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 March 31, 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
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 April 20, 2018, 104,763,203 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 MARCH 31, 2018
TABLE OF CONTENTS
Page | ||
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 March 31, | ||||||||
2018 | 2017 | |||||||
Net sales | $ | 567,265 | $ | 891,791 | ||||
Cost of sales | 394,467 | 807,607 | ||||||
Gross profit | 172,798 | 84,184 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 41,126 | 48,199 | ||||||
Research and development | 20,324 | 22,799 | ||||||
Production start-up | 37,084 | 1,150 | ||||||
Restructuring and asset impairments | — | 20,031 | ||||||
Total operating expenses | 98,534 | 92,179 | ||||||
Operating income (loss) | 74,264 | (7,995 | ) | |||||
Foreign currency (loss) gain, net | (2,517 | ) | 246 | |||||
Interest income | 11,824 | 6,417 | ||||||
Interest expense, net | (5,182 | ) | (9,169 | ) | ||||
Other income, net | 17,934 | 25,861 | ||||||
Income before taxes and equity in earnings | 96,323 | 15,360 | ||||||
Income tax expense | (11,625 | ) | (5,679 | ) | ||||
Equity in earnings, net of tax | (1,747 | ) | (552 | ) | ||||
Net income | $ | 82,951 | $ | 9,129 | ||||
Net income per share: | ||||||||
Basic | $ | 0.79 | $ | 0.09 | ||||
Diluted | $ | 0.78 | $ | 0.09 | ||||
Weighted-average number of shares used in per share calculations: | ||||||||
Basic | 104,550 | 104,103 | ||||||
Diluted | 106,305 | 104,410 | ||||||
See accompanying notes to these condensed consolidated financial statements.
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FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Net income | $ | 82,951 | $ | 9,129 | ||||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustments | 6,014 | 4,641 | ||||||
Unrealized loss on marketable securities and restricted investments, net of tax of $3,110 and $116 | (25,924 | ) | (4,790 | ) | ||||
Unrealized loss on derivative instruments, net of tax of $(64) and $813 | (932 | ) | (2,154 | ) | ||||
Other comprehensive loss | (20,842 | ) | (2,303 | ) | ||||
Comprehensive income | $ | 62,109 | $ | 6,826 | ||||
See accompanying notes to these condensed consolidated financial statements.
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FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,858,338 | $ | 2,268,534 | ||||
Marketable securities | 1,020,136 | 720,379 | ||||||
Accounts receivable trade, net | 273,277 | 211,797 | ||||||
Accounts receivable, unbilled and retainage | 151,393 | 174,608 | ||||||
Inventories | 174,070 | 172,370 | ||||||
Balance of systems parts | 65,374 | 28,840 | ||||||
Project assets | 10,094 | 77,931 | ||||||
Notes receivable, affiliate | 20,411 | 20,411 | ||||||
Prepaid expenses and other current assets | 197,206 | 157,902 | ||||||
Total current assets | 3,770,299 | 3,832,772 | ||||||
Property, plant and equipment, net | 1,311,642 | 1,154,537 | ||||||
PV solar power systems, net | 355,143 | 417,108 | ||||||
Project assets | 430,678 | 424,786 | ||||||
Deferred tax assets, net | 64,427 | 51,417 | ||||||
Restricted cash and investments | 354,082 | 424,783 | ||||||
Equity method investments | 200,955 | 217,230 | ||||||
Goodwill | 14,462 | 14,462 | ||||||
Intangibles assets, net | 79,607 | 80,227 | ||||||
Inventories | 116,397 | 113,277 | ||||||
Note receivable, affiliate | 47,798 | 48,370 | ||||||
Other assets | 94,699 | 85,532 | ||||||
Total assets | $ | 6,840,189 | $ | 6,864,501 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 136,897 | $ | 120,220 | ||||
Income taxes payable | 10,164 | 19,581 | ||||||
Accrued expenses | 297,446 | 366,827 | ||||||
Current portion of long-term debt | 6,062 | 13,075 | ||||||
Deferred revenue | 67,336 | 81,816 | ||||||
Other current liabilities | 35,833 | 48,757 | ||||||
Total current liabilities | 553,738 | 650,276 | ||||||
Accrued solar module collection and recycling liability | 170,352 | 166,609 | ||||||
Long-term debt | 431,817 | 380,465 | ||||||
Other liabilities | 524,911 | 568,454 | ||||||
Total liabilities | 1,680,818 | 1,765,804 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 104,762,691 and 104,468,460 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | 105 | 104 | ||||||
Additional paid-in capital | 2,797,671 | 2,799,107 | ||||||
Accumulated earnings | 2,380,178 | 2,297,227 | ||||||
Accumulated other comprehensive (loss) income | (18,583 | ) | 2,259 | |||||
Total stockholders’ equity | 5,159,371 | 5,098,697 | ||||||
Total liabilities and stockholders’ equity | $ | 6,840,189 | $ | 6,864,501 | ||||
See accompanying notes to these condensed consolidated financial statements.
