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 June 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

fslrlogoa17.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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

As of July 20, 2018, 104,802,050 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 JUNE 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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
309,318

 
$
623,326

 
$
876,583

 
$
1,515,117

Cost of sales
 
317,376

 
512,433

 
711,843

 
1,320,040

Gross (loss) profit
 
(8,058
)
 
110,893

 
164,740

 
195,077

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
50,854

 
48,957

 
91,980

 
97,156

Research and development
 
20,370

 
21,341

 
40,694

 
44,140

Production start-up
 
24,352

 
8,381

 
61,436

 
9,531

Restructuring and asset impairments
 

 
18,286

 

 
38,317

Total operating expenses
 
95,576

 
96,965

 
194,110

 
189,144

Operating (loss) income
 
(103,634
)
 
13,928

 
(29,370
)
 
5,933

Foreign currency gain (loss), net
 
2,422

 
(2,444
)
 
(95
)
 
(2,198
)
Interest income
 
16,865

 
7,555

 
28,689

 
13,972

Interest expense, net
 
(6,065
)
 
(6,374
)
 
(11,247
)
 
(15,543
)
Other (loss) income, net
 
(4,328
)
 
(2,699
)
 
13,606

 
23,162

(Loss) income before taxes and equity in earnings
 
(94,740
)
 
9,966

 
1,583

 
25,326

Income tax benefit (expense)
 
6,164

 
40,028

 
(5,461
)
 
34,349

Equity in earnings, net of tax
 
40,085

 
1,969

 
38,338

 
1,417

Net (loss) income
 
$
(48,491
)
 
$
51,963

 
$
34,460

 
$
61,092

 
 
 
 
 
 
 
 
 
Net (loss) income per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.46
)
 
$
0.50

 
$
0.33

 
$
0.59

Diluted
 
$
(0.46
)
 
$
0.50

 
$
0.32

 
$
0.58

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
104,776

 
104,338

 
104,664

 
104,221

Diluted
 
104,776

 
104,611

 
106,234

 
104,511


See accompanying notes to these condensed consolidated financial statements.



1

Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net (loss) income
 
$
(48,491
)
 
$
51,963

 
$
34,460

 
$
61,092

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(15,059
)
 
(4,038
)
 
(9,045
)
 
603

Unrealized gain (loss) on marketable securities and restricted investments, net of tax of $41, $(466), $3,151, and $(350)
 
506

 
4,523

 
(25,418
)
 
(267
)
Unrealized gain (loss) on derivative instruments, net of tax of $(914), $187, $(978), and $1,000
 
2,899

 
(298
)
 
1,967

 
(2,452
)
Other comprehensive (loss) income
 
(11,654
)
 
187

 
(32,496
)
 
(2,116
)
Comprehensive (loss) income
 
$
(60,145
)
 
$
52,150

 
$
1,964

 
$
58,976


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)
 
 
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
 
Current assets:
 

 
 
Cash and cash equivalents
 
$
2,024,491

 
$
2,268,534

Marketable securities
 
1,110,421

 
720,379

Accounts receivable trade, net
 
125,379

 
211,797

Accounts receivable, unbilled and retainage
 
177,711

 
174,608

Inventories
 
234,201

 
172,370

Balance of systems parts
 
72,411

 
28,840

Project assets
 
62,475

 
77,931

Notes receivable, affiliate
 
21,398

 
20,411

Prepaid expenses and other current assets
 
157,553

 
157,902

Total current assets
 
3,986,040

 
3,832,772

Property, plant and equipment, net
 
1,484,177

 
1,154,537

PV solar power systems, net
 
316,564

 
417,108

Project assets
 
500,863

 
424,786

Deferred tax assets, net
 
93,730

 
51,417

Restricted cash and investments
 
332,043

 
424,783

Equity method investments
 
8,110

 
217,230

Goodwill
 
14,462

 
14,462

Intangibles assets, net
 
77,095

 
80,227

Inventories
 
119,160

 
113,277

Note receivable, affiliate
 

 
48,370

Other assets
 
93,448

 
85,532

Total assets
 
$
7,025,692

 
$
6,864,501

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
161,139

 
$
120,220

Income taxes payable
 
29,822

 
19,581

Accrued expenses
 
381,053

 
366,827

Current portion of long-term debt
 
7,741

 
13,075

Deferred revenue
 
199,482

 
81,816

Other current liabilities
 
36,175

 
48,757

Total current liabilities
 
815,412

 
650,276

Accrued solar module collection and recycling liability
 
166,837

 
166,609

Long-term debt
 
448,554

 
380,465

Other liabilities
 
484,061

 
568,454

Total liabilities
 
1,914,864

 
1,765,804

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 104,797,535 and 104,468,460 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
 
105

 
104

Additional paid-in capital
 
2,809,272

 
2,799,107

Accumulated earnings
 
2,331,688

 
2,297,227

Accumulated other comprehensive (loss) income
 
(30,237
)
 
2,259

Total stockholders’ equity
 
5,110,828

 
5,098,697

Total liabilities and stockholders’ equity
 
$
7,025,692

 
$
6,864,501


See accompanying notes to these condensed consolidated financial statements.


3

Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
34,460

 
$
61,092

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
54,764

 
60,940

Impairments and net losses on disposal of long-lived assets
 
4,214

 
31,881

Share-based compensation
 
19,236

 
15,423

Equity in earnings, net of tax
 
(38,338
)
 
(1,417
)
Distributions received from equity method investments
 
12,394

 
11,180

Remeasurement of monetary assets and liabilities
 
6,178

 
(8,973
)
Deferred income taxes
 
(49,788
)
 
(21,887
)
Gains on sales of marketable securities and restricted investments
 
(19,472
)
 
(49
)
Liabilities assumed by customers for the sale of systems
 
(60,307
)
 

Other, net
 
(76
)
 
29

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, trade, unbilled and retainage
 
81,655

 
(135,234
)
Prepaid expenses and other current assets
 
(27,384
)
 
23,409

Inventories and balance of systems parts
 
(112,145
)
 
55,221

Project assets and PV solar power systems
 
(1,167
)
 
626,002

Other assets
 
(7,575
)
 
(8,070
)
Income tax receivable and payable
 
28,562

 
(12,231
)
Accounts payable
 
22,627

 
(37,902
)
Accrued expenses and other liabilities
 
134,961

 
(340,845
)
Accrued solar module collection and recycling liability
 
1,057

 
6,771

Net cash provided by operating activities
 
83,856

 
325,340

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(372,623
)
 
(217,502
)
Purchases of marketable securities and restricted investments
 
(761,633
)
 
(364,277
)
Proceeds from sales and maturities of marketable securities and restricted investments
 
471,444

 
252,809

Proceeds from sales of equity method investments
 
247,595

 

Payments received on notes receivable, affiliates
 
48,369

 
114

Other investing activities
 
(5,973
)
 
2,414

Net cash used in investing activities
 
(372,821
)
 
(326,442
)
Cash flows from financing activities
 
 
 
 
Repayment of long-term debt
 
(18,140
)
 
(23,014
)
Proceeds from borrowings under long-term debt, net of discounts and issuance costs
 
100,198

 
137,804

Payments of tax withholdings for restricted shares
 
(10,251
)
 
(4,247
)
Proceeds from commercial letters of credit
 

 
43,025

Contingent consideration payments and other financing activities
 
(1,816
)
 
(16,650
)
Net cash provided by financing activities
 
69,991

 
136,918

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(13,077
)
 
3,072

Net (decrease) increase in cash, cash equivalents and restricted cash
 
(232,051
)
 
138,888

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
 
$
2,098,425

 
$
1,554,578

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
165,670

 
$
48,742

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

 
$

Acquisitions currently or previously funded by liabilities and contingent consideration
 
$
15,798

 
$
17,657

Accrued interest capitalized to long-term debt
 
$
1,679

 
$
15,181


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 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 and six months ended June 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. 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 $38.3 million during the six months ended June 30, 2017, which included (i) $25.2 million of charges, primarily related to net losses on the disposition of previously impaired Series 4 and Series 5 manufacturing equipment, (ii) $6.8 million of severance benefits to terminated employees, and (iii) $6.4 million of net miscellaneous charges, primarily related to contract terminations, the write-off of operating supplies, and other Series 4 manufacturing exit costs. During the three months ended June 30, 2017, we incurred net charges of $18.3 million, primarily as a result of net losses on the disposition of the aforementioned manufacturing equipment. Substantially all amounts associated with these restructuring and asset impairment charges related to our 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Cash and cash equivalents:
 
 
 
 
Cash
 
$
1,804,118

 
$
2,142,949

Money market funds
 
220,373

 
125,585

Total cash and cash equivalents
 
2,024,491

 
2,268,534

Marketable securities:
 
 
 
 
Foreign debt
 
299,961

 
238,858

Foreign government obligations
 
117,771

 
152,850

U.S. debt
 
38,562

 
73,671

Time deposits
 
654,127

 
255,000

Total marketable securities
 
1,110,421

 
720,379

Total cash, cash equivalents, and marketable securities
 
$
3,134,912

 
$
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 June 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
 
June 30,
2018
 
December 31,
2017
Cash and cash equivalents
 
Cash and cash equivalents
 
$
2,024,491

 
$
2,268,534

Restricted cash  current (1)
 
Prepaid expenses and other current assets
 
6,554

 
11,120

Restricted cash  noncurrent (1)
 
Restricted cash and investments
 
67,380

 
50,822

Total cash, cash equivalents, and restricted cash
 
 
 
$
2,098,425

 
$
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 three and six months ended June 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 three and six months ended June 30, 2017, we sold marketable securities for proceeds of $15.1 million and $118.3 million, respectively, 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
As of June 30, 2018
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
302,899

 
$
1

 
$
2,939

 
$
299,961

Foreign government obligations
 
118,992

 

 
1,221

 
117,771

U.S. debt
 
38,607

 
2

 
47

 
38,562

Time deposits
 
654,127

 

 

 
654,127

Total
 
$
1,114,625

 
$
3

 
$
4,207

 
$
1,110,421




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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 June 30, 2018, we identified nine investments totaling $144.4 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $1.6 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 June 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 June 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
 
$
207,034

 
$
2,040

 
$
57,927

 
$
899

 
$
264,961

 
$
2,939

Foreign government obligations
 
31,273

 
494

 
86,498

 
727

 
117,771

 
1,221

U.S. debt
 
23,549

 
47

 

 

 
23,549

 
47

Total
 
$
261,856

 
$
2,581

 
$
144,425

 
$
1,626

 
$
406,281

 
$
4,207

 
 
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 June 30, 2018 were as follows (in thousands):
 
 
Fair
Value
One year or less
 
$
820,620

One year to two years
 
128,827

Two years to three years
 
160,974

Total
 
$
1,110,421





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Table of Contents

5. Restricted Cash and Investments

Restricted cash and investments consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
 
June 30,
2018
 
December 31,
2017
Restricted cash
 
$
67,380

 
$
50,822

Restricted investments
 
264,663

 
373,961

Total restricted cash and investments (1)
 
$
332,043

 
$
424,783

——————————
(1)
There was an additional $6.6 million and $11.1 million of restricted cash included within “Prepaid expenses and other current assets” at June 30, 2018 and December 31, 2017, respectively.

At June 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 June 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 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 six months ended June 30, 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
As of June 30, 2018
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
105,156

 
$
52,305

 
$

 
$
157,461

U.S. government obligations
 
115,975

 
377

 
9,150

 
107,202

Total
 
$
221,131

 
$
52,682

 
$
9,150

 
$
264,663




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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 June 30, 2018, we identified six restricted investments totaling $103.5 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $9.2 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 June 30, 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Accounts receivable trade, gross
 
$
126,472

 
$
213,776

Allowance for doubtful accounts
 
(1,093
)
 
(1,979
)
Accounts receivable trade, net
 
$
125,379

 
$
211,797


At June 30, 2018 and December 31, 2017, $28.0 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Accounts receivable, unbilled
 
$
175,753

 
$
172,594

Retainage
 
1,958

 
2,014

Accounts receivable, unbilled and retainage
 
$
177,711

 
$
174,608





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Inventories

Inventories consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Raw materials
 
$
180,836

 
$
148,968

Work in process
 
23,667

 
14,085

Finished goods
 
148,858

 
122,594

Inventories
 
$
353,361

 
$
285,647

Inventories – current
 
$
234,201

 
$
172,370

Inventories – noncurrent
 
$
119,160

 
$
113,277


Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Prepaid expenses
 
$
62,143

 
$
41,447

Value added tax receivables
 
13,187

 
12,232

Prepaid income taxes
 
6,689

 
31,944

Restricted cash
 
6,554

 
11,120

Derivative instruments 
 
3,757

 
4,303

Other current assets
 
65,223

 
56,856

Prepaid expenses and other current assets
 
$
157,553

 
$
157,902


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Land
 
$
8,097

 
$
8,181

Buildings and improvements
 
477,549

 
424,266

Machinery and equipment
 
1,490,425

 
1,059,103

Office equipment and furniture
 
166,504

 
157,512

Leasehold improvements
 
49,048

 
48,951

Construction in progress
 
515,025

 
641,263

Property, plant and equipment, gross
 
2,706,648

 
2,339,276

Accumulated depreciation
 
(1,222,471
)
 
(1,184,739
)
Property, plant and equipment, net
 
$
1,484,177

 
$
1,154,537


Depreciation of property, plant and equipment was $24.6 million and $43.2 million for the three and six months ended June 30, 2018, respectively, and $21.8 million and $48.7 million for the three and six months ended June 30, 2017, respectively.




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PV solar power systems, net

Photovoltaic (“PV”) solar power systems, consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
PV solar power systems, gross
 
$
344,077

 
$
451,045

Accumulated depreciation
 
(27,513
)
 
(33,937
)
PV solar power systems, net
 
$
316,564

 
$
417,108


Depreciation of PV solar power systems was $4.0 million and $8.3 million for the three and six months ended June 30, 2018, respectively, and $4.9 million and $9.8 million for the three and six months ended June 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 six months ended June 30, 2018 and 2017 (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest cost incurred
 
$
(7,591
)
 
$
(6,586
)
 
$
(14,057
)
 
$
(15,856
)
Interest cost capitalized – project assets
 
1,526

 
212

 
2,810

 
313

Interest expense, net
 
$
(6,065
)
 
$
(6,374
)
 
$
(11,247
)
 
$
(15,543
)

Project assets

Project assets consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Project assets – development costs, including project acquisition and land costs
 
$
281,325

 
$
250,590

Project assets – construction costs
 
282,013

 
252,127

Project assets
 
$
563,338

 
$
502,717

Project assets – current
 
$
62,475

 
$
77,931

Project assets – noncurrent
 
$
500,863

 
$
424,786


Other assets

Other assets consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Deferred rent
 
$
26,493

 
$
26,760

Notes receivable (1)
 
9,650

 
10,495

Income taxes receivable
 
4,485

 
4,454

Other
 
52,820

 
43,823

Other assets
 
$
93,448

 
$
85,532

——————————



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(1)
In April 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility bears interest at 8.0% per annum, payable quarterly, with the full amount due in December 2026. As of June 30, 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
December 31,
2017

Acquisitions (Impairments)

June 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 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. During the three months ended June 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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
95,964

 
$
(28,544
)
 
$
67,420

Power purchase agreements
 
6,486

 
(486
)
 
6,000

Patents
 
7,068

 
(3,393
)
 
3,675

Intangibles assets, net
 
$
109,518

 
$
(32,423
)
 
$
77,095

 
 
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 $4.9 million for the three and six months ended June 30, 2018, respectively, and $2.1 million and $4.1 million for the three and six months ended June 30, 2017, respectively.




