Document


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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=12078276&doc=13
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, $0.001 par value
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [x]   No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [ ]   No [x]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]
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 Act).  Yes [ ]   No [x]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.4 billion (based on the closing sales price of the registrant’s common stock on that date). As of February 16, 2018, 104,474,656 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2018, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
 




FIRST SOLAR, INC.

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS
 
 
Page
PART I
Item 1.
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
Item 15.
Item 16.

Throughout this Annual Report on Form 10-K, we refer to First Solar, Inc. and its consolidated subsidiaries as “First Solar,” “the Company,” “we,” “us,” and “our.” When referring to our manufacturing capacity, total sales, and solar module sales, the unit of electricity in watts for megawatts (“MW”) and gigawatts (“GW”) is direct current (“DC” or “DC”) unless otherwise noted. When referring to our projects or systems, the unit of electricity in watts for MW and GW is alternating current (“AC” or “AC”) unless otherwise noted.



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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”), which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: effects resulting from certain module manufacturing changes and associated restructuring activities; our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs (including estimated future module collection and recycling costs), warranties, solar module technology and cost reduction roadmaps, restructuring, product reliability, investments in unconsolidated affiliates, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules; our ability to expand manufacturing capacity worldwide; our ability to reduce the costs to develop and construct photovoltaic (“PV”) solar power systems; research and development (“R&D”) programs and our ability to improve the conversion efficiency of our solar modules; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “seek,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” “continue,” and the negative or plural of these words, and other comparable terminology. Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to us as of the filing date of this Annual Report on Form 10-K and therefore speak only as of the filing date. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason, whether as a result of new information, future developments, or otherwise. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements, including, but not limited to:

structural imbalances in global supply and demand for PV solar modules;

the market for renewable energy, including solar energy;

our competitive position and other key competitive factors;

reduction, elimination, or expiration of government subsidies, policies, and support programs for solar energy projects;

our ability to execute on our long-term strategic plans;

our ability to execute on our solar module technology and cost reduction roadmaps;

interest rate fluctuations and both our and our customers’ ability to secure financing;

our ability to attract new customers and to develop and maintain existing customer and supplier relationships;

our ability to successfully develop and complete our systems business projects;

our ability to convert existing production facilities to support new product lines, such as Series 6TM (“Series 6”) module manufacturing;




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general economic and business conditions, including those influenced by U.S., international, and geopolitical events;

environmental responsibility, including with respect to cadmium telluride (“CdTe”) and other semiconductor materials;

claims under our limited warranty obligations;

changes in, or the failure to comply with, government regulations and environmental, health, and safety requirements;

future collection and recycling costs for solar modules covered by our module collection and recycling program;

our ability to protect our intellectual property;

our ability to prevent and/or minimize the impact of cyber-attacks or other breaches of our information systems;

our continued investment in R&D;

the supply and price of components and raw materials, including CdTe;

our ability to attract and retain key executive officers and associates; and

all other matters discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our subsequently filed Quarterly Reports on Form 10-Q, and our other filings with the Securities and Exchange Commission (the “SEC”).

You should carefully consider the risks and uncertainties described under this section.




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PART I

Item 1. Business

Company Overview

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

In addressing overall global demand for electricity, our high-efficiency CdTe modules and fully integrated systems business provide competitively priced utility-scale PV solar energy solutions, which compete on an economic basis in many climates with traditional forms of energy generation and provide low cost electricity to end-users. Our vertically-integrated capabilities enable us to provide such solutions, accelerate the adoption of our technology, and successfully sell into key markets around the world. We seek to offer leadership across the entire solar value chain, resulting in more reliable and cost effective PV solar energy solutions for our customers.

Business Strategy

We believe the following strategies and points of differentiation provide the foundation for our leading industry position and enable us to remain one of the preferred providers of PV solar energy solutions.

Differentiated Technology

As a field-proven technology, our CdTe solar modules offer certain advantages over traditional crystalline silicon based solar modules by delivering competitive efficiency, higher real-world energy yield, and long-term reliability. Proven to deliver up to 8% more usable energy per nameplate watt than competing technologies in certain geographic markets and with a record of reliable system performance, our CdTe technology delivers more energy, more consistently, over the lifetime of a PV solar power system. Our recently introduced Series 6 module technology, with its combination of high conversion efficiencies, low manufacturing costs, larger form factor, and balance of systems (“BoS”) component compatibility, is expected to further enhance our competitive position once production of such module technology begins in 2018. We expect our transition to Series 6 module technology to enable us to maximize the intrinsic cost advantage of CdTe thin film technology versus crystalline silicon.

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

Manufacturing Process

Our modules are manufactured in a high-throughput, automated environment that integrates all manufacturing steps into a continuous flow line. Such manufacturing process eliminates the multiple supply chain operators and expensive



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and time-consuming batch processing steps that are used to produce crystalline silicon solar modules. At the outset, a sheet of glass enters the production line and in less than 3.5 hours is transformed into a completed module, which is flash tested, boxed, and ready for shipment. With over 17 GW of modules sold worldwide, we have a demonstrated history of manufacturing success and innovation. We currently have multiple production lines at our manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia and plan to also utilize our manufacturing facility in Ho Chi Minh City, Vietnam for the production of Series 6 modules. As we transition our remaining manufacturing capacity to Series 6 module technology, we expect to ramp down production of our Series 4TM (“Series 4”) modules over the next several years. This transition process, which has resulted in a temporary reduction in production capacity, allows us to use our existing manufacturing infrastructure to more quickly and cost effectively deploy our Series 6 module technology to best position us for long-term competitiveness and growth.

Vertical Integration

We are vertically integrated across substantially the entire solar value chain. Many of the efficiencies, cost reductions, and capabilities that we deliver to our customers are not easily replicable for other industry participants that are not vertically integrated in a similar manner. Accordingly, our operational model offers PV solar energy solutions that benefit from our wide range of capabilities, including: advanced PV solar module manufacturing; project development; engineering and plant optimization; grid integration and plant control systems; procurement and construction consulting; and O&M services.

Financial Viability

Our commitment is to create long-term shareholder value through a balance of growth, profitability, and liquidity. Despite substantial downward pressure on the price of solar modules due to pricing competition and significant capacity in the industry, we have continued to deliver strong and balanced financial performance. Such performance has also enabled us to fund our Series 6 transition and capacity expansion initiatives using cash flows generated by our operations. Accordingly, our financial viability provides strategic optionality as we evaluate how to invest in our business and generate returns for our shareholders. Our bankability and financial viability also enable us to offer meaningful module and system warranties after installation, which provide us with a competitive advantage relative to some of our peers in the solar industry in the context of project financing and offering PV solar energy solutions to long-term owners.

Sustainability

In addition to our financial commitments, we are also committed to minimizing the environmental impacts and enhancing the social and economic benefits of our products across their life cycle, from raw material sourcing through end-of-life module recycling. Accordingly, our modules and systems provide an ecologically leading solution to climate change, energy security, and water scarcity, which also enables our customers to achieve their sustainability objectives. On a lifecycle basis, our thin film module technology has the smallest carbon footprint, fastest energy payback time, and lowest water use of any PV solar technology on the market.

As a result of our specialized manufacturing process, our modules have approximately half the carbon footprint of conventional crystalline silicon modules and a fraction of the carbon footprint of conventional energy sources. Furthermore, our technology displaces up to 98% of greenhouse gas emissions and other air pollutants when replacing traditional forms of energy generation. Our manufacturing process also facilitates the fastest energy payback time (which is the amount of time a system must operate to recover the energy required to produce it) of all PV solar technologies. In less than six months under high irradiance conditions, our PV solar power systems produce more energy than was required to create them, which represents a 50-fold energy return on investment over a 25-year system lifetime and an abundant net energy gain to the electricity grid. Our modules also use up to 300 times less water per MW hour than conventional energy and up to 12 times less water than other solar technologies. In addition, our industry-leading recycling process further enhances our sustainability advantage by recovering approximately 90% of the glass for reuse in new glass products and over 90% of the semiconductor material for reuse in new First Solar modules.