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FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 82,951 | $ | 9,129 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion | 24,419 | 32,968 | ||||||
Impairments and net losses on disposal of long-lived assets | 1,047 | 15,011 | ||||||
Share-based compensation | 8,652 | 7,051 | ||||||
Equity in earnings, net of tax | 1,747 | 552 | ||||||
Remeasurement of monetary assets and liabilities | (1,458 | ) | (2,558 | ) | ||||
Deferred income taxes | (5,567 | ) | 4,494 | |||||
Gain on sales of marketable securities and restricted investments | (19,470 | ) | (46 | ) | ||||
Liabilities assumed by customers for the sale of systems | (60,307 | ) | — | |||||
Other, net | 6,097 | 5,537 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, trade, unbilled and retainage | (37,633 | ) | 252,244 | |||||
Prepaid expenses and other current assets | (60,539 | ) | 34,441 | |||||
Inventories and balance of systems parts | (40,624 | ) | (38,131 | ) | ||||
Project assets and PV solar power systems | 131,342 | 506,078 | ||||||
Other assets | (8,260 | ) | (6,985 | ) | ||||
Income tax receivable and payable | 12,208 | (2,308 | ) | |||||
Accounts payable | 1,909 | (3,013 | ) | |||||
Accrued expenses and other liabilities | (84,832 | ) | (323,694 | ) | ||||
Accrued solar module collection and recycling liability | 3,032 | 2,374 | ||||||
Net cash (used in) provided by operating activities | (45,286 | ) | 493,144 | |||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (177,725 | ) | (112,993 | ) | ||||
Purchases of marketable securities and restricted investments | (366,429 | ) | (359,283 | ) | ||||
Proceeds from sales and maturities of marketable securities and restricted investments | 167,134 | 177,678 | ||||||
Proceeds from sales of equity method investments | 7,559 | — | ||||||
Other investing activities | (5,228 | ) | 1,408 | |||||
Net cash used in investing activities | (374,689 | ) | (293,190 | ) | ||||
Cash flows from financing activities | ||||||||
Repayment of long-term debt | (11,282 | ) | (22,048 | ) | ||||
Proceeds from borrowings under long-term debt, net of discounts and issuance costs | 65,309 | 94,670 | ||||||
Payments of tax withholdings for restricted shares | (10,137 | ) | (4,167 | ) | ||||
Proceeds from commercial letters of credit | — | 43,025 | ||||||
Contingent consideration payments and other financing activities | (1,734 | ) | (9,316 | ) | ||||
Net cash provided by financing activities | 42,156 | 102,164 | ||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5,074 | ) | (7,307 | ) | ||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (382,893 | ) | 294,811 | |||||
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 | $ | 1,947,583 | $ | 1,710,501 | ||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||
Property, plant and equipment acquisitions funded by liabilities | $ | 162,812 | $ | 21,498 | ||||
Acquisitions currently or previously funded by liabilities and contingent consideration | $ | 9,133 | $ | 21,610 | ||||
Accrued interest capitalized to long-term debt | $ | 786 | $ | 13,589 | ||||
See accompanying notes to these condensed consolidated financial statements.
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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 year balances have been reclassified to conform to the current year 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 months ended March 31, 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 subsidiaries, and the term “condensed consolidated financial statements” refers to the accompanying unaudited condensed and 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.
5
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. 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.
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 $20.0 million during the three months ended March 31, 2017, which included (i) $10.2 million of charges, primarily related to net losses on the disposition of previously impaired Series 4 and Series 5 manufacturing equipment, (ii) $6.2 million of severance benefits to terminated employees, and (iii) $3.6 million of net miscellaneous charges, primarily related to contract terminations, the write-off of operating supplies, and other Series 4 manufacturing exit costs. 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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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 March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Cash and cash equivalents: | ||||||||
Cash | $ | 1,732,289 | $ | 2,142,949 | ||||
Money market funds | 126,049 | 125,585 | ||||||
Total cash and cash equivalents | 1,858,338 | 2,268,534 | ||||||
Marketable securities: | ||||||||
Foreign debt | 293,939 | 238,858 | ||||||
Foreign government obligations | 117,699 | 152,850 | ||||||
U.S. debt | 53,498 | 73,671 | ||||||
Time deposits | 555,000 | 255,000 | ||||||
Total marketable securities | 1,020,136 | 720,379 | ||||||
Total cash, cash equivalents, and marketable securities | $ | 2,878,474 | $ | 2,988,913 | ||||
During the three months ended March 31, 2017, we sold marketable securities for proceeds of $103.2 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 March 31, 2018 and December 31, 2017 (in thousands):