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Accrued expenses

Accrued expenses consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Accrued property, plant and equipment
 
$
115,109

 
$
133,433

Accrued project assets
 
105,269

 
55,834

Accrued inventory
 
47,502

 
24,830

Product warranty liability (1)
 
32,241

 
28,767

Accrued compensation and benefits
 
30,088

 
73,985

Other
 
50,844

 
49,978

Accrued expenses
 
$
381,053

 
$
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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Contingent consideration (1)
 
$
12,845

 
$
6,162

Derivative instruments 
 
11,333

 
27,297

Financing liability (2)
 

 
5,161

Indemnification liabilities (1)
 

 
2,876

Other
 
11,997

 
7,261

Other current liabilities
 
$
36,175

 
$
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.

Other liabilities

Other liabilities consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Product warranty liability (1)
 
$
193,572

 
$
195,507

Other taxes payable
 
93,429

 
89,724

Transition tax liability (2)
 
82,733

 
93,233

Deferred revenue
 
58,771

 
63,257

Derivative instruments
 
7,996

 
5,932

Contingent consideration (1)
 
2,953

 
3,153

Financing liability (3)
 

 
29,822

Commercial letter of credit liability (1)
 

 
43,396

Other
 
44,607

 
44,430

Other liabilities
 
$
484,061

 
$
568,454

——————————



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Table of Contents

(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.

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

 
$
8,494

 
$

Total derivatives designated as hedging instruments
 
$

 
$
8,494

 
$

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange forward contracts
 
$
3,757

 
$
2,736

 
$

Interest rate swap contracts
 

 
103

 
7,996

Total derivatives not designated as hedging instruments
 
$
3,757

 
$
2,839

 
$
7,996

Total derivative instruments
 
$
3,757

 
$
11,333

 
$
7,996




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Table of Contents

 
 
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 six months ended June 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
 
1,201

Amounts reclassified to earnings impacting:
 
 
Net sales
 
1,744

Balance in accumulated other comprehensive (loss) income at June 30, 2018
 
$
1,222

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

Amounts recognized in other comprehensive (loss) income
 
(3,452
)
Balance in accumulated other comprehensive (loss) income at June 30, 2017
 
$
(896
)

We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three and six months ended June 30, 2018 and 2017. During the three and six months ended June 30, 2018, we recognized unrealized losses of $0.3 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 six months ended June 30, 2017, we recognized unrealized losses of $0.1 million and $0.2 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 six months ended June 30, 2018 and 2017 (in thousands):
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
Income Statement Line Item
 
2018
 
2017
 
2018
 
2017
Foreign exchange forward contracts
 
Foreign currency gain (loss), net
 
$
19,035

 
$
(3,499
)
 
$
6,379

 
$
(23,658
)
Interest rate swap contracts
 
Interest expense, net
 
(1,507
)
 
(1,006
)
 
(2,167
)
 
(5,682
)




16

Table of Contents

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 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 June 30, 2018, the aggregate notional value of the interest rate swap contracts was AUD 44.1 million ($32.6 million). 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 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. As of June 30, 2018 and December 31, 2017, the aggregate notional value of the interest rate swap contracts was AUD 56.8 million ($41.9 million) and AUD 68.1 million ($53.2 million), respectively. 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 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 is scheduled to proportionately adjust with the scheduled draws and principal payments on the underlying hedged debt. As of June 30, 2018 and December 31, 2017, the notional value of the interest rate swap contract was ¥16.0 billion ($144.2 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.”

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



17

Table of Contents

a portion of these forecasted cash flows. As of June 30, 2018 and December 31, 2017, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to 3 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 derivatives 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 June 30, 2018 and December 31, 2017. As of June 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):
 
 
June 30, 2018
Currency
 
Notional Amount
 
USD Equivalent
Indian rupee
 
INR 4,730.0
 
$69.0
 
 
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 June 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 gain (loss), net” on our condensed consolidated statements of operations. These contracts mature at various dates within the next 3 months.




18

Table of Contents

As of June 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):
 
 
June 30, 2018
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Australian dollar
 
AUD 46.5
 
$34.3
Sell
 
Australian dollar
 
AUD 48.4
 
$35.8
Purchase
 
Brazilian real
 
BRL 16.9
 
$4.4
Sell
 
Brazilian real
 
BRL 9.1
 
$2.4
Sell
 
Canadian dollar
 
CAD 2.9
 
$2.2
Sell
 
Chilean peso
 
CLP 1,283.4
 
$2.0
Purchase
 
Chinese yuan
 
CNY 20.0
 
$3.0
Purchase
 
Euro
 
€166.6
 
$194.0
Sell
 
Euro
 
€230.5
 
$268.4
Sell
 
Indian rupee
 
INR 962.0
 
$14.0
Purchase
 
Japanese yen
 
¥1,257.2
 
$11.4
Sell
 
Japanese yen
 
¥24,098.5
 
$217.6
Purchase
 
Malaysian ringgit
 
MYR 8.9
 
$2.2
Sell
 
Malaysian ringgit
 
MYR 18.3
 
$4.5
Sell
 
Mexican peso
 
MXN 37.3
 
$1.9
Purchase
 
Singapore dollar
 
SGD 5.4
 
$4.0
Purchase
 
South African rand
 
ZAR 12.1
 
$0.9
Sell
 
South African rand
 
ZAR 33.7
 
$2.4
 
 
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 June 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 June 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 June 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 June 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):
 
 
June 30, 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
 
$
220,373

 
$
220,373

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
 
Foreign debt
 
299,961

 

 
299,961

 

Foreign government obligations
 
117,771

 

 
117,771

 

U.S. debt
 
38,562

 

 
38,562

 

Time deposits
 
654,127

 
654,127

 

 

Restricted investments
 
264,663

 

 
264,663

 

Derivative assets
 
3,757

 

 
3,757

 

Total assets
 
$
1,599,214

 
$
874,500

 
$
724,714

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
19,329

 
$

 
$
19,329

 
$




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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 June 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):
 
 
June 30, 2018
 
December 31, 2017
 
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
 
Notes receivable – noncurrent
 
$
9,650

 
$
9,642

 
$
10,495

 
$
10,516

Notes receivable, affiliate – current
 
21,398

 
23,620

 
20,411

 
23,317

Note receivable, affiliate – noncurrent
 

 

 
48,370

 
47,441

Liabilities:
 
 
 
 
 
 
 
 
Long-term debt, including current maturities (1)
 
$
468,823

 
$
471,974

 
$
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



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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, 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 financial activities are accounted for under the equity method of accounting. The following table summarizes our equity method investments as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
8point3 Operating Company, LLC
 
$

 
$
199,477

Clean Energy Collective, LLC
 
4,786

 
6,521

Other
 
3,324

 
11,232

Equity method investments
 
$
8,110

 
$
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, 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 agreed, subject to the satisfaction of certain conditions, to acquire our interests in the Partnership and its subsidiaries. In June 2018, we completed the sale of such interests and received net proceeds of $240.0 million after the payment of fees, expenses, and other amounts.

We accounted for our interest in OpCo, a subsidiary of the Partnership, under the equity method of accounting as we were 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. During the three and six months ended June 30, 2018, we recognized equity in earnings, net of tax, of $40.9 million and $39.7 million, respectively, from our investment in OpCo, including a gain of $40.3 million, net of tax, for the sale of our interests in the Partnership and its subsidiaries. During the three and six months ended June 30, 2017, we recognized equity in earnings, net of tax, of $3.0 million and $3.8 million, respectively, from our investment in OpCo. During the six months ended June 30, 2018 and 2017, we received distributions from OpCo of $12.4 million and $11.2 million, 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 certain continuing involvement with the project, we accounted for the leaseback agreement as a financing



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transaction until the sale of our interests in the Partnership and its subsidiaries in June 2018. Following the sale of such interests, the Maryland Solar project qualified for sale-leaseback accounting, and we recognized net revenue of $32.0 million from the sale of the project. As of December 31, 2017, the financing obligation associated with the leaseback was $35.0 million.

In March 2018, FirstEnergy Solutions Corp. (“FirstEnergy”), the off-taker 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.

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. In June 2018, the outstanding balance on the promissory note of $47.8 million was repaid in conjunction with the sale of our interests in the Partnership and its subsidiaries.

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 and six months ended June 30, 2018, we recognized revenue of $2.7 million and $5.6 million, respectively, for such O&M services. During the three and six months ended June 30, 2017, we recognized revenue of $2.5 million and $5.4 million, respectively, for such O&M services.

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.

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 June 30, 2018 and December 31, 2017, the balance outstanding on the term loan was $16.4 million and $15.8 million, respectively, 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 and six months ended June 30, 2018, we recognized losses, net of tax, of $0.7 million and $1.2 million, respectively, from our investment in CEC. During the three and six months ended June 30, 2017, we recognized losses, net of tax, of $0.9 million and $2.1 million, respectively, from our investment in CEC.




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Summarized Financial Information

The following table presents summarized financial information for OpCo as provided to us by the investee (in thousands):
 
 
Six Months Ended
May 31,
 
 
2018
 
2017
Summary statement of operations information:
 
 
 
 
Net sales
 
$
28,736

 
$
26,575

Operating (loss) income
 
(38,606
)
 
4,825

Net (loss) income (1)
 
(39,280
)
 
4,783

Net (loss) income attributable to equity method investee (1) (2)
 
(45,228
)
 
20,302

——————————
(1)
The difference between Net (loss) income and Net (loss) income attributable to equity method investee is due to OpCo’s tax equity financing facilities with third-party investors that hold noncontrolling ownership interests in certain of its subsidiaries. Accordingly, earnings or losses are allocated to such tax equity investors using the Hypothetical Liquidation at Book Value (or “HLBV”) method. During the six months ended May 31, 2018 and 2017, OpCo allocated certain earnings or losses to such third-party investors under the HLBV method, which represented the difference between Net (loss) income and Net (loss) income attributable to equity method investee.

(2)
Our proportionate share of OpCo’s net loss for the three and six months ended June 30, 2018 excluded the investee’s impairment loss related to the Maryland Solar project as we accounted for the sale-leaseback of the project as a financing transaction and the associated financing liability exceeded the carrying value of the project.

10. Debt

Our long-term debt consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
 
 
Balance (USD)
Loan Agreement
 
Currency
 
June 30,
2018
 
December 31,
2017
Revolving Credit Facility
 
USD
 
$

 
$

Luz del Norte Credit Facilities
 
USD
 
187,253

 
185,675

Ishikawa Credit Agreement
 
JPY
 
157,257

 
121,446

Japan Credit Facility
 
JPY
 

 
10,710

Tochigi Credit Facility
 
JPY
 
190

 

Mashiko Credit Agreement
 
JPY
 

 

Marikal Credit Facility
 
INR
 

 
7,384

Hindupur Credit Facility
 
INR
 

 
18,722

Anantapur Credit Facility
 
INR
 
16,464

 

Tungabhadra Credit Facility
 
INR
 
13,282

 

Manildra Credit Facility
 
AUD
 
59,045

 
62,451

Beryl Credit Facility
 
AUD
 
35,332

 

Capital lease obligations
 
Various
 
105

 
156

Long-term debt principal
 
 
 
468,928

 
406,544

Less: unamortized discounts and issuance costs
 
 
 
(12,633
)
 
(13,004
)
Total long-term debt
 
 
 
456,295

 
393,540

Less: current portion
 
 
 
(7,741
)
 
(13,075
)
Noncurrent portion
 
 
 
$
448,554

 
$
380,465





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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 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 June 30, 2018 and December 31, 2017 and had issued $52.3 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 June 30, 2018 and December 31, 2017, the balance outstanding on the OPIC loans was $140.3 million and $139.0 million, respectively. As of June 30, 2018 and December 31, 2017, the balance outstanding on the IFC loans was $47.0 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 $322.9 million, including intercompany charges, as of June 30, 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 up to ¥27.3 billion ($246.5 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 ($216.7 million) senior loan facility, a ¥2.1 billion ($19.0 million) consumption tax facility, and a ¥1.2 billion ($10.8 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



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secured by pledges of Ishikawa’s assets, accounts, material project documents, and by the equity interests in the entity. As of June 30, 2018 and December 31, 2017, the balance outstanding on the credit agreement was $157.3 million and $121.4 million, respectively.

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 ($36.1 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 June 30, 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 ($63.2 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 June 30, 2018 and December 31, 2017, the balance outstanding on the term loan facility was $0.2 million and zero, respectively.

Mashiko Credit Agreement

In March 2018, FS Japan Project 14 GK (“Mashiko”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Mashiko Credit Agreement”) with Mizuho Bank, Ltd. for aggregate borrowings up to ¥9.2 billion ($83.1 million) for the development and construction of a 19 MW PV solar power plant located in Tochigi, Japan. The credit agreement consists of a ¥8.1 billion ($73.1 million) senior loan facility, a ¥0.7 billion ($6.3 million) consumption tax facility, and a ¥0.4 billion ($3.6 million) letter of credit facility. The senior loan facility matures in March 2037, and the consumption tax facility matures in September 2020. The credit agreement is secured by pledges of Mashiko’s assets, accounts, material project documents, and ownership interests. As of June 30, 2018, there was no balance outstanding on the credit agreement.

Marikal Credit Facility

In March 2015, Marikal Solar Parks Private Limited, our indirect wholly-owned subsidiary and project company, entered into a term loan facility (the “Marikal Credit Facility”) with Axis Bank as administrative agent for aggregate borrowings up to INR 0.5 billion ($8.0 million) for the development and construction of a 10 MW PV solar power plant located in Telangana, India. In May 2018, we repaid the remaining $6.8 million principal balance on the term loan facility. As of December 31, 2017, the balance outstanding on the term loan facility was $7.4 million.

Hindupur Credit Facility

In November 2016, Hindupur Solar Parks Private Limited, our indirect wholly-owned subsidiary and project company, entered into a term loan facility (the “Hindupur Credit Facility”) with Yes Bank Limited for borrowings up to INR 4.3 billion ($62.8 million) for costs related to an 80 MW portfolio of PV solar power plants located in Andhra Pradesh, India. The term loan facility had a letter of credit sub-limit of INR 3.2 billion ($46.7 million), which was used for project related costs. In March 2018, we completed the sale of our Hindupur projects, and the outstanding balance of the Hindupur Credit Facility of $17.0 million was assumed by the customer. As of December 31, 2017, we had issued INR 2.9 billion ($42.3 million) of letters of credit under the term loan facility, and the balance outstanding on the term loan facility was $18.7 million.




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Anantapur Credit Facility

In March 2018, Anantapur Solar Parks Private Limited, our indirect wholly-owned subsidiary and project company, entered into a term loan facility (the “Anantapur Credit Facility”) with J.P. Morgan Securities India Private Limited for borrowings up to INR 1.2 billion ($17.5 million) for costs related to a 20 MW PV solar power plant located in Karnataka, India. The term loan facility matures in February 2021 and is secured by a letter of credit issued by JPMorgan Chase Bank, N.A., Singapore, in favor of the lender. Such letter of credit is secured by a cash deposit placed by First Solar FE Holdings Pte. Ltd. As of June 30, 2018, the balance outstanding on the term loan facility was $16.5 million.

