Document
 

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 September 30, 2018
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

fslrlogoa19.jpg
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [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 [ ]
 

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 October 19, 2018, 104,814,977 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
 

Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 


Table of Contents

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
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
676,220

 
$
1,087,026

 
$
1,552,803

 
$
2,602,143

Cost of sales
 
547,093

 
795,226

 
1,258,936

 
2,115,266

Gross profit
 
129,127

 
291,800

 
293,867

 
486,877

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
33,539

 
50,546

 
125,519

 
147,702

Research and development
 
22,390

 
20,850

 
63,084

 
64,990

Production start-up
 
14,723

 
12,624

 
76,159

 
22,155

Restructuring and asset impairments
 
—

 
791

 
—

 
39,108

Total operating expenses
 
70,652

 
84,811

 
264,762

 
273,955

Operating income
 
58,475

 
206,989

 
29,105

 
212,922

Foreign currency loss, net
 
(2,383
)
 
(3,968
)
 
(2,478
)
 
(6,166
)
Interest income
 
16,456

 
8,392

 
45,145

 
22,364

Interest expense, net
 
(3,198
)
 
(4,149
)
 
(14,445
)
 
(19,692
)
Other (loss) income, net
 
(5,971
)
 
2,018

 
7,635

 
25,180

Income before taxes and equity in earnings
 
63,379

 
209,282

 
64,962

 
234,608

Income tax (expense) benefit
 
(2,396
)
 
(7,580
)
 
(7,857
)
 
26,769

Equity in earnings, net of tax
 
(3,233
)
 
4,045

 
35,105

 
5,462

Net income
 
$
57,750

 
$
205,747

 
$
92,210

 
$
266,839

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.55

 
$
1.97

 
$
0.88

 
$
2.56

Diluted
 
$
0.54

 
$
1.95

 
$
0.87

 
$
2.54

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
104,804

 
104,432

 
104,711

 
104,287

Diluted
 
106,163

 
105,660

 
106,211

 
104,889


See accompanying notes to these condensed consolidated financial statements.



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Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
57,750

 
$
205,747

 
$
92,210

 
$
266,839

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
1,793

 
4,717

 
(7,252
)
 
5,320

Unrealized (loss) gain on marketable securities and restricted investments, net of tax of $273, $(23), $3,424, and $(373)
 
(6,688
)
 
1,511

 
(32,106
)
 
1,244

Unrealized (loss) gain on derivative instruments, net of tax of $(22), $291, $(1,000), and $1,291
 
(39
)
 
(61
)
 
1,928

 
(2,513
)
Other comprehensive (loss) income
 
(4,934
)
 
6,167

 
(37,430
)
 
4,051

Comprehensive income
 
$
52,816

 
$
211,914

 
$
54,780

 
$
270,890


See accompanying notes to these condensed consolidated financial statements.



2
Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
 
Current assets:
 

 
 
Cash and cash equivalents
 
$
1,434,883

 
$
2,268,534

Marketable securities
 
1,295,049

 
720,379

Accounts receivable trade, net
 
141,699

 
211,797

Accounts receivable, unbilled and retainage
 
421,134

 
174,608

Inventories
 
296,038

 
172,370

Balance of systems parts
 
51,448

 
28,840

Project assets
 
28,978

 
77,931

Notes receivable, affiliate
 
21,308

 
20,411

Prepaid expenses and other current assets
 
195,552

 
157,902

Total current assets
 
3,886,089

 
3,832,772

Property, plant and equipment, net
 
1,671,129

 
1,154,537

PV solar power systems, net
 
310,493

 
417,108

Project assets
 
463,624

 
424,786

Deferred tax assets, net
 
108,636

 
51,417

Restricted cash and investments
 
341,125

 
424,783

Equity method investments
 
3,192

 
217,230

Goodwill
 
14,462

 
14,462

Intangibles assets, net
 
74,585

 
80,227

Inventories
 
124,266

 
113,277

Note receivable, affiliate
 
—

 
48,370

Other assets
 
96,954

 
85,532

Total assets
 
$
7,094,555

 
$
6,864,501

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
154,602

 
$
120,220

Income taxes payable
 
49,941

 
19,581

Accrued expenses
 
433,117

 
366,827

Current portion of long-term debt
 
2,618

 
13,075

Deferred revenue
 
215,900

 
81,816

Other current liabilities
 
12,006

 
48,757

Total current liabilities
 
868,184

 
650,276

Accrued solar module collection and recycling liability
 
133,965

 
166,609

Long-term debt
 
463,485

 
380,465

Other liabilities
 
457,964

 
568,454

Total liabilities
 
1,923,598

 
1,765,804

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 104,814,322 and 104,468,460 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
 
105

 
104

Additional paid-in capital
 
2,816,585

 
2,799,107

Accumulated earnings
 
2,389,438

 
2,297,227

Accumulated other comprehensive (loss) income
 
(35,171
)
 
2,259

Total stockholders’ equity
 
5,170,957

 
5,098,697

Total liabilities and stockholders’ equity
 
$
7,094,555

 
$
6,864,501


See accompanying notes to these condensed consolidated financial statements.