As of March 31, 2018 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Foreign debt | $ | 296,454 | $ | 97 | $ | 2,612 | $ | 293,939 | ||||||||
Foreign government obligations | 118,994 | — | 1,295 | 117,699 | ||||||||||||
U.S. debt | 53,591 | — | 93 | 53,498 | ||||||||||||
Time deposits | 555,000 | — | — | 555,000 | ||||||||||||
Total | $ | 1,024,039 | $ | 97 | $ | 4,000 | $ | 1,020,136 | ||||||||
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 | ||||||||
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As of March 31, 2018, we identified 12 investments totaling $170.4 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $1.8 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 March 31, 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 March 31, 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 | $ | 164,816 | $ | 1,633 | $ | 83,972 | $ | 980 | $ | 248,788 | $ | 2,613 | ||||||||||||
Foreign government obligations | 31,300 | 461 | 86,398 | 833 | 117,698 | 1,294 | ||||||||||||||||||
U.S. debt | 53,498 | 93 | — | — | 53,498 | 93 | ||||||||||||||||||
Total | $ | 249,614 | $ | 2,187 | $ | 170,370 | $ | 1,813 | $ | 419,984 | $ | 4,000 | ||||||||||||
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 March 31, 2018 were as follows (in thousands):
Fair Value | ||||
One year or less | $ | 713,613 | ||
One year to two years | 164,764 | |||
Two years to three years | 141,759 | |||
Total | $ | 1,020,136 | ||
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5. Restricted Cash and Investments
Restricted cash and investments consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Restricted cash | $ | 84,147 | $ | 50,822 | ||||
Restricted investments | 269,935 | 373,961 | ||||||
Total restricted cash and investments (1) | $ | 354,082 | $ | 424,783 | ||||
——————————
(1) | There was an additional $5.1 million and $11.1 million of restricted cash included within “Prepaid expenses and other current assets” at March 31, 2018 and December 31, 2017, respectively. |
At March 31, 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 March 31, 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 facilities 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 three months ended March 31, 2018, we sold certain restricted investments for proceeds of $101.6 million, 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 March 31, 2018 and December 31, 2017 (in thousands):
As of March 31, 2018 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Foreign government obligations | $ | 109,981 | $ | 52,488 | $ | — | $ | 162,469 | ||||||||
U.S. government obligations | 115,244 | 410 | 8,188 | 107,466 | ||||||||||||
Total | $ | 225,225 | $ | 52,898 | $ | 8,188 | $ | 269,935 | ||||||||
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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 March 31, 2018, we identified six restricted investments totaling $103.8 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $8.2 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 March 31, 2018, the contractual maturities of our restricted investments were between 12 years and 19 years.
6. Consolidated Balance Sheet Details
Accounts receivable trade, net
Accounts receivable trade, net consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Accounts receivable trade, gross | $ | 275,604 | $ | 213,776 | ||||
Allowance for doubtful accounts | (2,327 | ) | (1,979 | ) | ||||
Accounts receivable trade, net | $ | 273,277 | $ | 211,797 | ||||
At March 31, 2018 and December 31, 2017, $8.1 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 March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Accounts receivable, unbilled | $ | 149,806 | $ | 172,594 | ||||
Retainage | 1,587 | 2,014 | ||||||
Accounts receivable, unbilled and retainage | $ | 151,393 | $ | 174,608 | ||||
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Inventories
Inventories consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Raw materials | $ | 168,399 | $ | 148,968 | ||||
Work in process | 17,085 | 14,085 | ||||||
Finished goods | 104,983 | 122,594 | ||||||
Inventories | $ | 290,467 | $ | 285,647 | ||||
Inventories – current | $ | 174,070 | $ | 172,370 | ||||
Inventories – noncurrent | $ | 116,397 | $ | 113,277 | ||||
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Prepaid expenses | $ | 52,770 | $ | 41,447 | ||||
Prepaid income taxes | 12,686 | 31,944 | ||||||
Value added tax receivables | 9,538 | 12,232 | ||||||
Restricted cash | 5,098 | 11,120 | ||||||
Derivative instruments | 3,330 | 4,303 | ||||||
Other current assets | 113,784 | 56,856 | ||||||
Prepaid expenses and other current assets | $ | 197,206 | $ | 157,902 | ||||
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Land | $ | 8,254 | $ | 8,181 | ||||
Buildings and improvements | 438,549 | 424,266 | ||||||
Machinery and equipment | 1,229,854 | 1,059,103 | ||||||
Office equipment and furniture | 166,687 | 157,512 | ||||||
Leasehold improvements | 49,105 | 48,951 | ||||||
Construction in progress | 622,625 | 641,263 | ||||||
Property, plant and equipment, gross | 2,515,074 | 2,339,276 | ||||||
Accumulated depreciation | (1,203,432 | ) | (1,184,739 | ) | ||||
Property, plant and equipment, net | $ | 1,311,642 | $ | 1,154,537 | ||||
Depreciation of property, plant and equipment was $18.6 million and $26.9 million for the three months ended March 31, 2018 and 2017, respectively.