Tungabhadra Credit Facility

In March 2018, Tungabhadra Solar Parks Private Limited, our indirect wholly-owned subsidiary and project company, entered into a term loan facility (the “Tungabhadra Credit Facility”) with J.P. Morgan Securities India Private Limited for borrowings up to INR 1.0 billion ($14.6 million) for costs related to a 20 MW PV solar power plant located in Karnataka, India. The term loan facility matures in February 2021 and is secured by a letter of credit issued by JPMorgan Chase Bank, N.A., Singapore, in favor of the lender. Such letter of credit is secured by a cash deposit placed by First Solar FE Holdings Pte. Ltd. As of June 30, 2018, the balance outstanding on the term loan facility was $13.3 million.

Manildra Credit Facility

In March 2017, Manildra Finco Pty Ltd, our indirect wholly-owned subsidiary and project financing company, entered into a term loan agreement (the “Manildra Credit Facility”) with Société Générale S.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. for aggregate borrowings up to AUD 81.7 million ($60.3 million) for costs related to a 49 MW PV solar power plant located in New South Wales, Australia. The credit facility consists of an AUD 75.7 million ($55.9 million) construction loan facility and an additional AUD 6.0 million ($4.4 million) goods and service tax facility (or “GST facility”) to fund certain taxes associated with the construction of the associated project. Upon completion of the project’s construction, the construction loan facility will convert to a term loan facility, which matures in March 2022. The GST facility matures in March 2019. The credit facility is secured by pledges of the borrower’s assets, accounts, material project documents, and by the equity interests in the entity. As of June 30, 2018 and December 31, 2017, the balance outstanding on the term loan facility was $59.0 million and $62.5 million, respectively.

Beryl Credit Facility

In May 2018, FS NSW Project No 1 Finco Pty Ltd, our wholly-owned subsidiary and project financing company, entered into a term loan agreement (the “Beryl Credit Facility”) with MUFG Bank, Ltd.; Société Générale, Hong Kong Branch; and Mizuho Bank, Ltd. for aggregate borrowings up to AUD 146.4 million ($108.1 million) for the development and construction of an 87 MW PV solar power plant located in New South Wales, Australia. The credit facility consists of an AUD 135.4 million ($100.0 million) construction loan facility, an AUD 7.0 million ($5.2 million) GST facility to fund certain taxes associated with the construction of the project, and an AUD 4.0 million ($3.0 million) letter of credit facility. Upon completion of the project’s construction, the construction loan facility will convert to a term loan facility. The term loan facility matures in May 2023, and the GST facility matures in May 2020. The credit facility is secured by pledges of the borrower’s assets, accounts, material project documents, and by the equity interests in the entity. As of June 30, 2018, the balance outstanding on the term loan facility was $35.3 million.




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Variable Interest Rate Risk

Certain of our long-term debt agreements bear interest at prime, LIBOR, TIBOR, BBSY, or equivalent variable rates. An increase in these variable rates would increase the cost of borrowing under our Revolving Credit Facility and certain project specific debt financings. Our long-term debt borrowing rates as of June 30, 2018 were as follows:
Loan Agreement
 
June 30, 2018
Revolving Credit Facility
 
4.09%
Luz del Norte Credit Facilities (1)
 
Fixed rate loans at bank rate plus 3.50%
 
Variable rate loans at 91-Day U.S. Treasury Bill Yield or LIBOR plus 3.50%
Ishikawa Credit Agreement
 
Senior loan facility at 6-month TIBOR plus 0.75% (2)
 
Consumption tax facility at 3-month TIBOR plus 0.5%
Japan Credit Facility
 
1-month TIBOR plus 0.5%
Tochigi Credit Facility
 
3-month TIBOR plus 1.0%
Mashiko Credit Agreement
 
Senior loan facility at 6-month TIBOR plus 0.70%
 
Consumption tax facility at 3-month TIBOR plus 0.5%
Anantapur Credit Facility
 
INR overnight indexed swap rate plus 1.5%
Tungabhadra Credit Facility
 
INR overnight indexed swap rate plus 1.5%
Manildra Credit Facility
 
Construction loan facility at 1-month BBSY plus 1.70% (2)
 
GST facility at 1-month BBSY plus 1.60%
Beryl Credit Facility
 
Construction loan facility at 1-month BBSY plus 1.55% (2)
 
GST facility at 1-month BBSY plus 1.00%
Capital lease obligations
 
Various
——————————
(1)
Outstanding balance comprised of $162.7 million of fixed rate loans and $24.5 million of variable rate loans as of June 30, 2018.

(2)
We have entered into interest rate swap contracts to hedge portions of these variable rates. See Note 7. “Derivative Financial Instruments” to our condensed consolidated financial statements for additional information.

Future Principal Payments

At June 30, 2018, the future principal payments on our long-term debt, excluding payments related to capital leases, were due as follows (in thousands):
 
 
Total Debt
Remainder of 2018
 
$
1,144

2019
 
11,212

2020
 
28,292

2021
 
43,324

2022
 
59,439

Thereafter
 
325,412

Total long-term debt future principal payments
 
$
468,823





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11. Commitments and Contingencies

Commercial Commitments

During the normal course of business, we enter into commercial commitments in the form of letters of credit, bank guarantees, and surety bonds to provide financial and performance assurance to third parties. Our amended and restated Revolving Credit Facility provides us with a sub-limit of $400.0 million to issue letters of credit, subject to certain additional limits depending on the currencies of the letters of credit, at a fee based on the applicable margin for Eurocurrency revolving loans and a fronting fee. As of June 30, 2018, we had $52.3 million in letters of credit issued under our Revolving Credit Facility, leaving $347.7 million of availability for the issuance of additional letters of credit. The majority of these letters of credit supported our systems projects. As of June 30, 2018, we also had $0.6 million of bank guarantees and letters of credit under separate agreements that were posted by certain of our foreign subsidiaries, $260.5 million of letters of credit issued under three bilateral facilities, of which $34.9 million was secured with cash, and $136.8 million of surety bonds outstanding, primarily for our systems projects. The available bonding capacity under our surety lines was $579.7 million as of June 30, 2018.

In addition to the commercial commitments noted above, we also issued certain commercial letters of credit, also known as letters of undertaking, under our Hindupur Credit Facility as discussed in Note 10. “Debt” to our condensed consolidated financial statements. Such commercial letters of credit represented conditional commitments on the part of the issuing financial institution to provide payment on amounts drawn in accordance with the terms of the individual documents. As part of the financing of the associated systems projects, we presented these commercial letters of credit to other financial institutions, whereby we received immediate funding, and these other financial institutions agreed to settle such letters at a future date. At the time of settlement, the balance of the commercial letters of credit would be included in the balance outstanding of the credit facility. In the periods between the receipt of cash and the subsequent settlement of the commercial letters of credit, we accrued interest on the balance or otherwise accreted any discounted value of the letters to their face value and recorded such amounts as “Interest expense, net” on our condensed consolidated statements of operations. In March 2018, we completed the sale of our Hindupur projects, and the outstanding letters of credit of $43.3 million under the Hindupur Credit Facility were assumed by the customer. As of December 31, 2017, we accrued $43.4 million for contingent obligations associated with such commercial letters of credit. These amounts were classified as “Other liabilities” on our condensed consolidated balance sheets to align with the timing in which we expected to settle such obligations as payments under the associated credit facility.

Supply Agreements

In April 2018, we entered into a supply agreement for the purchase of substrate glass for our PV solar modules. Under the terms of the agreement, we expect to pay approximately $2.4 billion over the supply period, which ends in December 2027. The agreement includes an aggregate termination penalty up to $350 million, of which $250 million declines on a straight-line basis over a period of five years beginning in July 2020 and $100 million declines on a straight-line basis over a period of eight years beginning in October 2019.

In March 2018, we entered into a 10-year supply agreement for the purchase of cover glass for our PV solar modules. Under the terms of the agreement, we expect to pay approximately $500 million over the 10-year supply period, which is scheduled to begin by January 2020. The agreement includes a termination penalty of up to $80 million, which declines annually on a straight-line basis over a period of six years.

Product Warranties

When we recognize revenue for module or system sales, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations for both modules and the balance of the systems. We make and revise these estimates based primarily on the number of solar modules under warranty installed at customer locations, our historical experience with warranty claims, our monitoring of field installation sites, our internal testing and the expected future performance of our solar modules and balance of systems (“BoS”) parts, and our estimated replacement costs. From time to time,



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we have taken remediation actions with respect to affected modules beyond our limited warranties and may elect to do so in the future, in which case we would incur additional expenses. Such potential voluntary future remediation actions beyond our limited warranty obligations may be material to our condensed consolidated statements of operations if we commit to any such remediation actions.

Product warranty activities during the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Product warranty liability, beginning of period
 
$
225,800

 
$
253,422

 
$
224,274

 
$
252,408

Accruals for new warranties issued
 
1,836

 
5,270

 
5,468

 
10,286

Settlements
 
(2,472
)
 
(2,249
)
 
(5,081
)
 
(3,916
)
Changes in estimate of product warranty liability
 
649

 
(16,742
)
 
1,152

 
(19,077
)
Product warranty liability, end of period
 
$
225,813

 
$
239,701

 
$
225,813

 
$
239,701

Current portion of warranty liability
 
$
32,241

 
$
37,217

 
$
32,241

 
$
37,217

Noncurrent portion of warranty liability
 
$
193,572

 
$
202,484

 
$
193,572

 
$
202,484


We estimate our limited product warranty liability for power output and defects in materials and workmanship under normal use and service conditions based on warranty return rates of approximately 1% to 3% for modules covered under warranty, depending on the series of module technology. As of June 30, 2018, a 1% change in estimated warranty return rates would change our module warranty liability by $74.5 million, and a 1% change in the estimated warranty return rate for BoS parts would not have a material impact on the associated warranty liability.

Performance Guarantees

As part of our systems business, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the engineering, procurement, and construction (“EPC”) agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable period meets or exceeds the modeled energy expectation, after certain adjustments. If there is an underperformance event with regards to these tests, we may incur liquidated damages as specified in the EPC contract. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. As of June 30, 2018 and December 31, 2017, we accrued $8.6 million and $2.1 million, respectively, of estimated obligations under such arrangements, which were classified as “Other current liabilities” in our condensed consolidated balance sheets.

As part of our O&M service offerings, we typically offer an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside of our control as the service provider, such as weather, curtailment, outages, force majeure, and other conditions that may affect system availability. Effective availability guarantees are only offered as part of our O&M services and terminate at the end of an O&M arrangement. If we fail to meet the contractual threshold for these guarantees, we may incur liquidated damages for certain lost energy under the PPA. Our O&M agreements typically contain provisions limiting our total potential losses under an agreement, including amounts paid for liquidated damages, to a percentage of O&M fees. Many of our O&M agreements also contain provisions whereby we may receive a bonus payment if system availability exceeds a separate threshold. As of June 30, 2018 and December 31, 2017, we did not accrue any estimated obligations under our effective availability guarantees.

Indemnifications

In certain limited circumstances, we have provided indemnifications to customers, including project tax equity investors, under which we are contractually obligated to compensate such parties for losses they suffer resulting from a breach of a representation, warranty, or covenant or a reduction in tax benefits received, including investment tax credits.



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Project related tax benefits are, in part, based on guidance provided by the Internal Revenue Service and U.S. Treasury Department, which includes assumptions regarding the fair value of qualifying PV solar power systems. For any sales contracts that have such indemnification provisions, we initially recognize a liability under ASC 460, Guarantees, for the estimated premium that would be required by a guarantor to issue the same indemnity in a standalone arm’s-length transaction with an unrelated party. We initially measure such liabilities at the greater of the fair value of the indemnity or the contingent liability required to be recognized under ASC 450, Contingencies, and reduce the revenue recognized in the related transaction.

We estimate the fair value of indemnities provided based on the cost of insurance policies that cover the underlying risks being indemnified and may purchase such policies to mitigate our exposure to potential indemnification payments. After an indemnification liability is recorded, we derecognize such amount pursuant to ASC 460-10-35-2 depending on the nature of the indemnity, which derecognition typically occurs upon expiration or settlement of the arrangement, and any contingent aspects of the indemnity are accounted for in accordance with ASC 450. Changes to any such indemnification liabilities provided are recorded as adjustments to revenue. As of June 30, 2018 and December 31, 2017, we accrued $3.0 million and $4.9 million of noncurrent indemnification liabilities, respectively, for tax related indemnifications. As of December 31, 2017, we also accrued $2.9 million of current indemnification liabilities for such matters. As of June 30, 2018, the maximum potential amount of future payments under our tax related indemnifications was $122.3 million, and we held insurance policies allowing us to recover up to $84.9 million of potential amounts paid under the indemnifications covered by the policies.

Contingent Consideration

As part of our prior acquisition of Enki Technology, Inc. (“Enki”), we agreed to pay additional consideration to the selling shareholders contingent upon the achievement of certain production and module performance milestones. As of June 30, 2018 and December 31, 2017, we accrued $3.5 million and $1.8 million of current liabilities, respectively, for our contingent obligations associated with the Enki acquisition based on their estimated fair values and the expected timing of payment.

We continually seek to make additions to our advanced-stage project pipeline by actively developing our early-to-mid-stage project pipeline and by pursuing opportunities to acquire projects at various stages of development. In connection with such project acquisitions, we may agree to pay additional amounts to project sellers upon the achievement of certain milestones, such as obtaining a PPA, obtaining financing, or selling the project to a new owner. We recognize a project acquisition contingent liability when we determine that such a liability is both probable and reasonably estimable, and the carrying amount of the related project asset is correspondingly increased. In May 2018, we acquired a portfolio of development projects in the southeastern United States for $21.9 million, which included $5.0 million of contingent consideration. As of June 30, 2018 and December 31, 2017, we accrued $9.3 million and $4.4 million of current liabilities, respectively, and $3.0 million and $3.2 million of long-term liabilities, respectively, for project related contingent obligations. Any future differences between the acquisition-date contingent obligation estimate and the ultimate settlement of the obligation are recognized as an adjustment to the project asset, as contingent payments are considered direct and incremental to the underlying value of the related project.

Solar Module Collection and Recycling Liability

We voluntarily established a module collection and recycling program to collect and recycle modules sold and covered under such program once the modules reach the end of their useful lives. For customer sales contracts that include modules covered under this program, we agree to pay the costs for the collection and recycling of qualifying solar modules, and the end-users agree to notify us, disassemble their solar power systems, package the solar modules for shipment, and revert ownership rights over the modules back to us at the end of the modules’ service lives. Accordingly, we record any collection and recycling obligations within “Cost of sales” at the time of sale based on the estimated cost to collect and recycle the covered solar modules. During the three and six months ended June 30, 2018 and 2017, substantially all of our modules sold were not covered by our collection and recycling program.




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We estimate the cost of our collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; the scale of recycling centers; and an estimated third-party profit margin and return on risk for collection and recycling services. We base these estimates on (i) our experience collecting and recycling our solar modules, (ii) the expected timing of when our solar modules will be returned for recycling, and (iii) the expected economic factors at the time the solar modules will be collected and recycled. In the periods between the time of sale and the related settlement of the collection and recycling obligation, we accrete the carrying amount of the associated liability by applying the discount rate used for its initial measurement. We classify accretion as an operating expense within “Selling, general and administrative” expense on our condensed consolidated statements of operations. We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly.

