UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[x] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017 | |
or | |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-4623678 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x] | Accelerated filer [ ] | Non-accelerated filer [ ] |
Smaller reporting company [ ] | Emerging growth company [ ] | (Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of July 21, 2017, 104,417,403 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
TABLE OF CONTENTS
Page | ||
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 623,326 | $ | 1,016,424 | $ | 1,515,117 | $ | 1,892,492 | ||||||||
Cost of sales | 512,433 | 834,373 | 1,320,040 | 1,432,830 | ||||||||||||
Gross profit | 110,893 | 182,051 | 195,077 | 459,662 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 21,341 | 32,931 | 44,140 | 63,118 | ||||||||||||
Selling, general and administrative | 48,957 | 63,776 | 97,156 | 131,279 | ||||||||||||
Production start-up | 8,381 | 55 | 9,531 | 55 | ||||||||||||
Restructuring and asset impairments | 18,286 | 85,532 | 38,317 | 85,532 | ||||||||||||
Total operating expenses | 96,965 | 182,294 | 189,144 | 279,984 | ||||||||||||
Operating income (loss) | 13,928 | (243 | ) | 5,933 | 179,678 | |||||||||||
Foreign currency loss, net | (2,444 | ) | (2,723 | ) | (2,198 | ) | (5,963 | ) | ||||||||
Interest income | 7,555 | 6,529 | 13,972 | 12,935 | ||||||||||||
Interest expense, net | (6,374 | ) | (7,151 | ) | (15,543 | ) | (11,793 | ) | ||||||||
Other (loss) income, net | (2,699 | ) | 6,753 | 23,162 | 42,306 | |||||||||||
Income before taxes and equity in earnings of unconsolidated affiliates | 9,966 | 3,165 | 25,326 | 217,163 | ||||||||||||
Income tax benefit (expense) | 40,028 | (7,288 | ) | 34,349 | (35,319 | ) | ||||||||||
Equity in earnings of unconsolidated affiliates, net of tax | 1,969 | (7,292 | ) | 1,417 | 2,377 | |||||||||||
Net income (loss) | $ | 51,963 | $ | (11,415 | ) | $ | 61,092 | $ | 184,221 | |||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.50 | $ | (0.11 | ) | $ | 0.59 | $ | 1.80 | |||||||
Diluted | $ | 0.50 | $ | (0.11 | ) | $ | 0.58 | $ | 1.78 | |||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||
Basic | 104,338 | 102,287 | 104,221 | 102,070 | ||||||||||||
Diluted | 104,611 | 102,287 | 104,511 | 103,378 | ||||||||||||
See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (loss) | $ | 51,963 | $ | (11,415 | ) | $ | 61,092 | $ | 184,221 | |||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | (4,038 | ) | (2,325 | ) | 603 | 3,217 | ||||||||||
Unrealized gain (loss) on marketable securities and restricted investments | 4,523 | 29,630 | (267 | ) | 35,596 | |||||||||||
Unrealized (loss) gain on derivative instruments | (298 | ) | 2,240 | (2,452 | ) | 2,346 | ||||||||||
Other comprehensive income (loss), net of tax | 187 | 29,545 | (2,116 | ) | 41,159 | |||||||||||
Comprehensive income | $ | 52,150 | $ | 18,130 | $ | 58,976 | $ | 225,380 | ||||||||
See accompanying notes to these condensed consolidated financial statements.
4
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,509,516 | $ | 1,347,155 | ||||
Marketable securities | 719,569 | 607,991 | ||||||
Accounts receivable trade, net | 260,994 | 266,687 | ||||||
Accounts receivable, unbilled and retainage | 347,920 | 206,739 | ||||||
Inventories | 344,473 | 363,219 | ||||||
Balance of systems parts | 26,147 | 62,776 | ||||||
Project assets | 35,992 | 700,800 | ||||||
Notes receivable, affiliate | 19,600 | 15,000 | ||||||
Prepaid expenses and other current assets | 172,701 | 217,462 | ||||||
Total current assets | 3,436,912 | 3,787,829 | ||||||
Property, plant and equipment, net | 784,937 | 629,142 | ||||||
PV solar power systems, net | 461,617 | 448,601 | ||||||
Project assets | 786,207 | 762,148 | ||||||
Deferred tax assets, net | 262,879 | 255,152 | ||||||
Restricted cash and investments | 383,722 | 371,307 | ||||||
Investments in unconsolidated affiliates and joint ventures | 225,967 | 234,610 | ||||||
Goodwill | 14,462 | 14,462 | ||||||
Other intangibles, net | 83,834 | 87,970 | ||||||
Inventories | 101,748 | 100,512 | ||||||
Notes receivable, affiliates | 49,996 | 54,737 | ||||||
Other assets | 88,005 | 77,898 | ||||||
Total assets | $ | 6,680,286 | $ | 6,824,368 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 118,075 | $ | 148,730 | ||||
Income taxes payable | 1,554 | 12,562 | ||||||
Accrued expenses | 190,453 | 262,977 | ||||||
Current portion of long-term debt | 13,574 | 27,966 | ||||||
Deferred revenue | 31,503 | 308,704 | ||||||
Other current liabilities | 148,689 | 146,942 | ||||||
Total current liabilities | 503,848 | 907,881 | ||||||
Accrued solar module collection and recycling liability | 175,001 | 166,277 | ||||||
Long-term debt | 307,459 | 160,422 | ||||||
Other liabilities | 402,669 | 371,439 | ||||||
Total liabilities | 1,388,977 | 1,606,019 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 104,395,532 and 104,034,731 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively | 104 | 104 | ||||||
Additional paid-in capital | 2,779,294 | 2,765,310 | ||||||
Accumulated earnings | 2,523,934 | 2,462,842 | ||||||
Accumulated other comprehensive loss | (12,023 | ) | (9,907 | ) | ||||
Total stockholders’ equity | 5,291,309 | 5,218,349 | ||||||
Total liabilities and stockholders’ equity | $ | 6,680,286 | $ | 6,824,368 | ||||
See accompanying notes to these condensed consolidated financial statements.