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PV solar power systems, net
Photovoltaic (“PV”) solar power systems, consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
PV solar power systems, gross | $ | 387,459 | $ | 451,045 | ||||
Accumulated depreciation | (32,316 | ) | (33,937 | ) | ||||
PV solar power systems, net | $ | 355,143 | $ | 417,108 | ||||
Depreciation of PV solar power systems was $4.3 million and $5.1 million for the three months ended March 31, 2018 and 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 months ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Interest cost incurred | $ | (6,465 | ) | $ | (9,270 | ) | ||
Interest cost capitalized – project assets | 1,283 | 101 | ||||||
Interest expense, net | $ | (5,182 | ) | $ | (9,169 | ) | ||
Project assets
Project assets consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Project assets – development costs, including project acquisition and land costs | $ | 196,569 | $ | 250,590 | ||||
Project assets – construction costs | 244,203 | 252,127 | ||||||
Project assets | $ | 440,772 | $ | 502,717 | ||||
Project assets – current | $ | 10,094 | $ | 77,931 | ||||
Project assets – noncurrent | $ | 430,678 | $ | 424,786 | ||||
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Other assets
Other assets consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Deferred rent | $ | 26,627 | $ | 26,760 | ||||
Notes receivable (1) | 10,410 | 10,495 | ||||||
Income taxes receivable | 4,470 | 4,454 | ||||||
Other | 53,192 | 43,823 | ||||||
Other assets | $ | 94,699 | $ | 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 March 31, 2018 and December 31, 2017, the balance outstanding on the credit facility was €7.0 million ($8.6 million and $8.4 million, respectively). |
Goodwill
Goodwill for the relevant reporting unit consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
December 31, 2017 | Acquisitions (Impairments) | March 31, 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 or IPR&D 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 were 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.
The following tables summarize our intangible assets at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Developed technology | $ | 78,709 | $ | (25,984 | ) | $ | 52,725 | |||||
Power purchase agreements | 6,486 | (405 | ) | 6,081 | ||||||||
Patents | 7,068 | (3,522 | ) | 3,546 | ||||||||
In-process research and development | 17,255 | — | 17,255 | |||||||||
Intangibles assets, net | $ | 109,518 | $ | (29,911 | ) | $ | 79,607 | |||||
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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 $2.4 million and $2.1 million for the three months ended March 31, 2018 and 2017, respectively.
Accrued expenses
Accrued expenses consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Accrued property, plant and equipment | $ | 116,116 | $ | 133,433 | ||||
Accrued project assets | 37,867 | 55,834 | ||||||
Accrued inventory | 35,163 | 24,830 | ||||||
Product warranty liability (1) | 32,655 | 28,767 | ||||||
Accrued compensation and benefits | 27,524 | 73,985 | ||||||
Other | 48,121 | 49,978 | ||||||
Accrued expenses | $ | 297,446 | $ | 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 March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Derivative instruments | $ | 16,359 | $ | 27,297 | ||||
Contingent consideration (1) | 5,980 | 6,162 | ||||||
Financing liability (2) | 5,145 | 5,161 | ||||||
Indemnification liabilities (1) | — | 2,876 | ||||||
Other | 8,349 | 7,261 | ||||||
Other current liabilities | $ | 35,833 | $ | 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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Other liabilities
Other liabilities consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
Product warranty liability (1) | $ | 193,145 | $ | 195,507 | ||||
Transition tax liability (2) | 93,233 | 93,233 | ||||||
Other taxes payable | 91,591 | 89,724 | ||||||
Deferred revenue | 62,535 | 63,257 | ||||||
Financing liability (3) | 28,652 | 29,822 | ||||||
Derivative instruments | 6,532 | 5,932 | ||||||
Contingent consideration (1) | 3,153 | 3,153 | ||||||
Commercial letter of credit liability (1) | — | 43,396 | ||||||
Other | 46,070 | 44,430 | ||||||
Other liabilities | $ | 524,911 | $ | 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. |
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.
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The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | ||||||||||||
Prepaid Expenses and Other Current Assets | Other Current Liabilities | Other Liabilities | ||||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Foreign exchange forward contracts | $ | 586 | $ | 13,518 | $ | — | ||||||
Total derivatives designated as hedging instruments | $ | 586 | $ | 13,518 | $ | — | ||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Foreign exchange forward contracts | $ | 2,744 | $ | 2,786 | $ | — | ||||||
Interest rate swap contracts | — | 55 | 6,532 | |||||||||
Total derivatives not designated as hedging instruments | $ | 2,744 | $ | 2,841 | $ | 6,532 | ||||||
Total derivative instruments | $ | 3,330 | $ | 16,359 | $ | 6,532 | ||||||
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 | ||||||
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 three months ended March 31, 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 | (868 | ) | ||
Balance in accumulated other comprehensive (loss) income at March 31, 2018 | $ | (2,591 | ) | |
Balance in accumulated other comprehensive (loss) income at December 31, 2016 | $ | 2,556 | ||
Amounts recognized in other comprehensive (loss) income | (2,967 | ) | ||
Balance in accumulated other comprehensive (loss) income at March 31, 2017 | $ | (411 | ) | |
We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three months ended March 31, 2018 and 2017. During the three months ended March 31, 2018 and 2017, we recognized unrealized losses of $0.2 million and $0.1 million, respectively, within “Other income, net” related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges.
