UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[x] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013 | |
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 | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common stock, $0.001 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [x] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [ ] |
(Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
The aggregate market value of the registrant’s common stock, $0.001 par value per share, held by non-affiliates of the registrant on June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3,169,994,502 (based on the closing sales price of the registrant’s common stock on that date). As of February 21, 2014, 99,512,794 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2013, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
TABLE OF CONTENTS
Page | |||
PART I | |||
Item 1: | Business | ||
Executive Officers of the Registrant | |||
Item 1A: | Risk Factors | ||
Item 1B: | Unresolved Staff Comments | ||
Item 2: | Properties | ||
Item 3: | Legal Proceedings | ||
Item 4: | Mine Safety Disclosures | ||
PART II | |||
Item 5: | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | ||
Item 6: | Selected Financial Data | ||
Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 7A: | Quantitative and Qualitative Disclosures About Market Risk | ||
Item 8: | Financial Statements and Supplementary Data | ||
Item 9: | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||
Item 9A: | Controls and Procedures | ||
Item 9B: | Other Information | ||
PART III | |||
Item 10: | Directors, Executive Officers, and Corporate Governance | ||
Item 11: | Executive Compensation | ||
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||
Item 13: | Certain Relationships and Related Transactions, and Director Independence | ||
Item 14: | Principal Accountant Fees and Services | ||
PART IV | |||
Item 15: | Exhibits and Financial Statement Schedules | ||
Signatures | |||
Consolidated Financial Statements | |||
Index to Exhibits | |||
Throughout this Annual Report on Form 10-K, we refer to First Solar, Inc. and its consolidated subsidiaries as “First Solar,” the “Company,” “we,” “us,” and “our.” Our last three fiscal years ended on December 31, 2013, 2012, and 2011.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933, which are subject to inherent risks, uncertainties, and assumptions that are difficult to predict. All statements in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; research and development programs and our ability to improve the conversion efficiency 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,” 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 Annual Report on Form 10-K are based upon information available to us as of the filing date of this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements, including, but not limited to:
• | structural imbalances in global supply and demand for photovoltaic (“PV”) modules; |
• | the market for renewable energy, including solar energy; |
• | reduction, elimination or expiration of government subsidies and support programs for solar energy projects; |
• | our ability to execute on our Long Term Strategic Plan; |
• | interest rate fluctuations and both our and our customers’ ability to secure financing; |
• | our ability to execute on our solar module and balance of systems (“BoS”) cost reduction roadmap; |
• | our ability to attract new customers and to develop and maintain existing customer and supplier relationships; |
• | changes in, or the failure to comply with, government regulations and environmental, health and safety requirements; |
• | our competitive position and other key competitive factors; |
• | environmental responsibility, including with respect to cadmium telluride and cadmium sulfide; |
• | claims under our limited warranty obligations; |
• | future collection and recycling costs for solar modules covered by our module collection and recycling program; |
• | our ability to protect our intellectual property; |
• | our continued investment in research and development; |
• | the supply and price of components and raw materials, including cadmium telluride; |
• | our ability to successfully develop and complete our systems business projects; |
• | our ability to attract and retain key executive officers and associates; |
• | general economic and business conditions, including those influenced by international and geopolitical events; and |
• | all other matters discussed in Item 1A: “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. |
You should carefully consider the risks and uncertainties described under this section.
1
Unit of Power
When referring to our manufacturing capacity, total sales and solar module sales, the unit of electricity in watts for megawatts(“MW”) and gigawatts (“GW”) is direct current (“DC”) unless otherwise noted. When referring to our PV solar power systems, the unit of electricity in watts for MW and GW is alternating current (“AC”) unless otherwise noted.
2
PART I
Item 1: Business
Company Overview
We are a global provider of solar energy solutions, focused on providing power solutions across key market segments. We design, manufacture and sell photovoltaic (“PV”) solar modules with an advanced thin-film semiconductor technology and we develop, design, construct and sell PV solar power solutions that primarily use the solar modules we manufacture. We are also developing crystalline silicon solar modules with proprietary high-power density, mono-crystalline technology, and we provide single-axis mounting systems with proprietary tracking capabilities. Additionally, we provide operations and maintenance (“O&M”) services to plant owners that use solar modules manufactured by us or by other third-party manufacturers. We have substantial, ongoing research and development efforts focused on module and systems level innovations. We are the world’s largest thin-film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our mission is to create enduring value by enabling a world powered by clean, affordable solar energy.
In addressing overall global demand for PV solar electricity, we have developed a differentiated, fully integrated systems business that can provide competitively priced utility-scale PV solutions for system owners and low cost solar electricity to end-users. Our fully integrated systems business has enabled us to drive cost reduction across the value chain, identify and break constraints to sustainable markets, and deliver compelling solutions to our customers and end-users. With our fully integrated systems business, we believe we are in a position to expand our business in economically sustainable markets (in which support programs are minimal), which are developing in areas that have a combination of abundant solar resources, relatively high current electricity costs and sizable electricity demand. We are committed to continually lowering the cost of solar electricity, and in the long-term, we plan to compete on an economic basis with conventional fossil-fuel-based peaking power generation.
In furtherance of our goal of delivering affordable solar electricity, we are continually focused on reducing PV solar power system costs in five primary areas: module manufacturing, balance of system (“BoS”) costs (consisting of the costs of the components of a solar power system other than the solar modules that we manufacture, such as inverters, mounting hardware, trackers, grid interconnection equipment, wiring and other devices, and installation labor costs), project development costs, the cost of capital, and the operating expenses of a PV solar system. First, with respect to our module manufacturing costs, our advanced technology has allowed us to reduce our average module manufacturing costs to among the lowest in the world for modules produced on a commercial scale, based on publicly available information. In 2013, our total average manufacturing cost was $0.63 per watt, which is competitive, on a comparable basis with, or, is lower than those of traditional crystalline silicon solar module manufacturers, based on publicly available information. By continuing to improve conversion efficiency, increasing production line throughput, and lowering raw material costs, we believe that we can further reduce our manufacturing costs per watt and maintain cost competitiveness with traditional crystalline silicon solar module manufacturers. Second, with respect to our planned BoS cost reduction roadmap, we have aggressive programs which target key improvements in components and system design, which, when combined with continued improvements in solar module conversion efficiency, volume procurement around standardized hardware platforms, use of innovative installation techniques and know how, and accelerated installation times, are expected to result in substantial reductions in our BoS costs resulting in a lower system levelized cost of energy. Third, with respect to our project development costs, we seek optimal site locations in an effort to maximize solar resource and minimize transmission and permitting costs, and to accelerate lead times to electricity generation. Fourth, with respect to the cost of capital, by continuing to demonstrate the financial viability and operational performance of our utility-scale PV solar power systems and increasing our system operating experience, we believe we can continue to lower the cost of capital associated with our systems, thereby further enhancing the economic viability of our projects and lowering the cost of electricity generated by PV solar power systems that incorporate our modules and technology. The remaining primary PV solar power system cost relates to the actual operating expenses of a system, which includes the operations and maintenance costs of the plant. We believe that our O&M services are an important aspect to the overall future reduction expected in the levelized cost of electricity (“LCOE”) of a PV solar power system through seamless grid integration, increased reliability and maximization of availability of the systems we operate and maintain for our customers.
In addition to enabling the PV system cost reductions described above, we believe that combining our vertical integration across the value chain enables us to be more competitive, accelerate the adoption of our technology in solar power systems, and identify and remove constraints to the successful migration to sustainable solar markets around the world. Our vertically integrated capabilities enable us to maximize value and mitigate risk for our customers and offer valuable benefits such as grid integration and stabilization, thereby positioning us to deliver meaningful PV energy solutions to varied energy problems worldwide. We seek to offer leadership across the entire solar value chain, resulting in more reliable and cost effective PV energy solutions for our customers, and furthering our mission to create enduring value by enabling a world powered by clean, affordable solar electricity.
3
Market Overview
Solar energy is a growing form of renewable energy with numerous economic as well as environmental benefits that make it an attractive complement to, and/or substitute for, traditional forms of electricity generation. In recent years, the price of PV systems, and accordingly the cost of producing electricity from PV solar, has dropped to levels that are in some markets and applications close to or even below the retail price of electricity. The rapid price decline that PV experienced in the last few years opens new possibilities to develop PV systems in some locations with limited or no financial incentives. The fact that a PV solar system requires no fuel provides a unique and valuable hedging benefit to owners of PV systems relative to traditional electricity generation assets. Once installed, solar systems can function for 25 or more years with relatively less maintenance or oversight, compared to traditional forms of electricity generation. In addition to PV solar’s economic benefits, PV solar has several environmental benefits. For example, PV systems do not generate any greenhouse gas or other emissions and use no or minimal amounts of water compared to traditional forms of electricity generation. Solar markets worldwide continue to develop, aided by the above factors as well as demand elasticity resulting from declining industry average selling prices, both at the module and system level, which make solar power more affordable to new markets, and we have continued to develop our localized presence and expertise in these markets.
In 2013, according to industry analyst IHS, industry module average selling prices began to show signs of stabilization in several markets, after a long period of significant decline across multiple markets. Lower industry module pricing, while currently challenging for solar manufacturers (particularly manufacturers with high cost structures), is expected to continue to contribute to global market diversification and volume elasticity. Over time, declining average selling prices are consistent with the erosion of one of the primary historical constraints to widespread solar market penetration, its affordability. Global demand is becoming more diffused as developing markets continue to grow. This has been reflected in changing business practices, as more solar companies seek to regionally diversify their downstream strategy. IHS estimates that PV installations worldwide in 2013 reached approximately 35 gigawatts (“GW”), and will grow by 17% in 2014 to reach approximately 41 GW.
In the United States, the solar market continues to advance as solar electricity narrows the cost gap with traditional electricity sources, together with a backdrop of policy support as described further under “Support Programs” below. Installed solar power capacity in the U.S. grew by 43% in 2013, with the country adding 2.9 GW of large-scale solar energy to the grid, according to the December 2013 Energy Infrastructure Update report from the Federal Energy Regulatory Commission’s (“FERC”) Office of Energy Projects. Projections for the sustainable growth of solar energy use in the United States are positive mostly due to a large pipeline of utility-scale installations, some of which are due to be completed in 2014 and 2015.
The solar industry continues to be characterized by intense pricing competition, both at the module and system level, with
many solar companies generating operating losses or little to no operating income. We believe the solar industry will continue to experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing. In light of such market realities, we continue to execute our Long Term Strategic Plan described below under which we are focusing on our competitive strengths. A key core strength is our differentiated, vertically integrated business model that enables us to provide utility-scale PV generation solutions to sustainable geographic markets that have an immediate need for mass-scale PV electricity.
Strategy and Competitive Strengths
To build upon our industry leading position and to remain one of the preferred providers of PV energy solutions, we are pursuing the following strategies: differentiation, sustainable growth and financial viability.
Differentiation
• | First Solar is vertically integrated across substantially the entire solar value chain. Many of the efficiencies, cost reductions and capabilities that we deliver to our customers are not easily replicable for other industry participants that are not similarly vertically integrated. The First Solar model offers PV energy solutions that benefit from our capabilities, including: project development; engineering and plant optimization; grid integration and plant control systems; project finance; advanced PV modules; inverters and power conversion components; trackers and fixed mounting systems; procurement and construction consulting; operations and maintenance; energy forecasting; and warranties and performance guarantees. |
• | First Solar systems deliver solar energy that is cost competitive with certain conventional energy sources today, depending on the location and application. Our solutions diversify the energy portfolio and reduce the risk of fuel-price volatility, while delivering a LCOE that is cost competitive in some circumstances with electricity generated from fossil fuels. With |
4
the absence of commodity price risk, solar energy has a meaningful value proposition, including a fixed price for 25 years with relatively low operating costs, reliable energy and no risk of fuel price volatility. When compared to the price of power derived from a conventional source of energy, a fixed price cannot be achieved unless the cost of hedging is included. Hedging costs of a commodity such as natural gas, along with the costs of credit support required for a 25-year hedge, can significantly increase conventional energy costs.
• | First Solar’s bankability and financial credibility enables us to offer meaningful system-level warranties for entire solar power plants years after the installation, which provides us with a competitive advantage relative to some of our peers in the solar sector in the context of project financing. |
• | We offer one of the most bankable utility-scale solar energy solutions in the world. With our financial stability and ability to maximize the use of our leading technology in debt-financed projects, our bankable energy solutions provide access to capital and relatively low-cost financing to leading utilities and energy investors. |
• | First Solar has developed advanced grid integration technology, which provides PV plants the ability to actively stabilize the electricity grid and operate more like traditional electricity generation plants. Advanced plant features of our grid integration systems include the ability to provide accurate energy forecasts, regulate voltage, curtail active power when necessary, limit the rate of change of power, prevent trips during faults and disturbances, and react to changes in grid frequency. |
• | First Solar has made significant improvements to BoS components to optimize the entire PV power plant and reduce lifecycle costs. Our proprietary data acquisition, plant control, and mounting systems are examples of plant optimizing technologies that enable us to provide reliable and predictable solar energy, increased energy yields and system availabilities, faster construction velocities, and a lower levelized cost of electricity. |
• | We invest significant resources in advanced research and development (“R&D”). First Solar’s R&D model differentiates us from our competition due to its vertical integration, from advanced research to product development, manufacturing and applications. Our module conversion efficiency has improved on average more than half a percent every year for the last 10 years. First Solar has recently achieved two new world records for cadmium telluride (“CdTe”) PV efficiency, achieving independently certified research cell efficiency of 20.4% and total area module efficiency of 16.1%. Our module R&D efforts are being focused on driving improvements in the lifetime energy production of our modules while simultaneously integrating our module and BoS offerings for cost effective, productive and reliable PV power plants. |
• | In certain climates, First Solar’s CdTe PV module can provide an energy yield advantage over conventional crystalline silicon solar modules with equal power rating. For example, in humid climates, our CdTe PV module provides a superior spectral response and in hot climates, our CdTe PV module provides a superior temperature coefficient. As a result, at temperatures above 25°C, First Solar CdTe modules produce more energy than competing conventional crystalline silicon solar modules with equal power rating. This performance advantage provides stronger plant performance in high temperature climates, which is particularly advantageous as more than 90% of a plant’s generation on average occurs when module temperatures are above 25°C. As a result, First Solar power plants can produce up to 8% more annual energy than competing power plants with the same nameplate capacity. |
• | First Solar CdTe PV modules are manufactured in a high-throughput, automated environment that integrates all manufacturing steps into a continuous flow line. At the outset, a sheet of tempered glass enters the production line and in less than 2.5 hours it is transformed into a complete PV module-flash tested, boxed and ready for shipment. We currently have 28 manufacturing lines worldwide and 2.2 GW of annual manufacturing capacity. Each line is currently capable of producing approximately 2,500 modules per day; totaling approximately 70,000 modules each day across 28 lines. About every 1.2 seconds, a completed PV module rolls off a First Solar line somewhere in the world. With expected increases in module efficiency as per our roadmap, our capacity has a potential to scale up to approximately 3 GW in 2017 based on the 28 existing lines. In addition, our stored manufacturing equipment includes up to 12 lines either from our closed German factories or from manufacturing facilities that we put on hold with capacity of up to approximately 1.3 GW. As a result our total available manufacturing capacity includes up to 4.3 GW of either installed or stored capacity that can be readily installed and deployed in production and become a significant enabler of our future growth. |
• | O&M is a key driver for power plants to deliver on their projected revenues. By leveraging our extensive experience in plant optimization and advanced diagnostics, we have developed one of the most advanced O&M programs in the industry. With more than 2.5 GW AC of utility-scale PV plants under the O&M program, we maintain a fleet average system availability that is above the industry modeled standard of 98%. Our experienced O&M staff enhances the probability that our power plants produce the energy predicted in their energy model. Our products and services are engineered to |
5
maximize energy output and revenue for our customers while significantly reducing their unplanned maintenance costs. Plant owners benefit from predictable expenses over the life of the contract and reduced risk of energy loss. Our goal is to optimize our customers’ power plants to produce the maximum amount of energy production and revenue under their PPA throughout its operational life. We have made significant investments in O&M technologies in order to develop and create a scalable and sustainable O&M platform. Our O&M is compliant with the North American Electric Reliability Corporation (“NERC”) standards and is designed to be scalable to accommodate the growing O&M needs of customers worldwide.
Sustainable Growth
Our Long Term Strategic Plan focuses on the transition of our business to primarily sustainable opportunities. In executing the LTSP we are focusing on providing solar PV generation solutions using our modules in sustainable geographic markets that we believe have a compelling need for mass-scale PV electricity, including markets throughout the Americas, Asia, Australia, the Middle East, and Africa. As part of our LTSP, we are focusing on opportunities in which our solar PV generation solutions can compete directly with fossil fuel offerings on an LCOE basis. Execution of the LTSP entails a reallocation of resources around the globe, in particular dedicating resources to regions such as Latin America, Asia, the Middle East, and Africa where we have not traditionally conducted significant business to date. We are evaluating and managing closely the appropriate level of resources required as we transition into and penetrate these specific markets. We have dedicated and intend to continue to dedicate significant capital and human resources to reduce the total installed cost of solar PV generation, to optimize the design and logistics associated with our solar PV generation solutions, and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. We expect that, over time, an increasing portion of our consolidated net sales, operating income and cash flows will come from solar offerings in the sustainable markets described above as we execute on our LTSP. The timing, execution and financial impacts of our LTSP are subject to risks and uncertainties, as described in Item 1A: “Risk Factors.”
Joint ventures or other business arrangements with strategic partners are a key part of our LTSP, and we have begun initiatives in several markets using such arrangements to expedite our penetration of those markets and establish relationships with potential customers and policymakers. Some of these business arrangements have involved and are expected in the future to involve significant investments or other allocations of capital on our part. We are in the process of developing relationships with policymakers, regulators, and especially end customers in each of these markets with a view to creating markets for utility scale PV solar power systems. We sell solar power solutions directly to end customers, including independent power producers, utilities, retail electricity providers and commercial and industrial customers. Depending on the market opportunity, our sales offerings range from module-only sales, to module sales with a range of development, engineering, procurement and construction services and solutions, to full turn-key PV solar power system sales. We expect these sales offerings to continue to evolve over time as we work with our customers to optimize how our PV solar generation solutions can best meet our customers’ energy and economic needs.
Financial Viability
First Solar has demonstrated the consistent ability to generate returns on invested capital in excess of its weighted average cost of capital. Despite substantial downward pressure on the price of solar modules due to significant excess capacity in the industry, we have continued to deliver strong financial performance and liquidity. As planned, we expect to continue to drive operating expense efficiencies and improvements while still investing in growth, the continued development of our global sales capabilities and our R&D roadmap. We seek to balance our incentive compensation and decision-making processes to ensure we direct our efforts and investments towards long-term profitable and sustainable growth with appropriate returns on invested capital and reinvest excess returns back into the business.
Offerings and Capabilities
Offerings
We are focusing our resources in markets and on energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with high solar resources, significant current or projected electricity demand and/or relatively high existing electricity prices. We differentiate our product offering by geographic market and localize the solution, as needed. Our consultative approach to our customers’ solar energy needs and capabilities results in customized solutions to meet their economic goals. We have designed our customer solutions according to the needs of the following different business areas. Although we have substantial experience with the utility-scale power plant and advanced PV module offerings described below, our other offerings are in various stages of development and we currently have limited experience with them.
6
• | Utility-Scale Power Plant. We have extensive, proven experience in delivering reliable grid-connected bulk power systems for utility-scale generation. First Solar’s grid-connected PV power plants diversify the energy portfolio, reduce fossil-fuel consumption, reduce the risk of fuel price volatility, and save costs, proving that centralized solar generation can deliver reliable and affordable solar electricity to the grid in many places around the world. Benefits of our grid-connected bulk power system solutions include reduction of fuel imports and improvements in energy security; diversification of the energy portfolio and reductions of risk related to fuel-price volatility; enhanced peaking generation and faster time-to-power; improved grid reliability and stability with advanced PV plant controls and managed PV variability through accurate forecasting. |
• | AC Power Block. First Solar is developing the AC Power Block as a pre-engineered system solution with guaranteed performance, consisting of First Solar modules, mounting solutions, third party inverters, a power block warranty and certain related services. Building on the core of our PV plant technology, the AC Power Block will enable our local Engineering, Procurement, and Construction (“EPC”) partners to develop PV power plants in diverse regions. By utilizing technologies optimized by First Solar, the AC Power Block is expected to provide verification of the power plant energy model ensuring that delivered performance equals predicted performance. The AC Power Block is expected to (i) feature execution by a local partner with First Solar technology and training; (ii) provide a bankable revenue stream; (iii) streamline development, financing, permitting, installation, and commissioning; (iv) reduce LCOE and (v) ensure predictable energy performance. As a result of First Solar’s experience in utility-scale generation, First Solar power plants are expected to deliver an accurate energy profile, cost structure and be optimized for project-specific economics. By applying our knowledge and technical expertise to the AC Power Block solution, we will be able to predict the energy model and guarantee the first year revenues. The AC Power block performance guarantee is expected to result in a high level of bankable revenue stream for project owners. |
• | Fuel Displacement. Our hybrid power plant solutions, which are currently in development, are expected to reduce fuel consumption and save costs for certain energy customers using liquid fuel as their primary energy source. Today, solar electricity is cheaper than diesel generated electricity in certain markets. With fixed pricing and no fuel-price volatility, solar can provide a meaningful value proposition for energy customers burning liquid fuel as their primary energy source. Our innovative hybrid system solutions are expected to provide cost-competitive solar energy as an alternative source of fuel, reducing fuel consumption and variable costs with reliable and affordable solar electricity. Benefits of our fuel displacement product are expected to include the reduction of fuel consumption and cost savings; an increase in fuel reserves or exports at market prices; a smaller impact from fuel price volatility; greater energy independence; reduction of CO2 emissions and generator operating time. |
• | Commercial and Industrial (“C&I”) - Distributed Generation for Restricted Spaces. We are in the process of developing system solutions, both ground-mounted and roof-top, for commercial and industrial applications, using both our CdTe PV technology and the high efficiency crystalline silicon technology we acquired in 2013. Distributed solar generation can be deployed rapidly, and because the energy generated is consumed locally, less energy is lost in transmission from the point of production. While our CdTe PV modules have been used in many C&I systems worldwide, our high-power density, mono-crystalline solar technology is expected to be particularly attractive in restricted spaces, enabling our customers to pack more power and energy production into each location, resulting in improved performance in site-constrained locations. We expect to begin manufacturing modules incorporating this crystalline silicon technology in limited quantities by the end of 2014. |
• | Off-Grid and Energy Access. Our off-grid and energy access offerings, currently in development, can address underserved energy markets and bring power solutions to some of the approximately 1.3 billion people without access to a modern energy grid. First Solar’s energy access offerings are expected to provide a practical and affordable option for underserved off-grid energy markets across the globe. Our mini-grid capabilities under development can provide aggregate surplus supply for village electrification in remote locations to power homes, schools, hospitals, telecommunication systems, and many other modern applications. Our underserved energy market capabilities under development can provide base-load solar generation with no fuel cost or delivery risk; reduce health risks associated with kerosene and diesel fuel; support fast installation, low maintenance, and easy service and provide income generation and economic development opportunities. We are currently engaged in three off-grid energy access test pilot sites in Kenya. |
• | Advanced PV Modules. Our Series 3 Black CdTe PV module outperforms conventional crystalline silicon solar modules with equal power rating due to superior spectral response and temperature coefficient. As a result, at temperatures above 25°C, First Solar modules produce more energy than conventional crystalline silicon solar modules with equal power rating. Our TetraSun crystalline silicon module (scheduled to begin manufacturing by the end of 2014) is designed for applications where space is at a premium or customers prefer a high-power density solution. With a proprietary cell architecture and manufacturing process, our crystalline silicon modules are expected to offer one of the industry’s highest |
7
power ratings and conversion efficiencies and lowest temperature coefficients, resulting in high energy density in space-constrained installations.