5
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 61,092 | $ | 184,221 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion | 60,940 | 115,079 | ||||||
Impairments and net losses on disposal of long-lived assets | 31,881 | 82,536 | ||||||
Share-based compensation | 15,423 | 18,571 | ||||||
Equity in earnings of unconsolidated affiliates, net of tax | (1,417 | ) | (2,377 | ) | ||||
Distributions received from equity method investments | 11,180 | — | ||||||
Remeasurement of monetary assets and liabilities | (8,973 | ) | (3,748 | ) | ||||
Deferred income taxes | (21,887 | ) | (3,182 | ) | ||||
Gain on sales of marketable securities and restricted investments | (49 | ) | (37,804 | ) | ||||
Noncash consideration from the sale of project assets | — | (6,950 | ) | |||||
Other, net | 29 | 875 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, trade, unbilled and retainage | (135,234 | ) | 50,324 | |||||
Prepaid expenses and other current assets | 23,409 | (52,137 | ) | |||||
Inventories and balance of systems parts | 55,221 | 42,867 | ||||||
Project assets | 626,002 | (240,919 | ) | |||||
Other assets | (8,070 | ) | (8,537 | ) | ||||
Income tax receivable and payable | (12,231 | ) | 20,231 | |||||
Accounts payable | (37,902 | ) | (74,569 | ) | ||||
Accrued expenses and other liabilities | (340,845 | ) | (65,846 | ) | ||||
Accrued solar module collection and recycling liability | 6,771 | 3,915 | ||||||
Net cash provided by operating activities | 325,340 | 22,550 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (217,502 | ) | (130,139 | ) | ||||
Purchases of marketable securities and restricted investments | (364,277 | ) | (299,719 | ) | ||||
Proceeds from sales and maturities of marketable securities and restricted investments | 252,809 | 253,420 | ||||||
Investment in note receivable, affiliate | — | (4,600 | ) | |||||
Other investing activities | 2,528 | (3,374 | ) | |||||
Net cash used in investing activities | (326,442 | ) | (184,412 | ) | ||||
Cash flows from financing activities | ||||||||
Repayment of long-term debt | (23,014 | ) | (85,830 | ) | ||||
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | 137,804 | 19,829 | ||||||
Repayment of sale-leaseback financing | (3,467 | ) | (3,502 | ) | ||||
Payments of tax withholdings for restricted shares | (4,247 | ) | (18,909 | ) | ||||
Proceeds from discounting of commercial letters of credit | 43,025 | — | ||||||
Contingent consideration payments and other financing activities | (13,183 | ) | (111 | ) | ||||
Net cash provided by (used in) financing activities | 136,918 | (88,523 | ) | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 3,072 | 5,269 | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 138,888 | (245,116 | ) | |||||
Cash, cash equivalents and restricted cash, beginning of the period | 1,415,690 | 1,207,116 | ||||||
Cash, cash equivalents and restricted cash, end of the period | $ | 1,554,578 | $ | 962,000 | ||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||
Property, plant and equipment acquisitions funded by liabilities | $ | 48,742 | $ | 20,797 | ||||
Acquisitions currently or previously funded by liabilities and contingent consideration | $ | 17,657 | $ | 23,803 | ||||
Accrued interest capitalized to long-term debt | $ | 15,181 | $ | — | ||||
See accompanying notes to these condensed consolidated financial statements.
6
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of First Solar management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other period. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K, which has been filed with the SEC.
Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications primarily relate to the adoptions of Accounting Standards Update (“ASU”) 2016-18, ASU 2016-09, and ASU 2014-09 as further described in Note 3. “Recent Accounting Pronouncements” and Note 14. “Revenue from Contracts with Customers” to our condensed consolidated financial statements.
Unless expressly stated or the context otherwise requires, the terms “the Company,” “we,” “us,” “our,” and “First Solar” refer to First Solar, Inc. and its subsidiaries.
2. Summary of Significant Accounting Policies
Use of Estimates. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to inputs used to recognize revenue over time, accrued solar module collection and recycling liabilities, product warranties, performance guarantees, indemnifications, accounting for income taxes, long-lived asset impairments, and testing goodwill. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions.
Accounts Receivable Trade and Allowance for Doubtful Accounts. We record trade accounts receivable for our unconditional rights to consideration arising from our performance under contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. We estimate our allowance for doubtful accounts for specific trade receivable balances based on historical collection trends, the age of outstanding trade receivables, existing economic conditions, and the financial security, if any, associated with the receivables. Past-due trade receivable balances are written off when our internal collection efforts have been unsuccessful. As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We do not typically include extended payment terms in our contracts with customers.
Accounts Receivable, Unbilled. Accounts receivable, unbilled represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. For example, we typically recognize revenue from contracts for the construction and sale of PV solar power systems over time using cost based input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract. Accordingly, revenue could be recognized in advance of billing the customer, resulting in an amount recorded to “Accounts receivable, unbilled and retainage.” Once we have an unconditional right to consideration under a construction contract, we typically bill our customer accordingly and reclassify the “Accounts receivable, unbilled and retainage” to “Accounts receivable trade, net.” Billing requirements vary by contract but are generally structured around the completion of certain construction milestones.
7
Retainage. Certain of our engineering, procurement, and construction (“EPC”) contracts for PV solar power systems we build contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones. We consider whether collectibility of such retainage is reasonably assured in connection with our overall assessment of the collectibility of amounts due or that will become due under our EPC contracts. Retainage included within “Accounts receivable, unbilled and retainage” is expected to be billed and collected within the next 12 months. After we satisfy the EPC contract requirements and have an unconditional right to consideration, we typically bill for retainage and reclassify such amounts to “Accounts receivable trade, net.”
Project Assets. Project assets primarily consist of costs related to solar power projects in various stages of development that are capitalized prior to the completion of the sale of the project, including projects that may have begun commercial operation under power purchase agreements (“PPAs”) and are actively marketed and intended to be sold. These project related costs include costs for land, development, and construction of a PV solar power system. Development costs may include legal, consulting, permitting, transmission upgrade, interconnection, and other similar costs. We typically classify project assets as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months. Once we enter into a definitive sales agreement, we classify such project assets as current until the sale is completed and we have met all of the criteria to recognize the sale as revenue. Any income generated by a project while it remains within project assets is accounted for as a reduction to our basis in the project, which at the time of sale and meeting all revenue recognition criteria will be recorded within cost of sales. If a project is completed and begins commercial operation prior to the closing of a sales arrangement, the completed project will remain in project assets until placed in service. We present all expenditures related to the development and construction of project assets, whether fully or partially owned, as a component of cash flows from operating activities.
We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project is expected to be recoverable, including whether there are any changes in environmental, ecological, permitting, market pricing, or regulatory conditions that may impact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project assets and adjust the carrying value to the estimated fair value, with the resulting impairment recorded within “Selling, general and administrative” expense.