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Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
92,210

 
$
266,839

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
89,192

 
89,552

Impairments and net losses on disposal of long-lived assets
 
5,379

 
33,171

Share-based compensation
 
26,787

 
25,527

Equity in earnings, net of tax
 
(35,105
)
 
(5,462
)
Distributions received from equity method investments
 
12,394

 
17,024

Remeasurement of monetary assets and liabilities
 
6,837

 
(12,464
)
Deferred income taxes
 
(55,732
)
 
(38,499
)
Gains on sales of marketable securities and restricted investments
 
(19,472
)
 
(49
)
Liabilities assumed by customers for the sale of systems
 
(116,456
)
 
—

Other, net
 
1,891

 
2,572

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, trade, unbilled and retainage
 
(178,723
)
 
(328,556
)
Prepaid expenses and other current assets
 
(34,321
)
 
35,818

Inventories and balance of systems parts
 
(158,311
)
 
178,562

Project assets and PV solar power systems
 
50,294

 
969,264

Other assets
 
(12,694
)
 
(16,453
)
Income tax receivable and payable
 
6,302

 
6,416

Accounts payable
 
28,591

 
(21,198
)
Accrued expenses and other liabilities
 
181,328

 
(289,919
)
Accrued solar module collection and recycling liability
 
(31,701
)
 
(5,426
)
Net cash (used in) provided by operating activities
 
(141,310
)
 
906,719

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(610,620
)
 
(315,129
)
Purchases of marketable securities and restricted investments
 
(1,102,440
)
 
(478,324
)
Proceeds from sales and maturities of marketable securities and restricted investments
 
627,106

 
386,309

Proceeds from sales of equity method investments
 
247,595

 
—

Payments received on notes receivable, affiliates
 
48,459

 
478

Other investing activities
 
(5,823
)
 
2,707

Net cash used in investing activities
 
(795,723
)
 
(403,959
)
Cash flows from financing activities
 
 
 
 
Repayment of long-term debt
 
(18,937
)
 
(23,683
)
Proceeds from borrowings under long-term debt, net of discounts and issuance costs
 
174,594

 
158,739

Payments of tax withholdings for restricted shares
 
(10,517
)
 
(5,114
)
Proceeds from commercial letters of credit
 
—

 
43,025

Contingent consideration payments and other financing activities
 
(1,957
)
 
(21,361
)
Net cash provided by financing activities
 
143,183

 
151,606

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(12,454
)
 
9,420

Net (decrease) increase in cash, cash equivalents and restricted cash
 
(806,304
)
 
663,786

Cash, cash equivalents and restricted cash, beginning of the period
 
2,330,476

 
1,415,690

Cash, cash equivalents and restricted cash, end of the period
 
$
1,524,172

 
$
2,079,476

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
144,928

 
$
128,450

Sale of system previously accounted for as sale-leaseback financing
 
$
31,992

 
$
—

Acquisitions currently or previously funded by liabilities and contingent consideration
 
$
8,622

 
$
12,212

Accrued interest capitalized to long-term debt
 
$
2,716

 
$
16,786


See accompanying notes to these condensed consolidated financial statements.



4
Table of Contents

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 in this Quarterly Report have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of First Solar management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Certain prior period balances have been reclassified to conform to the current period presentation.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other period. The condensed consolidated balance sheet at December 31, 2017 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, 2017 included in our Annual Report on Form 10-K, which has been filed with the SEC.

Unless expressly stated or the context otherwise requires, the terms “the Company,” “we,” “us,” “our,” and “First Solar” refer to First Solar, Inc. and its consolidated subsidiaries, and the term “condensed consolidated financial statements” refers to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report.

2. Recent Accounting Pronouncements

In February 2018, the Financial Accounting Standard Board (“FASB”) issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to allow entities to reclassify the income tax effects of tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2018-02 will have on our consolidated financial statements and associated disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, to simplify certain aspects of hedge accounting for both non-financial and financial risks and better align the recognition and measurement of hedge results with an entity’s risk management activities. ASU 2017-12 also amends certain presentation and disclosure requirements for hedging activities and changes how an entity assesses hedge effectiveness. ASU 2017-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2017-12 will have on our consolidated financial statements and associated disclosures.




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Table of Contents

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. The adoption of ASU 2016-16 in the first quarter of 2018 did not have a significant impact 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.

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 and disclosing key information about leasing transactions. 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) – Targeted Improvements, which provided an optional transition method to apply the new lease requirements through a cumulative-effect adjustment in the period of adoption.

We expect to adopt ASU 2016-02 in the first quarter of 2019 using this optional transition method. We also expect to elect certain practical expedients permitted under the transition guidance, which, among other things, allow us to not reassess prior conclusions related to contracts containing leases or lease classification. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures and designing the related processes and internal controls. We expect the adoption to have a significant impact on our consolidated balance sheet through the recognition of right-of-use assets and lease liabilities primarily related to real estate arrangements but do not expect the adoption to have a significant impact on our results of operations or cash flows.

3. Restructuring and Asset Impairments

Cadmium Telluride Module Manufacturing and Corporate Restructuring

In November 2016, our board of directors approved a set of initiatives intended to accelerate our transition to Series 6 module manufacturing and restructure our operations to reduce costs and better align the organization with our long-term strategic plans. Accordingly, we expect to upgrade and replace our legacy manufacturing fleet over the next several years with Series 6 manufacturing equipment, thereby enabling the production of solar modules with a larger form factor, better product attributes, and a lower cost structure.