Full Suite of Capabilities
The First Solar model offers PV energy solutions with superior value and less risk with our expertise across substantially the entire solar value chain, including:
• | Project Development. During project development, we obtain land and land rights for the development of PV solar power systems incorporating our modules, negotiate long-term PPAs with potential purchasers of the electricity to be generated by those plants or develop plants in regulated markets where feed-in-tariff (“FiT”) or similar structures are in place, manage the interconnection and transmission process, negotiate agreements to interconnect the systems to the electricity grid, and obtain the permits which are required prior to the construction of the PV solar power systems, including applicable environmental and land use permits. We also buy projects in various stages of development and continue developing those projects with system designs incorporating our own modules. We sell developed PV solar power systems to system operators who wish to own generating facilities, such as utilities, or to investors who are looking for long-term investment vehicles that are expected to generate consistent returns. |
• | EPC Services. We provide EPC services to projects developed by us, to projects developed by independent solar power project developers, and directly to system owners such as utilities. EPC products and services include engineering design and related services, BoS procurement, advanced development of grid integration solutions, and construction contracting and management. Depending on the customer and market need, we may provide our full EPC services or any combination of individual products and services within our EPC capabilities. An example of such combination of individual services would be providing engineering design and procurement of BoS parts (“EP” services) for a third party constructing a PV solar power system. |
• | O&M Services. We have a comprehensive O&M service offering with multiple PV solar power systems in operation. Utilizing a state of the art Global Operations Center, our team of O&M experts provide comprehensive services including NERC compliance, energy forecasting, 24/7 monitoring and control, PPA and Large Generator Interconnection Agreement compliance, performance engineering analysis, turn-key maintenance services including spare parts and breakdown repair, and environmental services. We offer our O&M service to solar power plant owners that use either our solar modules or modules manufactured by other third-party manufacturers. |
• | Project Finance. Our project finance group is primarily responsible for negotiating and executing the sale of PV solar power systems incorporating our modules which allows us to optimize the value of our project development portfolio. Our project finance team includes professionals with experience in arranging for and structuring financing for projects incorporating our modules including non-recourse project debt financing in the bank loan market and debt capital markets and project equity capital from tax oriented and strategic industry equity investors. |
• | The First Solar Tracker and Other Balance of System (“BoS”). BoS consists of all of the non-module components of the solar power plant. We sell certain components of the solar system including single-axis trackers, which are manufactured by a third party using our proprietary technology. We offer several proprietary mounting solutions that have been custom-designed by First Solar engineers to integrate exclusively with our modules and reduce system costs. Project specific factors such as the local irradiance, weather, soil, wind, and topography will dictate the optimal mounting solution for each project. With a single-axis tracker technology and multiple fixed mounting solutions to choose from, we offer a suite of mounting systems that have been engineered to maximize energy output, increase installation velocity, and reduce costs. Our proprietary tracker systems follow the sun throughout the day to maximize energy output and generate up to 25% more energy than fixed mounting systems. |
• | Power Sales and Marketing. We are developing capabilities in power sales and marketing, which will enable us to source buyers of electricity from our projects as needed, for instance during any stub periods between a solar plant’s commercial operation date and the subsequent start date of a long term PPA. |
Global Markets
As part of our Long Term Strategic Plan, we have established and are continuing to develop a localized business presence on six continents, as described below. Energy markets are by their nature localized, with different drivers and market forces impacting
8
electricity generation in a particular region or for a particular application. Accordingly, our business is evolving worldwide and shaped by the varying ways in which our PV solar solutions can be a compelling and economically viable solution to energy needs in different markets and applications.
The Americas
• | United States. Multiple PV markets in the United States, which accounted for 86% of our 2013 net sales, exemplify several of the criteria critical for a sustainable solar market: (i) sizeable electricity demand, particularly around growing population centers and industrial areas, (ii) high existing power prices, and (iii) abundant solar resources. In those areas and applications in which these factors are more pronounced, our PV solar solutions are getting closer to competing solely on an economic basis with more traditional forms of energy generation. The market penetration of PV solar is impacted by certain state and federal support programs, including the 30% federal investment tax credit set to expire at the end of 2016, as described under “Market Overview” and “Support Programs.” We have significant experience and a market leadership position in developing, financing, engineering, constructing, and maintaining utility-scale power plants in the United States, particularly in California and other southwestern states. Currently, our solar projects in the United States account for substantially all of the 2.7 GW AC advanced-stage pipeline of projects that we are either currently constructing or expect to construct. See Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Systems Project Pipeline” for more information about these projects. |
• | Chile. Chile is a promising region for PV solar in that certain markets are characterized by high existing electricity prices, abundant solar resources and visible demand in the form of mining or industrial activity. In 2008, Chile enacted the Non-Conventional Renewable Energy (“NCRE”) Law which made it mandatory for electricity companies selling energy to final customers to assure that a specified quota (which rises over time) of the energy they sell comes from NCRE sources, directly or indirectly. |
In early 2013, we acquired Solar Chile, a Santiago-based solar development company. Solar Chile has a portfolio of utility-scale PV power projects in varying stages of development currently totaling approximately 1 GW in northern Chile, including the Atacama Desert region, which offers the highest solar irradiance in the world. As a result of our investment in Chile, we have developed capabilities that allow us to carry out development activities and perform EPC and O&M services.
• | Other Americas. We are developing our business in other countries in the Americas including Canada, Brazil, Mexico and certain Central American countries. Canada accounted for approximately 8% of our 2013 net sales. |
Europe, Middle East and Africa
• | Europe. While PV solar adoption in prior years was driven to a large degree by feed-in-tariffs and other incentive programs in Germany, France, Italy and Spain, PV solar is entering its next phase in which growth will ultimately be determined by the degree to which PV solar solutions can compete economically with more traditional forms of electricity generation, particularly in areas with high prevailing electricity prices, strong electricity demand and strong solar resources. |
In Europe, which accounted for approximately 5% of our 2013 net sales, we have been engaged in project development activities with respect to certain projects in Germany, and the UK, and we are actively evaluating additional project opportunities in Turkey, Israel and emerging Southeastern European markets as well as mature Western European solar markets. In 2013, we entered into a joint venture with Belectric Solarkraftwerke GmbH to realize solar energy projects on three continents. The joint venture is based in Germany and is tasked with developing selected PV power projects independently acquired or developed by either of the two companies in Europe, North Africa, as well as projects of fewer than 20 megawatts, in the United States. Under the terms of the joint venture, First Solar will supply its thin-film modules, selected components such as the First Solar tracker and value-added services, while Belectric will provide its advanced balance of systems and a range of service capabilities. Both companies’ engineering, procurement and construction contributions will vary by project and geography.
• | Middle East and North Africa (“MENA”). The MENA region offers strong potential for PV solar adoption. In addition to this region benefiting from particularly abundant solar resources, PV solar offers this region the opportunity to shift more current and future domestic electricity consumption to PV solar, thereby allowing incrementally more hydrocarbon exports into the world markets. In MENA, several countries have announced sizeable solar targets, although policy mechanisms are in many cases not yet firmly established. For example, in the Kingdom of Saudi Arabia, a solar policy with a target of 41 GW of solar energy (of which at least 16 GW is PV) by 2032 was introduced in 2012. While the expected potential of the MENA market is significant, policy promulgation and market development are especially |
9
vulnerable to governmental inertia, political instability, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements and limited available infrastructure.
First Solar is pursuing a wide range of opportunities to support the MENA region’s efforts to cultivate its considerable solar resources. We established an office in Dubai, and we are in the process of setting up an office in Saudi Arabia. We constructed a 13 MW DC PV power plant for Dubai Electricity & Water Authority (“DEWA”) in Seih Al Dahal, approximately 50 kilometers south of Dubai. This is the first phase of the landmark Mohammad Bin Rashid Al Maktoum Solar Park, an AED 12 billion project that is expected to eventually produce 1 GW of clean energy for the UAE’s national grid using both PV and solar thermal technology.
• | South Africa. South Africa offers strong market potential for PV solar, which can play a useful role in delivering electricity to the region’s mining industry. The mining industry in South Africa and around the region is working to address electricity supply challenges that have a direct impact on operations. Whether mines are grid-connected or relying on diesel generators, solar energy, with its cost competitiveness and reliability, represents a meaningful value proposition. Deploying PV hybrid solutions that supplement existing power sources, such as the electricity grid or diesel generators, can help mining companies address their daytime electricity supply challenges, while minimizing costs and lowering their environmental impact. In South Africa, the government is procuring bids under a competitive tender process in support of a target of procuring over 18 GW of renewable energy by 2030 in South Africa’s Integrated Resource Plan of which over 8 GW was allocated to solar PV. First Solar has established an operating subsidiary in Cape Town, South Africa as a regional hub for activities across sub-Saharan Africa. |
Asia-Pacific (“APAC”)
• | Australia. Australia is a promising region for PV solar in that certain markets are characterized by abundant solar resources and visible demand in the form of mining and industrial activity. In Australia, which accounted for less than 1% of our 2013 net sales, the solar industry is impacted by several regulatory initiatives that support the installation of solar PV modules in both rooftop and free-field applications, including the federal government’s national Renewable Energy Target, which has set a renewable energy goal of 20% by 2020. Additional support has been provided by the Australian Renewable Energy Agency which offers grant-based funding for solar PV projects in both grid-connected and off-grid applications. Due to the uncertain nature of federal incentive programs, the states/territories have also launched their own policy support programs. |
In 2012, First Solar completed construction of the 10 MW Greenough River Solar Farm in Western Australia in cooperation with Verve Energy and GE Energy Financial Services. Greenough River Solar Farm is the largest PV solar farm in operation in Australia. In addition to supplying over 150,000 of its thin film PV modules and EPC services for the plant, First Solar is providing O&M services under a 15 year contract. In 2013, AGL Energy Limited (“AGL”) engaged First Solar to construct a 102 MW solar power plant at Nyngan and a 53 MW solar project at Broken Hill, both located in New South Wales. We executed engineering, procurement and construction contracts with AGL to supply the projects with our advanced thin-film PV modules and provide EPC services. In addition, First Solar will provide maintenance support for a period of five years once the solar farms are operational. The projects are supported by Commonwealth Government funding through the Australian Renewable Energy Agency as well as funding from the New South Wales Government. The Nyngan and Broken Hill solar projects will be Australia’s largest utility-scale solar projects, respectively. Construction of the Nyngan project commenced in January 2014, and commercial operation is expected by mid-2015. Construction of the Broken Hill project is expected to start approximately in mid-2014, and is scheduled to reach commercial operation before the end of 2015. In addition to our engagement with AGL, we entered into a collaboration and shareholder arrangement with Ingenero Pty Ltd. to provide a joint offering to the commercial and off-grid solar markets. The partnership combines Ingenero’s design, development and integration experience with our advanced thin-film PV module technology and demonstrated track record in utility-scale projects to better meet market requirements within Australia and the APAC region.
• | Japan. Japan has evolving electricity market characteristics, particularly after the 2011 Fukushima Daiichi nuclear disaster, that make it an attractive market for PV solar. Japan announced new safety standards after the failure of the Fukushima Daiichi nuclear power station resulting in the idling of Japan’s nuclear reactors, which historically generated nearly 50 GW or 30% of the country’s electricity. Japan has few domestic fossil fuel resources and as a result of the shutdown of its nuclear reactors, it further increased its dependence on fossil fuel imports to cover the generation shortfall. Japan is the largest importer of liquefied natural gas globally. The Japanese government has announced a long-term goal of dramatically increasing installed solar power capacity, with a target of 28 GW or more of solar power capacity by 2020. Japan is a signatory to the Kyoto Protocol, which requires it to reduce greenhouse gas emissions. As Japan will not likely reach its renewable energy (including solar) targets, Japan is increasing its incentives for solar power installations. Besides |
10
the upfront cash incentives, the federal government crafted a net FiT policy, requiring electric power utilities to buy excess electricity generated by PV systems at a premium rate. A FiT program was launched in 2012 for non-residential systems, which served as one of the key factors driving demand in Japan during the year.
We established a Japan operating subsidiary and opened an office in Tokyo to effectively pursue growth opportunities. We are expecting to partner with Japanese companies to develop, construct, and operate solar power plants, mitigating Japan’s dependence on nuclear power and natural gas fuel imports. In 2013, First Solar entered into an agreement with JX Nippon Oil & Energy Corporation to distribute high efficiency solar photovoltaic modules (based on high efficiency, high quality crystalline silicon technology we obtained through our acquisition of TetraSun, Inc. in 2013) in Japan through April 2015. During the fourth quarter of 2013, we started construction of a solar project in Kitakyushu-shi, Japan using our CdTe PV modules. The 1.4 MW DC project is expected to start operating in the first quarter of 2014.
• | India. There is significant potential for PV in India due to its growing energy needs, substantial population centers, a lack of electrification to many parts of the country, high competing energy costs, high levels of irradiance, and the aggressive renewable energy targets set by the government. In India, which accounted for less than 1% of our net sales, the Central Government has initiated actions to roll out Phase-III of its Jawaharlal Nehru National Solar Mission (“JNNSM”), which aims to install 22 GW of new solar electricity generating capacity by 2022, or a cumulative target capacity addition of 11 GW between 2013-17 as part of Phase II of JNNSM. |
In addition to national level initiatives, various Indian states have also embarked on solar power programs at the state level. Renewable Purchase Obligations (“RPOs”) have been introduced to help drive the PV market in India. Affected electricity consumers can achieve their purchase obligations by setting up their own installation or purchasing power directly through a PPA. Alternatively they can purchase solar Renewable Energy Certificates from other producers to meet their target.
In 2012, First Solar entered into module supply agreements and joint venture agreements with Kiran Energy Solar Power Pvt. Ltd. and Mahindra Solar One Pvt. Ltd. for the supply of First Solar’s advanced, thin-film solar modules for two solar PV power plants totaling 50 MW DC in India’s Rajasthan state. In addition, First Solar made an equity investment in the aforementioned solar power plants. The two adjacent projects, which together are one of India’s largest PV installations, are part of the second batch of utility-scale solar projects concluded under India’s JNNSM. Construction on both projects was completed in the first quarter of 2013. First Solar in India is seeking to develop utility scale solar PV projects, address the energy/RPO needs of the utilities and also target the open access industrial and commercial power demand. Options such as partnering with local entrepreneurs to develop solutions for segments in the energy access market and creating solutions by combining solar PV with other modes of generation and reduce dependence on liquid fuels especially in back-up (or even primary power) markets are also being explored. For a description of some of the risks associated with our efforts in India, see “Item 1A: Risk Factors - Risks Related to Our Markets and Customers - Our ability to pursue an expansion strategy in India could be adversely affected by protectionist or other adverse public policies.”
• | Other APAC. We are developing our business in other APAC countries including Indonesia, Malaysia and Thailand. In China, we continue to evaluate our options and remain committed to our presence, with the goal of developing sales and joint venture opportunities in the market. Due to market environment and other reasons, we have determined that we will no longer be pursuing the Ordos project that we had previously announced as part of a 2 GW Memorandum of Understanding with the City of Ordos. |
Support Programs
Although our Long Term Strategic Plan provides for First Solar to transition over time toward operating in sustainable markets that do not require solar specific government subsidies or support programs, in the near-term our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Support programs for PV solar electricity generation, depending on the jurisdiction, include FiTs, quotas (including renewable portfolio standards and tendering systems), and net energy metering programs. In addition to these support programs, financial incentives for PV solar electricity generation include tax incentives, grants, loans, rebates, and production incentives. Although we expect to become less impacted by, and less dependent on, support programs as we execute our LTSP and transition into primarily sustainable markets, support programs will continue to play varying roles in accelerating the adoption of PV solar systems around the world.
In Europe, renewable energy targets, in conjunction with FiTs, have contributed to the growth in PV solar markets. Renewable energy targets prescribe how much energy consumption must come from renewable sources, while FiT policies are intended to support new supply development by providing investor certainty. A 2009 European Union (“EU”) directive on renewable energy, which replaced an earlier 2001 directive, sets varying targets for all EU member states in support of the directive’s goal of a 20%
11
share of energy from renewable sources in the EU by 2020, and requires national action plans that establish clear pathways for the development of renewable energy sources.
Tax incentive programs exist in the U.S. at both the federal and state level and can take the form of investment and production tax credits, accelerated depreciation and sales and property tax exemptions and abatements. At the federal level, investment tax credits for business and residential solar systems have gone through several cycles of enactment and expiration since the 1980’s. In October 2008, the U.S. Congress extended the 30% federal energy investment tax credit (“ITC”) for both residential and commercial solar installations for eight years, through December 31, 2016. The ITC is a primary economic driver of solar installations in the U.S. Its extension through 2016 has contributed to greater medium term demand visibility in the U.S.; however, its expiration at the end of 2016 (unless extended) underscores the need for the LCOE from solar systems to continue to decline toward grid parity. The expiration of the 30% ITC poses significant uncertainties regarding future of U.S. PV solar market demand.
The majority of states in the U.S. have enacted legislation adopting Renewable Portfolio Standards (“RPS”) mechanisms. Under an RPS, regulated utilities and other load serving entities are required to procure a specified percentage of their total electricity sales to end-user customers from eligible renewable resources, such as solar generating facilities, by a specified date. Some programs may further require that a specified portion of the total percentage of renewable energy must come from solar generating facilities. RPS legislation and implementing regulations vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state’s RPS, the definition of eligible renewable energy resources, and the extent to which renewable energy credits (certificates representing the generation of renewable energy) qualify for RPS compliance. Measured in terms of the volume of renewable electricity required to meet its RPS mandate, California’s RPS program is the most significant in the U.S., and the California market for renewable energy dominates the western U.S. region. First enacted in 2002, California’s RPS statute has been amended several times to increase the overall percentage requirement as well as to accelerate the target date for program compliance. Pursuant to amendments enacted by the California Legislature in 2011, the California RPS program now requires utilities and other obligated load serving entities to procure 33% of their retail electricity demand from eligible renewable resources by 2020. In 2013, approximately 77% of our total net sales were derived from our systems projects or third-party module sales to solar power systems in California.
Business Segments
We operate our business in two segments. Our components segment involves the design, manufacture, and sale of solar modules which convert sunlight into electricity. We manufacture CdTe modules and we also expect to begin manufacturing high-efficiency crystalline silicon modules by the end of 2014. Third-party customers of our components segment include project developers, system integrators, and owners and operators of PV solar power systems.
Our second segment is our fully integrated systems business (“systems segment”), through which we provide complete turn-key PV solar power systems, or solar solutions that draw upon our capabilities, which include (i) project development, (ii) EPC services, (iii) O&M services, and (iv) project finance expertise, all as described in more detail below. We may provide our full EPC services or any combination of individual products and services within our EPC capabilities depending upon the customer and market opportunity. All of our systems segment products and services are generally for PV solar power systems which use our solar modules, and such products and services are sold directly to investor owned utilities, independent power developers and producers, commercial and industrial companies, and other PV solar power system owners. Any other revenues from other services not related to the design, manufacture and sale of solar modules is reflected in this segment.
See Note 23 “Segment and Geographical Information,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K for further information on our business segments.
Components Business
Our components business involves the design, manufacture, and sale of solar modules which convert sunlight into electricity.
Solar Modules
CdTe Modules. Our flagship module since the inception of First Solar has been manufactured using our advanced CdTe thin-film technology. Each solar module is a glass laminate approximately 2ft x 4ft (60cm x 120cm) in size that encapsulates a CdTe thin-film semiconductor. Our solar modules had an average rated power per module of approximately 91 watts, 86 watts, and 80 watts for 2013, 2012, and 2011, respectively. During 2013, we announced the release of our Series 3 Black and Series 3 Black Plus modules. The Series 3 Black module is the first thin-film module to pass independently validated thresher and long term sequential extended reliability tests, providing added confidence in long term harsh climate performance. The Series 3 Black Plus
12
adds innovative semiconductor technology enhancements that allow significant improvement in our long term power output degradation guidance and associated warranties. Our semiconductor structure is a single-junction polycrystalline thin-film that uses CdTe as the absorption layer. CdTe has absorption properties that are matched to the solar spectrum and can deliver competitive conversion efficiencies using only about 1-2% of the amount of semiconductor material (i.e., silicon) that is used to manufacture traditional crystalline silicon solar modules. One of the drivers of First Solar modules’ performance advantage over crystalline silicon modules is a lower temperature coefficient, delivering higher energy yields at elevated operating temperature typical of utility-scale solar power plants in sunny regions.
Crystalline Silicon Modules. In 2013, we acquired TetraSun for its high efficiency crystalline silicon technology for deployment in space constrained applications. We expect to begin manufacturing modules incorporating such technology by the end of 2014.
Descriptions below of our components business relate to our CdTe modules unless otherwise noted.
Manufacturing Process
We manufacture our CdTe solar modules on high-throughput production lines and perform all manufacturing steps ourselves in an automated, proprietary, and continuous process. Our solar modules employ a thin layer of semiconductor material to convert sunlight into electricity. Our manufacturing process eliminates the multiple supply chain operators and expensive and time-consuming batch processing steps that are used to produce crystalline silicon solar modules. Currently, we manufacture our solar modules at our Perrysburg, Ohio, and Kulim, Malaysia manufacturing facilities.
We have integrated our CdTe manufacturing processes into a continuous production line with the following three stages: the deposition stage, the cell definition and treatment stage, and the assembly and test stage. In the deposition stage, panels of transparent oxide-coated glass are robotically loaded onto the production line where they are cleaned, heated, and coated with thin layers of cadmium sulfide followed by a layer of CdTe using our proprietary vapor transport deposition technology, after which the semiconductor-coated plates are cooled rapidly to increase strength. In the cell definition and treatment stage, we use high speed lasers to transform the large single semiconductor coating on the glass plate into a series of interconnected cells that deliver the desired current and voltage output. In this stage, we also treat the semiconductor film using proprietary chemistries and processes to improve the device performance, and we apply a metal terminated sputtered back contact. Finally, in the assembly and test stage, we apply busbars, inter-laminate material, and a rear glass cover sheet that is laminated to encapsulate the semiconductor. A junction box and termination wires are then applied to complete the assembly. The final assembly stage is the only stage in our production line that requires manual processing.
We maintain a robust quality and reliability assurance program that monitors critical process parameters to ensure that industry and internal standards are met. This rigorous set of evaluations is conducted prior to each solar module undergoing acceptance testing for both electrical leakage and power measurement on a solar simulator. The quality and reliability tests complement production surveillance with an ongoing monitoring program, subjecting production modules to accelerated life cycle and stress testing to ensure conformance to IEC and UL requirements. This program assures a high level of product quality and reliability, helping to predict power performance in the field.
Research, Development, and Engineering
We continue to devote substantial resources to research and development with the primary objective of lowering the lifecycle cost of electricity generated by our PV systems. We conduct our research and development activities primarily in the United States. Within our components business, we focus our research and development activities on, among other areas, continuing to increase the conversion efficiency and energy yield of our solar modules and continuously improving durability and manufacturing efficiencies, including throughput improvement, volume ramp, and material cost reduction.
In the course of our research and development activities, we continuously explore and research technologies in our efforts to sustain competitive differentiation in our modules. We typically qualify process and product improvements for full production at our Perrysburg, Ohio plant and then use a systematic process to propagate them to our other production lines. We believe that our systematic approach to technology change management will provide continuous improvements and ensure uniform adoption across our production lines. In addition, our CdTe production lines are replicas or near replicas of each other and, as a result, a process or production improvement on one line can be rapidly deployed to other production lines.
We regularly produce research cells in our laboratories, some of which are tested for performance and certified by independent labs such as the National Renewable Energy Laboratory. Cell efficiency measures the proportion of light converted in a single solar cell at standard test conditions. Our research cells are produced using laboratory equipment and methods and are not intended
13
to be representative of our manufacturing capability. We believe that our record cells demonstrate a potential long-term module efficiency entitlement of over 18% using our commercial scale manufacturing equipment.
During 2013 we acquired GE’s global CdTe solar intellectual property portfolio, setting a course for significant advancement of our PV thin-film solar technology. The combination of the two companies’ complementary technologies and First Solar’s existing manufacturing capabilities are expected to accelerate the development of CdTe solar module performance and improve efficiency at manufacturing scale. In addition, GE Global Research and First Solar R&D are collaborating on future technology development to further advance CdTe solar technology pursuant to an agreement through 2014.
Customers
With respect to our components business, during 2013, we sold the majority of our solar modules (not included in our systems projects) to solar power system project developers, system integrators, and operators headquartered in Germany, France, Portugal, India, and the United States, which either resell our solar modules to end-users or integrate them into solar power plants that they own, operate, or sell. Third-party module sales represented approximately 12% of our total 2013 net sales. Additionally, we develop, design, construct and sell PV solar power systems that use the solar modules we manufacture.
During 2013, AES, MidAmerican Renewables, LLC and NextEra Energy individually accounted for more than 10% of our components segment’s net sales, which includes the solar modules used in our systems projects. We are investing in sustainable market development, particularly in areas with abundant solar resources and sizable electricity demand, and as part of such efforts we are seeking to develop additional customer relationships in sustainable markets and regions, which has reduced and is expected to continue to reduce our customer and geographic concentration and dependence.