Deferred Revenue. When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. We recognize deferred revenue as net sales after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met.
Revenue Recognition – Module and Other Equipment Sales. We recognize revenue for module and other equipment sales (e.g., module plus arrangements) at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For module and other equipment sales contracts that contain multiple performance obligations, such as the shipment or delivery of solar modules and other balance of systems (“BoS”) parts, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognize the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.
Revenue Recognition – Solar Power System Sales and/or Engineering, Procurement, and Construction Services. We generally recognize revenue for sales of solar power systems and/or EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system, including those in which we may receive consideration of a noncontrolling interest, when combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such sales arrangements, we recognize revenue using cost based input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract, after consideration of our customers’ commitment to perform its obligations under the contract, which is typically measured through the receipt of cash deposits or other forms of financial security issued by creditworthy financial institutions or parent entities. For sales of solar power systems in which we obtain an interest in the project sold to the customer, we recognize all of the revenue for the consideration received, including the fair value of the noncontrolling interest we obtained, and defer any profit associated with the interest obtained through “Equity in earnings of unconsolidated affiliates, net of tax.”
8
In applying cost based input methods of revenue recognition, we use the actual costs incurred relative to the total estimated costs (including solar module costs) to determine our progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. Costs incurred that do not contribute to satisfying our performance obligations (“inefficient costs”) are excluded from our input methods of revenue recognition as the amounts are not reflective of our transferring control of the system to the customer. Costs incurred towards contract completion may include costs associated with solar modules, direct materials, labor, subcontractors, and other indirect costs related to contract performance. We recognize solar module and direct material costs as incurred when such items have been installed in a system. Cost based input methods of revenue recognition require us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other forms of variable consideration as well as any payments to customers, such as indemnifications accounted for pursuant to Accounting Standards Codification (“ASC”) 460, Guarantees. Significant judgment is also required to evaluate assumptions related to the costs to complete our projects, including materials, labor, contingencies, and other system costs.
If estimated total costs on any contract, including any inefficient costs, are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be material depending on the size of the contracts or the changes in estimates.
As part of our solar power system sales, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable year meets or exceeds the modeled energy expectation, after certain adjustments. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. Conversely, if there is an underperformance event with regards to these tests, we may incur liquidated damages as a percentage of the EPC contract price. Such performance guarantees represent a form of variable consideration and are recognized as adjustments to revenue when sufficient performance data becomes available and only to the extent that it is probable that a significant reversal of such revenue will not occur.
Revenue Recognition – Operations and Maintenance. We generally recognize revenue for standard, recurring operations and maintenance (“O&M”) services over time as customers receive and consume the benefits of such services, which typically include 24/7 system monitoring, certain PPA and other agreement compliance, North American Electric Reliability Corporation (or “NERC”) compliance, large generator interconnection agreement compliance, energy forecasting, performance engineering analysis, regular performance reporting, turn-key maintenance services including spare parts and corrective maintenance repair, warranty management, and environmental services. Other ancillary O&M services, such as equipment replacement, weed abatement, landscaping, or solar module cleaning, are recognized as revenue as the services are provided and billed to the customer. Costs of O&M services are expensed in the period in which they are incurred.
As part of our O&M service offerings, we typically offer an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside of our control as the service provider. If system availability exceeds a contractual threshold, we may receive a bonus payment, or if system availability falls below a separate threshold, we may incur liquidated damages for certain lost energy under the PPA. Such bonuses or liquidated damages represent a form of variable consideration and are estimated and recognized over time as customers receive and consume the benefits of the O&M services.
Revenue Recognition – Energy Generation. We typically recognize revenue for energy generated and sold by PV solar power systems under ASC 840, Leases, consistent with the classification of the associated PPAs. Accordingly, we recognize revenue each period based on the volume of energy delivered to the customer (i.e., the PPA offtaker). For energy generated and sold by PV solar power systems on an open contract basis, we recognize revenue at the point in time the energy is delivered to the grid.
9
Shipping and Handling Costs. We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales, and classify such costs as a component of cost of sales.
Taxes Collected from Customers and Remitted to Governmental Authorities. We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of net sales or cost of sales.
See Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a summary of our other significant accounting policies.
3. Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. As a result of our adoption of ASU 2017-04 in the first quarter of 2017, we will eliminate Step 2 for future goodwill impairment tests.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. As a result of the adoption of ASU 2016-18 in the fourth quarter of 2016, we began including amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. See the tables at the end of this note for the effects of the adoption of ASU 2016-18 on our condensed consolidated statement of cash flows for the six months ended June 30, 2016.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 230) – Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires the recognition of income tax consequences of intra-entity transfers of assets, other than inventory, when the transfer occurs. Two common examples of assets included in the scope of ASU 2016-16 are intellectual property and long-lived assets. ASU 2016-16 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted in annual reporting periods for which financial statements (interim or annual) have not been issued. We are currently evaluating the impact ASU 2016-16 will have on our consolidated financial statements and associated disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), to provide financial statement users with more useful information about expected credit losses. ASU 2016-13 also changes how entities measure credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, and early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and associated disclosures.
10
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Our adoption of ASU 2016-09 in the fourth quarter of 2016 resulted in the recognition of certain deferred tax assets for excess tax benefits that had previously not been recognized, as such benefits did not reduce our income taxes payable in prior periods, and the recognition of amounts for previously estimated forfeitures of share-based awards. As a result of the adoption, we also adjusted our condensed consolidated statement of cash flows to eliminate the reclassification of excess tax benefits to cash flows from financing activities and to present payments of tax withholdings for share-based awards as cash flows from financing activities. See the tables at the end of this note for the effects of the adoption of ASU 2016-09 on our condensed consolidated financial statements for the three and six months ended June 30, 2016.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted for certain provisions of the guidance. We are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements and associated disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We adopted ASU 2014-09 in the first quarter of 2017 using the full retrospective method. This adoption primarily affected our systems business sales arrangements previously accounted for under ASC 360-20, which had required us to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement. When such forms of continuing involvement were present, we reduced the potential profit on the applicable project sale by our maximum exposure to loss.
