, net of cash acquired | | (35,739) | | | — | |
Other investing activities | Other investing activities | | (2,561) | | | (6,453) | | Other investing activities | | — | | | (2,561) | |
Net cash used in investing activities | Net cash used in investing activities | | (622,519) | | | (83,289) | | Net cash used in investing activities | | (299,630) | | | (622,519) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Proceeds from borrowings under long-term debt, net of issuance costs | | Proceeds from borrowings under long-term debt, net of issuance costs | | 307,214 | | | 297,405 | |
Repayment of long-term debt | Repayment of long-term debt | | (75,896) | | | (38,471) | | Repayment of long-term debt | | — | | | (75,896) | |
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | | 297,405 | | | 45,138 | | |
Payments of tax withholdings for restricted shares | Payments of tax withholdings for restricted shares | | (12,048) | | | (15,877) | | Payments of tax withholdings for restricted shares | | (31,100) | | | (12,048) | |
| Net cash provided by (used in) financing activities | | 209,461 | | | (9,210) | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 39,866 | | | 1,687 | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | (295,038) | | | 112,280 | | |
Cash, cash equivalents and restricted cash, beginning of the period | | 1,455,837 | | | 1,273,594 | | |
Cash, cash equivalents and restricted cash, end of the period | | $ | 1,160,799 | | | $ | 1,385,874 | | |
Net cash provided by financing activities | | Net cash provided by financing activities | | 276,114 | | | 209,461 | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (855) | | | 39,866 | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents | | Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 16,780 | | | (295,038) | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of the period | | Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of the period | | 1,493,462 | | | 1,455,837 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of the period | | Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of the period | | $ | 1,510,242 | | | $ | 1,160,799 | |
Supplemental disclosure of noncash investing and financing activities: | Supplemental disclosure of noncash investing and financing activities: | | | | | Supplemental disclosure of noncash investing and financing activities: | | | | |
Property, plant and equipment acquisitions funded by liabilities | Property, plant and equipment acquisitions funded by liabilities | | $ | 163,147 | | | $ | 50,415 | | Property, plant and equipment acquisitions funded by liabilities | | $ | 185,064 | | | $ | 163,147 | |
Proceeds to be received from asset-based government grants | | Proceeds to be received from asset-based government grants | | $ | 152,458 | | | $ | — | |
Acquisitions funded by contingent consideration | | Acquisitions funded by contingent consideration | | $ | 18,500 | | | $ | — | |
Proceeds to be received from sales of businesses | Proceeds to be received from sales of businesses | | $ | 72,689 | | | $ | — | | Proceeds to be received from sales of businesses | | $ | 208 | | | $ | 72,689 | |
See accompanying notes to these condensed consolidated financial statements.
FIRST SOLAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries in this Quarterly Report have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of First Solar management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Certain prior period balances have been reclassified to conform to the current period presentation.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions. Operating results for the three and nine months ended September 30, 20222023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20222023 or for any other period. The condensed consolidated balance sheet at December 31, 20212022 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 20212022 included in our Annual Report on Form 10-K, which has been filed with the SEC.
Unless expressly stated or the context otherwise requires, the terms “the Company,” “we,” “us,” “our,” and “First Solar” refer to First Solar, Inc. and its consolidated subsidiaries, and the term “condensed consolidated financial statements” refers to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report.
2. Business Acquisitions
In May 2023, we acquired 100% of the shares of Evolar AB (“Evolar”), a developer of perovskite technology, for cash payments of $35.5 million, net of cash acquired of $0.5 million, and a promise to pay additional consideration of up to $42.5 million contingent on the achievement of certain technical milestones. The fair value of such contingent consideration was determined to be $18.5 million at the acquisition date. In connection with applying the acquisition method of accounting, $47.0 million of the purchase price consideration was assigned to an in-process research and development (“IPR&D”) intangible asset to be amortized over its useful life upon successful completion of the underlying project, $15.0 million was assigned to goodwill, $9.2 million was assigned to a deferred tax liability, and $2.0 million was assigned to property, plant and equipment.
The acquired IPR&D includes technical information, know-how, and other proprietary information associated with certain production capabilities for perovskite technology. The acquisition is expected to accelerate the development of high efficiency multi-junction devices by integrating Evolar’s know-how with First Solar’s existing research and development (“R&D”) capabilities, intellectual property portfolio, and expertise in developing and commercially scaling thin film photovoltaic (“PV”) products. The goodwill is attributable to the acquired technical workforce of Evolar and the synergies the Company expects through integrating the acquired technology to accelerate the development of next-generation PV technology. The goodwill resulting from this transaction is not expected to be deductible for income tax purposes.
3. Sales of Businesses
Sale of Japan Project Development Business
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. 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 selling utility-scale photovoltaic (“PV”)PV solar power systems. Additionally, PAG agreed to certain module purchase commitments.
In June 2022, we completed the sale of our Japan project development business for an aggregate purchase price of ¥66.4 billion ($488.4 million), subject to certain customary post-closing adjustments. During the nine months ended September 30, 2022, we received proceeds of ¥56.8 billion ($419.2 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, during the nine months ended September 30, 2022, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
Sales of North AmericanDuring the three and International O&M Operations
In August 2020, we entered into an agreement with a subsidiary of Clairvest Group, Inc. (“Clairvest”) for the sale of our North American operations and maintenance (“O&M”) operations. In March 2021, we completed the transaction and, following certain customary post-closing adjustments, received total consideration of $149.1 million. As a result of this transaction, we recognized a gain of $115.8 million, net of transaction costs and post-closing adjustments, during the nine months ended September 30, 2021,2023, we recognized certain post-closing adjustments associated with the prior sale of our Japan project development business, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
Sales of International O&M Operations
In January 2022, we completed the sale of our Chilean operations and maintenance (“O&M&M”) operations to a separate subsidiary of Clairvest forGroup, Inc. (“Clairvest”) and 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 nine months ended September 30, 2022, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
In September 2022, we completed the sale of our Australian O&M operations to a separate subsidiary of Clairvest for consideration of $6.6 million, subject to certain customary post-closing adjustments. Proceeds from the transaction were received in early October 2022. As a result of this transaction, we recognized a gain of $5.1 million, net of transaction costs, during the three months ended September 30, 2022, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
In September 2022, we also completed the sale of our Japanese O&M operations to a subsidiary of PAG for consideration of ¥660.0 million ($4.6 million), subject to certain customary post-closing adjustments. As a result of this transaction, we recognized a gain of $1.2 million, net of transaction costs, during the three months ended September 30, 2022, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
Sale of U.S. Project Development Business
In January 2021, we entered into an agreement with Leeward Renewable Energy Development, LLC (“Leeward”), a subsidiary of the Ontario Municipal Employees Retirement System, for the sale of our U.S. project development business. In March 2021, we completed the transaction and received consideration of $151.4 million for the sale of such business. As a result of this transaction, we recognized a gain of $31.5 million, net of transaction costs, duringDuring the nine months ended September 30, 2021,2023, we recognized certain post-closing adjustments associated with the prior sale of our O&M operations in a foreign jurisdiction, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations.
3.4. Cash, Cash Equivalents, and Marketable Securities
Cash, cash equivalents, and marketable securities consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
Cash and cash equivalents: | Cash and cash equivalents: | | | | | Cash and cash equivalents: | | | | |
Cash | Cash | | $ | 1,150,787 | | | $ | 1,450,654 | | Cash | | $ | 1,034,684 | | | $ | 1,476,945 | |
Money market funds | Money market funds | | 195 | | | — | | Money market funds | | 458,274 | | | 4,324 | |
Total cash and cash equivalents | Total cash and cash equivalents | | 1,150,982 | | | 1,450,654 | | Total cash and cash equivalents | | 1,492,958 | | | 1,481,269 | |
Marketable securities: | Marketable securities: | | | | | Marketable securities: | | | | |
Foreign debt | Foreign debt | | 62,880 | | | 103,317 | | Foreign debt | | 34,716 | | | 59,777 | |
U.S. debt | U.S. debt | | 56,406 | | | 18,627 | | U.S. debt | | 43,701 | | | 56,463 | |
U.S. Treasury securities | | U.S. Treasury securities | | 99,713 | | | — | |
Time deposits | Time deposits | | 656,927 | | | 253,445 | | Time deposits | | 151,386 | | | 980,472 | |
Total marketable securities | Total marketable securities | | 776,213 | | | 375,389 | | Total marketable securities | | 329,516 | | | 1,096,712 | |
Total cash, cash equivalents, and marketable securities | Total cash, cash equivalents, and marketable securities | | $ | 1,927,195 | | | $ | 1,826,043 | | Total cash, cash equivalents, and marketable securities | | $ | 1,822,474 | | | $ | 2,577,981 | |
The following table provides a reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents reported within our condensed consolidated balance sheets as of September 30, 20222023 and December 31, 20212022 to the total of such amounts as presented in the condensed consolidated statements of cash flows (in thousands):
| | | Balance Sheet Line Item | | September 30, 2022 | | December 31, 2021 | | Balance Sheet Line Item | | September 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | Cash and cash equivalents | | Cash and cash equivalents | | $ | 1,150,982 | | | $ | 1,450,654 | | Cash and cash equivalents | | Cash and cash equivalents | | $ | 1,492,958 | | | $ | 1,481,269 | |
Restricted cash – current | Restricted cash – current | | Other current assets | | 989 | | | 1,532 | | Restricted cash – current | | Other current assets | | 8,262 | | | 3,175 | |
Restricted cash – noncurrent | Restricted cash – noncurrent | | Other assets | | 8,828 | | | 3,651 | | Restricted cash – noncurrent | | Other assets | | 3,266 | | | 2,734 | |
Total cash, cash equivalents, and restricted cash | | $ | 1,160,799 | | | $ | 1,455,837 | | |
Restricted cash equivalents – noncurrent | | Restricted cash equivalents – noncurrent | | Other assets | | 5,756 | | | 6,284 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 1,510,242 | | | $ | 1,493,462 | |
During the nine months ended September 30, 2021,2023, we sold marketable securities for proceeds of $5.5$34.9 million and realized gainsa loss of less than $0.1 million on such sales. See Note 8.10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our marketable securities.
The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | As of September 30, 2022 | | | As of September 30, 2023 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign debt | Foreign debt | | $ | 62,932 | | | $ | 22 | | | $ | 64 | | | $ | 10 | | | $ | 62,880 | | Foreign debt | | $ | 35,000 | | | $ | — | | | $ | 276 | | | $ | 8 | | | $ | 34,716 | |
U.S. debt | U.S. debt | | 58,247 | | | — | | | 1,824 | | | 17 | | | 56,406 | | U.S. debt | | 45,562 | | | 15 | | | 1,864 | | | 12 | | | 43,701 | |
U.S. Treasury securities | | U.S. Treasury securities | | 99,701 | | | 12 | | | — | | | — | | | 99,713 | |
Time deposits | Time deposits | | 657,162 | | | — | | | — | | | 235 | | | 656,927 | | Time deposits | | 151,427 | | | — | | | — | | | 41 | | | 151,386 | |
Total | Total | | $ | 778,341 | | | $ | 22 | | | $ | 1,888 | | | $ | 262 | | | $ | 776,213 | | Total | | $ | 331,690 | | | $ | 27 | | | $ | 2,140 | | | $ | 61 | | | $ | 329,516 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign debt | | $ | 103,263 | | | $ | 81 | | | $ | 18 | | | $ | 9 | | | $ | 103,317 | |
U.S. debt | | 19,003 | | | 10 | | | 384 | | | 2 | | | 18,627 | |
Time deposits | | 253,531 | | | — | | | — | | | 86 | | | 253,445 | |
Total | | $ | 375,797 | | | $ | 91 | | | $ | 402 | | | $ | 97 | | | $ | 375,389 | |
The following table presents the change in the allowance for credit losses related to our available-for-sale marketable securities for the nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Allowance for credit losses, beginning of period | | $ | 97 | | | $ | 121 | |
Provision for credit losses, net | | 311 | | | 329 | |
Sales and maturities of marketable securities | | (146) | | | (317) | |
Allowance for credit losses, end of period | | $ | 262 | | | $ | 133 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign debt | | $ | 59,940 | | | $ | — | | | $ | 140 | | | $ | 23 | | | $ | 59,777 | |
U.S. debt | | 58,308 | | | — | | | 1,823 | | | 22 | | | 56,463 | |
Time deposits | | 980,810 | | | — | | | — | | | 338 | | | 980,472 | |
Total | | $ | 1,099,058 | | | $ | — | | | $ | 1,963 | | | $ | 383 | | | $ | 1,096,712 | |
The contractual maturities of our marketable securities as of September 30, 20222023 were as follows (in thousands):
| | | | | | | | |
| | Fair Value |
One year or less | | $ | 662,925316,221 | |
One year to two years | | 73,1535,116 | |
Two years to three years | | 31,8734,451 | |
Three years to four years | | 4,384— | |
Four years to five years | | — | |
More than five years | | 3,8783,728 | |
Total | | $ | 776,213329,516 | |
4.5. Restricted Marketable Securities
Restricted marketable securities consisted of the following as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Foreign government obligations | Foreign government obligations | | $ | 45,448 | | | $ | 64,855 | | Foreign government obligations | | $ | 46,140 | | | $ | 46,886 | |
Supranational debt | Supranational debt | | 8,625 | | | 10,997 | | Supranational debt | | 15,166 | | | 8,661 | |
U.S. debt | U.S. debt | | 110,859 | | | 145,326 | | U.S. debt | | 105,336 | | | 109,328 | |
U.S. government obligations | U.S. government obligations | | 17,276 | | | 23,548 | | U.S. government obligations | | 17,058 | | | 17,195 | |
Total restricted marketable securities | Total restricted marketable securities | | $ | 182,208 | | | $ | 244,726 | | Total restricted marketable securities | | $ | 183,700 | | | $ | 182,070 | |
Our restricted marketable securities represent long-term investments to fund the estimated future cost of collecting and recycling modules covered under our solar module collection and recycling program. We have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc.; First Solar Malaysia Sdn. Bhd.; and First Solar Manufacturing GmbH are grantors. As of September 30, 20222023 and December 31, 2021,2022, such custodial accounts also included noncurrent restricted cash and cash equivalents balances of $6.3$5.8 million and $0.9$6.7 million, respectively, which were reported within “Other assets.”
Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. As necessary, we fund any incremental amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years.
During the nine months ended September 30, 2021, we sold all our restricted marketable securities for proceeds of $258.9 million and realized gains of $11.7 million on such sales, and repurchased $255.6 million of restricted marketable securities as part of our ongoing management of the custodial accounts. See Note 8.10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted marketable securities.
The following tables summarize the unrealized gains and losses related to our restricted marketable securities, by major security type, as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | As of September 30, 2022 | | | As of September 30, 2023 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign government obligations | Foreign government obligations | | $ | 60,333 | | | $ | — | | | $ | 14,875 | | | $ | 10 | | | $ | 45,448 | | Foreign government obligations | | $ | 63,377 | | | $ | — | | | $ | 17,227 | | | $ | 10 | | | $ | 46,140 | |
Supranational debt | Supranational debt | | 11,201 | | | — | | | 2,576 | | | — | | | 8,625 | | Supranational debt | | 17,743 | | | 341 | | | 2,918 | | | — | | | 15,166 | |
U.S. debt | U.S. debt | | 148,733 | | | — | | | 37,846 | | | 28 | | | 110,859 | | U.S. debt | | 146,938 | | | — | | | 41,574 | | | 28 | | | 105,336 | |
U.S. government obligations | U.S. government obligations | | 24,574 | | | — | | | 7,294 | | | 4 | | | 17,276 | | U.S. government obligations | | 24,483 | | | — | | | 7,421 | | | 4 | | | 17,058 | |
Total | Total | | $ | 244,841 | | | $ | — | | | $ | 62,591 | | | $ | 42 | | | $ | 182,208 | | Total | | $ | 252,541 | | | $ | 341 | | | $ | 69,140 | | | $ | 42 | | | $ | 183,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign government obligations | | $ | 66,867 | | | $ | — | | | $ | 2,002 | | | $ | 10 | | | $ | 64,855 | |
Supranational debt | | 11,362 | | | — | | | 365 | | | — | | | 10,997 | |
U.S. debt | | 150,060 | | | — | | | 4,697 | | | 37 | | | 145,326 | |
U.S. government obligations | | 24,640 | | | — | | | 1,086 | | | 6 | | | 23,548 | |
Total | | $ | 252,929 | | | $ | — | | | $ | 8,150 | | | $ | 53 | | | $ | 244,726 | |
The following table presents the change in the allowance for credit losses related to our restricted marketable securities for the nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Allowance for credit losses, beginning of period | | $ | 53 | | | $ | 13 | |
Provision for credit losses, net | | (11) | | | 69 | |
Sales of restricted marketable securities | | — | | | (29) | |
Allowance for credit losses, end of period | | $ | 42 | | | $ | 53 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Foreign government obligations | | $ | 64,008 | | | $ | — | | | $ | 17,112 | | | $ | 10 | | | $ | 46,886 | |
Supranational debt | | 11,146 | | | — | | | 2,485 | | | — | | | 8,661 | |
U.S. debt | | 148,288 | | | — | | | 38,932 | | | 28 | | | 109,328 | |
U.S. government obligations | | 24,551 | | | — | | | 7,352 | | | 4 | | | 17,195 | |
Total | | $ | 247,993 | | | $ | — | | | $ | 65,881 | | | $ | 42 | | | $ | 182,070 | |
As of September 30, 2022,2023, the contractual maturities of our restricted marketablethese securities were between 87 years and 1716 years.
5.6. Consolidated Balance Sheet Details
Accounts receivable trade, net
Accounts receivable trade, net consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Accounts receivable trade, gross | Accounts receivable trade, gross | | $ | 325,991 | | | $ | 430,100 | | Accounts receivable trade, gross | | $ | 757,726 | | | $ | 325,379 | |
Allowance for credit losses | Allowance for credit losses | | (570) | | | (664) | | Allowance for credit losses | | (4,206) | | | (1,042) | |
Accounts receivable trade, net | Accounts receivable trade, net | | $ | 325,421 | | | $ | 429,436 | | Accounts receivable trade, net | | $ | 753,520 | | | $ | 324,337 | |
Accounts receivable unbilled, net
Accounts receivable unbilled, net consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Accounts receivable unbilled, gross | | $ | 35,149 | | | $ | 25,336 | |
Allowance for credit losses | | — | | | (63) | |
Accounts receivable unbilled, net | | $ | 35,149 | | | $ | 25,273 | |
Allowance for credit losses
The following tables present the change in the allowances for credit losses related to our accounts receivable for the nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
Accounts receivable trade | | 2022 | | 2021 |
Allowance for credit losses, beginning of period | | $ | 664 | | | $ | 3,009 | |
Provision for credit losses, net | | 81 | | | (1,458) | |
Writeoffs | | (175) | | | (121) | |
Allowance for credit losses, end of period | | $ | 570 | | | $ | 1,430 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
Accounts receivable unbilled | | 2022 | | 2021 |
Allowance for credit losses, beginning of period | | $ | 63 | | | $ | 303 | |
Provision for credit losses, net | | (63) | | | (252) | |
| | | | |
Allowance for credit losses, end of period | | $ | — | | | $ | 51 | |
Inventories
Inventories consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Raw materials | Raw materials | | $ | 382,552 | | | $ | 404,727 | | Raw materials | | $ | 445,412 | | | $ | 412,848 | |
Work in process | Work in process | | 59,764 | | | 65,573 | | Work in process | | 92,494 | | | 66,641 | |
Finished goods | Finished goods | | 607,988 | | | 433,511 | | Finished goods | | 606,240 | | | 417,218 | |
Inventories | Inventories | | $ | 1,050,304 | | | $ | 903,811 | | Inventories | | $ | 1,144,146 | | | $ | 896,707 | |
Inventories – current | Inventories – current | | $ | 810,660 | | | $ | 666,299 | | Inventories – current | | $ | 882,787 | | | $ | 636,312 | |
Inventories – noncurrent | Inventories – noncurrent | | $ | 239,644 | | | $ | 237,512 | | Inventories – noncurrent | | $ | 261,359 | | | $ | 260,395 | |
Other current assets
Other current assets consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Spare maintenance materials and parts | Spare maintenance materials and parts | | $ | 112,796 | | | $ | 112,070 | | Spare maintenance materials and parts | | $ | 144,820 | | | $ | 114,428 | |
Prepaid expenses | Prepaid expenses | | 47,289 | | | 28,232 | | Prepaid expenses | | 51,736 | | | 43,262 | |
Operating supplies | Operating supplies | | 43,458 | | | 41,034 | | Operating supplies | | 41,993 | | | 32,556 | |
Insurance receivable for accrued litigation (1) | | Insurance receivable for accrued litigation (1) | | 21,800 | | | — | |
Prepaid income taxes | Prepaid income taxes | | 13,550 | | | 41,379 | | Prepaid income taxes | | 14,688 | | | 8,314 | |
Derivative instruments (1) | | 11,247 | | | 5,816 | | |
Restricted cash | Restricted cash | | 989 | | | 1,532 | | Restricted cash | | 8,262 | | | 3,175 | |
Derivative instruments (2) | | Derivative instruments (2) | | 1,836 | | | 2,018 | |
Other | Other | | 10,996 | | | 14,129 | | Other | | 46,483 | | | 18,384 | |
Other current assets | Other current assets | | $ | 240,325 | | | $ | 244,192 | | Other current assets | | $ | 331,618 | | | $ | 222,137 | |
——————————
(1)See Note 6.12. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our legal proceedings.
