Item 1. Condensed Consolidated Financial Statements (Unaudited)

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Item 1. Condensed Consolidated Financial Statements (Unaudited)

FIRST SOLAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net sales	$	583,504	$	927,565	$	2,016,058	$	2,102,100
Cost of sales	458,924		634,550		1,532,593		1,581,287
Gross profit	124,580		293,015		483,465		520,813
Operating expenses:
Selling, general and administrative	43,476		49,861		131,909		160,218
Research and development	25,426		22,972		69,234		71,068
Production start-up	2,945		13,019		16,014		23,812
Litigation loss	—		—		—		6,000
Total operating expenses	71,847		85,852		217,157		261,098
Gain on sales of businesses, net	(1,866)		—		147,284		—
Operating income	50,867		207,163		413,592		259,715
Foreign currency loss, net	(1,018)		(1,852)		(4,613)		(3,549)
Interest income	1,752		2,109		3,996		15,113
Interest expense, net	(2,958)		(10,975)		(10,577)		(21,018)
Other (expense) income, net	(2,603)		(3,236)		2,598		(8,653)
Income before taxes and equity in earnings	46,040		193,209		404,996		241,608
Income tax (expense) benefit	(837)		(38,107)		(67,673)		40,894
Equity in earnings, net of tax	—		(65)		—		150
Net income	$	45,203	$	155,037	$	337,323	$	282,652

Net income per share:
Basic	$	0.43	$	1.46	$	3.18	$	2.67
Diluted	$	0.42	$	1.45	$	3.16	$	2.65
Weighted-average number of shares used in per share calculations:
Basic	106,320		105,967		106,241		105,830
Diluted	106,899		106,751		106,879		106,537

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	45,203	$	155,037	$	337,323	$	282,652
Other comprehensive (loss) income:
Foreign currency translation adjustments	(1,915)		3,242		(11,341)		552
Unrealized (loss) gain on marketable securities and restricted marketable securities, net of tax of $47, $(236), $1,134 and $(822)	(3,486)		6,148		(19,961)		20,826
Unrealized gain (loss) on derivative instruments, net of tax of $153, $55, $(545) and $(31)	118		(1,827)		4,284		(1,741)
Other comprehensive (loss) income	(5,283)		7,563		(27,018)		19,637
Comprehensive income	$	39,920	$	162,600	$	310,305	$	302,289

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	September 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	1,367,464	$	1,227,002
Marketable securities (amortized cost of $554,897 and $519,844 and allowance for credit losses of $133 and $121 at September 30, 2021 and December 31, 2020, respectively)	554,601		520,066
Accounts receivable trade	249,771		269,095
Less: allowance for credit losses	(1,430)		(3,009)
Accounts receivable trade, net	248,341		266,086
Accounts receivable, unbilled	25,053		26,673
Less: allowance for credit losses	(51)		(303)
Accounts receivable, unbilled, net	25,002		26,370
Inventories	647,439		567,587
Assets held for sale	—		155,685
Prepaid expenses and other current assets	203,478		251,739
Total current assets	3,046,325		3,014,535
Property, plant and equipment, net	2,505,921		2,402,285
PV solar power systems, net	230,423		243,396
Project assets	335,259		373,377
Deferred tax assets, net	108,387		104,099
Restricted marketable securities (amortized cost of $254,659 and $247,628 and allowance for credit losses of $53 and $13 at September 30, 2021 and December 31, 2020, respectively)	251,379		265,280
Goodwill	14,462		14,462
Intangible assets, net	47,935		56,138
Inventories	236,446		201,229
Other assets	492,093		434,130
Total assets	$	7,268,630	$	7,108,931
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	170,041	$	183,349
Income taxes payable	12,984		14,571
Accrued expenses	231,163		310,467
Current portion of long-term debt	37,129		41,540
Deferred revenue	238,810		188,813
Liabilities held for sale	—		25,621
Other current liabilities	25,109		83,037
Total current liabilities	715,236		847,398
Accrued solar module collection and recycling liability	140,019		130,688
Long-term debt	241,483		237,691
Other liabilities	341,817		372,226
Total liabilities	1,438,555		1,588,003
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 106,326,000 and 105,980,466 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	106		106
Additional paid-in capital	2,865,628		2,866,786
Accumulated earnings	3,053,085		2,715,762
Accumulated other comprehensive loss	(88,744)		(61,726)
Total stockholders’ equity	5,830,075		5,520,928
Total liabilities and stockholders’ equity	$	7,268,630	$	7,108,931

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Three Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive (Loss) Income		Total Stockholders' Equity
	Shares	Amount
Balance at June 30, 2021	106,319	$	106	$	2,859,108	$	3,007,882	$	(83,461)	$	5,783,635
Net income	—	—		—		45,203		—		45,203
Other comprehensive loss	—	—		—		—		(5,283)		(5,283)
Common stock issued for share-based compensation	8	—		—		—		—		—
Tax withholding related to vesting of restricted stock	(1)	—		(67)		—		—		(67)
Share-based compensation expense	—	—		6,587		—		—		6,587
Balance at September 30, 2021	106,326	$	106	$	2,865,628	$	3,053,085	$	(88,744)	$	5,830,075

	Three Months Ended September 30, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive (Loss) Income		Total Stockholders' Equity
	Shares	Amount
Balance at June 30, 2020	105,961	$	106	$	2,848,928	$	2,445,022	$	(67,260)	$	5,226,796

Net income	—	—		—		155,037		—		155,037
Other comprehensive income	—	—		—		—		7,563		7,563
Common stock issued for share-based compensation	19	—		—		—		—		—
Tax withholding related to vesting of restricted stock	(5)	—		(289)		—		—		(289)
Share-based compensation expense	—	—		7,006		—		—		7,006
Balance at September 30, 2020	105,975	$	106	$	2,855,645	$	2,600,059	$	(59,697)	$	5,396,113

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(In thousands)

(Unaudited)


	Nine Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive (Loss) Income		Total Stockholders' Equity
	Shares	Amount
Balance at December 31, 2020	105,980	$	106	$	2,866,786	$	2,715,762	$	(61,726)	$	5,520,928
Net income	—	—		—		337,323		—		337,323
Other comprehensive loss	—	—		—		—		(27,018)		(27,018)
Common stock issued for share-based compensation	554	—		—		—		—		—
Tax withholding related to vesting of restricted stock	(208)	—		(15,877)		—		—		(15,877)
Share-based compensation expense	—	—		14,719		—		—		14,719
Balance at September 30, 2021	106,326	$	106	$	2,865,628	$	3,053,085	$	(88,744)	$	5,830,075

	Nine Months Ended September 30, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive (Loss) Income		Total Stockholders' Equity
	Shares	Amount
Balance at December 31, 2019	105,449	$	105	$	2,849,376	$	2,326,620	$	(79,334)	$	5,096,767
Cumulative-effect adjustment for the adoption of ASU 2016-13	—	—		—		(9,213)		—		(9,213)
Net income	—	—		—		282,652		—		282,652
Other comprehensive income	—	—		—		—		19,637		19,637
Common stock issued for share-based compensation	808	1		1,362		—		—		1,363
Tax withholding related to vesting of restricted stock	(282)	—		(13,053)		—		—		(13,053)
Share-based compensation expense	—	—		17,960		—		—		17,960
Balance at September 30, 2020	105,975	$	106	$	2,855,645	$	2,600,059	$	(59,697)	$	5,396,113