Competition
The renewable energy, solar energy, and solar module sectors are highly competitive and continually evolving as participants in these sectors strive to distinguish themselves within their markets and compete within the larger electric power industry. We face intense competition for sales of solar modules, which has resulted in and may continue to result in reduced margins and loss of market share. With respect to our components business, our primary sources of competition are currently crystalline silicon solar module manufacturers, as well as other thin-film module manufacturers and companies developing solar thermal and concentrated PV technologies. Certain of our existing or future competitors may be part of larger corporations that have greater financial resources and greater brand name recognition than we do and, as a result, may be better positioned to adapt to changes in the industry or the economy as a whole. Certain competitors may have direct or indirect access to sovereign capital, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time. Among PV module and cell manufacturers, the principal methods of competition include sales price per watt, conversion efficiency, reliability, warranty terms, and customer payment terms. In 2013, industry average module pricing stabilized but remained low relative to the prior five-year period. If competitors reduce module pricing to levels near or below their manufacturing costs, or are able to operate at minimal or negative operating margins for sustained periods of time, our results of operations could be adversely affected. At December 31, 2013, the global PV industry consisted of more than approximately 75 manufacturers of solar modules and cells. In the aggregate, these manufacturers had installed production capacity that significantly exceeded global demand in 2013. We believe the solar industry will continue to experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing, which could adversely affect our results of operations.
In addition, we expect to compete with future entrants to the PV industry that offer new technological solutions. We also face competition from semiconductor manufacturers and semiconductor equipment manufacturers or their customers, that produce PV cells, solar modules, or turn-key production lines.
We also face competition from companies that currently offer or are developing other renewable energy technologies (including wind, hydropower, geothermal, biomass, and tidal technologies) and other power generation sources that employ conventional fossil fuels.
Raw Materials
Our CdTe module manufacturing process uses approximately 30 types of raw materials and components to construct a complete solar module. One critical raw material in our production process is cadmium telluride. Of the other raw materials and components, the following eight are also critical to our manufacturing process: front glass coated with transparent conductive oxide, cadmium sulfide, photo resist, laminate material, tempered back glass, cord plate/cord plate cap, lead wire, and solar connectors. Before we use these materials and components in our manufacturing process, a supplier must undergo a rigorous qualification process. We
14
continually evaluate new suppliers and currently are qualifying several new suppliers and materials. When possible we attempt to use suppliers that can provide a raw material supply source that is near our manufacturing locations, reducing the cost and lead times for such materials. A few of our critical materials or components are single sourced and most others are supplied by a limited number of suppliers.
Solar Module Collection and Recycling Program
First Solar is committed to extended producer responsibility and takes into account the environmental impact of its products over their entire life cycle. We established the solar industry’s first comprehensive module collection and recycling program. First Solar’s module recycling process is designed to maximize the recovery of valuable materials, including the glass and encapsulated semiconductor material, for use in new modules or other new products and minimizes the environmental impacts associated with our modules at the end of their useful life. Approximately 90% of each collected First Solar module can be recycled into materials for use in new products, including new solar modules.
In the fourth quarter of 2012, we made changes to our collection and recycling program outside the EU. Under this program change, customers, as part of their overall power plant decommissioning obligations, are now responsible for ensuring modules are either recycled or responsibly disposed of at the end of their useful life. First Solar offers term-based recycling services to customers to help them meet these obligations. This change supports our ongoing transition to being a provider of adaptable solar energy solutions for our power plant customers. The change in First Solar’s recycling program provides power plant owners with flexibility in determining end-of-life module disposition, with options that enable them to more efficiently manage their capital and improve their financial returns. For example, our financial projections indicate that funding the cost of end-of-life module recycling through project cash flows can save power plant owners considerably more than a prefunded approach due to the higher returns generated from the project cash flows.
The European Union’s Waste Electronics and Electrical Equipment (“WEEE”) Directive places the obligation of recycling (including collection, treatment, and environmentally sound disposal) of electrical and electronic equipment (“EEE”) products upon producers. Over the next few years, this Directive will also be applicable to solar PV modules. For modules sold to and installed in the EU, we continue to maintain a commitment to cover and pre-fund the estimated collection and recycling costs consistent with our historical program prior to the changes made in the fourth quarter of 2012. However, as the detailed legal requirements of the transposed WEEE Directive become known in 2014, we will adjust the program in the various EU member states as required to ensure compliance with the different regulations. Additionally, for all modules subject to a sales arrangement prior to the above discussed change, we have an obligation and will maintain the commitment to collect and recycle such covered modules consistent with our historical pre-funded solar module collection and recycling program.
For our pre-funded collection and recycling program we continue to fund the estimated collection and recycling cost incremental to amounts already pre-funded in prior years for the cumulative modules covered by the program within 90 days of the end of each fiscal year, assuming for this purpose a minimum service life of 25 years for our solar modules. In addition to achieving substantial environmental benefits, our solar module collection and recycling program may provide us the opportunity to resell or redistribute working modules or recover certain raw materials and components for reuse in our manufacturing process. We currently have recycling facilities operating at each manufacturing facility (with sufficient capacity for manufacturing scrap, anticipated warranty returns, and modules collected at the end of their useful life over the next several years) that produce glass suitable for use in the production of new glass products and unrefined semiconductor materials that will be further processed by a third party supplier and then used to produce semiconductor materials for use in new solar modules.
To ensure that the pre-funded amounts for covered modules under the program are available regardless of our financial status in the future, a trust structure has been established; funds are put into custodial accounts in the name of a trustee. Only the trustee can distribute funds from the custodial accounts for qualified collection and recycling costs. These funds cannot be accessed for any purpose other than for qualified module collection and recycling costs of First Solar modules; such collection and recycling services will either be performed by us or a third party. End users with solar modules covered by our pre-funded program can request collection and recycling of their eligible solar modules by us at any time at no additional cost.
Solar Module Warranties
We provide a limited warranty against defects in materials and workmanship under normal use and service conditions for 10 years following delivery to the owners of our solar modules. We also typically warrant to our owners that solar modules installed in accordance with agreed-upon specifications will produce at least 90% of their labeled power output rating during the first 10 years following their installation and at least 80% of their labeled power output rating during the following 15 years. In resolving claims under both the defects and power output warranties, we have the option of either repairing or replacing the covered solar modules or, under the power output warranty, providing additional solar modules to remedy the power shortfall. We also have the
15
option to make a payment for the then current market price for solar modules to resolve claims. Our warranties are automatically transferred from the original purchasers of our solar modules to subsequent purchasers upon resale. In 2013, we announced to our customers the availability of a new linear power output warranty for modules shipping beginning in the second quarter of 2014.
As an alternative to our module power output warranty, we have offered a system level module performance warranty for a limited number of our recent system sales. This system level module performance warranty is designed for utility scale systems and provides 25-year plant-level energy degradation protection. The system level module performance warranty typically is calculated as a percentage of a system’s expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty. In resolving claims under the system level module performance warranty to restore the system to warranted performance levels, we first must validate that the root cause is due to module performance; then we typically have the option of either repairing or replacing modules, providing supplemental modules or making a cash payment. Consistent with our module power output warranty, when we elect to satisfy a valid warranty claim by providing replacement or supplement modules under the system level module performance warranty, we do not have any obligation to pay for the labor to remove or install modules.
Currently, only a small percentage of our systems projects are subject to such system level module performance warranty, but we expect that this percentage will increase in the future as we extend it to future systems sales arrangements. We do not anticipate that the system level module performance warranty will have a material impact on our future warranty claim rates, as such warranty is designed to be in line with the expected risk-adjusted aggregate performance of our modules. The offering of such system level warranty addresses the challenge of identifying, from the potential millions of modules installed in a utility scale system, individual modules that are performing below warranty by focusing on the energy generated by the system rather than the capacity of individual modules.
From time to time we have taken remediation actions with respect to affected modules beyond our limited warranty, and we may elect to do so in the future, in which case we would incur additional expenses. Such potential voluntary future remediation actions beyond our limited warranty obligation could have a material adverse effect on our results of operations if we commit to any such remediation actions.
Systems Business
Through our fully integrated systems business, we provide a complete turn-key solar power system solution or any combination of our systems solutions, which may include project development, EPC services, O&M services, and project finance.
Our systems business has grown over the past several years through a combination of business acquisitions and organic growth. In April 2009, we completed the acquisition of the project development business of OptiSolar Inc., which included a multi-gigawatt project pipeline. In July 2010, we completed the acquisition of NextLight Renewable Power, LLC (“NextLight”), a leading developer of utility-scale solar projects in the southwestern United States, which also included a multi-gigawatt project pipeline. In January 2013, we acquired Solar Chile, a Santiago-based solar development company. Solar Chile has a portfolio of utility-scale PV power projects in varying stages of development currently totaling approximately 1 GW in northern Chile, including the Atacama Desert region, which offers the highest solar irradiance in the world. In addition, in August 2013, we acquired a pipeline of U.S. and Mexico development assets from Element Power. Included in the 1.5 GW pipeline are diverse projects in various stages of development in California, Arizona, Texas, Georgia, North Carolina, Colorado, Louisiana, Illinois and Mexico. The projects are competitively positioned in their respective markets, have secured site options and interconnect queue positions, and are at various stages of environmental screening and permitting.
Project Development
Project development activities include: site selection and securing rights to acquire or use the site, obtaining in a timely manner the requisite interconnection and transmission studies, executing an interconnection agreement, obtaining environmental and land use permits, maintaining effective site control, and entering into a power purchase agreement with an off-taker of the power to be generated by the project. These activities culminate in receiving the right to construct and operate a solar power system. Depending on the market opportunity or geographic location, we may acquire projects in various stages of development or acquire project companies from developers in order to complete the development process, construct a PV power plant incorporating our modules and sell the system to a long-term project owner, or in certain cases, operate the system on our own. Depending on the market opportunity or geographic location, we may collaborate with local partners in connection with these project development activities. Depending on the type of project or geographic location, PPAs or FiT structures define the price and terms the utility customer or investor will pay for power produced from a project. Entering into a PPA generally provides the underlying economics needed to finalize development including permitting, beginning construction, arranging financing, and marketing the project for sale to a long-term project owner. Depending primarily on the location, stage of development upon our
16
acquisition of the project, and other site attributes, the development cycle typically ranges from one to five years. We may be required to incur significant costs for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. If there is a delay in obtaining any required regulatory approvals, we may be forced to incur additional costs, write-down capitalized project assets, and the right of the off-taker under the PPA to terminate may be triggered.
Customers
With respect to our systems business, our customers consist of investor owned utilities, independent power developers and producers, commercial and industrial companies, and other system owners who may purchase from us completed solar power plants (which include our solar modules), any combination of EPC services, and O&M services for the plants we build. During 2013, the substantial majority of our systems business sales were generated in North America.
During 2013, the principal customers of our systems segment were NextEra Energy, MidAmerican Renewables, LLC, Exelon Corporation, General Electric Company and Sumitomo Corporation of America, each of which also accounted for more than 10% of our systems segment net sales during 2013.
Competition
With respect to our systems business, we face competition from other providers of renewable energy solutions, including developers of PV, solar thermal and concentrated solar power systems, and developers of other forms of renewable energy projects, including wind, hydropower, geothermal, biomass, and tidal projects. To the extent other solar module manufacturers become more vertically integrated, we expect to face increased competition from such companies as well. We also face competition from other EPC companies and joint venture type arrangements between EPC companies and solar companies. Certain current or potential future competitors may also have a low cost of capital and/or access to foreign capital. While the decline in PV modules prices over the last several years has increased interest in solar electricity worldwide, there are limited barriers of entry in many parts of the PV solar value chain, depending on the geographic market. Accordingly, competition at the systems level can be intense, thereby exerting downward pressure on systems level profit margins industry-wide, to the extent competitors are willing and able to bid aggressively low prices for new projects and PPAs, using low cost assumptions for modules, BoS components, installation, maintenance and other costs. Please see Item 1A: “Risk Factors - Competition at the systems level can be intense, depending on the market opportunity, thereby potentially exerting downward pressure on systems level profit margins industry-wide, which could reduce our net sales, profitability and adversely affect our results of operations.”
EPC Warranty
In addition to our solar module warranties described above, for solar power plants built by our systems business, we typically provide a limited warranty on the balance of the system against defects in engineering design, installation, and workmanship for a period of one to two years following the substantial completion of a phase or the entire solar power plant. In resolving claims under the engineering design, installation, and workmanship warranties, we have the option of remedying the defect through repair, or replacement.
As part of our systems business, we conduct performance testing of the solar power plant prior to substantial completion to confirm the power plant meets operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy generation performance test during the first year of the solar power plant’s operation. Such a test is designed to demonstrate that the actual energy generation for the first year meets or exceeds the modeled energy expectation, after certain adjustments and exclusions. If there is an underperformance event, determined at the end of the first year after substantial completion, we may incur liquidated damages as a percentage of the EPC contract price. In some instances, a bonus payment may be received at the end of the first year if the power plant performs above a certain level. In limited cases, a similar energy generation test is offered as part of our operations and maintenance service, up to a maximum of five years. In such a case, liquidated damages are incurred at the lost energy price noted in the PPA.
Research, Development, and Engineering
Our systems business research and development activities are primarily focused on the objective of lowering the LCOE through reductions in BoS costs, improved systems design, and energy yield enhancements associated with PV systems that use our solar modules. These R&D efforts are also focused on continuing to improve our systems in terms of grid stabilization. We conduct our research and development activities for the systems business primarily in the United States. Innovations related to system design, hardware platforms, inverters, trackers, and installation techniques and know how, among other things, can and
17
are expected in the future to continue to reduce BoS costs, which can represent a significant portion of the costs associated with the construction of a typical utility-scale PV solar power system.
Own and Operate
From time to time we may temporarily own and operate certain PV solar systems with the intention to sell at a later date. The ability to do so allows us to gain control of the sales process, provide a lower risk profile to a future buyer of a PV solar system and improve our ability to drive higher eventual sale values. As of February 2014, we own and operate one completed solar power plant. We also currently own two additional solar power plants under construction that are delivering power to the grid. As an owner and operator of these PV solar systems, we and certain of our operating subsidiaries are subject to the authority of the FERC, as well as various other local, state and federal regulatory bodies. For more information about risks related to owning and operating PV solar power systems, please see Item 1A: “Risk Factors - As a temporary owner and operator of certain PV solar systems that are delivering electricity to the grid, certain of our indirect subsidiaries are regulated as a public utility under U.S. federal and state law, which could adversely affect the cost of doing business and limit our growth.” For more information about the economics of such ownership and the impacts on our liquidity See Item 7: “Management Discussion and Analysis - Liquidity and Capital Resources.”
Intellectual Property
Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We rely primarily on a combination of patents, trademarks and trade secrets, as well as associate and third party confidentiality agreements, to safeguard our intellectual property. We regularly file patent applications to protect inventions arising from our research and development, and are currently pursuing patent applications in the U.S. and worldwide. Our patent applications and any future patent applications might not result in a patent being issued with the scope of the claims we seek, or at all, and any patents we may receive may be challenged, invalidated, or declared unenforceable. In addition, we have registered and/or have applied to register, trademarks and service marks in the U.S. and a number of foreign countries for “First Solar” and “First Solar and Design.”
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among other things, trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of our PV module manufacturing process, including our unique materials sourcing, involve proprietary know-how, technology, or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms, and procedures. We have taken security measures to protect these elements. Our research and development personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our associates to assign to us all of the inventions, designs, and technologies they develop during the course of employment with us. We also require our customers and business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our modules, technology, or business plans.
We have not been subject to any material intellectual property infringement or misappropriation claims.
Environmental, Health, and Safety Matters
Our operations include the use, handling, storage, transportation, generation, and disposal of hazardous materials and hazardous wastes. We are subject to various national, state, local, and international laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, occupational health and safety, and the cleanup of contaminated sites. Therefore, we could incur substantial costs, including cleanup costs, fines, and civil or criminal sanctions and costs arising from third party property damage or personal injury claims as a result of violations of, or liabilities under, environmental and occupational health and safety laws and regulations or non-compliance with environmental permits required for our operations. We believe we are currently in substantial compliance with applicable environmental and occupational health and safety requirements and do not expect to incur material expenditures for environmental and occupational health and safety controls in the foreseeable future. However, future developments such as the implementation of new, more stringent laws and regulations, more aggressive enforcement policies, or the discovery of unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations, or financial condition. See Item 1A: “Risk Factors - Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and profitability.”
Corporate History
18
In February 2006 we were incorporated as a Delaware corporation. Our common stock has been listed on The NASDAQ Global Select Market under the symbol “FSLR” since our initial public offering in November 2006. In October 2009, our common stock was added to the S&P 500 Index, making First Solar the first, and currently only, pure-play renewable energy company in the index.
Associates
As of December 31, 2013, we had approximately 4,850 associates (our term for full and part-time employees), including approximately 3,675 in module manufacturing positions and approximately 375 associates that work directly in our systems business. The remainder of our associates are in research and development, sales and marketing, and general and administrative positions. None of our associates are currently represented by labor unions or covered by a collective bargaining agreement. As we expand domestically and internationally, however, we may encounter either regional laws that mandate union representation or associates who desire union representation or a collective bargaining agreement. We believe that our relations with our associates are good.
Information About Geographic Areas
We have significant marketing, distribution, and manufacturing operations both within and outside the United States. Currently, we manufacture our solar modules at our Perrysburg, Ohio, and Kulim, Malaysia manufacturing facilities.
In 2013, the foreign country with the greatest concentration risk was Canada, which accounted for 8% of our consolidated net sales. As part of our Long Term Strategic Plan, we are in the process of expanding our operations, particularly with respect to our systems business, to various countries worldwide, including countries in Latin America, Asia, the Middle East, Australia and Africa. As a result, we are subject to the legal, tax, political, social and regulatory requirements, and economic conditions of an increasing number of jurisdictions. The international nature of our operations subjects us to a number of risks, including fluctuations in exchange rates, adverse changes in foreign laws or regulatory requirements and tariffs, taxes, and other trade restrictions. See Item 1A: “Risk Factors — Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in foreign countries” and “Risk Factors — We may be unable to execute on our Long Term Strategic Plan, which could have a material adverse effect on our business, results of operations or financial condition.” See Note 23 “Segment and Geographical Information,” to our consolidated financial statements included in this Annual Report on Form 10-K for information about our net sales and long-lived assets by geographic region for the years ended December 31, 2013, 2012, and 2011. See also Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for other information about our operations and activities in various geographic regions.
Available Information
We maintain a website at http://www.firstsolar.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC. The information contained in or connected to our website is not incorporated by reference into this report. We use our website as one means of disclosing material non-public information and for complying with our disclosure obligations under the SEC’s Regulation FD. Such disclosures will typically be included within the Investor Relations section of our website (http://investor.firstsolar.com). Accordingly, investors should monitor such portions of our website in addition to following our press releases, SEC filings, and public conference calls and webcasts.
The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports and other information regarding issuers, such as First Solar, that file electronically with the SEC. The SEC’s Internet website is located at http://www.sec.gov.
Executive Officers of the Registrant
Our executive officers and their ages and positions as of February 25, 2014, were as follows:
19
Name | Age | Position | ||
James A. Hughes | 51 | Chief Executive Officer | ||
Mark R. Widmar | 48 | Chief Financial Officer and Chief Accounting Officer | ||
Georges J. Antoun | 51 | Chief Operating Officer | ||
Joseph Kishkill | 49 | Chief Commercial Officer | ||
James A. Hughes joined First Solar in March 2012 as Chief Commercial Officer and was appointed Chief Executive Officer in May 2012. Prior to joining First Solar, Mr. Hughes served, from October 2007 until April 2011, as Chief Executive Officer and Director of AEI Services LLC, which owned and operated power distribution, power generation (both thermal and renewable), natural gas transportation and services, and natural gas distribution businesses in emerging markets worldwide. From 2004 to 2007, he engaged in principal investing with a privately held company based in Houston, Texas that focused on micro-cap investments in North American distressed manufacturing assets. Previously, he served, from 2002 until March 2004, as President and Chief Operating Officer of Prisma Energy International, which was formed out of former Enron interests in international electric and natural gas utilities. Prior to that role, Mr. Hughes spent almost a decade with Enron Corporation in positions that included President and Chief Operating Officer of Enron Global Assets, President and Chief Operating Officer of Enron Asia, Pacific Africa and China and as Assistant General Counsel of Enron International. Mr. Hughes is a Non-Executive Director of APR Energy plc, a London Stock Exchange-listed energy company participating in the global market for gas and diesel fired temporary power plants. He is a member of the Board of Directors of the Los Angeles branch of the Federal Reserve Bank of San Francisco and a member of the Advisory Committee of the Export-Import Bank of the United States. Mr. Hughes holds a juris doctor degree from the University of Texas at Austin School of Law, a Certificate of Completion in international business law from Queen Mary’s College, University of London, and a bachelor’s degree in business administration from Southern Methodist University.
Mark R. Widmar joined First Solar in April 2011 as Chief Financial Officer. Mr. Widmar has also served as First Solar’s Chief Accounting Officer since February 1, 2012. Prior to joining First Solar, Mr. Widmar served as Chief Financial Officer of GrafTech International Ltd., a leading global manufacturer of advanced carbon and graphite materials, from May 2006 through March 2011, as well as President, Engineered Solutions from January 2011 through March 2011. Prior to joining GrafTech, Mr. Widmar served as Corporate Controller of NCR Inc. from 2005 to 2006, and was a Business Unit Chief Financial Officer for NCR from November 2002 to his appointment as Controller. He also served as a Division Controller at Dell, Inc. from August 2000 to November 2002 prior to joining NCR. Mr. Widmar also held various financial and managerial positions with Lucent Technologies Inc., Allied Signal, Inc., and Bristol Myers/Squibb, Inc. Mr. Widmar holds a B.S. in Business Accounting and a Masters of Business Administration from Indiana University.
Georges J. Antoun joined First Solar in July 2012 as the company’s Chief Operating Officer. Mr. Antoun has over 20 years of operational and technical experience, including leadership positions at several global technology companies. Mr. Antoun most recently served as Venture Partner at Technology Crossover Ventures (“TCV”), a private equity and venture firm that he joined in July 2011. Prior to joining TCV, Mr. Antoun was the Head of Product Area IP & Broadband Networks for Ericsson, based in San Jose, California. Mr. Antoun joined Ericsson in 2007, when Ericsson acquired Redback Networks, a telecommunications equipment company, where Mr. Antoun served as the Senior Vice President of World Wide Sales & Operations. After the acquisition, Mr. Antoun was promoted to Chief Executive Officer of the Redback Networks subsidiary. Prior to Redback Networks, Mr. Antoun spent five years at Cisco Systems, where he served as Vice President of Worldwide Systems Engineering and Field Marketing, Vice President of Worldwide Optical Operations, and Vice President of Carrier Sales. He has also held senior management positions at Newbridge Networks, a data and voice networking company, and Nynex (now Verizon Communications), where he was part of its Science and Technology Division. Mr. Antoun is a member of the Board of Directors of Ruckus Wireless, Inc., a publicly-traded company focusing on wi-fi solutions. Mr. Antoun earned a Bachelor of Science degree in Engineering from the University of Louisiana at Lafayette and a Master’s degree in Information Systems Engineering from Polytechnic Institute of New York University.
Joseph Kishkill joined First Solar in September 2013 as Chief Commercial Officer. Prior to joining First Solar, Mr. Kishkill served as President, Eastern Hemisphere Operations, for Exterran Energy Solutions, L.P. and Senior Vice President of Exterran Holdings, Inc., a global provider of natural gas, petroleum and water treatment production services. Prior to that, he led Exterran’s business in the Latin America region. Prior to joining Exterran’s predecessor company in 2002, Mr. Kishkill held positions of increasing responsibility with Enron Corporation from 1990 to 2001, advancing to Chief Executive Officer for South America. During his career, Mr. Kishkill has been based in Dubai, Brazil and Argentina and has provided management services for energy projects and pipelines throughout South America. Mr. Kishkill holds a Master in Business Administration degree from the Harvard Graduate School of Business Administration and holds a Bachelor of Science degree in Electrical Engineering from Brown University.
20
Item 1A: Risk Factors
An investment in our stock involves a high degree of risk. You should carefully consider the following information, together with the other information in this Annual Report on Form 10-K, before buying shares of our stock. If any of the following risks or uncertainties occur, our business, financial condition, and results of operations could be materially and adversely affected and the trading price of our stock could decline.
Risks Related to Our Markets and Customers
An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition and results of operations
Solar manufacturers had installed production capacity that significantly exceeded global demand during the past several years. We believe the solar industry will continue to experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing. In light of the increase in global production capacity, we engaged in a series of restructuring initiatives in 2012 to better align production with expected market demand including the closure of our German manufacturing operations in 2012. During the past several years, industry average sales prices per watt (“ASPs”) have declined significantly, as competitors reduced ASPs to sell-through inventories worldwide. If our competitors reduce module pricing to levels near or below their manufacturing costs, or are able to operate at minimal or negative operating margins for sustained periods of time, or if demand for PV modules does not grow sufficiently to justify the current production supply, our business, financial condition and results of operations could be adversely affected.
Competition at the systems level can be intense, thereby potentially exerting downward pressure on systems level profit margins industry-wide, which could reduce our net sales, profitability and adversely affect our results of operations.