(2)See Note 8. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Land | Land | | $ | 17,703 | | | $ | 18,359 | | Land | | $ | 35,240 | | | $ | 35,259 | |
Buildings and improvements | Buildings and improvements | | 874,533 | | | 693,289 | | Buildings and improvements | | 998,516 | | | 893,049 | |
Machinery and equipment | Machinery and equipment | | 2,719,789 | | | 2,527,627 | | Machinery and equipment | | 3,561,843 | | | 2,762,801 | |
Office equipment and furniture | Office equipment and furniture | | 144,223 | | | 139,611 | | Office equipment and furniture | | 157,510 | | | 146,467 | |
Leasehold improvements | Leasehold improvements | | 40,124 | | | 40,517 | | Leasehold improvements | | 40,064 | | | 40,160 | |
Construction in progress | Construction in progress | | 724,211 | | | 461,708 | | Construction in progress | | 964,135 | | | 1,121,938 | |
Property, plant and equipment, gross | Property, plant and equipment, gross | | 4,520,583 | | | 3,881,111 | | Property, plant and equipment, gross | | 5,757,308 | | | 4,999,674 | |
Accumulated depreciation | Accumulated depreciation | | (1,396,504) | | | (1,231,524) | | Accumulated depreciation | | (1,684,451) | | | (1,462,772) | |
Property, plant and equipment, net | Property, plant and equipment, net | | $ | 3,124,079 | | | $ | 2,649,587 | | Property, plant and equipment, net | | $ | 4,072,857 | | | $ | 3,536,902 | |
Depreciation of property, plant and equipment was $80.7 million and $223.5 million for the three and nine months ended September 30, 2023, respectively, and $61.6 million and $180.2 million for the three and nine months ended September 30, 2022, respectively, and $59.1 million and $174.7 million for the three and nine months ended September 30, 2021, respectively.
PV solar power systems, net
PV solar power systems, net consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
PV solar power systems, gross | | $ | 225,193 | | | $ | 281,660 | |
Accumulated depreciation | | (71,278) | | | (64,367) | |
PV solar power systems, net | | $ | 153,915 | | | $ | 217,293 | |
Depreciation of PV solar power systems was $2.0 million and $7.1 million for the three and nine months ended September 30, 2022, respectively, and $3.0 million and $8.9 million for the three and nine months ended September 30, 2021, respectively.
We evaluate our PV solar power systems for impairment under a held and used impairment model whenever events or changes in circumstances arise that may indicate that the carrying amount of a particular system may not be recoverable. Such events or changes may include a significant decrease in the market price of the asset, current-period operating or cash flow losses combined with a history of such losses or a projection of future losses associated with the use of the asset, and changes in expectations regarding our intent to hold the asset on a long-term basis or the timing of a potential asset disposition.
During the nine months ended September 30, 2022, we received multiple non-binding offers to purchase our Luz del Norte PV solar power plant and elected to pursue such opportunities in coordination with the project’s lenders. As a result of the expected sale in the near term, we compared the undiscounted future cash flows for the project to its carrying value and determined that the project was not recoverable. Accordingly, we measured the fair value of the project using a market approach valuation technique and recorded an impairment loss of $57.8 million in “Cost of sales” in our condensed consolidated statements of operations during the nine months ended September 30, 2022. Such impairment loss was comprised of $55.6 million for PV solar power systems, $1.3 million for intangible assets, and $0.9 million for operating lease assets. In October 2022, we entered into an agreement to sell the project, which, subject to Chilean antitrust approval, is expected to be completed in late 2022.
Project assets
Project assets consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Project assets – development costs, including project acquisition and land costs | | $ | 27,827 | | | $ | 117,407 | |
Project assets – construction costs | | — | | | 198,081 | |
Project assets | | $ | 27,827 | | | $ | 315,488 | |
In June 2022, we completed the sale of the majority of our project assets to PAG in connection with the sale of our Japan project development business. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information about this transaction.
Goodwill
Goodwill for the relevant reporting unit consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Acquisitions (Impairments) | | September 30, 2022 |
Modules | | $ | 407,827 | | | $ | — | | | $ | 407,827 | |
Accumulated impairment losses | | (393,365) | | | — | | | (393,365) | |
Goodwill | | $ | 14,462 | | | $ | — | | | $ | 14,462 | |
Intangible assets, net
Intangible assets, net consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Gross Amount | | Accumulated Amortization | | Accumulated Impairments | | Net Amount |
Developed technology | | $ | 100,606 | | | $ | (69,409) | | | $ | — | | | $ | 31,197 | |
Power purchase agreements | | 6,486 | | | (1,842) | | | (1,300) | | | 3,344 | |
Patents | | 8,480 | | | (6,390) | | | — | | | 2,090 | |
Intangible assets, net | | $ | 115,572 | | | $ | (77,641) | | | $ | (1,300) | | | $ | 36,631 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Gross Amount | | Accumulated Amortization | | | | Net Amount |
Developed technology | | $ | 99,964 | | | $ | (61,985) | | | | | $ | 37,979 | |
Power purchase agreements | | 6,486 | | | (1,621) | | | | | 4,865 | |
Patents | | 8,480 | | | (5,815) | | | | | 2,665 | |
Intangible assets, net | | $ | 114,930 | | | $ | (69,421) | | | | | $ | 45,509 | |
Amortization of intangible assets was $2.7 million and $8.2 million for the three and nine months ended September 30, 2022 and 2021, respectively.
Other assets
Other assets consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Advance payments for raw materials | | Advance payments for raw materials | | $ | 163,192 | | | $ | 91,260 | |
Operating lease assets (1) | Operating lease assets (1) | | $ | 97,861 | | | $ | 207,544 | | Operating lease assets (1) | | 81,512 | | | 93,185 | |
Advance payments for raw materials | | 81,619 | | | 86,962 | | |
Income tax receivables | Income tax receivables | | 47,235 | | | 39,862 | | Income tax receivables | | 70,818 | | | 56,993 | |
Project assets | | Project assets | | 26,906 | | | 30,108 | |
Prepaid expenses | | Prepaid expenses | | 22,443 | | | 11,714 | |
Restricted cash equivalents | | Restricted cash equivalents | | 5,756 | | | 6,284 | |
Accounts receivable unbilled, net | Accounts receivable unbilled, net | | 11,488 | | | 20,840 | | Accounts receivable unbilled, net | | 4,691 | | | 11,498 | |
Restricted cash | | Restricted cash | | 3,266 | | | 2,734 | |
Accounts receivable trade, net | Accounts receivable trade, net | | 9,645 | | | 21,293 | | Accounts receivable trade, net | | — | | | 1,500 | |
Restricted cash | | 8,828 | | | 3,651 | | |
Indirect tax receivables | | 351 | | | 21,873 | | |
Other | Other | | 54,173 | | | 36,739 | | Other | | 51,682 | | | 50,916 | |
Other assets | Other assets | | $ | 311,200 | | | $ | 438,764 | | Other assets | | $ | 430,266 | | | $ | 356,192 | |
——————————
(1)See Note 7.9. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.
Accrued expenses
Accrued expenses consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Accrued inventory | | Accrued inventory | | $ | 232,503 | | | $ | 44,679 | |
Accrued property, plant and equipment | Accrued property, plant and equipment | | $ | 124,950 | | | $ | 42,031 | | Accrued property, plant and equipment | | 178,077 | | | 148,777 | |
Accrued freight | Accrued freight | | 77,482 | | | 61,429 | | Accrued freight | | 64,668 | | | 77,136 | |
Accrued compensation and benefits | Accrued compensation and benefits | | 37,138 | | | 34,606 | | Accrued compensation and benefits | | 37,697 | | | 47,939 | |
Accrued inventory | | 37,037 | | | 42,170 | | |
Accrued other taxes | Accrued other taxes | | 12,472 | | | 23,103 | | Accrued other taxes | | 20,172 | | | 19,765 | |
Product warranty liability (1) | Product warranty liability (1) | | 11,039 | | | 13,598 | | Product warranty liability (1) | | 7,647 | | | 10,660 | |
Accrued project costs | | 5,618 | | | 48,836 | | |
Other | Other | | 27,404 | | | 22,677 | | Other | | 59,657 | | | 33,826 | |
Accrued expenses | Accrued expenses | | $ | 333,140 | | | $ | 288,450 | | Accrued expenses | | $ | 600,421 | | | $ | 382,782 | |
——————————
(1)See Note 10.12. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product Warranties.”
Other current liabilities
Other current liabilities consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Derivative instruments (1) | | $ | 12,892 | | | $ | 3,550 | | |
Accrued litigation (1) | | Accrued litigation (1) | | $ | 21,800 | | | $ | — | |
Operating lease liabilities (2) | Operating lease liabilities (2) | | 8,907 | | | 12,781 | | Operating lease liabilities (2) | | 9,647 | | | 9,193 | |
Other taxes payable | | 1,813 | | | 8,123 | | |
Contingent consideration (3) | | Contingent consideration (3) | | 7,500 | | | — | |
Derivative instruments (4) | | Derivative instruments (4) | | 2,959 | | | 6,668 | |
Other | Other | | 4,737 | | | 10,293 | | Other | | 4,824 | | | 5,384 | |
Other current liabilities | Other current liabilities | | $ | 28,349 | | | $ | 34,747 | | Other current liabilities | | $ | 46,730 | | | $ | 21,245 | |
——————————
(1)See Note 6.12. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our legal proceedings.
(2)See Note 9. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.
(3)See Note 12. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our contingent consideration arrangements.
(4)See Note 8. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.
(2)
Other liabilities
Other liabilities consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
Deferred revenue | | $ | 348,940 | | | $ | 95,943 | | |
Deferred tax liabilities, net | | Deferred tax liabilities, net | | $ | 47,632 | | | $ | 28,929 | |
Operating lease liabilities (1) | Operating lease liabilities (1) | | 44,655 | | | 145,912 | | Operating lease liabilities (1) | | 34,222 | | | 40,589 | |
Deferred tax liabilities, net | | 24,812 | | | 27,699 | | |
Product warranty liability (2) | Product warranty liability (2) | | 23,946 | | | 38,955 | | Product warranty liability (2) | | 18,500 | | | 23,127 | |
Contingent consideration (3) | | Contingent consideration (3) | | 11,000 | | | — | |
Other | Other | | 31,462 | | | 43,658 | | Other | | 26,037 | | | 27,292 | |
Other liabilities | Other liabilities | | $ | 473,815 | | | $ | 352,167 | | Other liabilities | | $ | 137,391 | | | $ | 119,937 | |
——————————
(1)See Note 7.9. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.
(2)See Note 10.12. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product Warranties.”
(3)See Note 12. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our contingent consideration arrangements.
7. Government Grants
Government grants represent benefits provided by federal, state, or local governments that are not subject to the scope of ASC 740. We recognize a grant when we have reasonable assurance that we will comply with the grant’s conditions and that the grant will be received. 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 a reduction to such asset’s cost-basis, which reduces future depreciation. Other government grants not related to long-lived assets are considered income-based grants, which are recognized as a reduction to the related cost of activities that generated the benefit.
The following table presents the benefits recognized from asset-based government grants in our condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | |
Balance Sheet Line Item | | September 30, 2023 | | December 31, 2022 |
Property, plant and equipment, net | | $ | 146,596 | | | $ | — | |
Other assets | | 5,862 | | | — | |
In February 2021, the state government of Tamil Nadu granted First Solar certain incentives associated with the construction of our first manufacturing facility in India. Among other things, such incentives provide a 24% subsidy for eligible capital investments, contingent upon meeting certain minimum investment and employment commitments. The capital subsidy is expected to be paid in six annual installments beginning in the fiscal year following the initial period of module production. Module production began during the three months ended September 30, 2023. Such credit is reflected on our condensed consolidated balance sheets within “Government grants receivable.”
6.The following table presents the benefits recognized from income-based government grants in our condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Income Statement Line Item | | 2023 | | 2022 | | 2023 | | 2022 |
Cost of sales | | $ | 204,623 | | | $ | — | | | $ | 429,744 | | | $ | — | |
In August 2022, the U.S. President signed into law the Inflation Reduction Act of 2022 (“IRA”). Among other things, the IRA offers a tax credit, pursuant to Section 45X of the Internal Revenue Code (“IRC”), 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. 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. We recognize such credit as a reduction to “Cost of sales” in the period the modules are sold to customers. Such credit is also reflected on our condensed consolidated balance sheets within “Government grants receivable.”
8. Derivative Financial Instruments
As a global company, we are exposed in the normal course of business to interest rate, foreign currency, and commodity price risks that could affect our financial position, results of operations, and cash flows. We use derivative instruments to hedge against these risks and only hold such instruments for hedging purposes, not for speculative or trading purposes.
Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive loss” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (i.e., “economic hedges”), we record the changes in fair value directly to earnings. See Note 8.10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.
The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | September 30, 2022 | | | September 30, 2023 |
| | Other Current Assets | | | Other Current Liabilities | | Other Liabilities | | Other Current Assets | | | Other Current Liabilities | |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | | | Derivatives designated as hedging instruments: | | | | | | |
Foreign exchange forward contracts | | $ | 4,341 | | | | $ | — | | | $ | — | | |
Commodity swap contracts | Commodity swap contracts | | — | | | | 9,133 | | | 840 | | Commodity swap contracts | | $ | — | | | | $ | 1,478 | | |
Total derivatives designated as hedging instruments | Total derivatives designated as hedging instruments | | $ | 4,341 | | | | $ | 9,133 | | | $ | 840 | | Total derivatives designated as hedging instruments | | $ | — | | | | $ | 1,478 | | |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | | Derivatives not designated as hedging instruments: | | | | |
Foreign exchange forward contracts | Foreign exchange forward contracts | | $ | 6,906 | | | | $ | 3,759 | | | $ | — | | Foreign exchange forward contracts | | $ | 1,836 | | | | $ | 1,481 | | |
| Total derivatives not designated as hedging instruments | Total derivatives not designated as hedging instruments | | $ | 6,906 | | | | $ | 3,759 | | | $ | — | | Total derivatives not designated as hedging instruments | | $ | 1,836 | | | | $ | 1,481 | | |
Total derivative instruments | Total derivative instruments | | $ | 11,247 | | | | $ | 12,892 | | | $ | 840 | | Total derivative instruments | | $ | 1,836 | | | | $ | 2,959 | | |
| | | | December 31, 2021 | | | December 31, 2022 |
| | Other Current Assets | | Other Current Liabilities | | | Other Current Assets | | Other Assets | | Other Current Liabilities | | Other Liabilities |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | Derivatives designated as hedging instruments: | | | | | | | | |
Foreign exchange forward contracts | | $ | 1,336 | | | $ | 139 | | | |
Commodity swap contracts | | Commodity swap contracts | | $ | — | | | $ | 17 | | | $ | 4,447 | | | $ | 144 | |
Total derivatives designated as hedging instruments | Total derivatives designated as hedging instruments | | $ | 1,336 | | | $ | 139 | | | Total derivatives designated as hedging instruments | | $ | — | | | $ | 17 | | | $ | 4,447 | | | $ | 144 | |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | Derivatives not designated as hedging instruments: | |
Foreign exchange forward contracts | Foreign exchange forward contracts | | $ | 4,480 | | | $ | 3,411 | | | Foreign exchange forward contracts | | $ | 2,018 | | | $ | — | | | $ | 2,221 | | | $ | — | |
Total derivatives not designated as hedging instruments | Total derivatives not designated as hedging instruments | | $ | 4,480 | | | $ | 3,411 | | | Total derivatives not designated as hedging instruments | | $ | 2,018 | | | $ | — | | | $ | 2,221 | | | $ | — | |
Total derivative instruments | Total derivative instruments | | $ | 5,816 | | | $ | 3,550 | | | Total derivative instruments | | $ | 2,018 | | | $ | 17 | | | $ | 6,668 | | | $ | 144 | |
The following table presents the pretax amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the nine months ended September 30, 20222023 and 20212022 (in thousands):
| | | Foreign Exchange Forward Contracts | | Commodity Swap Contracts | | Total | | Foreign Exchange Forward Contracts | | Commodity Swap Contracts | | Total |
Balance as of December 31, 2021 | | $ | 1,126 | | | $ | — | | | $ | 1,126 | | |
Balance as of December 31, 2022 | | Balance as of December 31, 2022 | | $ | — | | | $ | (7,242) | | | $ | (7,242) | |
Amounts recognized in other comprehensive income (loss) | Amounts recognized in other comprehensive income (loss) | | 545 | | | (10,832) | | | (10,287) | | Amounts recognized in other comprehensive income (loss) | | — | | | (962) | | | (962) | |
| Amounts reclassified to earnings impacting: | Amounts reclassified to earnings impacting: | | Amounts reclassified to earnings impacting: | |
| Cost of sales | Cost of sales | | (1,671) | | | — | | | (1,671) | | Cost of sales | | — | | | 5,576 | | | 5,576 | |
| Balance as of September 30, 2022 | | $ | — | | | $ | (10,832) | | | $ | (10,832) | | |
Balance as of September 30, 2023 | | Balance as of September 30, 2023 | | $ | — | | | $ | (2,628) | | | $ | (2,628) | |
| Balance as of December 31, 2020 | | $ | (3,644) | | | $ | 1,472 | | | $ | (2,172) | | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | | $ | 1,126 | | | $ | — | | | $ | 1,126 | |
Amounts recognized in other comprehensive income (loss) | Amounts recognized in other comprehensive income (loss) | | 2,268 | | | 1,531 | | | 3,799 | | Amounts recognized in other comprehensive income (loss) | | 545 | | | (10,832) | | | (10,287) | |
Amounts reclassified to earnings impacting: | Amounts reclassified to earnings impacting: | | Amounts reclassified to earnings impacting: | |
| Cost of sales | Cost of sales | | 1,913 | | | (883) | | | 1,030 | | Cost of sales | | (1,671) | | | — | | | (1,671) | |
| Balance as of September 30, 2021 | | $ | 537 | | | $ | 2,120 | | | $ | 2,657 | | |
Balance as of September 30, 2022 | | Balance as of September 30, 2022 | | $ | — | | | $ | (10,832) | | | $ | (10,832) | |
During the nine months ended September 30, 2022, we recognized unrealized losses of less than $0.1 million within “Cost of sales” for amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges. During the three and nine months ended September 30, 2021, we recognized unrealized gains of less than $0.1 million and unrealized losses of less than $0.1 million, respectively, within “Cost of sales” for amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges.
The following table presents the pretax amounts related to derivative instruments designated as net investment hedges affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the nine months ended September 30, 2022 (in thousands):
| | | | | | | | |
| | Foreign Exchange Forward Contracts |
Balance as of December 31, 2021 | | $ | — | |
Amounts recognized in other comprehensive income (loss) | | 4,341 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Balance as of September 30, 2022 | | $ | 4,341 | |
During the three and nine months ended September 30, 2022, we recognized unrealized gains of $0.4 million and $0.5 million, respectively, within “Other income (expense), net” for amounts excluded from effectiveness testing for our derivative instruments designated as net investment hedges.
The following table presents gains and losses related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and nine months ended September 30, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amount of Gain (Loss) Recognized in Income |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Income Statement Line Item | | 2022 | | 2021 | | 2022 | | 2021 |
Foreign exchange forward contracts | | Cost of sales | | $ | 55 | | | $ | 103 | | | $ | 577 | | | $ | (174) | |
Foreign exchange forward contracts | | Foreign currency loss, net | | 7,905 | | | 1,802 | | | 71,420 | | | 10,821 | |
Interest rate swap contracts | | Interest expense, net | | — | | | 96 | | | — | | | (595) | |
Interest Rate Risk
From time to time, we may use interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments. We do not use such swap contracts for speculative or trading purposes. During the nine months ended September 30, 2021, all of our interest rate swap contracts related to project specific debt facilities. Such swap contracts did not qualify for accounting as cash flow hedges in accordance with Accounting Standards Codification (“ASC”) 815 due to our expectation to sell the associated projects before the maturity of their project specific debt financings and corresponding swap contracts. Accordingly, changes in the fair values of these swap contracts were recorded directly to “Interest expense, net.” | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amount of Gain (Loss) Recognized in Income |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Income Statement Line Item | | 2023 | | 2022 | | 2023 | | 2022 |
Foreign exchange forward contracts | | Cost of sales | | $ | — | | | $ | 55 | | | $ | — | | | $ | 577 | |
Foreign exchange forward contracts | | Foreign currency loss, net | | 4,533 | | | 7,905 | | | (9,568) | | | 71,420 | |
Foreign Currency Risk
Cash Flow Exposure
We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, from time to time we may enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of December 31, 2021, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to 11 months. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASCAccounting Standards Codification (“ASC”) 815, and we designated them as such. We report unrealized gains or losses on such contracts in “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges as of December 31, 2021.
As of December 31, 2021, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):
| | | | | | | | | | | | | | |
| | December 31, 2021 |
Currency | | Notional Amount | | USD Equivalent |
U.S. dollar (1) | | $38.4 | | $38.4 |
British pound | | GBP 10.6 | | $14.4 |
——————————
(1)These derivative instruments represent hedges of outstanding payables denominated in U.S. dollars at certain of our foreign subsidiaries whose functional currencies are other than the U.S. dollar.
Net Investment Exposure
The functional currencies of certain of our foreign subsidiaries are their local currencies. Accordingly, we apply period-end exchange rates to translate their assets and liabilities and daily transaction exchange rates to translate their revenues, expenses, gains, and losses into U.S. dollars. We include the associated translation adjustments as a separate component of “Accumulated other comprehensive loss” within stockholders’ equity. From time to time, we may seek to mitigate the impact of such translation adjustments by entering into foreign exchange forward contracts that are designated as hedges of net investments in certain foreign subsidiaries. In June 2022, we entered into a foreign exchange forward contract with a notional value of ¥8.0 billion ($60.6 million), which qualifies for and was designated as a hedge of our net investment in a certain foreign subsidiary in Japan. As of September 30, 2022, this foreign exchange forward contract hedged such net investment for a remaining period of 3 months. We report unrealized gains or losses on this contract, which are based on spot exchange rates, as a component of our foreign currency translation adjustments within “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the net investments are sold or substantially liquidated. We determined that this derivative financial instrument was highly effective as a net investment hedge as of September 30, 2022.
Transaction Exposure and Economic Hedging
Many of our subsidiaries have assets and liabilities (primarily cash, receivables, deferred taxes, payables, accrued expenses, operating lease liabilities, 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 condensed consolidated statements of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on such foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.
We also enter into foreign exchange forward contracts to economically hedge balance sheet and other exposures related to transactions between certain of our subsidiaries and transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting. Accordingly, we recognize gains or losses from the fluctuations in foreign exchange rates and the fair value of these derivative contracts in “Foreign currency loss, net” on our condensed consolidated statements of operations.