As part of these initiatives, we incurred net charges of $39.1 million during the nine months ended September 30, 2017, which included (i) $25.7 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) $6.6 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 September 30, 2017, we incurred net charges of $0.8 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 modules segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations, and substantially all of the associated liabilities were paid or settled as of December 31, 2017.




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Table of Contents

4. Cash, Cash Equivalents, and Marketable Securities

We consider highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents with the exception of time deposits, which are presented as marketable securities. Cash, cash equivalents, and marketable securities consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Cash and cash equivalents:
 
 
 
 
Cash
 
$
1,234,270

 
$
2,142,949

Money market funds
 
200,613

 
125,585

Total cash and cash equivalents
 
1,434,883

 
2,268,534

Marketable securities:
 
 
 
 
Foreign debt
 
314,213

 
238,858

Foreign government obligations
 
117,975

 
152,850

U.S. debt
 
25,047

 
73,671

Time deposits
 
837,814

 
255,000

Total marketable securities
 
1,295,049

 
720,379

Total cash, cash equivalents, and marketable securities
 
$
2,729,932

 
$
2,988,913


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 to the total of such amounts as presented in the condensed consolidated statement of cash flows (in thousands):
 
 
Balance Sheet Line Item
 
September 30,
2018
 
December 31,
2017
Cash and cash equivalents
 
Cash and cash equivalents
 
$
1,434,883

 
$
2,268,534

Restricted cash – current (1)
 
Prepaid expenses and other current assets
 
6,777

 
11,120

Restricted cash – noncurrent (1)
 
Restricted cash and investments
 
82,512

 
50,822

Total cash, cash equivalents, and restricted cash
 
 
 
$
1,524,172

 
$
2,330,476

——————————
(1)
See Note 5. “Restricted Cash and Investments” to our condensed consolidated financial statements for discussion of our “Restricted cash” arrangements.

During the nine months ended September 30, 2018, we sold marketable securities for proceeds of $10.8 million and realized gains of less than $0.1 million on such sales. During the nine months ended September 30, 2017, we sold marketable securities for proceeds of $118.3 million and realized gains of less than $0.1 million on such sales. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our marketable securities.

The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of September 30, 2018 and December 31, 2017 (in thousands):
 
 
As of September 30, 2018
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
317,246

 
$
8

 
$
3,041

 
$
314,213

Foreign government obligations
 
118,993

 
—

 
1,018

 
117,975

U.S. debt
 
25,054

 
2

 
9

 
25,047

Time deposits
 
837,814

 
—

 
—

 
837,814

Total
 
$
1,299,107

 
$
10

 
$
4,068

 
$
1,295,049




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Table of Contents

 
 
As of December 31, 2017
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
240,643

 
$
3

 
$
1,788

 
$
238,858

Foreign government obligations
 
153,999

 
—

 
1,149

 
152,850

U.S. debt
 
73,746

 
—

 
75

 
73,671

Time deposits
 
255,000

 
—

 
—

 
255,000

Total
 
$
723,388

 
$
3

 
$
3,012

 
$
720,379


As of September 30, 2018, we identified 16 investments totaling $224.8 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $2.5 million. As of December 31, 2017, we identified 16 investments totaling $210.3 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $1.9 million. Such 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.

The following tables show unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of September 30, 2018 and December 31, 2017, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
 
 
As of September 30, 2018
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Foreign debt
 
$
179,522

 
$
1,513

 
$
106,871

 
$
1,528

 
$
286,393

 
$
3,041

Foreign government obligations
 
—

 
—

 
117,975

 
1,018

 
117,975

 
1,018

U.S. debt
 
10,043

 
9

 
—

 
—

 
10,043

 
9

Total
 
$
189,565

 
$
1,522

 
$
224,846

 
$
2,546

 
$
414,411

 
$
4,068

 
 
As of December 31, 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
 
$
119,869

 
$
735

 
$
88,919

 
$
1,053

 
$
208,788

 
$
1,788

Foreign government obligations
 
31,467

 
289

 
121,383

 
860

 
152,850

 
1,149

U.S. debt
 
73,671

 
75

 
—

 
—

 
73,671

 
75

Total
 
$
225,007

 
$
1,099

 
$
210,302

 
$
1,913

 
$
435,309

 
$
3,012


The contractual maturities of our marketable securities as of September 30, 2018 were as follows (in thousands):
 
 
Fair
Value
One year or less
 
$
1,059,555

One year to two years
 
118,724

Two years to three years
 
116,770

Total
 
$
1,295,049





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Table of Contents

5. Restricted Cash and Investments

Restricted cash and investments consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
 
September 30,
2018
 
December 31,
2017
Restricted cash
 
$
82,512

 
$
50,822

Restricted investments
 
258,613

 
373,961

Total restricted cash and investments (1)
 
$
341,125

 
$
424,783

——————————
(1)
There was an additional $6.8 million and $11.1 million of restricted cash included within “Prepaid expenses and other current assets” at September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018 and December 31, 2017, 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. See Note 11. “Commitments and Contingencies” to our condensed consolidated financial statements for further discussion related to our letters of credit.

