filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the “Note Regarding Forward-Looking Statements” that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under Item 1A. “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. This discussion and analysis does not address certain items in respect of the year ended December 31, 2018 in reliance on amendments to disclosure requirements adopted by the SEC in 2019. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019 for comparative discussions of our results of operations and liquidity and capital resources for the years ended December 31, 2019 and 2018.
Executive Overview
We are a leading global provider of PV solar energy solutions. We design, manufacture, and sell PV solar modules with an advanced thin film semiconductor technology and also develop and sell PV solar power systems that primarily use the modules we manufacture. Additionally, in certain markets we provide O&M services to system owners. We have substantial, ongoing R&D efforts focused on various technology innovations. We are the world’s largest thin film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers.
Certain of our financial results and other key operational developments for the year ended December 31, 2020 include the following:
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Net sales for 2020 decreased by 11% to $2.7 billion compared to $3.1 billion in 2019. The decrease in net sales was primarily attributable to the completion of substantially all construction activities at the Sun Streams, Phoebe, Sunshine Valley, Rosamond, Seabrook, and Lake Hancock projects in 2019, the sale of the Beryl and Little Bear projects in 2019, and lower construction activities at the GA Solar 4 project in the current period, partially offset by the sale of the Ishikawa, American Kings, Miyagi, Anamizu, Tungabhadra, and Anantapur projects in 2020 and an increase in the volume of modules sold to third parties.
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Gross profit increased 7.2 percentage points to 25.1% during 2020 from 17.9% during 2019 primarily due to higher gross profit on third-party module sales and improved throughput of our manufacturing facilities from the successful ramp of various Series 6 manufacturing lines, partially offset by the higher benefit from reductions to our product warranty liability in the prior period and an impairment loss for certain module manufacturing equipment.
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During late 2020, we completed the capacity expansion of our manufacturing facility in Perrysburg, Ohio. As of December 31, 2020 we had 6.3 GWDC of total installed Series 6 nameplate production capacity across all our facilities. We produced 6.1 GWDC of solar modules during 2020, which represented a 59% increase in Series 6 module production from 2019. The increase in Series 6 production was primarily driven by the production capacity added in 2019 at our second facility in Ho Chi Minh City, Vietnam and our facility in Lake Township, Ohio as well as higher throughput at various facilities. We expect to produce between 7.4 GWDC and 7.6 GWDC of Series 6 modules during 2021.
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In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we operate, including the United States, Malaysia, and Vietnam. At this time, such limitations have had limited effect on our Series 6 manufacturing facilities. However, these orders are subject to continuous revision, and our
understanding of the applicability of these orders and any potential exemptions may change at any time. To enable the continuity of our operations, we have implemented a wide range of safety measures intended to inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities.
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Following an evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our O&M services business, we received an offer to purchase certain portions of the business and determined it is in the best interest of our stockholders to pursue this transaction. As a result, in August 2020 we entered into an agreement with Clairvest for the sale of our North American O&M operations. The completion of the transaction is contingent on a number of closing conditions, including the receipt of certain third-party consents and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in the first half of 2021.
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Following an evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our U.S. project development business, we have determined it is in the best interest of our stockholders to pursue the sale of this business. On January 24, 2021, we entered into an agreement with OMERS for the sale of our U.S. project development operations, which comprises the business of developing, contracting for the construction of, and selling utility-scale PV solar power systems. The transaction includes our approximately 10 GWAC utility-scale solar project pipeline, including the advanced-stage Horizon, Madison, Ridgely, Rabbitbrush, and Oak Trail projects that are expected to commence construction in the next two years; the 30 MWAC Barilla Solar project, which is operational; and certain other equipment. In addition, OMERS has agreed to certain module purchase commitments. The completion of the transaction is contingent on a number of closing conditions, including the receipt of regulatory approval from FERC, the expiration of the mandatory waiting period under U.S. antitrust laws, a review of the transaction by CFIUS, and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in the first half of 2021.
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In January 2020, we entered into a Memorandum of Understanding (“MOU”) to settle a class action lawsuit filed in 2012 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 officers and directors (the “Class Action”). Pursuant to the MOU, we paid a total of $350 million to settle the claims brought on behalf of all persons who purchased or otherwise acquired the Company’s shares during a specified period, in exchange for mutual releases and a dismissal with prejudice of the complaint upon court approval of the settlement. The settlement contained no admission of liability, wrongdoing, or responsibility by any of the parties. The Arizona District Court entered an order in June 2020 that granted final approval of the settlement and dismissed the Class Action with prejudice.
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In June 2020, we entered into an agreement in principle to settle certain claims filed in 2015 in the Arizona District Court by putative stockholders that opted out of the Class Action (the “Opt-Out Action”). In July 2020, the parties executed a definitive settlement agreement pursuant to which we agreed to pay a total of $19 million in exchange for mutual releases and a dismissal with prejudice of the Opt-Out Action. The agreement contained no admission of liability, wrongdoing, or responsibility by any of the parties. In July 2020, First Solar funded the settlement and the parties filed a joint stipulation of dismissal. In September 2020, the Arizona District Court entered an order dismissing the case with prejudice.
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 many global markets have declined in recent years and are expected to continue to decline in the future. Furthermore, the COVID-19 pandemic has adversely affected certain purchasers of modules and systems, which may result in additional pressure on demand and average selling prices. 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. Accordingly, 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 also put pressure on pricing, which may be exacerbated by the COVID-19 pandemic’s disruption of the global economy. Additionally, intense competition at the system level may result in an environment in which pricing falls rapidly, thereby potentially increasing demand for solar energy solutions but constraining the ability for project developers and diversified module manufacturers to sustain meaningful and consistent profitability. In light of such market realities, we continue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process, our diversified capabilities, our financial viability, and the sustainability advantage of our modules and systems.