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	337,323	$	282,652
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation, amortization and accretion	194,606		173,277
Impairments and net losses on disposal of long-lived assets	9,083		24,600
Share-based compensation	14,974		18,189
Deferred income taxes	(13,450)		(77,970)
Gain on sales of businesses, net	(147,284)		—
Gains on sales of marketable securities and restricted marketable securities	(11,696)		(15,346)
Liabilities assumed by customers for the sale of systems	—		(136,745)
Other, net	(2,909)		16,289
Changes in operating assets and liabilities:
Accounts receivable, trade and unbilled	79,565		330,090
Prepaid expenses and other current assets	(52,275)		8,467
Inventories	(116,017)		(142,017)
Project assets and PV solar power systems	11,945		183,163
Other assets	(39,264)		(30,804)
Income tax receivable and payable	22,615		9,160
Accounts payable	879		(58,311)
Accrued expenses and other liabilities	(95,685)		(720,756)
Accrued solar module collection and recycling liability	10,682		(13,136)
Net cash provided by (used in) operating activities	203,092		(149,198)
Cash flows from investing activities:
Purchases of property, plant and equipment	(345,399)		(327,284)
Purchases of marketable securities and restricted marketable securities	(1,107,704)		(642,993)
Proceeds from sales and maturities of marketable securities and restricted marketable securities	1,075,768		1,100,176
Proceeds from sales of businesses	300,499		—
Other investing activities	(6,453)		(13,577)
Net cash (used in) provided by investing activities	(83,289)		116,322
Cash flows from financing activities:
Repayment of long-term debt	(38,471)		(224,643)
Proceeds from borrowings under long-term debt, net of discounts and issuance costs	45,138		140,304
Payments of tax withholdings for restricted shares	(15,877)		(13,053)
Other financing activities	—		(804)
Net cash used in financing activities	(9,210)		(98,196)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1,687		1,251
Net increase (decrease) in cash, cash equivalents and restricted cash	112,280		(129,821)
Cash, cash equivalents and restricted cash, beginning of the period	1,273,594		1,446,510
Cash, cash equivalents and restricted cash, end of the period	$	1,385,874	$	1,316,689
Supplemental disclosure of noncash investing and financing activities:
Property, plant and equipment acquisitions funded by liabilities	$	50,415	$	129,384

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or for any other period. The condensed consolidated balance sheet at December 31, 2020 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, 2020 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. Sales of Businesses

Sale of North American O&M operations

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 was in the best interest of our stockholders to pursue the transaction. Accordingly, in August 2020, we entered into an agreement with a subsidiary of Clairvest Group, Inc. (“Clairvest”) for the sale of our North American O&M operations.

On March 31, 2021, we completed the transaction. Following certain customary post-closing adjustments, we received total consideration of $149.1 million. As a result of this transaction, we recognized a gain of $115.8 million, net of transaction costs and post-closing adjustments, during the nine months ended September 30, 2021, which was included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations. The assets and liabilities associated with this business were classified as held for sale in our condensed consolidated balance sheet as of December 31, 2020.

Sale of U.S. project development business

Following a separate evaluation of the long-term cost structure, competitiveness, and risk-adjusted returns of our U.S. project development business, we determined it was also in the best interest of our stockholders to pursue the sale of this business. In January 2021, we entered into an agreement with Leeward Renewable Energy Development, LLC (“Leeward”), a subsidiary of the Ontario Municipal Employees Retirement System, for the sale of our U.S. project development business, which included developing, contracting for the construction of, and selling utility-scale photovoltaic (“PV”) solar power systems in the United States. The transaction included our approximately 10 GWAC utility-scale solar project pipeline, including the advanced-stage Horizon, Madison, Ridgely, Rabbitbrush, and Oak Trail projects, which are expected to commence construction in the next two years; the 30MWAC Barilla Solar project, which is operational; and certain other equipment. In addition, Leeward agreed to certain module purchase commitments.

On March 31, 2021, we completed the transaction for an aggregate purchase price of $284.0 million. Such purchase price included $151.4 million for the sale of the U.S. project development business and $132.6 million for the sale of 392 MWDC of solar modules, which is presented in “Net sales” on our condensed consolidated statements of operations for the nine months ended September 30, 2021.

During the nine months ended September 30, 2021, we recognized a gain of $31.5 million, net of transaction costs and post-closing adjustments, from the sale of our U.S. project development business, which is included in “Gain on sales of businesses, net” in our condensed consolidated statements of operations. The assets and liabilities associated with this business were classified as held for sale in our condensed consolidated balance sheet as of December 31, 2020.

3. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Cash and cash equivalents:
Cash	$	1,367,462	$	1,227,000
Money market funds	2		2
Total cash and cash equivalents	1,367,464		1,227,002
Marketable securities:
Foreign debt	147,445		214,254
U.S. debt	18,710		14,543
Time deposits	388,446		291,269
Total marketable securities	554,601		520,066
Total cash, cash equivalents, and marketable securities	$	1,922,065	$	1,747,068

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 to the total of such amounts as presented in the condensed consolidated statements of cash flows (in thousands):


	Balance Sheet Line Item	September 30, 2021		December 31, 2020
Cash and cash equivalents	Cash and cash equivalents	$	1,367,464	$	1,227,002
Restricted cash – current	Prepaid expenses and other current assets	1,181		1,745
Restricted cash – noncurrent	Other assets	17,229		44,847
Total cash, cash equivalents, and restricted cash		$	1,385,874	$	1,273,594

During the nine months ended September 30, 2021, we sold marketable securities for proceeds of $5.5 million and realized gains of less than $0.1 million on such sales. During the three and nine months ended September 30, 2020, we sold marketable securities for proceeds of $27.6 million and $188.1 million, respectively, and realized gains of less than $0.1 million and $0.2 million, respectively, on such sales. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our marketable securities.

The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of September 30, 2021 and December 31, 2020 (in thousands):


	As of September 30, 2021
	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses		Fair Value
Foreign debt	$	147,312	$	133	$	—	$	—	$	147,445
U.S. debt	19,009		13		309		3		18,710
Time deposits	388,576		—		—		130		388,446
Total	$	554,897	$	146	$	309	$	133	$	554,601


	As of December 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses		Fair Value
Foreign debt	$	213,949	$	367	$	46	$	16	$	214,254
U.S. debt	14,521		22		—		—		14,543
Time deposits	291,374		—		—		105		291,269
Total	$	519,844	$	389	$	46	$	121	$	520,066

The following table presents the change in the allowance for credit losses related to our available-for-sale marketable securities for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,
	2021		2020
Allowance for credit losses, beginning of period	$	121	$	—
Cumulative-effect adjustment for the adoption of ASU 2016-13	—		207
Provision for credit losses, net	329		215
Sales and maturities of marketable securities	(317)		(374)
Allowance for credit losses, end of period	$	133	$	48

The contractual maturities of our marketable securities as of September 30, 2021 were as follows (in thousands):


	Fair Value
One year or less	$	538,879
One year to two years	6,034
Two years to three years	—
Three years to four years	—
Four years to five years	4,813
More than five years	4,875
Total	$	554,601

4. Restricted Marketable Securities

Restricted marketable securities consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Foreign government obligations	$	71,603	$	149,700
Supranational debt	10,944		—
U.S. debt	145,151		—
U.S. government obligations	23,681		115,580
Total restricted marketable securities	$	251,379	$	265,280

Our restricted marketable securities represent long-term investments to fund the estimated future cost of collecting and recycling modules covered under our solar module collection and recycling program. 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. As of September 30, 2021 and December 31, 2020, such custodial accounts also included noncurrent restricted cash balances of $0.6 million and $0.7 million, respectively, which were reported within “Other assets.” Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. As necessary, we fund any incremental amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years.

During the nine months ended September 30, 2021, we sold all our restricted marketable securities for proceeds of $258.9 million and realized gains of $11.7 million on such sales, and repurchased $255.6 million of restricted marketable securities as part of our ongoing management of the custodial accounts. During the nine months ended September 30, 2020, we sold certain restricted marketable securities for proceeds of $115.2 million, realized gains of $15.1 million on such sales, and repurchased $114.5 million of restricted marketable securities as part of our ongoing management of the custodial accounts. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted marketable securities.