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Offerings and Capabilities

We are focusing on markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with high solar resources, significant current or projected electricity demand, and/or relatively high existing electricity prices. We differentiate our product offerings by geographic market and localize the solution, as needed. Our consultative approach to our customers’ solar energy needs and capabilities results in customized solutions to meet their economic goals. As a result, we have designed our product and service offerings according to the following business areas:

PV Solar Modules. Our modules couple our leading-edge CdTe technology with the manufacturing excellence and quality control that comes from being one of the world’s most experienced producers of advanced PV solar modules. Our technology demonstrates a proven performance advantage over most crystalline silicon solar modules of equivalent efficiency rating by delivering competitive efficiency, higher real-world energy yield, and long-term reliability. We are able to provide such product performance, quality, and reliability to our customers due, in large part, to investing more in R&D than any other solar company in the world.

Utility-Scale Power Plant. We have extensive, proven experience in developing and constructing reliable grid-connected power systems for utility-scale generation. Our grid-connected PV solar power systems diversify the energy portfolio, reduce fossil-fuel consumption, reduce the risk of fuel price volatility, and save costs, proving that centralized solar generation can deliver dependable and affordable solar electricity to the grid in many places around the world. Our plant control systems provide reliability services, such as frequency control, voltage control, ramping capacity, and automated generation control, which enable expanded integration of PV solar power systems into the power grid. Such reliability services also help balance the grid during times of high renewable energy generation. Our solar energy systems also offer a meaningful value proposition by eliminating commodity price risks thereby providing a long-term fixed price with relatively low operating costs. When compared to the price of power derived from a conventional source of energy, a fixed price cannot be achieved unless the cost of hedging is included. Hedging costs of a commodity such as natural gas, along with the costs of credit support required for a long-term hedge, can significantly increase conventional energy costs. Additional benefits of our grid-connected power systems include reductions of fuel imports and improvements in energy security; enhanced peaking generation and faster time-to-power; and managed variability through accurate forecasting.

EPC Services. We provide engineering, procurement, and construction (“EPC”) services to projects developed by us and other system owners such as utilities, independent power producers, and commercial and industrial companies. EPC services include engineering design and related services, BoS procurement, advanced development of grid integration solutions, and construction contracting and management. Depending on the customer and market needs, we may provide our full EPC services or any combination of individual products and services within our EPC capabilities. Our vertical integration combined with our partner collaboration enables us to identify and make system-level innovations, which creates further value for our customers.

O&M Services. By leveraging our extensive experience in plant optimization and advanced diagnostics, we have developed one of the largest and most advanced O&M programs in the industry, which includes more than 7 GWDC of utility-scale PV solar power systems. Despite this scale, we have historically maintained an average fleet system effective availability greater than 99%. Utilizing a state of the art Global Operations Center, our team of O&M associates provide a variety of services to optimize system performance and comply with power purchase agreements (“PPA”), other agreements, and regulations. Our products and services are engineered to maximize energy output and revenue for our customers while significantly reducing their unplanned maintenance costs. Plant owners benefit from predictable expenses over the life of the contract and reduced risk of energy loss. Our O&M program is compliant with the North American Electric Reliability Corporation (“NERC”) standards and is designed to be scalable to accommodate the growing O&M needs of customers worldwide. We offer our O&M services to solar power plant owners that use either our solar modules or modules manufactured by third-parties.



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Market Overview

Solar energy is one of the fastest growing forms of renewable energy with numerous economic and environmental benefits that make it an attractive complement to and/or substitute for traditional forms of energy generation. In recent years, the price of PV solar power systems, and accordingly the cost of producing electricity from such systems, has dropped to levels that are competitive with or even below the wholesale price of electricity in many markets. The rapid price decline that PV solar energy has experienced in recent years has opened new possibilities to develop systems in some locations with limited or no financial incentives. The fact that a PV solar power system requires no fuel provides a unique and valuable hedging benefit to owners of such systems relative to traditional energy generation assets. Once installed, PV solar power systems can function for 25 or more years with relatively less maintenance or oversight compared to traditional forms of energy generation. In addition to these economic benefits, solar energy has substantial environmental benefits. For example, PV solar power systems generate no greenhouse gas and other emissions and use no or minimal amounts of water compared to traditional forms of electricity generation. Worldwide solar markets continue to develop, aided by the above factors as well as demand elasticity resulting from declining industry average selling prices, both at the module and system level, which make solar power more affordable.

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

Global Markets

We have established and are continuing to develop a global business presence. Energy markets are by their nature localized, with different drivers and market forces impacting electricity generation and demand in a particular region or for a particular application. Accordingly, our business is evolving worldwide and is shaped by the varying ways in which our PV solar energy solutions can be a compelling and economically viable solution to energy needs in different markets and applications. The following markets represent the key markets for our PV solar modules and systems.

The Americas

Multiple markets within the United States, which accounted for 77% of our 2017 net sales, exemplify favorable characteristics for a solar market, including (i) sizeable electricity demand, particularly around growing population centers and industrial areas; (ii) strong demand for renewable energy generation; and (iii) abundant solar resources. In those areas and applications in which these factors are more pronounced, our PV solar energy solutions compete favorably on an economic basis with traditional forms of energy generation. The market penetration of PV solar is also impacted by certain state and federal support programs, including the current 30% federal investment tax credit, as described under “Support Programs.” We have significant experience and a market leadership position in developing, engineering, constructing, and maintaining utility-scale power plants in the United States, particularly in California and other southwestern states, and increasingly in southeastern states. Currently, our solar projects in the United States account for a majority of the advanced-stage pipeline of projects that we are either currently constructing or expect to construct. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for more information about these projects.



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Asia-Pacific

Australia. Australia continues to be a promising region for PV solar energy with strong growth in 2017 that is expected to continue in 2018. This growth is being driven by an increased demand for PPAs from Australian utilities and large industrial off-takers. In recent years, we redirected our strategy in Australia away from EPC services to focus more on utility-scale project development and module sales. Moving into 2018, we expect to pursue a robust Australian development pipeline, including self-developed projects in Queensland, New South Wales, and Victoria. In addition to this growing development pipeline, we plan to deliver modules to various third-party developers in 2018.

Japan. Japan’s electricity markets have various characteristics, which make them attractive markets for PV solar energy. In particular, Japan has few domestic fossil fuel resources and relies heavily on fossil fuel imports. The country has also introduced certain initiatives to limit its reliance on nuclear power as a result of previous issues with such technology. Accordingly, the Japanese government has announced a long-term goal of dramatically increasing installed solar power capacity and has provided various incentives for solar power installations. These programs are expected to maintain strong solar demand over the next several years. We are partnering with local companies to develop, construct, and operate PV solar power systems, which will further mitigate Japan’s dependence on fossil fuel imports and nuclear power. Our sales offerings in Japan also include our solar modules and O&M services. In December 2017, we executed sales agreements for multiple projects in Japan totaling 15 MWAC, which are the first projects we developed, constructed, and sold in the country. We are also in the process of constructing a 59 MWAC project in Ishikawa prefecture, a 40 MWAC project in Miyagi prefecture, and a 19 MWAC project in Tochigi prefecture. We have secured rights to sell power for these projects under separate 20-year PPAs with local power companies.

India. There is significant potential for PV solar energy in India due to its growing energy needs, substantial population centers, lack of electrification to many parts of the country, high energy costs, strong irradiance, and aggressive renewable energy targets set by the government, which include increasing the country’s solar capacity to 100 GW by the year 2022. To support this initiative, several key regulations have been announced relating to ramping up renewable purchase obligations, implementing penal provisions for non-compliance with the obligations under the Indian Electricity Act, budgetary allocations for establishing a Green Transmission Corridor, and the creation of numerous solar parks in various states with dedicated transmission infrastructure to be installed by the government. In addition to these measures, the Indian government also introduced the Renewable Generation Obligations, which mandate that all thermal power generators must implement new renewable energy generation capacity to match 10% of their new thermal generation capacity. Overall, these policy and regulatory measures have been introduced to create significant and sustained demand for PV solar in India. Accordingly, we continue to sell modules and develop utility-scale PV solar projects in India to address the energy and renewable purchase obligation needs of utilities and target the open access industrial and commercial power demand.

In December 2017, we completed the sale of our 25 MWAC Polepally and 10 MWAC Mahabubnagar projects, which are the first projects we developed, constructed, and sold in India. During 2017, we also executed definitive sales agreements for our Winsol and Hindupur projects, which total 155 MWAC, and commissioned two additional projects totaling 40 MWAC in Karnataka, for which we have secured rights to sell power under separate 25-year PPAs to the state owned electricity distribution companies. We continue to maintain our strong module presence in India with over 1.8 GWDC of installed modules.