Global solar markets continue to expand and develop, in part aided by demand elasticity resulting from declining average selling prices, both at the module and system levels, which have promoted the widespread adoption of solar energy. As a result of such market opportunities, we are expanding our manufacturing capacity and developing solar projects in certain markets as we execute on our utility-scale project pipeline. 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 pipeline. Although we expect a meaningful portion of our future consolidated net sales, operating income, and cash flows to be derived from such projects, we expect third-party module sales to continue to have a more significant impact on our operating results as we expand capacity and leverage the benefits of our Series 6 module technology.
Lower industry module and system pricing is expected to contribute to diversification in global electricity generation and further demand for solar energy. Over time, however, declining average selling prices may adversely affect our results of operations to the extent we have not already entered into contracts for future module or system sales. Our results of operations could also be adversely affected if competitors reduce pricing to levels below their costs, bid aggressively low prices for module sale agreements or PPAs, or are able to operate at minimal or negative operating margins for sustained periods of time. For certain of our competitors, such actions may be enabled by their direct or indirect access to sovereign capital or other forms of state-owned support. In certain markets in California and elsewhere, an oversupply imbalance at the grid level may 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. However, we believe the effects of such imbalance can be mitigated by modern solar power plants and energy storage solutions that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements, partnering with grid operators and utility companies, and implementing certain other cost reduction initiatives.
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 wattage (through a larger form factor or an improved conversion efficiency), energy yield, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and LCOE. Many crystalline silicon cell and wafer manufacturers have transitioned from lower efficiency BSF multi-crystalline cells (the legacy technology against which we have generally competed) to higher efficiency PERC 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 modules offer bifacial modules that also capture diffuse irradiance on the back side of a module. The cost effective manufacture of bifacial PERC modules has been enabled, in part, 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 may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which, after considering the incremental BoS and other costs, 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 systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin-film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing process (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers.
In terms of energy yield, in many climates our CdTe solar modules provide an energy production advantage over crystalline silicon solar modules 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 solar 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 partial shading response than conventional crystalline silicon solar modules, which may experience significantly lower energy generation than CdTe solar modules when partial shading occurs. As a result of these and other factors, our PV solar modules typically produce more annual energy in real world field conditions than conventional modules with the same nameplate capacity. Furthermore, our thin-film CdTe semiconductor technology is immune to cell cracking and its resulting power output loss, a common failure often observed in crystalline silicon modules caused by poor manufacturing, handling, weather, or other conditions.
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 further declines in the average selling prices of our modules and systems and additional margin compression. 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.
Certain Trends and Uncertainties
We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties. See Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K for discussions of other risks that may affect us.
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 in key geographic markets that we believe have a compelling need for mass-scale PV solar electricity, including markets throughout the United States, Japan, Europe, India, and certain other strategic markets. While these markets are expected to exhibit strong long-term demand for solar energy, the economic disruption caused by the COVID-19 pandemic has adversely affected near-term demand for electricity at the grid level. As a result, such temporary decline in load may adversely affect demand for specific forms of generation, such as our PV solar energy solutions, depending on the severity and duration of the economic disruption. Given these market dynamics, we continue to focus on opportunities in which our PV solar energy solutions compete directly with traditional forms of energy generation on an LCOE or similar basis, or complement such generation offerings. These opportunities include the retirement and replacement of aging fossil fuel-based generation resources with utility-scale PV solar energy solutions. For example, cumulative global retirements of coal generation plants are expected to approximate 900 GWDC by 2040, representing a significant increase in the potential market for solar energy.
This 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 impact our core utility-scale based offerings over the next several years, we believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain international markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions.
Our ability to provide utility-scale offerings on economically attractive terms depends, in part, on market factors outside our control, such as the availability of debt and/or equity financing (including, in the United States, tax equity financing), 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. For example, we generally sell projects we have developed within our systems business to purchasers that depend on financing to fund the initial capital expenditures required to develop, build, and/or purchase a system. Although governments and central banks around the world have implemented significant measures to support capital markets, the economic disruption caused by the COVID-19 pandemic may result in a long-term tightening of the supply of capital in global financial markets (including, in the United States, a reduction in total tax equity availability). A reduction in the supply of project debt or equity financing (including, in the United States, tax equity financing) caused by the COVID-19 pandemic could make it difficult for our customers to secure the financing necessary to develop, build, purchase, or install systems. Similarly, purchasers of modules may cease or significantly reduce business operations, cease or delay module procurement, encounter an inability to obtain financing, including due to a reduction in the supply of project debt financing or equity investments (including, in the United States, tax equity financing), conserve capital resources, or take other actions in response to the COVID-19 pandemic, which may reduce demand and average selling prices for our modules.
In certain markets, demand for our utility-scale offerings may be affected by specific regulations or policies of governmental bodies or utility regulators. For example, in June 2020, the Japanese legislature enacted an amendment to the Electricity Business Law Enforcement Order for the Ministry of Economy, Trade and Industry of Japan which, among other things, is expected to invalidate the feed-in-tariff certificates for projects that fail to achieve construction plan acceptance, submit an interconnection application, and/or achieve commercial operation within a set period of time following dates specified in their respective certificates. The amendment, which becomes effective in April 2022, applies to all projects regardless of generation type and is intended to release grid capacity reserved for delayed projects to enable other newly developed projects to utilize such capacity at a lower cost of electricity to consumers. The deadline by which a project must achieve construction plan acceptance, submit an interconnection application, and/or achieve commercial operation varies by project, but is no earlier than March 2023. Any deadlines that precede the expected construction plan acceptance and/or commercial operation dates of our various projects in Japan could adversely affect the value of such projects and our ability to secure any related project financing.
We intend to focus 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. As a result, we closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market.
