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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2017
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from            to

Commission file number: 001-33156

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11855931&doc=11
First Solar, Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-4623678
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)

(602) 414-9300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

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

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

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

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

As of October 20, 2017, 104,432,988 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
 


Table of Contents

FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
1,087,026

 
$
681,276

 
$
2,602,143

 
$
2,573,768

Cost of sales
 
795,226

 
510,368

 
2,115,266

 
1,943,198

Gross profit
 
291,800

 
170,908

 
486,877

 
630,570

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
50,546

 
60,345

 
147,702

 
191,624

Research and development
 
20,850

 
32,173

 
64,990

 
95,291

Production start-up
 
12,624

 
752

 
22,155

 
807

Restructuring and asset impairments
 
791

 
4,314

 
39,108

 
89,846

Total operating expenses
 
84,811

 
97,584

 
273,955

 
377,568

Operating income
 
206,989

 
73,324

 
212,922

 
253,002

Foreign currency loss, net
 
(3,968
)
 
(2,296
)
 
(6,166
)
 
(8,259
)
Interest income
 
8,392

 
5,894

 
22,364

 
18,829

Interest expense, net
 
(4,149
)
 
(5,563
)
 
(19,692
)
 
(17,356
)
Other income, net
 
2,018

 
6,419

 
25,180

 
48,725

Income before taxes and equity in earnings of unconsolidated affiliates
 
209,282

 
77,778

 
234,608

 
294,941

Income tax (expense) benefit
 
(7,580
)
 
68,205

 
26,769

 
32,886

Equity in earnings of unconsolidated affiliates, net of tax
 
4,045

 
4,474

 
5,462

 
6,851

Net income
 
$
205,747

 
$
150,457

 
$
266,839

 
$
334,678

Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.97

 
$
1.46

 
$
2.56

 
$
3.27

Diluted
 
$
1.95

 
$
1.45

 
$
2.54

 
$
3.25

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
104,432

 
103,339

 
104,287

 
102,496

Diluted
 
105,660

 
103,684

 
104,889

 
103,110


See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
205,747

 
$
150,457

 
$
266,839

 
$
334,678

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
4,717

 
1,418

 
5,320

 
4,635

Unrealized gain (loss) on marketable securities and restricted investments, net of tax of $(23), $345, $(373), and $(831)
 
1,511

 
(7,917
)
 
1,244

 
27,679

Unrealized (loss) gain on derivative instruments, net of tax of $291, $59, $1,291, and $1
 
(61
)
 
(276
)
 
(2,513
)
 
2,070

Other comprehensive income (loss)
 
6,167

 
(6,775
)
 
4,051

 
34,384

Comprehensive income
 
$
211,914

 
$
143,682

 
$
270,890

 
$
369,062


See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,019,073

 
$
1,347,155

Marketable securities
 
699,544

 
607,991

Accounts receivable trade, net
 
344,645

 
266,687

Accounts receivable, unbilled and retainage
 
455,118

 
206,739

Inventories
 
217,555

 
363,219

Balance of systems parts
 
20,892

 
62,776

Project assets
 
67,263

 
700,800

Note receivable, affiliate
 

 
15,000

Prepaid expenses and other current assets
 
142,404

 
217,462

Total current assets
 
3,966,494

 
3,787,829

Property, plant and equipment, net
 
940,119

 
629,142

PV solar power systems, net
 
454,483

 
448,601

Project assets
 
406,396

 
762,148

Deferred tax assets, net
 
276,423

 
255,152

Restricted cash and investments
 
408,873

 
371,307

Investments in unconsolidated affiliates and joint ventures
 
227,661

 
234,610

Goodwill
 
14,462

 
14,462

Other intangibles, net
 
81,765

 
87,970

Inventories
 
110,412

 
100,512

Notes receivable, affiliates
 
69,432

 
54,737

Other assets
 
98,173

 
77,898

Total assets
 
$
7,054,693

 
$
6,824,368

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
130,704

 
$
148,730

Income taxes payable
 
4,396

 
12,562

Accrued expenses
 
317,325

 
262,977

Current portion of long-term debt
 
13,451

 
27,966

Deferred revenue
 
69,095

 
308,704

Other current liabilities
 
44,046

 
146,942

Total current liabilities
 
579,017

 
907,881

Accrued solar module collection and recycling liability
 
163,707

 
166,277

Long-term debt
 
330,209

 
160,422

Other liabilities
 
469,364

 
371,439

Total liabilities
 
1,542,297

 
1,606,019

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 104,431,990 and 104,034,731 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
 
104

 
104

Additional paid-in capital
 
2,788,467

 
2,765,310

Accumulated earnings
 
2,729,681

 
2,462,842

Accumulated other comprehensive loss
 
(5,856
)
 
(9,907
)
Total stockholders’ equity
 
5,512,396

 
5,218,349

Total liabilities and stockholders’ equity
 
$
7,054,693

 
$
6,824,368


See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
266,839

 
$
334,678

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
89,552

 
172,221

Impairments and net losses on disposal of long-lived assets
 
33,171

 
85,251

Share-based compensation
 
25,527

 
24,467

Equity in earnings of unconsolidated affiliates, net of tax
 
(5,462
)
 
(6,851
)
Distributions received from equity method investments
 
17,024

 

Remeasurement of monetary assets and liabilities
 
(12,464
)
 
(3,711
)
Deferred income taxes
 
(38,499
)
 
(5,399
)
Gain on sales of marketable securities and restricted investments
 
(49
)
 
(38,101
)
Noncash consideration from the sale of project assets
 

 
(20,084
)
Other, net
 
2,572

 
2,481

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, trade, unbilled and retainage
 
(328,556
)
 
2,649

Prepaid expenses and other current assets
 
35,818

 
(47,386
)
Inventories and balance of systems parts
 
178,562

 
75,308

Project assets
 
969,264

 
(355,767
)
Other assets
 
(16,453
)
 