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The following table presents losses related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, | ||||||||||
Income Statement Line Item | 2018 | 2017 | ||||||||
Foreign exchange forward contracts | Foreign currency (loss) gain, net | $ | (12,656 | ) | $ | (20,159 | ) | |||
Interest rate swap contracts | Interest expense, net | (660 | ) | (4,676 | ) | |||||
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 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 Bank Bill Swap or “BBSW” interest rate while requiring the project to pay a fixed rate of 3.13%. The aggregate notional amount of the interest rate swap contracts proportionately adjusts with the scheduled draws and principal payments on the underlying hedged debt. As of March 31, 2018 and December 31, 2017, the aggregate notional value of the interest rate swap contracts was AUD 68.1 million ($52.3 million and $53.2 million respectively). These derivative instruments do not qualify for accounting as cash flow hedges 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 contracts. Accordingly, the changes in the fair value of the swap contracts are 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 Tokyo Interbank Offered Rate (“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 proportionately adjusts with the scheduled draws and principal payments on the underlying hedged debt. As of March 31, 2018 and December 31, 2017, the notional value of the interest rate swap contract was ¥12.8 billion ($119.9 million and $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.”
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 March 31, 2018 and December 31, 2017, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to 6 months and 9 months, respectively. 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
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hedges as of March 31, 2018 and December 31, 2017. As of March 31, 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):
March 31, 2018 | ||||
Currency | Notional Amount | USD Equivalent | ||
Indian rupee | INR 4,730.0 | $72.6 | ||
Euro | €10.2 | $12.5 | ||
Australian dollar | AUD 51.5 | $39.5 | ||
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 $2.6 million of net unrealized losses related to these forward contracts that are included in “Accumulated other comprehensive (loss) income” at March 31, 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) gain, net” on our condensed consolidated statements of operations. These contracts mature at various dates within the next 3 months.
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As of March 31, 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):
March 31, 2018 | ||||||
Transaction | Currency | Notional Amount | USD Equivalent | |||
Purchase | Euro | €185.7 | $228.4 | |||
Sell | Euro | €198.7 | $244.4 | |||
Purchase | Australian dollar | AUD 29.8 | $22.9 | |||
Sell | Australian dollar | AUD 27.9 | $21.4 | |||
Purchase | Malaysian ringgit | MYR 39.7 | $10.3 | |||
Sell | Malaysian ringgit | MYR 90.7 | $23.4 | |||
Sell | Canadian dollar | CAD 2.9 | $2.3 | |||
Purchase | Chilean peso | CLP 6,615.7 | $10.9 | |||
Sell | Chilean peso | CLP 7,917.4 | $13.1 | |||
Purchase | Chinese yuan | CNY 28.1 | $4.5 | |||
Purchase | Japanese yen | ¥571.0 | $5.4 | |||
Sell | Japanese yen | ¥21,130.0 | $198.5 | |||
Sell | Indian rupee | INR 5,641.7 | $86.6 | |||
Purchase | Singapore dollar | SGD 5.4 | $4.1 | |||
Sell | Mexican peso | MXN 37.3 | $2.1 | |||
Purchase | South African rand | ZAR 10.8 | $0.9 | |||
Sell | South African rand | ZAR 52.7 | $4.5 | |||
December 31, 2017 | ||||||
Transaction | Currency | Notional Amount | USD Equivalent | |||
Purchase | Euro | €151.4 | $181.6 | |||
Sell | Euro | €193.2 | $231.7 | |||
Purchase | Australian dollar | AUD 12.7 | $9.9 | |||
Sell | Australian dollar | AUD 56.8 | $44.4 | |||
Purchase | Malaysian ringgit | MYR 31.0 | $7.7 | |||
Sell | Malaysian ringgit | MYR 336.5 | $83.1 | |||
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 | |||
Sell | Japanese yen | ¥23,922.2 | $212.6 | |||
Purchase | Indian rupee | INR 645.7 | $10.1 | |||
Sell | Indian rupee | INR 8,376.0 | $131.1 | |||
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 March 31, 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 March 31, 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 March 31, 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 March 31, 2018 and December 31, 2017, the fair value measurements of our assets and liabilities measured on a recurring basis were as follows (in thousands):
March 31, 2018 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Total Fair Value and Carrying Value on Balance Sheet | 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 | $ | 126,049 | $ | 126,049 | $ | — | $ | — | ||||||||
Marketable securities: | ||||||||||||||||
Foreign debt | 293,939 | — | 293,939 | — | ||||||||||||
Foreign government obligations | 117,699 | — | 117,699 | — | ||||||||||||
U.S. debt | 53,498 | — | 53,498 | — | ||||||||||||
Time deposits | 555,000 | 555,000 | — | — | ||||||||||||
Restricted investments | 269,935 | — | 269,935 | — | ||||||||||||
Derivative assets | 3,330 | — | 3,330 | — | ||||||||||||
Total assets | $ | 1,419,450 | $ | 681,049 | $ | 738,401 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities | $ | 22,891 | $ | — | $ | 22,891 | $ | — | ||||||||
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December 31, 2017 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Total Fair Value and Carrying Value on Balance Sheet | 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 March 31, 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):
March 31, 2018 | December 31, 2017 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Assets: | ||||||||||||||||
Notes receivable – noncurrent | $ | 10,410 | $ | 10,372 | $ | 10,495 | $ | 10,516 | ||||||||
Notes receivable, affiliate – current | 20,411 | 22,939 | 20,411 | 23,317 | ||||||||||||
Note receivable, affiliate – noncurrent | 47,798 | 45,886 | 48,370 | 47,441 | ||||||||||||
Liabilities: | ||||||||||||||||
Long-term debt, including current maturities (1) | $ | 449,860 | $ | 453,658 | $ | 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 cash and cash equivalents, 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
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amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty financial institutions. Our net sales are primarily concentrated among a limited number of customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. Depending upon the sales arrangement, we may require some form of payment security from our customers, including advance payments, parent guarantees, bank guarantees, 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 financial activities are accounted for under the equity method of accounting. The following table summarizes our equity method investments as of March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | |||||||
8point3 Operating Company, LLC | $ | 191,655 | $ | 199,477 | ||||
Clean Energy Collective, LLC | 5,796 | 6,521 | ||||||
Other | 3,504 | 11,232 | ||||||
Equity method investments | $ | 200,955 | $ | 217,230 | ||||
8point3 Operating Company, LLC
In June 2015, 8point3 Energy Partners LP (the “Partnership”), a limited partnership formed by First Solar and SunPower Corporation (“SunPower,” and together with First Solar, the “Sponsors”), completed its initial public offering (the “IPO”) pursuant to a Registration Statement on Form S-1, as amended. As part of the IPO, the Sponsors contributed interests in various projects to 8point3 Operating Company, LLC (“OpCo”) in exchange for voting and economic interests in the entity, and the Partnership acquired an economic interest in OpCo using proceeds from the IPO. Since the formation of the Partnership, the Sponsors have, from time to time, sold interests in solar projects to the Partnership, which owns and operates such portfolio of solar energy generation projects.