Europe, the Middle East, and Africa

Europe. Historically, PV solar energy adoption in Europe was driven to a large degree by feed-in-tariffs (“FiTs”) and other incentive programs in Germany, France, the Netherlands, Italy, and Spain. However, PV solar energy in the region is transitioning to its next phase, in which growth will be driven by the degree to which PV solar energy solutions can compete economically with more traditional forms of energy generation, especially in areas with high prevailing electricity prices, strong electricity demand, and strong solar resources. In particular, Germany, France, the Netherlands, and Spain are all running tenders in which utility-scale PV solar projects can bid for capacity. Such tenders and other recent market developments indicate the potential for significant growth in the demand for PV solar energy. We continue



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to pursue module sales activities in France, the Netherlands, Germany, and Turkey and are actively evaluating additional sales opportunities in other markets where we are collaborating with certain local partners for the distribution of our modules or select project development opportunities.

The Middle East. The market potential for solar energy in the Middle East continues to be driven by a combination of strong economic fundamentals, aggressive tariff pricing, abundant solar resources, and robust policy. The United Arab Emirates (the “UAE”), Saudi Arabia, Egypt, and Jordan have established utility-scale solar programs, which are at varying degrees of maturity. The UAE and Jordan lead the region with policy mechanisms designed to ramp up the amount of renewable energy in their generation portfolios. Oman, Qatar, and Kuwait are also promising markets with indicators of future potential for solar energy. While there are several motives for investing in solar energy, including energy security, diversification of generation portfolios, and the minimization of domestic consumption of hydrocarbons, the common factor is that the economics of PV solar energy have made it a compelling energy generation source. Since establishing a presence in the Middle East in 2013, we have approximately 300 MWDC of installed modules across the region.

Africa. Africa offers strong potential for PV solar energy, which can play a useful role in meeting the region’s diversified energy needs. As the overall African market matures, the engagement of experienced project developers and support from international lenders are expected to further the adoption and growth of utility-scale PV solar energy solutions. Our primary focus in Africa is the sale of modules for utility-scale projects. Additionally, we are working with our channel partners to provide various solutions to the distributed generation and commercial and industrial markets.

Support Programs

Although we compete in key markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject, in the near term, to regulation and variability based on the availability and size of government subsidies and economic incentives, such as quotas, renewable portfolio standards, and tendering systems. In addition to these support programs, financial incentives for PV solar energy generation include tax incentives, grants, loans, rebates, and production incentives. Although we expect to become less impacted by, and less dependent on these forms of government support over time, such programs will continue to play varying roles in accelerating the adoption of PV solar power systems around the world.

In Europe, renewable energy targets, in conjunction with tenders for utility-scale PV solar and other support measures, have contributed to the growth in PV solar markets. Renewable energy targets prescribe how much energy consumption must come from renewable sources, while incentive policies and competitive tender policies are intended to support new supply development by providing certainty to investors. Various European Union (“EU”) directives on renewable energy have set targets for all EU member states in support of the goal of a 35% share of energy from renewable sources in the EU by 2030.

Tax incentive programs exist in the United States at both the federal and state level and can take the form of investment and production tax credits, accelerated depreciation, and sales and property tax exemptions and abatements. At the federal level, investment tax credits for business and residential solar systems have gone through several cycles of enactment and expiration since the 1980s. In 2015, the U.S. Congress extended the 30% federal energy investment tax credit (“ITC”) for both residential and commercial solar installations through 2019. The credit will step down to 26% in 2020, 22% in 2021, and remain at 10% permanently beginning in 2022. The ITC has been an important economic driver of solar installations in the United States, and its extension is expected to contribute to greater medium-term demand visibility in the United States. The positive impact of the ITC depends to a large degree on the availability of tax equity for project financing, and any significant reduction in the availability of tax equity in the future could make it more difficult to develop and construct projects requiring financing. The eventual step-down of the ITC to 10% underscores the need for the levelized cost of electricity (“LCOE”), meaning the net present value of a system’s total life cycle costs divided by the quantity of energy that is expected to be produced over the system’s life, of solar systems to continue to decline and remain competitive with other sources of energy generation.



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In October 2017, the U.S. Environmental Protection Agency Administrator issued a Notice of Proposed Rulemaking proposing to repeal the previous U.S. presidential administration’s Clean Power Plan (the “Rule”), which establishes standards to limit carbon dioxide emissions from existing power generation facilities. Accordingly, there is significant uncertainty regarding what effects, if any, the Rule may have on PV solar markets. The implementation and adoption of the Rule remains subject to ongoing litigation initiated by states and other stakeholders.

The majority of states in the United States have enacted legislation adopting Renewable Portfolio Standard (“RPS”) mechanisms. Under a RPS, regulated utilities and other load serving entities are required to procure a specified percentage of their total retail electricity sales to end-user customers from eligible renewable resources, such as solar energy generation facilities, by a specified date. Some programs may further require that a specified portion of the total percentage of renewable energy must come from solar generation facilities or other technologies. RPS legislation and implementing regulations vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state’s RPS, the definition of eligible renewable energy resources, and the extent to which renewable energy credits (certificates representing the generation of renewable energy) qualify for RPS compliance. Measured in terms of the volume of renewable electricity required to meet its RPS mandate, California’s RPS program is the most significant in the United States, and the California market for renewable energy has dominated the western U.S. region for the past several years. First enacted in 2002, California’s RPS statute has been amended several times to increase the overall percentage requirement as well as to accelerate the target date for program compliance. Pursuant to amendments enacted by the California Legislature in 2015, the California RPS program now requires utilities and other obligated load serving entities to procure 50% of their total retail electricity demand from eligible renewable resources by 2030. In 2017, approximately 29% of our total net sales were derived from our systems projects or third-party module sales to solar power projects in California.

Various proposed and contemplated environmental and tax policies may create regulatory uncertainty in the renewable energy sector, including the solar energy sector, and may lead to a reduction or removal of various clean energy programs and initiatives designed to curtail climate change. For more information about the risks associated with these potential government actions, see Item 1A. “Risk Factors – The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results.”

Business Segments

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

See Note 22. “Segment and Geographical Information to our consolidated financial statements included in this Annual Report on Form 10-K for further information on our business segments.




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Modules Business

Solar Modules

Since the inception of First Solar, our flagship module has been manufactured using our advanced CdTe thin film technology. Each Series 4 module is a glass laminate approximately 2ft x 4ft (60cm x 120cm) in size that encapsulates thin film semiconductor materials. Our modules had an average rated power per module of approximately 118 watts, 114 watts, and 107 watts for the years ended December 31, 2017, 2016, and 2015, respectively. Our Series 4 module, which offers up to 8% more energy than conventional crystalline silicon modules of equivalent efficiency rating, is compatible with advanced 1500-volt plant architectures. Our Series 4ATM module variant features anti-reflective coated glass, which further enhances energy production. Our module semiconductor structure is a single-junction polycrystalline thin film that uses CdTe as the absorption layer. CdTe has absorption properties that are well matched to the solar spectrum and can deliver competitive conversion efficiencies using approximately 1-2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules.

In November 2016, we announced plans for the introduction of our Series 6 module, which will be manufactured using similar materials and processes as our legacy module technologies that have been proven in high volume production and have been in the field for over a decade. Each Series 6 module is approximately 4ft x 6ft (123cm x 201cm) in size and is expected to have an average rated power per module of over 420 watts. We expect to begin production of our Series 6 modules in 2018.

Manufacturing Process

We manufacture our CdTe solar modules on high-throughput, integrated production lines in an automated, proprietary, and continuous process. Our solar modules employ a thin layer of semiconductor material to convert sunlight into electricity. Our manufacturing process eliminates the multiple supply chain operators and expensive and time-consuming batch processing steps that are used to produce crystalline silicon solar modules. We currently manufacture solar modules at our Perrysburg, Ohio and Kulim, Malaysia manufacturing facilities, and plan to utilize our manufacturing facility in Ho Chi Minh City, Vietnam for the production of Series 6 modules. As we transition our manufacturing capacity to Series 6 module technology, we expect to ramp down production of our Series 4 modules over the next several years.