(11,045
)
Income tax receivable and payable
 
6,416

 
(40,548
)
Accounts payable
 
(21,198
)
 
(143,663
)
Accrued expenses and other liabilities
 
(289,919
)
 
(91,709
)
Accrued solar module collection and recycling liability
 
(5,426
)
 
5,536

Net cash provided by (used in) operating activities
 
906,719

 
(61,673
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(315,129
)
 
(175,868
)
Purchases of marketable securities and restricted investments
 
(478,324
)
 
(422,607
)
Proceeds from sales and maturities of marketable securities and restricted investments
 
386,309

 
448,354

Investment in note receivable, affiliate

 

 
(4,760
)
Other investing activities
 
3,185

 
(8,893
)
Net cash used in investing activities
 
(403,959
)
 
(163,774
)
Cash flows from financing activities
 
 
 
 
Proceeds from borrowings under revolving credit facility
 

 
550,000

Repayment of long-term debt
 
(23,683
)
 
(86,250
)
Proceeds from borrowings under long-term debt, net of discounts and issuance costs
 
158,739

 
23,361

Repayment of sale-leaseback financing
 
(4,248
)
 
(4,294
)
Payments of tax withholdings for restricted shares
 
(5,114
)
 
(20,388
)
Proceeds from commercial letters of credit
 
43,025

 

Contingent consideration payments and other financing activities
 
(17,113
)
 
(159
)
Net cash provided by financing activities
 
151,606

 
462,270

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
9,420

 
6,742

Net increase in cash, cash equivalents and restricted cash
 
663,786

 
243,565

Cash, cash equivalents and restricted cash, beginning of the period
 
1,415,690

 
1,207,116

Cash, cash equivalents and restricted cash, end of the period
 
$
2,079,476

 
$
1,450,681

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
128,450

 
$
29,341

Acquisitions currently or previously funded by liabilities and contingent consideration
 
$
12,212

 
$
23,942

Accrued interest capitalized to long-term debt
 
$
16,786

 
$


See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted 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. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other period. The condensed consolidated balance sheet at December 31, 2016 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, 2016 included in our Annual Report on Form 10-K, which has been filed with the SEC.

Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications primarily relate to the adoptions of Accounting Standards Update (“ASU”) 2016-18, ASU 2016-09, and ASU 2014-09 as further described in Note 3. “Recent Accounting Pronouncements” and Note 14. “Revenue from Contracts with Customers” to our condensed consolidated financial statements.

Unless expressly stated or the context otherwise requires, the terms “the Company,” “we,” “us,” “our,” and “First Solar” refer to First Solar, Inc. and its subsidiaries.

2. Summary of Significant Accounting Policies

Use of Estimates. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to inputs used to recognize revenue over time, accrued solar module collection and recycling liabilities, product warranties, performance guarantees, indemnifications, accounting for income taxes, long-lived asset impairments, and testing goodwill. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from such estimates and assumptions.

Accounts Receivable Trade and Allowance for Doubtful Accounts. We record trade accounts receivable for our unconditional rights to consideration arising from our performance under contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. We estimate our allowance for doubtful accounts for specific trade receivable balances based on historical collection trends, the age of outstanding trade receivables, existing economic conditions, and the financial security, if any, associated with the receivables. Past-due trade receivable balances are written off when our internal collection efforts have been unsuccessful.

Our module and other equipment sales generally include up to 45-day payment terms following the transfer of control of the products to the customer. In addition, certain module and equipment sale agreements may require a down payment for a portion of the transaction price upon or shortly after entering into the agreement or related purchase order. Payment terms for sales of our solar power systems; engineering, procurement, and construction services (“EPC”); and operations and maintenance services vary by contract but are generally due upon demand or within several months of satisfying the associated performance obligations. As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We typically do not include extended payment terms in our contracts with customers.


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Accounts Receivable, Unbilled. Accounts receivable, unbilled represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. For example, we typically recognize revenue from contracts for the construction and sale of PV solar power systems over time using cost based input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract. Accordingly, revenue could be recognized in advance of billing the customer, resulting in an amount recorded to “Accounts receivable, unbilled and retainage.” Once we have an unconditional right to consideration under a construction contract, we typically bill our customer accordingly and reclassify the “Accounts receivable, unbilled and retainage” to “Accounts receivable trade, net.” Billing requirements vary by contract but are generally structured around the completion of certain construction milestones.

Retainage. Certain of our EPC contracts for PV solar power systems we build contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones. We consider whether collectibility of such retainage is reasonably assured in connection with our overall assessment of the collectibility of amounts due or that will become due under our EPC contracts. Retainage included within “Accounts receivable, unbilled and retainage” is expected to be billed and collected within the next 12 months. After we satisfy the EPC contract requirements and have an unconditional right to consideration, we typically bill for retainage and reclassify such amounts to “Accounts receivable trade, net.”

Project Assets. Project assets primarily consist of costs related to solar power projects in various stages of development that are capitalized prior to the completion of the sale of the project, including projects that may have begun commercial operation under power purchase agreements (“PPAs”) and are actively marketed and intended to be sold. These project related costs include costs for land, development, and construction of a PV solar power system. Development costs may include legal, consulting, permitting, transmission upgrade, interconnection, and other similar costs. We typically classify project assets as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months. Once we enter into a definitive sales agreement, we classify such project assets as current until the sale is completed and we have met all of the criteria to recognize the sale as revenue. Any income generated by a project while it remains within project assets is accounted for as a reduction to our basis in the project, which at the time of sale and meeting all revenue recognition criteria will be recorded within cost of sales. If a project is completed and begins commercial operation prior to the closing of a sales arrangement, the completed project will remain in project assets until placed in service. We present all expenditures related to the development and construction of project assets, whether fully or partially owned, as a component of cash flows from operating activities.