The following table summarizes the unrealized gains and losses related to our restricted marketable securities, by major security type, as of September 30, 2021 and December 31, 2020 (in thousands):


	As of September 30, 2021
	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses		Fair Value
Foreign government obligations	$	68,081	$	5,280	$	1,747	$	11	$	71,603
Supranational debt	11,416		—		472		—		10,944
U.S. debt	150,500		—		5,312		37		145,151
U.S. government obligations	24,662		—		976		5		23,681
Total	$	254,659	$	5,280	$	8,507	$	53	$	251,379


	As of December 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses		Fair Value
Foreign government obligations	$	131,980	$	17,720	$	—	$	—	$	149,700
U.S. government obligations	115,648		133		188		13		115,580
Total	$	247,628	$	17,853	$	188	$	13	$	265,280

The following table presents the change in the allowance for credit losses related to our restricted marketable securities for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,
	2021		2020
Allowance for credit losses, beginning of period	$	13	$	—
Cumulative-effect adjustment for the adoption of ASU 2016-13	—		54
Provision for credit losses, net	69		(29)
Sales of restricted marketable securities	(29)		(25)
Allowance for credit losses, end of period	$	53	$	—

As of September 30, 2021, the contractual maturities of our restricted marketable securities were between 9 years and 18 years.

5. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Accounts receivable trade, gross	$	249,771	$	269,095
Allowance for credit losses	(1,430)		(3,009)
Accounts receivable trade, net	$	248,341	$	266,086

At September 30, 2021 and December 31, 2020, $60.7 million and $24.4 million, respectively, of our trade accounts receivable were secured by letters of credit and surety bonds issued by creditworthy financial institutions.

Accounts receivable, unbilled, net

Accounts receivable, unbilled, net consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Accounts receivable, unbilled	$	25,053	$	26,673
Allowance for credit losses	(51)		(303)
Accounts receivable, unbilled, net	$	25,002	$	26,370

Allowance for credit losses

The following tables present the change in the allowances for credit losses related to our accounts receivable for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,
Accounts receivable, trade	2021		2020
Allowance for credit losses, beginning of period	$	3,009	$	1,386
Cumulative-effect adjustment for the adoption of ASU 2016-13	—		171
Provision for credit losses, net	(1,458)		1,421
Writeoffs	(121)		(565)
Allowance for credit losses, end of period	$	1,430	$	2,413


	Nine Months Ended September 30,
Accounts receivable, unbilled	2021		2020
Allowance for credit losses, beginning of period	$	303	$	—
Cumulative-effect adjustment for the adoption of ASU 2016-13	—		459
Provision for credit losses, net	(252)		635
Writeoffs	—		(175)
Allowance for credit losses, end of period	$	51	$	919

Inventories

Inventories consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Raw materials	$	356,109	$	292,334
Work in process	61,195		64,709
Finished goods	466,581		411,773
Inventories	$	883,885	$	768,816
Inventories – current	$	647,439	$	567,587
Inventories – noncurrent	$	236,446	$	201,229

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Prepaid expenses	$	172,112	$	160,534
Derivative instruments (1)	6,682		3,315
Prepaid income taxes	6,206		71,051
Restricted cash	1,181		1,745
Other current assets	17,297		15,094
Prepaid expenses and other current assets	$	203,478	$	251,739

——————————

(1)See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.

Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Land	$	17,856	$	14,498
Buildings and improvements	693,833		693,762
Machinery and equipment	2,507,719		2,184,236
Office equipment and furniture	139,034		143,685
Leasehold improvements	40,206		41,459
Construction in progress	281,715		419,766
Property, plant and equipment, gross	3,680,363		3,497,406
Accumulated depreciation	(1,174,442)		(1,095,121)
Property, plant and equipment, net	$	2,505,921	$	2,402,285

Depreciation of property, plant and equipment was $59.1 million and $174.7 million for the three and nine months ended September 30, 2021, respectively, and $49.7 million and $145.5 million for the three and nine months ended September 30, 2020, respectively.

PV solar power systems, net

PV solar power systems, net consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
PV solar power systems, gross	$	291,898	$	298,067
Accumulated depreciation	(61,475)		(54,671)
PV solar power systems, net	$	230,423	$	243,396

Depreciation of PV solar power systems was $3.0 million and $8.9 million for the three and nine months ended September 30, 2021, respectively, and $4.8 million and $16.4 million for the three and nine months ended September 30, 2020, respectively.

We evaluate our PV solar power systems for impairment under a held and used impairment model whenever events or changes in circumstances arise that may indicate that the carrying amount of a particular system may not be recoverable. Such events or changes may include a significant decrease in the market price of the asset, current-period operating or cash flow losses combined with a history of such losses or a projection of future losses associated with the use of the asset, and changes in expectations regarding our intent to hold the asset on a long-term basis or the timing of a potential asset disposition.

As of September 30, 2021 and December 31, 2020, the recoverability of our Luz del Norte PV solar power plant was based, in part, on the likelihood of our continued ownership and operation of the system. However, it is reasonably possible that our intent to hold the asset may change in the near term due to our evaluation of strategic sale opportunities for the system. The pursuit of such opportunities, which require coordination with the system’s lenders, may result in a determination that the carrying value of the system is not recoverable based on the probability-weighted undiscounted future cash flows, which in turn could result in a possible impairment of the system in future periods. Accordingly, any changes in our expected use of the asset or its disposition may result in impairment charges that could be material to our condensed consolidated financial statements and have a significant adverse impact on our results of operations.

Project assets

Project assets consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Project assets – development costs, including project acquisition and land costs	$	129,844	$	176,346
Project assets – construction costs	205,415		197,031
Project assets	$	335,259	$	373,377

Other assets

Other assets consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Operating lease assets (1)	$	238,508	$	226,664
Advanced payments for raw materials	89,252		97,883
Income tax receivables	39,888		36
Indirect tax receivables	24,785		14,849
Accounts receivable, unbilled, net	24,018		22,722
Accounts receivable trade, net	23,094		—
Restricted cash	17,229		44,847
Other	35,319		27,129
Other assets	$	492,093	$	434,130

——————————

(1)See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.

Goodwill

Goodwill for the relevant reporting unit consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	December 31, 2020		Acquisitions (Impairments)		September 30, 2021
Modules	$	407,827	$	—	$	407,827
Accumulated impairment losses	(393,365)		—		(393,365)
Goodwill	$	14,462	$	—	$	14,462

Intangible assets, net

The following tables summarize our intangible assets at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021
	Gross Amount		Accumulated Amortization		Net Amount
Developed technology	$	99,964	$	(59,518)	$	40,446
Power purchase agreements	6,486		(1,539)		4,947
Patents	8,173		(5,631)		2,542
Intangible assets, net	$	114,623	$	(66,688)	$	47,935


	December 31, 2020
	Gross Amount		Accumulated Amortization		Net Amount
Developed technology	$	99,964	$	(52,115)	$	47,849
Power purchase agreements	6,486		(1,296)		5,190
Patents	8,173		(5,074)		3,099
Intangible assets, net	$	114,623	$	(58,485)	$	56,138

Amortization of intangible assets was $2.7 million and $8.2 million for the three and nine months ended September 30, 2021, respectively, and $2.7 million and $8.1 million for the three and nine months ended September 30, 2020, respectively.

Accrued expenses

Accrued expenses consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Accrued project costs	$	43,721	$	81,380
Accrued freight	42,091		26,580
Accrued inventory	39,514		25,704
Accrued compensation and benefits	29,030		51,685
Accrued property, plant and equipment	20,637		66,543
Product warranty liability (1)	16,752		22,278
Other	39,418		36,297
Accrued expenses	$	231,163	$	310,467

——————————

(1)See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product Warranties.”