Our adoption of ASU 2014-09, which supersedes the real estate sales guidance under ASC 360-20, generally requires us to recognize revenue and profit from our systems business sales arrangements earlier and in a more linear fashion than our historical practice under ASC 360-20, including the estimation of certain profits that would otherwise have been deferred. Additionally, for systems business sales arrangements in which we obtain an interest in the project sold to the customer, we recognize all of the revenue for the consideration received, including the fair value of the noncontrolling interest we obtained, and defer any profit associated with the interest obtained through “Equity in earnings of unconsolidated affiliates, net of tax.” Following the adoption of ASU 2014-09, the revenue recognition for our other sales arrangements, including sales of solar modules and O&M services, remained materially consistent with our historical practice. See the tables at the end of this note for the effects of the adoption of ASU 2014-09 on our condensed consolidated financial statements as of December 31, 2016 and for the three and six months ended June 30, 2016. See Note 2. “Summary of Significant Accounting Policies” to our condensed consolidated financial statements for further discussion of the effects of the adoption of ASU 2014-09 on our significant accounting policies.
11
Adjustments to Previously Reported Financial Statements from the Adoption of Accounting Pronouncements
The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated balance sheet as of December 31, 2016 (in thousands):
December 31, 2016 | ||||||||||||
As Reported | Adoption of ASU 2014-09 | As Adjusted | ||||||||||
Accounts receivable, unbilled and retainage | $ | 205,530 | $ | 1,209 | $ | 206,739 | ||||||
Deferred project costs | 701,105 | (701,105 | ) | — | ||||||||
Project assets, current | — | 700,800 | 700,800 | |||||||||
Prepaid expenses and other current assets | 217,157 | 305 | 217,462 | |||||||||
Total current assets | 3,786,620 | 1,209 | 3,787,829 | |||||||||
Project assets and deferred project costs | 800,770 | (800,770 | ) | — | ||||||||
Project assets, noncurrent | — | 762,148 | 762,148 | |||||||||
Deferred tax assets, net | 252,655 | 2,497 | 255,152 | |||||||||
Investments in unconsolidated affiliates and joint ventures | 242,361 | (7,751 | ) | 234,610 | ||||||||
Other assets | 78,076 | (178 | ) | 77,898 | ||||||||
Total assets | 6,867,213 | (42,845 | ) | 6,824,368 | ||||||||
Income taxes payable | 5,288 | 7,274 | 12,562 | |||||||||
Billings in excess of costs and estimated earnings | 115,623 | (115,623 | ) | — | ||||||||
Payments and billings for deferred project costs | 284,440 | (284,440 | ) | — | ||||||||
Deferred revenue | — | 308,704 | 308,704 | |||||||||
Other current liabilities | 54,683 | 92,259 | 146,942 | |||||||||
Total current liabilities | 899,707 | 8,174 | 907,881 | |||||||||
Other liabilities | 428,120 | (56,681 | ) | 371,439 | ||||||||
Total liabilities | 1,654,526 | (48,507 | ) | 1,606,019 | ||||||||
Additional paid-in capital | 2,759,211 | 6,099 | 2,765,310 | |||||||||
Accumulated earnings | 2,463,279 | (437 | ) | 2,462,842 | ||||||||
Total stockholders’ equity | 5,212,687 | 5,662 | 5,218,349 | |||||||||
Total liabilities and stockholders’ equity | 6,867,213 | (42,845 | ) | 6,824,368 | ||||||||
12
The following table presents the effect of the adoptions of ASU 2016-09 and ASU 2014-09 on our condensed consolidated statements of operations for the three and six months ended June 30, 2016 (in thousands, except per share amounts):
Three Months Ended June 30, 2016 | ||||||||||||||||
As Reported | Adoption of ASU 2016-09 | Adoption of ASU 2014-09 | As Adjusted | |||||||||||||
Net sales | $ | 934,381 | $ | — | $ | 82,043 | $ | 1,016,424 | ||||||||
Cost of sales | 743,216 | — | 91,157 | 834,373 | ||||||||||||
Gross profit | 191,165 | — | (9,114 | ) | 182,051 | |||||||||||
Operating income (loss) | 8,871 | — | (9,114 | ) | (243 | ) | ||||||||||
Income before taxes and equity in earnings of unconsolidated affiliates | 12,279 | — | (9,114 | ) | 3,165 | |||||||||||
Income tax expense | (9,047 | ) | 698 | 1,061 | (7,288 | ) | ||||||||||
Equity in earnings of unconsolidated affiliates, net of tax | 10,176 | — | (17,468 | ) | (7,292 | ) | ||||||||||
Net income (loss) | 13,408 | 698 | (25,521 | ) | (11,415 | ) | ||||||||||
Comprehensive income | 42,953 | 698 | (25,521 | ) | 18,130 | |||||||||||
Basic net income (loss) per share | $ | 0.13 | $ | 0.01 | $ | (0.25 | ) | $ | (0.11 | ) | ||||||
Diluted net income (loss) per share | $ | 0.13 | $ | 0.01 | $ | (0.25 | ) | $ | (0.11 | ) | ||||||
Six Months Ended June 30, 2016 | ||||||||||||||||
As Reported | Adoption of ASU 2016-09 | Adoption of ASU 2014-09 | As Adjusted | |||||||||||||
Net sales | $ | 1,782,865 | $ | — | $ | 109,627 | $ | 1,892,492 | ||||||||
Cost of sales | 1,328,755 | — | 104,075 | 1,432,830 | ||||||||||||
Gross profit | 454,110 | — | 5,552 | 459,662 | ||||||||||||
Operating income | 174,126 | — | 5,552 | 179,678 | ||||||||||||
Income before taxes and equity in earnings of unconsolidated affiliates | 211,611 | — | 5,552 | 217,163 | ||||||||||||
Income tax expense | (42,811 | ) | 8,607 | (1,115 | ) | (35,319 | ) | |||||||||
Equity in earnings of unconsolidated affiliates, net of tax | 15,173 | — | (12,796 | ) | 2,377 | |||||||||||
Net income | 183,973 | 8,607 | (8,359 | ) | 184,221 | |||||||||||
Comprehensive income | 225,132 | 8,607 | (8,359 | ) | 225,380 | |||||||||||
Basic net income per share | $ | 1.80 | $ | 0.08 | $ | (0.08 | ) | $ | 1.80 | |||||||
Diluted net income per share | $ | 1.78 | $ | 0.08 | $ | (0.08 | ) | $ | 1.78 | |||||||
13
The following table presents the effect of the adoptions of ASU 2016-18, ASU 2016-09, and ASU 2014-09 on our condensed consolidated statement of cash flows for the six months ended June 30, 2016 (in thousands):
Six Months Ended June 30, 2016 | ||||||||||||||||||||
As Reported | Adoption of ASU 2016-18 | Adoption of ASU 2016-09 | Adoption of ASU 2014-09 | As Adjusted | ||||||||||||||||
Net income | $ | 183,973 | $ | — | $ | 8,607 | $ | (8,359 | ) | $ | 184,221 | |||||||||
Adjustments to reconcile net income to cash (used in) provided by operating activities: | ||||||||||||||||||||
Equity in earnings of unconsolidated affiliates, net of tax | (15,173 | ) | — | — | 12,796 | (2,377 | ) | |||||||||||||
Remeasurement of monetary assets and liabilities | (4,062 | ) | 314 | — | — | (3,748 | ) | |||||||||||||
Excess tax benefits from share-based compensation arrangements | (28,108 | ) | — | 28,108 | — | — | ||||||||||||||
Noncash consideration from the sale of project assets | — | — | — | (6,950 | ) | (6,950 | ) | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||