We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project is expected to be recoverable, including whether there are any changes in environmental, ecological, permitting, market pricing, or regulatory conditions that may impact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project assets and adjust the carrying value to the estimated fair value, with the resulting impairment recorded within “Selling, general and administrative” expense.

Deferred Revenue. When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. We recognize deferred revenue as net sales after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met.

Revenue Recognition – Module and Other Equipment Sales. We recognize revenue for module and other equipment sales (e.g., module plus arrangements) at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For module and other equipment sales contracts that contain multiple performance obligations, such as the shipment or delivery of solar modules and other balance of systems (“BoS”) parts, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.


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Revenue Recognition – Solar Power System Sales and/or Engineering, Procurement, and Construction Services. We generally recognize revenue for sales of solar power systems and/or EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system, including those in which we may receive consideration of a noncontrolling interest, when combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such sales arrangements, we recognize revenue using cost based input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract, after consideration of our customers’ commitment to perform its obligations under the contract, which is typically measured through the receipt of cash deposits or other forms of financial security issued by creditworthy financial institutions or parent entities. For sales of solar power systems in which we obtain an interest in the project sold to the customer, we recognize all of the revenue for the consideration received, including the fair value of the noncontrolling interest we obtained, and defer any profit associated with the interest obtained through “Equity in earnings of unconsolidated affiliates, net of tax.”

In applying cost based input methods of revenue recognition, we use the actual costs incurred relative to the total estimated costs (including solar module costs) to determine our progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. Cost based input methods of revenue recognition are considered a faithful depiction of our efforts to satisfy long-term construction contracts and therefore reflect the transfer of goods to a customer under such contracts. Costs incurred that do not contribute to satisfying our performance obligations (“inefficient costs”) are excluded from our input methods of revenue recognition as the amounts are not reflective of our transferring control of the system to the customer. Costs incurred towards contract completion may include costs associated with solar modules, direct materials, labor, subcontractors, and other indirect costs related to contract performance. We recognize solar module and direct material costs as incurred when such items have been installed in a system. Cost based input methods of revenue recognition require us to make estimates of net contract revenues and costs to complete our projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other payments to customers. Significant judgment is also required to evaluate assumptions related to the costs to complete our projects, including materials, labor, contingencies, and other system costs.

If estimated total costs on any contract, including any inefficient costs, are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be material depending on the size of the contracts or the changes in estimates.

As part of our solar power system sales, we conduct performance testing of a system prior to substantial completion to confirm the system meets its operational and capacity expectations noted in the EPC agreement. In addition, we may provide an energy performance test during the first or second year of a system’s operation to demonstrate that the actual energy generation for the applicable year meets or exceeds the modeled energy expectation, after certain adjustments. In certain instances, a bonus payment may be received at the end of the applicable test period if the system performs above a specified level. Conversely, if there is an underperformance event with regards to these tests, we may incur liquidated damages as a percentage of the EPC contract price. Such performance guarantees represent a form of variable consideration and are estimated at contract inception at their most likely amount and updated at the end of each reporting period as additional performance data becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

Revenue Recognition – Operations and Maintenance. We recognize revenue for standard, recurring operations and maintenance (“O&M”) services over time as customers receive and consume the benefits of such services, which typically include 24/7 system monitoring, certain PPA and other agreement compliance, North American Electric Reliability Corporation (or “NERC”) compliance, large generator interconnection agreement compliance, energy forecasting, performance engineering analysis, regular performance reporting, turn-key maintenance services including spare parts and corrective maintenance repair, warranty management, and environmental services. Other ancillary O&M services, such as equipment replacement, weed abatement, landscaping, or solar module cleaning, are recognized as revenue as the services are provided and billed to the customer. Costs of O&M services are expensed in the period in which they are incurred.

As part of our O&M service offerings, we typically offer an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside of our control as the service provider. If system availability exceeds a contractual threshold, we may receive a bonus payment, or if system availability falls below a separate threshold, we may incur liquidated damages for certain lost energy under the PPA. Such bonuses or liquidated damages represent a form of variable consideration and are estimated and recognized over time as customers receive and consume the benefits of the O&M services.

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Revenue Recognition – Energy Generation. We typically recognize revenue for energy generated and sold by PV solar power systems under Accounting Standards Codification (“ASC”) 840, Leases, consistent with the classification of the associated PPAs. Accordingly, we recognize revenue each period based on the volume of energy delivered to the customer (i.e., the PPA offtaker). For energy generated and sold by PV solar power systems on an open contract basis, we recognize revenue at the point in time the energy is delivered to the grid.

Shipping and Handling Costs. We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales, and classify such costs as a component of cost of sales.

Taxes Collected from Customers and Remitted to Governmental Authorities. We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of net sales or cost of sales.

See Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a summary of our other significant accounting policies.

3. Recent Accounting Pronouncements

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

In January 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. As a result of our adoption of ASU 2017-04 in the first quarter of 2017, we will eliminate Step 2 of future goodwill impairment tests.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. As a result of the adoption of ASU 2016-18 in the fourth quarter of 2016, we began including amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. See the tables at the end of this note for the effects of the adoption of ASU 2016-18 on our condensed consolidated statement of cash flows for the nine months ended September 30, 2016.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 230) – Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires the recognition of income tax consequences of intra-entity transfers of assets, other than inventory, when the transfer occurs. Two common examples of assets included in the scope of ASU 2016-16 are intellectual property and long-lived assets. ASU 2016-16 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted in annual reporting periods for which financial statements (interim or annual) have not been issued. We are currently evaluating the impact ASU 2016-16 will have on our consolidated financial statements and associated disclosures.