The significant decline in PV module prices over the last several years has and continues to create a challenging environment for module manufacturers, but it has also increased interest in solar electricity worldwide by eroding one of the primary historical constraints to widespread solar market penetration, namely its affordability. Aided by such lower module prices, competitors have in many cases been willing and able to bid aggressively for new projects and PPAs, using low cost assumptions for modules, BoS components, installation, maintenance and other costs as the basis for such bids. Achievable barriers to entry for competitors has led to, depending on the market and other factors, intense competition at the systems level. Intense competition at the systems level can result in an environment in which systems level pricing falls rapidly, thereby further increasing demand for solar solutions but constraining the ability for project developers, EPC companies and/or vertically-integrated solar companies such as First Solar to sustain meaningful and consistent profitability. Accordingly, while we believe our systems offerings and experience are positively differentiated in many cases from that of our competitors, we may be unable to develop or maintain a sufficient magnitude of new systems projects worldwide at economically attractive rates of return, and may not be able to achieve meaningful profitability under our Long Term Strategic Plan.
Depending on the market opportunity, we may be at a disadvantage compared to potential systems-level competitors. For example, certain of our competitors may have a stronger and/or more established localized business presence in a particular geographic region. Certain of our competitors may be larger entities that have greater financial resources and greater overall brand name recognition than we do and, as a result, may be better positioned to impact customer behavior or adapt to changes in the industry or the economy as a whole. Certain competitors may also have direct or indirect access to sovereign capital, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time.
Additionally, large-scale solar systems are still in their relatively early stages of existence, and, depending on the geographic area, many potential customers are still in the process of educating themselves about the points of differentiation among various available providers of PV solar solutions, including a company’s proven overall experience and bankability, system design and optimization expertise, grid interconnection and stabilization expertise, and proven O&M capabilities. If we are unable over time to meaningfully differentiate our offerings at scale, from the viewpoint of our potential customer base, our business, financial condition and results of operations could be adversely affected.
If PV technology is not suitable for widespread adoption at economically attractive rates of return, or if sufficient additional demand for solar modules does not develop or takes longer to develop than we anticipate, our net sales and profit may flatten or decline and we may be unable to sustain profitability.
21
The solar energy market is at a relatively early stage of development, in comparison to fossil fuel-based electricity generation. If PV technology proves unsuitable for widespread adoption at economically attractive rates of return or if additional demand for solar modules and systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient net sales to sustain profitability. In addition, demand for solar modules and systems in our targeted markets may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of PV technology and demand for solar modules and systems, including the following:
• | cost-effectiveness of the electricity generated by PV power systems compared to conventional energy sources, such as natural gas and coal (which fuel sources may be subject to significant price swings from time to time), and other non-solar renewable energy sources, such as wind; |
• | performance, reliability and availability of energy generated by PV systems compared to conventional and other non-solar renewable energy sources and products; |
• | success of other renewable energy generation technologies, such as hydroelectric, tidal, wind, geothermal, solar thermal, concentrated PV, and biomass; |
• | fluctuations in economic and market conditions that affect the price of, and demand for, conventional and non-solar renewable energy sources, such as increases or decreases in the price of natural gas, coal, oil, and other fossil fuels; |
• | fluctuations in capital expenditures by end-users of solar modules and systems which tend to decrease when the economy slows and when interest rates increase; and |
• | availability, substance, and magnitude of support programs including government targets, subsidies, incentives, and renewable portfolio standards to accelerate the development of the solar energy industry. |
Reduced growth in or the reduction, elimination, or expiration of government subsidies, economic incentives, renewable energy targets and other support for on-grid solar electricity applications, or increase in protectionist or other adverse public policies, could reduce demand and/or price levels for our solar modules, and limit our growth or lead to a reduction in our net sales, and adversely impact our operating results.
Although our Long Term Strategic Plan provides for First Solar to transition over time toward operating in sustainable markets that do not require solar specific government subsidies or support programs, and it is our belief that solar PV will experience widespread adoption in those applications where it competes economically with traditional forms of energy without any support programs, in the near-term our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Federal, state, and local governmental bodies in many countries have provided subsidies in the form of FiTs, rebates, tax incentives, and other incentives to end-users, distributors, systems integrators, and manufacturers of PV products. Many of these support programs expire, phase out over time, require renewal by the applicable authority, or may be amended. In particular, the expiration of the U.S. federal investment tax credit set for 2016 poses significant uncertainties regarding U.S. PV solar market demand. A summary of recent developments in the major government support programs that can impact our business appears under Item 1: “Business – Support Programs.” To the extent these support programs are reduced earlier than previously expected, or are changed retroactively, or free-field or conversion land applications are disadvantaged, such changes could reduce demand and/or price levels for our solar modules and systems, lead to a reduction in our net sales, and adversely impact our operating results. 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, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements and limited available infrastructure.
Our ability to pursue an expansion strategy in India could be adversely affected by protectionist or other adverse public policies.
Under Phase I of the National Solar Mission, India required developers of solar PV projects employing crystalline silicon technology to use solar cells and modules manufactured in India. First Solar modules were not impacted by this restriction. However, in its policy guideline for Batch I Phase II of the National Solar Mission, India has set aside 375 MW of the 750 MW program for domestically manufactured cells and modules irrespective of the technology used (crystalline silicon or thin film). This set-aside effectively cuts the ability of First Solar to compete in the Batch I, Phase II program in half. In February 2013, the United States Government announced that it would expand its previously requested World Trade Organization dispute settlement consultations with the Government of India on Phase I local content requirements (“LCRs”) to include consultations on the LCRs in Phase II. The outcome of the consultation is still pending.
22
In addition, India is investigating potential dumping of solar cells and modules from the U.S., Malaysia, Taiwan and China. First Solar is cooperating fully with the Indian government on this investigation. We expect a final decision on the case by the end of 2014. If we are deemed to have dumped our modules in India to the detriment of the domestic industry, we could be assessed anti-dumping duties and our ability to compete against domestic manufacturers and/or other exporters to India not affected by duties could be impaired.
We could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other foreign anti-bribery laws.
The FCPA generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Our policies mandate compliance with these anti-bribery laws. We currently operate in, and pursuant to our Long Term Strategic Plan intend to further expand into, many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into certain jurisdictions, including India, China, South America and the Middle East, requires substantial government contact where norms can differ from U.S. standards. Although we implement policies and procedures designed to facilitate compliance with these anti-bribery laws, our employees, subcontractors, agents and partners (such as joint venture partners) may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal and/or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.
We may be unable to fully execute on our Long Term Strategic Plan, which could have a material adverse effect on our business, results of operations or financial condition.
We face numerous difficulties in executing our Long Term Strategic Plan, particularly in new foreign jurisdictions, including the following:
• | difficulty in accurately prioritizing geographic markets which we can most effectively and profitably serve with our PV offerings, including miscalculations in overestimating or underestimating our addressable market demand; |
• | difficulty in overcoming the inertia involved in changing local electricity ecosystems as necessary to accommodate large-scale PV solar deployment and integration; |
• | protectionist or other adverse public policies in countries we operate in and/or are pursuing, including local content requirements or capital investment requirements; |
• | business climates, such as that in China, that may have the effect of putting foreign companies at a disadvantage relative to domestic companies; |
• | unstable economic, social and/or operating environments in foreign jurisdictions, including social unrest and currency, inflation and interest rate uncertainties; |
• | the possibility of applying an ineffective commercial approach to targeted markets, including product offerings that may not meet market needs; |
• | difficulty in generating sufficient sales volumes at economically sustainable profitability levels; |
• | difficulty in timely identifying, attracting training and retaining qualified sales, technical and other personnel in geographies targeted for expansion; |
• | the possibility of having insufficient capital resources necessary to achieve an effective localized business presence in targeted jurisdictions; |
• | difficulty in maintaining proper controls and procedures as we expand our business operations both in terms of complexity and geographical reach, including transitioning certain business functions to low-cost geographies; |
23
• | difficulty in competing against competitors who may have greater financial resources and/or a more effective or established localized business presence and/or be willing and able to operate with little or no operating margins for sustained periods of time; |
• | difficulty in competing against competitors who may gain in profitability and financial strength over time by successfully participating in the global rooftop PV solar market, which is a segment in which we do not have deep historical experience; |
• | difficulty in identifying the right local partners and developing any necessary partnerships with local businesses, on commercially acceptable terms; and |
• | difficulty in balancing market demand and manufacturing production in an efficient and timely manner, potentially causing us to be manufacturing capacity constrained in some future periods or over-supplied in others. |
In addition, please see the Risk Factors entitled “Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in foreign countries,” and “Reduced growth in or the reduction, elimination, or expiration of government subsidiaries, economic incentives, and other support for on-grid solar electricity, could reduce demand and/or price levels for our solar modules, and limit our growth or lead to a reduction in our net sales, and adversely impact our operating results.”
We may be unable to profitably provide new solar offerings or achieve sufficient market penetration with such offerings.
We are in the process of expanding our line-up of offerings to include solutions that build upon our core competencies but for which we have not had significant historical experience with, including the AC Power Block, and offerings related to fuel displacement, commercial and industrial and distributed generation for restricted spaces, and off-grid and energy access. We cannot be certain that we will be able to ascertain and allocate the appropriate financial and human resources necessary to grow these business areas. We could invest considerable capital into growing these businesses and not experience a satisfactory level of financial return. Also, in expanding into these areas, we may be competing against companies that previously have not been significant competitors, such as companies that currently have substantially more experience than we do in the rooftop segment. If we are unable to achieve growth in these areas, our overall growth and financial performance may be limited relative to our competitors and our operating results could be adversely impacted.
An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for customers to finance the cost of a PV system and could reduce the demand for our solar systems or modules and/or lead to a reduction in the average selling price for PV modules.
Many of our customers and our systems business depend on debt and/or equity financing to fund the initial capital expenditure required to develop, build and/or purchase a PV system. As a result, an increase in interest rates or lending rates, or a reduction in the supply of project debt financing or tax equity investments, could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers or our systems business to secure the financing necessary to develop, build, purchase or install a PV system on favorable terms, or at all, and thus lower demand for our solar modules which could limit our growth or reduce our net sales. In addition, we believe that a significant percentage of our end-users install PV systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates and/or lending rates could lower an investor’s return on investment in a PV system, increase equity return requirements or make alternative investments more attractive relative to PV systems, and, in each case, could cause these end-users to seek alternative investments.
Risks Related to Regulations
Existing regulations and policies, changes thereto, and new regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of PV products or systems, which may significantly reduce demand for our solar modules, systems or services.
The market for electricity generation products is heavily influenced by foreign, federal, state, and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of PV products and investment in the research and development of PV technology. For example, without a mandated regulatory exception for PV systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. If these interconnection standby fees were applicable to PV systems, it is likely that they would increase the cost of using PV systems to our end-users,
24
which could make them less desirable, thereby adversely affecting our business, prospects, results of operations, and financial condition. In addition, with respect to utilities that utilize a peak hour pricing policy or time-of-use pricing methods whereby the price of electricity is adjusted based on electricity supply and demand, electricity generated by PV systems currently benefits from competing primarily with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate for all times of the day, would require PV systems to achieve lower prices in order to compete with the price of electricity from other sources and would adversely impact our operating results.
Our solar systems, modules and services (such as O&M) are subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering, and other matters. It is a complex task to track the requirements of individual jurisdictions. Any new government regulations or utility policies pertaining to our solar modules, systems or services may result in significant additional expenses to us or our customers and, as a result, could cause a significant reduction in demand for our solar modules, systems or services. In addition, any regulatory compliance failure could result in significant management distraction, unplanned costs and/or reputational damage.
Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and profitability.
Our operations involve the use, handling, generation, processing, storage, transportation, and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local, and international levels. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, the cleanup of contaminated sites, and occupational health and safety. As we execute our Long Term Strategic Plan and expand our business into foreign jurisdictions worldwide, our environmental compliance burden will continue to increase both in terms of magnitude and complexity. We have incurred and will continue to incur significant costs and capital expenditures in complying with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims, cleanup costs, or other costs. Such solutions could also result in substantial delay or termination of projects under construction within our systems business, which could adversely impact our results of operations. While we believe we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations, and financial condition.
Our solar modules contain cadmium telluride and cadmium sulfide. Elemental cadmium and certain of its compounds are regulated as hazardous materials due to the adverse health effects that may arise from human exposure. Based on existing research, the risks of exposure to cadmium telluride are not believed to be as serious as those relating to exposure to elemental cadmium. In our manufacturing operations, we maintain engineering controls to minimize our associates’ exposure to cadmium or cadmium compounds and require our associates who handle cadmium compounds to follow certain safety procedures, including the use of personal protective equipment such as respirators, chemical goggles, and protective clothing. Relevant studies and third party peer review of our technology have concluded that the risk of exposure to cadmium or cadmium compounds from our end-products is negligible. In addition, the risk of exposure is further minimized by the encapsulated nature of these materials in our products and the physical properties of cadmium compounds used in our products and the recycling or responsible disposal of First Solar’s modules. While we believe that these factors and procedures are sufficient to protect our associates, end-users, and the general public from adverse health effects that may arise from cadmium exposure, we cannot ensure that human or environmental exposure to cadmium or cadmium compounds used in our products will not occur. Any such exposure could result in future third party claims against us, as well as damage to our reputation and heightened regulatory scrutiny of our products, which could limit or impair our ability to sell and distribute our products. The occurrence of future events such as these could have a material adverse effect on our business, financial condition, or results of operations.
The use of cadmium in various products is also subject to governmental regulation in several countries. More restrictive regulation in this area and/or expansion of such regulation to additional countries could impact the manufacture, sale, collection, and recycling of solar modules and could require us to make unforeseen environmental expenditures or limit our ability to sell and distribute our products.
As a temporary owner and operator of certain PV solar systems that are delivering electricity to the grid, certain of our indirect subsidiaries are regulated as a public utility under U.S. federal and state law, which could adversely affect the cost of doing business and limit our growth.
As a temporary owner and operator of certain PV solar systems that are delivering electricity to the grid, certain of our indirectly-owned operating subsidiaries are considered to be public utilities for purposes of the Federal Power Act, as amended
25
(the “FPA”) and public utility companies for purposes of the Public Utility Holding Company Act of 2005 (“PUHCA 2005”), and are subject to regulation by the Federal Energy Regulatory Commission (“FERC”), as well as various local and state regulatory bodies. We currently have three such indirect operating subsidiaries that are delivering electricity to the grid: SG2 Imperial Valley, LLC (“SG2”), Macho Springs Solar, LLC (“Macho Springs”), and Maryland Solar, LLC (“MD Solar”). As of February 2014, the SG2 and Macho Springs projects are under construction, and the MD Solar project is complete.
SG2 and Macho Springs are “exempt wholesale generators,” or “EWGs,” and as such are exempt from regulation under PUHCA 2005. MD Solar is a “qualifying facility,” or “QF,” under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”) and is also exempt from PUHCA 2005. In addition, MD Solar is exempt from most provisions of the FPA, as well as state laws regarding the financial or organizational regulation of public utilities. We will also be exempt from regulation under PUHCA 2005 so long as SG2 and Macho Springs remain EWGs, and so long as MD Solar remains a QF. We are not directly subject to FERC regulation under the FPA. However, we are considered to be a “holding company” for purposes of Section 203 of the FPA, which regulates certain transactions involving public utilities, and such regulation could adversely affect our ability to grow the business through acquisitions. Likewise, investors seeking to acquire our public utility subsidiaries or acquire ownership interests in our securities sufficient to give them control over us and our public utility subsidiaries may require prior FERC approval to do so. Such approval could result in transaction delays or uncertainties.
Public utilities under the FPA are required to obtain FERC acceptance of their rate schedules for wholesale sales of electricity and to comply with various regulations. The FERC has granted SG2 and Macho Springs the authority to sell electricity at market-based rates, and has granted them certain regulatory waivers, such as waivers from compliance with FERC’s accounting regulations. These FERC orders reserve the right to revoke or revise market-based sales authority if the FERC subsequently determines that SG2, Macho Springs, or any of their affiliates can exercise market power in the sale of generation products, the provision of transmission services, or if it finds that any of them can create barriers to entry by competitors. In addition, if SG2 or Macho Springs fail to comply with certain reporting obligations, the FERC may revoke their power sales tariffs. Finally, if SG2, Macho Springs, or MD Solar were deemed to have engaged in manipulative or deceptive practices concerning their power sales transactions, they would be subject to potential fines, disgorgement of profits, and/or suspension or revocation of their market-based rate authority. If our indirect subsidiaries were to lose their market-based rate authority, such companies would be required to obtain the FERC’s acceptance of a cost-of-service rate schedule and could become subject to the accounting, record-keeping, and reporting requirements that are imposed on utilities with cost-based rate schedules, which would impose cost and compliance burdens on us and could have an adverse effect on our results of operations. In addition to the risks described above, we would be subject to additional regulatory regimes at the state and foreign levels to the extent we own and operate PV power plants in the future in other states or foreign jurisdictions, such as our Barilla plant, currently under construction in Texas.
Risks Related to our Operations, Manufacturing, and Technology
Our operating history to date may not serve as an adequate basis to judge our future prospects and results of operations.
Our historical operating results may not provide a meaningful basis for evaluating our business, financial performance, and prospects. We may be unable to achieve similar growth, or grow at all, in future periods. Our ability to achieve similar growth in future periods is also affected by current economic conditions. Our past results occurred in an environment where, among other things, capital was at times more accessible to our customers to finance the cost of developing solar projects and economic incentives for solar power in certain markets (such as the German FiT) were more favorable. Accordingly, you should not rely on our results of operations for any prior period as an indication of our future performance.
We face intense competition from manufacturers of crystalline silicon solar modules, as well as thin-film solar modules and solar thermal and concentrated PV systems; if global supply exceeds global demand, it could lead to a reduction in the average selling price for PV modules, which could reduce our net sales and adversely affect our results of operations.
The solar energy and renewable energy industries are highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with the larger electric power industry. Within the global PV industry, we face competition from crystalline silicon solar module manufacturers, other thin-film solar module manufacturers and companies developing solar thermal and concentrated PV technologies. Existing or future solar manufacturers might be acquired by larger companies with significant capital resources, thereby intensifying competition with us. In addition, the introduction of a low cost disruptive technology could adversely affect our ability to compete, which could reduce our net sales and adversely affect our results of operations.
Even if demand for solar modules continues to grow, the rapid manufacturing capacity expansion undertaken by many solar module manufacturers, particularly manufacturers of crystalline silicon solar modules, has created and may continue to cause periods of structural imbalance during which supply exceeds demand. See “An increased global supply of PV modules has caused
26
and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition and results of operations.” In addition, we believe a significant decrease in the cost of silicon feedstock would provide further reductions in the manufacturing cost of crystalline silicon solar modules and lead to further pricing pressure for solar modules and potentially the oversupply of solar modules.
During any such period, our competitors could decide to reduce their sales prices in response to competition, even below their manufacturing costs, in order to generate sales. Other competitors may have direct or indirect access to sovereign capital, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time. As a result, we may be unable to sell our solar modules at attractive prices, or for a profit, during any period of excess supply of solar modules, which would reduce our net sales and adversely affect our results of operations. Also, we may decide to lower our average selling price to certain customers in certain markets in response to competition.
Thin-film solar technology has a limited field history. As a result and despite our efforts, our solar modules and systems may perform below expectations; problems with product quality or performance may cause us to incur significant and/or unexpected warranty and related expenses, damage our market reputation, and prevent us from maintaining or increasing our market share.
Researchers began developing thin-film semiconductor technology over 25 years ago, but were unable to integrate the technology into a practical industrial scale solar module production line until about a decade ago. We perform a variety of quality and life tests under different conditions upon which we base our assessments and warranty of product performance over its expected useful life. However, if our thin-film technology and solar modules perform below expectations, we could lose customers and face substantial warranty expense.
We provide a limited warranty against defects in materials and workmanship under normal use and service conditions for 10 years following delivery to the owners of our solar modules. We also typically warrant to our owners that solar modules installed in accordance with agreed-upon specifications will produce at least 90% of their labeled power output rating during the first 10 years following their installation and at least 80% of their labeled power output rating during the following 15 years. As a result, we bear the risk of extensive warranty claims long after we have sold our solar modules and recognized net sales. As an alternative to our module power output warranty, we have offered a system level module performance warranty for a limited number of our recent sales. As of December 31, 2013, our accrued warranty liability was $198.0 million, of which, $67.1 million was classified as current and $130.9 million was classified as noncurrent. In 2013, we announced to our customers the avalibility of a new linear power output warranty for modules shipped beginning in the second quarter of 2014.
We have historically estimated our product warranty liability for power output and defects in materials and workmanship under normal use and service conditions to have an estimated warranty return rate of approximately 3% of modules covered under warranty. A 1% change in the estimated warranty return rate would change our estimated product warranty liability by approximately $55 million.
During the period from June 2008 to June 2009, a manufacturing excursion occurred whereby certain modules manufactured during that time period may experience premature power loss once installed in the field. We initiated a voluntary remediation program beyond our standard warranty pursuant to which we made commitments to customers with systems containing modules affected by the manufacturing excursion that we would cover certain costs of remediation efforts. We have expensed $271.2 million total to-date for the estimated costs of remediating systems affected by modules manufactured during the relevant period.
If any of our assumptions used in estimating the above referenced warranty or manufacturing excursion costs prove incorrect, we could be required to accrue additional expenses, which could adversely impact our financial position, operating results and cash flows. Although we have taken significant corrective actions to avoid a manufacturing excursion from occurring, any future manufacturing excursions including any commitments made by us to take remediation actions in respect of affected modules beyond our limited warranty, could adversely impact our financial position, operating results and cash flows.
Although our power output warranty extends for 25 years, our oldest solar modules manufactured during the qualification of our pilot production line have only been in use since 2001. As a result, our warranty is based on a variety of quality and life tests that enable predictions of durability and future performance. These predictions, however, could prove to be materially different from the actual performance over the full life of our solar modules, causing us to incur substantial expense to repair or replace defective solar modules in the future. For example, our glass-on-glass solar modules could suffer various failure modes including breakage, delamination, corrosion, or experience power degradation in excess of expectations, and our manufacturing operations or supply chain could be subject to process variations that could cause affected modules to fail or underperform compared to our expectations. These risks could be amplified as we implement design and process changes in connection with our efforts to improve our product, accelerate module conversion efficiency and manufacturing production throughput improvements as part of our Long
27
Term Strategic Plan. In addition, as we increase the number of installations in extreme climates, in accordance with our Long Term Strategic Plan, we may experience increased failure rates due to deployment into such field conditions. Any widespread product failures may damage our market reputation, cause our sales to decline, require us to repair or replace the defective modules, and cause us to take voluntary remedial measures beyond warranty terms to enhance customer satisfaction, which could have a material adverse effect on our financial results.
In addition to our solar module warranty described above, for solar power plants built by our systems business, we typically provide a limited warranty on the balance of the system against defects in engineering design, installation, and workmanship for a period of one to two years following the substantial completion of a phase or the entire solar power plant. Failures of solar power plants built by us could result in significant increases to warranty expense, damage our market reputation, cause our sales to decline, cause us to incur unexpected costs to remedy defects or otherwise negatively affect our results of operations.
In addition, as part of our systems business, we conduct performance testing of the solar power plant prior to substantial completion to confirm the power plant meets operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy generation performance test during the first year of the solar power plant’s operation. Such a test is designed to demonstrate that the actual energy generation for the first year meets or exceeds the modeled energy expectation, after certain adjustments and exclusions. If there is an underperformance event, determined at the end of the first year after substantial completion, we may incur liquidated damages as a percentage of the EPC contract price. In limited cases, a similar energy generation test is offered as part of our operations and maintenance service, up to a maximum of five years.
If our estimates regarding the future cost of collecting and recycling solar modules covered by our collection and recycling program are incorrect, we could be required to accrue additional expenses at and from the time we realize our estimates are incorrect and face a significant unplanned cash burden.
Prior to 2013, we have historically pre-funded, and may need to continue to pre-fund in certain jurisdictions, our estimated future obligation for collecting and recycling solar modules covered by our collection and recycling program 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 the solar modules for transport, the cost of freight from the solar module installation sites to a recycling center, the material, labor, capital costs and scale of recycling centers, and an estimated third-party profit margin and return on risk for collection and recycling services. We base our estimate on our experience collecting and recycling solar modules that do not pass our quality control tests and solar modules returned under our warranty, and on our expectations about future developments in recycling technologies and processes and economic conditions at the time the solar modules are expected to be collected and recycled. If our estimates prove incorrect, we could be required to accrue additional expenses at and from the time we realize our estimates are incorrect and could also face a significant unplanned cash burden at the time we realize our estimates are incorrect or end-users return their solar modules, which could harm our operating results. In addition, participating end-users can return their solar modules covered under the collection and recycling program at any time. As a result, we could be required to collect and recycle covered solar modules earlier than we expect.