In February 2018, we entered into an agreement with CD Clean Energy and Infrastructure V JV, LLC, an equity fund managed by Capital Dynamics, Inc. (“Capital Dynamics”) and certain other co-investors and other parties, pursuant to which such parties have agreed, subject to the satisfaction of certain conditions, to acquire our interests in the Partnership and its subsidiaries. As of March 31, 2018, we owned an aggregate of 22,116,925 Class B shares representing a 28% voting interest in the Partnership, and an aggregate of 6,721,810 common units and 15,395,115 subordinated units in OpCo together representing a 28% limited liability company interest in the entity. Future quarterly distributions from OpCo are subject to a subordination period in which holders of the subordinated units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages in the payment of minimum distributions from prior quarters. The subordination period will end after OpCo has earned and paid minimum quarterly distributions for three years ending on or after August 31, 2018 and there are no outstanding arrearages on common units. Notwithstanding the foregoing, the subordination period could end early if OpCo has earned and paid 150% of minimum quarterly distributions, plus the related distributions to incentive distribution right holders, for one year and there are no outstanding arrearages on common units. At the end of the subordination period, all subordinated units will convert to common units on a one-for-one basis. During the three months ended March 31, 2018, we received distributions from OpCo of $6.2 million. We also hold certain incentive distribution rights in OpCo, which represent a right to incremental distributions after certain distribution thresholds are met.
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The Partnership is managed and controlled by its general partner, 8point3 General Partner, LLC (“General Partner”), and we account for our interest in OpCo, a subsidiary of the Partnership, under the equity method of accounting as we are able to exercise significant influence over the Partnership due to our representation on the board of directors of its General Partner and certain of our associates serving as officers of its General Partner. Under the equity method of accounting, we recognize equity in earnings for our proportionate share of OpCo’s net income or loss, including adjustments for the amortization of a $40.2 million remaining basis difference, which resulted from the cost of our investment differing from our proportionate share of OpCo’s equity. We recognized losses, net of tax, from our investment in OpCo of $1.2 million and equity in earnings, net of tax, of $0.8 million for the three months ended March 31, 2018 and 2017, respectively.
In connection with the IPO, we also entered into an agreement with a subsidiary of the Partnership to lease back one of our originally contributed projects, Maryland Solar, until December 31, 2019. Under the terms of the agreement, we make fixed rent payments to the Partnership’s subsidiary and are entitled to all of the energy generated by the project. Due to our continuing involvement with the project, we account for the leaseback agreement as a financing transaction. In March 2018, FirstEnergy Solutions Corp. (“FirstEnergy”), the offtaker for the Maryland Solar PPA, filed for chapter 11 bankruptcy protection, and in April 2018, FirstEnergy filed a motion for entry of an order authorizing FirstEnergy and its affiliates to reject certain energy contracts, including the Maryland Solar PPA. In the event the PPA is terminated, we expect to sell energy generated by the Maryland Solar project on an open contract basis. As of March 31, 2018 and December 31, 2017, our financing obligation associated with the leaseback was $33.8 million and $35.0 million, respectively, which exceeded the associated carrying value of the Maryland Solar project on our condensed consolidated balance sheets.
In December 2016, we completed the sale of our remaining 34% interest in the 300 MW Desert Stateline project located in San Bernardino County, California to OpCo and received a $50.0 million promissory note as part of the consideration for the sale. The promissory note is unsecured and matures in December 2020. The promissory note bears interest at 4% per annum, which rate may increase to 6% per annum (i) upon the occurrence and during the continuation of a specified event of default and (ii) in respect of amounts accrued as payments-in-kind pursuant to the terms of such promissory note. Subject to certain conditions, OpCo may prepay the promissory note. Until OpCo has paid in full the principal and interest on the promissory note, OpCo is restricted in its ability to: (i) acquire interests in additional projects; (ii) use the net proceeds of equity issuances except as prescribed in the promissory note; (iii) incur additional indebtedness to which the promissory note would be subordinate; and (iv) extend the maturity date under OpCo’s existing credit facility. As of March 31, 2018 and December 31, 2017, the balance outstanding on the promissory note was $47.8 million and $48.4 million, respectively.