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, including changes in the market set of potential buyers of our modules and 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 such offerings, 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 offerings. For example, the emergence of utility-owned generation has increased the number of potential project buyers as such utility customers benefit from a potentially low cost of capital available through rate-based utility investments. Given their long-term ownership profile, utility-owned generation customers typically seek to partner with diversified and stable companies that can provide a broad spectrum of utility-scale generation solutions, including reliable PV solar technology, thereby mitigating their long-term ownership risks.
On occasion, we may elect to develop 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 some portion of 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 off-take 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 off-take of the system. Furthermore, all system pricing is affected by the pricing of energy to be sold on an open contract basis following the termination of the PPA (i.e., merchant pricing curves), and changes in market assumptions regarding future open contract sales, including potential changes in energy demand caused by the COVID-19 pandemic, may also result in significant variability and uncertainty in the value of our systems projects.
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. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. As we evaluate the potential for future capacity expansion, we may also seek to further diversify our manufacturing presence, although we have made no decisions to do so at this time. Such additional capacity, and any other potential investments to add or otherwise modify our existing manufacturing capacity in response to market demand and competition, may require significant internal and possibly external sources of capital, and may be subject to certain risks and uncertainties described in Item 1A. “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, decrease our cost per watt, and, when necessary, continue to build new manufacturing plants over time in response to market demand, all of which are subject to risks and uncertainties” and “If any future production lines are not built in line with committed schedules, it may adversely affect our 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.”
In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. In addition, due to contraction of the virus, or concerns about becoming ill from the virus, we may experience reductions in the availability of our operational workforce, such as our manufacturing personnel. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availability of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, project development, construction, operating or maintenance operations, or research and development activities. At this time, such limitations have had a limited effect on our manufacturing facilities and certain project construction activities, and we have implemented a wide range of safety measures intended to enable the continuity of our operations and inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities, including those in the United States, Malaysia, and Vietnam.
To address the near-term business disruption caused by the COVID-19 pandemic, many governments have proposed policies or support programs intended to stimulate their respective economies. Such support programs may include additional incentives for renewable energy projects, including PV solar power systems, over several years. While we
compete in many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives.
Systems Project Pipeline
The following tables summarize, as of February 25, 2021, our approximately 1.3 GWAC 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 1.1 to 1.4. Such ratio varies across different projects due to many factors, including PPA pricing and the location, design, and costs of the system. 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. A project, or a portion of a project, may also be removed from the tables below in the event the 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 the project based on strategic opportunities or market factors.
Projects under Sales Agreements
The following table includes uncompleted sold projects and projects under contracts subject to conditions precedent:
| Project/Location | Project Size in MW****AC | PPA Contracted Partner | Customer | Expected Year Revenue Recognition Will Be Completed | % of Revenue Recognized as of December 31, 2020 | |||||||||||||||||||||||||||
| Horizon, Texas | 200 | (2) | (4) | (4) | (4) | |||||||||||||||||||||||||||
| Madison, Ohio (1) | 196 | Verizon Communications | (4) | (4) | (4) | |||||||||||||||||||||||||||
| Ridgely, Tennessee | 177 | Tennessee Valley Authority | (4) | (4) | (4) | |||||||||||||||||||||||||||
| Sun Streams 2, Arizona | 150 | Microsoft Corporation | (5) | 2021 (5) | —% | |||||||||||||||||||||||||||
| Rabbitbrush, California | 100 | (3) | (4) | (4) | (4) | |||||||||||||||||||||||||||
| Oak Trail, North Carolina | 100 | Verizon Communications | (4) | (4) | (4) | |||||||||||||||||||||||||||
| Total | 923 |
Projects with Confirmed Offtake Agreements Not under Sales Agreements
| Project/Location | Project Size in MW****AC | PPA Contracted Partner | Primary Permits Obtained | Expected or Actual Substantial Completion Year | % Complete as of December 31, 2020 | |||||||||||||||||||||||||||
| Luz del Norte, Chile | 141 | (6) | Yes | 2016 | 100% | |||||||||||||||||||||||||||
| Sun Streams PVS, Arizona | 65 | (7) | Yes | 2022 | 8% | |||||||||||||||||||||||||||
| Kyoto, Japan | 38 | Chubu Electric Power Company | Yes | 2022 | 33% | |||||||||||||||||||||||||||
| Japan (multiple locations) | 160 | (8) | Yes | 2021/2023 | 22% | |||||||||||||||||||||||||||
| Total | 404 |
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(1)Previously known as the Big Plain Solar project
(2)150 MWAC of the plant’s capacity is contracted with Dow Pipeline Company; remaining capacity to be sold on an open contract basis
(3)Central Coast Community Energy – 60 MWAC and Silicon Valley Clean Energy – 40 MWAC
(4)Project included in the sale of our U.S. project development business. Refer to Item 1. “Business – Offerings and Capabilities” for further information.
(5)Contracted but not specified. Project sale completed in February 2021.
(6)Approximately 70 MWAC of the plant’s capacity is contracted under various PPAs; remaining capacity to be sold on an open contract basis
(7)The project’s PPA was terminated in February 2021. We continue to market the project for sale.
(8)11 MWAC has been contracted with Tokyo Electric Power Company. The remaining 149 MWAC has secured feed-in-tariff rights, and the related PPAs for such projects will be executed at a later date.