Other current liabilities

Other current liabilities consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Operating lease liabilities (1)	$	13,566	$	14,006
Derivative instruments (2)	1,720		5,280
Other taxes payable	1,221		30,041
Other	8,602		33,710
Other current liabilities	$	25,109	$	83,037

——————————

(1)See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.

(2)See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for discussion of our derivative instruments.

Other liabilities

Other liabilities consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Operating lease liabilities (1)	$	173,627	$	189,034
Deferred revenue	68,663		44,919
Product warranty liability (2)	41,789		72,818
Deferred tax liabilities, net	14,305		23,671
Other	43,433		41,784
Other liabilities	$	341,817	$	372,226

——————————

(1)See Note 7. “Leases” to our condensed consolidated financial statements for discussion of our lease arrangements.

(2)See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product Warranties.”

6. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate, foreign currency, and commodity price 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” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (i.e., “economic hedges”), we record the changes in fair value directly to earnings. See Note 8. “Fair Value Measurements” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021
	Prepaid Expenses and Other Current Assets		Other Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	628	$	18	$	36	$	—
Commodity swap contracts	633		—		—		—
Total derivatives designated as hedging instruments	$	1,261	$	18	$	36	$	—

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	5,421	$	—	$	1,684	$	—
Interest rate swap contracts	—		—		—		595
Total derivatives not designated as hedging instruments	$	5,421	$	—	$	1,684	$	595
Total derivative instruments	$	6,682	$	18	$	1,720	$	595


	December 31, 2020
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	—	$	2,504	$	341
Commodity swap contracts	1,478		—		—
Total derivatives designated as hedging instruments	$	1,478	$	2,504	$	341

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	1,837	$	2,776	$	—
Total derivatives not designated as hedging instruments	$	1,837	$	2,776	$	—
Total derivative instruments	$	3,315	$	5,280	$	341

The following table presents the pretax amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the nine months ended September 30, 2021 and 2020 (in thousands):


	Foreign Exchange Forward Contracts		Commodity Swap Contracts		Total
Balance as of December 31, 2020	$	(3,644)	$	1,472	$	(2,172)
Amounts recognized in other comprehensive income (loss)	2,268		1,531		3,799

Amounts reclassified to earnings impacting:

Cost of sales	1,913		(883)		1,030



Balance as of September 30, 2021	$	537	$	2,120	$	2,657

Balance as of December 31, 2019	$	(962)	$	—	$	(962)
Amounts recognized in other comprehensive income (loss)	(2,129)		(228)		(2,357)
Amounts reclassified to earnings impacting:

Cost of sales	647		—		647



Balance as of September 30, 2020	$	(2,444)	$	(228)	$	(2,672)

During the three and nine months ended September 30, 2021, we recognized unrealized gains of less than $0.1 million and unrealized losses of less than $0.1 million, respectively, within “Cost of sales” for amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges. During the three and nine months ended September 30, 2020, we recognized unrealized gains of $0.1 million and $1.2 million, respectively, within “Cost of sales” for amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges.

The following table presents gains and losses related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):


		Amount of Gain (Loss) Recognized in Income
		Three Months Ended September 30,				Nine Months Ended September 30,
	Income Statement Line Item	2021		2020		2021		2020
Foreign exchange forward contracts	Cost of sales	$	103	$	(195)	$	(174)	$	(73)
Foreign exchange forward contracts	Foreign currency loss, net	1,802		(2,598)		10,821		(2,405)
Interest rate swap contracts	Interest expense, net	96		(5,878)		(595)		(7,259)

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. During the nine months ended September 30, 2021 and 2020, all of our interest rate swap contracts related to project specific debt facilities. Such swap contracts did not qualify for accounting as cash flow hedges in accordance with Accounting Standards Codification (“ASC”) 815 due to our expectation to sell the associated projects before the maturity of their project specific debt financings and corresponding swap contracts. Accordingly, changes in the fair values of these swap contracts were recorded directly to “Interest expense, net.”

In June 2021, FS Japan Project B4 GK, our indirect wholly-owned subsidiary and project company, entered into an interest rate swap contract to hedge a portion of the floating rate term loan facility under the project’s Ikeda Credit Facility (as defined in Note 9. “Debt” to our condensed consolidated financial statements). Such swap had an initial notional value of ¥0.7 billion and entitled the project to receive a six-month floating Tokyo Interbank Offered Rate (“TIBOR”) plus 0.70% interest rate while requiring the project to pay a fixed rate of 1.12%. The notional amount of the interest rate swap contract proportionately adjusts with scheduled draws and principal payments on the underlying hedged debt. As of September 30, 2021, the notional value of the interest rate swap contract was ¥1.0 billion ($8.6 million).

Foreign Currency Risk

Cash Flow Exposure

We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of September 30, 2021 and December 31, 2020, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to 14 months and 20 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 report unrealized gains or losses on such contracts in “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges as of September 30, 2021 and December 31, 2020.

As of September 30, 2021 and December 31, 2020, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):


	September 30, 2021
Currency	Notional Amount	USD Equivalent
U.S. dollar (1)	$39.8	$39.8
British pound	GBP 10.6	$14.3


	December 31, 2020
Currency	Notional Amount	USD Equivalent
U.S. dollar (1)	$43.4	$43.4

——————————

(1)These derivative instruments represent hedges of outstanding payables denominated in U.S. dollars at certain of our foreign subsidiaries whose functional currencies are other than the U.S. dollar.

In the following 12 months, we expect to reclassify to earnings $0.5 million of net unrealized gains related to foreign exchange forward contracts that are included in “Accumulated other comprehensive loss” at September 30, 2021 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, deferred taxes, payables, accrued expenses, operating lease liabilities, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported condensed consolidated statements of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on such foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.

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

As of September 30, 2021 and December 31, 2020, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):


	September 30, 2021
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Australian dollar	AUD 3.2	$2.3

Purchase	Brazilian real	BRL 2.6	$0.5



Purchase	Chilean peso	CLP 985.0	$1.2
Sell	Chilean peso	CLP 4,240.6	$5.3


Purchase	Euro	€86.4	$100.6
Sell	Euro	€32.6	$37.9
Purchase	British pound	GBP 2.5	$3.4


Sell	Indian rupee	INR 1,830.0	$24.7
Purchase	Japanese yen	¥151.8	$1.4
Sell	Japanese yen	¥27,325.6	$244.9
Purchase	Malaysian ringgit	MYR 30.5	$7.3
Sell	Malaysian ringgit	MYR 26.8	$6.4

Sell	Mexican peso	MXN 34.6	$1.7
Purchase	Singapore dollar	SGD 5.5	$4.0


	December 31, 2020
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Australian dollar	AUD 3.2	$2.5
Purchase	Brazilian real	BRL 2.6	$0.5
Sell	Canadian dollar	CAD 8.9	$7.0
Purchase	Chilean peso	CLP 2,006.0	$2.8
Sell	Chilean peso	CLP 4,476.7	$6.3
Purchase	Euro	€140.0	$172.1
Sell	Euro	€63.6	$78.2
Sell	Indian rupee	INR 619.2	$8.4
Purchase	Japanese yen	¥1,593.7	$15.5
Sell	Japanese yen	¥20,656.6	$200.5
Purchase	Malaysian ringgit	MYR 69.3	$17.2
Sell	Malaysian ringgit	MYR 24.9	$6.2
Sell	Mexican peso	MXN 34.6	$1.7
Purchase	Singapore dollar	SGD 2.9	$2.2

Commodity Price Risk

We use commodity swap contracts to mitigate our exposure to commodity price fluctuations for certain raw materials used in the production of our modules. In August 2020, we entered into a commodity swap contract to hedge a portion of our forecasted cash flows for purchases of aluminum frames for a one-year period. Such swap had an initial notional value based on metric tons of forecasted aluminum purchases, equivalent to $24.9 million, and entitles us to receive a three-month average London Metals Exchange price for aluminum while requiring us to pay certain fixed prices. The notional amount of the commodity swap contract proportionately adjusted with forecasted purchases of aluminum frames.