Our failure to further refine our technology, reduce module manufacturing and BoS costs and develop and introduce improved PV products could render our solar modules or systems uncompetitive and reduce our net sales, profitability, and/or market share.
We need to continue to invest significant financial resources in research and development to continue to improve our module conversion efficiency, lower the LCOE of our PV systems, and otherwise keep pace with technological advances in the solar energy industry. However, research and development activities are inherently uncertain, and we could encounter practical difficulties in commercializing our research results. We seek to continuously improve our products and processes, and the resulting changes carry potential risks in the form of delays, additional costs, or other unintended contingencies. In addition, our significant expenditures on research and development may not produce corresponding benefits. Other companies are developing a variety of competing PV technologies, including advanced multi-crystalline silicon cells, high efficiency n-type crystalline silicon cells, and copper indium gallium diselenide and amorphous silicon thin films, which could produce solar modules or systems that prove more cost-effective or have better performance than our solar modules or systems. In addition, other companies could potentially develop a highly reliable renewable energy system that mitigates the intermittent power production drawback of many renewable energy systems, or offers other value-added improvements from the perspective of utilities and other system owners, in which case such companies could compete with us even if the LCOE associated with such new system is higher than that of our systems. As a result, our solar modules or systems may be negatively differentiated or rendered obsolete by the technological advances of our competitors, which would reduce our net sales, profitability and/or market share.
28
In addition, we often forward price our products and services in anticipation of future cost reductions and technology improvements, and thus an inability to further refine our technology and execute our conversion efficiency roadmap and our long-term manufacturing cost, BoS cost and LCOE reduction objectives could adversely affect our margins and operating results.
Our failure to protect our intellectual property rights may undermine our competitive position and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly.
Protection of our proprietary processes, methods, and other technology is critical to our business. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies. We rely primarily on patents, trademarks, trade secrets, copyrights, and contractual restrictions to protect our intellectual property. We regularly file patent applications to protect inventions arising from our research and development, and are currently pursuing such patent applications in various countries in accordance with our strategy for intellectual property in that jurisdiction. Our existing patents and future patents could be challenged, invalidated, circumvented, or rendered unenforceable. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not be sufficient to provide meaningful protection against competitors or against competitive technologies.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation, and other trade secrets to develop and maintain our competitive position. Although we generally enter into confidentiality agreements with our associates and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets, and proprietary manufacturing expertise, methods, and compounds could have a material adverse effect on our business. In addition, effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in some foreign countries, especially any developing countries into which we may expand our operations. In some countries we have not applied for patent, trademark, or copyright protection.
Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Policing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. We cannot assure you that the outcome of such potential litigation will be in our favor. Such litigation may be costly and may divert management attention and other resources away from our business. An adverse determination in any such litigation may impair our intellectual property rights and may harm our business, prospects, and reputation. In addition, we have no insurance coverage against such litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties.
Some of our key raw materials and components are either single-sourced or sourced from a limited number of third party suppliers and their failure to perform could cause manufacturing delays and impair our ability to deliver solar modules to customers in the required quality and quantities and at a price that is profitable to us.
Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing cost. Some of our key raw materials and components are either single-sourced or sourced from a limited number of third party suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and impair our operations. In addition, some of our suppliers are small companies that may be unable to supply our increasing demand for raw materials and components as we continue to expand rapidly. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. A constraint on our production may cause us to be unable to meet our capacity ramp plan and/or our obligations under our customer contracts, which would have an adverse impact on our financial results.
A disruption in our supply chain for cadmium telluride, our semiconductor material, could interrupt or impair our ability to manufacture solar modules and could adversely impact our profitability and long-term growth prospects.
A key raw material we use in our production process is a cadmium telluride compound. Tellurium, one of the main components of cadmium telluride, is mainly produced as a by-product of copper refining and, therefore, its supply is largely dependent upon demand for copper. Our supply of cadmium telluride could be limited if any of our current suppliers or any of our future suppliers are unable to acquire an adequate supply of tellurium in a timely manner or at commercially reasonable prices. If our competitors begin to use or increase their demand for cadmium telluride, supply could be reduced and prices could increase. If our current suppliers or any of our future suppliers cannot obtain sufficient tellurium, they could substantially increase prices or be unable to
29
perform under their contracts. We may be unable to pass increases in the cost of our raw materials through to our customers. A substantial increase in tellurium prices could adversely impact our profitability and long-term growth objectives.
Our TetraSun module offering may not be able to achieve profitable commercial scale, which could adversely impact our operating results and our future growth strategy with respect to PV solar in restricted spaces.
In 2013, we acquired TetraSun, Inc., a development stage company with high efficiency crystalline silicon technology. We expect our high-power density TetraSun modules to offer advantages relative to our CdTe modules in commercial & industrial, rooftop and other space constrained applications. Although we expect to begin manufacturing TetraSun modules in limited quantities by the end of 2014, we are not experienced with crystalline silicon module manufacturing compared to many of our competitors, and accordingly we face numerous risks and uncertainties. Many of these risks are inherent in PV module manufacturing generally, or otherwise similar to risks involved in our CdTe PV module manufacturing operations, and are discussed elsewhere in Item 1A: “Risk Factors.”
Additionally, scaling of high-volume TetraSun module manufacturing could present supply chain, timing and other challenges. Contrasted with our largely automated CdTe manufacturing lines, our TetraSun module manufacturing operations will involve a batch process and will not be fully-integrated from initial feedstock to final module, potentially resulting in timing, cost, supply and other constraints. We will be outsourcing module assembly to a third party, and any constraints such party faces in meeting our volume or quality requirements would negatively impact our ability to deliver modules to our customers. TetraSun cells will be manufactured using n-type mono-crystalline wafers. We currently do not have polysilicon contracts in place and will rely on our wafer suppliers to contract feedstock in sufficient volumes to meet our demand. Market-driven increases in polysilicon prices realized by our wafer suppliers or increases in wafer prices generally would increase First Solar's manufacturing costs and negatively impact margins on TetraSun modules.
If we are able to achieve high-volume manufacturing of TetraSun modules, we may not have an adequate sales channel for such modules and/or the prevailing average selling price or conversion efficiency of PV modules in general may have changed in such a manner as to make our TetraSun modules uncompetitive. If our TetraSun modules are unable to achieve profitable commercial scale, we may have to write down all or a portion of the assets related to this business area, and our future growth strategy with respect to PV solar in restricted spaces could be adversely impacted, which outcomes could have an adverse effect on our business, financial condition or results of operations.
Our future success depends on our ability to effectively balance manufacturing production with market demand and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties.
Our future success depends on our ability to effectively balance manufacturing production with market demand and increase both our manufacturing capacity and production throughput over time in a cost-effective and efficient manner. If we cannot do so, we may be unable to expand our business, decrease our manufacturing cost per watt, maintain our competitive position, satisfy our contractual obligations, or sustain profitability. See “An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition and results of operations.” Our ability to expand production capacity is subject to significant risks and uncertainties, including the following:
• | making changes to our production process that are not properly qualified or that may cause problems with the quality of our solar modules; |
• | delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as our inability to secure successful contracts with equipment vendors; |
• | our custom-built equipment taking longer and costing more to manufacture than expected and not operating as designed; |
• | delays or denial of required approvals by relevant government authorities; |
• | being unable to hire qualified staff; |
• | failure to execute our expansion plans effectively; |
• | manufacturing concentration risk resulting from a majority of production lines worldwide being located in one geographic area, Malaysia; |
30
• | difficulty in balancing market demand and manufacturing production in an efficient and timely manner, potentially causing us to be manufacturing capacity constrained in some future periods or over-supplied in others; and |
• | incurring manufacturing asset write-downs, write-offs and other charges and costs, which may be significant, during those periods in which we idle, slow down or shut down manufacturing capacity. |
If any future production lines that we may build in the future are not built in line with our committed schedules it may impair any future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.
If we are unable to systematically replicate our production lines as necessary over time and achieve and sustain similar operating metrics in our future production lines as we have achieved at our existing production lines, our manufacturing capacity could be substantially constrained, our manufacturing costs per watt could increase, and this may impair our growth plans and/or cause us to lose customers, resulting in lower net sales, higher liabilities, and lower net income than we anticipate. For instance, future production lines could produce solar modules that have lower conversion efficiencies, higher failure rates, and higher rates of degradation than solar modules from our existing production lines, and we could be unable to determine the cause of the lower operating metrics or develop and implement solutions to improve performance.
Some of our manufacturing equipment is customized and sole sourced. If our manufacturing equipment fails or if our equipment suppliers fail to perform under their contracts, we could experience production disruptions and be unable to satisfy our contractual requirements.
Some of our manufacturing equipment is customized to our production lines based on designs or specifications that we provide to the equipment manufacturer, which then undertakes a specialized process to manufacture the custom equipment. As a result, the equipment is not readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If any piece of equipment fails, production along the entire production line could be interrupted. In addition, the failure of our equipment suppliers to supply equipment in a timely manner or on commercially reasonable terms could delay our expansion plans and otherwise disrupt our production schedule or increase our manufacturing costs, all of which would adversely impact our financial results.
If we are unable to further increase the number of sellable watts per solar module and reduce our manufacturing cost per watt, our profitability could decline.
Our profitability could decline if we are unable to continue to reduce our manufacturing cost per watt. Furthermore, our failure to reduce cost per watt by increasing our efficiency may impair our ability to enter new markets that we believe will require lower cost per watt for us to be competitive and may impair our growth plans.
We may be unable to manage the expansion of our operations effectively.
We expect to continue to expand our business in order to provide utility-scale PV generation to existing and new geographic markets and to maintain or increase market share. To manage the continued expansion of our operations, we will be required to continue to improve our operational and financial systems, procedures and controls, and expand, train, manage and retain our growing associate base. Our management will also be required to maintain and expand our relationships with customers, suppliers, and other third parties and attract new customers and suppliers. In addition, our current and planned operations, personnel, systems, and internal controls and procedures might be inadequate to support our future growth. The effectiveness of our controls and procedures could be adversely impacted as we transfer more business functions to lower cost geographies as part of our cost reduction initiatives. If we cannot manage our growth effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.
Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in foreign countries.
We have significant marketing, distribution, and manufacturing operations both within and outside the United States. We expect to continue to expand our operations worldwide; as a result, we will be subject to the legal, political, social, tax, and regulatory requirements, and economic conditions of many jurisdictions. Risks inherent to international operations, include, but are not limited to, the following:
• | difficulty in enforcing agreements in foreign legal systems; |
31
• | difficulty in forming appropriate legal entities to conduct business in foreign countries in the required time frame and the associated costs of forming those legal entities; |
• | varying degrees of protection afforded to foreign investments in the countries in which we operate, and irregular interpretations and enforcement of laws and regulations in these jurisdictions; |
• | foreign countries may impose additional income and withholding taxes or otherwise tax our foreign operations, impose tariffs, or adopt other restrictions on foreign trade and investment, including currency exchange controls; |
• | fluctuations in exchange rates may affect demand for our products and services and may adversely affect our profitability and cash flow in U.S. dollars to the extent that our equity investments, revenues or our costs are denominated in a foreign currency and the cost associated with hedging the dollar equivalent of such exposures is prohibitive; the longer the duration of such foreign currency exposure, the greater the risk; |
• | anti-corruption compliance issues, including the costs related to the mitigation of such risk; |
• | inability to obtain, maintain, or enforce intellectual property rights; |
• | risk of nationalization or other expropriation of private enterprises; |
• | changes in general economic and political conditions in the countries in which we operate, including changes in the government incentives we are relying on; |
• | unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to environmental protection, export duties, and quotas; |
• | opaque approval processes in which the lack of transparency may cause delays and increase the uncertainty of project approvals; |
• | difficulty in staffing and managing widespread operations; |
• | difficulty in repatriating earnings; |
• | difficulty in negotiating a successful collective bargaining agreement in applicable foreign jurisdictions; |
• | trade barriers such as export requirements, tariffs, taxes, local content requirements, anti-dumping regulations and requirements, and other restrictions and expenses, which could increase the price of our solar modules and make us less competitive in some countries; and |
• | difficulty of, and costs relating to, compliance with the different commercial and legal requirements of the overseas countries in which we offer and sell our solar modules. |
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social, and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.
Risks Related to Our Systems Business
Project development or construction activities may not be successful and projects under development may not receive required permits, real property rights, power purchase agreements (“PPAs”), interconnection and transmission arrangements or financing or construction may not commence or proceed as scheduled, which could increase our costs and impair our ability to recover our investments.
The development and construction of solar power electric generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for land and interconnection rights, preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. Success in developing a particular project is contingent upon, among other things:
32
• | obtaining financeable land rights, including land rights for the project site, transmission lines, and environmental mitigation; |
• | receipt from governmental agencies of required land use and construction permits and approvals; |
• | negotiation of development agreements, public benefit agreements, and other agreements to compensate local governments for project impacts; |
• | receipt of rights to interconnect the project to the electric grid or to transmit energy; |
negotiation of satisfactory engineering, procurement, and construction agreements;
• | entering into financeable arrangements for the purchase of the electrical output and renewable energy attributes generated by the project; |
• | securing necessary rights of way for access and transmission lines; |
• | securing appropriate title coverage, including coverage for mineral rights, mechanics’ liens, etc.; |
• | obtaining construction financing, including debt, equity and funds associated with the monetization of tax credits and other tax benefits; |
• | payment of PPA, interconnection and other deposits (some of which are non-refundable); and |
• | timely implementation and satisfactory completion of construction. |
Successful completion of a particular project may be adversely affected, delayed and/or rendered infeasible by numerous factors, including:
• | delays in obtaining and maintaining required governmental permits and approvals, including appeals of approvals obtained; |
• | potential permit and litigation challenges from project stakeholders, including local residents, environmental organizations, labor organizations, and others who may oppose the project; |
• | in connection with any such permit and litigation challenges, grant of injunctive relief to stop development and/or construction of a project; |
• | unforeseen engineering problems; |
• | construction delays and contractor performance shortfalls; |
• | work stoppages; |
• | cost over-runs; |
• | labor, equipment and materials supply shortages or disruptions; |
• | additional complexities when conducting project development or construction activities in foreign jurisdictions (either on a stand-alone basis or in collaboration with local business partners), including operating in accordance with the U.S. Foreign Corrupt Practices Act and applicable local laws and customs; |
• | unfavorable tax treatment; |
• | adverse weather conditions; |
• | water shortages; |
33
• | adverse environmental and geological conditions; and |
• | force majeure and other events out of our control. |
If we are unable to complete the development of a solar power facility, we fail to meet one or more agreed target construction milestone dates, any agreed upon system-level capacity or energy output guarantees or warranties (including, for some projects, twenty-five year energy performance or system-level module degradation warranties), or other contract terms, or our projects cause grid interference or other damage, we may be subject to forfeiture of significant deposits under power purchase agreements or interconnection agreements or termination of such agreements, significant liquidated damages, penalties and/or other obligations under the EPC agreement or other agreements relating to the project (including obligations to repair, replace and/or supplement additional modules and balance of system materials for the project), particularly if our liabilities are not capped under the terms of such agreement, and we typically will not be able to recover our investment in the project. Some of these penalties might require us to repurchase the project from the buyer or to down-size the project, under certain circumstances. If we were required to repurchase a project, we may have insufficient cash or capital resources necessary to make the repurchase payment or we may be unable to resell the project in a timely manner or on terms commercially satisfactory to us, which would adversely impact our results of operations. Some of these investments are included as assets on our consolidated balance sheet under the line item “Project assets.” If we are unable to complete the development of a solar power project, we may write-down or write-off some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized. In 2014, we expect to invest a significant amount of capital to develop projects owned by us or third parties, which may limit the availability of capital to use for other purposes, such as contract damages or repurchase payments.
We may enter into fixed-price EPC contracts in which we act as the general contractor for our customers in connection with the installation of their solar power systems. All essential costs are estimated at the time of entering into the EPC contract for a particular project, and these are reflected in the overall fixed-price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the subcontractors, suppliers, and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning a project occur (including those due to unexpected increases in inflation, commodity prices or labor costs) or delays in execution occur and we are unable to increase commensurately the EPC sales price, we may not achieve our expected margins or we may be required to record a loss in the relevant fiscal period.
We may be unable to acquire or lease land, obtain necessary interconnection and transmission rights, and/or obtain the approvals, licenses, permits and electric transmission grid interconnection and transmission rights necessary to build and operate PV power plants in a timely and cost effective manner, and regulatory agencies, local communities, labor unions or other third parties may delay, prevent, or increase the cost of construction and operation of the PV plants we intend to build.
In order to construct and operate our PV plants, we need to acquire or lease land and rights of way, obtain interconnection rights, and obtain all necessary local, county, state, federal, and foreign approvals, licenses, and permits as well as rights to interconnect the plants to the transmission grid and transmit energy generated from the plant. We may be unable to acquire the land or lease interests needed, may not obtain satisfactory interconnection rights, may not receive or retain the requisite approvals, permits, licenses and interconnection and transmission rights, or may encounter other problems which could delay or prevent us from successfully constructing and operating PV plants.
Many of our proposed PV plants are located on or require access through public lands administered by federal and state agencies pursuant to competitive public leasing and right-of-way procedures and processes. The authorization for the use, construction, and operation of PV plants and associated transmission facilities on federal, state, and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way, and other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and, potentially, excessive delay in obtaining such permits due, for example, to litigation or third party appeals, could prevent us from successfully constructing and operating PV plants in a timely manner and could result in a potential forfeiture of any deposit we have made with respect to a given project. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project.
In addition, local labor unions may increase the cost of, and/or lower the productivity of, project development in California and elsewhere. We may also be subject to labor unavailability and/or increased union labor requirements due to multiple simultaneous projects in a geographic region.
Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other systems constraints could significantly impact our ability to build PV plants and generate solar electricity power sales.
34
In order to deliver electricity from our PV plants to our customers, our projects generally need to connect to the transmission grid. The lack of available capacity on the transmission grid could substantially impact our projects and cause reductions in project size, delays in project implementation, increases in costs from transmission upgrades, and potential forfeitures of any deposit we have made with respect to a given project. These transmission issues, as well as issues relating to the availability of large systems such as transformers and switch gear, could significantly impact our ability to build PV plants and generate solar electricity sales.
Our systems business is largely dependent on us and third parties arranging financing from various sources, which may not be available or may only be available on unfavorable terms or in insufficient amounts.
The construction of the large utility-scale solar power projects under development by us is expected in many cases to require project financing, including non-recourse project debt financing in the bank loan market and institutional debt capital markets. Uncertainties exist as to whether our projects will be able to access the debt markets in a magnitude sufficient to finance their construction. If we are unable to arrange such financing or if it is only available on unfavorable terms, we may be unable to fully execute our systems business plan. In addition, we generally expect to sell our projects by raising project equity capital from tax- oriented, strategic industry, and other equity investors. Such equity sources may not be available or may only be available in insufficient amounts, in which case our ability to sell our projects may be delayed or limited and our business, financial condition, or results of operations may be adversely affected. Even if such financing sources are available, the counterparty to many of our fixed-price EPC contracts, which own the project we are constructing, are often special purpose vehicles that do not have significant assets other than their interests in the project and have pledged all or substantially all of these assets to secure the project-related debt and certain other sources of financing. If the owner defaults on its payment or other obligations to us, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended or committed to be expended to purchase equipment or supplies (including intercompany purchases of PV modules), or for termination payments we are entitled to under the terms of the related EPC contract. If we are unable to collect the amounts owed to us, or are unable to complete the project because of an owner default, we may be required to record a charge against earnings related to the project, which could result in a material loss.
In addition, for projects to which we provide EPC services but are not the project developer, our EPC activities are in many cases dependent on the ability of third parties to finance their PV plant projects, which, in turn, is dependent on their ability to obtain financing for such purchases on acceptable terms. Depending on prevailing conditions in the credit markets, interest rates and other factors, such financing may not be available or may only be available on unfavorable terms or in insufficient amounts. If third parties are limited in their ability to access financing to support their purchase of PV power plant construction services from us, we may not realize the cash flows that we expect from such sales, and this could adversely affect our ability to invest in our business and/or generate revenue. See also the risk factor above entitled “An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for end-users to finance the cost of a PV system and could reduce the demand for our solar modules and/or lead to a reduction in the average selling price for PV modules.”
Developing solar power projects may require significant upfront investment prior to the signing of an EPC contract and commencing construction, which could adversely affect our business and results of operations.
Our solar power project development cycles, which span the time between the identification of land and the commercial operation of a PV power plant project, vary substantially and can take many months or years to mature. As a result of these long project cycles, we may need to make significant upfront investments of resources (including, for example, payments for land rights, large transmission and PPA deposits or other payments, which may be non-refundable) in advance of the signing of EPC contracts and commencing construction and the receipt of any revenue, much of which is not recognized for several additional months or years following contract signing. Our potential inability to enter into sales contracts with potential customers after making such upfront investments could adversely affect our business and results of operations. Furthermore, we may become constrained in our ability to simultaneously fund our other business operations and these systems investments through our long project development cycles.
Our liquidity may be adversely affected to the extent the project sale market weakens and we are unable to sell our solar projects on pricing, terms and timing commercially acceptable to us. In such a scenario, we may choose to continue to own and operate certain solar power plants for a period of time, after which the project assets may be sold to third parties. In such cases, the delayed disposition of projects could require us to recognize a gain on the sale of assets instead of recognizing revenue.
We may not be able to obtain long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to attract financing and other investments.
35
Obtaining long-term contracts for the sale of power produced by the projects at prices and on other terms favorable to us is essential for obtaining financing and commencing construction of our projects. We must compete for power purchase agreements against other developers of solar and renewable energy projects. Further, other sources of power, such as natural gas-fired power plants, have historically been cheaper than the cost of solar power and power from certain types of projects, such as natural gas-fired power plants, can be delivered on a firm basis. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue. In addition, the availability of power purchase agreements is a function of a number of economic, regulatory, tax and public policy factors. In addition, certain of our projects may be scheduled for substantial completion prior to the commencement of a long-term PPA with a major off-taker, in which case we would be required to enter into a stub-period PPA for the intervening time period or sell down the project. We may not be able to do either on terms that are commercially attractive to us.
We may be subject to unforeseen costs, liabilities or obligations when providing O&M services.
We may provide ongoing O&M services to system owners under fixed-price long-term service agreements, pursuant to which we generally perform all scheduled and unscheduled maintenance for the system, perform operating and other asset management services for the system and provide an availability guarantee for the system. Our costs to perform these services are estimated at the time of entering into the O&M agreement for a particular project, and these are reflected in the fixed-price that we charge our customers under the O&M agreement. We do not have extensive experience in performing O&M services for PV solar power plants and estimating actual costs to serve under our O&M agreements relative to the price that we charge our customers, particularly in foreign jurisdictions in which we plan to offer PV systems solutions as part of our Long Term Strategic Plan. Should miscalculations in estimating these costs occur (including those due to unexpected increases in inflation or labor or BoS costs), our growth strategy and results of operations could be adversely affected. Because of the long-term nature of these O&M agreements the adverse impacts on results of operations could be significant, particularly if our liabilities are not capped or subject to an above-market liability cap under the terms of the O&M agreement. We also could be subject to substantial costs, liabilities or obligations in the event our solar systems do not meet any agreed-upon system-level availability or performance warranties.
Our systems business is subject to regulatory oversight and liability if we fail to operate our solar systems in compliance with electric reliability rules.
The ongoing O&M services that we provide for system owners may subject us to regulation by the North American Electric Reliability Corporation (“NERC”), or its designated regional representative, as a “generator operator,” or “GOP,” under electric reliability rules filed with FERC. Our failure to comply with the reliability rules applicable to GOPs could subject us to substantial fines by NERC, subject to FERC’s review. In addition, the system owners that receive our O&M services may be regulated by NERC as “generator owners,” or “GOs” and we may incur liability for GO violations and fines levied by NERC, subject to FERC’s review, based on the terms of our O&M agreements. Finally, as a systems owner and operator, we may in the future be subject to regulation by NERC as a GO.
Other Risks
We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.
We have made several acquisitions in the last several years, and in the future we may acquire additional companies, project pipelines, products, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of an acquisition and each acquisition has numerous risks. These risks include the following:
• | difficulty in assimilating the operations and personnel of the acquired company; |
• | difficulty in effectively integrating the acquired technologies or products with our current products and technologies; |
• | difficulty in achieving profitable commercial scale from acquired technologies; |
• | difficulty in maintaining controls, procedures, and policies during the transition and integration; |
• | disruption of our ongoing business and distraction of our management and associates from other opportunities and challenges due to integration issues; |
• | difficulty integrating the acquired company’s accounting, management information, and other administrative systems; |
36
• | inability to retain key technical and managerial personnel of the acquired business; |
• | inability to retain key customers, vendors, and other business partners of the acquired business; |
• | inability to achieve the financial and strategic goals for the acquired and combined businesses, as a result of insufficient capital resources or otherwise; |
• | incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results; |
• | potential impairment of our relationships with our associates, customers, partners, distributors, or third party providers of technology or products; |
• | potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things; |
• | potential inability to assert that internal controls over financial reporting are effective; |
• | potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and |
• | potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings. |
Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations.