We provide operations and maintenance (“O&M”) services to certain of the Partnership’s partially owned project entities, including SG2 Holdings, LLC; Lost Hills Blackwell Holdings, LLC; NS Solar Holdings, LLC; Kingbird Solar A, LLC; Kingbird Solar B, LLC; and Desert Stateline LLC. During the three months ended March 31, 2018 and 2017, we recognized revenue of $2.9 million, respectively, for such O&M services.
In June 2015, OpCo entered into a $525.0 million senior secured credit facility, consisting of a $300.0 million term loan facility, a $25.0 million delayed draw term loan facility, and a $200.0 million revolving credit facility (the “OpCo Credit Facility”). In September 2016, OpCo amended the OpCo Credit Facility to include an incremental $250.0 million term loan facility, which increased the maximum borrowing capacity under the OpCo Credit Facility to $775.0 million. The OpCo Credit Facility is secured, in part, by a pledge of the Sponsors’ equity interests in OpCo.
Clean Energy Collective, LLC
In November 2014, we entered into various agreements to purchase a minority ownership interest in Clean Energy Collective, LLC (“CEC”). This investment provided us with additional access to the distributed generation market and a partner to develop and market community solar offerings to North American residential customers and businesses directly on behalf of client utility companies. As part of the investment, we also received a warrant to purchase additional ownership interests in CEC.
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In addition to our equity investment, we also entered into a term loan agreement and a convertible loan agreement with CEC in November 2014 and February 2016, respectively. In August 2017, we amended the terms of the warrant and loan agreements to (i) fix the exercise price of the warrant at our initial investment price per unit, (ii) extend the maturity of the loans to November 2018, (iii) allow for the capitalization of certain accrued and future interest on the term loan, (iv) require mandatory prepayments on the term loan under certain conditions, and (v) fix the interest rate of the term loan at 16% per annum, payable semiannually. The interest rate of the convertible loan remained at 10% per annum, payable at maturity unless converted earlier pursuant to a qualified equity financing by CEC. As of March 31, 2018 and December 31, 2017, the balance outstanding on the term loan was $15.8 million and the balance outstanding on the convertible loan was $4.6 million.
CEC is considered a variable interest entity, and our 26% ownership interest in and loans to the company are considered variable interests. We account for our investment in CEC under the equity method of accounting as we are not the primary beneficiary of the company given that we do not have the power to make decisions over the activities that most significantly impact the company’s economic performance. Under the equity method of accounting, we recognize equity in earnings for our proportionate share of CEC’s net income or loss, including adjustments for the amortization of a basis difference resulting from the cost of our investment differing from our proportionate share of CEC’s equity. During the three months ended March 31, 2018 and 2017, we recognized losses, net of tax, of $0.5 million and $1.2 million, respectively, from our investment in CEC.
10. Debt
Our long-term debt consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
Balance (USD) | ||||||||||
Loan Agreement | Currency | March 31, 2018 | December 31, 2017 | |||||||
Revolving Credit Facility | USD | $ | — | $ | — | |||||
Luz del Norte Credit Facilities | USD | 186,462 | 185,675 | |||||||
Ishikawa Credit Agreement | JPY | 163,610 | 121,446 | |||||||
Japan Credit Facility | JPY | — | 10,710 | |||||||
Tochigi Credit Facility | JPY | — | — | |||||||
Mashiko Credit Agreement | JPY | — | — | |||||||
Marikal Credit Facility | INR | 7,137 | 7,384 | |||||||
Hindupur Credit Facility | INR | — | 18,722 | |||||||
Anantapur Credit Facility | INR | 17,308 | — | |||||||
Tungabhadra Credit Facility | INR | 13,963 | — | |||||||
Manildra Credit Facility | AUD | 61,380 | 62,451 | |||||||
Capital lease obligations | Various | 127 | 156 | |||||||
Long-term debt principal | 449,987 | 406,544 | ||||||||
Less: unamortized discounts and issuance costs | (12,108 | ) | (13,004 | ) | ||||||
Total long-term debt | 437,879 | 393,540 | ||||||||
Less: current portion | (6,062 | ) | (13,075 | ) | ||||||
Noncurrent portion | $ | 431,817 | $ | 380,465 | ||||||
Revolving Credit Facility
Our amended and restated credit agreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent provides us with a senior secured credit facility (the “Revolving Credit Facility”) with an aggregate borrowing capacity of $500.0 million, which we may increase to $750.0 million, subject to certain conditions. Borrowings under the credit facility bear interest at (i) London Interbank Offered Rate (“LIBOR”), adjusted for Eurocurrency reserve requirements, plus a margin of 2.00% or (ii) a base rate as defined in the credit agreement plus
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a margin of 1.00% depending on the type of borrowing requested. These margins are also subject to adjustment depending on our consolidated leverage ratio. We had no borrowings under our Revolving Credit Facility as of March 31, 2018 and December 31, 2017 and had issued $35.9 million and $57.5 million, respectively, of letters of credit using availability under the facility. Loans and letters of credit issued under the Revolving Credit Facility are jointly and severally guaranteed by First Solar, Inc.; First Solar Electric, LLC; First Solar Electric (California), Inc.; and First Solar Development, LLC and are secured by interests in substantially all of the guarantors’ tangible and intangible assets other than certain excluded assets.