This commodity swap contract qualifies for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. We report unrealized gains or losses on such contract in “Accumulated other comprehensive loss” and subsequently reclassify applicable amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that this derivative financial instrument was highly effective as a cash flow hedge as of September 30, 2021 and December 31, 2020. In the following 12 months, we expect to reclassify into earnings $2.1 million of net unrealized gains related to this commodity swap contract that are included in “Accumulated other comprehensive loss” at September 30, 2021 as we realize the earnings effects of the related forecasted transactions.

7. Leases

Our lease arrangements include land associated with our systems projects, our corporate and administrative offices, land for our international manufacturing facilities, and certain of our manufacturing equipment. Such leases primarily relate to assets located in the United States, Japan, Malaysia, India, and Vietnam.

The following table presents certain quantitative information related to our lease arrangements for the three and nine months ended September 30, 2021 and 2020, and as of September 30, 2021 and December 31, 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating lease cost	$	4,622	$	4,798	$	13,171	$	13,694
Variable lease cost	575		628		1,575		1,919
Short-term lease cost	104		1,112		711		2,817
Total lease cost	$	5,301	$	6,538	$	15,457	$	18,430

Payments of amounts included in the measurement of operating lease liabilities					$	16,813	$	15,756
Lease assets obtained in exchange for operating lease liabilities					$	19,769	$	93,992

					September 30, 2021		December 31, 2020
Operating lease assets					$	238,508	$	226,664
Operating lease liabilities – current					13,566		14,006
Operating lease liabilities – noncurrent					173,627		189,034


Weighted-average remaining lease term						20 years						20 years
Weighted-average discount rate						2.6		%				2.9		%

As of September 30, 2021, the future payments associated with our lease liabilities were as follows (in thousands):


	Total Lease Liabilities
Remainder of 2021	$	3,292
2022	17,051
2023	17,100
2024	16,608
2025	15,979
2026	14,489
Thereafter	140,192
Total future payments	224,711
Less: interest	(37,518)
Total lease liabilities	$	187,193

8. Fair Value Measurements

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

*•*Cash Equivalents. At September 30, 2021 and December 31, 2020, our cash equivalents consisted of money market funds. We value our cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics and classify the valuation techniques that use these inputs as Level 1.

*•*Marketable Securities and Restricted Marketable Securities. At September 30, 2021 and December 31, 2020, our marketable securities consisted of foreign debt, U.S. debt, and time deposits, and our restricted marketable securities consisted of foreign and U.S. government obligations, supranational debt, and U.S. debt. We value our marketable securities and restricted marketable securities using observable inputs that reflect quoted prices for securities with identical characteristics or quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals). Accordingly, we classify the valuation techniques that use these inputs as either Level 1 or Level 2 depending on the inputs used. We also consider the effect of our counterparties’ credit standing in these fair value measurements.

Derivative Assets and Liabilities. At September 30, 2021 and December 31, 2020, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies, interest rate swap contracts involving major interest rates, and commodity swap contracts involving major commodity prices. 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, forward and spot prices for currencies, and forward prices for commodities. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. In evaluating credit risk, we consider the effect of our counterparties’ and our own credit standing in the fair value measurements of our derivative assets and liabilities, respectively.

At September 30, 2021 and December 31, 2020, the fair value measurements of our assets and liabilities measured on a recurring basis were as follows (in thousands):


			Fair Value Measurements at Reporting Date Using
	September 30, 2021		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	$	2	$	2	$	—	$	—
Marketable securities:
Foreign debt	147,445		—		147,445		—
U.S. debt	18,710		—		18,710		—
Time deposits	388,446		388,446		—		—
Restricted marketable securities	251,379		—		251,379		—
Derivative assets	6,700		—		6,700		—
Total assets	$	812,682	$	388,448	$	424,234	$	—
Liabilities:
Derivative liabilities	$	2,315	$	—	$	2,315	$	—


			Fair Value Measurements at Reporting Date Using
	December 31, 2020		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	$	2	$	2	$	—	$	—
Marketable securities:
Foreign debt	214,254		—		214,254		—

U.S. debt	14,543		—		14,543		—
Time deposits	291,269		291,269		—		—
Restricted marketable securities	265,280		—		265,280		—
Derivative assets	3,315		—		3,315		—
Total assets	$	788,663	$	291,271	$	497,392	$	—
Liabilities:
Derivative liabilities	$	5,621	$	—	$	5,621	$	—

Fair Value of Financial Instruments

At September 30, 2021 and December 31, 2020, the carrying values and fair values of our financial instruments not measured at fair value were as follows (in thousands):


	September 30, 2021				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Accounts receivable, unbilled, net - noncurrent	$	24,018	$	21,498	$	22,722	$	22,096
Accounts receivable trade, net - noncurrent	23,094		20,111		—		—
Liabilities:
Long-term debt, including current maturities (1)	$	287,185	$	290,457	$	287,149	$	297,076

——————————

(1)Excludes unamortized discounts and issuance costs.

The carrying values in our condensed consolidated balance sheets of our trade accounts receivable, current unbilled accounts receivable, restricted cash, accounts 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 noncurrent unbilled accounts receivable, noncurrent trade accounts 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, accounts receivable, restricted cash, restricted marketable securities, foreign exchange forward contracts, interest rate swap contracts, and commodity swap contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place these instruments with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty 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, letters of credit, bank guarantees, or surety bonds. We also have power purchase agreements (“PPAs”) that subject us to credit risk in the event our off-take counterparties are unable to fulfill their contractual obligations, which may adversely affect our project assets and certain receivables. Accordingly, we closely monitor the credit standing of existing and potential off-take counterparties to limit such risks.

9. Debt

Our long-term debt consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):


		Balance (USD)
Loan Agreement	Currency	September 30, 2021		December 31, 2020
Revolving Credit Facility	USD	$	—	$	—
Luz del Norte Credit Facilities	USD	184,546		186,230
Japan Credit Facility	JPY	33,870		13,813
Tochigi Credit Facility	JPY	—		39,400
Kyoto Credit Facility	JPY	44,053		47,706
Ikeda Credit Facility	JPY	24,716		—
Long-term debt principal		287,185		287,149
Less: unamortized discounts and issuance costs		(8,573)		(7,918)
Total long-term debt		278,612		279,231
Less: current portion		(37,129)		(41,540)
Noncurrent portion		$	241,483	$	237,691

Revolving Credit Facility

On June 30, 2021, we terminated our Second Amended and Restated Credit Agreement (the “Revolving Credit Facility”) with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent, which was set to mature in July 2022. The Revolving Credit Facility provided us with an aggregate borrowing capacity of $500.0 million. Subject to certain conditions, we had the right to increase the aggregate commitments under the Revolving Credit Facility to $750.0 million. Borrowings under the Revolving Credit Facility bore 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.

In addition to paying interest on outstanding principal under the Revolving Credit Facility, we paid a commitment fee at a rate of 0.30% per annum, based on the average daily unused commitments under the facility. We also paid 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%.

Prior to the termination, we had no borrowings under the Revolving Credit Facility and had $3.3 million in issued and outstanding letters of credits, which were moved to a bilateral facility upon such termination. As of December 31, 2020, we had no borrowings under the Revolving Credit Facility and had issued $4.3 million of letters of credit using availability under the facility.