As of September 30, 20222023 and December 31, 2021,2022, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 20222023 |
Transaction | | Currency | | Notional Amount | | USD Equivalent |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Sell | | Canadian dollar | | CAD 4.2 | | $3.1 |
| | | | | | |
Sell | | Chilean peso | | CLP 5,996.51,372.6 | | $6.21.5 |
| | | | | | |
| | | | | | |
Purchase | | Euro | | €89.063.9 | | $85.767.3 |
Sell | | Euro | | €29.423.5 | | $28.324.8 |
| | | | | | |
Sell | | Indian rupee | | INR 18,611.557,797.8 | | $227.8695.1 |
Purchase | | Japanese yen | | ¥1,820.9695.6 | | $12.64.7 |
Sell | | Japanese yen | | ¥11,674.4709.2 | | $80.84.7 |
Purchase | | Malaysian ringgit | | MYR 38.2160.7 | | $8.334.1 |
Sell | | Malaysian ringgit | | MYR 28.116.5 | | $6.13.5 |
| | | | | | |
Sell | | Mexican peso | | MXN 34.6 | | $1.72.0 |
| | | | | | |
PurchaseSell | | Singapore dollar | | SGD 1.412.3 | | $1.09.0 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 20212022 |
Transaction | | Currency | | Notional Amount | | USD Equivalent |
PurchaseSell | | AustralianCanadian dollar | | AUD 3.2CAD 4.2 | | $2.3 |
Purchase | | Brazilian real | | BRL 2.6 | | $0.5 |
Sell | | Brazilian real | | BRL 2.6 | | $0.5 |
Purchase | | British pound | | GBP 2.5 | | $3.43.1 |
Sell | | Chilean peso | | CLP 4,058.65,996.5 | | $4.87.0 |
Purchase | | Euro | | €77.6160.2 | | $88.0170.5 |
Sell | | Euro | | €38.638.4 | | $43.840.9 |
Sell | | Indian rupee | | INR 10,943.027,119.5 | | $147.1327.4 |
Purchase | | Japanese yen | | ¥667.52,982.7 | | $5.822.4 |
Sell | | Japanese yen | | ¥31,524.68,950.3 | | $273.967.1 |
Purchase | | Malaysian ringgit | | MYR 17.099.8 | | $4.122.6 |
Sell | | Malaysian ringgit | | MYR 24.513.7 | | $5.93.1 |
Sell | | Mexican peso | | MXN 34.6 | | $1.71.8 |
Purchase | | Singapore dollar | | SGD 5.51.4 | | $4.11.0 |
Commodity Price Risk
We use commodity swap contracts to mitigate our exposure to commodity price fluctuations for certain raw materials used in the production of our modules. During the nine monthsyear ended September 30,December 31, 2022, we entered into various commodity swap contracts to hedge a portion of our forecasted cash flows for purchases of aluminum frames between July 2022 and December 2023. Such swaps had an aggregate initial notional value based on metric tons of forecasted aluminum purchases, equivalent to $70.5 million, and entitle us to receive a three-month average London Metals Exchange price for aluminum while requiring us to pay certain fixed prices. The notional amount of the commodity swap contracts proportionately adjustsadjusted with forecasted purchases of aluminum frames. As of September 30, 2022, the2023, there was no notional value associated with these contracts were $42.5 million.contracts.
These commodity swap contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We report unrealized gains or losses on such contracts in “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the hedged transactions occur and impact earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges as of September 30, 2023 and December 31, 2022. In the following 12 months, we expect to reclassify into earnings $7.7$2.6 million of net unrealized losses related to these commodity swap contracts that are included in “Accumulated other comprehensive loss” at September 30, 20222023 as we realize the earnings effects of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual commodity pricing when we realize the related forecasted transactions.
7.9. Leases
Our lease arrangements include land associated with our PV solar power systems, our corporate and administrative offices, land for our international manufacturing facilities, and certain of our manufacturing equipment. Such leases primarily relate to assets located in the United States, Malaysia, India, and Vietnam.
The following table presents certain quantitative information related to our lease arrangements for the three and nine months ended September 30, 20222023 and 2021,2022, and as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | | $ | 3,034 | | | $ | 4,622 | | | $ | 11,643 | | | $ | 13,171 | |
Variable lease cost | | 635 | | | 575 | | | 1,838 | | | 1,575 | |
Short-term lease cost | | 48 | | | 104 | | | 300 | | | 711 | |
Total lease cost | | $ | 3,717 | | | $ | 5,301 | | | $ | 13,781 | | | $ | 15,457 | |
| | | | | | | | |
Payments of amounts included in the measurement of operating lease liabilities | | | | | | $ | 11,867 | | | $ | 16,813 | |
Lease assets obtained in exchange for operating lease liabilities | | | | | | $ | 3,992 | | | $ | 19,769 | |
| | | | | | | | |
| | | | | | September 30, 2022 | | December 31, 2021 |
Operating lease assets | | | | | | $ | 97,861 | | | $ | 207,544 | |
Operating lease liabilities – current | | | | | | 8,907 | | | 12,781 | |
Operating lease liabilities – noncurrent | | | | | | 44,655 | | | 145,912 | |
| | | | | | | | | | | | | | |
Weighted-average remaining lease term | | 7 years | | 19 years |
Weighted-average discount rate | | 5.0 | % | | 2.8 | % |
In June 2022, we completed the sale of our Japan project development business to PAG, which included the transfer of various land leases associated with the business. As a result, we derecognized lease assets of $87.7 million, current lease liabilities of $3.0 million, and noncurrent lease liabilities of $77.9 million. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information about this transaction. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Operating lease cost | | $ | 2,980 | | | $ | 3,034 | | | $ | 8,931 | | $ | 11,643 |
Variable lease cost | | 512 | | | 635 | | | 2,528 | | 1,838 |
Short-term lease cost | | 150 | | | 48 | | | 318 | | 300 |
Total lease cost | | $ | 3,642 | | | $ | 3,717 | | | $ | 11,777 | | $ | 13,781 |
| | | | | | | | |
Payments of amounts included in the measurement of operating lease liabilities | | | | | | $ | 8,513 | | $ | 11,867 |
Lease assets obtained in exchange for operating lease liabilities | | | | | | $ | 1,791 | | $ | 3,992 |
| | | | | | | | |
| | | | | | September 30, 2023 | | December 31, 2022 |
Operating lease assets | | | | | | $ | 81,512 | | $ | 93,185 |
Operating lease liabilities – current | | | | | | 9,647 | | 9,193 |
Operating lease liabilities – noncurrent | | | | | | 34,222 | | 40,589 |
| | | | | | | | |
Weighted-average remaining lease term | | | | | | 5 years | | 6 years |
Weighted-average discount rate | | | | | | 5.1 | % | | 5.1 | % |
As of September 30, 2022,2023, the future payments associated with our lease liabilities were as follows (in thousands):
| | | Total Lease Liabilities | | Total Lease Liabilities |
Remainder of 2022 | | $ | 2,872 | | |
2023 | | 11,122 | | |
Remainder of 2023 | | Remainder of 2023 | | $ | 2,903 | |
2024 | 2024 | | 10,708 | | 2024 | | 11,340 | |
2025 | 2025 | | 9,830 | | 2025 | | 10,365 | |
2026 | 2026 | | 8,418 | | 2026 | | 8,255 | |
2027 | 2027 | | 5,923 | | 2027 | | 5,760 | |
2028 | | 2028 | | 5,873 | |
Thereafter | Thereafter | | 14,618 | | Thereafter | | 5,313 | |
Total future payments | Total future payments | | 63,491 | | Total future payments | | 49,809 | |
Less: interest | Less: interest | | (9,929) | | Less: interest | | (5,940) | |
Total lease liabilities | Total lease liabilities | | $ | 53,562 | | Total lease liabilities | | $ | 43,869 | |
8.10. Fair Value Measurements
The following is a description of the valuation techniques that we use to measure the fair value of assets and liabilities that we measure and report at fair value on a recurring basis:
•Cash equivalents.Equivalents and Restricted Cash Equivalents. At September 30, 2023 and December 31, 2022, our cash equivalents and restricted cash equivalents consisted of money market funds. We value our cash equivalents and restricted cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics and classify the valuation techniques that usesuse these inputs as Level 1.
•Marketable Securities and Restricted Marketable Securities. At September 30, 20222023 and December 31, 2021,2022, our marketable securities consisted of foreign debt, U.S. debt, U.S. Treasury securities, and time deposits, and our restricted marketable securities consisted of foreign and U.S. government obligations, supranational debt, and U.S. debt. We value our marketable securities and restricted marketable securities using observable inputs that reflect quoted prices for securities with identical characteristics or quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals). Accordingly, we classify the valuation techniques that use these inputs as either Level 1 or Level 2 depending on the inputs used. We also consider the effect of our counterparties’ credit standing in these fair value measurements.
•Derivative Assets and Liabilities. At September 30, 20222023 and December 31, 2021,2022, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies. At September 30, 2022, our derivative liabilities also includedcurrencies and commodity swap contracts involving major commodity prices. Since our derivative assets and liabilities are not traded on an exchange, we value them using standard industry valuation models. As applicable, these models project future cash flows and discount the amounts to a present value using market-based observable inputs, including credit risk, foreign exchange rates, forward and spot prices for currencies, and forward prices for commodities. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. In evaluating credit risk, we consider the effect of our counterparties’ and our own credit standing in the fair value measurements of our derivative assets and liabilities, respectively.
At September 30, 20222023 and December 31, 2021,2022, the fair value measurements of our assets and liabilities measured on a recurring basis were as follows (in thousands):
| | | | | | Fair Value Measurements at Reporting Date Using | | | | | Fair Value Measurements at Reporting Date Using |
| | | September 30, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | September 30, 2023 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Cash equivalents: | Cash equivalents: | | Cash equivalents: | |
Money market funds | Money market funds | | $ | 195 | | | $ | 195 | | | $ | — | | | $ | — | | Money market funds | | $ | 458,274 | | | $ | 458,274 | | | $ | — | | | $ | — | |
Restricted cash equivalents: | | Restricted cash equivalents: | |
Money market funds | | Money market funds | | 5,756 | | | 5,756 | | | — | | | — | |
Marketable securities: | Marketable securities: | | Marketable securities: | |
Foreign debt | Foreign debt | | 62,880 | | | — | | | 62,880 | | | — | | Foreign debt | | 34,716 | | | — | | | 34,716 | | | — | |
U.S. debt | U.S. debt | | 56,406 | | | — | | | 56,406 | | | — | | U.S. debt | | 43,701 | | | — | | | 43,701 | | | — | |
U.S. Treasury securities | | U.S. Treasury securities | | 99,713 | | | 99,713 | | | — | | | — | |
Time deposits | Time deposits | | 656,927 | | | 656,927 | | | — | | | — | | Time deposits | | 151,386 | | | 151,386 | | | — | | | — | |
Restricted marketable securities | Restricted marketable securities | | 182,208 | | | — | | | 182,208 | | | — | | Restricted marketable securities | | 183,700 | | | — | | | 183,700 | | | — | |
Derivative assets | Derivative assets | | 11,247 | | | — | | | 11,247 | | | — | | Derivative assets | | 1,836 | | | — | | | 1,836 | | | — | |
Total assets | Total assets | | $ | 969,863 | | | $ | 657,122 | | | $ | 312,741 | | | $ | — | | Total assets | | $ | 979,082 | | | $ | 715,129 | | | $ | 263,953 | | | $ | — | |
Liabilities: | Liabilities: | | | | | | | | | Liabilities: | | | | | | | | |
Derivative liabilities | Derivative liabilities | | $ | 13,732 | | | $ | — | | | $ | 13,732 | | | $ | — | | Derivative liabilities | | $ | 2,959 | | | $ | — | | | $ | 2,959 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | December 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 4,324 | | | $ | 4,324 | | | $ | — | | | $ | — | |
Restricted cash equivalents: | | | | | | | | |
Money market funds | | 6,284 | | | 6,284 | | | — | | | — | |
Marketable securities: | | | | | | | | |
Foreign debt | | 59,777 | | | — | | | 59,777 | | | — | |
| | | | | | | | |
U.S. debt | | 56,463 | | | — | | | 56,463 | | | — | |
Time deposits | | 980,472 | | | 980,472 | | | — | | | — | |
Restricted marketable securities | | 182,070 | | | — | | | 182,070 | | | — | |
Derivative assets | | 2,035 | | | — | | | 2,035 | | | — | |
Total assets | | $ | 1,291,425 | | | $ | 991,080 | | | $ | 300,345 | | | $ | — | |
Liabilities: | | | | | | | | |
Derivative liabilities | | $ | 6,812 | | | $ | — | | | $ | 6,812 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Marketable securities: | | | | | | | | |
Foreign debt | | $ | 103,317 | | | $ | — | | | $ | 103,317 | | | $ | — | |
| | | | | | | | |
U.S. debt | | 18,627 | | | — | | | 18,627 | | | — | |
Time deposits | | 253,445 | | | 253,445 | | | — | | | — | |
Restricted marketable securities | | 244,726 | | | — | | | 244,726 | | | — | |
Derivative assets | | 5,816 | | | — | | | 5,816 | | | — | |
Total assets | | $ | 625,931 | | | $ | 253,445 | | | $ | 372,486 | | | $ | — | |
Liabilities: | | | | | | | | |
Derivative liabilities | | $ | 3,550 | | | $ | — | | | $ | 3,550 | | | $ | — | |
Fair Value of Financial Instruments
At September 30, 20222023 and December 31, 2021,2022, the carrying values and fair values of our financial instruments not measured at fair value were as follows (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | | September 30, 2023 | | December 31, 2022 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Government grants receivable - noncurrent | | Government grants receivable - noncurrent | | $ | 582,202 | | | $ | 541,753 | | | $ | — | | | $ | — | |
Accounts receivable unbilled, net - noncurrent | Accounts receivable unbilled, net - noncurrent | | $ | 11,488 | | | $ | 10,207 | | | $ | 20,840 | | | $ | 18,846 | | Accounts receivable unbilled, net - noncurrent | | 4,691 | | | 4,062 | | | 11,498 | | | 10,304 | |
Accounts receivable trade, net - noncurrent | Accounts receivable trade, net - noncurrent | | 9,645 | | | 7,852 | | | 21,293 | | | 18,605 | | Accounts receivable trade, net - noncurrent | | — | | | — | | | 1,500 | | | 1,339 | |
| Liabilities: | Liabilities: | | Liabilities: | |
Long-term debt, including current maturities (1) | | $ | 266,169 | | | $ | 229,673 | | | $ | 246,737 | | | $ | 243,865 | | |
Long-term debt (1) | | Long-term debt (1) | | $ | 500,000 | | | $ | 450,040 | | | $ | 185,000 | | | $ | 160,986 | |
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(1)Excludes unamortized discounts and issuance costs.
The carrying values in our condensed consolidated balance sheets of our current trade accounts receivable, current unbilled accounts receivable, restricted cash, accounts payable, and accrued expenses approximated their fair values due to their nature and relatively short maturities; therefore, we excluded them from the foregoing table. The fair value measurements for our noncurrent unbilled accounts receivable, noncurrent trade accounts receivable, government grants receivable, and long-term debt are considered Level 2 measurements under the fair value hierarchy.
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, marketable securities, accounts receivable, restricted cash, restricted 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 these instruments with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We monitor 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. We 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 surety bonds.
9.11. Debt
Our long-term debt consisted of the following at September 30, 20222023 and December 31, 20212022 (in thousands):
| | | Balance (USD) | | Balance (USD) |
Loan Agreement | Loan Agreement | | Currency | | September 30, 2022 | | December 31, 2021 | Loan Agreement | | Currency | | September 30, 2023 | | December 31, 2022 |
Luz del Norte Credit Facilities | | USD | | $ | 181,169 | | | $ | 183,829 | | |
Revolving Credit Facility | | Revolving Credit Facility | | USD | | $ | — | | | $ | — | |
India Credit Facility | India Credit Facility | | USD | | 85,000 | | | — | | India Credit Facility | | USD | | 500,000 | | | 185,000 | |
Kyoto Credit Facility | | JPY | | — | | | 62,908 | | |
Long-term debt principal | Long-term debt principal | | 266,169 | | | 246,737 | | Long-term debt principal | | 500,000 | | | 185,000 | |
Less: unamortized discounts and issuance costs | | (6,510) | | | (6,836) | | |
Less: unamortized issuance costs | | Less: unamortized issuance costs | | (551) | | | (651) | |
Total long-term debt | Total long-term debt | | 259,659 | | | 239,901 | | Total long-term debt | | 499,449 | | | 184,349 | |
Less: current portion | Less: current portion | | (5,435) | | | (3,896) | | Less: current portion | | (35,409) | | | — | |
Noncurrent portion | Noncurrent portion | | $ | 254,224 | | | $ | 236,005 | | Noncurrent portion | | $ | 464,040 | | | $ | 184,349 | |
Luz del NorteRevolving Credit FacilitiesFacility
In August 2014, Parque Solar Fotovoltaico Luz del Norte SpA (“Luz del Norte”), our indirect wholly-owned subsidiary and project company,June 2023, we entered into a credit facilitiesagreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent, which provides us with a senior secured credit facility (the “Luz del Norte“Revolving Credit Facilities”Facility”) with an aggregate borrowing capacity of $1.0 billion. Borrowings under the U.S. International Development Finance CorporationRevolving Credit Facility bear interest at a rate per annum equal to, at our option, (i) the Term Secured Overnight Financing Rate (“DFC”Term SOFR”), plus a credit spread of 0.10%, plus a margin that ranges from 1.25% to 2.25% or (ii) an alternate base rate as defined in the credit agreement, plus a margin that ranges from 0.25% to 1.25%. The margins under the Revolving Credit Facility are based on the Company’s net leverage ratio or, if the Company elects to switch to a credit ratings-based system after the investment grade ratings trigger date occurs (as defined in the credit agreement), margins are based on the Company’s public debt rating.
In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay an unused commitment fee that ranges from 0.125% to 0.375% per annum, based on the same factors discussed above and the International Finance Corporation (“IFC”)daily unused commitments under the facility. We are also required to provide limited-recourse senior secured debt financingpay (i) a letter of credit fee based on the applicable margin for Term SOFR loans on the design, development, financing, construction, testing, commissioning, operation,face amount of each letter of credit, (ii) a letter of credit fronting fee as agreed by the Company and maintenancesuch issuing lender, and (iii) other customary letter of a 141 MWcredit fees. Our Revolving Credit Facility matures in June 2028.
AC PV solar power plant located near Copiapó, Chile.
As of September 30, 20222023, we had no borrowings or letters of credit under our Revolving Credit Facility. Loans and December 31, 2021,letters of credit issued under the balance outstanding on the DFC loans was $135.7 million and $137.7 million, respectively. As of September 30, 2022 and December 31, 2021, the balance outstanding on the IFC loans was $45.5 million and $46.1 million, respectively. The DFC and IFC loans mature in June 2037 andRevolving Credit Facility are secured by liens over all of Luz del Norte’s assets, a pledge ofon substantially all of the equity interests in the entity,Company’s tangible and certain letters of credit.intangible assets.
India Credit Facility
In July 2022, FS India Solar Ventures Private Limited, our indirect wholly-owned subsidiary, entered into a finance agreement (the “India Credit Facility”) with DFCthe U.S. International Development Finance Corporation (“DFC”) for aggregate borrowings of up to $500.0 million for the development and construction of an approximately 3.3 GWaDC solar module manufacturing facility located in Tamil Nadu, India. Principal on the India Credit Facility is payable in scheduled semi-annual installments beginning in the second half of 2024 through the facility’s expected maturity in August 2029. The India Credit Facility is guaranteed by First Solar, Inc.
Kyoto Credit Facility
In July 2020, First Solar Japan GK, our wholly-owned subsidiary, entered into a construction loan facility with Mizuho Bank, Ltd. for borrowings up to ¥15.0 billion ($142.8 million), which are intended to be used for the construction of a 38 MWAC PV solar power plant located in Kyoto, Japan (the “Kyoto Credit Facility”). In May 2022, we repaid the remaining $73.2 million principal balance on the credit facility.
Momura Credit Facility
In May 2022, FS Japan Project 25 GK (“Momura”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Momura Credit Facility”) with Nomura Capital Investment Co., Ltd. and Aozora Bank, Ltd. for aggregate borrowings up to ¥21.5 billion ($168.1 million) for the development and construction of a 53 MWAC PV solar power plant located in Tochigi, Japan. The credit facility consisted of an ¥18.8 billion ($146.6 million) term loan facility, a ¥1.9 billion ($15.1 million) consumption tax facility, and a ¥0.8 billion ($6.4 million) debt service reserve facility. In June 2022, we completed the sale of our Japan project development business, and the credit facility’s outstanding balance of $107.2 million was assumed by PAG. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information about this transaction.
Yatsubo Credit Facility
In May 2022, FS Japan Project 24 GK (“Yatsubo”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Yatsubo Credit Facility”) with Nomura Capital Investment Co., Ltd. and Aozora Bank, Ltd. for aggregate borrowings up to ¥10.9 billion ($85.0 million) for the development and construction of a 26 MWAC PV solar power plant located in Tochigi, Japan. The credit agreement consisted of a ¥9.5 billion ($74.2 million) term loan facility, a ¥1.0 billion ($7.6 million) consumption tax facility, and a ¥0.4 billion ($3.2 million) debt service reserve facility. In June 2022, we completed the sale of our Japan project development business, and the credit facility’s outstanding balance of $70.0 million was assumed by PAG. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information about this transaction.
Orido Credit Facility
In May 2022, FS Japan Project B5 GK (“Orido”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Orido Credit Facility”) with Nomura Capital Investment Co., Ltd. and Aozora Bank, Ltd. for aggregate borrowings up to ¥5.3 billion ($41.3 million) for the development and construction of a 14 MWAC PV solar power plant located in Tochigi, Japan. The credit agreement consisted of a ¥4.6 billion ($36.0 million) term loan facility, a ¥0.5 billion ($3.6 million) consumption tax facility, and a ¥0.2 billion ($1.7 million) debt service reserve facility. In June 2022, we completed the sale of our Japan project development business, and the credit facility’s outstanding balance of $18.0 million was assumed by PAG. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information about this transaction.