Our future success depends on our ability to retain our key associates and to successfully integrate them into our management team.
We are dependent on the services of our executive officers and other members of our senior management team. The loss of one or more of these key associates or any other member of our senior management team could have a material adverse effect on us. We may not be able to retain or replace these key associates, and we may not have adequate succession plans in place. Several of our current key associates including our executive officers are subject to employment conditions or arrangements that contain post-employment non-competition provisions. However, these arrangements permit the associates to terminate their employment with us upon little or no notice and the enforceability of the non-competition provisions in certain jurisdictions is uncertain.
If we are unable to attract, train, and retain key personnel, our business may be materially and adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train, and retain management, operations, sales, training and technical personnel, including in foreign jurisdictions as we continue to execute on our Long Term Strategic Plan. Recruiting and retaining capable personnel, particularly those with expertise in the PV industry and thin-film technology, are vital to our success. There is substantial competition for qualified technical personnel and there can be no assurance that we will be able to attract or retain our technical personnel. If we are unable to attract and retain qualified associates, or otherwise experience labor disruptions our business may be materially and adversely affected.
Certain types of services provided by onsite workers at certain of our solar projects under construction are subject to the Davis-Bacon Act. The Davis-Bacon Act requires that a contractor pay all personnel assigned to the contract at least the prevailing wage and fringe benefits, as established by and in accordance with the regulations promulgated by the U.S. Department of Labor (“DOL”). We have an established policy pursuant to which we evaluate Davis-Bacon Act requirements and ensure our compliance with these requirements. If the DOL were to ultimately determine that anyone working under such contracts were not properly classified, or were being paid the incorrect prevailing wage, we could incur additional liability with respect to such workers. For example, the Agua Caliente project we are constructing is currently undergoing a DOL Davis-Bacon Act compliance review, for which the ultimate outcome is uncertain. Any such liability incurred above our anticipated costs for these services could have an adverse effect on our financial condition and results of operations.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards or prohibit us from the manufacture and sale of our solar modules or the use of our technology.
37
Our success depends largely on our ability to use and develop our technology and know-how without infringing or misappropriating the intellectual property rights of third parties. The validity and scope of claims relating to PV technology patents involve complex scientific, legal, and factual considerations and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, which may not be available on reasonable terms, or at all, or pay ongoing royalties, require us to redesign our solar module, or subject us to injunctions prohibiting the manufacture and sale of our solar modules or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our solar modules until the resolution of such litigation.
Currency translation and transaction risk may negatively affect our net sales, cost of sales, and gross margins and could result in exchange losses.
Although our reporting currency is the U.S. dollar, we conduct our business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. For example, 6% and 4% of our net sales were denominated in euros for the years ended December 31, 2013 and 2012, respectively, and we expect more than a minor percentage of our net sales to be outside the United States and denominated in foreign currencies in the future. In addition, our operating expenses for our manufacturing plants located outside the U.S. and our operations for our systems business in foreign countries will generally be denominated in the local currency. Joint ventures or other business arrangements with strategic partners outside of the United States have and are expected in the future to involve significant investments denominated in the local currency. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our net sales, cost of sales, and equity investments and could result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.
We could also expand our business into emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such emerging markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds.
Our ability to hedge foreign currency exposure is dependent on our credit profile with the banks that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposure; and therefore, result in exchange gains or losses.
Global sovereign debt issues could adversely impact our business.
Potential sovereign debt issues in Europe, emerging markets, and other regions and their impact on the balance sheets and lending practices of global banks in particular could negatively impact our access to, and cost of, capital, and therefore could have an adverse effect on our business, results of operations, financial condition and competitive position. It could also similarly affect our customers and therefore limit the sales of our modules and demand for our systems business as well. Sovereign debt problems may also cause governments to reduce, eliminate or allow to expire government subsidies and economic incentives for solar energy, which could limit our growth or cause our net sales to decline and materially and adversely affect our business, financial condition, and results of operations.
We are subject to litigation risks, including securities class actions and stockholder derivative actions, which may be costly to defend and the outcome of which is uncertain.
From time to time, we are subject to legal claims, with and without merit, that may be costly and which may divert the attention of our management and our resources in general. In addition, our projects may be subject to litigation or other adverse proceedings that may adversely impact our ability to proceed with construction or sell a given project, which would adversely affect our ability to recognize revenue with respect to such project. The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. Certain of these lawsuits assert types of claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of one or more of these lawsuits, or any future lawsuits, could have a material adverse effect on our business, financial condition, or results of operations. Even if these lawsuits, or any future lawsuits, are not resolved against us, the costs of defending such lawsuits, may be costly, and may not be covered by our insurance policies. Because the price of our common stock has been, and
38
may continue to be, volatile, we can provide no assurance that additional securities litigation will not be filed against us in the future. For more information on our legal proceedings, including our securities class action and derivative actions, see Item 3 “Legal Proceedings” and Note 15 “Commitments and Contingencies - Legal Proceedings” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
Our largest stockholder has significant control over us and its interests may conflict with or differ from interests of other stockholders.
Our largest stockholder, consisting collectively of JCL FSLR Holdings, LLC and its beneficiaries and JTW Trust No. 1 UAD 9/19/02 and its beneficiaries, each affiliated in the past with the former Estate of John T. Walton (collectively, the “Significant Stockholder”), owned approximately 27% of our outstanding common stock at December 31, 2013. As a result, the Significant Stockholder has substantial influence over all matters requiring stockholder approval, including the election of our directors and the approval of significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets. The interests of the Significant Stockholder could conflict with or differ from interests of other stockholders. For example, the concentration of ownership held by the Significant Stockholder could delay, defer or prevent a change of control of our company or impede a merger, takeover, or other business combination which a majority of stockholders may view favorably.
If our goodwill and other intangible assets or project assets become impaired, we may be required to record a significant charge to earnings.
We may be required to record a significant charge to earnings in our financial statements should we determine that our goodwill, other intangible assets (i.e., in process research and development (“IPR&D”)) or project assets are impaired. Such a charge might have a significant impact on our financial position and results of operations. For example, during the fourth quarter of 2011 we recorded goodwill impairment expense of $393.4 million related to our components reporting unit as discussed further in Note 6 “Goodwill and Intangible Assets,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
As required by accounting rules, we review our goodwill for impairment at least annually in the fourth quarter or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might not be recoverable include a significant decline in our stock price and market capitalization, a significant decline in projections of future cash flows and lower future growth rates in our industry.
We review IPR&D for impairment on a quarterly basis to determine if the project has been abandoned. If the project has been determined to be abandoned or not recoverable, we would be required to impair the respective IPR&D project. We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable and recoverable if it is anticipated to be sellable for a profit once it is either fully developed or fully constructed. If our projects are not considered commercially viable, we would be required to impair the respective project assets.
Unanticipated changes in our tax provisions, the adoption of a new U.S. tax legislation, or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the United States and the foreign jurisdictions in which we operate. Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding, and other items in inter-company transactions. We are subject to potential tax examinations in these various jurisdictions. Tax authorities may disagree with our inter-company charges, cross-jurisdictional transfer pricing or other tax positions and assess additional taxes. We regularly assess the likely outcomes of these examinations in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these potential examinations, and the amounts ultimately paid upon resolution of examinations could be materially different from the amounts previously included in our income tax expense and therefore, could have a material impact on our tax provision, net income, and cash flows. In addition, our future effective tax rate could be adversely affected by changes to our operating structure, loss of our Malaysian tax holiday, changes in the mix of earnings in countries with tax holidays or differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. In addition, recently announced proposals for new U.S. tax legislation could have a material effect on the results of our operations; if enacted.
Our credit agreements contain covenant restrictions that may limit our ability to operate our business.
39
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, and obtain additional financing, if needed, because our Revolving Credit Facility and our Malaysian facility agreements contain, and any of our other future debt agreements may contain, covenant restrictions that limit our ability to, among other things:
• | incur additional debt, assume obligations in connection with letters of credit, or issue guarantees; |
• | create liens; |
• | enter into certain transactions with our affiliates; |
• | sell certain assets; and |
• | declare or pay dividends, make other distributions to stockholders, or make other restricted payments. |
Under our Revolving Credit Facility and our Malaysian facility agreements, we are also subject to certain financial covenants. Our ability to comply with covenants under our credit agreements is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under these agreements and any of our other future debt agreements, which if not cured or waived, could permit the holders thereof to accelerate such debt and could cause cross-defaults under our other facility agreements and the possible acceleration of debt under such other facility agreements, as well as cross-defaults under certain of our key project and operational agreements. In addition, we cannot assure you that events that occur within the Company, or in the industry or the economy as a whole, will not constitute material adverse effects under these agreements. If it is determined that a material adverse effect has occurred, the lenders can, under certain circumstances, restrict future borrowings or accelerate the due date of outstanding loan balances. If any of our debt is accelerated, we may in the future not have sufficient funds available to repay such debt, and we may experience cross-defaults under our other debt agreements or project and key operational agreements, which could materially and negatively affect our business, financial condition and results of operations.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
Our principal properties consisted of the following:
40
Nature | Primary Segment(s) Using Property | Location | Held | Major Encumbrances | ||||
Manufacturing Plant, Research and Development Facility and Administrative Offices | Components | Perrysburg, Ohio, United States | Own | n/a | ||||
Manufacturing Plants and Administrative Offices | Components | Kulim, Kedah, Malaysia | Lease Land/Own Buildings | Malaysian Ringgit Facility Agreement (1) | ||||
Administrative Office | Components & Systems | Georgetown, Penang, Malaysia | Lease | n/a | ||||
Manufacturing Plants (2) | Components | Frankfurt/Oder, Germany | Own | n/a | ||||
Manufacturing Plant (3) | Components | Ho Chi Minh City, Vietnam | Lease Land/Own Building | n/a | ||||
Corporate Headquarters | Components & Systems | Tempe, Arizona, United States | Lease | n/a | ||||
Administrative Office | Systems | Bridgewater, New Jersey, United States | Lease | n/a | ||||
Administrative Office | Systems | San Francisco, California, United States | Lease | n/a | ||||
Research and Development Facility | Components | Santa Clara, California, United States | Lease | n/a | ||||
Administrative Office | Components & Systems | Mainz, Germany | Lease | n/a | ||||
Administrative Office | Systems | New Delhi, India | Lease | n/a | ||||
Administrative Office | Systems | Sydney, Australia | Lease | n/a | ||||
Administrative Office | Systems | Dubai, United Arab Emirates | Lease | n/a | ||||
Administrative Office | Systems | Santiago, Chile | Lease | n/a | ||||
Administrative Office | Systems | Cape Town, South Africa | Lease | n/a | ||||
Administrative Office | Systems | Tokyo, Japan | Lease | n/a | ||||
(1) | See Note 14 “Debt,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K for additional information on property encumbrances. |
(2) | Manufacturing ceased in December 2012. |
(3) | We did not proceed with our previously announced 4-line plant in Vietnam and such property is being actively marketed for sale. |
In addition, we lease small amounts of office and warehouse space in several other U.S. and international locations.
Item 3: Legal Proceedings
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations, and claims, including, but not limited to, routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows, or financial condition.
SEC Matter
41
On September 23, 2011, the Company informed the staff of the Securities and Exchange Commission (the “SEC”) that the Company was commencing an internal investigation regarding a possible violation of Regulation FD. The possible violation arose in connection with disclosures on September 21, 2011, relating to the failure of the Topaz Solar Farm project to meet the statutory deadline to receive a federal loan guarantee from the US Department of Energy. This internal investigation was conducted on behalf of the Company’s board of directors by independent outside counsel. Following completion of the internal investigation, the Company appointed a new Vice President of Investor Relations. The SEC, pursuant to an order dated November 17, 2011, commenced an investigation into the matter, and the Company has cooperated with the SEC during the course of its investigation. On September 3, 2013, the SEC informed the Company that the SEC has concluded its investigation and that the SEC will not be taking any action against the Company.
Class Action
On March 15, 2012, a purported class action lawsuit titled Smilovits v. First Solar, Inc., et al., Case No. 2:12-cv-00555-DGC, was filed in the United States District Court for the District of Arizona (hereafter “Arizona District Court”) against the Company and certain of our current and former directors and officers. The complaint was filed on behalf of purchasers of the Company’s securities between April 30, 2008, and February 28, 2012. The complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for damages, and an award of costs and expenses to the putative class, including attorneys’ fees. The Company believes it has meritorious defenses and will vigorously defend this action.
On July 23, 2012, the Arizona District Court issued an order appointing as lead plaintiffs in the class action the Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme (collectively “Pension Schemes”). The Pension Schemes filed an amended complaint on August 17, 2012, which contains similar allegations and seeks similar relief as the original complaint. Defendants filed a motion to dismiss on September 14, 2012. On December 17, 2012, the court denied Defendants’ motion to dismiss. On February 26, 2013, the court directed the parties to begin class certification discovery, and ordered a further scheduling conference to set the merit discovery schedule after the issue of class certification has been decided. On June 21, 2013, the Pension Schemes filed a motion for class certification. On October 8, 2013, the Arizona District Court granted the Pension Schemes’ motion for class certification.
The securities class action is still in the early stages and merits discovery has only begun. Accordingly, we are not in a position to assess whether any loss or adverse effect on our financial condition is probable or remote or to estimate the range of potential loss, if any.
Derivative Actions
On April 3, 2012, a derivative action titled Tsevegmid v. Ahearn, et al., Case No. 1:12-cv-00417-CJB, was filed by a putative stockholder on behalf of the Company in the United States District Court for the District of Delaware (hereafter “Delaware District Court”) against certain current and former directors and officers of the Company, alleging breach of fiduciary duties and unjust enrichment. The complaint generally alleges that from June 1, 2008, to March 7, 2012, the defendants caused or allowed false and misleading statements to be made concerning the Company’s financial performance and prospects. The action includes claims for, among other things, damages in favor of the Company, certain corporate actions to purportedly improve the Company’s corporate governance, and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees. On April 10, 2012, a second derivative complaint was filed in the Delaware District Court. The complaint, titled Brownlee v. Ahearn, et al., Case No. 1:12-cv-00456-CJB, contains similar allegations and seeks similar relief to the Tsevegmid action. By court order on April 30, 2012, pursuant to the parties’ stipulation, the Tsevegmid action and the Brownlee action were consolidated into a single action in the Delaware District Court. On May 15, 2012, defendants filed a motion to challenge Delaware as the appropriate venue for the consolidated action. On March 4, 2013, the magistrate judge issued a Report and Recommendation recommending to the court that defendants’ motion be granted and that the case be transferred to the District of Arizona. On July 12, 2013, the court adopted the magistrate judge’s Report and Recommendation and ordered the case transferred to the District of Arizona. The transfer was completed on July 15, 2013.
On April 12, 2012, a derivative complaint was filed in the Arizona District Court, titled Tindall v. Ahearn, et al., Case No. 2:12-cv-00769-ROS. In addition to alleging claims and seeking relief similar to the claims and relief asserted in the Tsevegmid and Brownlee actions, the Tindall complaint alleges violations of Sections 14(a) and 20(b) of the Securities Exchange Act of 1934. On April 19, 2012, a second derivative complaint was filed in the Arizona District Court, titled Nederhood v. Ahearn, et al., Case No. 2:12-cv-00819-JWS. The Nederhood complaint contains similar allegations and seeks similar relief to the Tsevegmid and Brownlee actions. On May 17, 2012 and May 30, 2012, respectively, two additional derivative complaints, containing similar
42
allegations and seeking similar relief as the Nederhood complaint, were filed in Arizona District Court: Morris v. Ahearn, et al., Case No. 2:12-cv-01031-JAT and Tan v. Ahearn, et al., 2:12-cv-01144-NVW.
On July 17, 2012, the Arizona District Court issued an order granting First Solar’s motion to transfer the derivative actions to Judge David Campbell, the judge to whom the Smilovits class action is assigned. On August 8, 2012, the court consolidated the four derivative actions pending in Arizona District Court, and on August 31, 2012, Plaintiffs filed an amended complaint. Defendants filed a motion to stay the action on September 14, 2012. On December 17, 2012, the court granted Defendants’ motion to stay pending resolution of the Smilovits class action. On August 13, 2013, Judge Campbell consolidated the two derivative actions transferred from the Delaware District Court with the stayed Arizona derivative actions.
On July 16, 2013, a derivative complaint was filed in the Superior Court of Arizona, Maricopa County, titled Bargar et al. v. Ahearn et al., Case No. CV2013-009938, by a putative shareholder against certain current and former directors and officers of the Company. The complaint contains similar allegations to the Delaware and Arizona derivative cases, and includes claims for, among other things, breach of fiduciary duties, insider trading, unjust enrichment, and waste of corporate assets. By court order on October 3, 2013, the Superior Court of Arizona, Maricopa County granted the parties’ stipulation to defer defendants’ response to the complaint pending resolution of the Smilovits class action or expiration of the stay issued in the consolidated derivative actions in the Arizona District Court. On November 5, 2013, the matter was placed on the court’s inactive calendar.
The Company believes that plaintiffs in the derivative actions lack standing to pursue litigation on behalf of First Solar. The derivative actions are still in the initial stages and there has been no discovery. Accordingly, we are not in a position to assess whether any loss or adverse effect on our financial condition is probable or remote or to estimate the range of potential loss, if any.
Item 4: Mine Safety Disclosures
None.
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock has been listed on The NASDAQ Global Select Market under the symbol “FSLR” since November 17, 2006. Prior to this time, there was no public market for our common stock. The following table sets forth the range of high and low closing prices per share as reported on The NASDAQ Global Select Market for the periods indicated.
High | Low | |||||||
Fiscal Year 2013 | ||||||||
First Quarter | $ | 36.13 | $ | 24.70 | ||||
Second Quarter | $ | 56.40 | $ | 26.10 | ||||
Third Quarter | $ | 50.27 | $ | 36.47 | ||||
Fourth Quarter | $ | 64.28 | $ | 41.60 | ||||
Fiscal Year 2012 | ||||||||
First Quarter | $ | 49.03 | $ | 25.05 | ||||
Second Quarter | $ | 24.53 | $ | 11.77 | ||||
Third Quarter | $ | 25.70 | $ | 14.00 | ||||
Fourth Quarter | $ | 33.03 | $ | 20.07 | ||||
The closing sales price of our common stock on The NASDAQ Global Select Market was $55.93 per share on February 21, 2014. As of February 21, 2014, there were 19 record holders of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee names.
Dividend Policy
43
We have never paid, and it is our present intention for the foreseeable future not to pay, dividends on our common stock. Our Revolving Credit Facility imposes restrictions on our ability to declare or pay dividends. The declaration and payment of dividends is subject to the discretion of our board of directors and depends on various factors, including the continued applicability of the above-referenced restrictions under our Revolving Credit Facility, our net income, financial condition, cash requirements, future prospects, and other factors deemed relevant by our board of directors.
Equity Compensation Plans
The following table sets forth certain information, as of December 31, 2013, concerning securities authorized for issuance under the 2010 Omnibus Incentive Compensation Plan of our company:
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (a)(1) | Weighted-Average Exercise Price of Outstanding Options and Rights (b)(2) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(c) | |||||||
Equity compensation plans approved by our stockholders | 5,278,226 | $ | — | 3,103,762 | ||||||
Equity compensation plans not approved by our stockholders | — | $ | — | — | ||||||
Total | 5,278,226 | 3,103,762 | ||||||||
(1) | Includes 5,278,226 shares issuable upon vesting of restricted stock units (“RSUs”) granted under the 2010 Omnibus Incentive Compensation Plan. |
(2) | The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price. |
See Note 17 “Share-Based Compensation,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K for further discussion on the Equity Compensation Plans.
Stock Price Performance Graph
The following graph compares the cumulative 5-year total return on our common stock relative to the cumulative total returns of the S&P 500 Index and the Guggenheim Solar ETF, which represents a peer group of solar companies. In the stock price performance graph included below, an investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, the S&P 500 Index, and the Guggenheim Solar ETF on December 27, 2008, and its relative performance is tracked through December 31, 2013. No cash dividends have been declared on shares of our common stock. This performance graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof, and irrespective of any general incorporation language in any such filing. The stock price performance shown on the graph represents past performance and should not be considered an indication of future price performance.
44
___________________________________
* $100 invested on 12/27/08 in stock or index, including reinvestment of dividends. Index calculated on a month end basis.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliate Purchases
None.
Item 6: Selected Financial Data
The following table sets forth our selected consolidated financial data for the periods and at the dates indicated.
The selected consolidated financial information from the consolidated statements of operations and consolidated statements of cash flows for the fiscal years ended December 31, 2013, 2012, and 2011 and the selected consolidated financial data from the consolidated balance sheets for the fiscal years ended December 31, 2013 and 2012 has been derived from the audited consolidated financial statements included in this Annual Report on Form 10-K. The selected consolidated financial data from the consolidated balance sheets for the fiscal years ended December 31, 2011, 2010 and December 26, 2009 and selected consolidated financial information from the consolidated statements of operations and consolidated statements of cash flows for the fiscal years ended December 26, 2009 have been derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The information presented below should be read in conjunction with Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes thereto.
45
Years Ended | ||||||||||||||||||||
Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | Dec 26, 2009 | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 3,308,989 | $ | 3,368,545 | $ | 2,766,207 | $ | 2,563,515 | $ | 2,066,200 | ||||||||||
Cost of sales | 2,446,235 | 2,515,796 | 1,794,456 | 1,378,669 | 1,021,618 | |||||||||||||||
Gross profit | 862,754 | 852,749 | 971,751 | 1,184,846 | 1,044,582 | |||||||||||||||
Research and development | 134,300 | 132,460 | 140,523 | 94,797 | 78,161 | |||||||||||||||
Selling, general and administrative | 270,261 | 280,928 | 412,541 | 321,704 | 272,898 | |||||||||||||||
Production start-up | 2,768 | 7,823 | 33,620 | 19,442 | 13,908 | |||||||||||||||
Goodwill impairment | — | — | 393,365 | — | — | |||||||||||||||
Restructuring and asset impairments | 86,896 | 469,101 | 60,366 | — | — | |||||||||||||||
Operating income (loss) | 368,529 | (37,563 | ) | (68,664 | ) | 748,903 | 679,615 | |||||||||||||
Foreign currency (loss) gain | (259 | ) | (2,122 | ) | 995 | (3,468 | ) | 5,207 | ||||||||||||
Interest income | 16,752 | 12,824 | 13,391 | 14,375 | 9,735 | |||||||||||||||
Interest expense, net | (1,884 | ) | (13,888 | ) | (100 | ) | (6 | ) | (5,258 | ) | ||||||||||
Other (expense) income, net | (4,921 | ) | 945 | 665 | 2,273 | (2,985 | ) | |||||||||||||
Income tax expense (benefit) | 25,179 | 56,534 | (14,220 | ) | 97,876 | 46,176 | ||||||||||||||
Net income (loss) | $ | 353,038 | $ | (96,338 | ) | $ | (39,493 | ) | $ | 664,201 | $ | 640,138 | ||||||||
Net income (loss) per share data: | ||||||||||||||||||||
Basic net income (loss) per share: | ||||||||||||||||||||
Net income (loss) per share | $ | 3.77 | $ | (1.11 | ) | $ | (0.46 | ) | $ | 7.82 | $ | 7.67 | ||||||||
Weighted average shares | 93,697 | 86,860 | 86,067 | 84,891 | 83,500 | |||||||||||||||
Diluted net income (loss) per share: | ||||||||||||||||||||
Net income (loss) per share | $ | 3.70 | $ | (1.11 | ) | $ | (0.46 | ) | $ | 7.68 | $ | 7.53 | ||||||||
Weighted average shares | 95,468 | 86,860 | 86,067 | 86,491 | 85,044 | |||||||||||||||
Cash dividends declared per common share | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Years Ended | ||||||||||||||||||||
Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | Dec 26, 2009 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash Flow Data: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 856,126 | $ | 762,209 | $ | (33,463 | ) | $ | 705,492 | $ | 675,193 | |||||||||
Net cash used in investing activities | (537,106 | ) | (383,732 | ) | (676,457 | ) | (742,085 | ) | (701,690 | ) | ||||||||||
Net cash provided by (used in) financing activities | 101,164 | (89,109 | ) | 571,218 | 150,451 | (22,021 | ) | |||||||||||||
Years Ended | ||||||||||||||||||||
Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | Dec 26, 2009 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,325,072 | $ | 901,294 | $ | 605,619 | $ | 765,689 | $ | 664,499 | ||||||||||
Marketable securities, current and noncurrent | 439,102 | 102,578 | 182,338 | 348,160 | 449,844 | |||||||||||||||
Total assets | 6,883,502 | 6,348,692 | 5,777,614 | 4,380,403 | 3,349,512 | |||||||||||||||
Total long-term debt | 223,323 | 562,572 | 663,648 | 237,391 | 174,958 | |||||||||||||||
Total liabilities | 2,380,385 | 2,743,166 | 2,133,751 | 925,458 | 696,725 | |||||||||||||||
Total stockholders’ equity | 4,503,117 | 3,605,526 | 3,643,863 | 3,454,945 | 2,652,787 | |||||||||||||||
46
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” and “First Solar” refer to First Solar, Inc. and its subsidiaries. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the “Note Regarding Forward-Looking Statements,” that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under Item 1A: “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
Unit of Power
When referring to our manufacturing capacity, total sales and solar module sales, the unit of electricity in watts for megawatts(“MW”) and gigawatts (“GW”) is direct current (“DC”) unless otherwise noted. When referring to our PV solar power systems, the unit of electricity in watts for MW and GW is alternating current (“AC”) unless otherwise noted.