At September 30, 2018 and December 31, 2017, our restricted investments consisted of long-term marketable securities that were held in custodial accounts to fund the estimated future costs of collecting and recycling modules covered under our solar module collection and recycling program. 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. No incremental funding was required in 2018 as substantially all of our module sales in the prior year were not covered under our solar module collection and recycling program. 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. Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds.

During the nine months ended September 30, 2018, we sold certain restricted investments for proceeds of $101.6 million and realized gains of $19.5 million on such sales, and withdrew the funds from the trust as a reimbursement of overfunded amounts. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted investments.

The following tables summarize the unrealized gains and losses related to our restricted investments, by major security type, as of September 30, 2018 and December 31, 2017 (in thousands):
 
 
As of September 30, 2018
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
105,661

 
$
48,950

 
$
—

 
$
154,611

U.S. government obligations
 
116,717

 
229

 
12,944

 
104,002

Total
 
$
222,378

 
$
49,179

 
$
12,944

 
$
258,613




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Table of Contents

 
 
As of December 31, 2017
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
127,436

 
$
62,483

 
$
—

 
$
189,919

U.S. government obligations
 
174,624

 
12,944

 
3,526

 
184,042

Total
 
$
302,060

 
$
75,427

 
$
3,526

 
$
373,961


As of September 30, 2018, we identified six restricted investments totaling $100.4 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $12.9 million. As of December 31, 2017, we identified six restricted investments totaling $107.7 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $3.5 million. The unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell these securities prior to the recovery of our cost basis. Therefore, we did not consider these investments to be other-than-temporarily impaired.

As of September 30, 2018, the contractual maturities of our restricted investments were between 11 years and 18 years.

6. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Accounts receivable trade, gross
 
$
142,934

 
$
213,776

Allowance for doubtful accounts
 
(1,235
)
 
(1,979
)
Accounts receivable trade, net
 
$
141,699

 
$
211,797


At September 30, 2018 and December 31, 2017, $11.0 million and $16.8 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 September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Accounts receivable, unbilled
 
$
410,513

 
$
172,594

Retainage
 
10,621

 
2,014

Accounts receivable, unbilled and retainage
 
$
421,134

 
$
174,608





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Table of Contents

Inventories

Inventories consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Raw materials
 
$
210,219

 
$
148,968

Work in process
 
27,703

 
14,085

Finished goods
 
182,382

 
122,594

Inventories
 
$
420,304

 
$
285,647

Inventories – current
 
$
296,038

 
$
172,370

Inventories – noncurrent
 
$
124,266

 
$
113,277


Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Prepaid expenses
 
$
72,441

 
$
41,447

Prepaid income taxes
 
38,813

 
31,944

Indirect tax receivables
 
27,680

 
26,553

Restricted cash
 
6,777

 
11,120

Derivative instruments 
 
5,494

 
4,303

Other current assets
 
44,347

 
42,535

Prepaid expenses and other current assets
 
$
195,552

 
$
157,902


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Land
 
$
14,431

 
$
8,181

Buildings and improvements
 
481,529

 
424,266

Machinery and equipment
 
1,736,460

 
1,059,103

Office equipment and furniture
 
171,456

 
157,512

Leasehold improvements
 
49,102

 
48,951

Construction in progress
 
468,735

 
641,263

Property, plant and equipment, gross
 
2,921,713

 
2,339,276

Accumulated depreciation
 
(1,250,584
)
 
(1,184,739
)
Property, plant and equipment, net
 
$
1,671,129

 
$
1,154,537


Depreciation of property, plant and equipment was $29.4 million and $72.6 million for the three and nine months ended September 30, 2018, respectively, and $22.4 million and $71.1 million for the three and nine months ended September 30, 2017, respectively.




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PV solar power systems, net

Photovoltaic (“PV”) solar power systems, consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
PV solar power systems, gross
 
$
341,343

 
$
451,045

Accumulated depreciation
 
(30,850
)
 
(33,937
)
PV solar power systems, net
 
$
310,493

 
$
417,108


Depreciation of PV solar power systems was $3.5 million and $11.8 million for the three and nine months ended September 30, 2018, respectively, and $5.1 million and $14.9 million for the three and nine months ended September 30, 2017, respectively.

Capitalized interest

The cost of constructing project assets includes interest costs incurred during the construction period. The components of interest expense and capitalized interest were as follows during the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Interest cost incurred
 
$
(5,023
)
 
$
(4,775
)
 
$
(19,080
)
 
$
(20,630
)
Interest cost capitalized – project assets
 
1,825

 
626

 
4,635

 
938

Interest expense, net
 
$
(3,198
)
 
$
(4,149
)
 
$
(14,445
)
 
$
(19,692
)

Project assets

Project assets consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Project assets – development costs, including project acquisition and land costs
 
$
246,147

 
$
250,590

Project assets – construction costs
 
246,455

 
252,127

Project assets
 
$
492,602

 
$
502,717

Project assets – current
 
$
28,978

 
$
77,931

Project assets – noncurrent
 
$
463,624

 
$
424,786





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Table of Contents

Other assets

Other assets consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Deferred rent
 
$
26,359

 
$
26,760

Indirect tax receivables
 
26,720

 
15,253

Notes receivable (1)
 
9,306

 
10,495

Income taxes receivable
 
4,428

 
4,454

Other
 
30,141

 
28,570

Other assets
 
$
96,954

 
$
85,532

——————————
(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 September 30, 2018 and December 31, 2017, the balance outstanding on the credit facility was €7.0 million ($8.1 million and $8.4 million, respectively).