Our module collection and recycling liability was $166.8 million and $166.6 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, a 1% increase in the annualized inflation rate used in our estimated future collection and recycling cost per module would increase our liability by $33.6 million, and a 1% decrease in that rate would decrease our liability by $28.2 million. See Note 5. “Restricted Cash and Investments” to our condensed consolidated financial statements for more information about our arrangements for funding this liability.

Legal Proceedings

Class Action

On March 15, 2012, a purported class action lawsuit titled Smilovits v. First Solar, Inc., et al., Case No. 2:12-cv-00555-DGC, was filed in the United States District Court for the District of Arizona (hereafter “Arizona District Court”) against the Company and certain of our current and former directors and officers. The complaint was filed on behalf of persons who purchased or otherwise acquired the Company’s publicly traded securities between April 30, 2008 and February 28, 2012 (the “Class Action”). The complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for damages, including interest, and an award of reasonable costs and attorneys’ fees to the putative class. The Company believes it has meritorious defenses and will vigorously defend this action.

On July 23, 2012, the Arizona District Court issued an order appointing as lead plaintiffs in the Class Action the Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme (collectively, the “Pension Schemes”). The Pension Schemes filed an amended complaint on August 17, 2012, which contains similar allegations and seeks similar relief as the original complaint. Defendants filed a motion to dismiss on September 14, 2012. On December 17, 2012, the court denied defendants’ motion to dismiss. On October 8, 2013, the Arizona District Court granted the Pension Schemes’ motion for class certification, and certified a class comprised of all persons who purchased or otherwise acquired publicly traded securities of the Company between April 30, 2008 and February 28, 2012 and were damaged thereby, excluding defendants and certain related parties. Merits discovery closed on February 27, 2015.

Defendants filed a motion for summary judgment on March 27, 2015. On August 11, 2015, the Arizona District Court granted defendants’ motion in part and denied it in part, and certified an issue for immediate appeal to the Ninth Circuit Court of Appeals (the “Ninth Circuit”). First Solar filed a petition for interlocutory appeal with the Ninth Circuit, and that petition was granted on November 18, 2015. On May 20, 2016, the Pension Schemes moved to vacate the order granting the petition, dismiss the appeal, and stay the merits briefing schedule. On December 13, 2016, the Ninth Circuit denied the Pension Schemes’ motion. On January 31, 2018, the Ninth Circuit issued an opinion affirming the Arizona District Court’s order denying in part defendants’ motion for summary judgment. On March 16, 2018, First Solar filed a petition for panel rehearing or rehearing en banc with the Ninth Circuit. On May 7, 2018, the Ninth Circuit denied defendants’ petition. The case is now pending in the Arizona District Court.




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This lawsuit asserts claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement may result in a significant monetary judgment or award against us or a significant monetary payment by us, and could have a material adverse effect on our business, financial condition, or results of operations. Even if this lawsuit is not resolved against us, the costs of defending the lawsuit may be significant, as may be the cost of any settlement, and would likely exceed the coverage limits of, or may not be covered by, our insurance policies. Given the need for further expert discovery, and the uncertainties of trial, at this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the range of potential loss, if any.

Opt-Out Action

On June 23, 2015, a suit titled Maverick Fund, L.D.C. v. First Solar, Inc., et al., Case No. 2:15-cv-01156-ROS, was filed in Arizona District Court by putative stockholders that opted out of the Class Action. The complaint names the Company and certain of our current and former directors and officers as defendants, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and violated state law, by making false and misleading statements regarding the Company’s financial performance and prospects. The action includes claims for recessionary and actual damages, interest, punitive damages, and an award of reasonable attorneys’ fees, expert fees, and costs. The Company believes it has meritorious defenses and will vigorously defend this action.

First Solar and the individual defendants have not yet responded to the complaint. Accordingly, at this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the range of potential loss, if any.

Derivative Actions

On April 3, 2012, a derivative action titled Tsevegmid v. Ahearn, et al., Case No. 1:12-cv-00417-CJB, was filed by a putative stockholder on behalf of the Company in the United States District Court for the District of Delaware (hereafter “Delaware District Court”) against certain current and former directors and officers of the Company, alleging breach of fiduciary duties and unjust enrichment. The complaint generally alleges that from June 1, 2008, to March 7, 2012, the defendants caused or allowed false and misleading statements to be made concerning the Company’s financial performance and prospects. The action includes claims for, among other things, damages in favor of the Company, certain corporate actions to purportedly improve the Company’s corporate governance, and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees. On April 10, 2012, a second derivative complaint was filed in the Delaware District Court. The complaint, titled Brownlee v. Ahearn, et al., Case No. 1:12-cv-00456-CJB, contains similar allegations and seeks similar relief to the Tsevegmid action. By court order on April 30, 2012, pursuant to the parties’ stipulation, the Tsevegmid action and the Brownlee action were consolidated into a single action in the Delaware District Court. On May 15, 2012, defendants filed a motion to challenge Delaware as the appropriate venue for the consolidated action. On March 4, 2013, the magistrate judge issued a Report and Recommendation recommending to the court that defendants’ motion be granted and that the case be transferred to the Arizona District Court. On July 12, 2013, the court adopted the magistrate judge’s Report and Recommendation and ordered the case transferred to the Arizona District Court. The transfer was completed on July 15, 2013.

On April 12, 2012, a derivative complaint was filed in the Arizona District Court, titled Tindall v. Ahearn, et al., Case No. 2:12-cv-00769-ROS. In addition to alleging claims and seeking relief similar to the claims and relief asserted in the Tsevegmid and Brownlee actions, the Tindall complaint alleges violations of Sections 14(a) and 20(b) of the Securities Exchange Act of 1934. On April 19, 2012, a second derivative complaint was filed in the Arizona District Court, titled Nederhood v. Ahearn, et al., Case No. 2:12-cv-00819-JWS. The Nederhood complaint contains similar allegations and seeks similar relief to the Tsevegmid and Brownlee actions. On May 17, 2012 and May 30, 2012, respectively, two additional derivative complaints, containing similar allegations and seeking similar relief as the Nederhood complaint, were filed in Arizona District Court: Morris v. Ahearn, et al., Case No. 2:12-cv-01031-JAT and Tan v. Ahearn, et al., 2:12-cv-01144-NVW.




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On July 17, 2012, the Arizona District Court issued an order granting First Solar’s motion to transfer the derivative actions to Judge David Campbell, the judge to whom the Class Action is assigned. On August 8, 2012, the court consolidated the four derivative actions pending in Arizona District Court, and on August 31, 2012, plaintiffs filed an amended complaint. Defendants filed a motion to stay the action on September 14, 2012. On December 17, 2012, the Arizona District Court granted defendants’ motion to stay pending resolution of the Class Action. On August 13, 2013, Judge Campbell consolidated the two derivative actions transferred from the Delaware District Court with the stayed Arizona derivative actions. On February 19, 2016, the Arizona District Court issued an order lifting the stay in part. Pursuant to the February 19, 2016 order, the plaintiffs filed an amended complaint on March 11, 2016, and defendants filed a motion to dismiss the amended complaint on April 1, 2016. On June 30, 2016, the Arizona District Court granted defendants’ motion to dismiss the insider trading and unjust enrichment claims with prejudice, and further granted defendants’ motion to dismiss the claims for alleged breaches of fiduciary duties with leave to amend. On July 15, 2016, plaintiffs filed a motion to reconsider certain aspects of the order granting defendants’ motion to dismiss. The Arizona District Court denied the plaintiffs’ motion for reconsideration on August 4, 2016. On July 15, 2016, plaintiffs filed a motion to intervene, lift the stay, and unseal documents in the Class Action. On September 30, 2016, the Arizona District Court denied plaintiffs’ motion. On October 17, 2016, plaintiffs filed a notice of appeal to the Ninth Circuit of the September 30, 2016 order (the “Intervention Appeal”). On October 27, 2016, plaintiffs filed a motion to extend the October 31, 2016 deadline to file an amended complaint. On November 29, 2016, the Arizona District Court denied plaintiffs’ request and directed the clerk to terminate the action. On January 23, 2017, the Arizona District Court entered judgment in favor of defendants and terminated the action. On January 27, 2017, plaintiffs filed a notice of appeal to the Ninth Circuit (the “Merits Appeal”). On January 22, 2018, the Ninth Circuit ruled in favor of First Solar in the Intervention Appeal, and dismissed that appeal. On June 13, 2018, the Ninth Circuit ruled in favor of First Solar in the Merits Appeal, and dismissed that appeal.

On July 16, 2013, a derivative complaint was filed in the Superior Court of Arizona, Maricopa County, titled Bargar, et al. v. Ahearn, et al., Case No. CV2013-009938, by a putative stockholder against certain current and former directors and officers of the Company (“Bargar”). The complaint contains similar allegations to the Delaware and Arizona derivative cases, and includes claims for, among other things, breach of fiduciary duties, insider trading, unjust enrichment, and waste of corporate assets. By court order on October 3, 2013, the Superior Court of Arizona, Maricopa County granted the parties’ stipulation to defer defendants’ response to the complaint pending resolution of the Class Action or expiration of the stay issued in the consolidated derivative actions in the Arizona District Court. On November 5, 2013, the matter was placed on the court’s inactive calendar. The parties have jointly sought and obtained multiple requests to continue the stay in this action. Most recently, on June 29, 2018, the court entered an order continuing the stay until November 30, 2018.

The Company believes that the plaintiff in the Bargar derivative action lacks standing to pursue litigation on behalf of First Solar. The Bargar derivative action is still in the initial stages and there has been no discovery. Accordingly, at this time we are not in a position to assess the likelihood of any potential loss or adverse effect on our financial condition or to estimate the range of potential loss, if any.

Other Matters and Claims

We are party to other legal matters and claims in the normal course of our operations. While we believe the ultimate outcome of such other matters and claims will not have a material adverse effect on our financial position, results of operations, or cash flows, the outcome of such matters and claims is not determinable with certainty, and negative outcomes may adversely affect us.




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12. Revenue from Contracts with Customers

The following table represents a disaggregation of revenue from contracts with customers for the three and six months ended June 30, 2018 and 2017 along with the reportable segment for each category (in thousands):
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Category
 
Segment
 
2018
 
2017
 
2018
 
2017
Solar modules
 
Modules
 
$
105,332

 
$
228,392

 
$
266,625

 
$
299,530

Solar power systems
 
Systems
 
109,659

 
340,036

 
464,069

 
1,092,518

EPC services
 
Systems
 
56,854

 
14,302

 
69,572

 
40,434

O&M services
 
Systems
 
24,427

 
24,964

 
51,141

 
49,660

Energy generation (1)
 
Systems
 
13,046

 
15,628

 
25,176

 
29,664

Module plus
 
Systems
 

 
4

 

 
3,311

Net sales
 
 
 
$
309,318

 
$
623,326

 
$
876,583

 
$
1,515,117

——————————
(1)
During the three and six months ended June 30, 2017, the majority of energy generated and sold by our PV solar power systems was accounted for under ASC 840 consistent with the classification of the associated PPAs.

We generally recognize revenue for sales of solar power systems and/or EPC services over time using cost based input methods, in which significant judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If the estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

Changes in estimates for sales of systems and EPC services occur for a variety of reasons, including but not limited to (i) construction plan accelerations or delays, (ii) module cost forecast changes, (iii) cost related change orders, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on our condensed consolidated statements of operations. The following table outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the three and six months ended June 30, 2018 and 2017 as well as the number of projects that comprise such changes. For purposes of the table, we only include projects with changes in estimates that have a net impact on revenue of at least $1.0 million during the periods presented with the exception of the sales and use tax matter described below, for which the aggregate change in estimate has been presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Number of projects (1)
 
1

 
3

 
23

 
5

 
 
 
 
 
 
 
 
 
(Decrease) increase in revenue from net changes in transaction prices (in thousands) (1)
 
$
(4,513
)
 
$
2,680

 
$
48,277

 
$
956

(Decrease) increase in revenue from net changes in input cost estimates (in thousands)
 
(12,160
)
 
3,400

 
(10,281
)
 
4,895

Net (decrease) increase in revenue from net changes in estimates (in thousands)
 
$
(16,673
)
 
$
6,080

 
$
37,996

 
$
5,851

 
 
 
 
 
 
 
 
 
Net change in estimate as a percentage of aggregate revenue for associated projects
 
(1.9
)%
 
1.3
%
 
0.4
%
 
0.7
%
——————————



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(1)
During the six months ended June 30, 2018, we settled a tax examination with the state of California regarding several matters, including certain sales and use tax payments due under lump sum EPC contracts. Accordingly, we revised our estimates of sales and use taxes due for projects in the state of California, which affected the estimated transaction prices for such contracts, and recorded an increase to revenue of $54.6 million.

The following table reflects the changes in our contract assets, which we classify as “Accounts receivable, unbilled” or “Retainage,” and our contract liabilities, which we classify as “Deferred revenue,” for the six months ended June 30, 2018 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
 
Six Months Change
Accounts receivable, unbilled
 
$
175,753

 
$
172,594

 

 

Retainage
 
1,958

 
2,014

 

 

Accounts receivable, unbilled and retainage
 
$
177,711

 
$
174,608

 
$
3,103

 
2
%
 
 
 
 
 
 
 
 
 
Deferred revenue (1)
 
$
258,253

 
$
145,073

 
$
113,180

 
78
%
——————————
(1)
Includes $58.8 million and $63.3 million of long-term deferred revenue classified as “Other liabilities” on our condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively.

Accounts receivable, unbilled represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. Billing requirements vary by contract but are generally structured around the completion of certain construction milestones. Some of our EPC contracts for systems we build may also contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones. When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs incurred on long-term construction contracts and advance payments received on sales of solar modules.

During the six months ended June 30, 2018, our contract assets increased by $3.1 million primarily due to certain unbilled receivables associated with the Rosamond project, which commenced construction in early 2018, partially offset by scheduled billings on the California Flats project. During the six months ended June 30, 2018, our contract liabilities increased by $113.2 million primarily as a result of advance payments received for sales of solar modules and certain EPC projects in Florida, partially offset by the completion of the sale of certain Japan projects, for which we collected the proceeds in 2017. During the six months ended June 30, 2018 and 2017, we recognized revenue of $55.0 million and $308.1 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods.

The following table represents our remaining performance obligations as of June 30, 2018 for sales of solar power systems, including uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements for partner developed projects that we are constructing or expect to construct. Such table excludes remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606. We expect to recognize $1.0 billion of revenue for such contracts through the later of the substantial completion or the closing dates of the projects.



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Project/Location
 
Project Size in MWAC
 
Revenue Category
 
EPC Contract/Partner Developed Project
 
Expected Year Revenue Recognition Will Be Completed
 
Percentage of Revenue Recognized
California Flats, California
 
280

 
Solar power systems
 
Capital Dynamics
 
2018
 
75%
Phoebe, Texas
 
250

 
EPC
 
Innergix Renewable Energy
 
2019
 
—%
Rosamond, California
 
150

 
Solar power systems
 
Contracted but not specified
 
2019
 
35%
Balm Solar, Florida
 
74

 
EPC
 
Tampa Electric Company
 
2018
 
16%
Payne Creek, Florida
 
70

 
EPC
 
Tampa Electric Company
 
2018
 
63%
Grange Hall, Florida
 
61

 
EPC
 
Tampa Electric Company
 
2019
 
—%
Peace Creek, Florida
 
55

 
EPC
 
Tampa Electric Company
 
2019
 
—%
Troy Solar, Indiana
 
51

 
EPC
 
Southern Indiana Gas and Electric Company
 
2020
 
—%
Total
 
991

 
 
 
 
 
 
 
 

As of June 30, 2018, we had entered into contracts with customers for the future sale of 8.3 GWDC of solar modules for an aggregate transaction price of $3.0 billion. We expect to recognize such amounts as revenue through 2021 as we transfer control of the modules to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. As of June 30, 2018, we had also entered into long-term O&M contracts covering approximately 7 GWDC of utility-scale PV solar power systems. We expect to recognize $0.5 billion of revenue during the noncancelable term of these O&M contracts over a weighted-average period of 11.6 years.