Variable Interest Rate Risk
CertainAs of September 30, 2023, our long-term debt agreements bear interest at London Interbank Offered Rate (“LIBOR”) or equivalent variable rates. An increase in these variable rates would increase the cost of borrowing under the debt agreements. Our long-term debt borrowing rates as of September 30, 2022 were as follows:
| | | | | | | | | | | | | | |
Loan Agreement | | September 30, 2022 |
Luz del Norte Credit Facilities (1)Interest Rate | | Fixed rate loans at bank rate plus 3.50% |
| Variable rate loans at 91-Day U.S. Treasury Bill Yield or LIBOR plus 3.50%Effective Interest Rate |
India Credit Facility | | U.S. Treasury Constant Maturity Yield plus 1.75% | | 5.80% |
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(1)Outstanding balance comprised of $122.4 million of fixed rate loans and $58.8 million of variable rate loans as of September 30, 2022.
Future Principal Payments
At September 30, 2022,2023, the future principal payments on our long-term debt were due as follows (in thousands):
| | | Total Debt | | Total Debt |
Remainder of 2022 | | $ | 1,375 | | |
2023 | | 6,085 | | |
Remainder of 2023 | | Remainder of 2023 | | $ | — | |
2024 | 2024 | | 13,047 | | 2024 | | 35,450 | |
2025 | 2025 | | 23,013 | | 2025 | | 90,900 | |
2026 | 2026 | | 23,418 | | 2026 | | 90,900 | |
2027 | 2027 | | 24,661 | | 2027 | | 90,950 | |
2028 | | 2028 | | 91,000 | |
Thereafter | Thereafter | | 174,570 | | Thereafter | | 100,800 | |
Total long-term debt future principal payments | Total long-term debt future principal payments | | $ | 266,169 | | Total long-term debt future principal payments | | $ | 500,000 | |
10.12. Commitments and Contingencies
Commercial Commitments
During the normal course of business, we enter into commercial commitments in the form of letters of credit and surety bonds to provide financial and performance assurance to third parties. As of September 30, 2022, the majority of these commercial commitments supported our modules business. As of September 30, 2022,2023, the issued and outstanding amounts and available capacities under these commitments were as follows (in millions):
| | | Issued and Outstanding | | Available Capacity | | Issued and Outstanding | | Available Capacity |
Bilateral facilities (1) | | $ | 95.8 | | | $ | 119.2 | | |
Revolving Credit Facility (1) | | Revolving Credit Facility (1) | | $ | — | | | $ | 250.0 | |
Bilateral facilities (2) | | Bilateral facilities (2) | | 126.2 | | | 118.9 | |
Surety bonds | Surety bonds | | 8.8 | | | 232.8 | | Surety bonds | | 21.6 | | | 232.0 | |
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(1)Our Revolving Credit Facility provides us with a sub-limit of $250.0 million to issue letters of credit, at a fee based on the applicable margin for Term SOFR loans, a fronting fee, and other customary letter of credit fees.
(2)Of the total letters of credit issued under the bilateral facilities, $2.3$8.9 million was secured with cash.
Product Warranties
When we recognize revenue for sales of modules or projects, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations for both modules and the balance of the systems. We estimate our limited product warranty liability for power output and defects in materials and workmanship under normal use and service conditions based on return rates for each series of module technology. We make and revise these estimates based primarily on the number of solar modules under warranty installed at customer locations, our historical experience with and projections of warranty claims, and our estimated per-module replacement costs. We also monitor our expected future module performance through certain quality and reliability testing and actual performance in certain field installation sites. From time to time, we have taken remediation actions with respect to affected modules beyond our limited warranties and may elect to do so in the future, in which case we would incur additional
expenses. Such potential voluntary future remediation actions beyond our limited warranty obligations may be material to our condensed consolidated statements of operations if we commit to any such remediation actions.
Product warranty activities during the three and nine months ended September 30, 20222023 and 20212022 were as follows (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 |
Product warranty liability, beginning of period | Product warranty liability, beginning of period | | $ | 47,129 | | | $ | 91,058 | | | $ | 52,553 | | | $ | 95,096 | | Product warranty liability, beginning of period | | $ | 31,969 | | | $ | 47,129 | | | $ | 33,787 | | | $ | 52,553 | |
Accruals for new warranties issued | Accruals for new warranties issued | | 1,376 | | | 1,680 | | | 3,649 | | | 8,397 | | Accruals for new warranties issued | | 1,310 | | | 1,376 | | | 3,155 | | | 3,649 | |
Settlements | Settlements | | (3,160) | | | (1,091) | | | (10,414) | | | (6,730) | | Settlements | | (1,326) | | | (3,160) | | | (4,519) | | | (10,414) | |
Changes in estimate of product warranty liability | Changes in estimate of product warranty liability | | (10,360) | | | (33,106) | | | (10,803) | | | (38,222) | | Changes in estimate of product warranty liability | | (5,806) | | | (10,360) | | | (6,276) | | | (10,803) | |
Product warranty liability, end of period | Product warranty liability, end of period | | $ | 34,985 | | | $ | 58,541 | | | $ | 34,985 | | | $ | 58,541 | | Product warranty liability, end of period | | $ | 26,147 | | | $ | 34,985 | | | $ | 26,147 | | | $ | 34,985 | |
Current portion of warranty liability | Current portion of warranty liability | | $ | 11,039 | | | $ | 16,752 | | | $ | 11,039 | | | $ | 16,752 | | Current portion of warranty liability | | $ | 7,647 | | | $ | 11,039 | | | $ | 7,647 | | | $ | 11,039 | |
Noncurrent portion of warranty liability | Noncurrent portion of warranty liability | | $ | 23,946 | | | $ | 41,789 | | | $ | 23,946 | | | $ | 41,789 | | Noncurrent portion of warranty liability | | $ | 18,500 | | | $ | 23,946 | | | $ | 18,500 | | | $ | 23,946 | |
We estimate our limited product warranty liability for power output and defects in materials and workmanship under normal use and service conditions based on return rates for each series of module technology. During the three months ended September 30, 2022 and 2021,2023, we revised this estimate based on updated information regarding our warranty claims, which reduced our product warranty liability by $5.7 million. This updated information reflected lower-than-expected warranty claims for our older series of module technology and revisions to projected settlements, resulting in reductions to our projected module return rate. During the three months ended September 30, 2022, we revised the estimate based on updated information regarding our warranty claims, which reduced our product warranty liability by $10.2 million and $33.1 million, respectively.million. This updated information reflected lower-than-expected warranty claims for our older series of module technology as well as the evolving claims profile of our newest series of module technology, resulting in reductions to our projected module return rates.
IndemnificationsContingent Consideration
InAs part of our Evolar acquisition, we agreed to pay additional consideration of up to $42.5 million to the selling shareholders contingent upon the successful achievement of certain limited circumstances, we have provided indemnificationstechnical milestones. See Note 2. “Business Acquisitions” to customers or other parties, including project tax equity investors, under which we are contractually obligated to compensate such partiesour condensed consolidated financial statements for losses they suffer resulting from a breachfurther discussion of a representation, warranty, or covenant; a reduction in tax benefits received, including investment tax credits; the resolution of specific matters associated with a project’s development or construction; or guarantees of a third party’s payment or performance obligations. Project related tax benefits are, in part, based on guidance provided by the Internal Revenue Service and U.S. Treasury Department, which includes assumptions regarding the fair value of qualifying PV solar power systems. For contracts that have such indemnification provisions, we initially recognize a liability under ASC 460 for the estimated premium that would be required by a guarantor to issue the same indemnity in a standalone arm’s-length transaction with an unrelated party. We may base these estimates on the cost of insurance or other instruments that cover the underlying risks being indemnified and may purchase such instruments to mitigate our exposure to potential indemnification payments. We subsequently measure such liabilities at the greater of the initially estimated premium or the contingent liability required to be recognized under ASC 450. We recognize any indemnification liabilities as a reduction of earnings associated with the related transaction.
After an indemnification liability is recorded, we derecognize such amount pursuant to ASC 460 depending on the nature of the indemnity, which derecognition typically occurs upon expiration or settlement of the arrangement, and any contingent aspects of the indemnity are accounted for in accordance with ASC 450.this acquisition. As of September 30, 2022 and December 31, 2021,2023, we accrued $3.7 million and $3.8recorded $7.5 million of current indemnification liabilities respectively. As of September 30, 2022, the maximum potential amount of future payments under our indemnifications was $102.3 million, and we held insurance and other instruments allowing us to recover up to $28.2$11.0 million of potential amounts paid under the indemnifications.
In September 2017, we made an indemnification payment in connection with the sale of one of our projects following the underpayment of anticipated cash grants by the United States government. In February 2018, the associated project entity commenced legal action against the United States government seeking full payment of the cash grants. In May 2021, the parties reached an agreement, pursuant to which the United States government made a settlement payment to the project entity. Under the terms of the indemnification arrangement, we received $65.1 millionlong-term liabilities for our portion of the settlement payment, which we recorded as revenue during the nine months ended September 30, 2021.such contingent obligations based on their estimated fair values.
Solar Module Collection and Recycling Liability
We previously established a module collection and recycling program, which has since been discontinued, to collect and recycle modules sold and covered under such program once the modules reach the end of their service lives. For legacy customer sales contracts that wereare covered under this program, we agreed to pay the costs for the collection and recycling of qualifying solar modules, and the end-users agreed to notify us, disassemble their solar power systems, package the solar modules for shipment, and revert ownership rights over the modules back to us at the end of the modules’ service lives. Accordingly, we recorded any collection and recycling obligations within “Cost of sales” at the time of sale based on the estimated cost to collect and recycle the covered solar modules.
We estimate the cost of our collection and recycling obligations based on the present value of the expected future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; and by-product credits for certain materials recovered during the recycling process. We base these estimates on our experience collecting and recycling solar modules and certain assumptions regarding costs at the time the solar modules will be collected and recycled. In the periods between the time of sale and the related settlement of the collection and recycling obligation, we accrete the carrying amount of the associated liability and classify the corresponding expense within “Selling, general and administrative” expense on our condensed consolidated statements of operations.
We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly. During the three months ended September 30, 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. During the three months ended September 30, 2021, we completed our annual cost study of obligations under our module collection and recycling program and increased the associated liability by $10.8 million primarily due to lower estimated by-product credits for certain semiconductor materials recovered during the recycling process and updates to certain valuation assumptions.
Our module collection and recycling liability was $120.2$130.1 million and $139.1$128.1 million as of September 30, 20222023 and December 31, 2021,2022, respectively. See Note 4.5. “Restricted Marketable Securities” to our condensed consolidated financial statements for more information about our arrangements for funding this liability.
Legal Proceedings
Class Action
OnIn January 7, 2022, a putative class action lawsuit titled City of Pontiac General Employees’ Retirement System v. First Solar, Inc., et al., Case No. 2:22-cv-00036-MTL, was filed in the United States District Court for the District of Arizona (hereafter “Arizona District Court”) against the Company and certain of our current officers (collectively, “Putative Class Action Defendants”). The complaint was filed on behalf of a purported class consisting of all purchasers of First Solar common stock between February 22, 2019 and February 20, 2020, inclusive. The complaint asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on allegedly false and misleading statements related to the Company’s Series 6 solar modules and its project
development business. It seeks unspecified damages and an award of costs and expenses. The Company and its officers believe they have meritorious defenses and intend to vigorously defend this action. On April 25, 2022, the Arizona District Court issued an order appointing the Palm Harbor Special Fire Control & Rescue District Firefighters’ Pension Plan and the Greater Pennsylvania Carpenters’ Pension Fund as Lead Plaintiffs. On June 23, 2022, Lead Plaintiffs filed an Amended Complaint that bringsbrought the same claims and seekssought the same relief as the original complaint. On January 10, 2023, the Court granted the Putative Class Action Defendants’ motion to dismiss in full, with leave to amend by February 10, 2023. On February 10, 2023, Lead Plaintiffs filed a Second Amended Complaint. Putative Class Action Defendants filed a motion to dismiss the Second Amended Complaint on August 22, 2022.February 24, 2023. Lead Plaintiffs filed their opposition to the motion to dismiss on October 21, 2022. GivenMarch 10, 2023, and Putative Class Action Defendants filed a reply in support of their motion to dismiss on March 17, 2023. On June 23, 2023, the early stageCourt granted the Putative Class Action Defendants’ motion to dismiss with prejudice. On July 14, 2023, the Clerk of Court entered judgment in favor of the litigation, at this time we arePutative Class Action Defendants. Lead Plaintiffs did not file an appeal, and the judgment in a position to assessfavor of the likelihoodPutative Class Action Defendants is now final.
Derivative Action
OnIn September 13, 2022, a derivative action titled Federman v. Widmar, et al., Case No. 2:22-cv-01541-MTM,22-cv-01541-JAT, was filed by a putative stockholder purportedly on behalf of the Company in the Arizona District Court against certainour current directors and certain officers of the Company (collectively, “Derivative Action Defendants”), alleging violations of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, contribution and indemnification, aiding and abetting, and gross mismanagement. The complaint generally alleges that the Derivative Action Defendants caused or allowed false and misleading statements to be made concerning the Company’s Series 6 modules and project development business. The action includes claims for, among other things, damages in favor of the Company and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees. The Company believes that the plaintiff in the derivative action lacks standing to pursue litigation on behalf of First Solar. On February 17, 2023, the case was transferred to Judge Liburdi, who is also presiding over the related putative class action. On March 10, 2023, the plaintiff filed an Amended Complaint. On April 10, 2023, the Derivative Action Defendants filed a motion to dismiss the Amended Complaint. The derivativeplaintiff filed its opposition to the motion to dismiss on May 17, 2023, and the Derivative Action Defendants filed a reply in support of their motion to dismiss on June 17, 2023. Given the Court’s dismissal of the putative class action, is stillthe parties agreed that the claims in the initial stagesDerivative Action should be dismissed with prejudice and there has been no discovery. Accordingly, we are not infiled a positionjoint stipulation to assess the likelihood of any loss or adversethat effect on our financial condition orSeptember 7, 2023. On September 8, 2023, the Court ordered the Clerk of Court to estimatedismiss the amount or range of potential loss, if any, from this action.action with prejudice.
Other Matters and Claims
OnIn July 12, 2021, Southern Power Company and certain of its affiliates (“Southern”) filed an arbitration demand with the American Arbitration Association against two subsidiaries of the Company, alleging breach of the engineering, procurement, and construction (“EPC”) agreements for five projects in the United States, for which the Company’s subsidiaries served as the EPC contractor. The arbitration demand asserts breach of obligations to design and engineer the projects in accordance with the EPC agreements, particularly as such obligations relate to the procurement of tracker systems and inverters. In September 2022, the Company received additional details in the discovery process of the arbitration, based upon which we believe Southern is seeking damages of approximately $55 million and an award of costs and expenses. Prior to September 2022, no such damages were specified by Southern. The Company and its subsidiaries denydenied the claims, and intend to vigorously defend this arbitration in all respects. Arbitration hearings are scheduled for early 2023. Givendefended the stage of proceedings and inherent risks involvedclaims in arbitration at this timehearings, which concluded in February 2023. In May 2023, the parties submitted their final proposals of individual award claims to the arbitration panel. On July 19, 2023, the arbitration panel entered an interim award to Southern for $35.6 million. As a result, we are unable to assessaccrued a loss for such interim award in our results of operations for the likelihood of any potential loss or adverse effect on our financial condition or to estimate thenine months ended September 30, 2023. Such amount or range of potential loss, if any, from this arbitration.
Duringwas paid during the three months ended September 30, 2023. The interim award permitted the parties to raise additional issues with the arbitration panel, and Southern moved for pre- and post-judgment interest and a limited claim for attorneys’ fees. In orders dated October 13, 2023 and October 16, 2023, the arbitration panel denied Southern’s motion for interest and attorney’s fees, respectively. Because all post-award motions have been resolved, the award will become final. The Company believes that the deadline to appeal the interim award judgment will expire no earlier than December 17, 2023.
During the year ended December 31, 2022, we received variousseveral 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. In January 2023, we were notified by two of our customers that Sade served them with patent infringement complaints, and we have assumed the defense of these claims. We have conducted due diligence on the patents and claims and believe that we will prevail toin the extentactions. In April 2023, we are obligated to defend any matter or commencecommenced an Inter Partes Review (“IPR”) before the United States Patent and Trademark Office.Office seeking to invalidate such claims. Based upon that filing, we have also sought to stay the litigation proceedings pending the IPR process. One such action has been formally stayed pending the IPR outcome. There has been no action in the second proceeding, and unless plaintiff or the court order the parties to proceed, First Solar will not seek a stay prior to the IPR decision. The decision whether to allow the IPR to proceed is expected in November 2023. Given the early stage of the litigation, at this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the amount or range of possible loss, if any, from these actions.
In April 2019, a subcontractor of First Solar sustained certain injuries while performing work at a former project site and, in May 2019, commenced legal action against a subsidiary of the Company. In June 2023, a jury awarded damages of approximately $51.3 million to the plaintiff. On September 21, 2023, the Superior Court of California for Monterey County ruled, in response to a motion for remittitur filed by the Company, that the damages awarded to the plaintiff were excessive and reduced the award from $51.3 million to $21.8 million. Accordingly, as of September 30, 2023, we recorded a $21.8 million accrued litigation payable included in “Other current liabilities” in our condensed consolidated balance sheet. We believe the full amount of awarded damages will be covered by our various insurance policies. Accordingly, we also recorded a $21.8 million receivable included in “Other current assets” in our condensed consolidated balance sheet as of September 30, 2023. The plaintiff did not accept the reduced award by the court ordered deadline of October 10, 2023, and, as a result, the $21.8 million award has been vacated and a new trial will be scheduled. We, in conjunction with our insurance carriers, are exploring challenges to the verdict in an appellate court.
On September 29, 2023, the Company received a subpoena from the Division of Enforcement of the SEC seeking documents and information since 2019 relating to the Company’s operations in India, the Company's entry into a PV module supply agreement with an India-based customer, and certain aspects of the Company's technology roadmap, among other things. The Company is cooperating with the SEC and cannot predict the ultimate timing, scope, or outcome of this matter.
We are party to other legal matters and claims in the normal course of our operations. While we believe the ultimate outcome of these matters and claims will not have a material adverse effect on our financial position, results of operations, or cash flows, the outcome of such matters and claims is not determinable with certainty, and negative outcomes may adversely affect us. There have been no material changes to these matters since our Annual Report on Form 10-K for the year ended December 31, 2021 was filed with the SEC on March 1, 2022.
11.13. Revenue from Contracts with Customers
The following table presents the disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 20222023 and 20212022 along with the reportable segment for each category (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Category | Category | | Segment | | 2022 | | 2021 | | 2022 | | 2021 | Category | | Segment | | 2023 | | 2022 | | 2023 | | 2022 |
Solar modules | Solar modules | | Modules | | $ | 619,922 | | | $ | 562,810 | | | $ | 1,582,248 | | | $ | 1,640,436 | | Solar modules | | Modules | | $ | 800,393 | | | $ | 619,922 | | | $ | 2,139,220 | | | $ | 1,582,248 | |
Solar power systems | | Solar power systems | | Other | | 217 | | | 90 | | | 19,474 | | | 2,433 | |
O&M services | | O&M services | | Other | | 481 | | | 3,481 | | | 1,374 | | | 11,558 | |
Energy generation | Energy generation | | Other | | 5,440 | | | 7,339 | | | 20,689 | | | 29,375 | | Energy generation | | Other | | (1) | | | 5,440 | | | (19) | | | 20,689 | |
O&M services | | Other | | 3,481 | | | 5,262 | | | 11,558 | | | 37,210 | | |
Solar power systems | | Other | | 90 | | | 10,132 | | | 2,433 | | | 311,076 | | |
EPC services | | Other | | — | | | (2,039) | | | — | | | (2,039) | | |
| Net sales | Net sales | | $ | 628,933 | | | $ | 583,504 | | | $ | 1,616,928 | | | $ | 2,016,058 | | Net sales | | $ | 801,090 | | | $ | 628,933 | | | $ | 2,160,049 | | | $ | 1,616,928 | |
We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Such contracts may contain provisions that require us to make liquidated damage payments to the customer if we fail to ship or deliver modules by scheduled dates. For certain contracts, we may also be required to make liquidated damage payments if we fail to deliver modules that meet certain U.S. domestic content requirements. We recognize these liquidated damages as a reduction of revenue in the period we transfer control of the modules to the customer.
We recognize revenue for sales of development projects or completed systems when we enter into the associated sales contract. For certain prior project sales, including sales of solar power systems with EPC services, such revenue included estimated amounts of variable consideration. These estimates may require significant judgment to determine the most likely amount of net contract revenues. The cumulative effect of revisions to estimates is recorded in the period in which the revisions are identified and the amounts can be reasonably estimated. During the three and nine months ended September 30, 2021, respectively,2023 revenue increased $7.8 million and $73.0$12.3 million due to net changes inadjustments to the estimated transaction prices for certain projects we previously sold, which represented 0.9% and 2.3%3.1% of the aggregate revenue for such projects. Changes for the nine months ended September 30, 2021 were primarily due to a $65.1 million settlement for an outstanding indemnification arrangement associated with the prior sale of one of our projects, which we recorded as revenue during that period. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our indemnification arrangements.
The following table reflects the changes in our contract assets, which we classify as “Accounts receivable unbilled, net” and our contract liabilities, which we classify as “Deferred revenue,” for the nine months ended September 30, 20222023 (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | Nine Month Change | | | September 30, 2023 | | December 31, 2022 | | Nine Month Change |
Accounts receivable unbilled, net (1) | Accounts receivable unbilled, net (1) | | $ | 46,637 | | | $ | 46,113 | | | $ | 524 | | | 1 | % | Accounts receivable unbilled, net (1) | | $ | 38,294 | | | $ | 42,152 | | | $ | (3,858) | | | (9) | % |
Deferred revenue (2) | Deferred revenue (2) | | $ | 584,233 | | | $ | 297,811 | | | $ | 286,422 | | | 96 | % | Deferred revenue (2) | | $ | 1,721,769 | | | $ | 1,207,940 | | | $ | 513,829 | | | 43 | % |
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(1)Includes $11.5$4.7 million and $20.8$11.5 million of noncurrent accounts receivable unbilled, net classified as “Other assets” on our condensed consolidated balance sheets as of September 30, 20222023 and December 31, 2021,2022, respectively.