Goodwill

Goodwill for the relevant reporting unit consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
December 31,
2017

Acquisitions (Impairments)

September 30,
2018
Modules
 
$
407,827

 
$
—

 
$
407,827

Accumulated impairment losses
 
(393,365
)
 
—

 
(393,365
)
Goodwill
 
$
14,462

 
$
—

 
$
14,462


Intangibles assets, net

Intangibles assets, net primarily include developed technologies from prior business acquisitions, certain power purchase agreements (“PPAs”) acquired after the associated PV solar power systems were placed in service, and our internally-generated intangible assets, substantially all of which are patents on technologies related to our products and production processes. We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure 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. During the nine months ended September 30, 2018, $17.3 million of in-process research and development related to our prior acquisition of Enki Technology, Inc. was reclassified to developed technology and began amortizing over its useful life of 10 years.

The following tables summarize our intangible assets at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30, 2018
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
95,964

 
$
(30,819
)
 
$
65,145

Power purchase agreements
 
6,486

 
(567
)
 
5,919

Patents
 
7,068

 
(3,547
)
 
3,521

Intangibles assets, net
 
$
109,518

 
$
(34,933
)
 
$
74,585




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Table of Contents

 
 
December 31, 2017
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
76,959

 
$
(24,140
)
 
$
52,819

Power purchase agreements
 
6,486

 
(324
)
 
6,162

Patents
 
7,068

 
(3,077
)
 
3,991

In-process research and development
 
17,255

 
—

 
17,255

Intangibles assets, net
 
$
107,768

 
$
(27,541
)
 
$
80,227


Amortization expense for our intangible assets was $2.5 million and $7.4 million for the three and nine months ended September 30, 2018, respectively, and $2.1 million and $6.2 million for the three and nine months ended September 30, 2017, respectively.

Accrued expenses

Accrued expenses consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Accrued project assets
 
$
135,991

 
$
55,834

Accrued property, plant and equipment
 
106,661

 
133,433

Accrued inventory
 
54,191

 
24,830

Accrued compensation and benefits
 
41,761

 
73,985

Product warranty liability (1)
 
33,595

 
28,767

Other
 
60,918

 
49,978

Accrued expenses
 
$
433,117

 
$
366,827

——————————
(1)
See Note 11. “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 September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Contingent consideration (1)
 
$
6,372

 
$
6,162

Derivative instruments 
 
1,602

 
27,297

Financing liability (2)
 
—

 
5,161

Indemnification liabilities (1)
 
—

 
2,876

Other
 
4,032

 
7,261

Other current liabilities
 
$
12,006

 
$
48,757

——————————
(1)
See Note 11. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Contingent consideration” and “Indemnification liabilities” arrangements.

(2)
See Note 9. “Equity Method Investments” to our condensed consolidated financial statements for discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.




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Table of Contents

Other liabilities

Other liabilities consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30,
2018
 
December 31,
2017
Product warranty liability (1)
 
$
191,809

 
$
195,507

Other taxes payable
 
83,789

 
89,724

Transition tax liability (2)
 
82,733

 
93,233

Deferred revenue
 
47,677

 
63,257

Derivative instruments
 
5,962

 
5,932

Contingent consideration (1)
 
2,250

 
3,153

Financing liability (3)
 
—

 
29,822

Commercial letter of credit liability (1)
 
—

 
43,396

Other
 
43,744

 
44,430

Other liabilities
 
$
457,964

 
$
568,454

——————————
(1)
See Note 11. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product warranty liability,” “Contingent consideration,” and “Commercial letter of credit liability” arrangements.

(2)
See Note 14. “Income Taxes” to our condensed consolidated financial statements for discussion of the one-time transition tax on accumulated earnings of foreign subsidiaries as a result of Tax Act.

(3)
See Note 9. “Equity Method Investments” to our condensed consolidated financial statements for discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.