13. Share-Based Compensation

The following table presents the share-based compensation expense recognized in our condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Cost of sales
 
$
2,286

 
$
1,404

 
$
3,536

 
$
3,104

Selling, general and administrative
 
6,603

 
5,475

 
12,264

 
9,697

Research and development
 
1,639

 
1,460

 
3,064

 
2,589

Production start-up
 
56

 
32

 
372

 
32

Total share-based compensation expense
 
$
10,584

 
$
8,371

 
$
19,236

 
$
15,422





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The following table presents share-based compensation expense by type of award for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Restricted and performance stock units
 
$
9,588

 
$
8,192

 
$
17,993

 
$
14,210

Unrestricted stock
 
419

 
419

 
879

 
838

Stock purchase plan
 

 
34

 

 
394

 
 
10,007

 
8,645

 
18,872

 
15,442

Net amount released from (absorbed into) inventory
 
577

 
(274
)
 
364

 
(20
)
Total share-based compensation expense
 
$
10,584

 
$
8,371

 
$
19,236

 
$
15,422


Share-based compensation expense capitalized in inventory was $1.7 million and $2.1 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, we had $61.2 million of unrecognized share-based compensation expense related to unvested restricted and performance stock units, which we expect to recognize over a weighted-average period of approximately 1.6 years.

In February 2017, the compensation committee of our board of directors approved a long-term incentive program for key executive officers and associates. The program is intended to incentivize retention of our key executive talent, provide a smooth transition from our former key senior talent equity performance program, and align the interests of executive management and stockholders. Specifically, the program consists of (i) performance stock units to be earned over an approximately three-year performance period beginning in March 2017 and (ii) stub-year grants of separate performance stock units to be earned over an approximately two-year performance period also beginning in March 2017. Vesting of the March 2017 performance stock units is contingent upon the relative attainment of target cost per watt and operating expense metrics. In April 2018, in continuation of our long-term incentive program for key executive officers and associates, the compensation committee of our board of directors approved additional grants of performance stock units to be earned over an approximately three-year performance period beginning in May 2018. Vesting of the May 2018 performance stock units is contingent upon the relative attainment of target gross margin, operating expense, and contracted revenue metrics. Vesting of performance stock units is also contingent upon the employment of program participants through the applicable vesting dates, with limited exceptions in case of death, disability, a qualifying retirement, or a change-in-control of First Solar. Performance stock units were included in the computation of diluted net income per share based on the number of shares that would be issuable if the end of the reporting period were the end of the contingency period.

14. Income Taxes

The Tax Act, enacted in December 2017, significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing a one-time transition tax on certain accumulated earnings and profits of foreign corporate subsidiaries (the “transition tax”) that may electively be paid over eight years, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Tax Act also includes many new provisions, such as changes to bonus depreciation, changes to deductions for executive compensation, net operating loss deduction limitations, a tax on global intangible low-taxed income (“GILTI”) earned by foreign corporate subsidiaries, a base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). We continue to evaluate the impact of the Tax Act on us.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 to (i) clarify certain aspects of accounting for income taxes under ASC 740 in the reporting period the Tax Act was signed into law when information is not yet available or complete and (ii) provide a measurement period up to one year to complete the accounting for the Tax Act. We have not completed our accounting for the Tax Act but have, in certain cases, made reasonable estimates of the effects of the Tax Act. In other cases, we have not been able to make a reasonable estimate of such tax effects and have



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continued to account for the affected items, including state income taxes to the extent there is uncertainty regarding conformity to the federal tax system, based on previous tax laws. In all cases, we will continue to make and refine our estimates as additional analysis is completed. Our estimates may also be refined as we gain a more thorough understanding of the tax law. Any changes to our provisional estimates could be material to income tax expense.

As a result of the Tax Act, we remeasured certain deferred tax assets and liabilities based on the tax rate applicable to when the temporary differences are expected to reverse in the future, which is generally 21%, and recorded a provisional tax expense of $6.6 million for the year ended December 31, 2017. No adjustments to this provisional amount were made during the three and six months ended June 30, 2018. We continue to evaluate certain aspects of the Tax Act, which could potentially affect the remeasurement of these deferred tax balances and result in additional tax expense.

The transition tax was based on our total post-1986 foreign earnings and profits, which we had deferred from U.S. income taxes under previous tax law. We estimated and recorded a provisional transition tax expense of $401.5 million for the year ended December 31, 2017. No adjustments to this provisional amount were made during the three and six months ended June 30, 2018. As we continue gathering additional information to finalize our calculations of post-1986 foreign earnings and profits previously deferred from U.S. income taxes, the provisional amount may change. We have not completed our accounting for the transition tax, and as we finalize and complete our plans for the reinvestment or repatriation of unremitted foreign earnings and are able to calculate the resulting tax effects, we expect to record such tax effects, if any, and disclose such plans within the measurement period.

The Tax Act subjects a U.S. shareholder to tax on GILTI earned by foreign corporate subsidiaries. Because of the complexity of the new GILTI, BEAT, and FDII provisions of the Tax Act and different aspects of our estimated future results of global operations, we continue to evaluate the effects of the GILTI provisions and have not yet determined our accounting policy election to (i) record taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (ii) factor such amounts into our measurement of deferred income taxes (the “deferred method”). Based on our evaluation, we included an estimate of the tax on GILTI in our effective tax rate for the six months ended June 30, 2018 but did not recognize additional GILTI on deferred items. We expect to complete our accounting for the GILTI provisions of the Tax Act and make a corresponding accounting policy election within the prescribed measurement period.

The BEAT provisions of the Tax Act impose a minimum tax related to certain deductible payments made to related foreign persons. In addition, the Tax Act disallows certain interest and royalty deductions for payments made to related parties depending on their countries’ tax treatment of the payments. The new FDII provision allows a U.S. corporation to deduct 37.5% of its foreign-derived intangible income. We evaluated the impact of the BEAT and FDII provisions of the Tax Act on our expected 2018 operating results and expect such impact to be immaterial.

Our effective tax rate was 345.0% and (135.6)% for the six months ended June 30, 2018 and 2017, respectively. The increase in our effective tax rate was primarily driven by losses in certain jurisdictions for which no tax benefit could be recorded and the relative size of our pretax income in the current period, a discrete tax benefit in 2017 associated with the acceptance of our election to classify certain of our German subsidiaries as disregarded entities of First Solar, Inc., and changes in certain of our uncertain tax positions, including interest and penalties, partially offset by excess tax benefits associated with share-based compensation. Our provision for income taxes differed from the amount computed by applying the U.S. statutory federal income tax rate of 21% primarily due to losses in certain jurisdictions for which no tax benefit could be recorded and changes in certain of our uncertain tax positions, including interest and penalties, partially offset by the beneficial impact of our Malaysian tax holiday and excess tax benefits associated with share-based compensation.

Our Malaysian subsidiary has been granted a long-term tax holiday that expires in 2027. The tax holiday, which generally provides for a full exemption from Malaysian income tax, is conditional upon our continued compliance with certain employment and investment thresholds, which we are currently in compliance with and expect to continue to comply with through the expiration of the tax holiday in 2027.




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We account for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740. It is reasonably possible that $9.4 million of uncertain tax positions will be recognized within the next 12 months due to the expiration of the statute of limitations associated with such positions.

We are subject to audit by U.S. federal, state, local, and foreign tax authorities. We are currently under examination in India, Chile, and the state of California. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed by our tax audits are not resolved in a manner consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.

15. Net (Loss) Income per Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potentially dilutive common shares, including restricted and performance stock units and stock purchase plan shares, unless there is a net loss for the period. In computing diluted net income per share, we utilize the treasury stock method.

The calculation of basic and diluted net (loss) income per share for the three and six months ended June 30, 2018 and 2017 was as follows (in thousands, except per share amounts):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Basic net (loss) income per share
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(48,491
)
 
$
51,963

 
$
34,460

 
$
61,092

Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
104,776

 
104,338

 
104,664

 
104,221

 
 
 
 
 
 
 
 
 
Diluted net (loss) income per share
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
104,776

 
104,338

 
104,664

 
104,221

Effect of restricted and performance stock units and stock purchase plan shares
 

 
273

 
1,570

 
290

Weighted-average shares used in computing diluted net (loss) income per share
 
104,776

 
104,611

 
106,234

 
104,511

 
 
 
 
 
 
 
 
 
Net (loss) income per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.46
)
 
$
0.50

 
$
0.33

 
$
0.59

Diluted
 
$
(0.46
)
 
$
0.50

 
$
0.32

 
$
0.58


The following table summarizes the potential shares of common stock that were excluded from the computation of diluted net income per share for the three and six months ended June 30, 2018 and 2017 as such shares would have had an anti-dilutive effect (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Anti-dilutive shares
 
1,943

 
245

 
290

 
291





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16. Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive income or loss includes foreign currency translation adjustments, unrealized gains and losses on available-for-sale debt securities, and unrealized gains and losses on derivative instruments designated and qualifying as cash flow hedges. The following table presents the changes in accumulated other comprehensive (loss) income, net of tax, for the six months ended June 30, 2018 (in thousands):
 
 
Foreign Currency Translation Adjustment
 
Unrealized Gain (Loss) on Marketable Securities and Restricted Investments
 
Unrealized Gain (Loss) on Derivative Instruments
 
Total
Balance as of December 31, 2017
 
$
(65,346
)
 
$
68,388

 
$
(783
)
 
$
2,259

Other comprehensive (loss) income before reclassifications
 
(9,045
)
 
(9,096
)
 
1,201

 
(16,940
)
Amounts reclassified from accumulated other comprehensive (loss) income
 

 
(19,473
)
 
1,744

 
(17,729
)
Net tax effect
 

 
3,151

 
(978
)
 
2,173

Net other comprehensive (loss) income
 
(9,045
)
 
(25,418
)
 
1,967

 
(32,496
)
Balance as of June 30, 2018
 
$
(74,391
)
 
$
42,970

 
$
1,184

 
$
(30,237
)

The following table presents the pretax amounts reclassified from accumulated other comprehensive (loss) income into our condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):
Comprehensive Income Components
 
Income Statement Line Item
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Unrealized gain on marketable securities and restricted investments
 
Other (loss) income, net
 
$
3

 
$
3

 
$
19,473

 
$
49

Unrealized loss on derivative contracts:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Net sales
 
(1,744
)
 

 
(1,744
)
 

Total amount reclassified
 
 
 
$
(1,741
)
 
$
3

 
$
17,729

 
$
49


17. Segment Reporting

We operate our business in two segments. Our modules segment involves the design, manufacture, and sale of cadmium telluride (“CdTe”) solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include integrators and operators of PV solar power systems. Our second segment is our fully integrated systems segment, through which we provide complete turn-key PV solar power systems, or solar solutions, that draw upon our capabilities, which include (i) project development, (ii) EPC services, and (iii) O&M services. We may provide our full EPC services or any combination of individual products and services within our EPC capabilities depending upon the customer and market opportunity. All of our systems segment products and services are for PV solar power systems, which primarily use our solar modules, and we sell such products and services to utilities, independent power producers, commercial and industrial companies, and other system owners. Additionally within our systems segment, we may temporarily own and operate certain of our systems for a period of time based on strategic opportunities or market factors.




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Beginning with the three months ended December 31, 2017, we changed the composition of our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. As a result of this change, our modules segment, which was historically referred to as our components segment, includes module sales to third parties and excludes any module sales to our systems segment. Previously, we included an allocation of net sales value for all solar modules manufactured by our modules segment and installed in projects sold or built by our systems segment in the net sales of our modules segment. Our systems segment now includes all net sales from the sale of solar power systems and related products and services, including any modules installed in such systems and any revenue from energy generated by such systems. All prior period balances were revised to conform to the current year presentation. See Note 22. “Segment and Geographical Information” in our Annual Report on Form 10-K for the year ended December 31, 2017 for a complete discussion of our segment reporting.

The following tables present certain financial information for our reportable segments for the three and six months ended June 30, 2018 and 2017 and as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
 
Modules
 
Systems
 
Total
 
Modules
 
Systems
 
Total
Net sales
 
$
105,332

 
$
203,986

 
$
309,318

 
$
228,392

 
$
394,934

 
$
623,326

Gross (loss) profit
 
(26,551
)
 
18,493

 
(8,058
)
 
39,137

 
71,756

 
110,893

Depreciation and amortization expense
 
18,014

 
4,817

 
22,831

 
15,877

 
6,418

 
22,295

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
 
Modules
 
Systems
 
Total
 
Modules
 
Systems
 
Total
Net sales
 
$
266,625

 
$
609,958

 
$
876,583

 
$
299,530

 
$
1,215,587

 
$
1,515,117

Gross (loss) profit
 
(16,273
)
 
181,013

 
164,740

 
49,272

 
145,805

 
195,077

Depreciation and amortization expense
 
27,263

 
10,095

 
37,358

 
38,376

 
12,316

 
50,692

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
 
December 31, 2017
 
 
Modules
 
Systems
 
Total
 
Modules
 
Systems
 
Total
Goodwill
 
$
14,462

 
$

 
$
14,462

 
$
14,462

 
$

 
$
14,462





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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”), which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: effects resulting from certain module manufacturing changes and associated restructuring activities; our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs (including estimated future module collection and recycling costs), warranties, solar module technology and cost reduction roadmaps, restructuring, product reliability, equity method investments, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules; effects resulting from pending litigation; our ability to expand manufacturing capacity worldwide; our ability to reduce the costs to develop and construct PV solar power systems; research and development (“R&D”) programs and our ability to improve the conversion efficiency of our solar modules; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “seek,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” “continue,” and the negative or plural of these words, and other comparable terminology.

Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q and therefore speak only as of the filing date. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason, whether as a result of new information, future developments, or otherwise. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the matters discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, elsewhere in this Quarterly Report on Form 10-Q, and our other reports filed with the SEC. You should carefully consider the risks and uncertainties described under these sections.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q. When referring to our manufacturing capacity, total sales, and solar module sales, the unit of electricity in watts for megawatts (“MW”) and gigawatts (“GW”) is direct current (“DC” or “DC”) unless otherwise noted. When referring to our projects or systems, the unit of electricity in watts for MW and GW is alternating current (“AC” or “AC”) unless otherwise noted.




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Executive Overview

We are a leading global provider of comprehensive PV solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin film semiconductor technology and also develop, design, construct, and sell PV solar power systems that primarily use the modules we manufacture. Additionally, we provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on module and system-level innovations. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our mission is to provide cost-advantaged solar technology through innovation, customer engagement, industry leadership, and operational excellence.