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In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), to provide financial statement users with more useful information about expected credit losses. ASU 2016-13 also changes how entities measure credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, and early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and associated disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Our adoption of ASU 2016-09 in the fourth quarter of 2016 resulted in the recognition of certain deferred tax assets for excess tax benefits that had previously not been recognized, as such benefits did not reduce our income taxes payable in prior periods, and the recognition of amounts for previously estimated forfeitures of share-based awards. As a result of the adoption, we also adjusted our condensed consolidated statement of cash flows to eliminate the reclassification of excess tax benefits to cash flows from financing activities and to present payments of tax withholdings for share-based awards as cash flows from financing activities. See the tables at the end of this note for the effects of the adoption of ASU 2016-09 on our condensed consolidated financial statements for the three and nine months ended September 30, 2016.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted for certain provisions of the guidance. We are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements and associated disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

We adopted ASU 2014-09 in the first quarter of 2017 using the full retrospective method. This adoption primarily affected our systems business sales arrangements previously accounted for under ASC 360-20, which had required us to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement. When such forms of continuing involvement were present, we reduced the potential profit on the applicable project sale by our maximum exposure to loss.

Our adoption of ASU 2014-09, which supersedes the real estate sales guidance under ASC 360-20, generally requires us to recognize revenue and profit from our systems business sales arrangements earlier and in a more linear fashion than our historical practice under ASC 360-20, including the estimation of certain profits that would otherwise have been deferred. Additionally, for systems business sales arrangements in which we obtain an interest in the project sold to the customer, we recognize all of the revenue for the consideration received, including the fair value of the noncontrolling interest we obtained, and defer any profit associated with the interest obtained through “Equity in earnings of unconsolidated affiliates, net of tax.” Following the adoption of ASU 2014-09, the revenue recognition for our other sales arrangements, including sales of solar modules and O&M services, remained materially consistent with our historical practice. See the tables at the end of this note for the effects of the adoption of ASU 2014-09 on our condensed consolidated financial statements as of December 31, 2016 and for the three and nine months ended September 30, 2016. See Note 2. “Summary of Significant Accounting Policies” to our condensed consolidated financial statements for further discussion of the effects of the adoption of ASU 2014-09 on our significant accounting policies.


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Adjustments to Previously Reported Financial Statements from the Adoption of Accounting Pronouncements

The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated balance sheet as of December 31, 2016 (in thousands):
 
 
December 31, 2016
 
 
As Reported
 
Adoption of ASU 2014-09
 
As Adjusted
Accounts receivable, unbilled and retainage
 
$
205,530

 
$
1,209

 
$
206,739

Deferred project costs
 
701,105

 
(701,105
)
 

Project assets, current
 

 
700,800

 
700,800

Prepaid expenses and other current assets
 
217,157

 
305

 
217,462

Total current assets
 
3,786,620

 
1,209

 
3,787,829

Project assets and deferred project costs
 
800,770

 
(800,770
)
 

Project assets, noncurrent
 

 
762,148

 
762,148

Deferred tax assets, net
 
252,655

 
2,497

 
255,152

Investments in unconsolidated affiliates and joint ventures
 
242,361

 
(7,751
)
 
234,610

Other assets
 
78,076

 
(178
)
 
77,898

Total assets
 
6,867,213

 
(42,845
)
 
6,824,368

Income taxes payable
 
5,288

 
7,274

 
12,562

Billings in excess of costs and estimated earnings
 
115,623

 
(115,623
)
 

Payments and billings for deferred project costs
 
284,440

 
(284,440
)
 

Deferred revenue
 

 
308,704

 
308,704

Other current liabilities
 
54,683

 
92,259

 
146,942

Total current liabilities
 
899,707

 
8,174

 
907,881

Other liabilities
 
428,120

 
(56,681
)
 
371,439

Total liabilities
 
1,654,526

 
(48,507
)
 
1,606,019

Additional paid-in capital
 
2,759,211

 
6,099

 
2,765,310

Accumulated earnings
 
2,463,279

 
(437
)
 
2,462,842

Total stockholders’ equity
 
5,212,687

 
5,662

 
5,218,349

Total liabilities and stockholders’ equity
 
6,867,213

 
(42,845
)
 
6,824,368


The following table presents the effect of the adoptions of ASU 2016-09 and ASU 2014-09 on our condensed consolidated statements of operations for the three and nine months ended September 30, 2016 (in thousands, except per share amounts):
 
 
Three Months Ended September 30, 2016
 
 
As Reported
 
Adoption of ASU 2016-09
 
Adoption of ASU 2014-09
 
As Adjusted
Net sales
 
$
688,029

 
$

 
$
(6,753
)
 
$
681,276

Cost of sales
 
501,749

 

 
8,619

 
510,368

Gross profit
 
186,280

 

 
(15,372
)
 
170,908

Operating income
 
88,696

 

 
(15,372
)
 
73,324

Income before taxes and equity in earnings of unconsolidated affiliates
 
93,150

 

 
(15,372
)
 
77,778

Income tax benefit
 
50,522

 
15,170

 
2,513

 
68,205

Equity in earnings of unconsolidated affiliates, net of tax
 
10,474

 

 
(6,000
)
 
4,474

Net income
 
154,146

 
15,170

 
(18,859
)
 
150,457

Comprehensive income
 
147,371

 
15,170

 
(18,859
)
 
143,682

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
1.49

 
$
0.15

 
$
(0.18
)
 
$
1.46

Diluted net income per share
 
$
1.49

 
$
0.14

 
$
(0.18
)
 
$
1.45


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Nine Months Ended September 30, 2016
 
 
As Reported
 
Adoption of ASU 2016-09
 
Adoption of ASU 2014-09
 
As Adjusted
Net sales
 
$
2,470,894

 
$

 
$
102,874

 
$
2,573,768

Cost of sales
 
1,830,504

 

 
112,694

 
1,943,198

Gross profit
 
640,390

 

 
(9,820
)
 
630,570

Operating income
 
262,822

 

 
(9,820
)
 