Accounts receivable, trade, unbilled and retainage | 8,333 | — | — | 41,991 | 50,324 | |||||||||||||||
Prepaid expenses and other current assets | (51,921 | ) | — | — | (216 | ) | (52,137 | ) | ||||||||||||
Project assets | (344,385 | ) | — | — | 103,466 | (240,919 | ) | |||||||||||||
Other assets | (9,093 | ) | — | — | 556 | (8,537 | ) | |||||||||||||
Income tax receivable and payable | 27,723 | — | (8,607 | ) | 1,115 | 20,231 | ||||||||||||||
Accrued expenses and other liabilities | 59,644 | — | 18,909 | (144,399 | ) | (65,846 | ) | |||||||||||||
Net cash (used in) provided by operating activities | (24,781 | ) | 314 | 47,017 | — | 22,550 | ||||||||||||||
Change in restricted cash | 35,264 | (35,264 | ) | — | — | — | ||||||||||||||
Net cash used in investing activities | (149,148 | ) | (35,264 | ) | — | — | (184,412 | ) | ||||||||||||
Excess tax benefits from share-based compensation arrangements | 28,108 | — | (28,108 | ) | — | — | ||||||||||||||
Payments of tax withholdings for restricted shares | — | — | (18,909 | ) | — | (18,909 | ) | |||||||||||||
Net cash used in financing activities | (41,506 | ) | — | (47,017 | ) | — | (88,523 | ) | ||||||||||||
Net decrease in cash, cash equivalents and restricted cash | (210,166 | ) | (34,950 | ) | — | — | (245,116 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of the period | 1,126,826 | 80,290 | — | — | 1,207,116 | |||||||||||||||
Cash, cash equivalents and restricted cash, end of the period | 916,660 | 45,340 | — | — | 962,000 | |||||||||||||||
14
4. Restructuring and Asset Impairments
Cadmium Telluride Module Manufacturing and Corporate Restructuring
In November 2016, our board of directors approved a set of initiatives intended to accelerate our transition to Series 6 module manufacturing and restructure our operations to reduce costs and better align the organization with our long term strategic plan. Accordingly, we expect to upgrade and replace our existing manufacturing fleet through 2019 with Series 6 manufacturing equipment, thereby enabling the production of solar modules with a larger form factor, better product attributes, and a lower cost structure.
As part of these initiatives, we incurred net charges of $38.3 million during the six months ended June 30, 2017, which included (i) $25.2 million of charges, primarily related to net losses on the disposition of previously impaired Series 4 and Series 5 manufacturing equipment, (ii) $6.8 million of severance benefits to terminated employees, and (iii) $6.4 million of net miscellaneous charges, primarily related to contract terminations, the write-off of operating supplies, and other Series 4 manufacturing exit costs. During the three months ended June 30, 2017, we incurred net charges of $18.3 million, primarily as a result of net losses on the disposition of the aforementioned manufacturing equipment. Substantially all amounts associated with these restructuring and asset impairment charges related to our components segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations. We expect to incur up to $15 million of additional charges in 2017 as we continue the transition to Series 6 module manufacturing.
The following table summarizes our cadmium telluride (“CdTe”) module manufacturing and corporate restructuring activity recorded during the six months ended June 30, 2017 and the remaining liability balances at June 30, 2017 (in thousands):
Asset Impairments | Severance | Other | Total | |||||||||||||
Ending liability balance at December 31, 2016 | $ | — | $ | 7,865 | $ | 550 | $ | 8,415 | ||||||||
Charges to income | 25,186 | 6,781 | 6,350 | 38,317 | ||||||||||||
Cash payments | — | (13,607 | ) | (4,727 | ) | (18,334 | ) | |||||||||
Non-cash amounts | (25,186 | ) | — | (772 | ) | (25,958 | ) | |||||||||
Ending liability balance at June 30, 2017 | $ | — | $ | 1,039 | $ | 1,401 | $ | 2,440 | ||||||||
Crystalline Silicon Module Manufacturing Restructuring
In June 2016, our executive management elected to reallocate our crystalline silicon module production capacity to support next generation CdTe module offerings. As a result, we ended production of our crystalline silicon modules to focus on our core CdTe module technology and utility-scale PV solar power systems. The majority of our crystalline silicon module manufacturing associates were expected to be redeployed in other manufacturing operations.
In connection with these restructuring activities, we incurred charges of $84.6 million during the three months ended June 30, 2016, which included (i) $35.5 million of impairment charges related to certain crystalline silicon module manufacturing equipment considered abandoned for accounting purposes, (ii) $35.8 million of impairment charges for developed technology intangible assets associated with our crystalline silicon module technology, (iii) $6.1 million of goodwill impairment charges from the disposal of our crystalline silicon components reporting unit, and (iv) $7.2 million of miscellaneous charges related to certain contract manufacturing agreements and the write-off of operating supplies. All amounts associated with these charges related to our components segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations.
During the three months ended June 30, 2016, we also incurred charges of $0.9 million for severance benefits to terminated employees associated with other restructuring activities.
15
5. Business Acquisitions
Enki Technology
In October 2016, we acquired 100% of the shares of Enki Technology, Inc. (“Enki”), a developer of advanced coating materials for the PV solar industry, for cash payments of $10.3 million, net of cash acquired of $0.3 million, and a promise to pay additional consideration of up to $7.0 million contingent on the achievement of certain production and module performance milestones. In connection with applying the acquisition method of accounting, $17.3 million of the purchase price consideration was assigned to an in process research and development (“IPR&D”) intangible asset to be amortized over its useful life upon successful completion of the underlying projects, $4.4 million was assigned to a deferred tax liability, and $4.4 million was assigned to goodwill. The acquired IPR&D includes patents, technical information and know-how, and other proprietary information associated with the development and production of anti-reflective coating material that we expect to use in the production of our solar modules. Such technology is expected to improve our module conversion efficiency and overall durability at a lower cost structure compared to our current production processes.