Our CdTe manufacturing processes includes the following three stages: (i) the deposition stage, (ii) the cell definition and treatment stage, and (iii) the assembly and test stage. In the deposition stage, panels of transparent oxide-coated glass are robotically loaded onto the production line where they are cleaned, laser-mark identified with a serial number, heated, and coated with thin layers of CdTe and other semiconductor materials using our proprietary vapor transport deposition technology, after which the semiconductor-coated plates are cooled rapidly to increase glass strength. In the cell definition and treatment stage, we use high-speed lasers to transform the large continuous semiconductor coating on the glass plate into a series of interconnected cells that deliver the desired current and voltage output. In this stage, we also treat the semiconductor film using proprietary chemistries and processes to improve the device’s performance, and we apply a metal sputtered back contact. Finally, in the assembly and test stage, we apply busbars, inter-layer material, and a rear glass cover sheet that is laminated to encapsulate the device. A junction box, termination wires, and an under-mount frame (for Series 6 modules) are then applied to complete the assembly. The final assembly stage is the only stage in our production line that requires manual processing.

We maintain a robust quality and reliability assurance program that monitors critical process parameters and measures product performance to ensure that industry and more stringent internal standards are met. Acceptance testing for electrical leakage, visual quality, and power measurement on a solar simulator are also conducted prior to a module being boxed for shipment. The quality and reliability tests complement production surveillance with an ongoing monitoring program, subjecting production modules to accelerated life stress testing to help ensure ongoing conformance to requirements of the International Electrotechnical Commission and Underwriters Laboratories Inc. These programs help assure delivery of power and performance in the field with a high level of product quality and reliability.



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Research, Development, and Engineering

Our R&D model differentiates us from much of our competition due to its vertical integration, from advanced research to product development, manufacturing, and applications. We continue to devote substantial resources to our R&D efforts, which generally focus on continually improving the conversion efficiency and energy yield of our solar modules. We also focus our R&D activities on continuously improving module durability and manufacturing efficiencies, including throughput improvement, volume ramp, and material cost reduction. Based on publicly available information, we lead all PV solar module manufacturers in R&D investment, maintaining a rate of innovation that enables rapid efficiency gains and cost reductions.

In the course of our R&D activities, we explore various technologies in our efforts to sustain competitive differentiation in our modules. We primarily conduct our R&D activities and qualify process and product improvements for full production at our Perrysburg, Ohio plant and then use a systematic process to propagate them to our other production lines. We believe that our systematic approach to technology change management provides continuous improvements and ensures uniform adoption across our production lines. In addition, our CdTe production lines are replicas or near replicas of each other and, as a result, a process or production improvement on one line can be rapidly and reliably deployed to other production lines.

We regularly produce research cells in our laboratories, some of which are tested for performance and certified by independent labs, such as the National Renewable Energy Laboratory. Cell efficiency measures the proportion of light converted to electricity in a single solar cell at standard test conditions. Our research cells are produced using laboratory equipment and methods and are not intended to be representative of our manufacturing capability. Our module conversion efficiency has improved on average more than half a percent every year for the last ten years. We currently hold two world records for CdTe PV efficiency, achieving an independently certified research cell efficiency of 22.1% and a full area module efficiency of 18.2%. We believe that our record cells demonstrate a potential long-term module efficiency entitlement of over 20% using our commercial-scale manufacturing equipment. For information regarding our research and development expense for the years ended December 31, 2017, 2016, and 2015, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Customers

During 2017, we sold the majority of our solar modules (not included in our systems projects) to integrators and operators of systems in the United States, India, and Turkey, and such third-party module sales represented approximately 27% of our total net sales. During 2017, Zorlu Enerji and RCR O’Donnell Griffin Pty, Ltd each accounted for more than 10% of our modules business net sales.

We continue to invest in key geographic markets, particularly in areas with abundant solar resources and sizable electricity demand, and additional customer relationships to diversify our customer base. We also collaborate with strategic partners in community solar solutions, which address the residential and small business sectors to provide a broad range of customers with access to competitively priced solar energy regardless of the suitability of their rooftops. Community solar utilizes relatively small ground-mounted installations that provide clean energy to utilities, which then offer consumers the ability to buy into a specific community installation and benefit from the solar power generated by that resource. The demand for such offerings continues to build as states across the country are beginning to enact community solar policies, and utilities are looking to diversify their energy generation portfolio in order to meet customer demand for affordable, clean energy. We also collaborate with providers of Community Choice Aggregation programs, which allow cities and counties to purchase power on behalf of residents and businesses to provide clean energy options at competitive prices. Our expertise in utility-scale generation and module technology, paired with community solar and/or Community Choice Aggregation, allows residential power consumers to “go solar,” including those who live in apartment buildings or whose home rooftops cannot accommodate solar panels.




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Competition

The solar energy and renewable energy sectors are highly competitive and continually evolving as participants in these sectors strive to distinguish themselves within their markets and compete within the larger electric power industry. We face intense competition for sales of solar modules, which has resulted in and may continue to result in reduced average selling prices and loss of market share. With respect to our modules business, our primary sources of competition are crystalline silicon solar module manufacturers, as well as other thin film solar module manufacturers. In addition, we expect to compete with future entrants into the PV solar industry that offer new technological solutions. We also face competition from semiconductor manufacturers and semiconductor equipment manufacturers or their customers that produce PV solar cells, solar modules, or turn-key production lines. We also compete with companies that currently offer or are developing other renewable energy technologies (including wind, hydroelectric, geothermal, biomass, and tidal technologies), as well as traditional energy generation sources.

Certain of our existing or future competitors may have direct or indirect access to sovereign capital, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time. Among PV solar module manufacturers, the principal methods of competition include sales price per watt, conversion efficiency, energy yield, reliability, warranty terms, and customer payment terms. If competitors reduce module pricing to levels near or below their manufacturing costs, or are able to operate at minimal or negative operating margins for sustained periods of time, our results of operations could be adversely affected. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing, which could adversely affect our results of operations. For additional information, see Item 1A. “Risk Factors – Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time. An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition, and results of operations.”

Raw Materials

Our CdTe module manufacturing process uses approximately 30 types of raw materials and components to construct a solar module. One critical raw material in our production process is CdTe. Of the other raw materials and components, the following are also critical to our manufacturing process: front glass coated with transparent conductive oxide, other semiconductor materials, organics such as photo resist, tempered back glass, frames, packaging components such as interlayer, cord plate/cord plate cap, lead wire, and solar connectors. Before we use these materials and components in our manufacturing process, a supplier must undergo a rigorous qualification process. We continually evaluate new suppliers and currently are qualifying new suppliers and materials. When possible, we attempt to use suppliers that can provide a raw material supply source that is near our manufacturing locations, reducing the cost and lead times for such materials. Several of our key raw materials and components are either single-sourced or sourced from a limited number of suppliers.

Solar Module Collection and Recycling Program

We are committed to extended producer responsibility and take into account the environmental impact of our products over their entire life cycle. As part of such efforts, we established the solar industry’s first comprehensive module collection and recycling program. Our module recycling process is designed to enable the recovery of valuable materials, including the glass and encapsulated semiconductor material, for use in new modules or other products and minimizes the environmental impacts associated with our modules at the end of their useful lives. Approximately 90% of each collected First Solar module can be recycled into materials for reuse. For customer sales contracts that include modules covered under this program, we agree to pay the costs for the collection and recycling of qualifying solar modules, and the end-users agree to notify us, disassemble their solar power systems, package the solar modules for shipment, and revert ownership rights over the modules back to us at the end of the modules’ service lives. We currently have recycling facilities operating at each of our manufacturing facilities in the United States and Malaysia and at our former manufacturing facility location in Germany.



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The EU’s Waste Electronics and Electrical Equipment (“WEEE”) directive places the obligation of recycling (including collection, treatment, and environmentally sound disposal) of electrical and electronic equipment products upon producers, and such directive is applicable to PV solar modules in EU member states. For modules covered under our program that were previously sold into and installed in the EU, we continue to maintain a commitment to cover the estimated collection and recycling costs consistent with our historical program. Additionally, as a result of the transposition of the WEEE directive by the EU member states, we have adjusted our offerings, as required, in various EU member states to ensure compliance with specific EU member state WEEE regulations.

Solar Module Warranties

We provide a limited PV solar module warranty covering defects in materials and workmanship under normal use and service conditions for approximately 10 years. We also typically warrant that modules installed in accordance with agreed-upon specifications will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by 0.5% every year thereafter throughout the approximate 25-year performance warranty period. As an alternative form of our standard limited module power output warranty, we also offer an aggregated or system-level limited module performance warranty. This system-level limited module performance warranty is designed for utility-scale systems and provides 25-year system-level energy degradation protection. For additional information on our solar module warranty programs, refer to Item 1A. “Risk Factors – Problems with product quality or performance, including our Series 4 modules and Series 6 modules, may cause us to incur significant and/or unexpected warranty and related expenses, damage our market reputation, and prevent us from maintaining or increasing our market share.