Certain of our financial results and other key operational developments for the three months ended June 30, 2018 include the following:

Net sales for the three months ended June 30, 2018 decreased by 50% to $309.3 million compared to $623.3 million for the same period in 2017. The decrease in net sales was primarily due to the sale of the Switch Station projects during the three months ended June 30, 2017 and a decrease in third-party module sales, partially offset by ongoing construction activities at the Rosamond, Payne Creek, and California Flats projects.

Gross profit for the three months ended June 30, 2018 decreased 20.4 percentage points to (2.6)% from 17.8% for the same period in 2017. The decrease in gross profit was primarily due to higher under-utilization charges associated with the initial ramp of certain Series 6 manufacturing lines, a mix of lower gross profit projects sold or under construction during the period, and reductions in the average selling price per watt of our modules sold directly to third parties.

As of June 30, 2018, we had 4.0 GW of installed annual production capacity at our manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia. We produced 0.6 GW of solar modules during the three months ended June 30, 2018, which was consistent with the same period in 2017. We expect to produce approximately 2.8 GW of solar modules during 2018, including 0.8 GW of Series 6 modules.

In April 2018, we commenced commercial production of Series 6 modules at our manufacturing facility in Perrysburg, Ohio. In June 2018, we completed certain internal qualification procedures at our Series 6 manufacturing facility in Kulim, Malaysia, and in July 2018, we commenced commercial production of Series 6 modules at the facility. We also expect to commence commercial production of Series 6 modules at our Ho Chi Minh City, Vietnam manufacturing facility later in 2018.

Market Overview

The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. In particular, module average selling prices in global markets have experienced an accelerated decline in recent periods and are expected to continue to decline to some degree in the future. In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will continue to put pressure on pricing. We believe the solar industry is currently in such a period, due in part to recent developments in China, which include feed-in-tariff reductions causing deferment of in-country project development. Additionally, intense competition at the system level may result in an environment in which pricing falls rapidly, thereby further increasing demand for solar energy solutions but constraining the ability for project developers, EPC companies, and vertically-integrated solar companies such as First Solar to sustain meaningful and consistent profitability. In light of such market realities, we are focusing on our strategies and points of differentiation, which include our advanced module and system technologies, our manufacturing process, our vertically-integrated business model, our financial viability, and the sustainability advantage of our modules and systems.



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Global solar markets continue to develop, in part aided by demand elasticity resulting from declining industry average selling prices, both at the module and system levels, which make solar power more affordable. We are developing, constructing, and operating multiple solar projects around the world as we continue to execute on our advanced-stage utility-scale project pipeline. We expect a significant portion of our future consolidated net sales, operating income, and cash flows to be derived from such projects. We also continue to develop our early-to-mid-stage project pipeline and evaluate acquisitions of projects to further expand both our early-to-mid-stage and advanced-stage project pipelines. See the tables under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for additional information about projects within our advanced-stage project pipeline.

Lower industry module and system pricing, while currently challenging for certain module manufacturers (particularly manufacturers with higher cost structures), is expected to continue to contribute to diversification in global electricity generation and further demand for solar energy solutions. Over time, we believe that solar energy generation will experience widespread adoption as it competes economically with traditional forms of energy generation. In the near term, however, declining average selling prices are expected to adversely affect our results of operations relative to prior years. If competitors reduce pricing to levels below their costs; bid aggressively low prices for module sale agreements, EPC agreements, and PPAs; or are able to operate at minimal or negative operating margins for sustained periods of time, our results of operations could be further adversely affected. In certain markets in California and elsewhere, an oversupply imbalance at the grid level may further reduce short-to-medium term demand for new solar installations relative to prior years, lower PPA pricing, and lower margins on module and system sales to such markets. We continue to mitigate these uncertainties in part by executing on our module technology improvements, including our transition to Series 6 module manufacturing, continuing the development of key markets, and implementing certain other cost reduction initiatives, including both manufacturing, BoS, and other operating costs.

We face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects. Solar module manufacturers compete with one another on price and on several module value attributes, including conversion efficiency, energy yield, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and levelized cost of electricity (“LCOE”), meaning the net present value of a system’s total life cycle costs divided by the quantity of energy that is expected to be produced over the system’s life. As noted above, competition on the basis of selling price per watt has intensified in recent periods, which has contributed to declines in module average selling prices in several key markets. Many crystalline silicon cell and wafer manufacturers continue to transition from lower efficiency Back Surface Field (“BSF”) multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency Passivated Emitter Rear Contact (“PERC”) multi-crystalline and mono-crystalline cells at competitive cost structures.

Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC solar modules are pursuing the commercialization of bifacial modules that also capture diffuse irradiance on the back side of a module. We believe the cost effective manufacture of bifacial PERC modules is being enabled by the expansion of inexpensive crystal growth and diamond wire saw capacity in China. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology can improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications and BoS configurations, which could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce.

We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and fully integrated PV solar power systems is highly competitive. Our cost competitiveness is based in large part on our module conversion efficiency, proprietary manufacturing technology (which enables us to produce a CdTe module in less than 3.5 hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture traditional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing



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and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. Polysilicon costs have declined in recent years, and polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, contributing to a decline in our relative manufacturing cost competitiveness over traditional crystalline silicon module manufacturers.

Given the smaller size (sometimes referred to as form factor) of our Series 4 modules compared to certain types of crystalline silicon modules, we may incur higher labor and BoS costs associated with the construction of systems using our Series 4 modules. Thus, to compete effectively on an LCOE basis, our Series 4 modules may need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules with larger form factors. Our next generation Series 6 modules have a larger form factor along with better product attributes and a lower manufacturing cost structure. Accordingly, the larger form factor and design of our Series 6 modules is expected to reduce the number of electrical connections and hardware required for system installation. The resulting labor and material savings are expected to represent a significant improvement compared to current technologies and a substantial reduction in total installed system costs resulting in improved project returns as BoS costs represent a significant portion of the costs associated with the construction of a typical utility-scale system.

In terms of energy yield, in many climates, our CdTe modules provide a significant energy production advantage over most conventional crystalline silicon solar modules (including BSF and PERC technologies) of equivalent efficiency rating. For example, our CdTe solar modules provide a superior temperature coefficient, which results in stronger system performance in typical high insolation climates as the majority of a system’s generation, on average, occurs when module temperatures are well above 25°C (standard test conditions). In addition, our CdTe modules provide a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to laboratory standards. Our CdTe solar modules also provide a better shading response than conventional crystalline silicon solar modules, which may lose up to three times as much power as CdTe solar modules when shading occurs. As a result of these and other factors, our PV solar power systems typically produce more annual energy in real world field conditions than competing systems with the same nameplate capacity.

While our modules and systems are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in additional margin compression, further declines in the average selling prices of our modules and systems, erosion in our market share for modules and systems, and/or declines in overall net sales. We continue to focus on enhancing the competitiveness of our solar modules and systems by accelerating progress along our module technology and cost reduction roadmaps, continuing to make technological advances at the system level, using innovative installation techniques and know-how, and leveraging volume procurement around standardized hardware platforms.

Certain Trends and Uncertainties

We believe that our operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations. See Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, and Item 1A. of this Quarterly Report on Form 10-Q for discussions of other risks (the “Risk Factors”) that may affect our financial condition and results of operations.

Our long-term strategic plans are focused on our goal to create long-term shareholder value through a balance of growth, profitability, and liquidity. In executing such plans, we are focusing on providing utility-scale PV solar energy solutions using our modules in key geographic markets that we believe have a compelling need for mass-scale PV electricity, including markets throughout the Americas, the Asia-Pacific region, and certain other strategic markets. Additionally, we are focusing on opportunities in which our PV solar energy solutions can compete directly with traditional forms of energy generation on an LCOE or similar basis, or complement such generation offerings. Our focus on our core module and utility-scale offerings exists within a current market environment that includes rooftop and distributed generation solar, particularly in the United States. While it is unclear how rooftop and distributed generation solar might



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impact our core utility-scale based offerings in the next several years, we believe that utility-scale solar will continue to be a compelling solar offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. Additionally, our ability to provide utility-scale offerings on economically attractive terms depends, in part, on certain market factors outside of our control, such as interest rate fluctuations, domestic or international trade policies, and government support programs. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for such systems and limit the number of potential buyers.

We are closely evaluating and managing the appropriate level of resources required as we pursue the most advantageous and cost effective projects and partnerships in our key markets. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy, to optimize the design and logistics around our PV solar energy solutions, and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. We expect that, over time, the majority of our consolidated net sales, operating income, and cash flows will come from solar offerings in the key geographic markets described above. The timing, execution, and financial impacts of our long-term strategic plans are subject to risks and uncertainties, as described in the Risk Factors. We are focusing our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with significant current or projected electricity demand, relatively high existing electricity prices, strong demand for renewable energy generation, and high solar resources.

Creating or maintaining a market position in certain strategically targeted markets and energy applications also requires us to adapt to new and changing market conditions. For example, our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins, which may adversely affect our results of operations. We expect the profitability associated with our various sales offerings to vary from one another over time, and possibly vary from our internal long-range profitability expectations and targets, depending on the market opportunity and the relative competitiveness of our offerings compared with other energy solutions, traditional or otherwise, that are available to potential customers. In addition, as we execute on our long-term strategic plans, we will continue to monitor and adapt to any changing dynamics in emerging technologies, such as commercially viable energy storage solutions, which are expected to further enable PV solar power systems to compete with traditional forms of energy generation by shifting the delivery of energy generated by such systems to periods of greater demand. Storage solutions continue to evolve in terms of technology and cost, and global deployments of storage capacity are expected to exceed 100 GW by 2030, representing a significant increase in the potential market for renewable energy. We will also continue to monitor and adapt to changing dynamics in the market set of potential buyers of solar projects. Market environments with few potential project buyers and a higher cost of capital would generally exert downward pressure on the potential revenue from the solar projects we are developing, whereas, conversely, market environments with many potential project buyers and a lower cost of capital would likely have a favorable impact on the potential revenue from such solar projects.

On occasion, we may temporarily own and operate certain systems with the intention to sell them at a later date. We may also elect to construct and temporarily retain ownership interests in partially contracted or uncontracted systems for which there is a partial or no PPA with an off-taker, such as a utility, but rather an intent to sell a portion of or all the electricity produced by the system on an open contract basis until the system is sold. Expected revenue from projects without a PPA for the full offtake of the system is subject to greater variability and uncertainty based on market factors and is typically lower than projects with a PPA for the full offtake of the system. Additionally, our joint ventures and other business arrangements with strategic partners have and may in the future result in us temporarily retaining a noncontrolling ownership interest in the underlying systems projects we develop, supply modules to, or construct, potentially for a period of up to several years. In each of the above mentioned examples, we may retain such ownership interests in a consolidated or unconsolidated separate entity.

We continually evaluate forecasted global demand, competition, and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. In July 2017, we announced plans to utilize our previously idled Vietnamese manufacturing plant for production of our next generation Series 6 modules. In December 2017, we subsequently announced plans to construct a second and identical Series 6



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manufacturing plant adjacent to our existing Vietnamese manufacturing plant. In April 2018, we announced plans to construct an additional Series 6 manufacturing plant in Lake Township, Ohio, a short distance from our manufacturing plant in Perrysburg, Ohio. Our Vietnamese plants, recently announced second U.S. plant, and any other potential investments to add or otherwise modify our manufacturing capacity in response to market demand and competition may require significant internal and possibly external sources of liquidity and may be subject to certain risks and uncertainties described in the Risk Factors, including those described under the headings “Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties” and “If any future production lines are not built in line with our committed schedules, it may impair any future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.”

Systems Project Pipeline

The following tables summarize, as of July 26, 2018, our approximately 2.6 GW advanced-stage project pipeline. The actual volume of modules installed in our projects will be greater than the project size in MWAC as module volumes required for a project are based upon MWDC, which will be greater than the MWAC size pursuant to a DC-AC ratio typically ranging from 1.2 to 1.3. Such ratio varies across different projects due to various system design factors. Projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized. Projects, or portions of projects, may also be removed from the tables below in the event an EPC-contracted or partner-developed project does not obtain permitting or financing, a project is not able to be sold due to the changing economics of the project or other factors, or we decide to temporarily own and operate, or retain interests in, such project based on strategic opportunities or market factors.

Projects under Sales Agreements
(Includes uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements, including partner developed projects that we will be or are constructing.)
Project/Location
 
Project Size in MWAC
 
PPA Contracted Partner
 
EPC Contract/Partner Developed Project
 
Expected Year Revenue Recognition Will Be Completed
 
% of Revenue Recognized as of June 30, 2018
California Flats, California
 
280

 
PG&E / Apple (1)
 
Capital Dynamics
 
2018
 
75%
Phoebe, Texas
 
250

 
Shell Energy North America
 
Innergix Renewable Energy
 
2019
 
—%
Twiggs County Solar, Georgia
 
200

 
Georgia Power Company
 
Origis Holdings USA
 
2020
 
—%
Rosamond, California
 
150

 
SCE
 
(3)
 
2019
 
35%
Balm Solar, Florida
 
74

 
(2)
 
Tampa Electric Company
 
2018
 
16%
Payne Creek, Florida
 
70

 
(2)
 
Tampa Electric Company
 
2018
 
63%
Grange Hall, Florida
 
61

 
(2)
 
Tampa Electric Company
 
2019
 
—%
Peace Creek, Florida
 
55

 
(2)
 
Tampa Electric Company
 
2019
 
—%
Troy Solar, Indiana
 
51

 
(2)
 
Southern Indiana Gas and Electric Company
 
2020
 
—%
Manildra, Australia
 
49

 
EnergyAustralia
 
New Energy Solar
 
2018
 
—%
Total
 
1,240

 
 
 
 
 
 
 
 




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Projects with Executed PPAs Not Under Sales Agreements
Project/Location
 
Project Size in MWAC
 
PPA Contracted Partner
 
Fully Permitted
 
Expected or Actual Substantial Completion Year
 
% Complete as of June 30, 2018
Sun Streams, Arizona
 
150

 
SCE
 
Yes
 
2019
 
14%
Southwestern U.S.
 