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended December 31, 2020, 2019, and 2018:
| Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
| Cost of sales | 74.9 | % | 82.1 | % | 82.5 | % | ||||||||||||||
| Gross profit | 25.1 | % | 17.9 | % | 17.5 | % | ||||||||||||||
| Selling, general and administrative | 8.2 | % | 6.7 | % | 7.9 | % | ||||||||||||||
| Research and development | 3.5 | % | 3.2 | % | 3.8 | % | ||||||||||||||
| Production start-up | 1.5 | % | 1.5 | % | 4.0 | % | ||||||||||||||
| Litigation loss | 0.2 | % | 11.9 | % | — | % | ||||||||||||||
| Operating income (loss) | 11.7 | % | (5.3) | % | 1.8 | % | ||||||||||||||
| Foreign currency (loss) income, net | (0.2) | % | 0.1 | % | — | % | ||||||||||||||
| Interest income | 0.6 | % | 1.6 | % | 2.7 | % | ||||||||||||||
| Interest expense, net | (0.9) | % | (0.9) | % | (1.2) | % | ||||||||||||||
| Other (expense) income, net | (0.4) | % | 0.6 | % | 1.8 | % | ||||||||||||||
| Income tax benefit (expense) | 4.0 | % | 0.2 | % | (0.2) | % | ||||||||||||||
| Equity in earnings, net of tax | (0.1) | % | — | % | 1.5 | % | ||||||||||||||
| Net income (loss) | 14.7 | % | (3.8) | % | 6.4 | % |
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 contracting and management, 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.
Net sales
Modules Business
We generally price and sell our solar modules on a per watt basis. During 2020, Longroad Energy, NextEra Energy, and Softbank each accounted for more than 10% of our modules business net sales, and the majority of our solar modules were sold to integrators and operators of systems in the United States and France. Substantially all of our modules business net sales during 2020 were denominated in U.S. dollars and Euro. We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. The revenue recognition
policies for module sales are further described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements.
Systems Business
During 2020, Goldman Sachs Renewable Power, SMFL Mirai Partners, and Mitsui & Co. each accounted for more than 10% of our systems business net sales, and the majority of our systems business net sales were in the United States and Japan. Substantially all of our systems business net sales during 2020 were denominated in U.S. dollars and Japanese yen. We 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 development project, which excludes EPC services, or for the sale of a completed system when we enter into the associated sales contract with the customer. The revenue recognition policies for our systems business are further described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements.
The following table shows net sales by reportable segment for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Modules | $ | 1,736,060 | $ | 1,460,116 | $ | 502,001 | $ | 275,944 | 19 | % | $ | 958,115 | 191 | % | ||||||||||||||||||||||||||||||
| Systems | 975,272 | 1,603,001 | 1,742,043 | (627,729) | (39) | % | (139,042) | (8) | % | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,711,332 | $ | 3,063,117 | $ | 2,244,044 | $ | (351,785) | (11) | % | $ | 819,073 | 36 | % |
Net sales from our modules segment increased by $275.9 million in 2020 primarily due to a 21% increase in the volume of watts sold, partially offset by a 2% decrease in the average selling price per watt. Net sales from our systems segment decreased by $627.7 million in 2020 primarily due to the completion of substantially all construction activities at the Sun Streams, Phoebe, Sunshine Valley, Rosamond, Seabrook, and Lake Hancock projects in 2019, the sale of the Beryl and Little Bear projects in 2019, and lower construction activities at the GA Solar 4 project in the current period, partially offset by the sale of the Ishikawa, American Kings, Miyagi, Anamizu, Tungabhadra, and Anantapur projects in 2020.
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, and construction labor), and site specific costs.
The following table shows cost of sales by reportable segment for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Modules | $ | 1,306,929 | $ | 1,170,037 | $ | 552,468 | $ | 136,892 | 12 | % | $ | 617,569 | 112 | % | ||||||||||||||||||||||||||||||
| Systems | 723,730 | 1,343,868 | 1,299,399 | (620,138) | (46) | % | 44,469 | 3 | % | |||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 2,030,659 | $ | 2,513,905 | $ | 1,851,867 | $ | (483,246) | (19) | % | $ | 662,038 | 36 | % | ||||||||||||||||||||||||||||||
| % of net sales | 74.9 | % | 82.1 | % | 82.5 | % |
Cost of sales decreased $483.2 million, or 19%, and decreased 7.2 percentage points as a percent of net sales when comparing 2020 with 2019. The decrease in cost of sales was driven by a $620.1 million decrease in our systems segment cost of sales primarily due to the lower volume of projects under construction during the period. Such decrease in our systems segment cost of sales was partially offset by a $136.9 million increase in our modules segment cost of sales primarily as a result of the following:
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higher costs of $247.4 million from an increase in the volume of modules sold;
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an impairment loss of $17.4 million for certain module manufacturing equipment, including framing and assembly tools, which were no longer compatible with our long-term module technology roadmap;
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manufacturing related charges of $15.1 million associated with the ongoing COVID-19 pandemic; and
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a reduction to our product warranty liability of $80.0 million in 2019 due to revised module return rates; partially offset by
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a reduction to our product warranty liability of $19.7 million in 2020 due to lower-than-expected settlements for our older series of module technology and revisions to projected settlements;
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lower under-utilization and certain other charges associated with the initial ramp of certain Series 6 manufacturing lines, which decreased cost of sales by $61.7 million compared to 2019;
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a reduction in our module collection and recycling liability of $18.9 million primarily due to changes to the estimated timing of cash flows associated with capital, labor, and maintenance costs and updates to certain valuation assumptions; and
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continued module cost reductions, which decreased cost of sales by $157.2 million.
Gross profit
Gross 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 years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 680,673 | $ | 549,212 | $ | 392,177 | $ | 131,461 | 24 | % | $ | 157,035 | 40 | % | ||||||||||||||||||||||||||||||
| % of net sales | 25.1 | % | 17.9 | % | 17.5 | % |
Gross profit increased 7.2 percentage points to 25.1% during 2020 from 17.9% during 2019 primarily due to higher gross profit on third-party module sales and improved throughput of our manufacturing facilities from the successful ramp of various Series 6 manufacturing lines, partially offset by the lower benefit from reductions to our product warranty liability and the impairment loss for certain module manufacturing equipment described above.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.