(2)Includes $348.9 million and $95.9 million of noncurrent deferred revenue classified as “Other liabilities” on our condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
During the nine months ended September 30, 2022,2023, our contract assets decreased by $3.9 million primarily due to billings for certain prior project sales, partially offset by unbilled receivables associated with variable consideration related to certain prior project sales. During the nine months ended September 30, 2023, our contract liabilities increased by $286.4$513.8 million primarily due to advance payments received for sales of solar modules in the current period, partially offset by the recognition of revenue for sales of solar modules for which payment was received in 2021.prior years. During the nine months ended September 30, 20222023 and 2021,2022, we recognized revenue of $186.2$320.3 million and $169.5$186.2 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods.
As of September 30, 2022,2023, we had entered into contracts with customers for the future sale of 50.077.6 GWDC of solar modules for an aggregate transaction price of $14.0$23.0 billion, which we expect to recognize as revenue through 20272030 as we transfer control of the modules to the customers. Such aggregate transaction price excludes estimates of variable consideration for certain contractsassociated with customers that are associated with(i) future module technology improvements, including new product designs and enhancements to certain energy related attributes. Certain other potential price adjustments associated with the extension of the U.S. investment tax credit (“ITC”),attributes, (ii) sales freight andin excess of a defined threshold, (iii) changes to certain commodity prices, have also been excluded. While our contracts with customers typically represent firm purchase commitments, theseand (iv) the module wattage committed for delivery, among other things. As a result, the revenue recognized from such contracts may increase or decrease in future periods relative to the original transaction price. These contracts may also be subject to amendments madeas agreed to by us or requested by our customers.the parties to the contract. These amendments may increase or decrease the volume of modules to be sold under the contract, change delivery schedules, or otherwise adjust the expected revenue under these contracts.
12.
14. Share-Based Compensation
The following table presents share-based compensation expense recognized in our condensed consolidated statements of operations for the three and nine months ended September 30, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Cost of sales (1) | | $ | 1,044 | | | $ | 154 | | | $ | 1,988 | | | $ | 235 | |
Selling, general and administrative (1) | | 9,572 | | | 5,746 | | | 16,900 | | | 14,998 | |
Research and development (2) | | 1,227 | | | 529 | | | 2,219 | | | (259) | |
Production start-up | | 11 | | | — | | | 14 | | | — | |
Total share-based compensation expense | | $ | 11,854 | | | $ | 6,429 | | | $ | 21,121 | | | $ | 14,974 | |
——————————
(1)On March 31, 2021, we completed the sales of our North American O&M operations and U.S. project development business, which resulted in the forfeiture of unvested shares for associates (our term for full- and part-time employees) departing the Company as part of the transactions. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information related to these transactions. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Cost of sales | | $ | 1,238 | | | $ | 1,044 | | | $ | 3,513 | | | $ | 1,988 | |
Selling, general and administrative | | 5,905 | | | 9,572 | | | 16,668 | | | 16,900 | |
Research and development | | 1,047 | | | 1,227 | | | 2,959 | | | 2,219 | |
Production start-up | | 8 | | | 11 | | | 69 | | | 14 | |
Total share-based compensation expense | | $ | 8,198 | | | $ | 11,854 | | | $ | 23,209 | | | $ | 21,121 | |
(2)Effective March 15, 2021, our former Chief Technology Officer retired from the Company, which resulted in the forfeiture of his unvested shares during the nine months ended September 30, 2021.
Share-based compensation expense capitalized in inventory and PV solar power systems was $0.6 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022,2023, we had $43.4$40.1 million of unrecognized share-based compensation expense related to unvested restricted stock and performance units, which we expect to recognize over a weighted-average period of approximately 1.4 years.
In July 2019,March 2020, the compensation committee of our board of directors approved grants of performance units (“PUs”) for key executive officers to be earned over a multi-year performance period, which ended in December 2021.2022. Vesting of the 20192020 grants of performance unitsPUs was contingent upon the relative attainment of target cost per watt,contracted revenue, module wattage, gross profit, and operating incomereturn on capital metrics. In March 2022,2023, the compensation committee certified the achievement of the vesting conditions applicable to the grants, which approximated the maximumtarget level of performance. Accordingly, each participant received one share of common stock for each vested performance unitPU granted, net of any tax withholdings.
In March 2020, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2022. Vesting of the 2020 grants of performance units is contingent upon the relative attainment of target contracted revenue, module wattage, and return on capital metrics.
In May 2021, the compensation committee approved additional grants of performance unitsPUs for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2023. Vesting of the 2021 grants of performance unitsPUs is contingent upon the relative attainment of target contracted revenue, cost per watt, incremental average selling price, and operating income metrics.
In March 2022, the compensation committee approved additional grants of performance unitsPUs for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2024. Vesting of the 2022 grants of performance unitsPUs is contingent upon the relative attainment of target contracted revenue, cost per watt, and return on capital metrics.
In March 2023, the compensation committee approved additional grants of PUs for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2025. Vesting of performance unitsthe 2023 grants of PUs is contingent upon the relative attainment of target contracted revenue, production, and operating margin metrics.
Vesting of PUs is also contingent upon the employment of program participants through the applicable vesting dates, with limited exceptions in case of death, disability, a qualifying retirement, or a change-in-control of First Solar. Outstanding performance unitsPUs are included in the computation of diluted net income per share based on the number of shares that would be issuable if the end of the reporting period were the end of the contingency period.
In February 2022, First Solar adopted a Clawback Policy (“the Policy”) that applies to the Company’s current and former Section 16 officers. The Policy applies to all incentive compensation, including any performance-based annual incentive awards and performance-based equity compensation. The Policy was adopted to ensure that incentive compensation is paid or awarded based on accurate financial results and the correct calculation of performance against incentive targets.
13.15. Income Taxes
In August 2022, the U.S. President signed into law the Inflation Reduction Act of 2022 (the “IRA”),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 providing various incentives to address climate change, including the introduction of the advanced manufacturing production tax credits.credit. The provisions of the IRA are generally effective for tax years beginning after 2022. Given the complexities of the IRA, which is pending technical guidance and regulations from the Internal Revenue Service (“IRS”) and U.S. Treasury Department, we will continue to monitor these developments and evaluate the potential future impact to our results of operations.
In November 2022, the U.S. Treasury Department released proposed foreign tax credit (“FTC”) regulations addressing various aspects of the U.S. FTC regime. Among other items, these proposed regulations provide certain exceptions for determining creditable foreign withholding taxes. Taxpayers may rely on these proposed regulations, which apply to tax years beginning on or after December 28, 2021. As a result of these proposed regulations, foreign withholding taxes will continue to be creditable. In July 2023, the U.S. Treasury Department issued Notice 2023-55, which provides temporary relief for taxpayers in determining whether a foreign tax is eligible for a foreign tax creditfor taxable years beginning on or after December 28, 2021, and ending before December 31, 2023.
Our effective tax rate was 341.4%6.4% and 16.7%341.4% for the nine months ended September 30, 20222023 and 2021,2022, respectively. The increasedecrease in our effective tax rate was primarily driven by the relative size of our pretax income in the currentprior period, higher prior period losses in certain jurisdictions for which no tax benefit could be recorded, the effect of the advanced manufacturing production credit described in Note 7. "Government Grants" to our condensed consolidated financial statements, a discrete tax expense in the prior period associated with the remeasurement of our net deferred tax assets in Vietnam, as a result of the new long-term tax incentive described below, lower relative amounts of income earned in foreign jurisdictions with lower tax rates, and the effect of tax law changes associated with the foreign tax credit (“FTC”)proposed FTC regulations described below.above. Our provision for income taxes differed from the amount computed by applying the U.S. statutory federal income tax rate of 21% primarily due to higher losses in certain jurisdictions for which no tax benefit could be recorded, the remeasurement of our net deferred tax assets in Vietnam mentioned above, and the effect of tax law changes associated with the FTC regulationsIRA described below.
In December 2021, the U.S. Treasury released final FTC regulations addressing various aspects of the U.S. FTC regime. Among other items, these regulations revised the definition of a creditable foreign incomeabove and excess tax and the time at which foreign taxes accrued can be claimed as a credit. These regulations are applicable for tax years beginning on or after December 28, 2021. As a result of these regulations, foreign taxes, which were previously creditable, are now treated as foreign tax deductions at the U.S. statutory federal income tax rate of 21%.benefits associated with share-based compensation.
Our Malaysian subsidiary has been granted a long-term tax holiday that expires in 2027. The tax holiday, which generally provides for a full exemption from Malaysian income tax, is conditional upon our continued compliance with certain employment and investment thresholds, which we are currently in compliance with and expect to continue to comply with through the expiration of the tax holiday in 2027.
Our Vietnamese subsidiary had previously been granted a tax incentive that provided a two-year tax exemption, which began in 2020, and reduced annual tax rates through the end of 2025. In May 2022, our Vietnamese subsidiary was granted a new long-term tax incentive that provides an additional two-year tax exemption andthrough 2023, followed by reduced annual tax rates of 5% through 2036,2032 and 10% through 2036. Such long-term tax incentive is conditional upon our continued compliance with certain revenue and research and development (“R&D”)&D spending thresholds, which we are currently in compliance with and expect to continue to comply with through the expiration of the tax holiday.
We account for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740. It is reasonably possible that $0.3 million of uncertain tax positions will be recognized within the next 12 months due to the expiration of the statute of limitations associated with such positions.
We are subject to audit by federal, state, local, and foreign tax authorities. We are currently under examination in India, Chile, Singapore, and the state of California.Florida. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed by our tax examinations are not resolved in a manner consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
14.16. Net Income (Loss) Income per Share
The calculation of basic and diluted net income (loss) income per share for the three and nine months ended September 30, 20222023 and 20212022 was as follows (in thousands, except per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Basic net (loss) income per share | | | | | | | | | |
Basic net income (loss) per share | | Basic net income (loss) per share | | | | | | | | |
Numerator: | Numerator: | | Numerator: | |
Net (loss) income | | $ | (49,168) | | | $ | 45,203 | | | $ | (36,618) | | | $ | 337,323 | | |
Net income (loss) | | Net income (loss) | | $ | 268,398 | | | $ | (49,168) | | | $ | 481,538 | | | $ | (36,618) | |
Denominator: | Denominator: | | Denominator: | |
Weighted-average common shares outstanding | Weighted-average common shares outstanding | | 106,596 | | | 106,320 | | | 106,532 | | | 106,241 | | Weighted-average common shares outstanding | | 106,834 | | | 106,596 | | | 106,795 | | | 106,532 | |
| Diluted net (loss) income per share | | |
Diluted net income (loss) per share | | Diluted net income (loss) per share | |
Denominator: | Denominator: | | Denominator: | |
Weighted-average common shares outstanding | Weighted-average common shares outstanding | | 106,596 | | | 106,320 | | | 106,532 | | | 106,241 | | Weighted-average common shares outstanding | | 106,834 | | | 106,596 | | | 106,795 | | | 106,532 | |
Effect of restricted stock and performance units | Effect of restricted stock and performance units | | — | | | 579 | | | — | | | 638 | | Effect of restricted stock and performance units | | 664 | | | — | | | 531 | | | — | |
Weighted-average shares used in computing diluted net (loss) income per share | | 106,596 | | | 106,899 | | | 106,532 | | | 106,879 | | |
Weighted-average shares used in computing diluted net income (loss) per share | | Weighted-average shares used in computing diluted net income (loss) per share | | 107,498 | | | 106,596 | | | 107,326 | | | 106,532 | |
| Net (loss) income per share: | | |
Net income (loss) per share: | | Net income (loss) per share: | |
Basic | Basic | | $ | (0.46) | | | $ | 0.43 | | | $ | (0.34) | | | $ | 3.18 | | Basic | | $ | 2.51 | | | $ | (0.46) | | | $ | 4.51 | | | $ | (0.34) | |
Diluted | Diluted | | $ | (0.46) | | | $ | 0.42 | | | $ | (0.34) | | | $ | 3.16 | | Diluted | | $ | 2.50 | | | $ | (0.46) | | | $ | 4.49 | | | $ | (0.34) | |
The following table summarizes the potential shares of common stock that were excluded from the computation of diluted net (loss) income per share for the three and nine months ended September 30, 20222023 and 20212022 as such shares would have had an anti-dilutive effect (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Anti-dilutive shares | | 626 | | | 8 | | | 523 | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Anti-dilutive shares | | — | | | 626 | | | — | | | 523 | |
15.17. Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 20222023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustment | | Unrealized Gain (Loss) on Marketable Securities and Restricted Marketable Securities | | Unrealized Gain (Loss) on Derivative Instruments | | Total |
Balance as of December 31, 2021 | | $ | (89,452) | | | $ | (8,036) | | | $ | 1,126 | | | $ | (96,362) | |
Other comprehensive loss before reclassifications | | (36,386) | | | (55,996) | | | (10,287) | | | (102,669) | |
Amounts reclassified from accumulated other comprehensive loss | | (4,312) | | | — | | | (1,671) | | | (5,983) | |
Net tax effect | | — | | | 2,624 | | | 2,540 | | | 5,164 | |
Net other comprehensive loss | | (40,698) | | | (53,372) | | | (9,418) | | | (103,488) | |
Balance as of September 30, 2022 | | $ | (130,150) | | | $ | (61,408) | | | $ | (8,292) | | | $ | (199,850) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustment | | Unrealized (Loss) Gain on Marketable Securities and Restricted Marketable Securities | | Unrealized (Loss) Gain on Derivative Instruments | | Total |
Balance as of December 31, 2022 | | $ | (121,473) | | | $ | (64,780) | | | $ | (5,564) | | | $ | (191,817) | |
Other comprehensive (loss) income before reclassifications | | (8,504) | | | (3,077) | | | (962) | | | (12,543) | |
Amounts reclassified from accumulated other comprehensive loss | | 869 | | | 9 | | | 5,576 | | | 6,454 | |
Net tax effect | | — | | | 23 | | | (1,087) | | | (1,064) | |
Net other comprehensive (loss) income | | (7,635) | | | (3,045) | | | 3,527 | | | (7,153) | |
Balance as of September 30, 2023 | | $ | (129,108) | | | $ | (67,825) | | | $ | (2,037) | | | $ | (198,970) | |
The following table presents the pretax amounts reclassified from accumulated other comprehensive loss into our condensed consolidated statements of operations for the three and nine months ended September 30, 20222023 and 20212022 (in thousands):
| Comprehensive Income Components | Comprehensive Income Components | | Income Statement Line Item | | Three Months Ended September 30, | | Nine Months Ended September 30, | Comprehensive Income Components | | Income Statement Line Item | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Foreign currency translation adjustment: | Foreign currency translation adjustment: | | | | | | | | | | | Foreign currency translation adjustment: | | | | | | | | | | |
Foreign currency translation adjustment | Foreign currency translation adjustment | | Gain on sales of businesses, net | | $ | — | | | $ | — | | | $ | 3,756 | | | $ | — | | Foreign currency translation adjustment | | Cost of sales | | $ | — | | | $ | — | | | $ | 146 | | | $ | — | |
Foreign currency translation adjustment | Foreign currency translation adjustment | | Other income (expense), net | | 403 | | | (728) | | | 556 | | | (1,203) | | Foreign currency translation adjustment | | Gain on sales of businesses, net | | — | | | — | | | — | | | 3,756 | |
Foreign currency translation adjustment | | Foreign currency translation adjustment | | Other (expense) income, net | | (1,005) | | | 403 | | | (1,015) | | | 556 | |
Total foreign currency translation adjustment | Total foreign currency translation adjustment | | 403 | | | (728) | | | 4,312 | | | (1,203) | | Total foreign currency translation adjustment | | (1,005) | | | 403 | | | (869) | | | 4,312 | |
Unrealized gain on marketable securities and restricted marketable securities | | Other income (expense), net | | — | | | — | | | — | | | 11,696 | | |
Unrealized gain (loss) on derivative instruments: | | |
Unrealized loss on marketable securities and restricted marketable securities | | Unrealized loss on marketable securities and restricted marketable securities | | Other (expense) income, net | | — | | | — | | | (9) | | | — | |
Unrealized (loss) gain on derivative contracts: | | Unrealized (loss) gain on derivative contracts: | |
Foreign exchange forward contracts | Foreign exchange forward contracts | | Cost of sales | | 218 | | | 15 | | | 1,671 | | | (1,913) | | Foreign exchange forward contracts | | Cost of sales | | — | | | 218 | | | — | | | 1,671 | |
Commodity swap contracts | Commodity swap contracts | | Cost of sales | | — | | | 670 | | | — | | | 883 | | Commodity swap contracts | | Cost of sales | | (911) | | | — | | | (5,576) | | | — | |
| Total unrealized gain (loss) on derivative instruments | | 218 | | | 685 | | | 1,671 | | | (1,030) | | |
Total gain (loss) reclassified | | $ | 621 | | | $ | (43) | | | $ | 5,983 | | | $ | 9,463 | | |
Total unrealized (loss) gain on derivative contracts | | Total unrealized (loss) gain on derivative contracts | | (911) | | | 218 | | | (5,576) | | | 1,671 | |
Total (loss) gain reclassified | | Total (loss) gain reclassified | | $ | (1,916) | | | $ | 621 | | | $ | (6,454) | | | $ | 5,983 | |
16.18. Segment Reporting
Our primary segment is our modules business, which involves the design, manufacture, and sale of cadmium telluride (“CdTe”) solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include developers and operators of PV solarsystems, utilities, independent power systems.producers, commercial and industrial companies, and other system owners. Our residual business operations include certain project development activities, O&M services, the results of operations from PV solar power systems we ownowned and operateoperated in certain international regions, as well as certain O&M services and project development activities.
For the year ended December 31, 2021, we changed our reportable segmentssale of such systems to align with revisions to our internal reporting structure and long-term strategic plans. Following this change, our modules business represents our only reportable segment. We previously operated our business in two segments, which included our modules and systems businesses. Systems business activities primarily involved (i) project development, (ii) EPC services, and (iii) O&M services, which now comprise our residual business operations and are categorized as “Other” in the tables below. All prior year balances were revised to conform to the current year presentation.third-party customers.
See Note 20.19. “Segment and Geographical Information” in our Annual Report on Form 10-K for the year ended December 31, 20212022 for additional discussion of our segment reporting.
The following tables provide a reconciliation of certain financial information for our reportable segment to information presented in our condensed consolidated financial statements for the three and nine months ended September 30, 20222023 and 20212022 and as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | | Three Months Ended September 30, 2023 | | Three Months Ended September 30, 2022 |
| | | Modules | | Other | | Total | | Modules | | Other | | Total | | | Modules | | Other | | Total | | Modules | | Other | | Total |
Net sales | Net sales | | $ | 619,922 | | | $ | 9,011 | | | $ | 628,933 | | | $ | 562,810 | | | $ | 20,694 | | | $ | 583,504 | | Net sales | | $ | 800,393 | | | $ | 697 | | | $ | 801,090 | | | $ | 619,922 | | | $ | 9,011 | | | $ | 628,933 | |
Gross profit (loss) | Gross profit (loss) | | 24,040 | | | (3,058) | | | 20,982 | | | 118,260 | | | 6,320 | | | 124,580 | | Gross profit (loss) | | 367,359 | | | 8,816 | | | 376,175 | | | 24,040 | | | (3,058) | | | 20,982 | |
Depreciation and amortization expense | Depreciation and amortization expense | | 58,287 | | | 2,075 | | | 60,362 | | | 56,335 | | | 3,045 | | | 59,380 | | Depreciation and amortization expense | | 76,991 | | | 2 | | | 76,993 | | | 58,287 | | | 2,075 | | | 60,362 | |
| | | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | | | Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 |
| | | Modules | | Other | | Total | | Modules | | Other | | Total | | | Modules | | Other | | Total | | Modules | | Other | | Total |
Net sales | Net sales | | $ | 1,582,248 | | | $ | 34,680 | | | $ | 1,616,928 | | | $ | 1,640,436 | | | $ | 375,622 | | | $ | 2,016,058 | | Net sales | | $ | 2,139,220 | | | $ | 20,829 | | | $ | 2,160,049 | | | $ | 1,582,248 | | | $ | 34,680 | | | $ | 1,616,928 | |
Gross profit (loss) | Gross profit (loss) | | 66,396 | | | (57,151) | | | 9,245 | | | 328,047 | | | 155,418 | | | 483,465 | | Gross profit (loss) | | 776,170 | | | 22,476 | | | 798,646 | | | 66,396 | | | (57,151) | | | 9,245 | |
Depreciation and amortization expense | Depreciation and amortization expense | | 172,296 | | | 7,276 | | | 179,572 | | | 163,747 | | | 9,193 | | | 172,940 | | Depreciation and amortization expense | | 211,161 | | | 6 | | | 211,167 | | | 172,296 | | | 7,276 | | | 179,572 | |
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| | Modules | | Other | | Total | | Modules | | Other | | Total | | Modules | | Other | | Total | | Modules | | Other | | Total |
Goodwill | Goodwill | | $ | 14,462 | | | $ | — | | | $ | 14,462 | | | $ | 14,462 | | | $ | — | | | $ | 14,462 | | Goodwill | | $ | 28,473 | | | $ | — | | | $ | 28,473 | | | $ | 14,462 | | | $ | — | | | $ | 14,462 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”), which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: the length and severity of the ongoing COVID-19 (novel coronavirus) outbreak, including its impacts across our businesses on demand, manufacturing operations, construction activities associated with our expanding manufacturing capacity, financing, and our global supply chains, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impacts, and the ability of our customers, suppliers, equipment vendors, and other counterparties to fulfill their contractual obligations to us; effects resulting from certain module manufacturing changes; our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, module volumes produced, module volumes sold, revenues, gross margin, operating expenses, products, projected costs (including estimated future module collection and recycling costs), warranties, solar module technology and cost reduction roadmaps, restructuring, product reliability, investments, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules;policies; the potential impact of legislation intended to encourage renewable energy investments through tax credits; effects resulting from pending litigation; our ability to expand manufacturing capacity worldwide;worldwide, including our plans to construct new manufacturing facilities in the United States and related increase in manufacturing capacity; the impact of supply chain disruptions, further exacerbated by the COVID-19 pandemic, thatwhich may affect the procurement of raw materials used in our manufacturing process and the distribution of our modules; research and development (“R&D”)&D programs and our ability to improve the wattage of our solar modules; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “seek,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” “continue,” “contingent,” and the negative or plural of these words, and other comparable terminology.
Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q and therefore speak only as of the filing date. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason, whether as a result of new information, future developments, or otherwise. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the severity and duration of the COVID-19 pandemic, including its potential impact on the Company’s business, financial condition, and results of operations; to:
•structural imbalances in global supply and demand for PV solar modules;
•the market for renewable energy, including solar energy;
•our competitive position and other key competitive factors;
•the reduction, elimination, or expiration of government subsidies, policies, and support programs for solar energy projects and other renewable energy projects;
•the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules;
•the passage of legislation intended to encourage renewable energy investments through tax credits; credits, such as the IRA;
•our ability to execute on our long-term strategic plans; plans, including our ability to secure financing;
•our ability to execute on our solar module technology and cost reduction roadmaps;
•our ability to produceincorporate technology improvements into our manufacturing process, including the implementation of our Copper Replacement (“CuRe”) program and the production of bifacial solar modules and next generationmodules;
•our ability to avoid manufacturing interruptions, including during the ramp of our Series 7 modules; modules manufacturing facilities;
•our ability to improve the wattage of our solar modules;
•interest rate fluctuations and our customers’ ability to secure financing;
•the loss of any of our large customers, or the ability of our customers and counterparties to perform under their contracts with us;
•the severity and duration of public health threats (including pandemics such as COVID-19), including its potential impact on the Company’s business, financial condition, and results of operations;
•the satisfaction of conditions precedent in our sales agreements;
•our ability to attract new customers and to develop and maintain existing customer and supplier relationships;
•our ability to convert existing or construct new production facilities to support new product lines;
•general economic and business conditions, including those influenced by
U.S., international, and geopolitical events;
•environmental responsibility, including with respect to CdTe and other semiconductor materials;
•claims under our limited warranty obligations;
•changes in, or the failure to comply with, government regulations and environmental, health, and safety requirements;
•effects resultingarising from and results of pending litigation;
•future collection and recycling costs for solar modules covered by our module collection and recycling program;
•supply chain disruption,disruptions, including the availability of shipping containers, port congestion, cancelled shipments by logistic providers, and the cost of fuel, demurrage and detention charges, all of which may be exacerbated by the COVID-19 pandemic; charges;
•our ability to protect our intellectual property;
•our ability to prevent and/or minimize the impact of cyber-attacks or other breaches of our information systems;
•our continued investment in research and development (“R&D”); &D;
•the supply and price of components and raw materials, including CdTe;
•our ability to attract and retain key executive officers and associates; and the
•all other matters discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021,2022, elsewhere in this Quarterly Report on Form 10-Q, and our other reports filed with the SEC.
You should carefully consider the risks and uncertainties described in these reports.
this section. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q. When referring to our manufacturing capacity, total sales, and solar module sales, the unit of electricity in watts for megawatts (“MW”) and gigawatts (“GW”) is direct current (“DC” or “DC”) unless otherwise noted. When referring to our projects or systems, the unit of electricity in watts for MW and GW is alternating current (“AC” or “AC”) unless otherwise noted.
Executive Overview
We are a leading American solar technology company and global provider of PV solar energy solutions. Developed at our R&D labs in California and Ohio, we manufacture and sell PV solar modules with an advanced thin film semiconductor technology that provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar modules. From raw material sourcing through end-of-life module recycling, we are committed to reducing the environmental impacts and enhancing the social and economic benefits of our products across their life cycle. We are the world’s largest thin film PV solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere.
Certain of our financial results and other key operational developments for the three months ended September 30, 20222023 include the following:
•Net sales for the three months ended September 30, 20222023 increased by 8%27% to $628.9$801.1 million compared to $583.5$628.9 million for the same period in 2021.2022. The increase was primarily driven by an increase in the volume of modules sold to third parties partially offset by a decrease in the average selling price per watt.
•Gross profit for the three months ended September 30, 2022 decreased 18.1 percentage points to 3.3% from 21.4% for the same period in 2021. The decrease in gross profit was primarily due to a decreaseand an increase in the average selling price per watt of our modules, an increase in sales freight, demurrage, and detention charges, a lower benefit from reductions to our product warranty liability, and a favorable settlement with a customer in the prior period. These decreases to gross profit were partially offset by the higher volume of modules sold, a decrease to our module collection and recycling liability in the current period compared to an increase in the prior period, and continued module cost reductions.modules.
•AsGross profit as a percentage of September 30, 2022, we had approximately 9 GWDC of total installed nameplate production capacity across all our facilities. We produced 2.4 GWDC of solar modules duringnet sales for the three months ended September 30, 2022, which represented an 18% increase in module production2023 increased 43.7 percentage points to 47.0% from 3.3% for the same period in 2021.2022. The increase in productiongross profit was primarily driven bydue to the recognition of the advanced manufacturing production credit under Section 45X of the IRC, reductions in sales freight costs, and a higher throughput at our manufacturing facilities. We expect to produce between 8.9 GWDC and 9.0 GWDC of solaraverage selling price per watt for modules during 2022.sold in the current period.
•During the three months ended September 30, 2022,2023, we commenced production of Series 7 modules at our first manufacturing facility in India, bringing our total installed nameplate production capacity across all our facilities to approximately 16.5 GW. During the three months ended September 30, 2023, we produced 3.2 GW and sold 2.7 GW of solar modules. During 2023, we expect to produce between 11.7 GW and 12.1 GW and sell between 11.8 GW and 12.3 GW of solar modules.
•In July 2023 we announced plans to expand our manufacturing capacity by an additional 4.43.5 GWDC by constructing our fourthfifth manufacturing facility in the United States and increasing our manufacturing footprint at our existing facilitiesStates. This facility, which will be located in Ohio.Iberia Parish, Louisiana, is expected to commence operations in late 2025. Such expansion plans, in combination with our previously announced expansion plans, are expected to increase our manufacturing capacity by approximately 117.9 GWDC by 2025.2026. This expansion, together with other initiatives to enhance our manufacturing throughput, is expected to increase our total installed nameplate capacity to approximately 25 GW by 2026.
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 has opened new possibilities to develop systems in many locations with limited or no financial incentives, thereby promoting the widespread adoption of solar energy. Additionally, recentlyOther technological developments in the industry, such as the advancement of energy storage capabilities, have further enhanced the prospects of solar energy as an alternative to traditional forms of energy generation. In addition to these economic benefits, solar energy has substantial environmental benefits. For example, PV solar power systems generate no greenhouse gas or other emissions and use minimal amounts of water compared to traditional energy generation assets. As a result of these and other factors, worldwide solar markets continue to develop and expand.
Recently enacted government support programs, such as the IRA, have contributed and are expected to continue to contribute to this momentum by providing solar module manufacturers, project developers, and project owners with certain subsidies and tax incentives to accelerate the ongoing transition to clean energy. Among other things, the IRA (i) reinstates the 30% investment tax credit for qualifying solar projects that meet certain wage and apprenticeship requirements, (ii) extends the production tax credit (“PTC”) to include energy generated from solar projects, (iii) provides incremental investment and production tax credits for solar projects that meet certain domestic content and location requirements, and (iv) offers tax credits for solar modules and solar module components manufactured in the United States and sold to third parties. The provisionsFrom time to time, certain state and local governments may offer support programs to incentivize the purchase of solar module manufacturing equipment and the IRA are generally effective for tax years beginning after 2022.hiring and training of manufacturing personnel.
Supply and demand. As a result of the market opportunities and increased demand described above, we are in the process of expanding our manufacturing capacity by approximately 117.9 GW,DC, including the construction of our third manufacturing facility in the United States, which is expected to commence operations in the first half of 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 2025, contingent upon permitting and pending approvalthe second half of various federal, state, and local incentives;2024; our fifth manufacturing facility in the United States, which is expected to commence operations in late 2025; and the expansion of our manufacturing footprint at our existing facilities in Ohio.Ohio, which is expected to be completed in the first half of 2024. We continue to evaluate opportunities for future expansion, particularly within the United States. In the aggregate, we believe manufacturers of solar cells and modules, particularly those in China, have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. Accordingly, we believe the solar industry may experience periods of structural imbalance between supply and demand, which could lead to periods of pricing volatility. In light of suchthese market realities, we continue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process and distributed manufacturing presence, our R&D capabilities, the sustainability advantage of our modules, and our financial stability. As a result of this focus, we recently commenced production of Series 7 modules at our third manufacturing facility in Ohio and our first manufacturing facility in India.
Pricing competition. The solar industry has been characterized by intense pricing competition, both at the module and system levels. This competition may result in an environment in which pricing falls rapidly, therebywhich could potentially increasingincrease demand for solar energy solutions but constrainingconstrain the ability for project developers and module manufacturers to sustain meaningful and consistent profitability. Module average selling prices in many global markets have declined for several years and are expected to continue to decline in the long-term. However, in certain markets, module average selling prices have been favorably influenced by trade measures and policies, government regulations, raw material availability, and supply chain disruptions. For example, module spot pricing in the United States has increased, in part, due to elevated commodity and logistics costs and, more recently, due to the rising demand for modules manufactured in the United States as a result of the IRA described above. While the duration of this elevated period of pricing is uncertain, module average selling prices in the United States are expected to remain elevated for the next several years.
Competitive pricing for modules and systems, relative to the cost of traditional forms of energy generation, is expected to contribute to diversification in global electricity generation and further demand for solar energy. Our results of operations could be adversely affected if competitors reduce pricing to levels below their costs, bid aggressively low prices for module sale agreements, or are able to operate at minimal or negative operating margins for sustained periods of time. For certain of our competitors, including many in China, these practices may be enabled by their direct or indirect access to sovereign capital or other forms of state-ownedstate support. Additionally,Although module average selling prices in certainmany global markets an oversupply imbalance athave generally declined for several years, module spot pricing in the grid level may reduce short-to-medium termUnited States, our primary market, remains elevated primarily due to the rising demand for new solar installations relative to prior years, lowerdomestically manufactured modules as a result of the IRA. The duration of this elevated period of pricing for power purchase agreements (“PPAs”), and lower margins on module and system sales to such markets. However, we believe the effects of such imbalance can be mitigated by modern solar power plants and energy storage solutions that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements and implementing certain other cost reduction initiatives.is uncertain.
Diverse offerings. We face intense competition from manufacturers of crystalline silicon solar modules and other emerging technologies. Solar module manufacturers compete with one another on sales price per watt, which may be influenced by several module value attributes, including energy yield, wattage (through a larger form factor or an improved conversion efficiency), energy yield, degradation, sustainability, and reliability. Sales price per watt may also be influenced by warranty terms and customer payment terms. We believe that utility-scale solar will continue to be a compelling offering and will continue to represent an increasing portion of the overall electricity generation mix. However, this focus on utility-scale module offerings exists within a current market environment that includes rooftop and distributed generation solar, which may influence our future offerings.
We continue to devote significant resources to support the implementation of our technology roadmap and improve the energy output of our modules. In the course of our R&D activities, we explore various technologies in our efforts to sustain competitive differentiation of our modules. Such technologies include the development of bifacial modules, the implementation of our CuRe program, and ongoing research and development of multi-junction solar modules.
•Bifacial. 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. We currently produce monofacial solar modules and, based on recent R&D activities, expect to produce bifacial solar modules in the near term. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which could potentially lower the overall levelized cost of electricity (“LCOE”) of a system when compared to systems using conventionalmonofacial solar modules. We recently manufactured a limited production run of our first bifacial solar module utilizing a thin film semiconductor, which is undergoing field and laboratory testing. Such bifacial module features an innovative transparent back contact which, in addition to converting both front and rear side irradiance, allows infrared light to pass through rather than be absorbed as heat. This design is expected to lower the operational temperature of the module, resulting in a higher energy yield. We currently expect to begin commercial production of bifacial modules in the fourth quarter of 2023.
•CuRe. Our CuRe program is intended to improve our current semiconductor structure by replacing copper with certain other elements that are expected to enhance module performance by improving its bifaciality characteristics, lowering its temperature coefficient, and improving its warranted degradation. As a result of these performance improvements, our PV solar modules includingare expected to produce more energy in real world operating conditions over their estimated useful lives than crystalline silicon modules with the modulessame nameplate capacity. In September 2023, we established a new world record CdTe research cell conversion efficiency of 22.4%, which was based on our CuRe program and certified by the U.S. Department of Energy’s National Renewable Energy Laboratory. We currently produce. Additionally, certain module manufacturers have introduced n-type mono-crystalline modules,expect to complete our lead line implementation of CuRe in the second half of 2024.
•Multi-junction. We continue to evaluate opportunities to develop and leverage other solar cell technologies in multi-junction applications that combine our thin film PV technology with another high efficiency PV semiconductor, with each layer optimized for a different range of the solar spectrum. We believe such as tunnel oxide passivated contact modules,applications, which are expected to provide certain improvementsutilize at least one thin-film semiconductor, have the potential to enable our module conversion efficiency temperature coefficient, and bifacial performance, and claim to provide certain degradation advantages comparedreach 28% by 2030. Our recent acquisition of Evolar is expected to other mono-crystalline modules.accelerate the development of high efficiency multi-junction devices by integrating Evolar’s know-how with First Solar’s existing R&D capabilities.
ProductionProduct efficiencies.We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing process (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 2% to 3% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers.
Energy performanceperformance. . In many climates our solar modules provide certain energy production advantages relative to competing crystalline silicon solar modules. For example, our CdTe solar technology provides:
•a superior temperature coefficient, which results in stronger system performance in typical high insolation climates as the majority of a system’s generation, on average, occurs when module temperatures are well above 25°C (standard test conditions);
•a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to standard test conditions;
•a better partial shading response than competing crystalline silicon technologies, which may experience significantly lower energy generation than CdTe solar modules when partial shading occurs; and
•an immunity to cell cracking and its resulting power output loss, a common failure often observed in crystalline silicon modules caused by poor manufacturing, handling, weather, or other conditions.
In addition to these technological advantages, we also warrant that our solar modules will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by a degradation factor between 0.3% and 0.5%, depending on the module series, every year thereafter throughout the limited power output warranty period of up to 30 years. As a result of these and other factors, our solar modules can produce more annual energy in real world operating conditions than conventional crystalline silicon modules with the same nameplate capacity.
While our modules are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in further declines in the average selling prices of our modules and additional margin compression. We continue to focus on enhancing the competitiveness of our solar modules by accelerating progress alongthrough our module technology and cost reduction roadmaps.
Certain Trends and Uncertainties
We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties. See Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 20212022 for discussions of other risks (the “Risk Factors”) that may affect us.
Our business is evolving worldwide and is shaped by the varying ways in which our offerings can be compelling and economically viable solutions to energy needs in various markets. In addressing electricity demands, we are focused on providing utility-scale module offerings in key geographic markets that we believe have a compellingsignificant need for mass-scale PV solar electricity, including markets throughout the United States, India, and Europe. We closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. When deployed in utility-scale applications, our modules provide energy at a lower LCOE compared to traditional forms of energy generation, making them an attractive alternative to or replacement for aging fossil fuel-based generation resources. Accordingly, future retirements of aging energy generation resources represent a significant increase in the potential market for solar energy.
This focus on utility-scale module offerings exists within a current market environment that includes rooftop and distributed generation solar. We believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions. For example, we continue to evaluate 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 24% by 2025 and 28% by 2030.
Demand for our PV solar energy solutionsmodule offerings depends, in part, on 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 many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for our solar modules. Recent developments to government support programs include the following:
•United StatesStates.. 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 periods of inflationary pricing for certain of our key raw materials, including substrate glass and cover 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 complexitiesSeveral aspects of the IRA which isare pending technical guidance and regulations from the Internal Revenue ServiceIRS and U.S. Treasury Department, which earlier this year released a notice of intent to issue proposed regulations for the domestic content bonus tax credit and notices of proposed rulemaking and temporary regulations for the direct payment election and the tax credit transfer election. This initial guidance is subject to revision prior to the publishing of final regulations by the IRS and U.S. Treasury Department. Given the complexities of the IRA, we continue to evaluate the full extent of benefits available to us, which are expected towe expect will favorably impact our results of operations in future periods. For example, we currently expect to qualify for the advanced manufacturing production tax credit under Section 45X of the Internal Revenue Code,IRC, which provides certain specified benefits for solar modules and solar module components manufactured in the United States and sold to third parties. Such credits, which may be refundableSee Note 7. "Government Grants" to our condensed consolidated financial statements for discussion of our expectation of the financial benefits available to us or transferable to a third party, are available at their specified credit amounts through 2029 and are scheduled to phase out starting inunder the 2030 tax year with full phase out by the end of 2032.IRA.
•India. In September 2022,March 2023, the government of India approved an expansion to itsallocated financial incentives under the Production Linked Incentive (“PLI”) scheme to certain PV module manufacturers, including First Solar. The PLI scheme is expected to provide aggregate funding of INR 195185 billion ($2.52.3 billion), of which is intendedINR 11.8 billion ($143 million) was allocated to First Solar, 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 PLI scheme, manufacturers arewere selected through a competitive bid process and may be entitled to receive certain cash incentives over a five-year period following the commissioning of their manufacturing facilities. Among other things, such incentives are based on thesubject to attaining certain minimum thresholds for module efficiency and temperature coefficient of the modules produced, theand require that a certain proportion of raw materials be sourced from the domestic market, the extent to which the manufacturer’s operations are fully integrated within India, and the quantity of modules soldmarket. Such conditions will be evaluated on a quarterly basis from such manufacturing operations.2026 through 2031. At this time, it is uncertain whether and to what extent we may qualify for such incentives.
Demand for our 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 our 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. States. In June 2022, the U.S. President authorized the U.S. Secretary of Commerce to provide a 24-month antidumping and countervailing duty (“AD/CVD”) tariff exemption for imported solar panels from certain Southeast Asian countries. For more information about this development, see Item 1A. “Risk Factors.” Separately,The U.S. Department of Commerce (“USDOC”) previously issued regulations implementing the U.S. President also authorizedAD/CVD moratorium in the use ofevent that it found circumvention with respect to such Southeast Asian countries. In August 2023, the Defense Production Act to expand domestic production of clean energy technologies.USDOC issued final affirmative circumvention rulings, finding that solar panels completed in Cambodia, Malaysia, Thailand, and Vietnam using parts and components produced in China circumvent pre-existing AD/CVD orders on China. At this time, it is uncertain whatexpected that duties will apply to such solar panels unless they are imported, used, and installed by certain dates in 2024. Our operating results could be adversely impacted if the USDOC and other U.S. Government agencies do not enforce the affirmative circumvention rulings as expected or if pending litigation challenges result in a modification of the rulings. Conversely, effective enforcement could positively impact our operating results.
•United States. In October 2023, a coalition of U.S. aluminum extruders and a labor union filed AD/CVD cases on aluminum extrusions from 15 countries. The USDOC has initiated investigations based on the petitions. First Solar imports certain items that appear to be covered by the investigations. Our operating results could be adversely impacted if the USDOC imposes duties on such imports.
•India. The Approved List of Module Manufacturers (“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 Ministry of New and Renewable Energy, and any these developments will have onmodifications to the ALMM and its application may affect future investments in solar module manufacturing in the United States.
•United States. India. 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. In May 2022,March 2023, the government of India temporarily suspended the ALMM, thereby exempting solar project developers from procuring modules from companies included in the ALMM through its MinistryMarch 2024. Our operating results could be adversely impacted if such suspension is extended in future periods or if the ALMM restriction is significantly relaxed to allow modules to be imported from countries that are part of Environment, Forest and Climate Change and Ministrythe Association of New and Renewable Energy (“MNRE”), proposed legislation intended to regulate electronic waste (“e-waste”). Among other things, such proposed legislation expandsSoutheast Asian Nations. In May 2023, the scope of India’s existing e-waste regulationsALMM was amended to include PV solara new minimum module efficiency threshold of 19% for most applications and 20% for utility-scale applications. Our ability to sell modules including certain recycling obligations for solar module manufacturers, and limitsin the useIndian market depends on the inclusion of certain hazardous substances, such as cadmium. The MNRE has engaged various stakeholders, including First Solar,our modules manufactured in an effort to propose modifications intended to closely align this policy withIndia on the European Union’s Waste Electrical and Electronic Equipment Directive. At this time, it is unclear whether and to what extent such policyALMM. We currently expect that we will be enacted into law. If such legislation is successfully signed into law without modification, it could negatively impactincluded in the ALMM once we receive certain certifications from the International Electrotechnical Commission and the Bureau of Indian Standards in late 2023. However, our business, financial condition, and resultsmodules may be initially precluded from utility-scale applications in India until we achieve the minimum product efficiency mentioned above.
Our ability to provide solar modules on economically attractive terms is also affected by the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules. For example, the cost of ocean freight throughout many parts of the world remains at elevated levels, relative to pre-COVID-19 pandemic rates, primarily due to port congestion, cancellations of shipments by logistics providers, and elevated fuel costs. Such factors may disrupt our supply chain and adversely impact our manufacturing operations as several of our key raw materials and components are either single-sourced or sourced from a limited number of international suppliers. We may also incur additionalTo mitigate certain 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 employingemploy module contract structures that provide additional consideration to us if the cost of logistics services, excluding demurrage and detention, exceeds a defined threshold. We may also adjust our shipping plans to include additional lead times for module deliveries and/or utilize our network of U.S. distribution centers. Additionally, our manufacturing capacity expansions in the U.S. and India are expected to bring manufacturing activities closer to customer demand, further mitigating our exposure to the cost of ocean freight. While it is currently unclear how long these issues will persist, they may be further exacerbated by the disruption of major shipping routes or other economic disruptions.
We generally price and sell our solar modules on a per watt basis. As of September 30, 2022,2023, we had entered into contracts with customers for the future sale of 50.077.6 GWDC of solar modules for an aggregate transaction price of $14.0$23.0 billion, which we expect to recognize as revenue through 20272030 as we transfer control of the modules to the customers. Such volume includes contracts for the sale of 31.440.3 GWDC of solar modules that include transaction price adjustments associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Based on these potential technology improvements, the contracted module volumes as of September 30, 2022,2023, 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 $0.7$0.4 billion, the majority of which would be recognized in 2024, 2025, 2026 and 2026.2027. In addition to these price adjustments, certain of our contracts with customers may also include potentialfavorable price adjustments associated with the extension of the U.S. ITC, sales freight andin 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.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 continually evaluate forecasted global demand, competition, and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improvingreducing manufacturing yield losses. Additionally, we recently commenced production of Series 7 modules at our third manufacturing facility in Ohio and our first manufacturing facility in India, and are in the process of expanding our manufacturing capacity by approximately 117.9 GW,DC, including the construction of our third manufacturing facility in the United States, which is expected to commence operations in the first half of 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 2025, contingent upon permitting and pending approvalthe second half of various federal, state, and local incentives;2024; our fifth manufacturing facility in the United States, which is expected to commence operations in late 2025; and the expansion of our manufacturing footprint at our existing facilities in Ohio.Ohio, which is expected to be completed in the first half of 2024. 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 capital, and may be subject to certain risks and uncertainties described in the Risk Factors.