Systems Business

Project Development

Project development activities generally include (i) site selection and securing rights to acquire or use the site, (ii) obtaining the requisite interconnection and transmission studies, (iii) executing an interconnection agreement, (iv) obtaining environmental and land-use permits, (v) maintaining effective site control, and (vi) entering into a PPA with an off-taker of the power to be generated by the project. The sequence of such development activities varies by international location and, in certain locations, may begin by initially bidding for PPA or off-take agreements. These activities culminate in receiving the right to construct and operate a PV solar power system. Depending on the market opportunity or geographic location, we may acquire projects in various stages of development or acquire project companies from developers in order to complete the development process, construct a system incorporating our modules, and sell the system to a long-term owner. We may also collaborate with local partners in connection with these project development activities. Depending on the type of project or geographic location, PPAs or FiT structures define the price and terms the utility or customer will pay for power produced from the project. Depending primarily on the location, stage of development upon our acquisition of the project, and/or other site attributes, the development cycle typically ranges from one to two years but can be as long as five years. We may be required to incur significant costs for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. If there is a delay in obtaining any required regulatory approvals, we may be forced to incur additional costs or impair our project assets, and the termination rights of the off-taker under the PPA may be triggered.

EPC Services

EPC services include engineering design and related services, BoS procurement, advanced development of grid integration solutions, and construction contracting and management. We provide the majority of our EPC services to our self-developed projects intended to be sold; however, we may also provide EPC services to other system owners such as utilities, independent power producers, and commercial and industrial companies. Depending on the customer and market need, we may provide our full EPC services or any combination of individual products and services within our EPC capabilities.




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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. For PV solar power systems we construct, we typically provide limited warranties for defects in engineering design, installation, and BoS part workmanship for a period of one to two years following the substantial completion of a system or a block within the system. We may also 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, such as irradiance, weather, module degradation, soiling, curtailment, and other conditions that may affect a system’s energy output but are unrelated to quality, design, or construction.

O&M Services

Our typical O&M service arrangements involve the performance of standard activities associated with operating and maintaining a PV solar power system. We perform such activities pursuant to the scope of services outlined in the underlying contract. These activities are considered necessary to optimize system performance and comply with PPAs, other agreements, and regulations. Although the scope of our services may vary by contract, our O&M service arrangements generally include 24/7 system monitoring, certain PPA and other agreement compliance, 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. As part of our O&M services, we also typically provide an effective availability guarantee, which stipulates that a system will be available to generate a certain percentage of total possible energy during a specific period after adjusting for factors outside of our control as the service provider, such as weather, curtailment, outages, force majeure, and other conditions that may affect system availability.

Customers

Our systems customers consist of utilities, independent power producers, commercial and industrial companies, and other system owners, such as investors who are looking for long-term investment vehicles that are expected to generate consistent returns. Such customers may purchase completed systems, which include our solar modules, or any combination of development, EPC services, and/or O&M services. During 2017, the substantial majority of our systems business sales were in North America, and the principal customer of our systems business was Capital Dynamics, Inc. (“Capital Dynamics”), who accounted for more than 10% of our systems business net sales.

In certain markets, the emergence of utility-owned generation has increased the number of potential project buyers as such utility customers benefit from a potentially low cost of capital available through rate-basing utility investments. Given their long-term ownership profile, utility-owned generation customers typically seek to partner with vertically-integrated companies, such as First Solar, who can provide a broad spectrum of utility-scale generation solutions, including reliable PV solar technology, project development and construction, and O&M services, thereby mitigating their long-term ownership risks. The wholesale commercial and industrial market also represents a promising opportunity given our utility-scale PV solar power system expertise. The demand for corporate renewables is accelerating, with corporations worldwide committing to the RE100 campaign, a collaborative, global initiative of influential businesses committed to 100% renewable electricity. We believe we also have a competitive advantage in the commercial and industrial market due to customers’ sensitivity to the bankability and financial viability of their suppliers and geographically diverse operating locations. With our strong development experience, financial strength, and global footprint, we are well positioned to meet their needs. For example, we recently completed the sale of our California Flats project in Monterey County, California, from which Apple Inc. will purchase electricity from 130 MWAC of the project under a 25-year PPA.

Competition

With respect to our systems business, we face competition from other providers of renewable energy solutions, including developers of PV solar power systems and developers of other forms of renewable energy projects, such as wind, hydroelectric, geothermal, biomass, and tidal projects. To the extent other solar module manufacturers become more



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vertically integrated, we expect to face increased competition from such companies as well. We also face competition from other EPC companies and joint venture type arrangements between EPC companies and solar companies. Certain current or potential future competitors may have a low cost of capital and/or access to foreign capital. The decline in module prices over the last several years has increased interest in solar energy worldwide, and there are limited barriers to entry in certain parts of the PV solar value chain, depending on the geographic market. Accordingly, competition at the system level can be intense, thereby exerting downward pressure on system-level average selling prices industry-wide. See Item 1A. “Risk Factors – Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations.”

Research, Development, and Engineering

Our systems related R&D activities are primarily focused on the objective of lowering the LCOE of a PV solar power system through reductions in BoS costs, improved system design, and energy yield enhancements associated with systems that use our modules. Such R&D efforts are also focused on continuing to improve our systems in terms of grid integration and reliability. We conduct our R&D activities for systems primarily in the United States. Innovations related to system design, inverters and power converters, hardware platforms and installation techniques, and know-how, among other things, can and are expected in the future to continue to reduce BoS costs, which can represent a significant portion of the costs associated with the construction of a typical utility-scale PV solar power system. For information regarding our research and development expense for the years ended December 31, 2017, 2016, and 2015, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Own and Operate

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. The ability to do so provides certain potential benefits, including greater control over the sales process and offering a lower risk profile to project buyers. As of December 31, 2017, we owned and operated a number of systems in various geographic markets, including Chile, India, the United States, and the Asia-Pacific region. As an owner and operator of certain U.S. systems, we may be subject to the authority of the Federal Energy Regulatory Commission (“FERC”), as well as various other local, state, and federal regulatory bodies. For more information about risks related to owning and operating such systems, please see Item 1A. “Risk Factors – As an owner and operator of PV solar power systems that deliver electricity to the grid, certain of our affiliated entities may be regulated as public utilities under U.S. federal and state law, which could adversely affect the cost of doing business and limit our growth.” For more information about the economics of such ownership and the impacts on our liquidity see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Intellectual Property

Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We rely primarily on a combination of patents, trademarks, and trade secrets, as well as associate and third-party confidentiality agreements, to safeguard our intellectual property. We regularly file patent applications to protect inventions arising from our R&D activities and are currently pursuing patent applications in the United States and other countries. Our patent applications and any future patent applications might not result in a patent being issued with the scope of the claims we seek, or at all, and any patents we may receive may be challenged, invalidated, or declared unenforceable. In addition, we have registered and/or have applied to register trademarks and service marks in the United States and a number of foreign countries for “First Solar.”

With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among other things, trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of our PV solar module manufacturing processes, including our unique materials sourcing,



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involve proprietary know-how, technology, or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms, and procedures. We have taken security measures to protect these elements. Our R&D personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our associates to assign to us all of the inventions, designs, and technologies they develop during the course of employment with us. We also require our customers and business partners to enter into confidentiality agreements before we disclose sensitive aspects of our modules, technology, or business plans.

We have not been subject to any material intellectual property infringement or misappropriation claims.

Environmental, Health, and Safety Matters

Our operations include the use, handling, storage, transportation, generation, and disposal of hazardous materials and wastes. We are subject to various national, state, local, and international laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water; the use, management, and disposal of hazardous materials and wastes; occupational health and safety; and the cleanup of contaminated sites. Therefore, we could incur substantial costs, including cleanup costs, fines, and civil or criminal sanctions and costs arising from third-party property damage or personal injury claims as a result of violations of, or liabilities under, environmental and occupational health and safety laws and regulations or non-compliance with environmental permits required for our operations. We believe we are currently in substantial compliance with applicable environmental and occupational health and safety requirements and do not expect to incur material expenditures for environmental and occupational health and safety controls in the foreseeable future. However, future developments such as the implementation of new, more stringent laws and regulations, more aggressive enforcement policies, or the discovery of unknown environmental conditions may require expenditures that could have a material adverse effect on our business, financial condition, or results of operations. See Item 1A. “Risk Factors – Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and results of operations.”