The following table shows selling, general and administrative expense for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 222,918 | $ | 205,471 | $ | 176,857 | $ | 17,447 | 8 | % | $ | 28,614 | 16 | % | ||||||||||||||||||||||||||||||
| % of net sales | 8.2 | % | 6.7 | % | 7.9 | % |
Selling, general and administrative expense in 2020 increased compared to 2019 primarily due to higher charges for impairments of certain project assets and an increase in professional fees, partially offset by lower project development and travel expenses.
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 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.
The following table shows research and development expense for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 93,738 | $ | 96,611 | $ | 84,472 | $ | (2,873) | (3) | % | $ | 12,139 | 14 | % | ||||||||||||||||||||||||||||||
| % of net sales | 3.5 | % | 3.2 | % | 3.8 | % |
Research and development expense in 2020 decreased compared to 2019 primarily as a result of lower employee compensation expense due to reductions in R&D headcount for our systems business, partially offset by increased material and module testing costs.
Production start-up
Production start-up expense consists primarily of employee compensation and other costs associated with operating a production line before it is 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 years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Production start-up | $ | 40,528 | $ | 45,915 | $ | 90,735 | $ | (5,387) | (12) | % | $ | (44,820) | (49) | % | ||||||||||||||||||||||||||||||
| % of net sales | 1.5 | % | 1.5 | % | 4.0 | % |
During 2020, we incurred production start-up expense for the transition to Series 6 module manufacturing at our second facility in Kulim, Malaysia and the capacity expansion of our manufacturing facility in Perrysburg, Ohio. During 2019, we incurred production start-up expense at our new facility in Lake Township, Ohio and our second facility in Ho Chi Minh City, Vietnam, which commenced commercial production in early 2019.
Litigation loss
The following table shows litigation loss for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Litigation loss | $ | 6,000 | $ | 363,000 | $ | — | $ | (357,000) | (98) | % | $ | 363,000 | 100 | % | ||||||||||||||||||||||||||||||
| % of net sales | 0.2 | % | 11.9 | % | — | % |
In January 2020, we entered into an MOU to settle a class action lawsuit filed in 2012 in the Arizona District Court against the Company and certain of our current and former officers and directors. Pursuant to the MOU, we agreed to pay a total of $350 million to settle the claims brought on behalf of all persons who purchased or otherwise acquired the Company’s shares during a specified period, in exchange for mutual releases and a dismissal with prejudice of the complaint upon court approval of the settlement. The settlement contains no admission of liability, wrongdoing, or responsibility by any of the parties. As a result of the entry into the MOU, we accrued a loss for the above-referenced settlement in 2019, and paid the $350 million settlement in January 2020. In June 2020, the Arizona District Court entered an order that granted final approval of the settlement and dismissed the Class Action with prejudice.
In June 2020, we entered into an agreement in principle to settle the claims in the Opt-Out Action filed in 2015 in the Arizona District Court by putative stockholders that opted out of the Class Action. In July 2020, the parties executed a definitive settlement agreement pursuant to which we agreed to pay a total of $19 million in exchange for mutual releases and a dismissal with prejudice of the Opt-Out Action. The agreement contains no admission of liability, wrongdoing, or responsibility by any of the parties. In July 2020, First Solar funded the settlement and the parties filed a joint stipulation of dismissal. In September 2020, the Arizona District Court entered an order dismissing the case with prejudice. As of December 31, 2019, we had accrued $13 million of estimated losses for this action. As a result of the settlement, we accrued an incremental $6 million litigation loss during 2020.
See Note 13. “Commitments and Contingencies” to our consolidated financial statements for additional information on these matters.
Foreign currency (loss) income, net
Foreign currency (loss) income, 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 (loss) income, net for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency (loss) income, net | $ | (4,890) | $ | 2,291 | $ | (570) | $ | (7,181) | 313 | % | $ | 2,861 | 502 | % |
Foreign currency loss increased in 2020 compared to 2019 primarily due to higher costs associated with hedging activities related to our subsidiaries in Japan and Europe and differences between our economic hedge positions and the underlying exposures.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, restricted cash, and restricted marketable securities. Interest income also includes interest earned from notes receivable and late customer payments.
The following table shows interest income for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Interest income | $ | 16,559 | $ | 48,886 | $ | 59,788 | $ | (32,327) | (66) | % | $ | (10,902) | (18) | % |
Interest income during 2020 decreased compared to 2019 primarily due to lower interest rates on cash and cash equivalents and lower average balances and interest rates associated with time deposits and marketable securities.
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 Accounting Standards Codification (“ASC”) 815. We may capitalize interest expense to 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 years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Interest expense, net | $ | (24,036) | $ | (27,066) | $ | (25,921) | $ | 3,030 | (11) | % | $ | (1,145) | 4 | % |
Interest expense, net in 2020 decreased compared to 2019 primarily due to lower interest expense associated with project debt, partially offset by higher amortization of debt discounts and issuance costs and a decrease in capitalized interest.
Other (expense) income, net
Other (expense) income, net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted marketable securities.
The following table shows other (expense) income, net for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Other (expense) income, net | $ | (11,932) | $ | 17,545 | $ | 39,737 | $ | (29,477) | (168) | % | $ | (22,192) | (56) | % |
Other expense, net increased in 2020 compared to 2019 primarily due to lower realized gains from sales of restricted marketable securities and expected credit losses associated with certain notes receivable, partially offset by prior period charges associated with certain letter of credit arrangements and the impairment of a strategic investment. See Note 7. “Consolidated Balance Sheet Details” to our consolidated financial statements for further information about the allowance for credit losses for our notes receivable.