In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee at a rate of 0.30% per annum, based on the average daily unused commitments under the facility, which may also be adjusted due to changes in our consolidated leverage ratio. We also pay a letter of credit fee based on the applicable margin for Eurocurrency revolving loans on the face amount of each letter of credit and a fronting fee of 0.125%. Our Revolving Credit Facility matures in July 2022.
Luz del Norte Credit Facilities
In August 2014, Parque Solar Fotovoltaico Luz del Norte SpA (“Luz del Norte”), our indirect wholly-owned subsidiary and project company, entered into credit facilities with the Overseas Private Investment Corporation (“OPIC”) and the International Finance Corporation (“IFC”) to provide limited-recourse senior secured debt financing for the design, development, financing, construction, testing, commissioning, operation, and maintenance of a 141 MW PV solar power plant located near Copiapó, Chile. At the same time, Luz del Norte also entered into a Chilean peso facility (the “VAT facility” and together with the OPIC and IFC loans, the “Luz del Norte Credit Facilities”) with Banco de Crédito e Inversiones to fund Chilean value added tax associated with the construction of the Luz del Norte project. In March 2017, we repaid the remaining balance on the VAT facility.
In March 2017, we amended the terms of the OPIC and IFC credit facilities. Such amendments (i) allowed for the capitalization of accrued and unpaid interest through March 15, 2017, along with the capitalization of certain future interest payments as variable rate loans under the credit facilities, (ii) allowed for the conversion of certain fixed rate loans to variable rate loans upon scheduled repayment, (iii) extended the maturity of the OPIC and IFC loans until June 2037, and (iv) canceled the remaining borrowing capacity under the OPIC and IFC credit facilities with the exception of the capitalization of certain future interest payments. As of March 31, 2018 and December 31, 2017, the balance outstanding on the OPIC loans was $139.6 million and $139.0 million, respectively. As of March 31, 2018 and December 31, 2017, the balance outstanding on the IFC loans was $46.8 million and $46.6 million, respectively. The OPIC and IFC loans are secured by liens over all of Luz del Norte’s assets, which had an aggregate book value of $326.3 million, including intercompany charges, as of March 31, 2018 and by a pledge of all of the equity interests in the entity.
Ishikawa Credit Agreement
In December 2016, FS Japan Project 12 GK (“Ishikawa”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Ishikawa Credit Agreement”) with Mizuho Bank, Ltd. for aggregate borrowings of up to ¥27.3 billion ($256.5 million) for the development and construction of a 59 MW PV solar power plant located in Ishikawa, Japan. The credit agreement consists of a ¥24.0 billion ($225.5 million) senior loan facility, a ¥2.1 billion ($19.7 million) consumption tax facility, and a ¥1.2 billion ($11.3 million) letter of credit facility. The senior loan facility matures in October 2036, and the consumption tax facility matures in April 2020. The credit agreement is secured by pledges of Ishikawa’s assets, accounts, material project documents, and by the equity interests in the entity. As of March 31, 2018 and December 31, 2017, the balance outstanding on the credit agreement was $163.6 million and $121.4 million, respectively.
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Japan Credit Facility
In September 2015, First Solar Japan GK, our wholly-owned subsidiary, entered into a construction loan facility with Mizuho Bank, Ltd. for borrowings up to ¥4.0 billion ($37.6 million) for the development and construction of utility-scale PV solar power plants in Japan (the “Japan Credit Facility”). In September 2017, First Solar Japan GK renewed the facility for an additional one-year period until September 2018. The facility is guaranteed by First Solar, Inc. and secured by pledges of certain projects’ cash accounts and other rights in the projects. As of March 31, 2018 and December 31, 2017, the balance outstanding on the facility was zero and $10.7 million, respectively.
Tochigi Credit Facility
In June 2017, First Solar Japan GK, our wholly-owned subsidiary, entered into a term loan facility with Mizuho Bank, Ltd. for borrowings up to ¥7.0 billion ($65.8 million) for the development of utility-scale PV solar power plants in Japan (the “Tochigi Credit Facility”). The majority of the facility is available to be drawn by or before November 2018, and the aggregate term loan facility matures in March 2021. The facility is guaranteed by First Solar, Inc. and secured by pledges of certain of First Solar Japan GK’s accounts. As of March 31, 2018 and December 31, 2017, there was no balance outstanding on the term loan facility.
Mashiko Credit Agreement
In March 2018, FS Japan Project 14 GK (“Mashiko”), our indirect wholly-owned subsidiary and project