150

 
(3)
 
Yes
 
2020/2021
 
4%
Luz del Norte, Chile
 
141

 
(4)
 
Yes
 
2016
 
100%
American Kings Solar, California
 
123

 
SCE
 
No
 
2020
 
16%
Willow Springs, California
 
100

 
SCE
 
Yes
 
2018
 
35%
Sunshine Valley, Nevada
 
100

 
SCE
 
Yes
 
2019
 
4%
Japan (multiple locations)
 
89

 
(5)
 
No
 
2019/2020
 
26%
Beryl, Australia
 
87

 
(6)
 
Yes
 
2019
 
31%
Willow Springs 3, California
 
75

 
(3)
 
Yes
 
2021
 
7%
Seabrook, South Carolina
 
73

 
South Carolina Electric and Gas Company
 
No
 
2020
 
3%
Sun Streams PVS, Arizona
 
65

 
APS
 
No
 
2020
 
2%
Ishikawa, Japan
 
59

 
Hokuriku Electric Power Company
 
Yes
 
2018
 
75%
Little Bear, California
 
40

 
Marin Clean Energy (7)
 
No
 
2020
 
5%
Miyagi, Japan
 
40

 
Tohoku Electric Power Company
 
Yes
 
2021
 
12%
India (multiple locations)
 
40

 
(8)
 
Yes
 
2017
 
100%
Total
 
1,332

 
 
 
 
 
 
 
 
——————————
(1)
PG&E – 150 MWAC and Apple Energy, LLC – 130 MWAC 

(2)
Utility-owned generation

(3)
Contracted but not specified

(4)
Approximately 70 MWAC of the plant’s capacity is contracted under PPAs

(5)
Hokuriku Electric Power Company and Tokyo Electric Power Company

(6)
Approximately 55 MWAC of the plant’s capacity is contracted with Transport for NSW

(7)
Expandable to 160 MWAC, subject to satisfaction of certain PPA contract conditions

(8)
Gulbarga Electricity Supply Co. – 20 MWAC and Chamundeshwari Electricity Supply Co. – 20 MWAC 




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Results of Operations

The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
102.6
 %
 
82.2
 %
 
81.2
 %
 
87.1
 %
Gross (loss) profit
 
(2.6
)%
 
17.8
 %
 
18.8
 %
 
12.9
 %
Selling, general and administrative
 
16.4
 %
 
7.9
 %
 
10.5
 %
 
6.4
 %
Research and development
 
6.6
 %
 
3.4
 %
 
4.6
 %
 
2.9
 %
Production start-up
 
7.9
 %
 
1.3
 %
 
7.0
 %
 
0.6
 %
Restructuring and asset impairments
 
 %
 
2.9
 %
 
 %
 
2.5
 %
Operating (loss) income
 
(33.5
)%
 
2.2
 %
 
(3.4
)%
 
0.4
 %
Foreign currency gain (loss), net
 
0.8
 %
 
(0.4
)%
 
 %
 
(0.1
)%
Interest income
 
5.5
 %
 
1.2
 %
 
3.3
 %
 
0.9
 %
Interest expense, net
 
(2.0
)%
 
(1.0
)%
 
(1.3
)%
 
(1.0
)%
Other (loss) income, net
 
(1.4
)%
 
(0.4
)%
 
1.6
 %
 
1.5
 %
Income tax benefit (expense)
 
2.0
 %
 
6.4
 %
 
(0.6
)%
 
2.3
 %
Equity in earnings, net of tax
 
13.0
 %
 
0.3
 %
 
4.4
 %
 
0.1
 %
Net (loss) income
 
(15.7
)%
 
8.3
 %
 
3.9
 %
 
4.0
 %

Segment Overview

We operate our business in two segments. Our modules segment involves the design, manufacture, and sale of CdTe solar modules to third parties, and our systems segment includes the development, construction, operation, maintenance, and sale of PV solar power systems, including any modules installed in such systems and any revenue from energy generated by such systems. See Note 17. “Segment Reporting” to our condensed consolidated financial statements for more information on our operating segments. See also Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for a description of the system projects in our advanced-stage project pipeline.

Beginning with the three months ended December 31, 2017, we changed the composition of our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. As a result of this change, our modules segment, which was historically referred to as our components segment, includes module sales to third parties and excludes any module sales to our systems segment. Previously, we included an allocation of net sales value for all solar modules manufactured by our modules segment and installed in projects sold or built by our systems segment in the net sales of our modules segment. Our systems segment now includes all net sales from the sale of solar power systems and related products and services, including any modules installed in such systems and any revenue from energy generated by such systems. All prior period balances were revised to conform to the current year presentation.




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Net sales

Modules Business

We generally price and sell our solar modules per watt of nameplate power. During the three and six months ended June 30, 2018, we sold the majority of our solar modules to integrators and operators of systems in the United States, Tanzania, and Turkey, and substantially all of our modules business net sales were denominated in U.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts.

Systems Business

Through our fully integrated systems business, we provide complete turn-key PV solar power systems, or solar solutions, that draw upon our capabilities, which include (i) project development, (ii) EPC services, and (iii) O&M services. Additionally within our systems segment, we may temporarily own and operate certain of our systems for a period of time based on strategic opportunities or market factors. We typically recognize revenue for sales of solar power systems using cost based input methods, which result in revenue being recognized as work is performed based on the relationship between actual costs incurred compared to the total estimated costs for a given contract. We may also recognize revenue for the sale of a system after the project has been completed due to the timing of when we enter into the associated sales contract with the customer.

The following table shows net sales by reportable segment for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Modules
 
$
105,332

 
$
228,392

 
$
(123,060
)
 
(54
)%
 
$
266,625

 
$
299,530

 
$
(32,905
)
 
(11
)%
Systems
 
203,986

 
394,934

 
(190,948
)
 
(48
)%
 
609,958

 
1,215,587

 
(605,629
)
 
(50
)%
Net sales
 
$
309,318

 
$
623,326

 
$
(314,008
)
 
(50
)%
 
$
876,583

 
$
1,515,117

 
$
(638,534
)
 
(42
)%

Net sales from our modules segment decreased $123.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 primarily due to a 48% decrease in the volume of watts sold and an 11% decrease in the average selling price per watt. Net sales from our systems segment decreased $190.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 primarily as a result of the sale of the Switch Station projects in 2017, which were substantially complete when we entered into the associated sales contract with the customer, partially offset by ongoing construction activities at the Rosamond, Payne Creek, and California Flats projects.

Net sales from our modules segment decreased $32.9 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to a 15% decrease in the average selling price per watt, partially offset by a 5% increase in the volume of watts sold. Net sales from our systems segment decreased $605.6 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to the sale of the Moapa and Switch Station projects in 2017, which were substantially complete when we entered into the associated sales contracts with the customers, partially offset by the sale of certain India projects and the Rosamond project in 2018, ongoing construction activities at the California Flats project, and the commencement of construction on the Payne Creek project in early 2018.




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Cost of sales

Modules Business

Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion).

Systems Business

For our systems business, project-related costs include development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPC costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering costs, and construction labor costs), and site specific costs.

The following table shows cost of sales by reportable segment for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Modules
 
$
131,883

 
$
189,255

 
$
(57,372
)
 
(30
)%
 
$
282,898

 
$
250,258

 
$
32,640

 
13
 %
Systems
 
185,493

 
323,178

 
(137,685
)
 
(43
)%
 
428,945

 
1,069,782

 
(640,837
)
 
(60
)%
Total cost of sales
 
$
317,376

 
$
512,433

 
$
(195,057
)
 
(38
)%
 
$
711,843

 
$
1,320,040

 
$
(608,197
)
 
(46
)%
% of net sales
 
102.6
%
 
82.2
%
 
 

 
 

 
81.2
%
 
87.1
%
 
 
 
 

Our cost of sales decreased $195.1 million, or 38%, and increased 20.4 percentage points as a percent of net sales for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease in cost of sales was driven by a $137.7 million decrease in our systems segment cost of sales primarily due to the sale of the Switch Station projects in 2017. The decrease in cost of sales was also driven by a $57.4 million decrease in our modules segment cost of sales primarily as a result of lower costs of $96.3 million from a decrease in the volume of modules sold, partially offset by higher under-utilization charges associated with the initial ramp of certain Series 6 manufacturing lines, which increased cost of sales by $21.0 million, and a reduction to our product warranty liability of $12.5 million during the three months ended June 30, 2017 due to lower legacy module replacement costs.

Our cost of sales decreased $608.2 million, or 46%, and decreased 5.9 percentage points as a percent of net sales for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease in cost of sales was driven by a $640.8 million decrease in our systems segment cost of sales primarily due to the sale of the Moapa and Switch Station projects in 2017. This decrease in cost of sales was partially offset by a $32.6 million increase in our modules segment cost of sales primarily as a result of the higher under-utilization charges described above, higher costs of $13.7 million due to an increase in the volume of modules sold, and the reduction to our product warranty liability during the three months ended June 30, 2017 described above, partially offset by continued cost reductions in the cost per watt of our solar modules, which decreased cost of sales by $15.4 million.




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Gross (loss) profit

Gross (loss) profit may be affected by numerous factors, including the selling prices of our modules and systems, our manufacturing costs, project development costs, BoS costs, the capacity utilization of our manufacturing facilities, and foreign exchange rates. Gross profit may also be affected by the mix of net sales from our modules and systems businesses.

The following table shows gross profit for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Gross (loss) profit
 
$
(8,058
)
 
$
110,893

 
$
(118,951
)
 
(107
)%
 
$
164,740

 
$
195,077

 
$
(30,337
)
 
(16
)%
% of net sales
 
(2.6
)%
 
17.8
%
 
 

 
 

 
18.8
%
 
12.9
%
 
 
 
 

Gross (loss) profit decreased 20.4 percentage points to (2.6)% during the three months ended June 30, 2018 from 17.8% during the three months ended June 30, 2017 due to the higher under-utilization charges described above, a mix of lower gross profit projects sold or under construction during the period, and reductions in the average selling price per watt of our modules sold directly to third parties as described above.

Gross (loss) profit increased 5.9% to 18.8% during the six months ended June 30, 2018 from 12.9% during the six months ended June 30, 2017 primarily as a result of the settlement of a tax examination with the state of California, which affected our estimates of sales and use taxes due for certain projects, and a mix of higher gross profit projects sold during the period, partially offset by the higher under-utilization charges described above. See Note 12. “Revenue from Contracts with Customers” to our condensed consolidated financial statements for additional information on the settlement of the tax examination.

Selling, general and administrative

Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expenses, and other business development and selling expenses.

The following table shows selling, general and administrative expense for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Selling, general and administrative
 
$
50,854

 
$
48,957

 
$
1,897

 
4
%
 
$
91,980

 
$
97,156

 
$
(5,176
)
 
(5
)%
% of net sales
 
16.4
%
 
7.9
%
 
 

 
 

 
10.5
%
 
6.4
%
 
 
 
 

Selling, general and administrative expense for the three months ended June 30, 2018 was consistent with the three months ended June 30, 2017. Selling, general and administrative expenses for the six months ended June 30, 2018 decreased compared to the six months ended June 30, 2017 primarily due to lower professional fees and lower business development expenses, partially offset by higher charges for impairments of certain project assets.




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Research and development

Research and development expense consists primarily of salaries and other personnel-related costs; the cost of products, materials, and outside services used in our process and product R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules and systems.

The following table shows research and development expense for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Research and development
 
$
20,370

 
$
21,341

 
$
(971
)
 
(5
)%
 
$
40,694

 
$
44,140

 
$
(3,446
)
 
(8
)%
% of net sales
 
6.6
%
 
3.4
%
 
 

 
 

 
4.6
%
 
2.9
%
 
 
 
 

The decrease in research and development expense for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 was primarily due to reduced material and module testing costs during our transition to Series 6 module manufacturing and lower R&D facilities expenses.

Production start-up

Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase and applicable facility related costs. Costs related to equipment upgrades and implementation of manufacturing process improvements are also included in production start-up expense as well as costs related to the selection of a new site, related legal and regulatory costs, and costs to maintain our plant replication program to the extent we cannot capitalize these expenditures. In general, we expect production start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition or replacement of production lines at an existing manufacturing facility, primarily due to the additional infrastructure investment required when building an entirely new facility.

The following table shows production start-up expense for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Production start-up
 
$
24,352

 
$
8,381

 
$
15,971

 
191
%
 
$
61,436

 
$
9,531

 
$
51,905

 
545
%
% of net sales
 
7.9
%
 
1.3
%
 
 

 
 

 
7.0
%
 
0.6
%
 
 
 
 

During the three and six months ended June 30, 2018, we incurred production start-up expense for the ongoing transition to Series 6 module manufacturing at our facilities in Kulim, Malaysia and Ho Chi Minh City, Vietnam. We also incurred production start-up expense for the transition to Series 6 module manufacturing at our facility in Perrysburg, Ohio in 2017 and early 2018.

Restructuring and asset impairments

Restructuring and asset impairments consists of expenses incurred related to material restructuring initiatives and includes any associated asset impairments, costs for employee termination benefits, costs for contract terminations and penalties, and other restructuring related costs. Such restructuring initiatives are intended to align the organization with then current business conditions and to reduce costs.




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The following table shows restructuring and asset impairments for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Restructuring and asset impairments
 
$

 
$
18,286

 
$
(18,286
)
 
(100
)%
 
$

 
$
38,317

 
$
(38,317
)
 
(100
)%
% of net sales
 
%
 
2.9
%
 
 

 
 

 
%
 
2.5
%
 
 
 
 

During the three and six months ended June 30, 2017 we incurred restructuring and asset impairment charges associated with our transition to Series 6 module manufacturing. Such charges included net losses on the disposition of previously impaired Series 4 and Series 5 manufacturing equipment, severance benefits to terminated employees, and net miscellaneous charges, primarily related to contract terminations, the write-off of operating supplies, and other Series 4 manufacturing exit costs. See Note 3. “Restructuring and Asset Impairments” to our condensed consolidated financial statements for additional information.

Foreign currency gain (loss), net

Foreign currency gain (loss), net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries’ functional currencies.

The following table shows foreign currency gain (loss), net for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Foreign currency gain (loss), net
 
$
2,422

 
$
(2,444
)
 
$
4,866

 
199
%
 
$
(95
)
 
$
(2,198
)
 
$
2,103

 
(96
)%

Foreign currency gain for the three and six months ended June 30, 2018 increased compared to the three and six months ended June 30, 2017 primarily due to the strengthening of the U.S. dollar relative to certain foreign currencies and lower costs associated with hedging activities related to our subsidiaries in Japan and India.

Interest income

Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest income also includes interest earned from notes receivable and late customer payments.

The following table shows interest income for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Interest income
 
$
16,865

 
$
7,555

 
$
9,310

 
123
%
 
$
28,689

 
$
13,972

 
$
14,717

 
105
%

Interest income for the three and six months ended June 30, 2018 increased compared to the three and six months ended June 30, 2017 primarily due to higher balances of cash, cash equivalents, and time deposits and increased interest rates associated with such balances.




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Interest expense, net

Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with ASC 815. We may capitalize interest expense into our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period.

The following table shows interest expense, net for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Interest expense, net
 
$
(6,065
)
 
$
(6,374
)
 
$
309

 
(5
)%
 
$
(11,247
)
 
$
(15,543
)
 
$
4,296

 
(28
)%

Interest expense, net for the three months ended June 30, 2018 decreased compared to the three months ended June 30, 2017 primarily due to higher interest costs capitalized to certain projects under construction, partially offset by higher levels of project specific debt financings. Interest expense, net for the six months ended June 30, 2018 decreased compared to the six months ended June 30, 2017 primarily due to changes in the fair value of interest rate swap contracts, which do not qualify for hedge accounting, and higher interest costs capitalized to certain projects under construction, partially offset by higher levels of project specific debt financings.

Other (loss) income, net

Other (loss) income, net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted investments.

The following table shows other income, net for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Other (loss) income, net
 
$
(4,328
)
 
$
(2,699
)
 
$
(1,629
)
 
60
%
 
$
13,606

 
$
23,162

 
$
(9,556
)
 
(41
)%

Other (loss) income, net for the three months ended June 30, 2018 was consistent with the three months ended June 30, 2017. Other (loss) income, net for the six months ended June 30, 2018 decreased compared to the six months ended June 30, 2017 primarily due to a $26.8 million settlement from the resolution of an outstanding matter with a former customer during the six months ended June 30, 2017, partially offset by realized gains of $19.5 million during the six months ended June 30, 2018 from the sale of certain restricted investments.

Income tax benefit (expense)

In December 2017, the U.S. President signed into law the Tax Act, which significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing a mandatory one-time transition tax on certain accumulated earnings and profits of foreign corporate subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.