Overview
We are a global provider of solar energy solutions, focused on providing power solutions across key market segments. We design, manufacture and sell photovoltaic (“PV”) solar modules with an advanced thin-film semiconductor technology, and we develop, design, construct and sell PV solar power solutions that primarily use the solar modules we manufacture. We are also developing crystalline silicon solar modules with proprietary high-power density, mono-crystalline technology and we provide single-axis mounting systems with proprietary tracking capabilities. Additionally, we provide operations and maintenance (“O&M”) services to plant owners that use solar modules manufactured by us or by other third-party manufacturers. We have substantial, ongoing research and development efforts focused on module and systems level innovations. We are the world’s largest thin-film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our mission is to create enduring value by enabling a world powered by clean, affordable solar energy.
In addressing overall global demand for PV solar electricity, we have developed a differentiated, fully integrated systems business that can provide competitively priced utility-scale PV solutions for system owners and low cost solar electricity to end-users. Our fully integrated systems business has enabled us to drive cost reduction across the value chain, identify and break constraints to sustainable markets, and deliver compelling solutions to our customers and end-users. With our fully integrated systems business, we believe we are in a position to expand our business in economically sustainable markets (in which support programs are minimal), which are developing in areas that have a combination of abundant solar resources, relatively high current electricity costs and sizable electricity demand. We are committed to continually lowering the cost of solar electricity, and in the long-term, we plan to compete on an economic basis with conventional fossil-fuel-based peaking power generation.
We believe that combining our vertical integration across the value chain enables us to be more competitive, accelerate the adoption of our technology in solar power systems, and identify and remove constraints to the successful migration to sustainable solar markets around the world. Our vertically integrated capabilities enable us to maximize value and mitigate risk for our customers and offer valuable benefits such as grid integration and stabilization, thereby positioning us to deliver meaningful PV energy solutions to varied energy problems worldwide. We seek to offer leadership across the entire solar value chain, resulting in more reliable and cost effective PV energy solutions for our customers, and furthering our mission to create enduring value by enabling a world powered by clean, affordable solar electricity.
Market Overview
The solar industry continues to be characterized by intense pricing competition, both at the module and system level, with many solar companies generating operating losses or little to no operating income. In the aggregate, manufacturers of solar modules and cells have installed production capacity that exceeds global demand. We believe the solar industry will continue to experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing. In light of such market realities, we continue to execute our Long Term Strategic Plan described below under which we are focusing on our competitive strengths. A key core strength is our differentiated, vertically integrated business model that enables us to provide utility-scale PV generation solutions to sustainable geographic markets that have an immediate need for mass-scale PV electricity.
47
Solar markets worldwide continue to develop, in part aided by demand elasticity resulting from declining industry average selling prices, both at the module and system level, which make solar power more affordable to new markets, and we have continued to develop our localized presence and expertise in these markets. For example, in November 2013, we announced that construction had started on our 1.4 MW DC solar project in Kitakyushu-shi, Japan, utilizing our CdTe thin-film PV modules. In November 2013, we also announced that we entered into an agreement with JX Nippon Oil & Energy Corporation for the distribution in Japan through April 2015 of First Solar high efficiency crystalline silicon modules, expected to be manufactured beginning in 2014. In January 2014, we announced that we had started construction on Australia’s largest utility-scale solar project, the 102 MW Nyngan solar project in New South Wales.
In North America, we continue to execute on our advanced-stage utility-scale project pipeline. We continue to make construction progress on what are currently or will be among the world’s largest PV solar power systems. We expect a substantial portion of our consolidated net sales, operating income and cash flows through the end of 2014 to be derived from these projects. We continue to advance the development and selling efforts for the other projects included in our advanced-stage utility-scale project pipeline, and we continue to develop our early-to-mid stage project pipeline and evaluate acquisitions of projects to continue to add to our advanced-stage utility-scale project pipeline. In October 2013, we announced that we had agreed to sell the 250 MW AC Silver State South Solar Project to a subsidiary of NextEra Energy Resources. First Solar will provide EPC services for the project, which is adjacent to the 50 MW Silver State North project that was developed and built by First Solar and commissioned in 2012. In November 2013, we announced that we signed power purchase agreements with member cities of the Southern California Public Power Authority (SCPPA) for electricity to be generated at the 40 MW PV solar power plant that we are developing and will construct in Kern County, California. In January 2014, we announced that we had started construction on Phase I of the Barilla Solar Project in Pecos County, Texas. First Solar will build, commission and operate the 22 MW power plant, and expects to offer the output to customers, including municipal utilities and electric cooperatives.
We believe industry module average selling prices have begun to show signs of stabilization in several markets, after a long period of significant decline across multiple markets. Lower industry module pricing, while currently challenging for solar manufacturers (particularly manufacturers with high cost structures), is expected to continue to contribute to global market diversification and volume elasticity. Over time, declining average selling prices are consistent with the erosion of one of the primary historical constraints to widespread solar market penetration, its affordability. In the near term, however, in light of industry-wide manufacturing capacity that exceeds demand, it is unclear whether growing worldwide demand could absorb industry-wide module supply without further inventory build-up and/or price reductions, which could adversely affect our results of operations. If competitors reduce module pricing to levels below their cash manufacturing costs, or are able to operate at negative or minimal operating margins for sustained periods of time, our results of operations could be further adversely affected. We continue to mitigate this uncertainty in part by executing on and building our advance-stage utility-scale systems pipeline as a buffer against demand fluctuations, accelerating our module efficiency improvement and BoS cost reduction roadmaps to maintain and increase our competitiveness, profitability and capital efficiency, adjusting our production plans and capacity utilization to match our expected demand, and continuing the development of worldwide geographic markets.
In the components business, we continue to face intense competition from manufacturers of crystalline silicon solar modules and other types of solar modules and PV systems. Solar module manufacturers compete with one another in several product performance attributes, including reliability and selling price per watt, and, with respect to solar power systems, return on equity (“ROE”) and LCOE, meaning the net present value of total life cycle costs of the solar power project divided by the quantity of energy which is expected to be produced over the system’s life. We are among the lowest cost PV module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness is reflected in the price at which we sell our modules and fully integrated PV solar power systems and enables our PV solar power systems to compete favorably in respect of their ROE or LCOE. Our cost competitiveness is based in large part on our proprietary technology (which enables conversion efficiency improvements and enables us to produce a module in less than 2.5 hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), our scale, and our operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of the polysilicon that is used to manufacture traditional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. Polysilicon costs had periods of decline over the past several years, contributing to a decline in our manufacturing cost competitiveness over traditional crystalline silicon module manufacturers. Given the lower conversion efficiency of our modules compared to certain types of crystalline silicon modules, there may be higher BoS costs associated with systems using our modules. Thus, to compete effectively on the basis of LCOE, our modules need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules with higher conversion efficiencies. We continue to reduce BoS costs associated with PV solar power systems using our modules. We believe we can continue to reduce BoS costs by improving module conversion efficiency, leveraging volume procurement around standardized hardware platforms, using innovative
48
installation techniques and know how, and accelerating installation times. BoS costs can represent a significant portion of the costs associated with the construction of a typical utility-scale PV solar power system.
While our modules and PV solar power systems are currently competitive in cost, reliability and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in additional margin compression, further declines in the average selling prices of our solar modules, erosion in our market share for modules and PV solar power systems, decreases in the rate of net sales growth, and/or declines in overall net sales. We have taken, and continue to take, various actions to mitigate the potential impact resulting from competitive pressures, including adjusting our pricing policies as necessary, accelerating progress along our module efficiency improvement and BoS cost reduction roadmaps, and further focusing our research and development on increasing the conversion efficiency of our solar modules.
As we continue to expand our systems business into sustainable markets, we can offer value beyond the solar module, reduce our exposure to module-only competition, provide differentiated product offerings to minimize the impact of solar module commoditization, and provide comprehensive utility-scale PV solar power system solutions that significantly reduce solar electricity costs. Thus, our systems business allows us to play a more active role than many of our competitors in managing the demand for our solar modules. Finally, we continue to form and develop strong relationships with our customers and strategic partners around the world and continue to develop our range of product offerings, including EPC capabilities and O&M services, in order to enhance the competitiveness of systems using our solar modules. For example, we have and expect in the future to form joint ventures or other business arrangements with project developers in certain strategic markets in order to provide our modules and potential systems business PV generation solutions to the projects developed by such ventures.
Certain Trends and Uncertainties
We believe that our continuing operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations. See Item 1A: “Risk Factors” and elsewhere in this Annual Report on Form 10-K for a discussion of other risks that may affect our financial condition and results of operations.
Long Term Strategic Plan
In executing our Long Term Strategic Plan (“LTSP”) we are focusing on providing solar PV generation solutions using our modules to sustainable geographic markets that we believe have a compelling need for mass-scale PV electricity, including markets throughout the Americas, Asia, Australia, the Middle East, and Africa. As part of our LTSP, we are focusing on opportunities in which our solar PV generation solutions will compete directly with fossil fuel offerings on an LCOE basis. Execution of the LTSP entails a reallocation of resources around the globe, in particular dedicating resources to regions such as Latin America, Asia, the Middle East, and Africa where we have not traditionally conducted significant business to date. We are evaluating and managing closely the appropriate level of resources required as we transition into and penetrate these specific markets. We have and intend to continue to dedicate significant capital and human resources to reduce the total installed cost of solar PV generation, to optimize the design and logistics around our solar PV generation solutions, and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market.
We expect that, over time, an increasing portion of our consolidated net sales, operating income and cash flows will come from solar offerings in the sustainable markets described above as we execute on our LTSP. The timing, execution and financial impacts of our LTSP are subject to risks and uncertainties, as described in the Risk Factors. We are focusing our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with high solar resources, significant current or projected electricity demand and/or relatively high existing electricity prices. As part of these efforts, we continue to expand resources globally, including by appointing country heads and supporting professional, sales and other staff in target sustainable markets. Accordingly we are shifting current costs and expect to incur additional costs over time as we establish a localized business presence in these regions.
Joint ventures or other business arrangements with strategic partners are a key part of our LTSP, and we have begun initiatives in several markets using such arrangements to expedite our penetration of those markets and establish relationships with potential customers and policymakers. Some of these business arrangements have and are expected in the future to involve significant investments or other allocations of capital on our part. We are in the process of developing relationships with policymakers, regulators, and end customers in each of these markets with a view to creating markets for utility scale PV solar power systems. We sell solar power solutions directly to end customers, including independent power producers, utilities, retail electricity providers and commercial and industrial customers. Depending on the market opportunity, our sales offerings range from module only sales, to module sales with a range of development, engineering, procurement and construction services and solutions, to full turn-key PV solar power system sales. We expect these sales offerings to continue to evolve over time as we work with our customers to
49
optimize how our PV solar generation solutions can best meet our customers’ energy and economic needs. As described above under “Item 1: Business - Offerings and Capabilities,” in addition to our utility-scale power plant offering, we have an AC Power Block offering as well as fuel displacement, commercial and industrial and off-grid and energy access offerings.
In order to create or maintain a market position in certain strategically targeted markets our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins, which may adversely affect our results of operations. We expect the profitability associated with our various sales offerings to vary from one another over time, and possibly vary from our internal long-range profitability expectations and targets, depending on the market opportunity and the relative competitiveness of our offering compared with other energy solutions, fossil fuel based or otherwise, that are available to potential customers.
We expect to use our working capital, the availability under our Revolving Credit Facility, or non-recourse project financing to finance the construction of certain of our PV solar power systems, if the sale of such systems prior to construction beginning does not meet our economic return expectations or we cannot sell under terms and conditions that are favorable to us. From time to time we may temporarily own and operate certain PV solar systems with the intention to sell at a later date. The ability to do so allows us to gain control of the sales process, provide a lower risk profile to a future buyer of a PV solar system and improve our ability to drive higher eventual sale values. As of February 2014, we own and operate one completed solar power plant. We also currently own two additional solar power plants under construction that are delivering power to the grid. We may also elect to construct and/or retain ownership interests in a merchant power plant, as we are doing with our Barilla Solar Project currently under construction in west Texas. We continue to pursue strategic partnerships that open up new geographic markets and those that provide access to a lower cost of capital and optimize the value of our projects. Additionally, our joint ventures and other business arrangements with strategic partners have and may in the future result in us temporarily retaining a minority or non-controlling ownership interest in the underlying systems projects we develop, supply modules to, or construct potentially for a period of up to several years. In each of the above mentioned examples, we may retain such ownership interests in a consolidated and/or unconsolidated separate entity.
Construction of Some of the World’s Largest Solar PV Power Systems
We expect a substantial portion of our consolidated net sales, operating income and cash flows through the end of 2014 to be derived from several large projects in North America, including the following projects which are currently or will be among the world’s largest PV solar power systems: the 550 MW Topaz Solar Farm, located in San Luis Obispo County, California; the 550 MW Desert Sunlight Solar Farm, located west of Blythe, California; the 230 MW AVSR project, located north of Los Angeles, California; the 139 MW Campo Verde project, located in Imperial County, California; the 250 MW Moapa solar project, located on the Moapa River Indian Reservation in Clark County, northeast of Las Vegas, Nevada; the 250 MW Silver State South project, located near Primm in Clark County, Nevada; the 150 MW Solar Gen 2 project, located in California's Imperial Valley; and the 58 MW Copper Mountain Solar 2 project, part of the 150 MW Copper Mountain Solar complex in Boulder City, Nevada. Please see the tables under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Systems Project Pipeline” for additional information about these and other projects within our systems business advanced-stage project pipeline. Construction progress of these projects is subject to risks and delays as described in “Item 1A: Risk Factors” and elsewhere in this report. Revenue recognition for these and other systems projects is in many cases not linear in nature due to the timing of when all revenue recognition criteria have been or are expected to be met, and consequently period over period comparisons of results of operations may not be meaningful. As we progress construction towards substantial completion of these PV power systems, we may have a larger portion of our net sales, operating income and cash flows come from future sales of solar offerings outside of North America, pursuant to our LTSP described above. North America however, will continue to represent a meaningful portion of our net sales, operating income and cash flows as a significant portion of our advance-stage project pipeline, excluding the projects above, is also comprised of projects in North America.
Systems Project Pipeline
The following tables summarize, as of February 25, 2014, our approximately 3.8 GW systems business advanced-stage project pipeline. As of December 31, 2013, for the Projects Sold/ Under Contract in our advanced-stage project pipeline of approximately 2.7 GW, we have recognized revenue with respect to the equivalent of approximately 1.4 GW. Such MW equivalent amount refers to the ratio of revenue recognized for the Projects Sold/ Under Contract in our advanced-stage project pipeline compared to total contracted revenue for such projects, multiplied by the total MW for such projects. The remaining revenue to be recognized subsequent to December 31, 2013 for the Projects Sold/ Under Contract in our advanced-stage project pipeline is expected to be approximately $4.1 billion. The substantial majority of such amount is expected to be recognized as revenue through the later of the substantial completion or project closing dates of the Projects Sold/ Under Contract. The remaining revenue to be recognized does not have a direct correlation to expected remaining module shipments for such Projects Sold/ Under Contract as expected module shipments do not represent total systems revenues and do not consider the timing of when all revenue recognition criteria
50
are met including timing of module installation. The actual volume of modules installed in our Projects Sold/ Under Contract will be greater than the Project Size in MW AC as module volumes required for a project are based upon MW DC, which will be greater than the MW AC size pursuant to a DC-AC ratio typically ranging from 1.2 to 1.4. Such ratio varies across different projects due to various system design factors. Projects are removed from our advanced-stage project pipeline tables below once we have completed construction and after all revenue has been recognized.
We continually seek to make additions to our advance-stage project pipeline. We are actively developing our early to mid-stage project pipeline in order to secure PPAs and we are also pursuing opportunities to acquire advance-stage projects, which already have PPAs in place. From February 27, 2013 through February 25, 2014, we acquired 610 MW of advance-stage projects, and we expect to acquire additional advance-stage projects when such acquisitions meet our strategic and/or our return on investment requirements.
Projects Sold/ Under Contract
(Includes uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements including partner developed projects that we will be or are constructing)
As of December 31, 2013 | |||||||
Project/Location | Project Size in MW AC (1) | Power Purchase Agreement (“PPA”) | Third Party Owner/Purchaser | Expected Year Revenue Recognition Will Be Completed By | Percentage Complete | Percentage of Revenue Recognized | |
Topaz, California | 550 | PG&E | MidAmerican | 2014/2015 | 72% | 72% | |
Desert Sunlight, California | 550 | PG&E / SCE | NextEra/GE/Sumitomo | 2014/2015 | 74% | 62% | |
Agua Caliente, Arizona | 290 | PG&E | NRG / MidAmerican | 2014 | 99% | 99% | |
McCoy, California | 250 | SCE | NextEra (2) | 2016 | —% | —% | |
Silver State South, Nevada | 250 | SCE | NextEra (9) | 2016 | —% | —% | |
AVSR, California | 230 | PG&E | Exelon | 2014 | 88% | 88% | |
AGL, Australia | 155 | AGL | AGL (2) (6) | 2015 | 1% | —% | |
Campo Verde, California | 139 | SDG&E | Southern | 2014 | 96% | —% | |
Imperial Energy Center South, California | 130 | SDG&E | Tenaska (2) | 2014 | 99% | 99% | |
California (Multiple Locations) (10) | 79 | PG&E/ SCE | Various (2) | 2014 | 1% | —% | |
Copper Mountain 2, Nevada | 58 | PG&E | Sempra (2) | 2015 (3) | —% | —% | |
PNM2, New Mexico | 22 | UOG (4) | PNM (2) | 2014 | 99% | 99% | |
Total | 2,703 | ||||||
Projects with Executed PPA - Not Sold/ Not Contracted
51
Project/Location | Fully Permitted | Project Size in MW AC (1) | Power Purchase Agreement (“PPA”) | Expected or Actual Substantial Completion Year | As of December 31, 2013 Percentage Complete | |
Stateline, California | No | 300 | SCE | 2016 | —% | |
Moapa, Nevada | No | 250 | LADWP (2) | 2015 | —% | |
Solar Gen 2, California | Yes | 150 | SDG&E | 2014 | 26% | |
California Flats, California | No | 150 | PG&E | 2016 (5) | —% | |
North Star, California | No | 60 | PG&E | 2015 | —% | |
Macho Springs, New Mexico | Yes | 50 | El Paso Electric | 2014 | 58% | |
Cuyama, California | No | 40 | PG&E | 2015/2016 (5) | —% | |
Kingbird, California | No | 40 | SCPPA (8)/City of Pasadena | 2015 | —% | |
Lost Hills, California | Yes | 32 | PG&E | 2015 (7) | —% | |
PNM 3, New Mexico | No | 23 | UOG (2) (4) | 2014 | —% | |
Barilla, Texas | No | 22 | (11) | 2014 | —% | |
Maryland Solar, Maryland | Yes | 20 | FE Solutions | 2014 | 100% | |
Total | 1,137 | |||||
Key:
(1) | The volume of modules installed in MW DC (“direct current”) will be higher than the MW AC (“alternating current”) size pursuant to a DC-AC ratio typically ranging from 1.2-1.4. Such ratio varies across different projects due to various system design factors |
(2) | EPC contract or partner developed project |
(3) | First 92 MW AC phase was completed in 2012. Remaining phase is 58 MW AC for which substantial completion is expected in 2015 |
(4) | UOG = Utility Owned Generation |
(5) | PPA term does not begin until 2019 |
(6) | First Solar will own five percent of projects |
(7) | Project has short-term PPA that begins in 2015 with PG&E PPA beginning in 2019 |
(8) | SCPPA - Southern California Public Power Authority |
(9) | Project sale closing subject to certain conditions precedent |
(10) | Kent South (Kings County), Kansas (Kings County), Adams East (Fresno County) and Old River (Kern County) |
(11) | Merchant Plant - No PPA |
GE Solar Technology Purchase and Strategic Commercial Relationship
In August 2013 we acquired all of the CdTe PV specific intellectual property assets and CdTe manufacturing processes of General Electric Company (“GE”) pursuant to certain transaction and purchase agreements in exchange for 1.75 million shares of First Solar common stock. The purchase of such intellectual property has advanced our solar module efficiency roadmap and is expected to reduce the LCOE of PV solar power systems that incorporate our modules. In addition to the purchase of such intellectual property, our research and development associates collaborate with GE Global Research Center on knowledge transfer and future technology development to further advance CdTe solar technology and module efficiencies pursuant to an agreement through 2014. GE also has the ability to purchase our modules with GE specific branding for future global GE deployments.
TetraSun Acquisition
In April 2013, we completed the acquisition of TetraSun, Inc. (“TetraSun”), a company with a novel, high-efficiency crystalline silicon cell technology. We believe that when the technology is successfully transitioned to commercial manufacturing scale, the innovative cell architecture developed by TetraSun is capable of conversion efficiencies exceeding 21 percent with manufacturing costs comparable to conventional multicrystalline silicon solar modules. We expect modules incorporating this technology to complement our current CdTe module and systems offerings by allowing us to address markets in space constrained commercial and residential rooftop applications. In such applications, we expect our high-efficiency modules based on the TetraSun technology to be competitively differentiated by enabling solar systems with high energy density in constrained spaces at competitive
52
pricing. We are currently targeting commencement of manufacturing by the end of 2014. We expect to market and sell such high efficiency modules using the First Solar name or through co-branding with strategic partners.
Restructuring and Asset Impairments
We have undertaken a series of restructuring initiatives as further described in Note 4 “Restructuring and Asset Impairments,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K. In February 2012 and April 2012, respectively, we announced material restructuring initiatives intended to (i) align the organization with our Long Term Strategic Plan, including expected sustainable market opportunities, (ii) accelerate operating cost reductions and improve overall operating efficiency, and (iii) better align production capacity and geographic location of such capacity with expected geographic market requirements and demand.
Such restructuring initiatives resulted in charges to restructuring expense of $5.2 million in 2013 and $469.1 million in 2012. The most significant actions taken as part of these restructuring activities were the decisions to close our manufacturing operations comprised of 8-lines of installed manufacturing capacity in Frankfurt (Oder), Germany at the end of 2012 due to the lack of policy support for utility-scale solar projects in Europe and to not proceed with our previously planned 4-line manufacturing plant in Vietnam and 2-line manufacturing plant in France, based upon expected future market demand and our focus on providing utility-scale PV generation solutions primarily to sustainable geographic markets.
In October 2013, we entered into an agreement to sell our facility in Mesa, Arizona. The facility consisted of land, a building, and certain fixtures and improvements. The facility housed our O&M capabilities as well as certain equipment and inventory. The facility was originally designed to house a CdTe PV module manufacturing factory; however, we never commissioned manufacturing at the facility. As a result of the sales agreement, we have classified the Mesa facility as “Assets held for sale” in the consolidated balance sheet as of December 31, 2013 and recognized a $56.5 million asset impairment charge, which lowered the book value of the facility to its fair value, less costs to sell. During the fourth quarter of 2013 we received cash proceeds, net of costs to sell, of approximately $115 million in connection with the Mesa sales agreement. The transaction will be completed during the first quarter of 2014.
Our Vietnam facility was classified as an asset held for sale as of December 31, 2013 and 2012, respectively. During 2013, no reasonable offers to purchase the plant were obtained by us and as a result we were unable to sell the facility by the end of the one-year period. In addition, during the fourth quarter of 2013, we adjusted our marketing strategy with regards to the plant and expect to expand the range of targeted buyers to include strategic as well as financial buyers to effectuate the disposition. We will continue to actively market the facility at a price that is reasonable given the change in the targeted buyer group. As a result of this change, we determined that the estimated fair value of our Vietnam plant and related equipment was less than its carrying value and we recorded an asset impairment charge of $25.2 million to lower the carrying value of the facility to its estimated fair value, less costs to sell.