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 (the “Luz del Norte Credit Facilities”) with the U.S. International Development Finance Corporation (“DFC”) 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 MWAC PV solar power plant located near Copiapó, Chile.

In March 2017, we amended the terms of the DFC 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 DFC and IFC loans until June 2037, and (iv) canceled the remaining borrowing capacity under the DFC and IFC credit facilities with the exception of the capitalization of certain future interest payments. As of September 30, 2021 and December 31, 2020, the balance outstanding on the DFC loans was $138.2 million and $139.4 million, respectively. As of September 30, 2021 and December 31, 2020, the balance outstanding on the IFC loans was $46.3 million and $46.8 million, respectively. The DFC and IFC loans are secured by liens over all of Luz del Norte’s assets and by a pledge of all of the equity interests in the entity. In October 2021, we received a waiver for technical noncompliance related to the credit facilities as of September 30, 2021.

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 ($33.4 million) for the development and construction of utility-scale PV solar power plants in Japan (the “Japan Credit Facility”). Borrowings under the facility generally mature within 12 months following the completion of construction activities for each financed project. The facility is guaranteed by First Solar, Inc. and secured by pledges of certain projects’ cash accounts and other rights in the projects.

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 ($62.2 million) for the development of utility-scale PV solar power plants in Japan (the “Tochigi Credit Facility”). In March 2021, the credit facility matured and we repaid the remaining $36.8 million principal balance.

Kyoto Credit Facility

In July 2020, First Solar Japan GK, our wholly-owned subsidiary, entered into a construction loan facility with Mizuho Bank, Ltd. for borrowings up to ¥15.0 billion ($142.8 million), which are intended to be used for the construction of a 38 MWAC PV solar power plant located in Kyoto, Japan (the “Kyoto Credit Facility”). Borrowings under the facility generally mature within 12 months following the completion of construction activities at the project. The facility is guaranteed by First Solar, Inc. and First Solar Japan GK, our wholly-owned subsidiary, and secured by pledges of the project’s cash accounts and certain other assets.

Ikeda Credit Facility

In March 2021, FS Japan Project B4 GK (“Ikeda”), our indirect wholly-owned subsidiary and project company, entered into a credit agreement (the “Ikeda Credit Facility”) with MUFG Bank, Ltd.; Japan Post Insurance Co., Ltd.; The Shizuoka Bank, Ltd.; The Hyakugo Bank, Ltd.; The Iyo Bank, Ltd.; and The Yamagata Bank, Ltd. for aggregate borrowings up to ¥9.8 billion ($88.6 million) for the development and construction of a 21 MWAC PV solar power plant located in Tochigi, Japan. The credit facility consists of a ¥4.7 billion ($43.1 million) fixed rate term loan facility, a ¥3.8 billion ($34.1 million) variable rate term loan facility, a ¥0.9 billion ($8.2 million) consumption tax facility, and a ¥0.4 billion ($3.2 million) debt service reserve facility. The fixed rate and variable rate term loan facilities mature in April 2040, the consumption tax facility matures in May 2024, and the debt service reserve facility is expected to mature in October 2039. The credit facility is secured by pledges of certain of Ikeda’s assets, accounts, material project documents, and by the equity interests in the entity.

Variable Interest Rate Risk

Certain of our long-term debt agreements bear interest at LIBOR, TIBOR, or equivalent variable rates. An increase in these variable rates would increase the cost of borrowing under certain project specific debt financings. Our long-term debt borrowing rates as of September 30, 2021 were as follows:


Loan Agreement		September 30, 2021
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%
Japan Credit Facility		1-month TIBOR plus 0.55%
Kyoto Credit Facility		1-month TIBOR plus 0.60%
Ikeda Credit Facility (2)		Fixed rate term loan facility at 1.20%
	Variable rate term loan facility at 6-month TIBOR plus 0.70% (3)
	Consumption tax facility at 3-month TIBOR plus 0.50%
	Debt service reserve facility at 6-month TIBOR plus 1.20%

——————————

(1)Outstanding balance comprised of $135.9 million of fixed rate loans and $48.6 million of variable rate loans as of September 30, 2021.

(2)Outstanding balance comprised of $12.2 million of fixed rate loans and $12.5 million of variable rate loans as of September 30, 2021.

(3)We have entered into an interest rate swap contract to hedge a portion of this variable rate. See Note 6. “Derivative Financial Instruments” to our condensed consolidated financial statements for additional information.

Future Principal Payments

At September 30, 2021, the future principal payments on our long-term debt were due as follows (in thousands):


	Total Debt
Remainder of 2021	$	717
2022	37,905
2023	6,687
2024	55,137
2025	8,636
2026	9,114
Thereafter	168,989
Total long-term debt future principal payments	$	287,185

10. Commitments and Contingencies

Commercial Commitments

During the normal course of business, we enter into commercial commitments in the form of letters of credit and surety bonds to provide financial and performance assurance to third parties. As of September 30, 2021, the majority of these commercial commitments supported our systems projects. As of September 30, 2021, the issued and outstanding amounts and available capacities under these commitments were as follows (in millions):


	Issued and Outstanding		Available Capacity
Bilateral facilities (1)	$	27.4	$	287.6
Surety bonds	12.6		703.8

——————————

(1)Of the total letters of credit issued under the bilateral facilities, $2.6 million was secured with cash.

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 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. From time to time, 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 nine months ended September 30, 2021 and 2020 were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Product warranty liability, beginning of period	$	91,058	$	123,194	$	95,096	$	129,797
Accruals for new warranties issued	1,680		3,435		8,397		7,903
Settlements	(1,091)		(9,289)		(6,730)		(18,772)
Changes in estimate of product warranty liability	(33,106)		(19,987)		(38,222)		(21,575)
Product warranty liability, end of period	$	58,541	$	97,353	$	58,541	$	97,353
Current portion of warranty liability	$	16,752	$	22,325	$	16,752	$	22,325
Noncurrent portion of warranty liability	$	41,789	$	75,028	$	41,789	$	75,028

We estimate our limited product warranty liability for power output and defects in materials and workmanship under normal use and service conditions based on return rates for each series of module technology. During the three months ended September 30, 2021, we revised this estimate based on updated information regarding our warranty claims, which reduced our product warranty liability by $33.1 million. This updated information reflected lower-than-expected warranty claims for our older series of module technology as well as the evolving claims profile of our newest series of module technology, resulting in reductions to our projected module return rates. During the three months ended September 30, 2020, we revised this estimate based on updated information regarding our warranty claims, which reduced our product warranty liability by $19.7 million. This updated information reflected lower-than-expected settlements for our older series of module technology and revisions to projected settlements, resulting in a lower projected return rate.

In general, we expect the return rates for our Series 6 modules to be lower than our older series, and we estimate that the return rate for such newer series of module technology will be less than 1%. As of September 30, 2021, a 1% increase in the return rate across all series of module technology would increase our product warranty liability by $112.2 million, and a 1% increase in the return rate for balance of systems (“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 regard to these tests, we may incur liquidated damages as specified in the applicable EPC agreement. 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 December 31, 2020, we accrued $10.2 million for our estimated obligations under such arrangements, which were classified as “Other current liabilities” in our condensed consolidated balance sheet.

Indemnifications

In certain limited circumstances, we have provided indemnifications to customers or other parties, 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; a reduction in tax benefits received, including investment tax credits; the resolution of specific matters associated with a project’s development or construction; or guarantees of a third party’s payment or performance obligations. 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 contracts that have such indemnification provisions, we initially recognize a liability under ASC 460 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 may base these estimates on the cost of insurance or other instruments that cover the underlying risks being indemnified and may purchase such instruments to mitigate our exposure to potential indemnification payments. We subsequently measure such liabilities at the greater of the initially estimated premium or the contingent liability required to be recognized under ASC 450. We recognize any indemnification liabilities as a reduction of earnings associated with the related transaction.