6. Cash, Cash Equivalents, and Marketable Securities
Cash, cash equivalents, and marketable securities consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Cash and cash equivalents: | ||||||||
Cash | $ | 1,459,516 | $ | 1,347,155 | ||||
Money market funds | 50,000 | — | ||||||
Total cash and cash equivalents | 1,509,516 | 1,347,155 | ||||||
Marketable securities: | ||||||||
Foreign debt | 154,374 | 296,819 | ||||||
Foreign government obligations | 196,344 | 271,172 | ||||||
U.S. debt | 63,851 | — | ||||||
Time deposits | 305,000 | 40,000 | ||||||
Total marketable securities | 719,569 | 607,991 | ||||||
Total cash, cash equivalents, and marketable securities | $ | 2,229,085 | $ | 1,955,146 | ||||
We classify our marketable securities as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as part of “Accumulated other comprehensive loss” until realized. We record realized gains and losses on the sale of our marketable securities in “Other (loss) income, net” computed using the specific identification method. During the three and six months ended June 30, 2017, we realized gains of less than $0.1 million on the sale of our marketable securities. During the three and six months ended June 30, 2016, we realized no gains or losses on the sale of our marketable securities. See Note 10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our marketable securities.
As of June 30, 2017 and December 31, 2016, we identified three investments totaling $31.1 million and $51.2 million, respectively, that had been in a loss position for a period of time greater than 12 months with unrealized losses of less than $0.1 million and $0.1 million, respectively. The unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell these securities prior to the recovery of our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired. All of our available-for-sale marketable securities are subject to a periodic impairment review. We did not identify any of our marketable securities as other-than-temporarily impaired as of June 30, 2017 and December 31, 2016.
16
The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of June 30, 2017 and December 31, 2016 (in thousands):
As of June 30, 2017 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Foreign debt | $ | 155,088 | $ | — | $ | 714 | $ | 154,374 | ||||||||
Foreign government obligations | 197,083 | — | 739 | 196,344 | ||||||||||||
U.S. debt | 63,884 | — | 33 | 63,851 | ||||||||||||
Time deposits | 305,000 | — | — | 305,000 | ||||||||||||
Total | $ | 721,055 | $ | — | $ | 1,486 | $ | 719,569 | ||||||||
As of December 31, 2016 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Foreign debt | $ | 298,085 | $ | 2 | $ | 1,268 | $ | 296,819 | ||||||||
Foreign government obligations | 272,357 | — | 1,185 | 271,172 | ||||||||||||
Time deposits | 40,000 | — | — | 40,000 | ||||||||||||
Total | $ | 610,442 | $ | 2 | $ | 2,453 | $ | 607,991 | ||||||||
The contractual maturities of our marketable securities as of June 30, 2017 and December 31, 2016 were as follows (in thousands):
As of June 30, 2017 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
One year or less | $ | 565,092 | $ | — | $ | 314 | $ | 564,778 | ||||||||
One year to two years | 102,712 | — | 587 | 102,125 | ||||||||||||
Two years to three years | 53,251 | — | 585 | 52,666 | ||||||||||||
Total | $ | 721,055 | $ | — | $ | 1,486 | $ | 719,569 | ||||||||
As of December 31, 2016 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
One year or less | $ | 283,247 | $ | — | $ | 429 | $ | 282,818 | ||||||||
One year to two years | 164,797 | 2 | 414 | 164,385 | ||||||||||||
Two years to three years | 162,398 | — | 1,610 | 160,788 | ||||||||||||
Total | $ | 610,442 | $ | 2 | $ | 2,453 | $ | 607,991 | ||||||||
The net unrealized losses of $1.5 million and $2.5 million on our marketable securities as of June 30, 2017 and December 31, 2016, respectively, were primarily the result of changes in interest rates relative to rates at the time of purchase. Our investment policy requires marketable securities to be highly rated and limits the security types, issuer concentration, and duration to maturity of our marketable securities portfolio.
The following tables show unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of June 30, 2017 and December 31, 2016, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
As of June 30, 2017 | ||||||||||||||||||||||||
In Loss Position for Less Than 12 Months | In Loss Position for 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Foreign debt | $ | 128,293 | $ | 676 | $ | 26,081 | $ | 38 | $ | 154,374 | $ | 714 | ||||||||||||
Foreign government obligations | 191,356 | 727 | 4,988 | 12 | 196,344 | 739 | ||||||||||||||||||
U.S. debt | 63,851 | 33 | — | — | 63,851 | 33 | ||||||||||||||||||
Total | $ | 383,500 | $ | 1,436 | $ | 31,069 | $ | 50 | $ | 414,569 | $ | 1,486 | ||||||||||||
17
As of December 31, 2016 | ||||||||||||||||||||||||
In Loss Position for Less Than 12 Months | In Loss Position for 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Foreign debt | $ | 234,332 | $ | 1,123 | $ | 51,236 | $ | 145 | $ | 285,568 | $ | 1,268 | ||||||||||||
Foreign government obligations | 272,503 | 1,185 | — | — | 272,503 | 1,185 | ||||||||||||||||||
Total | $ | 506,835 | $ | 2,308 | $ | 51,236 | $ | 145 | $ | 558,071 | $ | 2,453 | ||||||||||||
7. Restricted Cash and Investments
Restricted cash and investments consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Restricted cash | $ | 28,169 | $ | 31,381 | ||||
Restricted investments | 355,553 | 339,926 | ||||||
Total restricted cash and investments (1) | $ | 383,722 | $ | 371,307 | ||||
(1) | There was an additional $16.9 million and $37.2 million of restricted cash included within “Prepaid expenses and other current assets” at June 30, 2017 and December 31, 2016, respectively. |
At June 30, 2017 and December 31, 2016, our restricted cash consisted of deposits held by various banks to secure certain of our letters of credit and other deposits designated for the construction or operation of systems projects as well as the payment of amounts related to project specific debt financings. Restricted cash for our letters of credit is classified as current or noncurrent based on the maturity date of the corresponding letter of credit. See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for further discussion relating to our letters of credit. Restricted cash for project construction, operation, and financing is classified as current or noncurrent based on the projected use of the restricted funds.