Income tax benefit (expense)
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 United States and numerous foreign jurisdictions in which we operate, principally Japan, Malaysia, and Vietnam. Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate in the United States is 21%, and the tax rates in Japan, Malaysia, and Vietnam are 30.6%, 24%, and 20%, 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. In Vietnam, we have been granted a tax incentive, scheduled to expire at the end of 2025, pursuant to which income earned in Vietnam is subject to reduced tax rates.
The following table shows income tax benefit (expense) for the years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | $ | 107,294 | $ | 5,480 | $ | (3,441) | $ | 101,814 | 1,858 | % | $ | 8,921 | (259) | % | ||||||||||||||||||||||||||||||
| Effective tax rate | (36.6) | % | 4.6 | % | 3.0 | % |
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 increased by $101.8 million during 2020 compared to 2019 primarily due to a tax benefit from the effect of tax law changes associated with the CARES Act, the reversal of uncertain tax positions due to the expiration of the statute of limitations, and the release of the valuation allowance associated with our Vietnamese subsidiary due to its current year operating income, partially offset by higher pretax income.
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 years ended December 31, 2020, 2019, and 2018:
| Years Ended | Change | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2020 over 2019 | 2019 over 2018 | |||||||||||||||||||||||||||||||||||||||
| Equity in earnings, net of tax | $ | (2,129) | $ | (284) | $ | 34,620 | $ | (1,845) | 650 | % | $ | (34,904) | (101) | % |
Equity in earnings, net of tax in 2020 was consistent with equity in earnings, net of tax in 2019.
Liquidity and Capital Resources
As of December 31, 2020, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, contracts with customers for the future sale of solar modules, and advanced-stage project pipeline will be sufficient to meet our working capital, capital expenditure, and systems project investment needs for at least the next 12 months. As needed, we also believe we will have adequate access to the capital markets. In addition, we have availability under our Revolving Credit Facility, under which we have made no borrowings as of December 31, 2020. 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, such as systems project development activities in certain international regions. However, our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to company-specific, industry-wide, or broader market concerns, such as a tightening of the supply of capital due to the COVID-19 pandemic and related containment measures. Any incremental debt financings could result in increased debt service expenses and/or restrictive covenants, which could limit our ability to pursue our strategic plans.
As of December 31, 2020, we had $1.7 billion in cash, cash equivalents, and marketable securities compared to $2.2 billion as of December 31, 2019. The decrease in cash, cash equivalents, and marketable securities was primarily driven by purchases of property, plant and equipment; the $350 million settlement payment associated with our prior class action lawsuit; the timing of cash receipts from certain third-party module sales, for which proceeds were received in late 2019 prior to the step down in the U.S. investment tax credit from 30% to 26%; and other operating expenditures; partially offset by cash proceeds from the sale and construction of certain systems projects. As of December 31, 2020 and 2019, $1.1 billion and $0.9 billion, respectively, of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Japanese yen, and Indian rupee denominated holdings.
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 United States, we may be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. We maintain the intent and ability to permanently reinvest our accumulated earnings outside the United States, with the exception of our subsidiaries in Canada and Germany. 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.
We continually evaluate forecasted global demand and seek to balance our manufacturing capacity with such demand. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. During 2021, we expect to spend $425 million to $475 million for capital expenditures, including upgrades to machinery and equipment that we believe will further increase our module wattage and expand capacity and throughput at our manufacturing facilities.
We also expect to commit significant working capital to purchase various raw materials used in our module manufacturing process. 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. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules. Our remaining purchases under these supply agreements are expected to be approximately $1.8 billion of substrate glass and $410 million of cover glass. We have the right to terminate these agreements upon payment of specified
termination penalties (which, in aggregate, are up to $390 million as of December 31, 2020 and decline over the remaining supply periods).
Our systems business is expected to continue to have significant liquidity requirements in the future. From time to time, 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, the majority of which support our systems projects. Our 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 such letters of credit. The net amount of our project assets and related portions of deferred revenue and long-term debt, which approximates our net capital investment in the development and construction of systems projects, was $260.6 million as of December 31, 2020. Solar power project development 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 development 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 or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. 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 may 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 system at economics that are attractive to us or potential customers are unwilling to assume the risks and rewards typical of system ownership, we may instead elect to temporarily own and operate such system until we can sell it on economically attractive terms. The decision to retain ownership of a system impacts our liquidity depending upon the size and cost of the project. As of December 31, 2020, we had $243.4 million 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 regard to such systems.
From time to time, we may be party to legal matters and claims against us. In January 2020, we entered into an MOU to settle a class action lawsuit filed in the Arizona District Court. Pursuant to the MOU, among other things, we agreed to pay a total of $350 million to settle the claims in the lawsuit in exchange for mutual releases and dismissal with prejudice of the complaint upon court approval of the settlement. In February 2020, we subsequently entered into a Stipulation and Agreement of Settlement (the “Settlement Agreement”) with certain named plaintiffs on terms and conditions that were consistent with the MOU. Pursuant to the Settlement Agreement, among other things, (i) we contributed $350 million in cash to a settlement fund that will be used to pay all settlement fees and expenses, attorneys’ fees and expenses, and cash payments to members of the settlement class and (ii) the settlement class has agreed to release us, the other defendants named in the class action, and certain of their respective related parties from any and all claims concerning, based on, arising out of, or in connection with the class action. The Settlement Agreement contained no admission of liability, wrongdoing, or responsibility by any of the parties. On June 30, 2020, the Arizona District Court entered an order granting final approval of the settlement and dismissed the Class Action with prejudice.