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Table of Contents

7. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our financial position, results of operations, and cash flows. We use derivative instruments to hedge against these risks and only hold such instruments for hedging purposes, not for speculative or trading purposes.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive (loss) income” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30, 2018
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
5

 
$
—

 
$
—

Total derivatives designated as hedging instruments
 
$
5

 
$
—

 
$
—

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange forward contracts
 
$
5,489

 
$
1,554

 
$
—

Interest rate swap contracts
 
—

 
48

 
5,962

Total derivatives not designated as hedging instruments
 
$
5,489

 
$
1,602

 
$
5,962

Total derivative instruments
 
$
5,494

 
$
1,602

 
$
5,962

 
 
December 31, 2017
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
252

 
$
13,240

 
$
—

Total derivatives designated as hedging instruments
 
$
252

 
$
13,240

 
$
—

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange forward contracts
 
$
4,051

 
$
14,057

 
$
—

Interest rate swap contracts
 
—

 
—

 
5,932

Total derivatives not designated as hedging instruments
 
$
4,051

 
$
14,057

 
$
5,932

Total derivative instruments
 
$
4,303

 
$
27,297

 
$
5,932





16
Table of Contents

The following table presents the pretax amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income or loss and our condensed consolidated statements of operations for the nine months ended September 30, 2018 and 2017 (in thousands):
 
 
Foreign Exchange Forward Contracts
Balance in accumulated other comprehensive (loss) income at December 31, 2017
 
$
(1,723
)
Amounts recognized in other comprehensive (loss) income
 
(3,884
)
Amounts reclassified to earnings impacting:
 
 
Net sales
 
1,698

Cost of sales
 
212

Foreign currency loss, net
 
5,448

Other (loss) income, net
 
(546
)
Balance in accumulated other comprehensive (loss) income at September 30, 2018
 
$
1,205

 
 
 
Balance in accumulated other comprehensive (loss) income at December 31, 2016
 
$
2,556

Amounts recognized in other comprehensive (loss) income
 
(3,993
)
Amounts reclassified to earnings impacting:
 
 
Other (loss) income, net
 
189

Balance in accumulated other comprehensive (loss) income at September 30, 2017
 
$
(1,248
)

We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three and nine months ended September 30, 2018 and 2017. During the three and nine months ended September 30, 2018, we recognized unrealized gains of $1.0 million and $0.5 million, respectively, related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “Other (loss) income, net.” During the three and nine months ended September 30, 2017, we recognized unrealized gains of $0.7 million and $0.5 million, respectively, related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “Other (loss) income, net.”

The following table presents gains and losses related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
Income Statement Line Item
 
2018
 
2017
 
2018
 
2017
Foreign exchange forward contracts
 
Foreign currency loss, net
 
$
7,098

 
$
6,934

 
$
13,477

 
$
(16,724
)
Interest rate swap contracts
 
Interest expense, net
 
883

 
167

 
(1,284
)
 
(5,515
)

Interest Rate Risk

We use interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments. We do not use such swap contracts for speculative or trading purposes.

In August 2018, FS Japan Project 14 GK, our indirect wholly-owned subsidiary and project company, entered into an interest rate swap contract to hedge a portion of the floating rate senior loan facility under the project’s Mashiko Credit Agreement (as defined in Note 10. “Debt” to our condensed consolidated financial statements). Such swap had an initial notional value of ¥5.5 billion and entitled the project to receive a six-month floating Tokyo Interbank Offered Rate (“TIBOR”) interest rate while requiring the project to pay a fixed rate of 0.820%. The notional amount of the interest rate swap contract is scheduled to proportionately adjust with the scheduled draws and principal payments on the



17
Table of Contents

underlying hedged debt. As of September 30, 2018, the notional value of the interest rate swap contract was ¥5.8 billion ($51.5 million). This derivative instrument does not qualify for accounting as a cash flow hedge in accordance with Accounting Standards Codification (“ASC 815”) due to our expectation to sell the associated project before the maturity of its project specific debt financing and corresponding swap contract. Accordingly, the changes in the fair value of the swap contract are recorded directly to “Interest expense, net.”

In May 2018, FS NSW Project No 1 Finco Pty Ltd, our indirectly wholly-owned subsidiary and project financing company, entered into various interest rate swap contracts to hedge the floating rate construction loan facility and a portion of the floating rate term loan facility under the associated project’s Beryl Credit Facility (as defined in Note 10. “Debt” to our condensed consolidated financial statements). The swaps had an initial aggregate notional value of AUD 42.4 million and, depending on the loan facility being hedged, entitled the project to receive one-month or three-month floating Bank Bill Swap Bid (“BBSY”) interest rates while requiring the project to pay fixed rates of 2.0615% or 3.2020%. The notional amounts of the interest rate swap contracts are scheduled to proportionately adjust with the scheduled draws and principal payments on the underlying hedged debt. As of September 30, 2018, the aggregate notional value of the interest rate swap contracts was AUD 64.8 million ($46.8 million). These derivative instruments do not qualify for accounting as cash flow hedges in accordance with ASC 815 due to our expectation to sell the associated project before the maturity of its project specific debt financing and corresponding swap contracts. Accordingly, the changes in the fair value of the swap contracts are recorded directly to “Interest expense, net.”

In March 2017, Manildra Finco Pty Ltd, our indirect wholly-owned subsidiary and project financing company, entered into various interest rate swap contracts to hedge a portion of the floating rate construction loan facility under the associated project’s Manildra Credit Facility (as defined in Note 10. “Debt” to our condensed consolidated financial statements). Such swaps had an initial aggregate notional value of AUD 12.8 million and entitled the project to receive a one-month or three-month floating BBSY interest rate while requiring the project to pay a fixed rate of 3.13%. The notional amounts of the interest rate swap contracts are scheduled to proportionately adjust with the scheduled draws and principal payments on the underlying hedged debt. In September 2018, we completed the sale of our Manildra project, and its interest rate swap contracts and outstanding construction loan balance were assumed by the customer. As of December 31, 2017, the aggregate notional value of the interest rate swap contracts was AUD 68.1 million ($53.2 million). These derivative instruments did not qualify for accounting as cash flow hedges in accordance with ASC 815 due to our expectation to sell the associated project before the maturity of its project specific debt financing and corresponding swap contracts. Accordingly, the changes in the fair value of the swap contracts were recorded directly to “Interest expense, net.”