During 2017, we recognized certain provisional tax expenses associated with the Tax Act. The final effects of the Tax Act may differ from such provisional amounts, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to estimates



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utilized to calculate provisional amounts, or actions we may take as a result of the Tax Act. The associated accounting for the Tax Act is expected to be completed when our 2017 U.S. corporate income tax return is filed in late 2018.

Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions in which we operate, principally Australia, India, and Malaysia. Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate in the U.S. decreased from 35% to 21% beginning in January 2018, while the tax rates in Australia, India, and Malaysia are 30%, 34.9%, and 24%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax, conditional upon our continued compliance with certain employment and investment thresholds.

The following table shows income tax expense for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Income tax benefit (expense)
 
$
6,164

 
$
40,028

 
$
(33,864
)
 
(85
)%
 
$
(5,461
)
 
$
34,349

 
$
(39,810
)
 
(116
)%
Effective tax rate
 
6.5
%
 
(401.6
)%
 
 

 
 

 
345.0
%
 
(135.6
)%
 
 
 
 

Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. The rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period. Income tax benefit decreased by $33.9 million during the three months ended June 30, 2018 compared to the three months ended June 30, 2017 primarily due to a $42.1 million discrete tax benefit in 2017 associated with the acceptance of our election to classify certain of our German subsidiaries as disregarded entities of First Solar, Inc., partially offset by a pretax loss in 2018. Income tax expense increased by $39.8 million during the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to the 2017 discrete tax benefit mentioned above and changes in certain of our uncertain tax positions, including interest and penalties, partially offset by excess tax benefits associated with share-based compensation.

Equity in earnings, net of tax

Equity in earnings, net of tax represents our proportionate share of the earnings or losses from equity method investments as well as any gains or losses on the sale or disposal of such investments.

The following table shows equity in earnings, net of tax for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
 
(Dollars in thousands)
 
2018
 
2017
 
Three Month Change
 
2018
 
2017
 
Six Month Change
Equity in earnings, net of tax
 
$
40,085

 
$
1,969

 
$
38,116

 
1,936
%
 
$
38,338

 
$
1,417

 
$
36,921

 
2,606
%

Equity in earnings, net of tax for the three and six months ended June 30, 2018 increased compared to the three and six months ended June 30, 2017 primarily due to the sale of our ownership interests in 8point3 Operating Company, LLC, which resulted in a gain of $40.3 million, net of tax. See Note 9. “Equity Method Investments” to our condensed consolidated financial statements for additional information.




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Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the amounts of reported assets, liabilities, revenues, and expenses, as well as the disclosure of contingent liabilities. Some of our accounting policies require the application of significant judgment in the selection of the appropriate assumptions for making these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our judgments and estimates on our historical experience, our forecasts, and other available information as appropriate. We believe the judgments and estimates involved in over time revenue recognition, accrued solar module collection and recycling, product warranties, accounting for income taxes, long-lived asset impairments, and testing goodwill for impairment have the greatest potential impact on our condensed consolidated financial statements. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

For a description of the accounting policies that require the most significant judgment and estimates in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to our accounting policies during the six months ended June 30, 2018.

Recent Accounting Pronouncements

See Note 2. “Recent Accounting Pronouncements” to our condensed consolidated financial statements for a summary of recent accounting pronouncements.

Liquidity and Capital Resources

As of June 30, 2018, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, advanced-stage project pipeline, availability under our Revolving Credit Facility considering minimum liquidity covenant requirements, and access to the capital markets will be sufficient to meet our working capital, systems project investment, and capital expenditure needs for at least the next 12 months. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally.

We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, capital expenditures, and strategic discretionary spending. In the future, we may also engage in additional debt or equity financings, including project specific debt financings. We believe that when necessary, we will have adequate access to the capital markets, although our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to industry-wide or company-specific concerns. Such financings could result in increased debt service expenses, dilution to our existing stockholders, or restrictive covenants which could restrain our ability to pursue our strategic plans. As of June 30, 2018, we were in compliance with the covenants for all of our long-term debt facilities.

As of June 30, 2018, we had $3.1 billion in cash, cash equivalents, and marketable securities compared to $3.0 billion as of December 31, 2017. Cash, cash equivalents, and marketable securities as of June 30, 2018 increased primarily as a result of proceeds associated with the sale of our interests in the Partnership and its subsidiaries, a reimbursement of overfunded amounts from our module collection and recycling trust, and proceeds from borrowings under project specific debt financings, partially offset by purchases of property, plant and equipment. As of June 30, 2018 and December 31, 2017, $1.4 billion and $1.6 billion, respectively, of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Euro, and Indian rupee denominated holdings and U.S. dollar, Euro, and Malaysian ringgit denominated holdings, respectively.

We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations in the U.S., we may



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be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. Although we maintain the intent and ability to permanently reinvest our accumulated earnings outside of the U.S., with the exception of our subsidiaries in Canada and Germany, we continue to evaluate how the Tax Act may affect our plans to repatriate additional amounts to fund our domestic operations or otherwise deploy our worldwide cash. In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources.

Our systems business requires significant liquidity and is expected to continue to have significant liquidity requirements in the future. The net amount of our project assets and related portion of deferred revenue, which approximates our net capital investment in the development and construction of systems projects, was $0.5 billion as of June 30, 2018. Solar power project development and construction cycles, which span the time between the identification of a site location and the commercial operation of a system, vary substantially and can take many years to mature. As a result of these long project cycles and strategic decisions to finance the construction of certain projects using our working capital, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale of such projects. Delays in construction progress or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. We have historically financed these up-front systems project investments primarily using working capital. In certain circumstances, we may need to finance construction costs exclusively using working capital, if project financing becomes unavailable due to market-wide, regional, or other concerns.

From time to time, we develop projects in certain markets around the world where we may hold all or a significant portion of the equity in a project for several years. Given the duration of these investments and the currency risk relative to the U.S. dollar in some of these markets, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted.

Additionally, we may elect to retain an ownership interest in certain systems projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a systems project at economics that are attractive to us or potential customers are unwilling to assume the risks and rewards typical of PV solar power system ownership, we may instead elect to temporarily own and operate such systems until we can sell the systems on economically attractive terms. The decision to retain ownership of a system impacts liquidity depending upon the size and cost of the project. As of June 30, 2018, we had $0.3 billion of net PV solar power systems that had been placed in service, primarily in international markets. We have elected, and may in the future elect, to enter into temporary or long-term project financing to reduce the impact on our liquidity and working capital with regards to such projects and systems. We may also consider entering into tax equity or other arrangements with respect to ownership interests in certain of our projects, which could cause a portion of the economics of such projects to be realized over time.

The following additional considerations have impacted or may impact our liquidity for the remainder of 2018 and beyond:

We expect to make significant capital investments over the next several years as we transition our production to Series 6 module technology and purchase the related manufacturing equipment and infrastructure. These investments also include the commencement and expansion of operations at our existing manufacturing plant in Vietnam and the construction of an additional U.S. manufacturing plant in Lake Township, Ohio. We expect the aggregate capital investment for currently planned Series 6 related programs to be approximately $1.8 billion, including $0.8 billion of capital expenditures already made as of June 30, 2018. These capital investments are expected to provide an annual Series 6 manufacturing capacity of approximately 6.6 GW once completed. During the remainder of 2018, we expect to spend $400 million to $500 million for capital expenditures, the majority of which is associated with the Series 6 transition. We believe these capital expenditures will, over time, increase our aggregate manufacturing capacity, reduce our manufacturing costs, increase our solar module conversion efficiencies, and reduce the overall cost of systems using our modules.




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Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Accordingly, we may enter into long-term supply agreements to mitigate potential risks related to the procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. In April 2018, we entered into a supply agreement for the purchase of substrate glass for our PV solar modules. Under the terms of the agreement, we expect to pay approximately $2.4 billion over the supply period, which ends in December 2027. In March 2018, we entered into a 10-year supply agreement for the purchase of cover glass for our PV solar modules. Under the terms of the agreement, we expect to pay approximately $500 million over the 10-year supply period, which is scheduled to begin by January 2020.

The balance of our solar module inventories and BoS parts was $221.3 million as of June 30, 2018. As we continue to develop and construct our advanced-stage project pipeline, we must produce solar modules and procure BoS parts in volumes sufficient to support our planned construction schedules. As part of this construction cycle, we typically produce or procure these inventories in advance of receiving payment for such materials, which may temporarily reduce our liquidity. Once solar modules and BoS parts are installed in a project, they are classified as either project assets, PV solar power systems, or cost of sales depending on whether the project is subject to a definitive sales contract and whether other revenue recognition criteria have been met. We also produce significant volumes of modules for sale directly to third-parties, which requires us to carry inventories at levels sufficient to satisfy the demand of our customers and the needs of their utility-scale projects, which may also temporarily reduce our liquidity.

We may commit working capital during the remainder of 2018 and beyond to acquire solar power projects in various stages of development, including advanced-stage projects with PPAs, and to continue developing those projects as necessary. Depending upon the size and stage of development, the costs to acquire such solar power projects could be significant. When evaluating project acquisition opportunities, we consider both the strategic and financial benefits of any such acquisitions.

Cash Flows

The following table summarizes the key cash flow activity for the six months ended June 30, 2018 and 2017 (in thousands):
 
 
Six Months Ended
June 30,
 
 
2018
 
2017
Net cash provided by operating activities
 
$
83,856

 
$
325,340

Net cash used in investing activities
 
(372,821
)
 
(326,442
)
Net cash provided by financing activities
 
69,991

 
136,918

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(13,077
)
 
3,072

Net (decrease) increase in cash, cash equivalents and restricted cash
 
$
(232,051
)
 
$
138,888


Operating Activities

The decrease in net cash provided by operating activities was primarily driven by the sale of the Moapa and Switch Station projects in 2017 and costs associated with the ongoing transition to Series 6 module manufacturing. Such decreases were partially offset by lower expenditures for the construction of certain projects using working capital, the sale of certain India projects, and prepayments received from customers in 2018.




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Investing Activities

The increase in net cash used in investing activities was primarily due to an increase in net purchases of marketable securities and restricted investments and higher purchases of property, plant and equipment driven by our transition to Series 6 module manufacturing, partially offset by proceeds associated with the sale of our interests in the Partnership and its subsidiaries in 2018.

Financing Activities

The decrease in net cash provided by financing activities was primarily the result of lower net proceeds from borrowings under our long-term debt arrangements associated with the construction of certain projects in Japan and India and lower proceeds from commercial letters of credit for the construction of certain projects in India.

Contractual Obligations

Our contractual obligations have not materially changed since December 31, 2017 with the exception of borrowings under project specific debt financings, certain glass supply agreements entered into in April and March 2018, and other changes in the ordinary course of business. See Note 10. “Debt” and Note 11. “Commitments and Contingencies” to our condensed consolidated financial statements for more information related to the changes in our long-term debt and purchase commitments, respectively. See also our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information regarding our contractual obligations.

Off-Balance Sheet Arrangements

As of June 30, 2018, we had no off-balance sheet debt or similar obligations, other than financial assurance related instruments and operating leases, which are not classified as debt. We do not guarantee any third-party debt. See Note 11. “Commitments and Contingencies” to our condensed consolidated financial statements for further information about our financial assurance related instruments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the information previously provided under Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2018 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

We also carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) to determine whether any changes in our internal control over financial reporting



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occurred during the three months ended June 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes in our internal control over financial reporting that occurred during the three months ended June 30, 2018.

CEO and CFO Certifications

We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4. be read in conjunction with those certifications for a more complete understanding of the subject matter presented.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 11. “Commitments and Contingencies” under the heading “Legal Proceedings” of our condensed consolidated financial statements for legal proceedings and related matters.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, which could materially affect our business, financial condition, results of operations, or cash flows. The risks described in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently consider immaterial may also materially adversely affect our business, financial condition, results of operations, or cash flows. Except for the updated risk factors appearing below, there have been no material changes in the risk factors contained in our Annual Report on Form 10-K or in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.

We may not be able to obtain long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to attract financing and other investmentswith regard to projects for which electricity is or will be sold on an open contract basis rather than under a PPA, our results of operations could be adversely affected to the extent prevailing spot electricity prices decline in an unexpected manner.

Obtaining long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to us is essential for obtaining financing and commencing construction of our projects. We must compete for PPAs against other developers of solar and renewable energy projects. This intense competition for PPAs has resulted in downward pressure on PPA pricing for newly contracted projects. In addition, we believe the solar industry may experience periods



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of structural imbalance between supply and demand that put downward pressure on module pricing. This downward pressure on module pricing would also create downward pressure on PPA pricing for newly contracted projects. See the Risk Factor entitled “Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations” contained in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for additional information. If falling PPA pricing results in forecasted project revenue that is insufficient to generate returns anticipated to be demanded in the project sale market, our business, financial condition, and results of operations could be adversely affected.

Other sources of power, such as natural gas-fired power plants, have historically been cheaper than the cost of solar power, and certain types of generation projects, such as natural gas-fired power plants, can deliver power on a firm basis. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue. In addition, the availability of PPAs is dependent on utility and corporate energy procurement practices that could evolve and shift allocation of market risks over time. In addition, PPA availability and terms are a function of a number of economic, regulatory, tax, and public policy factors, which are also subject to change. Also, certain of our projects may be scheduled for substantial completion prior to the commencement of a long-term PPA with a major off-taker, in which case we would be required to enter into a stub-period PPA for the intervening time period or sell down the project. We may not be able to do either on terms that are commercially attractive to us. Finally, the electricity from certain of our projects is or is expected to be sold on an open contract basis for a period of time rather than under a PPA. If prevailing spot electricity prices relating to any such project were to decline in an unexpected manner, such project may decline in value and our results of operations could otherwise be adversely affected.

Even if we are able to obtain PPAs favorable to us, the ability of our offtake counterparties to fulfill their contractual obligations to us depends, in part, on their creditworthiness. These counterparties, such as our investor-owned utility counterparties in the state of California, which may have liability for damages associated with California’s recent wildfires, could become subject to insolvency or liquidation proceedings or otherwise suffer a deterioration of their creditworthiness, any of which could result in underpayment or nonpayment under such agreements or prevent our ability to attract debt or equity financing for our projects.

We are in the process of upgrading our enterprise resource planning system; failure to successfully execute this upgrade may result in increased costs, business disruptions, and untimely or inaccurate financial reporting.

We are dependent on information systems to facilitate the day-to-day operations of our business and to produce timely, accurate, and reliable financial information. We are in the process of upgrading our existing enterprise resource planning (“ERP”) system to simplify and improve the overall performance of our information systems. ERP system upgrades involve complexities due to the number of associates and processes affected by such changes. A failure to successfully upgrade our ERP system or difficulties in the upgrade process may result in increased costs; disruptions in our ability to effectively source, sell, or ship our products; delays in customer collections; or an inability to timely and accurately report our financial results, any of which could adversely affect our financial condition or results of operations.

Item 5. Other Information

None.




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Item 6. Exhibits

The following exhibits are filed with or incorporated by reference into this Quarterly Report on Form 10-Q:
Exhibit Number
 
Exhibit Description
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
——————————
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
FIRST SOLAR, INC.
 
 
 
 
Date: July 26, 2018
By:
 
/s/ BRYAN SCHUMAKER
 
Name:
 
Bryan Schumaker
 
Title:
 
Chief Accounting Officer




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