After an indemnification liability is recorded, we derecognize such amount pursuant to ASC 460 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. As of September 30, 2021 and December 31, 2020, we accrued $3.8 million and $3.2 million of current indemnification liabilities, respectively. As of September 30, 2021, the maximum potential amount of future payments under our indemnifications was $101.8 million, and we held insurance and other instruments allowing us to recover up to $28.2 million of potential amounts paid under the indemnifications.

In September 2017, we made an indemnification payment in connection with the sale of one of our projects following the underpayment of anticipated cash grants by the United States government. In February 2018, the associated project entity commenced legal action against the United States government seeking full payment of the cash grants. In May 2021, the parties reached an agreement, pursuant to which the United States government made a settlement payment to the project entity. Under the terms of the indemnification arrangement, we received $65.1 million for our portion of the settlement payment, which we recorded as revenue during the nine months ended September 30, 2021.

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 agreed to pay the costs for the collection and recycling of qualifying solar modules, and the end-users agreed 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 recorded 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.

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 condensed consolidated statements of operations.

We periodically review our estimates of expected future recycling costs and may adjust our liability accordingly. During the three months ended September 30, 2021, we completed our annual cost study of obligations under our module collection and recycling program and increased the associated liability by $10.8 million primarily due to lower estimated by-product credits for certain semiconductor materials recovered during the recycling process and updates to certain valuation assumptions. During the three months ended September 30, 2020, we completed our annual cost study of obligations under our module collection and recycling program and reduced the associated liability by $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.

Our module collection and recycling liability was $140.0 million and $130.7 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, a 10% increase in the expected future recycling costs would increase the liability by $14.0 million. See Note 4. “Restricted Marketable Securities” to our condensed consolidated financial statements for more information about our arrangements for funding this liability.

Legal Proceedings

Opt-Out Action

First Solar was party to a suit titled Maverick Fund, L.D.C. v. First Solar, Inc., et al., Case No. 2:15-cv-01156-ROS, filed in 2015 in the United States District Court for the District of Arizona (hereafter “Arizona District Court”) by putative stockholders that opted out of a separate class action lawsuit (the “Opt-Out Action”).

In July 2020, the parties executed a definitive settlement agreement pursuant to which First Solar 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 defendants. On July 30, 2020, First Solar funded the settlement, and on July 31, 2020, the parties filed a joint stipulation of dismissal. On September 10, 2020, the Arizona District Court entered an order dismissing the case with prejudice. As of December 31, 2019, we accrued $13 million of estimated losses for this action. As a result of the settlement, we accrued an incremental $6 million litigation loss during the nine months ended September 30, 2020.

Other Matters and Claims

We are party to legal matters and claims in the normal course of our operations, which are described in Note 13 within our Annual Report on Form 10-K for the year ended December 31, 2020. While we believe the ultimate outcome of these 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. There have been no material changes to these matters since our Annual Report on Form 10-K for the year ended December 31, 2020 was filed with the SEC on February 26, 2021.

11. Revenue from Contracts with Customers

The following table presents the disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2021 and 2020 along with the reportable segment for each category (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,
Category	Segment	2021		2020		2021		2020
Solar modules	Modules	$	562,810	$	422,480	$	1,640,436	$	1,187,679
Solar power systems	Systems	10,132		471,174		311,076		776,724
O&M services	Systems	5,262		28,061		37,210		89,237
Energy generation (1)	Systems	7,339		14,335		29,375		54,884
EPC services (2)	Systems	(2,039)		(8,485)		(2,039)		(6,424)
Net sales		$	583,504	$	927,565	$	2,016,058	$	2,102,100

——————————

(1)During the three and nine months ended September 30, 2020, 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.

(2)For certain of our EPC agreements, we 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 regard to these tests, we may incur liquidated damages as specified in the applicable EPC agreement. During the three months ended September 30, 2020, we accrued liquidated damages for certain of these agreements, which we recognized as a reduction to revenue. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our performance guarantee arrangements.

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. Such contracts may contain provisions that require us to make liquidated damage payments to the customer if we fail to ship or deliver modules by scheduled dates. We recognize these liquidated damages as a reduction of revenue in the period we transfer control of the modules to the customer.

For EPC services, or sales of solar power systems with EPC services, we recognize revenue 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 toward contract completion. 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) changes in estimates of variable consideration, (ii) construction plan accelerations or delays, (iii) module cost forecast changes, (iv) cost related change orders, or (v) 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 nine months ended September 30, 2021 and 2020 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. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Number of projects	4			6			9			12

Increase (decrease) in revenue from net changes in transaction prices (in thousands) (1)	$	7,818		$	(16,319)		$	72,950		$	(25,470)
Increase (decrease) in revenue from net changes in input cost estimates (in thousands)	—			24			—			(2,483)
Net increase (decrease) in revenue from net changes in estimates (in thousands)	$	7,818		$	(16,295)		$	72,950		$	(27,953)

Net change in estimate as a percentage of aggregate revenue	0.9		%	(1.3)		%	2.3		%	(1.3)		%

——————————

(1)During the nine months ended September 30, 2021, we recorded revenue of $65.1 million associated with the settlement of an outstanding indemnification arrangement associated with the sale of one of our projects. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our indemnification arrangements.

The following table reflects the changes in our contract assets, which we classify as “Accounts receivable, unbilled,” and our contract liabilities, which we classify as “Deferred revenue,” for the nine months ended September 30, 2021. As of December 31, 2020, these balances excluded any assets or liabilities classified as held for sale (in thousands):


	September 30, 2021		December 31, 2020		Nine Month Change
Accounts receivable, unbilled (1)	$	49,204	$	49,395
Allowance for credit losses	(184)		(303)
Accounts receivable, unbilled, net	$	49,020	$	49,092	$	(72)	—	%

Deferred revenue (2)	$	307,473	$	233,732	$	73,741	32	%

——————————

(1)Includes $24.2 million and $22.7 million of noncurrent accounts receivable, unbilled classified as “Other assets” on our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively.

(2)Includes $68.7 million and $44.9 million of noncurrent deferred revenue classified as “Other liabilities” on our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively.

During the nine months ended September 30, 2021, our contract assets decreased by $0.1 million primarily due to final billings for certain project sales, offset by unbilled receivables associated with the sale of the Sun Streams 4 and Sun Streams 5 projects in the current period. During the nine months ended September 30, 2021, our contract liabilities increased by $73.7 million primarily due to advance payments received for sales of solar modules in the current period, partially offset by the recognition of revenue for sales of solar modules for which payment was received in 2020. During the nine months ended September 30, 2021 and 2020, we recognized revenue of $169.5 million and $296.7 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods.

As of September 30, 2021, we had entered into contracts with customers for the future sale of 16.4 GWDC of solar modules for an aggregate transaction price of $4.6 billion. We expect to recognize such amounts as revenue through 2024 as we transfer control of the modules to the customers. While our contracts with customers typically represent firm purchase commitments, these contracts may be subject to amendments made by us or requested by our customers. These amendments may increase or decrease the volume of modules to be sold under the contract, change delivery schedules, or otherwise adjust the expected revenue under these contracts.

12. Share-Based Compensation

The following table presents share-based compensation expense recognized in our condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of sales (1)	$	154	$	1,099	$	235	$	2,554
Selling, general and administrative (1)	5,746		5,562		14,998		13,323
Research and development (2)	529		548		(259)		2,312
Total share-based compensation expense	$	6,429	$	7,209	$	14,974	$	18,189

——————————

(1)On March 31, 2021, we completed the sales of our North American O&M operations and U.S. project development business, which resulted in the forfeiture of unvested shares for associates (our term for full and part-time employees) departing the Company as part of the transactions. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information related to these transactions.