At June 30, 2017 and December 31, 2016, our restricted investments consisted of long-term marketable securities that were held in custodial accounts to fund the estimated future costs associated with collecting and recycling modules covered under our solar module collection and recycling program. We classify our restricted investments as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as a part of “Accumulated other comprehensive loss” until realized. We record realized gains and losses on the sale of our restricted investments in “Other (loss) income, net” computed using the specific identification method. During the three months ended March 31, 2016, we realized gains of $37.8 million on the sale of certain restricted investments as part of an effort to align the currencies of the investments with those of the corresponding collection and recycling liabilities. Restricted investments are classified as noncurrent as the underlying accrued solar module collection and recycling liability is also noncurrent in nature. See Note 10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted investments.
As necessary, we fund any incremental amounts for our estimated collection and recycling obligations within 90 days of the end of each year. We determine the funding requirement, if any, based on estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of 25 years less amounts already funded in prior years. During 2016, substantially all of our module sales were not covered under our solar module collection and recycling program, and as a result, no incremental funding for the program was required in 2017. To ensure that amounts previously funded will be available in the future regardless of potential adverse changes in our financial condition (even in the case of our own insolvency), we have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc., First Solar Malaysia Sdn. Bhd., and First Solar Manufacturing GmbH are grantors. Only the trustee can distribute funds from the custodial accounts, and these funds cannot be accessed for any purpose other than to cover qualified costs of module collection and recycling, either by us or a third party performing the required collection and recycling services. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds.
18
The following tables summarize the unrealized gains and losses related to our restricted investments, by major security type, as of June 30, 2017 and December 31, 2016 (in thousands):
As of June 30, 2017 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Foreign government obligations | $ | 118,714 | $ | 57,280 | $ | — | $ | 175,994 | ||||||||
U.S. government obligations | 171,922 | 12,557 | 4,920 | 179,559 | ||||||||||||
Total | $ | 290,636 | $ | 69,837 | $ | 4,920 | $ | 355,553 | ||||||||
As of December 31, 2016 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Foreign government obligations | $ | 107,604 | $ | 62,350 | $ | — | $ | 169,954 | ||||||||
U.S. government obligations | 169,294 | 10,468 | 9,790 | 169,972 | ||||||||||||
Total | $ | 276,898 | $ | 72,818 | $ | 9,790 | $ | 339,926 | ||||||||
As of June 30, 2017, the contractual maturities of our restricted investments were between 13 years and 20 years. As of December 31, 2016, the contractual maturities of our restricted investments were between 11 years and 20 years.
8. Consolidated Balance Sheet Details
Accounts receivable trade, net
Accounts receivable trade, net consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Accounts receivable trade, gross | $ | 261,014 | $ | 266,687 | ||||
Allowance for doubtful accounts | (20 | ) | — | |||||
Accounts receivable trade, net | $ | 260,994 | $ | 266,687 | ||||
At June 30, 2017 and December 31, 2016, $68.3 million and $12.2 million, respectively, of our accounts receivable trade, net were secured by letters of credit, bank guarantees, or other forms of financial security issued by creditworthy financial institutions.
Accounts receivable, unbilled and retainage
Accounts receivable, unbilled and retainage consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Accounts receivable, unbilled | $ | 341,888 | $ | 200,474 | ||||
Retainage | 6,032 | 6,265 | ||||||
Accounts receivable, unbilled and retainage | $ | 347,920 | $ | 206,739 | ||||
Inventories
Inventories consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Raw materials | $ | 134,581 | $ | 148,222 | ||||
Work in process | 8,294 | 13,204 | ||||||
Finished goods | 303,346 | 302,305 | ||||||
Inventories | $ | 446,221 | $ | 463,731 | ||||
Inventories – current | $ | 344,473 | $ | 363,219 | ||||
Inventories – noncurrent (1) | $ | 101,748 | $ | 100,512 | ||||
19
(1) | As needed, we may purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our normal operating cycle (which is 12 months). We classify such raw materials that we do not expect to consume within our normal operating cycle as noncurrent. |
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Prepaid expenses | $ | 38,993 | $ | 42,007 | ||||
Prepaid income taxes | 38,656 | 35,336 | ||||||
Restricted cash | 16,893 | 37,154 | ||||||
Value added tax receivables | 9,418 | 22,308 | ||||||
Derivative instruments | 6,974 | 6,078 | ||||||
Other current assets | 61,767 | 74,579 | ||||||
Prepaid expenses and other current assets | $ | 172,701 | $ | 217,462 | ||||
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Land | $ | 8,041 | $ | 7,839 | ||||
Buildings and improvements | 413,308 | 378,981 | ||||||
Machinery and equipment | 1,055,461 | 1,444,442 | ||||||
Office equipment and furniture | 151,942 | 147,833 | ||||||
Leasehold improvements | 49,243 | 53,552 | ||||||
Construction in progress | 258,182 | 93,164 | ||||||
Stored assets (1) | 13,664 | 17,995 | ||||||
Property, plant and equipment, gross | 1,949,841 | 2,143,806 | ||||||
Accumulated depreciation | (1,164,904 | ) | (1,514,664 | ) | ||||
Property, plant and equipment, net | $ | 784,937 | $ | 629,142 | ||||
(1) | Consists of certain machinery and equipment (“stored assets”) that were originally intended for use in previously planned manufacturing capacity expansions. As further described in Note 4. “Restructuring and Asset Impairments” to our condensed consolidated financial statements, we recently introduced our next generation Series 6 module technology, which is expected to enable the production of modules with a larger form factor, better product attributes, and a lower cost structure. The majority of the remaining stored assets are expected to be repurposed for Series 6 module manufacturing as we transition our production lines to such module technology through 2018. As the remaining stored assets are neither in the condition nor location to produce modules as intended, we will not begin depreciation until such assets are placed in service. We evaluate our property, plant and equipment, including our stored assets, for impairment under a held and used impairment model whenever events or changes in circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of such assets may not be recoverable. |
Depreciation of property, plant and equipment was $21.8 million and $48.7 million for the three and six months ended June 30, 2017, respectively, and $52.5 million and $107.0 million for the three and six months ended June 30, 2016, respectively.
20
PV solar power systems, net
PV solar power systems, net consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
PV solar power systems, gross | $ | 487,654 | $ | 464,581 | ||||
Accumulated depreciation | (26,037 | ) | (15,980 | ) | ||||
PV solar power systems, net | $ | 461,617 | $ | 448,601 | ||||
During the six months ended June 30, 2017, we placed $13.9 million of projects in service, including a project in the Asia-Pacific region. Depreciation of PV solar power systems was $4.9 million and $9.8 million for the three and six months ended June 30, 2017, respectively, and $1.3 million and $2.5 million for the three and six months ended June 30, 2016, respectively.