In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availabilityItem 1A. “Risk Factors” of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, R&D activities,Annual Report on Form 10-K for the implementation of our technology roadmap, or construction activities associated with our expanding manufacturing capacity. At this time, such limitations have had a minimal effect on our manufacturing facilities. We maintain company plans and policies to implement all necessary safety precautions to protect our personnel as the COVID-19 pandemic evolves. Our R&D and manufacturing expansion activities may be delayed due to travel restrictions, quarantine requirements, other government orders, or increases in COVID-19 infection rates. Refer to the Risk Factors for more information related to impacts of COVID-19 on our business.year ended December 31, 2022.
Results of Operations
The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net sales | Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | Cost of sales | | 96.7 | % | | 78.6 | % | | 99.4 | % | | 76.0 | % | Cost of sales | | 53.0 | % | | 96.7 | % | | 63.0 | % | | 99.4 | % |
Gross profit | Gross profit | | 3.3 | % | | 21.4 | % | | 0.6 | % | | 24.0 | % | Gross profit | | 47.0 | % | | 3.3 | % | | 37.0 | % | | 0.6 | % |
Selling, general and administrative | Selling, general and administrative | | 7.4 | % | | 7.5 | % | | 7.5 | % | | 6.5 | % | Selling, general and administrative | | 6.3 | % | | 7.4 | % | | 6.5 | % | | 7.5 | % |
Research and development | Research and development | | 4.6 | % | | 4.4 | % | | 5.0 | % | | 3.4 | % | Research and development | | 5.1 | % | | 4.6 | % | | 5.0 | % | | 5.0 | % |
Production start-up | Production start-up | | 3.1 | % | | 0.5 | % | | 2.5 | % | | 0.8 | % | Production start-up | | 1.5 | % | | 3.1 | % | | 2.5 | % | | 2.5 | % |
Litigation loss | | Litigation loss | | — | % | | — | % | | 1.6 | % | | — | % |
Gain on sales of businesses, net | Gain on sales of businesses, net | | 1.0 | % | | (0.3) | % | | 15.7 | % | | 7.3 | % | Gain on sales of businesses, net | | — | % | | 1.0 | % | | — | % | | 15.7 | % |
Operating (loss) income | | (10.9) | % | | 8.7 | % | | 1.2 | % | | 20.5 | % | |
Operating income (loss) | | Operating income (loss) | | 34.1 | % | | (10.9) | % | | 21.3 | % | | 1.2 | % |
Foreign currency loss, net | Foreign currency loss, net | | (0.8) | % | | (0.2) | % | | (0.7) | % | | (0.2) | % | Foreign currency loss, net | | (0.1) | % | | (0.8) | % | | (0.5) | % | | (0.7) | % |
Interest income | Interest income | | 1.6 | % | | 0.3 | % | | 0.9 | % | | 0.2 | % | Interest income | | 2.9 | % | | 1.6 | % | | 3.4 | % | | 0.9 | % |
Interest expense, net | Interest expense, net | | (0.5) | % | | (0.5) | % | | (0.6) | % | | (0.5) | % | Interest expense, net | | (0.5) | % | | (0.5) | % | | (0.3) | % | | (0.6) | % |
Other income (expense), net | | 0.8 | % | | (0.4) | % | | 0.2 | % | | 0.1 | % | |
Income tax benefit (expense) | | 2.0 | % | | (0.1) | % | | (3.2) | % | | (3.4) | % | |
| Net (loss) income | | (7.8) | % | | 7.7 | % | | (2.3) | % | | 16.7 | % | |
Other (expense) income, net | | Other (expense) income, net | | (0.1) | % | | 0.8 | % | | (0.1) | % | | 0.2 | % |
Income tax (expense) benefit | | Income tax (expense) benefit | | (2.8) | % | | 2.0 | % | | (1.5) | % | | (3.2) | % |
Net income (loss) | | Net income (loss) | | 33.5 | % | | (7.8) | % | | 22.3 | % | | (2.3) | % |
Segment Overview
Our primary segment is our modules business, which involves the design, manufacture, and sale of CdTe solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include developers and operators of PV solarsystems, utilities, independent power systems.producers, commercial and industrial companies, and other system owners. Our residual business operations include certain project development activities, O&M services, the results of operations from PV solar power systems we ownowned and operateoperated in certain international regions, as well as certain O&M services and project development activities.
For the year ended December 31, 2021, we changed our reportable segmentssale of such systems to align with revisions to our internal reporting structure and long-term strategic plans. Following this change, our modules business represents our only reportable segment. We previously operated our business in two segments, which included our modules and systems businesses. Systems business activities primarily involved (i) project development, (ii) EPC services, and (iii) O&M services, which now comprise our residual business operations and are categorized as “Other” in the tables below. All prior year balances were revised to conform to the current year presentation.third-party customers.
Net sales
We generally price and sell our solar modules on a per watt basis. During the three and nine months ended September 30, 2022,2023, we sold the majority of our solar modules to developers and operators of systems in the United States, and substantially all of our modules business net sales were denominated in U.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Net sales from our residual business operations primarily consists of revenue recognized for sales of development projects or completed systems, including any modules installed in such systems and any revenue from energy generated by such systems. In certain prior periods, our residual business operations also included EPC services we provided to third parties.
The following table shows net sales by reportable segment for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Modules | Modules | | $ | 619,922 | | | $ | 562,810 | | | $ | 57,112 | | | 10 | % | | $ | 1,582,248 | | | $ | 1,640,436 | | | $ | (58,188) | | | (4) | % | Modules | | $ | 800,393 | | | $ | 619,922 | | | $ | 180,471 | | | 29 | % | | $ | 2,139,220 | | | $ | 1,582,248 | | | $ | 556,972 | | | 35 | % |
Other | Other | | 9,011 | | | 20,694 | | | (11,683) | | | (56) | % | | 34,680 | | | 375,622 | | | (340,942) | | | (91) | % | Other | | 697 | | | 9,011 | | | (8,314) | | | (92) | % | | 20,829 | | | 34,680 | | | (13,851) | | | (40) | % |
Net sales | Net sales | | $ | 628,933 | | | $ | 583,504 | | | $ | 45,429 | | | 8 | % | | $ | 1,616,928 | | | $ | 2,016,058 | | | $ | (399,130) | | | (20) | % | Net sales | | $ | 801,090 | | | $ | 628,933 | | | $ | 172,157 | | | 27 | % | | $ | 2,160,049 | | | $ | 1,616,928 | | | $ | 543,121 | | | 34 | % |
Net sales from our modules segment increased $57.1$180.5 million for the three months ended September 30, 20222023 compared to the three months ended September 30, 20212022 primarily due to a 23%20% increase in the volume of wattsmodules sold partially offset by a 10% decreaseto third parties and an 8% increase in the average selling price per watt. Net sales from our residual business operations decreased $11.7 million forduring the three months ended September 30, 20222023 decreased $8.3 million compared to the three months ended September 30, 20212022 primarily due to a favorable settlement with a customerhigher net sales in the prior period.period associated with operating PV solar power systems and providing O&M services in certain international jurisdictions prior to the sale of such systems and businesses.
Net sales from our modules segment decreased $58.2increased $557.0 million for the nine months ended September 30, 20222023 compared to the nine months ended September 30, 20212022 primarily due to a 12% decrease29% increase in the volume of modules sold to third parties and a 5% increase in the average selling price per watt, partially offset by a 10% increase in the volume of watts sold.watt. Net sales from our residual business operations decreased $340.9 million forduring the nine months ended September 30, 20222023 decreased $13.9 million compared to the nine months ended September 30, 20212022 primarily due to higher net sales of certain projects in the United States in the prior period and the settlement of an outstanding indemnification arrangement associated with operating PV solar power systems and providing O&M services in certain international jurisdictions prior to the sale of onesuch systems and businesses, partially offset by the recognition of our projects. Under the terms of the indemnification arrangement, we received $65.1 million for our portion of the settlement payment, which we recorded as revenuecertain contingent earnouts in the current period for projects we sold in prior period. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our indemnification arrangements.periods.
Cost of sales
Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion). Cost of sales for our residual business operations primarily consists ofincludes project-related costs, such as development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPC costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering, and construction labor), and site-specificsite specific costs.
The following table shows cost of sales by reportable segment for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Modules | Modules | | $ | 595,882 | | | $ | 444,550 | | | $ | 151,332 | | | 34 | % | | $ | 1,515,852 | | | $ | 1,312,389 | | | $ | 203,463 | | | 16 | % | Modules | | $ | 433,034 | | | $ | 595,882 | | | $ | (162,848) | | | (27) | % | | $ | 1,363,050 | | | $ | 1,515,852 | | | $ | (152,802) | | | (10) | % |
Other | Other | | 12,069 | | | 14,374 | | | (2,305) | | | (16) | % | | 91,831 | | | 220,204 | | | (128,373) | | | (58) | % | Other | | (8,119) | | | 12,069 | | | (20,188) | | | (167) | % | | (1,647) | | | 91,831 | | | (93,478) | | | (102) | % |
Total cost of sales | | $ | 607,951 | | | $ | 458,924 | | | $ | 149,027 | | | 32 | % | | $ | 1,607,683 | | | $ | 1,532,593 | | | $ | 75,090 | | | 5 | % | |
Cost of sales | | Cost of sales | | $ | 424,915 | | | $ | 607,951 | | | $ | (183,036) | | | (30) | % | | $ | 1,361,403 | | | $ | 1,607,683 | | | $ | (246,280) | | | (15) | % |
% of net sales | % of net sales | | 96.7 | % | | 78.6 | % | | | | | | 99.4 | % | | 76.0 | % | | | | % of net sales | | 53.0 | % | | 96.7 | % | | | | | | 63.0 | % | | 99.4 | % | | | |
Cost of sales increased $149.0decreased $183.0 million, or 32%30%, and increased 18.1decreased 43.7 percentage points as a percent of net sales for the three months ended September 30, 20222023 compared to the three months ended September 30, 2021.2022. The increasedecrease in cost of sales was driven by a $151.3$162.8 million increasedecrease in our modules segment cost of sales primarily as a resultdue to (i) the recognition of the following:
•advanced manufacturing production credit under Section 45X of the IRC, which decreased cost of sales by $204.6 million, and (ii) lower sales freight of $111.0 million, partially offset by (iii) higher costs of $101.3$118.0 million fromdue to an increase in the volume of modules sold;
•sold and (iv) higher sales freight, demurrage,under-utilization charges associated with the initial ramp of our first Series 7 manufacturing facilities in Ohio and detention charges of $59.4 million; and
•a reduction to 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,India, which decreasedincreased cost of sales by $11.8 million;
•an increase to$25.2 million. The decrease in cost of sales was also driven by a $20.2 million decrease in our module collection and recycling liabilityresidual business operations cost of $10.8 million in 2021sales primarily due to lower estimated by-product credits forcosts associated with operating PV solar power systems and providing O&M services in certain semiconductor materials recovered during the recycling process and updates to certain valuation assumptions;
•a reduction to our product warranty liability of $10.2 million in 2022international jurisdictions due to reductionsthe sale of such systems and businesses in the
prior period, as well as a favorable current-period settlement with a former supplier that resulted in an $8.4 million benefit to our projected module return rates; and
•a reduction to our module collection and recycling liabilitycost of $7.5 million in 2022 due to lower estimated capital and chemical costs resulting from improvements to our module recycling technology.sales.
Cost of sales increased $75.1decreased $246.3 million, or 5%15%, and increased 23.4decreased 36.4 percentage points as a percent of net sales for the nine months ended September 30, 20222023 compared to the nine months ended September 30, 2021.2022. The increasedecrease in cost of sales was driven by a $203.5$152.8 million increasedecrease in our modules segment cost of sales primarily as a resultdue to (i) the advanced manufacturing production credit described above, which decreased cost of the following:
•sales by $429.7 million, (ii) lower sales freight of $162.9 million, and (iii) continued module cost reductions of $80.3 million, partially offset by (iv) higher costs of $124.3$430.0 million fromdue to an increase in the volume of modules sold;
•sold and (v) higher sales freight, demurrage,under-utilization charges associated with the initial ramp of our first Series 7 manufacturing facilities in Ohio and detention charges of $114.2 million; and
•the reduction to our product warranty liability of $33.1 million in 2021 described above; partially offset by
•continued module cost reductions,India, which decreasedincreased cost of sales by $35.9 million;
•the increase$66.0 million. The decrease in cost of sales was also driven by a $93.5 million decrease in our residual business operations primarily due to our module collection and recycling liabilityan impairment loss of $10.8 million in 2021 described above;
•the reduction to our product warranty liability of $10.2 million in 2022 described above;
•manufacturing charges of $9.9$57.8 million in the prior period associated with the COVID-19 pandemic;anticipated sale of the Luz del Norte project and
•the reduction to our module collection and recycling liability of $7.5 million in 2022 described above.
The increase in cost of sales was partially offset by a $128.4 million decrease in our residual business operations cost of sales primarily due to sales of certain projects in the United States higher costs in the prior period partially offset by the impairment loss in the current period for our Luz del Norteassociated with operating PV solar power plant. See Note 5. “Consolidated Balance Sheet Details”systems and providing O&M services in certain international jurisdictions prior to our condensed consolidated financial statements for discussionthe sale of the impairment of our Luz del Norte project.such systems and businesses.
Gross profit
Gross profit may be affected by numerous factors, including the selling prices of our modules and the selling prices of projects and services included in our residual business operations, our manufacturing costs, project development costs, the capacity utilization of our manufacturing facilities, and foreign exchange rates. Gross profit may also be affected by the mix of net sales from our modules business and residual business operations.
The following table shows gross profit (loss) for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Gross profit | Gross profit | | $ | 20,982 | | | $ | 124,580 | | | $ | (103,598) | | | (83) | % | | $ | 9,245 | | | $ | 483,465 | | | $ | (474,220) | | | (98) | % | Gross profit | | $ | 376,175 | | | $ | 20,982 | | | $ | 355,193 | | | >100% | | $ | 798,646 | | | $ | 9,245 | | | $ | 789,401 | | | >100% |
% of net sales | % of net sales | | 3.3 | % | | 21.4 | % | | | | | | 0.6 | % | | 24.0 | % | | % of net sales | | 47.0 | % | | 3.3 | % | | | | | | 37.0 | % | | 0.6 | % | |
Gross profit decreased 18.1as a percentage of net sales increased 43.7 percentage points to 47.0% during the three months ended September 30, 2023 from 3.3% during the three months ended September 30, 2022 from 21.4% during the three months ended September 30, 2021 primarily due to (i) the advanced manufacturing production credit described above, (ii) reductions in sales freight costs, and (iii) a decrease in thehigher average selling price per watt of ourfor modules an increase in sales freight, demurrage, and detention charges, a lower benefit from reductions to our product warranty liability described above, and the favorable settlement with a customer in the prior period mentioned above. These decreases to gross profit were partially offset by the higher volume of modules sold the decrease to our module collection and recycling liability in the current period compared to the increase in the prior period described above, and continued module cost reductions.period.
Gross profit decreased 23.4as a percentage of net sales increased 36.4 percentage points to 37.0% during the nine months ended September 30, 2023 from 0.6% during the nine months ended September 30, 2022 from 24.0% during the nine months ended September 30, 20212022. Such increases were primarily due to (i) the advanced manufacturing production credit described above, (ii) reductions in sales freight costs, (iii) a decrease in thehigher average selling price per watt of ourfor modules an increase in sales freight, demurrage, and detention charges, the volume of higher gross profit projects sold during the prior period, the impairment loss in the current period, for our(iv) the prior period impairment of the Luz del Norte PV solar power plantproject described above, and the prior period indemnification matter described above. These decreases to gross profit were partially offset by the higher volume of modules sold and(v) continued module cost reductions.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.
The following table shows selling, general and administrative expense for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Selling, general and administrative | Selling, general and administrative | | $ | 46,368 | | | $ | 43,476 | | | $ | 2,892 | | | 7 | % | | $ | 121,990 | | | $ | 131,909 | | | $ | (9,919) | | | (8) | % | Selling, general and administrative | | $ | 50,172 | | | $ | 46,368 | | | $ | 3,804 | | | 8 | % | | $ | 140,528 | | | $ | 121,990 | | | $ | 18,538 | | | 15 | % |
% of net sales | % of net sales | | 7.4 | % | | 7.5 | % | | | | | | 7.5 | % | | 6.5 | % | | % of net sales | | 6.3 | % | | 7.4 | % | | | | | | 6.5 | % | | 7.5 | % | |
Selling, general and administrative expense for the three months ended September 30, 2022 increased compared to the three months ended September 30, 2021,2022, primarily due to higher costs associated with our implementation of a new global enterprise resource planning (“ERP”) system and higher expected credit losses due to an increase in employee compensation expense driven by higher share-based compensation and employee bonus expenses,accounts receivable, partially offset by higher charges for impairments of certain project assets in the prior period.lower share-based compensation expense.
Selling, general and administrative expense for the nine months ended September 30, 2022 decreased2023 increased compared to the nine months ended September 30, 20212022 primarily due to higher charges for impairments of certain project assets in the prior period, a decrease in employee compensation expense driven by reductions in headcount from the sales of our North American O&M operations and U.S. project development business in the prior period, lower professional fees, higher costs related to the ERP implementation mentioned above, and lowerhigher expected credit losses for our accounts receivable, partially offset bydue to an increase in employee compensation expense driven by higher share-based compensation and employee bonus expenses.accounts receivable.
Research and development
Research and development expense consists primarily of salaries and other personnel-related costs; the cost of products, materials, and outside services used in our R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules.
The following table shows research and development expense for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Research and development | Research and development | | $ | 29,183 | | | $ | 25,426 | | | $ | 3,757 | | | 15 | % | | $ | 81,520 | | | $ | 69,234 | | | $ | 12,286 | | | 18 | % | Research and development | | $ | 41,190 | | | $ | 29,183 | | | $ | 12,007 | | | 41 | % | | $ | 108,445 | | | $ | 81,520 | | | $ | 26,925 | | | 33 | % |
% of net sales | % of net sales | | 4.6 | % | | 4.4 | % | | | | | | 5.0 | % | | 3.4 | % | | % of net sales | | 5.1 | % | | 4.6 | % | | | | | | 5.0 | % | | 5.0 | % | |
Research and development expense for the three and nine months ended September 30, 20222023 increased compared to the three months ended September 30, 2021 primarily due to higher employee compensation expense resulting from an increase in headcount.
Research and development expense for the nine months ended September 30, 2022 increased compared to the nine months ended September 30, 2021 primarily due to higheran increase in employee compensation expense resulting from an increase in headcount increasedand higher material and module testing costs, lower share-based compensation expense in the prior period driven by the forfeiture of unvested shares by our former Chief Technology Officer, who retired in March 2021, and increased freight costs.
Production start-up
Production start-up expense consists of costs associated with operating a production line before it is qualified for commercial production, including the cost of raw materials for solar modules run through the production line during the qualification phase, employee compensation for individuals supporting production start-up activities, and applicable facility related costs. Production start-up expense also includes costs related to the selection of a new site and implementation costs for manufacturing process improvements to the extent we cannot capitalize these expenditures.
The following table shows production start-up expense for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Production start-up | Production start-up | | $ | 19,768 | | | $ | 2,945 | | | $ | 16,823 | | | >100% | | $ | 40,337 | | | $ | 16,014 | | | $ | 24,323 | | | 152 | % | Production start-up | | $ | 12,059 | | | $ | 19,768 | | | $ | (7,709) | | | (39) | % | | $ | 54,930 | | | $ | 40,337 | | | $ | 14,593 | | | 36 | % |
% of net sales | % of net sales | | 3.1 | % | | 0.5 | % | | | | | | 2.5 | % | | 0.8 | % | | % of net sales | | 1.5 | % | | 3.1 | % | | | | | | 2.5 | % | | 2.5 | % | |
During the three months ended September 30, 2023, we incurred production start-up expense primarily for our first manufacturing facility in India, which commenced operations during the three months ended September 30, 2023, and for our fourth manufacturing facility in the U.S., which is expected to commence operations in the second half of 2024. During the three months ended September 30, 2022, we incurred production start-up expense primarily for our third manufacturing facility in the U.S., which commenced production of modules in early 2023.
During the nine months ended September 30, 2023, we incurred production start-up expense primarily for our first manufacturing facility in India, our third manufacturing facility in the U.S., certain manufacturing upgrades at our Malaysian facilities, and our fourth manufacturing facility in the U.S. During the nine months ended September 30, 2022, we incurred production start-up expense primarily for our third manufacturing facility in the U.S. and for certain manufacturing upgrades at our Malaysian facilities.
DuringLitigation loss
The following table shows litigation loss for the three and nine months ended September 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Litigation loss | | $ | — | | | $ | — | | | $ | — | | | — | % | | $ | 35,590 | | | $ | — | | | $ | 35,590 | | | 100 | % |
% of net sales | | — | % | | — | % | | | | | | 1.6 | % | | — | % | | | | |
In July 2021, Southern filed an arbitration demand with the American Arbitration Association against two of the Company’s subsidiaries alleging breach of the EPC agreements for five projects in the United States for which such subsidiaries served as the EPC contractor. On July 19, 2023, the arbitration panel issued an interim award letter adopting certain of Southern’s proposed individual award claims in the amount of $35.6 million. As a result, we incurred production start-up expense primarilyaccrued a loss for certain manufacturing upgrades atthis matter in our facilities in Kulim, Malaysia. Duringresults of operations for the nine months ended September 30, 2021, we incurred production start-up expense primarily2023. See Note 12. “Commitments and Contingencies” to our condensed consolidated financial statements for the transition to Series 6 module manufacturing at our second facility in Kulim, Malaysia, which commenced commercial production in early 2021.further information about this matter.