Cash Flows
The following table summarizes key cash flow activity for the years ended December 31, 2020, 2019, and 2018 (in thousands):
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 37,120 | $ | 174,201 | $ | (326,809) | ||||||||||||||
| Net cash used in investing activities | (131,227) | (362,298) | (682,714) | |||||||||||||||||
| Net cash (used in) provided by financing activities | (82,587) | 74,943 | 255,228 | |||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 3,778 | (2,959) | (13,558) | |||||||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (172,916) | $ | (116,113) | $ | (767,853) |
Operating Activities
The decrease in net cash provided by operating activities during 2020 was primarily driven by the $350 million settlement payment associated with our prior class action lawsuit as described above and the timing of cash receipts from certain third-party module sales, for which proceeds were received in late 2019 prior to the step down in the U.S. investment tax credit, partially offset by higher cash proceeds from the sale of systems projects in Japan and the United States.
Investing Activities
The decrease in net cash used in investing activities during 2020 was primarily due to lower purchases of property, plant and equipment.
Financing Activities
The increase in net cash used in financing activities during 2020 was primarily due to the repayment of the Ishikawa Credit Agreement, partially offset by proceeds from borrowings under project specific debt financings associated with the construction of certain projects in Japan.
Contractual Obligations
The following table presents the payments due by fiscal year for our outstanding contractual obligations as of December 31, 2020 (in thousands), excluding certain obligations we expect to transfer to Clairvest upon the closing of the sale of our North American O&M business and to OMERS upon the closing of the sale of our U.S. project development business:
| Payments Due by Year | ||||||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | ||||||||||||||||||||||||||||
| Long-term debt obligations | $ | 287,149 | $ | 41,801 | $ | 23,932 | $ | 62,287 | $ | 159,129 | ||||||||||||||||||||||
| Interest payments (1) | 116,030 | 11,433 | 21,881 | 19,818 | 62,898 | |||||||||||||||||||||||||||
| Operating lease obligations | 252,771 | 17,858 | 34,861 | 33,884 | 166,168 | |||||||||||||||||||||||||||
| Purchase obligations (2) | 1,058,664 | 590,516 | 198,993 | 161,730 | 107,425 | |||||||||||||||||||||||||||
| Recycling obligations | 130,688 | — | — | — | 130,688 | |||||||||||||||||||||||||||
| Contingent consideration (3) | 2,243 | 2,243 | — | — | — | |||||||||||||||||||||||||||
| Other obligations (4) | 3,541 | 2,122 | 1,119 | 300 | — | |||||||||||||||||||||||||||
| Total | $ | 1,851,086 | $ | 665,973 | $ | 280,786 | $ | 278,019 | $ | 626,308 |
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(1)Includes estimated cash interest to be paid over the remaining terms of the underlying debt. Interest payments are based on fixed and floating rates as of December 31, 2020.
(2)Purchase obligations represent agreements to purchase goods or services, including open purchase orders and contracts with fixed volume commitments, that are noncancelable or cancelable with a significant penalty. Purchase obligations for our long-term supply agreements for the purchase of substrate glass and cover glass represent specified termination penalties, which are up to $390 million in the aggregate under the agreements. Our remaining purchases under these supply agreements are expected to be approximately $1.8 billion of substrate glass and $410 million of cover glass.
(3)In connection with business or project acquisitions, we may agree to pay additional amounts to the selling parties upon achievement of certain milestones. See Note 13. “Commitments and Contingencies” to our consolidated financial statements for further information.
(4)Includes expected letter of credit fees and unused revolver fees.
We have excluded $5.4 million of unrecognized tax benefits from the amounts presented above as the timing of such obligations is uncertain.
Off-Balance Sheet Arrangements
As of December 31, 2020, 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 13. “Commitments and Contingencies” to our consolidated financial statements for further information about our financial assurance related instruments.
Recent Accounting Pronouncements
See Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements for a summary of recent accounting pronouncements.
Critical Accounting Estimates
In preparing our consolidated financial statements in conformity with generally accepted accounting principles in the United States (“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. 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. Our significant accounting policies are described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements. The accounting policies that require the most significant judgment and estimates include the following:
Revenue Recognition – Solar Power System Sales and/or EPC Services. We recognize revenue for the sale of a development project, which excludes EPC services, or for the sale of a completed system when we enter into the associated sales contract with the customer. For EPC services, or sales of solar power systems with EPC services, we generally recognize revenue over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such arrangements, we recognize revenue and gross profit as work is performed using cost based input methods, for which we determine our progress toward contract completion based on the relationship between actual costs incurred and total estimated costs (including solar module costs) of the contract. Such revenue recognition is also dependent, in part, on our customers’ commitment to perform their obligations under the contract, which is typically measured through the receipt of cash deposits or other forms of financial security issued by creditworthy financial institutions or parent entities.
Cost based input methods of revenue recognition are considered a faithful depiction of our efforts to satisfy long-term construction contracts and therefore reflect the transfer of goods to a customer under such contracts. Costs incurred that do not contribute to satisfying our performance obligations (“inefficient costs”) are excluded from our input methods of revenue recognition as the amounts are not reflective of our transferring control of the system to the customer. Costs incurred toward contract completion may include costs associated with solar modules, direct materials, labor, subcontractors, and other indirect costs related to contract performance. We recognize solar module and direct material costs as incurred when such items have been installed in a system.
Cost based input methods of revenue recognition require us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other payments to customers. Significant judgment is also required to evaluate assumptions related to the costs to complete our projects, including materials, labor, contingencies, and other system costs. If the estimated total costs on any contract, including any inefficient costs, are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be material depending on the size of the contracts or the changes in estimates.