Capitalized interest
The cost of constructing facilities, equipment, and project assets includes interest costs incurred during the assets’ construction period. The components of interest expense and capitalized interest were as follows during the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest cost incurred | $ | (6,586 | ) | $ | (8,473 | ) | $ | (15,856 | ) | $ | (14,368 | ) | ||||
Interest cost capitalized – property, plant and equipment | — | 831 | — | 1,067 | ||||||||||||
Interest cost capitalized – project assets | 212 | 491 | 313 | 1,508 | ||||||||||||
Interest expense, net | $ | (6,374 | ) | $ | (7,151 | ) | $ | (15,543 | ) | $ | (11,793 | ) | ||||
Project assets
Project assets consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Project assets – development costs, including project acquisition and land costs | $ | 348,214 | $ | 444,264 | ||||
Project assets – construction costs | 473,985 | 1,018,684 | ||||||
Project assets | $ | 822,199 | $ | 1,462,948 | ||||
Project assets – current | $ | 35,992 | $ | 700,800 | ||||
Project assets – noncurrent | $ | 786,207 | $ | 762,148 | ||||
Other assets
Other assets consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Deferred rent | $ | 27,013 | $ | 27,160 | ||||
Notes receivable (1) | 10,582 | 7,385 | ||||||
Income taxes receivable | 4,401 | 4,230 | ||||||
Other | 46,009 | 39,123 | ||||||
Other assets | $ | 88,005 | $ | 77,898 | ||||
(1) | In April 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility bears interest at 8.0% per annum, payable quarterly, with the full amount due in December 2026. As of June 30, 2017 and December 31, 2016, the balance outstanding on the credit facility was €7.0 million ($8.0 million and $7.4 million, respectively). |
21
Goodwill
Goodwill, summarized by relevant reporting unit, consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
December 31, 2016 | Acquisitions (Impairments) | June 30, 2017 | ||||||||||
Components | $ | 407,827 | $ | — | $ | 407,827 | ||||||
Accumulated impairment losses | (393,365 | ) | — | (393,365 | ) | |||||||
Goodwill | $ | 14,462 | $ | — | $ | 14,462 | ||||||
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair values assigned to the individual assets acquired and liabilities assumed. We do not amortize goodwill, but instead are required to test goodwill for impairment at least annually. If necessary, we would record any impairment in accordance with ASC 350, Intangibles – Goodwill and Other. We perform impairment tests between scheduled annual tests in the fourth quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value.
Other intangibles, net
Other intangibles, net consisted of developed technologies from prior business acquisitions, certain PPAs acquired after the associated PV solar power systems were placed in service, our internally-generated intangible assets, substantially all of which were patents on technologies related to our products and production processes, and IPR&D related to our Enki acquisition as described in Note 5. “Business Acquisitions” to our condensed consolidated financial statements. We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure them. We amortize intangible assets on a straight-line basis over their estimated useful lives once the intangible assets meet the criteria to be amortized.
The following tables summarize our intangible assets at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | ||||||||||||||||
Gross Amount | Accumulated Amortization | Accumulated Impairments | Net Amount | |||||||||||||
Developed technology | $ | 76,959 | $ | (20,455 | ) | $ | — | $ | 56,504 | |||||||
Power purchase agreements | 6,486 | (162 | ) | — | 6,324 | |||||||||||
Patents | 6,538 | (2,787 | ) | — | 3,751 | |||||||||||
In-process research and development | 17,255 | — | — | 17,255 | ||||||||||||
Other intangibles, net | $ | 107,238 | $ | (23,404 | ) | $ | — | $ | 83,834 | |||||||
December 31, 2016 | ||||||||||||||||
Gross Amount | Accumulated Amortization | Accumulated Impairments | Net Amount | |||||||||||||
Developed technology | $ | 114,612 | $ | (18,208 | ) | $ | (36,215 | ) | $ | 60,189 | ||||||
Power purchase agreements | 6,486 | — | — | 6,486 | ||||||||||||
Patents | 6,538 | (2,498 | ) | — | 4,040 | |||||||||||
In-process research and development | 17,255 | — | — | 17,255 | ||||||||||||
Other intangibles, net | $ | 144,891 | $ | (20,706 | ) | $ | (36,215 | ) | $ | 87,970 | ||||||
Amortization expense for our intangible assets was $2.1 million and $4.1 million for the three and six months ended June 30, 2017, respectively, and $3.0 million and $6.0 million for the three and six months ended June 30, 2016, respectively.
22
Accrued expenses
Accrued expenses consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Product warranty liability (1) | $ | 37,217 | $ | 40,079 | ||||
Accrued compensation and benefits | 32,198 | 47,877 | ||||||
Accrued property, plant and equipment | 28,691 | 14,828 | ||||||
Accrued project assets | 26,187 | 71,164 | ||||||
Accrued inventory | 10,208 | 13,085 | ||||||
Other | 55,952 | 75,944 | ||||||
Accrued expenses | $ | 190,453 | $ | 262,977 | ||||
(1) | See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product warranty liability.” |
Other current liabilities
Other current liabilities consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Indemnification liabilities (1) | $ | 102,444 | $ | 100,000 | ||||
Derivative instruments | 19,008 | 6,642 | ||||||
Contingent consideration (1) | 11,848 | 19,620 | ||||||
Financing liability (2) | 5,219 | 5,219 | ||||||
Other | 10,170 | 15,461 | ||||||
Other current liabilities | $ | 148,689 | $ | 146,942 | ||||
(1) | See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Indemnification liabilities” and “Contingent consideration” arrangements. |
(2) | See Note 11. “Investments in Unconsolidated Affiliates and Joint Ventures” to our condensed consolidated financial statements for discussion of the financing liabilities associated with our leaseback of the Maryland Solar project. |
Other liabilities
Other liabilities consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Product warranty liability (1) | $ | 202,484 | $ | 212,329 | ||||
Commercial letter of credit liability (1) | 69,987 | 26,579 | ||||||
Financing liability (2) | 30,707 | 33,314 | ||||||
Other taxes payable | 26,353 | 24,099 | ||||||
Derivative instruments | 6,549 | 444 | ||||||
Contingent consideration (1) | 5,810 | 10,472 | ||||||
Other | 60,779 | 64,202 | ||||||
Other liabilities | $ | 402,669 | $ | 371,439 | ||||