Gain on sales of businesses, net
The following table shows gain on sales of businesses, net for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Gain on sales of businesses, net | Gain on sales of businesses, net | | $ | 5,984 | | | $ | (1,866) | | | $ | 7,850 | | | 421 | % | | $ | 253,272 | | | $ | 147,284 | | | $ | 105,988 | | | 72 | % | Gain on sales of businesses, net | | $ | 211 | | | $ | 5,984 | | | $ | (5,773) | | | (96) | % | | $ | 329 | | | $ | 253,272 | | | $ | (252,943) | | | (100) | % |
% of net sales | % of net sales | | 1.0 | % | | (0.3) | % | | | | | | 15.7 | % | | 7.3 | % | | % of net sales | | — | % | | 1.0 | % | | | | | | — | % | | 15.7 | % | |
During the three months ended September 30, 2022, we completed the salessale of certain internationalour Australian O&M operations to a subsidiary of Clairvest and our Japanese O&M operations to a subsidiary of PAG. During the nine months ended September 30, 2022, we also completed the salessale of our Japan project development business to PAG and certain other internationalthe sale of our Chilean O&M operations to a subsidiary of Clairvest. During the three and nine months ended September 30, 2021,2023, we completed therecognized certain post-closing adjustments associated with these transactions, which were included in “Gain on sales of businesses, net” in our North American O&M operations to a subsidiarycondensed consolidated statements of Clairvest and our U.S. project development business to Leeward.operations. See Note 2.3. “Sales of Businesses” to our condensed consolidated financial statements for further information related to these transactions.
Foreign currency loss, net
Foreign currency loss, net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries’ functional currencies.
The following table shows foreign currency loss, net for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Foreign currency loss, net | Foreign currency loss, net | | $ | (4,859) | | | $ | (1,018) | | | $ | (3,841) | | | 377 | % | | $ | (12,041) | | | $ | (4,613) | | | $ | (7,428) | | | 161 | % | Foreign currency loss, net | | $ | (987) | | | $ | (4,859) | | | $ | 3,872 | | | (80) | % | | $ | (11,586) | | | $ | (12,041) | | | $ | 455 | | | (4) | % |
Foreign currency loss, net for the three and nine months ended September 30, 2022 increased2023 decreased compared to the three and nine months ended September 30, 20212022 primarily due to the differences between our economic hedge positions and the underlying currency exposures, and higher costs associated with hedging activities related to our subsidiaries in India.India, and the beneficial impact of certain hedging activities in Japan in the prior period.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, restricted cash, restricted cash equivalents, and restricted marketable securities. Interest income also includes interest earned from late customer payments.
The following table shows interest income for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Interest income | Interest income | | $ | 9,749 | | | $ | 1,752 | | | $ | 7,997 | | | 456 | % | | $ | 14,954 | | | $ | 3,996 | | | $ | 10,958 | | | 274 | % | Interest income | | $ | 23,254 | | | $ | 9,749 | | | $ | 13,505 | | | 139 | % | | $ | 74,102 | | | $ | 14,954 | | | $ | 59,148 | | | 396 | % |
Interest income for the three and nine months ended September 30, 20222023 increased compared to the three and nine months ended September 30, 20212022 primarily due to higher interest ratesyields on cash time deposits, and restrictedmarketable securities and higher average balances associated with marketable securities.
Interest expense, net
Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with ASC 815.debt. We may capitalize interest expense to our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period.
The following table shows interest expense, net for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Interest expense, net | Interest expense, net | | $ | (2,991) | | | $ | (2,958) | | | $ | (33) | | | 1 | % | | $ | (9,092) | | | $ | (10,577) | | | $ | 1,485 | | | (14) | % | Interest expense, net | | $ | (3,734) | | | $ | (2,991) | | | $ | (743) | | | 25 | % | | $ | (5,897) | | | $ | (9,092) | | | $ | 3,195 | | | (35) | % |
Interest expense, net for the three months ended September 30, 2022 was consistent with2023 increased compared to the three months ended September 30, 2021.2022 primarily due to increased borrowings under our India credit facility, partially offset by the assumption of our Luz del Norte project loans by a subsidiary of Toesca Asset Management in connection with the sale of the project in late 2022. Interest expense, net for the nine months ended September 30, 20222023 decreased compared to the nine months ended September 30, 2021 primarily2022 due to changes in the fair valueassumption of interest rate swap contracts in the prior period, which did not qualify for hedge accounting, lower amortization of debt discounts and issuance costs in the current period, and lower interest expense associated withour Luz del Norte project debt.loans mentioned above, partially offset by increased borrowings under our India credit facility.
Other (expense) income, (expense), net
Other (expense) income, (expense), net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted marketable securities.
The following table shows other (expense) income, (expense), net for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Other income (expense), net | | $ | 4,774 | | | $ | (2,603) | | | $ | 7,377 | | | 283 | % | | $ | 2,679 | | | $ | 2,598 | | | $ | 81 | | | 3 | % | |
Other (expense) income, net | | Other (expense) income, net | | $ | (1,033) | | | $ | 4,774 | | | $ | (5,807) | | | (122) | % | | $ | (1,492) | | | $ | 2,679 | | | $ | (4,171) | | | (156) | % |
Other income, netexpense for the three and nine months ended September 30, 20222023 increased compared to the three and nine months ended September 30, 20212022 primarily due to an increase in the value of a strategic equity investment. Other income, net for the nine months ended September 30, 2022 increased compared to the nine months ended September 30, 2021 primarily due to the valuation increase of a strategic equity investment mentioned above, partially offset by higher realized gains from sales of restricted marketable securities in the prior period.
Income tax (expense) benefit (expense)
Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions in which we operate, principally Japan,Singapore, Malaysia, and Vietnam. Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate in the United States is 21%, and the tax rates in Japan,Singapore, Malaysia, and Vietnam are 30.6%17%, 24%, and 20%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax, conditional upon our continued compliance with certain employment and investment thresholds. In Vietnam, we have been granted a 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) benefit (expense) for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
(Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | Three Month Change | | 2022 | | 2021 | | Nine Month Change | (Dollars in thousands) | | 2023 | | 2022 | | Three Month Change | | 2023 | | 2022 | | Nine Month Change |
Income tax benefit (expense) | | $ | 12,512 | | | $ | (837) | | | $ | 13,349 | | | (>100%) | | $ | (51,788) | | | $ | (67,673) | | | $ | 15,885 | | | (23) | % | |
Income tax (expense) benefit | | Income tax (expense) benefit | | $ | (22,067) | | | $ | 12,512 | | | $ | (34,579) | | | 276 | % | | $ | (33,071) | | | $ | (51,788) | | | $ | 18,717 | | | (36) | % |
Effective tax rate | Effective tax rate | | 20.3 | % | | 1.8 | % | | | | | | 341.4 | % | | 16.7 | % | | Effective tax rate | | 7.6 | % | | 20.3 | % | | | | | | 6.4 | % | | 341.4 | % | |
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 benefitexpense increased by $13.3$34.6 million during the three months ended September 30, 20222023 compared to the three months ended September 30, 20212022 primarily due to ourhigher pretax lossincome, partially offset by the beneficial effect of tax law changes associated with the IRA and proposed FTC regulations in the current period, partially offset by losses in certain jurisdictions for which no tax benefit could be recorded. period.
Income tax expense decreased by $15.9$18.7 million during the nine months ended September 30, 20222023 compared to the nine months ended September 30, 20212022 primarily due to our lower pretax income in the currentbeneficial effect of tax law changes associated with the IRA and proposed FTC regulations, higher prior period partially offset by losses in certain jurisdictions for which no tax benefit could be recorded, higher excess tax benefits associated with share-based compensation, and a discrete tax expense in the prior period due to the remeasurement of our net deferred tax assets in Vietnam, as a result of a long-term tax incentive grantedpartially offset by higher pretax income in May 2022.the current period.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the amounts of reported assets, liabilities, revenues, and expenses, as well as the disclosure of contingent liabilities. Some of our accounting policies require the application of significant judgment in the selection of the appropriate assumptions for making these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our judgments and estimates on our historical experience, our forecasts, and other available information as appropriate. We believe the judgments and estimates involved in accrued solar module collection and recycling, product warranties, accounting for income taxes, and long-lived asset impairments, and government grants (described in further detail below) have the greatest potential impact on our condensed consolidated financial statements. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of the accounting policies that require the most significant judgment and estimates in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.2022. There have been no material changes to our accounting policies during the nine months ended September 30, 2022.2023.
Government Grants. We continue to evaluate the extent of benefits available to us pursuant to the IRA, 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.
There are currently several critical and complex aspects of the IRA pending technical guidance and regulations from the IRS and U.S. Treasury Department that could affect the estimated benefits we have recognized and expect to recognize from the advanced manufacturing production credit. Such pending guidance is described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, and certain proposed guidance recently published by the IRS is described above in “Certain Trends and Uncertainties.” 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, (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 material adverse changes to the benefits we have recognized and expect to recognize.
Recent Accounting Pronouncements
None.
Liquidity and Capital Resources
As of September 30, 2022,2023, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, and contracts with customers for the future sale of solar modules will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. In addition, we have availability under our Revolving Credit Facility, under which we have made no borrowings as of September 30, 2023. As necessary, we also believe we will have adequate access to the capital markets.markets, including potential opportunities for near-term bridge financing to address the uncertainty of payment timing associated with IRA credits generated by our U.S. manufacturing operations. 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, including near-term construction activities and purchases of manufacturing equipment for our newest manufacturing and R&D facilities in India and the United 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 broader market concerns.
Any incremental debt financings could result in increased debt service expenses and/or restrictive covenants, which could limit our ability to pursue our strategic plans.
As of September 30, 20222023, we had $1.9$1.8 billion in cash, cash equivalents, and marketable securities compared to $1.8$2.6 billion as of December 31, 2021.2022. The increasedecrease in cash, cash equivalents, and marketable securities was primarily driven by purchases of property, plant and equipment, various operating expenditures, and certain advance payments of raw materials, partially offset by proceeds from borrowings under long-term debt agreements and cash receipts from module sales, including advance payments for future sales, proceeds from the sales of our Japan project development business and certain international O&M operations, and proceeds from borrowings, partially offset by purchases of property, plant and equipment, expenditures for the construction of certain projects in Japan, and other operating expenditures.sales. As of September 30, 2022, $0.82023, $1.3 billion of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Japanese yen,Euro, and Indian rupee and Euro denominated holdings. Our investment policy seeks to preserve our investment principal and maintain adequate liquidity to meet our cash flow requirements, while at the same time optimizing the return on our investments. Such policy applies to all invested funds, whether managed internally or externally. Pursuant to such policy, we place our investments with a diversified group of high-quality financial institutions and limit the concentration of such investments with any one counterparty. We place significant emphasis on the creditworthiness of financial institutions and assess the credit ratings and financial health of our counterparty financial institutions when making investment decisions.
We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations in the United States, we may be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. We maintain the intent and ability to permanently reinvest our accumulated earnings outside the United States, with the exception of our subsidiaries in Canada and Germany. In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources.
Although 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 continuallycontinue to evaluate forecasted globalthe 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” of our Annual Report on Form 10-K for the year ended December 31, 2022. See Note 7. "Government Grants" to our condensed consolidated financial statements for further information about government grants.
As a result of various market opportunities and increased demand for our products, we recently commenced production of Series 7 modules at our third manufacturing facility in Ohio and seek to balance our first manufacturing capacity with such demand. Wefacility in India and are currently in the process of expanding our manufacturing capacity by approximately 117.9 GW,DC, including the construction of our third manufacturing facility in the United States, which is expected to commence operations in the first half of 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 2025, contingent upon permitting and pending approvalthe second half of various federal, state, and local incentives;2024; our fifth manufacturing facility in the United States, which is expected to commence operations in late 2025; and the expansion of our manufacturing footprint at our existing facilities in Ohio. Our newest factoriesOhio, which is expected to be completed in the United States and India are 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 system that reduces module installation time.first half of 2024. In aggregate, we currently expect to invest approximately $2.5 billion forour remaining investment in these facilities and upgrades. As we expand our manufacturing capacity, we expectupgrades to continue to receive advance payments from customers for the future sale of modules. Such advance payments are reflected as deferred revenue in our condensed consolidated balance sheets. As of September 30, 2022, our deferred revenue wasbe approximately $0.6$1.9 billion. Accordingly, theThe capital expenditures necessary to expand our capacity in the near term are expected tomay be financed, in part, by advance payments from customers for module sales in future periods.periods, the advanced manufacturing production credit described above, and/or near-term bridge financing instruments.
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 improvingreducing manufacturing yield losses. We have a demonstrated history of innovation, continuous improvement, and manufacturing success driven by our significant investments in various R&D initiatives. We continue to invest significant financial resources in such initiatives, and recently announced our plans to investincluding approximately $0.3 billion of remaining investments for a dedicated R&D facility in the United States to support the implementation of our technology roadmap. SuchWe expect such R&D facility willto feature a high-tech pilot manufacturing line, allowing for the production of full-sized prototypes of thin film and tandemmulti-junction PV modules, andmodules. Such R&D facility is expected to be completed in the first half of 2024. During 2022,2023, we expect to spend $0.8$1.7 billion to $1.0$1.9 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. These capital investments, and any other potential investments to implement our technology roadmap, may require significant internal and possibly external sources of capital, and may be subject to certain risks and uncertainties described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.
We have also committed and expect to commitcontinue 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 procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules. Our remaining purchases under these supply agreements are expected to be approximately $1.6 billion of substrate glass and approximately $314 million of cover glass. We have the right to terminate certain of these agreements upon payment of specified termination penalties (which, in aggregate, are up to $277$641 million as of September 30, 20222023 and decline over the remaining
supply periods). Additionally, for certain strategic suppliers, we have made, and may in the future be required to make, certain advance payments to secure the raw materials necessary for our module manufacturing.
We have also committed certain financial resources to fulfill our solar module collection and recycling obligations, and have established a trust under which these funds are put into custodial accounts with an established and reputable bank. As of September 30, 2022,2023, such funds were comprised of restricted marketable securities of $182.2$183.7 million and restricted cash and cash equivalents balances of $6.3$5.8 million. As of September 30, 2022,2023, our module collection and recycling liability was $120.2$130.1 million. Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. As necessary, we adjust the funded amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years.
As of September 30, 2022,2023, we had no off-balance sheet debt or similar obligations, other than financial assurance related instruments, which are not classified as debt. We do not guarantee any third-party debt. See Note 10.12. “Commitments and Contingencies” to our condensed consolidated financial statements for further information about our financial assurance related instruments.
Cash Flows
The following table summarizes key cash flow activity for the nine months ended September 30, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Net cash provided by operating activities | | $ | 78,154 | | | $ | 203,092 | |
Net cash used in investing activities | | (622,519) | | | (83,289) | |
Net cash provided by (used in) financing activities | | 209,461 | | | (9,210) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 39,866 | | | 1,687 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | (295,038) | | | $ | 112,280 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 |
Net cash provided by operating activities | | $ | 41,151 | | | $ | 78,154 | |
Net cash used in investing activities | | (299,630) | | | (622,519) | |
Net cash provided by financing activities | | 276,114 | | | 209,461 | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (855) | | | 39,866 | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 16,780 | | | $ | (295,038) | |
Operating Activities
The decrease in net cash provided by operating activities was primarily driven by certain advance payments for raw materials, higher operating expenditures, and lower cash receipts from module sales, partially offset by higher expenditures for the construction of certain projects in Japan and certain advance payments for raw materials in the current period, partially offset by higher cash receipts from module sales in the current period and higher operating expenditures in the prior period.
Investing Activities
The increasedecrease in net cash used in investing activities was primarily due to higher net purchasessales and maturities of marketable securities and restricted marketable securities,in the current period, partially offset by higher purchases of property, plant and equipment in the current period and proceeds from the salessale of our North American O&M operations and U.S.Japan project development business in the prior period, partially offset by proceeds from the sales of our Japan project development business and certain international O&M operations in the current period.
Financing Activities
The increase in net cash provided by financing activities was primarily due to higher net borrowings under project specific debt financings for the construction of certain projects in Japan. Such project specific debt financings were assumed by PAG when we completed the sale of our Japan project development business in June 2022. The increase is also due to borrowings under the India Credit Facility in the current period forcompared to net borrowings under various long-term debt agreements in the development and constructionprior period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the information previously provided under Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 20222023 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We also carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) to determine whether any changes in our internal control over financial reporting occurred during the three months ended September 30, 20222023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes in our internal control over financial reporting that occurred during the three months ended September 30, 2022.2023.
In August 2023, we completed our implementation of a new global ERP system, which replaced many of our existing core financial and business systems, and post-implementation activities are expected to continue over several months. Among other things, the new global ERP system is expected to (i) improve the efficiency and effectiveness of certain financial and business transaction processes, (ii) enhance the flow of financial information, and (iii) strengthen data management and analysis. The ERP implementation resulted in changes to various processes and procedures, for which the design of certain associated internal controls has been modified. None of these modifications have materially affected our internal control over financial reporting. As the post-implementation activities continue, we may have additional changes to certain of our processes and procedures, and we will evaluate quarterly whether such changes materially affect our internal control over financial reporting. As of September 30, 2023, no changes have been made in our internal control over financial reporting with respect to this implementation.
CEO and CFO Certifications
We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4. be read in conjunction with those certifications for a more complete understanding of the subject matter presented.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10.12. “Commitments and Contingencies” under the heading “Legal Proceedings” of our condensed consolidated financial statements for legal proceedings and related matters.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021,2022, which could materially affect our business, financial condition, results of operations, or cash flows. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently consider immaterial may also materially adversely affect our business, financial condition, results of operations, or cash flows. Except for the risk factor set forth below, thereThere have been no material changes in the risk factors contained in our Annual Report on Form 10-K.
The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other 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 out over time, require renewal by the applicable authority, or may be amended. 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. Another consideration is the effect of governmental land-use planning policies and environmental policies on utility-scale PV solar development. The adoption of restrictive land-use designations or environmental regulations that proscribe or restrict the siting of utility-scale solar facilities could adversely affect the marginal cost of such development.
Changes or threatened changes in U.S. regulatory policy may subject us to significant risks, including the following:
•Item 5. 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;Other Information
From time to time, our directors and officers may adopt plans for the purchase or sale of our securities. Such plans may be designed to satisfy the affirmative defense conditions of Rule 10b5-1 under the Exchange Act or may constitute non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K). During the three months ended September 30, 2023, none of our officers or directors adopted or terminated non-Rule 10b5-1 trading arrangements. However, certain officers of the Company adopted 10b5-1 trading plans for the sale of our securities. The following table provides certain terms of such plans:
•
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Position | | Action | | Adoption Date | | Expiration Date | | Aggregate Number of Securities to be Sold (1) |
Patrick Buehler | | Chief Product Officer | | Adoption | | August 29, 2023 | | May 15, 2024 | | 7,456 |
Kuntal Verma | | Chief Manufacturing Officer | | Adoption | | July 31, 2023 | | March 22, 2024 | | 10,131 |
Caroline Stockdale | | Chief People & Communications Officer | | Adoption | | July 31, 2023 | | July 26, 2024 | | 12,406 |
Byron Jeffers | | Chief Accounting Officer | | Adoption | | July 31, 2023 | | April 30, 2024 | | 2,703 |
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(1)Represents the gross number of shares subject to the Rule 10b5-1(c) plan, excluding the potential effect of shares withheld for taxes. Amounts related to PUs are presented at their target amounts. The actual number of PUs that vest following the end of the applicable performance period, if any, limitationswill depend on the value or availability to manufacturers or potential investorsrelative attainment of tax incentives that benefit solar energy production, sales, or projects, such as the Section 45X manufacturing credit, ITC, PTC, and accelerated depreciation deductions, could result in reducing such investors’ economic returns, causing a reduction in the availability of affordable financing, thereby reducing demand for PV solar modules; andperformance metrics.
•any effort to overturn federal and state laws, regulations, or policies that are supportive of solar energy generation or that remove costs or other limitations on other types of electricity generation that compete with solar energy projects could negatively impact our ability to compete with traditional forms of electricity generation and materially and adversely affect our business.
Application of U.S. trade laws, or trade laws of other countries, may also impact, either directly or indirectly, our operating results. In some instances, the application of trade laws is currently beneficial to the Company, and changes in their application could have an adverse impact.
For example, the United States currently imposes different types of tariffs and/or other trade remedies on certain imported crystalline silicon PV modules and cells 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 imposes a 14.75% tariff in the first year, which is scheduled to phase down annually in 0.25 percentage point increments over the four-year term. 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.
In addition, 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 and USDOC refusals to fully enforce U.S. antidumping and countervailing duty laws could have an adverse impact on our operating results. In March 2022, 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. 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. USDOC’s preliminary determinations concerning alleged circumvention with respect to those four countries are due to be announced on November 29, 2022. We cannot predict what further actions USDOC will take with respect to these circumvention inquiries. Our operating results could be adversely impacted if USDOC makes negative circumvention determinations or refrains from imposing antidumping and countervailing duties on imports covered by affirmative circumvention determinations. Conversely, affirmative circumvention determinations could positively impact our operating results.
Moreover, 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.
In other instances, the application of U.S. trade laws has had, or could have, an adverse impact on our operating results by increasing our costs or limiting the competitiveness of our products. For example, the United States 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. These examples show that established markets for PV solar development face uncertainties arising from policy, regulatory, and governmental constraints. While the expected potential of the markets we are targeting is significant, policy promulgation and market development are especially vulnerable to governmental inertia, political instability, the imposition or lowering of trade remedies and other trade barriers, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements, and limited available infrastructure.
Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q: | | | | | | | | |
Exhibit Number | | Exhibit Description |
3.1 | | |
3.2 | | |
10.1*+§ | | |
31.1* | | |
31.2* | | |
32.1† | | |
101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
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* Filed herewith.
+ Portions of this exhibit have been redacted in compliance with Item 601(b)(10) of Regulation S-K.
§ Exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K.
† Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| FIRST SOLAR, INC. |
| | | |
Date: October 27, 202231, 2023 | By: | | /s/ BYRON JEFFERS |
| Name: | | Byron Jeffers |
| Title: | | Chief Accounting Officer |