As part of our solar power system sales, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable period meets or exceeds the modeled energy expectation, after certain adjustments. These tests are based on meteorological, energy, and equipment performance data measured at the system’s location as well as certain projections of such data over the remaining measurement period. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. Conversely, if there is an underperformance event with regards to these tests, we may incur liquidated damages as a percentage of the EPC contract price. Such performance guarantees represent a form of variable consideration and are estimated at contract inception at their most likely amount and updated at the end of each reporting period as additional performance data becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
Revenue Recognition – Operations and Maintenance. We recognize revenue for standard, recurring O&M services over time as customers receive and consume the benefits of such services. Costs of O&M services are expensed in the period in which they are incurred. As part of our O&M service offerings, we typically offer an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside our control as the service provider. These tests are based on meteorological, energy, and equipment performance data measured at the system’s location as well as certain projections of such data over the remaining measurement period. If system availability exceeds a contractual threshold, we may receive a bonus payment, or if system availability falls below a separate threshold, we may incur liquidated damages for certain lost energy under the PPA. Such bonuses or liquidated damages represent a form of variable consideration and are estimated and recognized over time as customers receive and consume the benefits of the O&M services.
Accrued Solar Module Collection and Recycling Liability. We previously established a module collection and recycling program, which has since been discontinued, to collect and recycle modules sold and covered under such program once the modules reach the end of their service lives. For legacy customer sales contracts that were covered under this program, we recognized expense at the time of sale for the estimated cost of our obligations to collect and recycle such modules. We estimate the cost of our collection and recycling obligations based on the present value of the expected future cost of collecting and recycling the solar modules, which includes estimates for the cost of
packaging materials; the cost of freight from the solar module installation sites to a recycling center; material, labor, and capital costs; and by-product credits for certain materials recovered during the recycling process. We base these estimates on our experience collecting and recycling solar modules and certain assumptions regarding costs 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 and classify the corresponding expense within “Selling, general and administrative” expense on our consolidated statements of operations. We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly.
Product Warranties. We provide a limited PV solar module warranty covering defects in materials and workmanship under normal use and service conditions for up to 12 years. We also typically warrant that modules installed in accordance with agreed-upon specifications will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by a degradation factor every year thereafter throughout the limited power output warranty period of up to 30 years. Among other things, our solar module warranty also covers the resulting power output loss from cell cracking.
As an alternative form of our standard limited module power output warranty, we have also offered an aggregated or system-level limited module performance warranty. This system-level limited module performance warranty is designed for utility-scale systems and provides 25-year system-level energy degradation protection. This warranty represents a practical expedient to address the challenge of identifying, from the potential millions of modules installed in a utility-scale system, individual modules that may be performing below warranty thresholds by focusing on the aggregate energy generated by the system rather than the power output of individual modules. The system-level limited module performance warranty is typically calculated as a percentage of a system’s expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty.
In addition to our limited solar module warranties described above, for PV solar power systems we construct, we typically provide limited warranties for defects in engineering design, installation, and BoS part workmanship for a period of one to two years following the substantial completion of a system or a block within the system.
When we recognize revenue for module or system sales, we accrue liabilities for the estimated future costs of meeting our limited warranty obligations. We make and revise these estimates based primarily on the number of our solar modules under warranty installed at customer locations, our historical experience with and projections of warranty claims, and our estimated per-module replacement costs. We also monitor our expected future module performance through certain quality and reliability testing and actual performance in certain field installation sites. In general, we expect the return rates for our newer series of module technology to be lower than our older series. We estimate that the return rate for such newer series of module technology will be less than 1%.
Income Taxes. We are subject to the income tax laws of the United States, its states and municipalities, and those of the foreign jurisdictions in which we have significant business operations. Such tax laws are complex and subject to different interpretations by the taxpayer and the relevant taxing authorities. We make judgments and interpretations regarding the application of these inherently complex tax laws when determining our provision for income taxes and also make estimates about when in the future certain items are expected to affect taxable income in the various tax jurisdictions. Disputes over interpretations of tax laws may be settled with the relevant taxing authority upon examination or audit. We regularly evaluate the likelihood of assessments in each of our taxing jurisdictions resulting from current and future examinations, and we record tax liabilities as appropriate.
In preparing our consolidated financial statements, we calculate our income tax provision based on our interpretation of the tax laws and regulations in the various jurisdictions where we conduct business. This requires us to estimate our current tax obligations, assess uncertain tax positions, and assess temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. These temporary differences result in deferred tax assets and liabilities. We must also assess the likelihood that each of our deferred tax assets will be realized. To
the extent we believe that realization of any of our deferred tax assets is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in a reporting period, we generally record a corresponding tax expense. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally reduces our overall income tax expense.
We establish liabilities for potential additional taxes based on our assessment of the outcome of our tax positions. Once established, we adjust these liabilities when additional information becomes available or when an event occurs requiring an adjustment. Significant judgment is required in making these estimates and the actual cost of a tax assessment, fine, or penalty may ultimately be materially different from our recorded liabilities, if any.
We continually explore initiatives to better align our tax and legal entity structure with the footprint of our global operations and recognize the tax impact of these initiatives, including changes in the assessment of uncertain tax positions, indefinite reinvestment exception assertions, and the realizability of deferred tax assets, in the period when we believe all necessary internal and external approvals associated with such initiatives have been obtained, or when the initiatives are materially complete.
Asset Impairments. We assess long-lived assets classified as “held and used,” including our property, plant and equipment; PV solar power systems; project assets; operating lease assets; and intangible assets for impairment whenever events or changes in circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of such assets may not be recoverable, and these assessments require significant judgment in determining whether such events or changes have occurred. These events or changes in circumstances may include a significant decrease in the market price of a long-lived asset; a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; a significant adverse change in the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; a current-period operating or cash flow loss combined with a history of such losses or a projection of future losses associated with the use of a long-lived asset; or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, and we must also exercise judgment in assessing such groupings and levels.
When impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If the carrying value of the asset group exceeds the undiscounted future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted cash flows for the asset group, (ii) third-party valuations, and/or (iii) information available regarding the current market value for such assets. If the fair value of an asset group is determined to be less than its carrying value, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs. Estimating future cash flows requires significant judgment, and such projections may vary from the cash flows eventually realized.
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