253,002

Income before taxes and equity in earnings of unconsolidated affiliates
 
304,761

 

 
(9,820
)
 
294,941

Income tax benefit
 
7,711

 
23,777

 
1,398

 
32,886

Equity in earnings of unconsolidated affiliates, net of tax
 
25,647

 

 
(18,796
)
 
6,851

Net income
 
338,119

 
23,777

 
(27,218
)
 
334,678

Comprehensive income
 
372,503

 
23,777

 
(27,218
)
 
369,062

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
3.30

 
$
0.23

 
$
(0.26
)
 
$
3.27

Diluted net income per share
 
$
3.28

 
$
0.23

 
$
(0.26
)
 
$
3.25


The following table presents the effect of the adoptions of ASU 2016-18, ASU 2016-09, and ASU 2014-09 on our condensed consolidated statement of cash flows for the nine months ended September 30, 2016 (in thousands):
 
 
Nine Months Ended September 30, 2016
 
 
As Reported
 
Adoption of ASU 2016-18
 
Adoption of ASU 2016-09
 
Adoption of ASU 2014-09
 
As Adjusted
Net income
 
$
338,119

 
$

 
$
23,777

 
$
(27,218
)
 
$
334,678

Adjustments to reconcile net income to cash used in operating activities:
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates, net of tax
 
(25,647
)
 

 

 
18,796

 
(6,851
)
Remeasurement of monetary assets and liabilities
 
(4,054
)
 
343

 

 

 
(3,711
)
Excess tax benefits from share-based compensation arrangements
 
(18,169
)
 

 
18,169

 

 

Noncash consideration from the sale of project assets

 

 

 

 
(20,084
)
 
(20,084
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts receivable, trade, unbilled and retainage
 
(22,791
)
 

 

 
25,440

 
2,649

Prepaid expenses and other current assets
 
(47,300
)
 

 

 
(86
)
 
(47,386
)
Project assets
 
(469,988
)
 

 

 
114,221

 
(355,767
)
Other assets
 
(11,234
)
 

 

 
189

 
(11,045
)
Income tax receivable and payable
 
(14,798
)
 

 
(24,352
)
 
(1,398
)
 
(40,548
)
Accrued expenses and other liabilities
 
(2,812
)
 

 
20,963

 
(109,860
)
 
(91,709
)
Net cash used in operating activities
 
(100,573
)
 
343

 
38,557

 

 
(61,673
)
Change in restricted cash
 
44,171

 
(44,171
)
 

 

 

Net cash used in investing activities
 
(119,603
)
 
(44,171
)
 

 

 
(163,774
)
Excess tax benefits from share-based compensation arrangements
 
18,169

 

 
(18,169
)
 

 

Payments of tax withholdings for restricted shares
 

 

 
(20,388
)
 

 
(20,388
)
Net cash provided by financing activities
 
500,827

 

 
(38,557
)
 

 
462,270

Net increase in cash, cash equivalents and restricted cash
 
287,393

 
(43,828
)
 

 

 
243,565

Cash, cash equivalents and restricted cash, beginning of the period
 
1,126,826

 
80,290

 

 

 
1,207,116

Cash, cash equivalents and restricted cash, end of the period
 
1,414,219

 
36,462

 

 

 
1,450,681



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4. Restructuring and Asset Impairments

Cadmium Telluride Module Manufacturing and Corporate Restructuring

In November 2016, our board of directors approved a set of initiatives intended to accelerate our transition to Series 6 module manufacturing and restructure our operations to reduce costs and better align the organization with our long-term strategic plan. Accordingly, we expect to upgrade and replace our existing manufacturing fleet through 2019 with Series 6 manufacturing equipment, thereby enabling the production of solar modules with a larger form factor, better product attributes, and a lower cost structure.

As part of these initiatives, we incurred net charges of $39.1 million during the nine months ended September 30, 2017, which included (i) $25.7 million of charges, primarily related to net losses on the disposition of previously impaired Series 4 and Series 5 manufacturing equipment, (ii) $6.8 million of severance benefits to terminated employees, and (iii) $6.6 million of net miscellaneous charges, primarily related to contract terminations, the write-off of operating supplies, and other Series 4 manufacturing exit costs. During the three months ended September 30, 2017, we incurred net charges of $0.8 million, primarily as a result of net losses on the disposition of the aforementioned manufacturing equipment. Substantially all amounts associated with these restructuring and asset impairment charges related to our components segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations. We expect to incur up to $5 million of additional charges in 2017 as we continue the transition to Series 6 module manufacturing.

The following table summarizes our cadmium telluride (“CdTe”) module manufacturing and corporate restructuring activity recorded during the nine months ended September 30, 2017 and the remaining liability balances at September 30, 2017 (in thousands):
 
 
Asset Impairments
 
Severance
 
Other
 
Total
Ending liability balance at December 31, 2016
 
$

 
$
7,865

 
$
550

 
$
8,415

Charges to income
 
25,704

 
6,781

 
6,623

 
39,108

Cash payments
 

 
(14,115
)
 
(6,314
)
 
(20,429
)
Non-cash amounts
 
(25,704
)
 

 
(772
)
 
(26,476
)
Ending liability balance at September 30, 2017
 
$

 
$
531

 
$
87

 
$
618


During the three and nine months ended September 30, 2016, we incurred charges of $2.9 million and $3.8 million, respectively, for severance benefits to terminated employees and certain other actions associated with related restructuring initiatives.

Crystalline Silicon Module Manufacturing Restructuring

In June 2016, our executive management elected to reallocate our crystalline silicon module production capacity to support next generation CdTe module offerings. As a result, we ended production of our crystalline silicon modules to focus on our core CdTe module technology and utility-scale PV solar power systems. The majority of our crystalline silicon module manufacturing associates were expected to be redeployed in other manufacturing operations.