In January 2017, FS Japan Project 12 GK, our indirect wholly-owned subsidiary and project company, entered into an interest rate swap contract to hedge a portion of the floating rate senior loan facility under the project’s Ishikawa Credit Agreement (as defined in Note 10. “Debt” to our condensed consolidated financial statements). Such swap had an initial notional value of ¥5.7 billion and entitled the project to receive a six-month floating TIBOR plus 0.75% interest rate while requiring the project to pay a fixed rate of 1.482%. The notional amount of the interest rate swap contract is scheduled to proportionately adjust with the scheduled draws and principal payments on the underlying hedged debt. As of September 30, 2018 and December 31, 2017, the notional value of the interest rate swap contract was ¥16.0 billion ($140.7 million) and ¥12.8 billion ($113.4 million), respectively. This derivative instrument does not qualify for accounting as a cash flow hedge in accordance with ASC 815 due to our expectation to sell the associated project before the maturity of its project specific debt financing and corresponding swap contract. Accordingly, the changes in the fair value of the swap contract are recorded directly to “Interest expense, net.”




18
Table of Contents

Foreign Currency Risk

Cash Flow Exposure

We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of September 30, 2018 and December 31, 2017, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to nine months. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of a derivative’s unrealized gain or loss in “Accumulated other comprehensive (loss) income” and subsequently reclassify amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges as of September 30, 2018 and December 31, 2017. As of September 30, 2018 and December 31, 2017, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
September 30, 2018
Currency
 
Notional Amount
 
USD Equivalent
Australian dollar
 
AUD 8.8
 
$6.4
 
 
December 31, 2017
Currency
 
Notional Amount
 
USD Equivalent
Indian rupee
 
INR 4,730.0
 
$74.1
Euro
 
€15.7
 
$18.8

In the following 12 months, we expect to reclassify to earnings $1.2 million of net unrealized gains related to these forward contracts that are included in “Accumulated other comprehensive (loss) income” at September 30, 2018 as we realize the earnings effects of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rates when we realize the related forecasted transactions.

Transaction Exposure and Economic Hedging

Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, deferred taxes, payables, accrued expenses, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported condensed consolidated statements of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on such foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.

We also enter into foreign exchange forward contracts to economically hedge balance sheet and other exposures related to transactions between certain of our subsidiaries and transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting. Accordingly, we recognize gains or losses from the fluctuations in foreign exchange rates and the fair value of these derivative contracts in “Foreign currency loss, net” on our condensed consolidated statements of operations. These contracts mature at various dates within the next three months.




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As of September 30, 2018 and December 31, 2017, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
September 30, 2018
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Australian dollar
 
AUD 20.5
 
$14.8
Sell
 
Australian dollar
 
AUD 13.1
 
$9.5
Purchase
 
Brazilian real
 
BRL 8.5
 
$2.1
Sell
 
Brazilian real
 
BRL 3.5
 
$0.9
Sell
 
Canadian dollar
 
CAD 2.9
 
$2.2
Sell
 
Chilean peso
 
CLP 2,101.0
 
$3.2
Purchase
 
Euro
 
€122.3
 
$141.6
Sell
 
Euro
 
€214.3
 
$248.2
Sell
 
Indian rupee
 
INR 1,111.3
 
$15.3
Purchase
 
Japanese yen
 
¥3,580.4
 
$31.5
Sell
 
Japanese yen
 
¥24,343.4
 
$214.5
Purchase
 
Malaysian ringgit
 
MYR 39.6
 
$9.6
Sell
 
Malaysian ringgit
 
MYR 140.9
 
$34.0
Sell
 
Mexican peso
 
MXN 37.3
 
$2.0
Purchase
 
Singapore dollar
 
SGD 3.8
 
$2.8
Sell
 
South African rand
 
ZAR 37.8
 
$2.7
 
 
December 31, 2017
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Australian dollar
 
AUD 12.7
 
$9.9
Sell
 
Australian dollar
 
AUD 56.8
 
$44.4
Sell
 
Canadian dollar
 
CAD 1.7
 
$1.4
Sell
 
Chilean peso
 
CLP 10,180.9
 
$16.6
Purchase
 
Chinese yuan
 
CNY 13.8
 
$2.1
Purchase
 
Euro
 
€151.4
 
$181.6
Sell
 
Euro
 
€193.2
 
$231.7
Purchase
 
Indian rupee
 
INR 645.7
 
$10.1
Sell
 
Indian rupee
 
INR 8,376.0
 
$131.1
Sell
 
Japanese yen
 
¥23,922.2
 
$212.6
Purchase
 
Malaysian ringgit
 
MYR 31.0
 
$7.7
Sell
 
Malaysian ringgit
 
MYR 336.5
 
$83.1
Sell
 
Singapore dollar
 
SGD 3.1
 
$2.3
Purchase
 
South African rand
 
ZAR 12.5
 
$1.0
Sell
 
South African rand
 
ZAR 61.1
 
$5.0




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8. Fair Value Measurements

The following is a description of the valuation techniques that we use to measure the fair value of assets and liabilities that we measure and report at fair value on a recurring basis:

•
Cash Equivalents. At September 30, 2018 and December 31, 2017, our cash equivalents consisted of money market funds. We value our money market cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.