Corporate History

We were incorporated in Delaware in February 2006. Our common stock has been listed on The NASDAQ Global Select Market (“NASDAQ”) under the symbol FSLR since our initial public offering in November 2006.

Associates

As of December 31, 2017, we had approximately 4,100 associates (our term for full and part-time employees), including approximately 2,900 in our modules business and approximately 400 associates that work directly in our systems business. The remainder of our associates are in R&D, sales and marketing, and general and administrative positions. None of our associates are currently represented by labor unions or covered by a collective bargaining agreement. As we expand domestically and internationally, we may encounter either regional laws that mandate union representation or associates who desire union representation or a collective bargaining agreement. We believe that our relations with our associates are good.

Information about Geographic Areas

We have significant manufacturing, development, construction, sales, and marketing operations both within and outside the United States. We manufacture our solar modules at our manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia and plan to also utilize our manufacturing facility in Ho Chi Minh City, Vietnam.

As part of our long-term strategic plans, we conduct business in various countries across the world, including the United States, countries in the Asia-Pacific region, India, Europe, the Middle East, and Africa. As a result, we are subject to the legal, tax, political, social, regulatory, and economic conditions of an increasing number of foreign jurisdictions. During 2017, the foreign countries with the greatest concentration of customer risk were India and Turkey which



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accounted for a total of 9% of our consolidated net sales. The international nature of our operations also subjects us to a number of risks, including fluctuations in exchange rates, adverse changes in foreign laws or regulatory requirements, and tariffs, taxes, and other trade restrictions. See Item 1A. “Risk Factors – Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in the United States and/or foreign countries” and “We may be unable to fully execute on our long-term strategic plans, which could have a material adverse effect on our business, financial condition, or results of operations.See Note 22. “Segment and Geographical Information to our consolidated financial statements included in this Annual Report on Form 10-K for information about our net sales and long-lived assets by geographic region.

Available Information

We maintain a website at www.firstsolar.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. The information contained in or connected to our website is not incorporated by reference into this report. We use our website as one means of disclosing material non-public information and for complying with our disclosure obligations under the SEC’s Regulation FD. Such disclosures are typically included within the Investor Relations section of our website at investor.firstsolar.com. Accordingly, investors should monitor such portions of our website in addition to following our press releases, SEC filings, and public conference calls and webcasts. The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports and other information regarding issuers, such as First Solar, that file electronically with the SEC.

Executive Officers of the Registrant

Our executive officers and their ages and positions as of February 22, 2018 were as follows:
Name
 
Age
 
Position
Mark R. Widmar
 
52
 
Chief Executive Officer
Alexander R. Bradley
 
36
 
Chief Financial Officer
Georges Antoun
 
55
 
Chief Commercial Officer
Philip Tymen deJong
 
58
 
Chief Operations Officer
Raffi Garabedian
 
51
 
Chief Technology Officer
Paul Kaleta
 
62
 
Executive Vice President, General Counsel and Secretary
Christopher R. Bueter
 
54
 
Executive Vice President, Human Resources

Mark R. Widmar was appointed Chief Executive Officer in July 2016. He joined First Solar in April 2011 as Chief Financial Officer and also served as First Solar’s Chief Accounting Officer from February 2012 through June 2015. Mr. Widmar also serves as a director on the board of the general partner of 8point3 Energy Partners LP, the joint yieldco formed by First Solar and SunPower Corporation in 2015 to own and operate a portfolio of selected solar generation assets. From March 2015 to June 2016, Mr. Widmar served as the Chief Financial Officer of the general partner of 8point3 Energy Partners LP. Prior to joining First Solar, Mr. Widmar served as Chief Financial Officer of GrafTech International Ltd., a leading global manufacturer of advanced carbon and graphite materials, from May 2006 through March 2011. Prior to joining GrafTech, Mr. Widmar served as Corporate Controller of NCR Inc. from 2005 to 2006, and was a Business Unit Chief Financial Officer for NCR from November 2002 to his appointment as Controller. He also served as a Division Controller at Dell, Inc. from August 2000 to November 2002 prior to joining NCR. Mr. Widmar also held various financial and managerial positions with Lucent Technologies Inc., Allied Signal, Inc., and Bristol Myers/Squibb, Inc. He began his career in 1987 as an accountant with Ernst & Young. Mr. Widmar holds a Bachelor of Science in Business Accounting and a Masters of Business Administration from Indiana University.




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Alexander R. Bradley was appointed interim Chief Financial Officer in July 2016 and confirmed as Chief Financial Officer in October 2016. Mr. Bradley previously served as Vice President, Treasury and Project Finance for First Solar. Mr. Bradley also serves as a director on the board of the general partner of 8point3 Energy Partners LP. From June 2015 to June 2016, Mr. Bradley served as a Vice President of Operations of the general partner of 8point3 Energy Partners LP. Mr. Bradley has led or supported the structuring, sale, and financing of over $10 billion and approximately 2.7 GW of the Company’s worldwide development assets, including several of the largest PV power plant projects in North America. Mr. Bradley’s professional experience includes more than 10 years in investment banking, mergers and acquisitions, project finance, and business development in the United States and internationally. Prior to joining the Company in May 2008, Mr. Bradley worked at HSBC in investment banking and leveraged finance, in London and New York, covering the energy and utilities sector. He received his Master of Arts from the University of Edinburgh, Scotland.

Georges Antoun was appointed Chief Commercial Officer in July 2016. He joined First Solar in July 2012 as Chief Operating Officer before being appointed as President, U.S. in July 2015. Mr. Antoun has over 25 years of operational and technical experience, including leadership positions at several global technology companies. Prior to joining First Solar, Mr. Antoun served as Venture Partner at Technology Crossover Ventures (“TCV”), a private equity and venture firm that he joined in July 2011. Before joining TCV, Mr. Antoun was the Head of Product Area IP & Broadband Networks for Ericsson, based in San Jose, California. Mr. Antoun joined Ericsson in 2007, when Ericsson acquired Redback Networks, a telecommunications equipment company, where Mr. Antoun served as the Senior Vice President of World Wide Sales & Operations. After the acquisition, Mr. Antoun was promoted to Chief Executive Officer of the Redback Networks subsidiary. Prior to Redback Networks, Mr. Antoun spent five years at Cisco Systems, where he served as Vice President of Worldwide Systems Engineering and Field Marketing, Vice President of Worldwide Optical Operations, and Vice President of Carrier Sales. Prior to Cisco Systems, he was the Director of Systems Engineering at Newbridge Networks, a data and voice networking company. Mr. Antoun started his career at Nynex (now Verizon Communications), where he was part of its Science and Technology Division. Mr. Antoun also served as a member of the board of directors of Ruckus Wireless, Inc. and Violin Memory, Inc., both publicly-traded companies. He earned a Bachelor of Science degree in Engineering from the University of Louisiana at Lafayette and a Master’s degree in Information Systems Engineering from NYU Poly.

Philip Tymen deJong was appointed Chief Operating Officer in July 2015. Mr. deJong has comprehensive leadership responsibility for areas including manufacturing, EPC, quality and reliability, supply chain, and product management. Mr. deJong joined First Solar in January 2010 as Vice President, Plant Management and served in several Senior Vice President roles in manufacturing and operations prior to being appointed Senior Vice President, Manufacturing & EPC in January 2015. Prior to joining First Solar, Mr. deJong was Vice President of Assembly/Test Manufacturing for Numonyx Corporation. Prior to that, he worked for 25 years at Intel Corporation, holding various positions in engineering, manufacturing, wafer fabrication management, and assembly/test manufacturing. Mr. deJong holds a Bachelor of Science degree in Industrial Engineering/Mechanical Engineering from Oregon State University and has completed advanced study at the University of New Mexico Anderson School of Management.

Raffi Garabedian has been the Chief Technology Officer of First Solar since May 2012 and manages the Company’s technology, PV module, and power plant system products and roadmaps. Mr. Garabedian joined First Solar in June 2008 as Director of Disruptive Technologies. Prior to First Solar, Mr. Garabedian spent over 15 years in the MEMS (micro-electro-mechanical systems) industry, developing new products ranging from automotive engine control sensors to fiber optic telecommunications switching systems. He was the founding CEO of Touchdown Technologies, Inc., which was acquired by Verigy, as well as Micromachines Inc., which was acquired by Kavlico. Mr. Garabedian is named on approximately 28 issued U.S. patents. Mr. Garabedian earned a Bachelor of Science degree in Electrical Engineering from Rensselaer Polytechnic Institute and a Master of Science degree in Electrical Engineering with a focus on semiconductor and microsystems technology from the University of California Davis.