In connection with these restructuring activities, we incurred charges of $86.0 million during the nine months ended September 30, 2016, which included (i) $35.8 million of impairment charges related to certain crystalline silicon module manufacturing equipment considered abandoned for accounting purposes, (ii) $35.8 million of impairment charges for developed technology intangible assets associated with our crystalline silicon module technology, (iii) $6.1 million of goodwill impairment charges from the disposal of our crystalline silicon components reporting unit, and (iv) $8.3 million of miscellaneous charges related to certain contract manufacturing agreements and the write-off of operating supplies. During the three months ended September 30, 2016, we incurred charges of $1.4 million for contract manufacturing agreements and long-lived asset impairments. All amounts associated with these charges related to our components segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations.


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5. Business Acquisitions

Enki Technology

In October 2016, we acquired 100% of the shares of Enki Technology, Inc. (“Enki”), a developer of advanced coating materials for the PV solar industry, for cash payments of $10.3 million, net of cash acquired of $0.3 million, and a promise to pay additional consideration of up to $7.0 million contingent on the achievement of certain production and module performance milestones. In connection with applying the acquisition method of accounting, $17.3 million of the purchase price consideration was assigned to an in process research and development (“IPR&D”) intangible asset to be amortized over its useful life upon successful completion of the underlying projects, $4.4 million was assigned to a deferred tax liability, and $4.4 million was assigned to goodwill. The acquired IPR&D includes patents, technical information and know-how, and other proprietary information associated with the development and production of anti-reflective coating material that we expect to use in the production of our solar modules. Such technology is expected to improve our module conversion efficiency and overall durability at a lower cost structure compared to our current production processes.

6. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
September 30,
2017
 
December 31,
2016
Cash and cash equivalents:
 
 
 
 
Cash
 
$
1,968,818

 
$
1,347,155

Money market funds
 
50,255

 

Total cash and cash equivalents
 
2,019,073

 
1,347,155

Marketable securities:
 
 
 
 
Foreign debt
 
172,249

 
296,819

Foreign government obligations
 
198,307

 
271,172

U.S. debt
 
73,988

 

Time deposits
 
255,000

 
40,000

Total marketable securities
 
699,544

 
607,991

Total cash, cash equivalents, and marketable securities
 
$
2,718,617

 
$
1,955,146


We classify our marketable securities as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as part of “Accumulated other comprehensive loss” until realized. We record realized gains and losses on the sale of our marketable securities in “Other income, net” computed using the specific identification method. During the nine months ended September 30, 2017, we sold marketable securities for proceeds of $118.3 million and realized gains of less than $0.1 million on such sales. During the three and nine months ended September 30, 2016, we sold marketable securities for proceeds of $135.2 million and $159.2 million, respectively, and realized gains of $0.3 million on such sales. See Note 10. “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, 2017 and December 31, 2016 (in thousands):
 
 
As of September 30, 2017
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
173,111

 
$

 
$
862

 
$
172,249

Foreign government obligations
 
199,009

 

 
702

 
198,307

U.S. debt
 
74,016

 
2

 
30

 
73,988

Time deposits
 
255,000

 

 

 
255,000

Total
 
$
701,136

 
$
2

 
$
1,594

 
$
699,544


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As of December 31, 2016
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign debt
 
$
298,085

 
$
2

 
$
1,268

 
$
296,819

Foreign government obligations
 
272,357

 

 
1,185

 
271,172

Time deposits
 
40,000

 

 

 
40,000

Total
 
$
610,442

 
$
2

 
$
2,453

 
$
607,991


As of September 30, 2017, we identified eight investments totaling $119.2 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $0.9 million. As of December 31, 2016, we identified three investments totaling $51.2 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of $0.1 million. The unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell these securities prior to the recovery of our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired. All of our available-for-sale marketable securities are subject to a periodic impairment review. We did not identify any of our marketable securities as other-than-temporarily impaired as of September 30, 2017 and December 31, 2016.

The following tables show unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of September 30, 2017 and December 31, 2016, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
 
 
As of September 30, 2017
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Foreign debt
 
$
102,806

 
$
288

 
$
64,443

 
$
574

 
$
167,249

 
$
862

Foreign government obligations
 
143,546

 
422

 
54,761

 
280

 
198,307

 
702

U.S. debt
 
63,981

 
30

 

 

 
63,981

 
30

Total
 
$
310,333

 
$
740

 
$
119,204

 
$
854

 
$
429,537

 
$
1,594

 
 
As of December 31, 2016
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Foreign debt
 
$
234,332

 
$
1,123

 
$
51,236

 
$
145

 
$
285,568

 
$
1,268

Foreign government obligations
 
272,503

 
1,185

 

 

 
272,503

 
1,185

Total
 
$
506,835

 
$
2,308

 
$
51,236

 
$
145

 
$
558,071

 
$
2,453


The contractual maturities of our marketable securities as of September 30, 2017 were as follows (in thousands):
 
 
Fair
Value
One year or less
 
$
454,961

One year to two years
 
154,847

Two years to three years
 
89,736

Total
 
$
699,544



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Table of Contents

7. Restricted Cash and Investments

Restricted cash and investments consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
September 30,
2017
 
December 31,
2016
Restricted cash
 
$
43,851

 
$
31,381

Restricted investments
 
365,022

 
339,926

Total restricted cash and investments (1)
 
$
408,873

 
$
371,307


(1)
There was an additional $16.6 million and $37.2 million of restricted cash included within “Prepaid expenses and other current assets” at September 30, 2017 and December 31, 2016, respectively.

At September 30, 2017 and December 31, 2016, our restricted cash consisted of deposits held by various banks to secure certain of our letters of credit and other deposits designated for the construction or operation of systems projects as well as the payment of amounts related to project specific debt financings. Restricted cash for our letters of credit is classified as current or noncurrent based on the maturity date of the corresponding letter of credit. See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for further discussion related to our letters of credit. Restricted cash for project construction, operation, and financing is classified as current or noncurrent based on the projected use of the restricted funds.