(2)Effective March 15, 2021, our former Chief Technology Officer retired from the Company, which resulted in the forfeiture of his unvested shares during the nine months ended September 30, 2021.

Share-based compensation expense capitalized in inventory, project assets, and PV solar power systems was $0.8 million as of September 30, 2021 and $1.1 million as of December 31, 2020. As of September 30, 2021, we had $29.3 million of unrecognized share-based compensation expense related to unvested restricted and performance units, which we expect to recognize over a weighted-average period of approximately 1.4 years.

In April 2018, the compensation committee of our board of directors (“the Board”) approved a long-term incentive program for key executive officers and associates. The program was intended to incentivize retention of our key executive talent and align the interest of executive management and stockholders. The program consisted of performance units to be earned over an approximately three-year performance period, which ended in December 2020. Vesting of the 2018 grants of performance units was contingent upon the relative attainment of target gross margin, operating expense, and contracted revenue metrics. In February 2021, the compensation committee certified the achievement of the vesting conditions applicable to the grants, which approximated the target level of performance. Accordingly, each participant received one share of common stock for each vested performance unit, net of any tax withholdings.

In July 2019, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2021. Vesting of the 2019 grants of performance units is contingent upon the relative attainment of target cost per watt, module wattage, gross profit, and operating income metrics.

In March 2020, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2022. Vesting of the 2020 grants of performance units is contingent upon the relative attainment of target contracted revenue, module wattage, and return on capital metrics.

In May 2021, the compensation committee approved additional grants of performance units for key executive officers. Such grants are expected to be earned over a multi-year performance period ending in December 2023. Vesting of the 2021 grants of performance units is contingent upon the relative attainment of target contracted revenue, cost per watt, incremental average selling price, and operating income metrics.

Vesting of performance 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. Outstanding performance units are 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.

13. Income Taxes

In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “CARES Act”) was signed into law. The CARES Act includes a number of federal corporate tax relief provisions that are intended to support the ongoing liquidity of U.S. corporations. Among other provisions, the CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years. Because changes in tax law are accounted for in the period of enactment, the retroactive effects of such changes were accounted for as a discrete item in the prior period.

As a result of the CARES Act, we expect to carry back our 2019 and 2020 net operating losses to our 2016 U.S. corporate income tax return, which will restore certain foreign tax credits we expect to utilize by amending our 2017 and 2018 U.S. corporate income tax returns. Such amended returns will restore other general business credits we expect to utilize in future tax years before the credits expire and eliminate the transition tax liability for accumulated earnings of foreign subsidiaries resulting from the Tax Cuts and Jobs Act.

Our effective tax rate was 16.7% and (16.9)% for the nine months ended September 30, 2021 and 2020, respectively. The increase in our effective tax rate was primarily driven by a discrete tax benefit in the prior year associated with the net operating loss carryback provisions of the CARES Act described above. 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 the beneficial impact of the Malaysian tax holiday and Vietnamese tax incentive.

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. In addition, our Vietnamese subsidiary has been granted a tax incentive that provides a two-year tax exemption, which began in 2020, and reduced annual tax rates through the end of 2025.

We account for uncertain tax positions pursuant to the recognition and measurement criteria under ASC 740. It is reasonably possible that $0.4 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 federal, state, local, and foreign tax authorities. We are currently under examination in India, Malaysia, 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 examinations cannot be predicted with certainty. If any issues addressed by our tax examinations 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.

14. Net Income per Share

The calculation of basic and diluted net income per share for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Basic net income per share
Numerator:
Net income	$	45,203	$	155,037	$	337,323	$	282,652
Denominator:
Weighted-average common shares outstanding	106,320		105,967		106,241		105,830

Diluted net income per share
Denominator:
Weighted-average common shares outstanding	106,320		105,967		106,241		105,830
Effect of restricted and performance units and stock purchase plan shares	579		784		638		707
Weighted-average shares used in computing diluted net income per share	106,899		106,751		106,879		106,537

Net income per share:
Basic	$	0.43	$	1.46	$	3.18	$	2.67
Diluted	$	0.42	$	1.45	$	3.16	$	2.65

The following table summarizes the shares of common stock that were excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2021 and 2020 as such shares would have had an anti-dilutive effect (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Anti-dilutive shares	8	1	3	—

15. Accumulated Other Comprehensive Loss

The following table presents the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2021 (in thousands):


	Foreign Currency Translation Adjustment		Unrealized Gain (Loss) on Marketable Securities and Restricted Marketable Securities		Unrealized Gain (Loss) on Derivative Instruments		Total
Balance as of December 31, 2020	$	(76,239)	$	16,630	$	(2,117)	$	(61,726)
Other comprehensive (loss) income before reclassifications	(12,544)		(9,399)		3,799		(18,144)
Amounts reclassified from accumulated other comprehensive loss	1,203		(11,696)		1,030		(9,463)
Net tax effect	—		1,134		(545)		589
Net other comprehensive (loss) income	(11,341)		(19,961)		4,284		(27,018)
Balance as of September 30, 2021	$	(87,580)	$	(3,331)	$	2,167	$	(88,744)

The following table presents the pretax amounts reclassified from accumulated other comprehensive loss into our condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):


Comprehensive Income Components	Income Statement Line Item	Three Months Ended September 30,				Nine Months Ended September 30,
	2021	2020		2021		2020
Foreign currency translation adjustment:
Foreign currency translation adjustment	Cost of sales	$	—	$	370	$	—	$	370
Foreign currency translation adjustment	Other (expense) income, net	(728)		—		(1,203)		—
Total foreign currency translation adjustment		(728)		370		(1,203)		370
Unrealized gain on marketable securities and restricted marketable securities	Other (expense) income, net	—		9		11,696		15,346
Unrealized gain (loss) on derivative contracts:
Foreign exchange forward contracts	Cost of sales	15		(334)		(1,913)		(647)
Commodity swap contracts	Cost of sales	670		—		883		—
Total unrealized gain (loss) on derivative contracts		685		(334)		(1,030)		(647)
Total (loss) gain reclassified		$	(43)	$	45	$	9,463	$	15,069

16. 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 systems segment, through which we provide power plant solutions in certain markets, which include (i) project development, (ii) EPC services, and (iii) O&M services. We may provide any combination of individual products and services within such capabilities (including, with respect to EPC services, by contracting with third parties) depending upon the customer and market opportunity. Our systems segment customers include utilities, independent power producers, commercial and industrial companies, and other system owners. From time to time, we may temporarily own and operate, or retain interests in, certain of our systems for a period of time based on strategic opportunities or market factors. See Note 20. “Segment and Geographical Information” in our Annual Report on Form 10-K for the year ended December 31, 2020 for additional discussion of our segment reporting.

The following tables present certain financial information for our reportable segments for the three and nine months ended September 30, 2021 and 2020 and as of September 30, 2021 and December 31, 2020 (in thousands):


	Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
	Modules		Systems		Total		Modules		Systems		Total
Net sales	$	562,810	$	20,694	$	583,504	$	422,480	$	505,085	$	927,565
Gross profit	118,260		6,320		124,580		124,822		168,193		293,015
Depreciation and amortization expense	56,335		3,045		59,380		43,137		4,982		48,119

	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
	Modules		Systems		Total		Modules		Systems		Total
Net sales	$	1,640,436	$	375,622	$	2,016,058	$	1,187,679	$	914,421	$	2,102,100
Gross profit	328,047		155,418		483,465		280,115		240,698		520,813
Depreciation and amortization expense	163,747		9,193		172,940		132,529		17,477		150,006

	September 30, 2021						December 31, 2020
	Modules		Systems		Total		Modules		Systems		Total
Goodwill	$	14,462	$	—	$	14,462	$	14,462	$	—	$	14,462

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