Paul Kaleta joined First Solar in March 2014 as Executive Vice President & General Counsel. In February 2017, Mr. Kaleta was appointed as First Solar’s corporate secretary. Prior to joining First Solar, Mr. Kaleta was Executive Vice President, General Counsel, Shared Services & Secretary, and Chief Compliance Officer for NV Energy, Inc., which



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was acquired by Berkshire Hathaway’s Energy Group in December 2013. Before that, he was Vice President and General Counsel for Koch Industries, Inc., one of the world’s largest privately held companies with diverse businesses worldwide, including refining, petrochemicals, and commodity trading, among others. He also served in a number of legal and other leadership roles for Koch companies. Before joining Koch, he was Vice President and General Counsel of Niagara Mohawk Power Corporation (now part of National Grid). In private practice, Mr. Kaleta was an equity partner in the Washington D.C. law firm Swidler Berlin LLP and an associate in the Washington D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP. He also served as a federal judicial clerk. Mr. Kaleta is the founding chair of the Southern Nevada Chapter of the “I Have a Dream Foundation” (now “Core Academy-powered by The Rogers Foundation”), a member of the board of directors of Advanced Energy Economy, a member of the client advisory council of Lex Mundi, and has taught both energy law and business ethics and leadership, as an adjunct professor, among other industry professional and community activities. Mr. Kaleta holds a juris doctor degree from Georgetown University Law Center and a bachelor’s degree from Hamilton College.

Christopher R. Bueter was appointed Executive Vice President, Human Resources in February 2016. Mr. Bueter joined First Solar in November 2009 as Global Director for Industrial Relations and also served as Vice President, Human Resources Global Business Development and Corporate Services, Vice President, Global Human Resources and Labor Relations, and Senior Vice President, Human Resources. Prior to joining First Solar, Mr. Bueter served as the Vice President of Global Employee Relations at Dana Corporation, an American-based worldwide supplier of powertrain components. In his 24 years at Dana Corporation, he served in a variety of roles, including Corporate Director of Employee Relations and Distribution Services Division Human Resources Manager. Mr. Bueter holds a Bachelor of Science in human resources management from the University of Toledo, and a juris doctor degree from the University of Toledo Law School.

Item 1A. Risk Factors

An investment in our stock involves a high degree of risk. You should carefully consider the following information, together with the other information in this Annual Report on Form 10-K, before buying shares of our stock. If any of the following risks or uncertainties occur, our business, financial condition, and results of operations could be materially and adversely affected and the trading price of our stock could decline.

Risks Related to Our Markets and Customers

Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time. An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition, and results of operations.

In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. For example, we estimate that in 2017, over 20 GW of capacity was added by solar module manufacturers, particularly but not exclusively in Asia. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing. During the past several years, industry average selling prices per watt have declined, at times significantly, both at the module and system levels, as competitors have reduced prices to sell inventories worldwide. There may be additional pressure on global demand and average selling prices in the future resulting from fluctuating demand in certain major solar markets such as China. If our competitors reduce module pricing to levels near or below their manufacturing costs, or are able to operate at minimal or negative operating margins for sustained periods of time, or if demand for PV modules does not grow sufficiently to justify the current production supply, our business, financial condition, and results of operations could be adversely affected.




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If PV solar and related technologies are not suitable for widespread adoption at economically attractive rates of return or if sufficient additional demand for solar modules, related technologies, and systems does not develop or takes longer to develop than we anticipate, our net sales and profit may flatten or decline and we may be unable to sustain profitability.

In comparison to traditional forms of energy generation, the solar energy market continues to be at a relatively early stage of development. If utility-scale PV solar technology proves unsuitable for widespread adoption at economically attractive rates of return or if additional demand for solar modules and systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient net sales to sustain profitability. In addition, demand for solar modules, related technologies, and systems in our targeted markets may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of utility-scale PV solar technology in our targeted markets, as well as the demand for solar modules and systems generally, including the following:

cost-effectiveness of the electricity generated by PV solar power systems compared to conventional energy sources, such as natural gas (which fuel source may be subject to significant price fluctuations from time to time), and other non-solar renewable energy sources, such as wind, geothermal, and hydroelectric;

changes in tax, trade remedies, and other public policy, as well as in economic, market, and other conditions that affect the price of, and demand for, conventional energy resources, non-solar renewable energy resources (e.g., wind and hydroelectric), and energy efficiency programs and products, including increases or decreases in the prices of natural gas, coal, oil, and other fossil fuels and in the prices of competing renewable resources;

the extent of competition, barriers to entry, and overall conditions and timing relating to the development of solar in new and emerging market segments such as commercial and industrial customers, community solar, community choice aggregators, and microgrids, among other customer segments;

availability, substance, and magnitude of support programs including federal, state, and local government subsidies, incentives, targets, and renewable portfolio standards, among other policies and programs, to accelerate the development of the solar industry;

performance, reliability, and availability of energy generated by PV solar power systems compared to conventional and other non-solar renewable energy sources and products, particularly conventional energy generation capable of providing 24-hour, non-intermittent baseload power;

the development, functionality, scale, cost, and timing of storage solutions; and

changes in the amount and priorities of capital expenditures by end-users of solar modules and systems (e.g., utilities), which capital expenditures tend to decrease when the economy slows or when interest rates increase, thereby resulting in redirection away from solar generation to development of competing forms of electric generation and to distribution (e.g., smart grid), transmission, and energy efficiency measures.

The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results.

Although we believe that solar energy will experience widespread adoption in those applications where it competes economically with traditional forms of energy without any support programs, in certain markets our net sales and profit remain subject to variability based on the availability and size of government subsidies and economic incentives. Federal, state, and local governmental bodies in many countries have provided subsidies in the form of FiTs, rebates,



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tax incentives, and other incentives to end-users, distributors, system integrators, and manufacturers of PV solar products. Many of these support programs expire, phase out over time, require renewal by the applicable authority, or may be amended. A summary of certain recent developments in the major government support programs that may impact our business appears under Item 1. “Business – Support Programs.” To the extent these support programs are reduced earlier than previously expected or are changed retroactively, such changes could negatively impact demand and/or price levels for our solar modules and systems, lead to a reduction in our net sales, and adversely impact our operating results. Another consideration in the U.S. market, and to a lesser extent in other global markets, is the effect of governmental land-use planning policies and environmental policies on utility-scale PV solar development. The adoption of restrictive land-use designations or environmental regulations that proscribe or restrict the siting of utility-scale solar facilities could adversely affect the marginal cost of such development.

In addition, policies of the U.S. presidential administration may create regulatory uncertainty in the renewable energy industry, including the solar industry, and our business, financial condition, and results of operations could be adversely affected. Members of the U.S. presidential administration, including representatives of the U.S. Department of Energy, have made public statements that indicate that the administration may not be supportive of various clean energy programs and initiatives designed to curtail climate change. For example, in June 2017, the U.S. President announced that the U.S. would withdraw from participation in the 2015 Paris Agreement on climate change mitigation. In addition, the administration has indicated that it may be supportive of overturning or modifying policies of or regulations enacted by the prior administration that placed limitations on gas and coal electricity generation, mining, and/or exploration. Additionally, in October 2017, the U.S. Environmental Protection Agency Administrator issued a Notice of Proposed Rulemaking, proposing to repeal the previous U.S. presidential administration’s Clean Power Plan, which establishes standards to limit carbon dioxide emissions from existing power generation facilities. If the current U.S. administration and/or the U.S. Congress takes action, or continues to publicly speak out about the need to take action, in furtherance of any such policies, we would be subject to significant risks, including the following:

a reduction or removal of clean energy programs and initiatives and the incentives they provide may diminish the market for future solar energy off-take agreements and reduce the ability for solar developers to compete for future solar energy off-take agreements, which may reduce incentives for project developers to develop solar projects and purchase PV solar modules;

any limitations on the value or availability to potential investors of tax incentives that benefit solar energy projects such as the ITC and accelerated depreciation deductions could result in such investors generating reduced revenues and economic returns and facing a reduction in the availability of affordable financing, thereby reducing demand for PV solar modules. The ITC is a U.S. federal incentive that provides an income tax credit to the owner of the project after the project is placed in service of up to 30% of eligible basis. Under the Modified Accelerated Cost-Recovery System, owners of equipment used in a solar project may claim all of their depreciation deductions with respect to such equipment over five years, even though the useful life of such equipment is generally greater than five years. In addition, in December 2017, the U.S. government enacted comprehensive tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Under the Tax Act, qualified property placed in service after September 22, 2017 and before January 1, 2023 is generally eligible for 100% expensing, and such property placed in service after December 31, 2022 and before January 1, 2027 is generally eligible for expensing at lower percentages. However, the Tax Act also reduces the U.S. corporate income tax rate to 21% for tax years beginning after December 31, 2017, which could diminish the capacity of potential investors to benefit from incentives such as the ITC and reduce the value of accelerated depreciation deductions and expensing, thereby reducing the relative attractiveness of solar projects as an investment; and

any effort to overturn federal and state laws, regulations, or policies that are supportive of solar energy generation or that remove costs or other limitations on other types of electricity generation that compete with solar energy projects could negatively impact our ability to compete with traditional forms of electricity generation and materially and adversely affect our business.