At September 30, 2017 and December 31, 2016, our restricted investments consisted of long-term marketable securities that were held in custodial accounts to fund the estimated future costs associated with collecting and recycling modules covered under our solar module collection and recycling program. We classify our restricted investments as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as a part of “Accumulated other comprehensive loss” until realized. We record realized gains and losses on the sale of our restricted investments in “Other income, net” computed using the specific identification method. During the nine months ended September 30, 2016, we sold certain restricted investments for proceeds of $106.1 million and realized gains of $37.8 million on such sales as part of an effort to align the currencies of the investments with those of the corresponding collection and recycling liabilities. Restricted investments are classified as noncurrent as the underlying accrued solar module collection and recycling liability is also noncurrent in nature. See Note 10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted investments.

As necessary, we fund any incremental amounts for our estimated collection and recycling obligations within 90 days of the end of each year. We determine the funding requirement, if any, based on estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of 25 years less amounts already funded in prior years. During 2016, substantially all of our module sales were not covered under our solar module collection and recycling program, and as a result, no incremental funding for the program was required in 2017. To ensure that amounts previously funded will be available in the future regardless of potential adverse changes in our financial condition (even in the case of our own insolvency), we have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc., First Solar Malaysia Sdn. Bhd., and First Solar Manufacturing GmbH are grantors. Only the trustee can distribute funds from the custodial accounts, and these funds cannot be accessed for any purpose other than to cover qualified costs of module collection and recycling, either by us or a third party performing the required collection and recycling services. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds.

The following tables summarize the unrealized gains and losses related to our restricted investments, by major security type, as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
As of September 30, 2017
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
124,083

 
$
60,279

 
$

 
$
184,362

U.S. government obligations
 
173,269

 
12,291

 
4,900

 
180,660

Total
 
$
297,352

 
$
72,570

 
$
4,900

 
$
365,022


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As of December 31, 2016
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Foreign government obligations
 
$
107,604

 
$
62,350

 
$

 
$
169,954

U.S. government obligations
 
169,294

 
10,468

 
9,790

 
169,972

Total
 
$
276,898

 
$
72,818

 
$
9,790

 
$
339,926


As of September 30, 2017, the contractual maturities of our restricted investments were between 12 years and 19 years.

8. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Accounts receivable trade, gross
 
$
347,209

 
$
266,687

Allowance for doubtful accounts
 
(2,564
)
 

Accounts receivable trade, net
 
$
344,645

 
$
266,687


At September 30, 2017 and December 31, 2016, $51.3 million and $12.2 million, respectively, of our accounts receivable trade, net were secured by letters of credit, bank guarantees, or other forms of financial security issued by creditworthy financial institutions.

Accounts receivable, unbilled and retainage

Accounts receivable, unbilled and retainage consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Accounts receivable, unbilled
 
$
451,526

 
$
200,474

Retainage
 
3,592

 
6,265

Accounts receivable, unbilled and retainage
 
$
455,118

 
$
206,739


Inventories

Inventories consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Raw materials
 
$
142,819

 
$
148,222

Work in process
 
9,756

 
13,204

Finished goods
 
175,392

 
302,305

Inventories
 
$
327,967

 
$
463,731

Inventories – current
 
$
217,555

 
$
363,219

Inventories – noncurrent (1)
 
$
110,412

 
$
100,512


(1)
As needed, we may purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our normal operating cycle, which is 12 months. We classify such raw materials that we do not expect to consume within our normal operating cycle as noncurrent.


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Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Prepaid expenses
 
$
33,862

 
$
42,007

Prepaid income taxes
 
21,798

 
35,336

Restricted cash
 
16,552

 
37,154

Derivative instruments 
 
9,644

 
6,078

Value added tax receivables
 
8,463

 
22,308

Other current assets
 
52,085

 
74,579

Prepaid expenses and other current assets
 
$
142,404

 
$
217,462


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Land
 
$
8,135

 
$
7,839

Buildings and improvements
 
423,031

 
378,981

Machinery and equipment
 
1,060,654

 
1,444,442

Office equipment and furniture
 
155,351

 
147,833

Leasehold improvements
 
48,938

 
53,552

Construction in progress
 
416,684

 
93,164

Stored assets (1)
 

 
17,995

Property, plant and equipment, gross
 
2,112,793

 
2,143,806

Accumulated depreciation
 
(1,172,674
)
 
(1,514,664
)
Property, plant and equipment, net
 
$
940,119

 
$
629,142


(1)
Consisted of certain machinery and equipment (“stored assets”) that were originally intended for use in previously planned manufacturing capacity expansions. The majority of the stored assets remaining at December 31, 2016 were repurposed for Series 6 module manufacturing.

Depreciation of property, plant and equipment was $22.4 million and $71.1 million for the three and nine months ended September 30, 2017, respectively, and $51.6 million and $158.6 million for the three and nine months ended September 30, 2016, respectively.

PV solar power systems, net

PV solar power systems, net consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
PV solar power systems, gross
 
$
485,519

 
$
464,581

Accumulated depreciation
 
(31,036
)
 
(15,980
)
PV solar power systems, net
 
$
454,483

 
$
448,601


During the nine months ended September 30, 2017, we placed $13.3 million of projects in service, including a project in the Asia-Pacific region. Depreciation of PV solar power systems was $5.1 million and $14.9 million for the three and nine months ended September 30, 2017, respectively, and $4.4 million and $6.8 million for the three and nine months ended September 30, 2016, respectively.