•
Marketable Securities and Restricted Investments. At September 30, 2018 and December 31, 2017, our marketable securities consisted of foreign debt, foreign government obligations, U.S. debt, and time deposits, and our restricted investments consisted of foreign and U.S. government obligations. We value our marketable securities and restricted investments using observable inputs that reflect quoted prices for securities with identical characteristics or quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals). Accordingly, we classify the valuation techniques that use these inputs as either Level 1 or Level 2 depending on the inputs used. We also consider the effect of our counterparties’ credit standing in these fair value measurements.

•
Derivative Assets and Liabilities. At September 30, 2018 and December 31, 2017, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies and interest rate swap contracts involving major interest rates. Since our derivative assets and liabilities are not traded on an exchange, we value them using standard industry valuation models. As applicable, these models project future cash flows and discount the amounts to a present value using market-based observable inputs, including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. In evaluating credit risk, we consider the effect of our counterparties’ and our own credit standing in the fair value measurements of our derivative assets and liabilities, respectively.

At September 30, 2018 and December 31, 2017, the fair value measurements of our assets and liabilities measured on a recurring basis were as follows (in thousands):
 
 
 
 
Fair Value Measurements at Reporting
Date Using
 
 
 
 
 
 
 
September 30,
2018
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
200,613

 
$
200,613

 
$
—

 
$
—

Marketable securities:
 
 
 
 
 
 
 
 
Foreign debt
 
314,213

 
—

 
314,213

 
—

Foreign government obligations
 
117,975

 
—

 
117,975

 
—

U.S. debt
 
25,047

 
—

 
25,047

 
—

Time deposits
 
837,814

 
837,814

 
—

 
—

Restricted investments
 
258,613

 
—

 
258,613

 
—

Derivative assets
 
5,494

 
—

 
5,494

 
—

Total assets
 
$
1,759,769

 
$
1,038,427

 
$
721,342

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
7,564

 
$
—

 
$
7,564

 
$
—




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Fair Value Measurements at Reporting
Date Using
 
 
 
 
 
 
 
December 31,
2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
125,585

 
$
125,585

 
$
—

 
$
—

Marketable securities:
 
 
 
 
 
 
 
 
Foreign debt
 
238,858

 
—

 
238,858

 
—

Foreign government obligations
 
152,850

 
—

 
152,850

 
—

U.S. debt
 
73,671

 
—

 
73,671

 
—

Time deposits
 
255,000

 
255,000

 
—

 
—

Restricted investments
 
373,961

 
—

 
373,961

 
—

Derivative assets
 
4,303

 
—

 
4,303

 
—

Total assets
 
$
1,224,228

 
$
380,585

 
$
843,643

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
33,229

 
$
—

 
$
33,229

 
$
—


Fair Value of Financial Instruments

At September 30, 2018 and December 31, 2017, the carrying values and fair values of our financial instruments not measured at fair value were as follows (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
 
Notes receivable – noncurrent
 
$
9,306

 
$
9,264

 
$
10,495

 
$
10,516

Notes receivable, affiliate – current
 
21,308

 
23,638

 
20,411

 
23,317

Note receivable, affiliate – noncurrent
 
—

 
—

 
48,370

 
47,441

Liabilities:
 
 
 
 
 
 
 
 
Long-term debt, including current maturities (1)
 
$
478,101

 
$
491,243

 
$
406,388

 
$
416,486

——————————
(1)
Excludes capital lease obligations and unamortized discounts and issuance costs.

The carrying values in our condensed consolidated balance sheets of our trade accounts receivable, unbilled accounts receivable and retainage, restricted cash, accounts payable, income taxes payable, and accrued expenses approximated their fair values due to their nature and relatively short maturities; therefore, we excluded them from the foregoing table. The fair value measurements for our notes receivable and long-term debt are considered Level 2 measurements under the fair value hierarchy.

Credit Risk

We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, marketable securities, trade accounts receivable, restricted cash and investments, notes receivable, and foreign exchange forward contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, marketable securities, restricted cash and investments, and foreign exchange forward contracts with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty



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financial institutions. Our net sales are primarily concentrated among a limited number of customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. Depending upon the sales arrangement, we may require some form of payment security from our customers, including advance payments, parent guarantees, bank guarantees, surety bonds, or commercial letters of credit.

9. Equity Method Investments

From time to time, we may enter into investments or other strategic arrangements to expedite our penetration of certain markets and establish relationships with potential customers. We may also enter into strategic arrangements with customers or other entities to maximize the value of particular projects. Some of these arrangements may involve significant investments or other allocations of capital. Investments in unconsolidated entities for which we have significant influence, but not control, over the entities’ operating and fina