Financial Operations Overview
The following describes certain line items in our statement of operations and some of the factors that affect our operating results.
Net sales
Components Business
We generally price and sell our solar modules per watt of name plate power. During 2013, a significant portion of net sales from the components business was related to modules included in our PV solar power systems described below under “Net Sales — Systems Business.” Other than the modules included in our PV solar power systems, we sold the majority of our solar modules to PV solar power system project developers, system integrators, and operators headquartered in the United States, Germany, and France, which primarily integrate them into PV solar power systems that they own, operate, or construct.
From time to time we enter into module sales agreements with customers worldwide for specific projects or volumes of modules. Such agreements are generally not long term in nature. During the years ended December 31, 2013 and 2012, 48% and 10%, respectively of our components business net sales, excluding modules included in our PV solar power systems, were denominated in Euros and were subject to fluctuations in the exchange rate between the Euro and U.S. dollar.
Under our typical customer sales contracts for solar modules, we transfer title and risk of loss to the customer and recognize revenue upon shipment. Pricing is typically fixed or determinable at the time of shipment, and our customers do not typically have
53
extended payment terms. Customers do not have rights of return under these contracts. Our revenue recognition policies for the components business are described further in Note 2 “Summary of Significant Accounting Policies,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
During 2013, AES, MidAmerican Renewables, LLC and NextEra Energy individually accounted for more than 10% of our components segment’s net sales, which includes the solar modules used in our systems projects.
Systems Business
Through our fully integrated systems business, we provide a complete turn-key solar power system solution using our solar modules, which may include project development, EPC services, O&M services, and project finance expertise.
Net sales from our systems segment may include the following types of transactions:
• | Engineering and Procurement (“EP”). Contract Design for customer of a solar electricity generation system that uses our solar modules; includes the procurement of some or all BoS components from third party suppliers. |
• | Engineer, Procure, and Construct (“EPC”). Contract Design and construction for a customer of a turn-key solar electricity generation system that uses our solar modules; includes the procurement of all BoS components from third party suppliers. |
• | Sale of Project Assets. Sale of project assets to a customer at various stages of development. This generally includes a single project consisting of costs incurred for permits, land or land rights, and/or power purchase agreements. |
• | Operating and Maintenance (“O&M”) Agreement. Typically a fixed-price long-term services agreement to operate and maintain a solar electricity generating system that we built. |
Net sales from our systems segment are impacted by numerous factors, including the cost competitiveness of our systems offerings in comparison to our competitors’ solar power systems and other forms of electricity generation, the magnitude and effectiveness of support programs, and other solar power system demand drivers.
During 2013, 2012 and 2011, the majority of our systems segment net sales were generated in North America.
During 2013, the principal customers of our systems segment were Exelon Corporation, General Electric Company, Sumitomo Corporation of America, MidAmerican Renewables, LLC and NextEra Energy, each of which also accounted for more than 10% of our systems segment sales during 2013.
Revenue Recognition — Systems Business. Revenue recognition for our systems projects are in many cases not linear in nature due to the timing of when all revenue recognition criteria have been met, and consequently period over period comparisons of results of operations may not be meaningful. We typically use the percentage-of-completion method using actual costs incurred over total estimated costs to construct a project (including module costs) as our standard accounting policy, but we only apply this method after all revenue recognition criteria have been met. There are also many instances in which we recognize revenue only after a project has been completed, primarily due to a project not being sold prior to completion or because all revenue recognition criteria are not met until the project is completed. Our revenue recognition policies for the systems business are described in further detail in Note 2 “Summary of Significant Accounting Policies,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
Cost of sales
Components Business
Our cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, cadmium telluride and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and other materials and components. Our cost of sales also includes direct labor for the manufacturing of solar modules and manufacturing overhead such as engineering, equipment maintenance, environmental health and safety, quality and production control, and procurement costs. Cost of sales also includes depreciation of manufacturing plant and equipment and facility-related expenses. In addition, we record shipping, warranty and the majority of our obligation for solar module collection and recycling costs within cost of sales.
54
Our manufacturing cost per watt, which is an operating metric we use as an indicator of manufacturing cost competitiveness, represents the current manufacturing and associated costs incurred to produce and sell solar modules during a period divided by the number of sellable watts produced in the same period. Beginning in 2013, our cost per watt excludes any costs associated with our manufacturing plants in Frankfurt (Oder), Germany, which closed manufacturing operations at the end of 2012.
Overall, we expect our cost per watt to decrease over the next several years due to an increase in watts per solar module, through improved conversion efficiencies, an increase in unit output per production line, and ongoing reductions in variable and fixed costs. This expected decrease in cost per watt would be partially offset during periods in which we underutilize manufacturing capacity.
Systems Business
Within our systems business, project-related costs include standard EPC costs (consisting primarily of BoS costs for inverters, electrical and mounting hardware, project management and engineering costs, and engineering and construction labor costs), site specific costs, and development costs (including transmission upgrade costs, interconnection fees, and permitting costs).
As further described in Note 23 “Segment and Geographical Information,” to our consolidated financial statements for the year ended December 31, 2013 included within this Annual Report on Form 10-K, at the time when all revenue recognition criteria are met, we include the sale of our solar modules manufactured by our components business and used by our systems business within net sales of our components business. Therefore, the related cost of sales are also included within our components business at that time. The cost of solar modules is comprised of the manufactured inventory cost incurred by our components segment.
Gross profit
Gross profit is affected by numerous factors, including our module and system average selling prices, market mix, our manufacturing costs, BoS costs, project development costs, the effective utilization of our production capacity and facilities, and foreign exchange rates. Gross profit is also affected by the mix of net sales generated by our components and systems businesses. Gross profit for our systems business excludes the sales and cost of sales for solar modules, used in our systems projects which we include in the gross profit of our components business.
Research and development
Research and development expense consists primarily of salaries and personnel-related costs, the cost of products, materials, and outside services used in our process and product research and development activities for both the components and systems businesses and depreciation and amortization expense associated with research and development specific facilities and intangible assets. We acquire equipment for general use in our process and product development and record the depreciation of this equipment as research and development expense. Currently, the substantial majority of our research and development expenses are attributable to our components segment.
We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules and PV solar power systems using our modules.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expenses, and other business development and selling expenses. We expect selling, general and administrative expense to decline over time as we reduce costs in connection with our LTSP.
Our systems business has certain of its own dedicated administrative key functions, such as accounting, legal, finance, project finance, human resources, procurement, and marketing. Costs for these functions are recorded and included within selling, general and administrative costs for our systems segment. Our corporate key functions consist primarily of company-wide corporate tax, corporate treasury, corporate accounting/finance, corporate legal, investor relations, corporate communications and government relations, and executive management functions. These corporate functions and the assets supporting such functions benefit both the components and systems segments. We allocate corporate costs to the components and systems segments as part of selling, general and administrative costs, based upon the estimated benefits provided to each segment from these corporate functions. We determine the estimated benefits provided to each segment for these corporate costs based upon a combination of the estimated time spent by corporate employees supporting each segment and the average relative selling, general and administrative costs incurred by each segment before such corporate allocations.
55
Production start-up
Production start-up expense consists primarily of salaries and personnel-related costs and the cost of operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase. It also includes all expenses related to the selection of a new site and the related legal and regulatory costs, and the costs to maintain our plant replication program, to the extent we cannot capitalize these expenditures. In general, we expect production start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition of new production lines at an existing manufacturing facility or implementing changes to our manufacturing process at such existing facilities, primarily due to the additional infrastructure investment required when building an entirely new facility. On a going forward basis the only costs included in production start-up expense will be plant level expansions. Production start-up expense is attributable to our components segment.
Goodwill impairment
During the fourth quarter of 2011, we determined that goodwill related to our components segment was impaired and recorded expense of $393.4 million. During 2013 and 2012, we had no goodwill impairments.
Restructuring and asset impairments
Restructuring expenses include those expenses incurred related to material restructuring initiatives and include severance and employee termination costs, that are directly related to our restructuring initiatives, costs associated with contract terminations and other restructuring related costs. These restructuring initiatives are intended to align the organization with our Long Term Strategic Plan (including expected sustainable market opportunities) and reduce costs. See Note 4 “Restructuring and Asset Impairments,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K. Asset impairment expenses include those expenses for reducing the net book value of certain assets to fair value. Expenses recognized for restructuring activities and asset impairments are discussed further above under “Executive Overview –Restructuring and Asset Impairments.”
Foreign currency (loss) gain
Foreign currency (loss) gain consists of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries’ functional currencies.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest income also includes interest received from notes receivable and any interest collected for late customer payments.
Interest expense, net
Interest expense is incurred on various debt financings. We capitalize interest expense into our property, plant and equipment or project assets when such costs qualify for interest capitalization, reducing the amount of interest expense reported in any given period.
Other (expense) income, net
Other (expense) income, net is primarily comprised of other miscellaneous items, changes in fair value of foreign exchange contracts and realized gains/losses on the sale of marketable securities.
Income tax expense (benefit)
Income taxes are imposed on our taxable income by taxing authorities in the various jurisdictions in which we operate, principally the United States, Germany, and Malaysia. The statutory federal corporate income tax rate in the United States is 35.0%, while the tax rates in Germany and Malaysia are approximately 29.6% and 25.0%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax.
Results of Operations
56
The following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended December 31, 2013, 2012, and 2011:
Years Ended December 31, | |||||||||
2013 | 2012 | 2011 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 73.9 | % | 74.7 | % | 64.9 | % | |||
Gross profit | 26.1 | % | 25.3 | % | 35.1 | % | |||
Research and development | 4.1 | % | 3.9 | % | 5.1 | % | |||
Selling, general and administrative | 8.2 | % | 8.3 | % | 14.9 | % | |||
Production start-up | 0.1 | % | 0.2 | % | 1.2 | % | |||
Goodwill impairment | — | % | — | % | 14.2 | % | |||
Restructuring and asset impairment | 2.6 | % | 13.9 | % | 2.2 | % | |||
Operating income (loss) | 11.1 | % | (1.1 | )% | (2.5 | )% | |||
Foreign currency (loss) gain | — | % | (0.1 | )% | — | % | |||
Interest income | 0.5 | % | 0.4 | % | 0.5 | % | |||
Interest expense, net | (0.1 | )% | (0.4 | )% | — | % | |||
Other (expense) income, net | (0.1 | )% | — | % | — | % | |||
Income tax expense (benefit) | 0.8 | % | 1.7 | % | (0.5 | )% | |||
Net income (loss) | 10.7 | % | (2.9 | )% | (1.4 | )% | |||
Segment Overview
We operate our business in two segments. Our components segment involves the design, manufacture, and sale of solar modules which convert sunlight into electricity. We manufacture CdTe modules and we also expect to begin manufacturing high-efficiency crystalline silicon modules by the end of 2014. Third-party customers of our components segment include project developers, system integrators, and owners and operators of PV solar power systems.
Our second segment is our fully integrated systems business (“systems segment”), through which we provide complete turn-key PV solar power systems, or solar solutions that draw upon our capabilities, which include (i) project development, (ii) EPC services, (iii) O&M services, and (iv) project finance expertise. We may provide our full EPC services or any combination of individual products and services within our EPC capabilities depending upon the customer and market opportunity. All of our systems segment products and services are for PV solar power systems which use primarily our solar modules, and such products and services are sold directly to investor owned utilities, independent power developers and producers, commercial and industrial companies, and other PV solar power system owners.
In our operating segment financial disclosures, we include an allocation of net sales value for all solar modules manufactured by our components segment and installed in projects sold or built by our systems segment in the net sales of our components segment. In the gross profit of our operating segment disclosures, we include the corresponding cost of sales value for the solar modules installed in projects sold or built by our systems segment in the components segment. The cost of solar modules is comprised of the manufactured cost incurred by our components segment.
See Note 23 “Segment and Geographical Information,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
See also Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Systems Project Pipeline” for a description of the projects in our advanced-stage project pipeline. Due to the distinct size, profitability and terms of the underlying sales arrangements for each project under construction, timing of meeting all revenue recognition criteria may create uneven net sales and gross profit patterns, making year over year comparisons less meaningful.
Product Revenue
The following table sets forth the total amounts of solar modules and solar power systems net sales for the years ended December 31, 2013, 2012, and 2011. For the purpose of the following table, (a) Solar module revenue is composed of total net sales from the sale of solar modules to third parties, and (b) Solar power system revenue is composed of total net sales from the
57
sale of PV solar power systems and related services and solutions including the solar modules installed in the PV solar power systems we develop and construct.
(Dollars in thousands) | 2013 | 2012 | 2011 | |||||||||
Solar module revenue | $ | 380,869 | $ | 325,427 | $ | 1,523,695 | ||||||
Solar power system revenue | 2,928,120 | 3,043,118 | 1,242,512 | |||||||||
Net sales | $ | 3,308,989 | $ | 3,368,545 | $ | 2,766,207 | ||||||
Solar module revenue sales to third parties increased $55.4 million during 2013 compared to 2012 primarily due to an increase in volume of watts sold of 39%, partially offset by a 15% decrease in average selling prices per watt.
Solar power system revenue decreased by $115.0 million for the year ended 2013 compared to 2012 primarily due to the number and size of projects under construction between these periods as well as the timing of when all revenue recognition criteria have been met. Solar power system revenue included decreases in net sales from our AV Solar Ranch One, Copper Mountain 2 and Topaz projects which are at various points of completion, combined with reductions in net sales for substantially completed Agua Caliente, Alpine, Silver State North, Avra Valley and Greenough River projects. These decreases were partially offset by increases in net sales from initial revenue recognition for our Desert Sunlight, PNM and DEWA projects combined with increases in net sales from our completed Imperial Energy Center South project and our projects in Canada, including Amherstburg, Belmont and Walpole.
Solar module revenue sales to third parties decreased by $1.2 billion for 2012 compared to 2011 primarily due to a 67% decrease in volume of watts sold and a 36% decrease in average selling prices per watt.
Solar power system revenue increased by $1.8 billion for 2012 compared to 2011 primarily due to increases in net sales from our AV Solar Ranch One, Topaz, Copper Mountain 2, St. Clair, Silver State North, Alpine, Imperial Energy Center South and Avra Valley projects, partially offset by decreases in net sales from our Agua Caliente, Amherstburg 2, Santa Teresa and Paloma projects. The increase in net sales is due to the number and size of projects under construction between the relevant periods as well as the timing of when all revenue recognition criteria have been met.
Fiscal Years Ended December 31, 2013 and 2012
Net sales
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Net Sales (Segment Profile) | |||||||||||||||
Components | $ | 1,173,947 | $ | 1,185,958 | $ | (12,011 | ) | (1 | )% | ||||||
Systems | 2,135,042 | 2,182,587 | (47,545 | ) | (2 | )% | |||||||||
Total | $ | 3,308,989 | $ | 3,368,545 | $ | (59,556 | ) | (2 | )% | ||||||
Net sales from our components segment, which includes solar modules used in our systems projects, decreased by $12 million, primarily due to a 17% decrease in average selling prices, partially offset by a 19% increase in volume of watts sold.
Net sales from our systems segment, which excludes solar modules used in our systems projects, decreased by $47.5 million, primarily due to the number and size of projects under construction between these periods as well as the timing of when all revenue recognition criteria have been met. Net sales from our system segment included decreases in net sales from our AV Solar Ranch One, Copper Mountain 2 and Topaz projects which are at various points of completion, combined with reductions in net sales for substantially completed Agua Caliente, Alpine, Silver State North, Avra Valley and Greenough River projects. These decreases were partially offset by increases in net sales from initial revenue recognition for our Desert Sunlight, PNM and DEWA projects combined with increases in net sales from our completed Imperial Energy Center South project and our projects in Canada, including Amherstburg, Belmont and Walpole.
Cost of sales
58
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Cost of Sales | |||||||||||||||
Components | $ | 1,085,441 | $ | 1,130,196 | $ | (44,755 | ) | (4 | )% | ||||||
Systems | 1,360,794 | 1,385,600 | (24,806 | ) | (2 | )% | |||||||||
Cost of sales | $ | 2,446,235 | $ | 2,515,796 | $ | (69,561 | ) | (3 | )% | ||||||
% of net sales | 73.9 | % | 74.7 | % | |||||||||||
Our costs of sales decreased by $69.6 million, or 3% and declined 0.8% as a percentage of net sales when comparing 2013 with 2012. The decrease in cost of sales was primarily due to a $44.8 million reduction in cost of sales in our components segment and can largely be attributed to the following 2012 expenses that substantially did not occur in 2013:
• | Expenses associated with our voluntary remediation efforts for our 2008-2009 manufacturing excursion decreased $39.5 million; |
• | Accelerated depreciation expense for certain manufacturing equipment that was replaced as part of our planned equipment upgrade programs decreased $24.8 million; |
• | Expenses associated with inventory write-downs to lower of cost or market and other adjustments declined by $27.5 million primarily as a result of favorable fluctuations in inventory market pricing; |
• | Expenses related to our voluntary remediation efforts for workmanship issues affecting a limited number of solar modules manufactured between October 2008 and June 2009 declined $15.8 million. |
In addition, in 2013, we recorded a $17.9 million favorable adjustment to our cost of sales in connection with a decrease in the module collection and recycling liability as further discussed in Note 13 “Solar Module Collection and Recycling Liability,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K. These decreases in our cost of sales were partially offset by a $45.6 million increase associated with growth in the volume of solar modules sold, net of cost reductions in our manufacturing process and module efficiency improvements. In addition, our cost of sales was unfavorably impacted by a 5% increase in underutilization of our manufacturing capacity. During 2013 we ran our factories at approximately 77% capacity utilization primarily due to temporary idling of manufacturing lines in Perrysburg and Malaysia, causing a $23.6 million increase in cost of sales.
Additionally, cost of sales decreased by $24.8 million in our systems segment primarily for BoS components and other construction costs related to the relative number and size of various utility-scale solar power systems under construction and the progress on such construction between the periods as well as the timing of when all revenue recognition criteria have been met.
Our average manufacturing cost per watt declined by $0.10 per watt, or 14%, from $0.73 in 2012 to $0.63 in 2013 and included $0.01 of non-cash stock based compensation. The decrease is primarily the result of increased module efficiencies realized, the closure of our German manufacturing plants at the end of 2012, and manufacturing improvement programs and cost savings initiatives that are being developed and implemented by our research and development and manufacturing teams.
Gross profit
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Gross profit | $ | 862,754 | $ | 852,749 | $ | 10,005 | 1 | % | |||||||
% of net sales | 26.1 | % | 25.3 | % | |||||||||||
Gross profit as a percentage of net sales increased by 0.8 percentage point during 2013 compared with 2012 primarily due to the following: (i) a 1.2 percentage point increase related to lower expense associated with voluntary remediation efforts for our 2008-2009 manufacturing excursion; (ii) a 0.6 percentage point increase related to lower module collection and recycling liability; (iii) a 0.7 percentage point increase due to lower accelerated depreciation expense for certain manufacturing equipment that have been replaced as part of our planned upgrade programs; (iv) a 0.8 percentage point increase related to lower inventory write-down expense ; and (v) a 0.5 percentage point increase due to lower costs associated with voluntary remediation efforts for workmanship issues affecting a limited number of solar modules manufactured between October 2008 and June 2009. These increases were partially offset by a 1.7 percentage point gross profit decrease in systems segment due to the mix of lower gross profit projects under construction between the periods and a 1.3 percentage point decrease due to lower gross profit for modules sold in our components segment primarily due to increased underutilization and lower average selling prices compared to module production costs between periods.
59
Research and development
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Research and development | $ | 134,300 | $ | 132,460 | $ | 1,840 | 1 | % | |||||||
% of net sales | 4.1 | % | 3.9 | % | |||||||||||
The overall increase in our R&D expense primarily resulted from costs related to the improvement of our current generation modules, integration of our module and BoS technology into our PV power plants, as well as development of our next generation CdTe and crystalline silicon solar cells. The increase in research and development expense of $1.8 million year over year was primarily related our acquisition of CdTe PV intellectual property assets and solar manufacturing processes from GE and an acquisition of crystalline silicon technology from TetraSun. In connection with the GE acquisition, we entered into a joint collaboration agreement with GE to collaborate on future technology development to further advance CdTe solar technology. R&D expense increased $5.8 million as a result of TetraSun acquisition primarily due to incremental increase in labor, facility and depreciation expenses as well as additional costs related to testing of the TetraSun cell manufacturing technology and development of crystalline silicon solar cells. These increases were partially offset by (i) a $3.2 million decrease in personnel-related expenses resulting from lower headcount, share-based and incentive compensation expense and (ii) a $0.8 million reduction in travel and other expenses as a result of our cost containment measures.
During 2013, we continued the development of our solar modules with increased efficiencies at converting sunlight into electricity and increased the average conversion efficiency of our solar modules from 12.6% in 2012 to 13.2% in 2013.
Selling, general and administrative
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Selling, general and administrative | $ | 270,261 | $ | 280,928 | $ | (10,667 | ) | (4 | )% | ||||||
% of net sales | 8.2 | % | 8.3 | % | |||||||||||
Our selling, general and administrative expenses decreased by $10.7 million, or 4%, and were 8.2% and 8.3% as a percentage of net sales, when comparing 2013 with 2012, respectively. The most significant items affecting our selling, general and administrative costs during 2013 and 2012 are as follows:
• | Selling, general and administrative expenses for 2012 included $15.9 million related to the 2008-2009 manufacturing excursion as discussed further in Note 15 “Commitments and Contingencies - Accrued Expenses in Excess of Product Warranty,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K; |
• | Infrastructure expenses including facility, rent and utilities declined $7.1 million primarily due to an early exit from certain administrative office leases in 2012 and reduction in telecommunication spending. |
• | Depreciation and amortization expense declined $6.4 million mainly due to acceleration of expense for certain leasehold improvements in 2012 and lower depreciation expense related to our Mesa facility; |
• | Project, business development, legal and professional services fees increased $14.5 million largely due to increased business development activity and continued expansion of our systems business into sustainable markets; |
• | Salary and benefit expenses increased by $5.6 million primarily in connection with an increase in share-based compensation of $26.1 million, partially offset by a decrease in salaries of $20.5 million due to headcount reductions and lower incentive compensation. Share based compensation expense increased primarily as a result of the impact of a change in our estimated forfeiture rate for share-based compensation awards in 2012, partially offset by a change in 2013. Our 2012 restructuring activities resulted in an increase in actual forfeitures and thus lower share based compensation expense compared with historical experience prior to such restructuring activities. |
Production start-up
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Production start-up | $ | 2,768 | $ | 7,823 | $ | (5,055 | ) | (65 | )% | ||||||
% of net sales | 0.1 | % | 0.2 | % | |||||||||||
60
During 2013 and 2012, we incurred $2.8 million and $7.8 million, respectively, of production start-up expenses. Expenses are primarily for global manufacturing personnel dedicated plant expansion, new equipment installation, equipment upgrades and process improvements for both new and existing plants. On a going forward basis the only costs included in production-start up expense will be plant level expansions.
Restructuring and asset impairments
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Restructuring and asset impairments | $ | 86,896 | $ | 469,101 | $ | (382,205 | ) | (81 | )% | ||||||
% of net sales | 2.6 | % | 13.9 | % | |||||||||||
During 2013 and 2012, we incurred $86.9 million and $469.1 million, respectively, of restructuring and asset impairment charges of which $5.2 million and $469.1 million, respectively, related to restructuring initiatives announced in 2012, which included charges associated with the closure of our German manufacturing plants and our decision to not move forward with our previously planned 4-line manufacturing plant in Vietnam. Additionally, during 2013 we recorded asset impairment expense of $56.5 million related to the agreement to sell our Mesa, Arizona facility and an additional $25.2 million impairment charge to adjust the carrying value of our plant in Vietnam, which is held for sale. The effect of these asset impairments reduced the book value of both our Mesa, Arizona facility and Vietnam plant to fair value, less costs to sell. See Note 4 “Restructuring and Asset Impairments,” to our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
Foreign currency (loss) gain
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Foreign currency (loss) gain | $ | (259 | ) | $ | (2,122 | ) | $ | 1,863 | (88 | )% | |||||
Foreign currency (loss) gain decreased during 2013 compared with 2012, primarily due to differences between our economic hedge positions and the underlying exposure, and changes in the associated exchange rates.
Interest income
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Year Change | ||||||||||||
Interest income | $ | 16,752 | $ | 12,824 | $ | 3,928 | 31 | % | |||||||
Interest income increased by $3.9 million during 2013 compared with 2012, primarily due to interest earned on notes receivable, affiliate of $1.4 million, combined with increased interest earned on higher average balances of our cash, cash equivalents, marketable securities and notes receivable.
Interest expense, net
Years Ended | Year Over | ||||||||||||||
(Dollars in thousands) | |||||||||||||||