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Capitalized interest

The cost of constructing facilities, equipment, and project assets includes interest costs incurred during the assets’ construction period. The components of interest expense and capitalized interest were as follows during the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Interest cost incurred
 
$
(4,775
)
 
$
(5,998
)
 
$
(20,630
)
 
$
(20,365
)
Interest cost capitalized – property, plant and equipment
 

 
314

 

 
1,381

Interest cost capitalized – project assets
 
626

 
121

 
938

 
1,628

Interest expense, net
 
$
(4,149
)
 
$
(5,563
)
 
$
(19,692
)
 
$
(17,356
)

Project assets

Project assets consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Project assets – development costs, including project acquisition and land costs
 
$
282,278

 
$
444,264

Project assets – construction costs
 
191,381

 
1,018,684

Project assets
 
$
473,659

 
$
1,462,948

Project assets – current
 
$
67,263

 
$
700,800

Project assets – noncurrent
 
$
406,396

 
$
762,148


Other assets

Other assets consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Deferred rent
 
$
26,879

 
$
27,160

Notes receivable (1)
 
10,558

 
7,385

Income taxes receivable
 
4,321

 
4,230

Other
 
56,415

 
39,123

Other assets
 
$
98,173

 
$
77,898


(1)
In April 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility bears interest at 8.0% per annum, payable quarterly, with the full amount due in December 2026. As of September 30, 2017 and December 31, 2016, the balance outstanding on the credit facility was €7.0 million ($8.3 million and $7.4 million, respectively).

Goodwill

Goodwill for the relevant reporting unit consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
December 31,
2016

Acquisitions (Impairments)

September 30,
2017
Components
 
$
407,827

 
$

 
$
407,827

Accumulated impairment losses
 
(393,365
)
 

 
(393,365
)
Goodwill
 
$
14,462

 
$

 
$
14,462



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Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair values assigned to the individual assets acquired and liabilities assumed. We do not amortize goodwill, but instead are required to test goodwill for impairment at least annually. If necessary, we would record any impairment in accordance with ASC 350, Intangibles – Goodwill and Other. We perform impairment tests between scheduled annual tests in the fourth quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value.

Other intangibles, net

Other intangibles, net consists of developed technologies from prior business acquisitions, certain PPAs acquired after the associated PV solar power systems were placed in service, our internally-generated intangible assets, substantially all of which were patents on technologies related to our products and production processes, and IPR&D related to our Enki acquisition as described in Note 5. “Business Acquisitions” to our condensed consolidated financial statements. We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure them. We amortize intangible assets on a straight-line basis over their estimated useful lives once the intangible assets meet the criteria to be amortized.

The following tables summarize our intangible assets at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30, 2017
 
 
Gross Amount
 
Accumulated Amortization
 
Accumulated Impairments
 
Net Amount
Developed technology
 
$
76,959

 
$
(22,298
)
 
$

 
$
54,661

Power purchase agreements
 
6,486

 
(243
)
 

 
6,243

Patents
 
6,538

 
(2,932
)
 

 
3,606

In-process research and development
 
17,255

 

 

 
17,255

Other intangibles, net
 
$
107,238

 
$
(25,473
)
 
$

 
$
81,765

 
 
December 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Accumulated Impairments
 
Net Amount
Developed technology
 
$
114,612

 
$
(18,208
)
 
$
(36,215
)
 
$
60,189

Power purchase agreements
 
6,486

 

 

 
6,486

Patents
 
6,538

 
(2,498
)
 

 
4,040

In-process research and development
 
17,255

 

 

 
17,255

Other intangibles, net
 
$
144,891

 
$
(20,706
)
 
$
(36,215
)
 
$
87,970


Amortization expense for our intangible assets was $2.1 million and $6.2 million for the three and nine months ended September 30, 2017, respectively, and $2.1 million and $8.1 million for the three and nine months ended September 30, 2016, respectively.

Accrued expenses

Accrued expenses consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Accrued property, plant and equipment
 
$
112,084

 
$
14,828

Accrued compensation and benefits
 
51,731

 
47,877

Accrued project assets
 
48,248

 
71,164

Product warranty liability (1)
 
31,016

 
40,079

Accrued inventory
 
15,211

 
13,085

Other
 
59,035

 
75,944

Accrued expenses
 
$
317,325

 
$
262,977


(1)
See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product warranty liability.”


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Other current liabilities

Other current liabilities consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Derivative instruments 
 
$
16,851

 
$
6,642

Contingent consideration (1)
 
9,106

 
19,620

Financing liability (2)
 
5,173

 
5,219

Indemnification liabilities (1)
 
2,790

 
100,000

Other
 
10,126

 
15,461

Other current liabilities
 
$
44,046

 
$
146,942


(1)
See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Indemnification liabilities” and “Contingent consideration” arrangements.

(2)
See Note 11. “Investments in Unconsolidated Affiliates and Joint Ventures” to our condensed consolidated financial statements for discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.

Other liabilities

Other liabilities consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Product warranty liability (1)
 
$
212,678

 
$
212,329

Commercial letter of credit liability (1)
 
69,951

 
26,579

Deferred revenue
 
63,643

 

Financing liability (2)
 
30,378

 
33,314

Other taxes payable
 
25,222

 
24,099

Derivative instruments
 
8,697

 
444

Contingent consideration (1)
 
3,106

 
10,472

Other
 
55,689

 
64,202

Other liabilities
 
$
469,364

 
$
371,439


(1)
See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our “Product warranty liability,” “Contingent consideration,” and “Commercial letter of credit liability” arrangements.

(2)
See Note 11. “Investments in Unconsolidated Affiliates and Joint Ventures” to our condensed consolidated financial statements for discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.

9. Derivative Financial Instruments

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

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive loss” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. See Note 10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.


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Table of Contents

The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 (in thousands):
<
 
 
September 30, 2017
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
267

 
$
10,777

 
$

Total derivatives designated as hedging instruments
 
$
267

 
$
10,777

 
$

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange forward contracts
 
$
9,377