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Application of U.S. trade laws, or trade laws of other countries, may also impact, either directly or indirectly, our operating results. For example, in April 2017, a U.S.-based manufacturer of solar cells filed a petition under Sections 201 and 202 of the Trade Act of 1974 for global safeguard relief with the U.S. International Trade Commission (the “USITC”). Such petition requested, among other things, the imposition of certain tariffs on crystalline silicon solar cells imported into the United States and the establishment of a minimum price per watt on imported crystalline silicon solar modules. In September 2017, the USITC determined such products are being imported into the United States in such increased quantities as to be a substantial cause of serious injury to the relevant domestic industry and subsequently recommended various remedies to the U.S. President. In January 2018, the President proclaimed tariffs on imported crystalline silicon modules, and a tariff-rate quota on imported crystalline silicon cells, over a four-year period, with the tariff on modules, and the tariff on cells above the first 2.5 GWDC of imports, starting at 30% for the February 2018 to February 2019 period and declining by five percentage points in each subsequent 12-month period. Thin film solar cell products, such as our CdTe technology, are expressly excluded from the tariffs. Some countries and companies have challenged the tariffs under the rules of the World Trade Organization and U.S. law. It is unknown if such tariffs will be applied as originally proclaimed, or how such tariffs, or any other U.S. or global trade remedies or other trade barriers, may directly or indirectly affect U.S. or global markets for solar energy and our business, financial condition, and results of operations.

These examples show that established markets for PV solar development, such as the U.S. market, face uncertainties arising from policy, regulatory, and governmental constraints. While the expected potential of the emerging markets we are targeting is significant, policy promulgation and market development are especially vulnerable to governmental inertia, political instability, the imposition of trade remedies and other trade barriers, geopolitical risk, fossil fuel subsidization, potentially stringent localization requirements, and limited available infrastructure.

We may be unable to fully execute on our long-term strategic plans, which could have a material adverse effect on our business, financial condition, or results of operations.

We face numerous difficulties in executing on our long-term strategic plans, particularly in new foreign jurisdictions, including the following:

difficulty in accurately prioritizing geographic markets that we can most effectively and profitably serve with our PV offerings, including miscalculations in overestimating or underestimating addressable market demand;

difficulty in competing against companies who may have greater financial resources and/or a more effective or established localized business presence and/or an ability to operate with minimal or negative operating margins for sustained periods of time;

difficulty in overcoming the inertia involved in changing local electricity ecosystems as necessary to accommodate large-scale PV solar deployment and integration;

adverse public policies in countries we operate in and/or are pursuing, including local content requirements, the imposition of trade remedies, or capital investment requirements;

business climates, such as that in China, that may have the effect of putting foreign companies at a disadvantage relative to domestic companies;

unstable economic, social, and/or operating environments in foreign jurisdictions, including social unrest, currency, inflation, and interest rate uncertainties;

the possibility of applying an ineffective commercial approach to targeted markets, including product offerings that may not meet market needs;

difficulty in generating sufficient sales volumes at economically sustainable profitability levels;



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difficulty in timely identifying, attracting, training, and retaining qualified sales, technical, and other personnel in geographies targeted for expansion;

difficulty in maintaining proper controls and procedures as we expand our business operations both in terms of complexity and geographical reach, including transitioning certain business functions to low-cost geographies, with any material control failure potentially leading to reputational damage and loss of confidence in our financial reporting accuracy;

difficulty in competing successfully for market share in overall solar markets as a result of the success of companies participating in the global rooftop PV solar market, which is a segment in which we do not have significant historical experience;

difficulty in establishing and implementing a commercial and operational approach adequate to address the specific needs of the markets we are pursuing;

difficulty in identifying effective local partners and developing any necessary partnerships with local businesses on commercially acceptable terms; and

difficulty in balancing market demand and manufacturing production in an efficient and timely manner, potentially causing our manufacturing capacity to be constrained in some future periods or over-supplied in others.

In addition, please see the Risk Factors entitled “Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in the United States and/or foreign countries,” and “The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results.”

We may be unable to profitably provide new solar offerings or achieve sufficient market penetration with such offerings.

We may expand our portfolio of offerings to include solutions that build upon our core competencies but for which we have not had significant historical experience, including variations in our traditional product offerings or other offerings related to commercial and industrial customers and community solar. We cannot be certain that we will be able to ascertain and allocate the appropriate financial and human resources necessary to grow these business areas. We could invest capital into growing these businesses but fail to address market or customer needs or otherwise not experience a satisfactory level of financial return. Also, in expanding into these areas, we may be competing against companies that previously have not been significant competitors, such as companies that currently have substantially more experience than we do in the residential, commercial and industrial, or other targeted offerings. If we are unable to achieve growth in these areas, our overall growth and financial performance may be limited relative to our competitors and our operating results could be adversely impacted.

An increase in interest rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for customers to finance the cost of a PV solar power system and could reduce the demand for our modules or systems and/or lead to a reduction in the average selling price for such offerings.

Many of our customers and our systems business depend on debt and/or equity financing to fund the initial capital expenditure required to develop, build, and/or purchase a PV solar power system. As a result, an increase in interest rates, or a reduction in the supply of project debt financing or tax equity investments (including reductions due to a



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change in tax related incentives that benefit tax equity investors, such as the reduction of the U.S. corporate income tax rate to 21% for tax years beginning after December 31, 2017 under the Tax Act, which could reduce the value of these incentives), could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers or our systems business to secure the financing necessary to develop, build, purchase, or install a PV solar power system on favorable terms, or at all, and thus lower demand for our solar modules, which could limit our growth or reduce our net sales. See the Risk Factor entitled “The reduction, elimination, or expiration of government subsidies, economic incentives, tax incentives, renewable energy targets, and other support for on-grid solar electricity applications, or other adverse public policies, such as tariffs or other trade remedies imposed on solar cells and modules, could negatively impact demand and/or price levels for our solar modules and systems and limit our growth or lead to a reduction in our net sales, thereby adversely impacting our operating results” for additional information. In addition, we believe that a significant percentage of our customers install systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates and the reduction of the U.S. corporate income tax rate as described above could lower an investor’s return on investment in a system, increase equity return requirements, or make alternative investments more attractive relative to PV solar power systems and, in each case, could cause these customers to seek alternative investments.

Risks Related to our Operations, Manufacturing, and Technology

Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties.

Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and increase both our manufacturing capacity and production throughput over time in a cost-effective and efficient manner. If we cannot do so, we may be unable to expand our business, decrease our manufacturing cost per watt, maintain our competitive position, satisfy our contractual obligations, sustain profitability, or create long-term shareholder value. Our ability to expand production capacity, or to convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, is subject to significant risks and uncertainties, including the following:

delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as our inability to secure successful contracts with equipment vendors;

our custom-built equipment taking longer and costing more to manufacture than expected and not operating as designed;

delays or denial of required approvals by relevant government authorities;

being unable to hire qualified staff;

failure to execute our expansion or conversion plans effectively;

manufacturing concentration risk resulting from a current majority of our production lines worldwide being located in one geographic area, Malaysia, and the possible inability to meet customer demand in the event of compromises to shipping processes, supply chain, or other aspects of such facility;

difficulty in balancing market demand and manufacturing production in an efficient and timely manner, potentially causing our manufacturing capacity to be constrained in some future periods or over-supplied in others; and




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incurring manufacturing asset write-downs, write-offs, and other charges and costs, which may be significant, during those periods in which we idle, slow down, shut down, convert, or otherwise adjust our manufacturing capacity.

We face intense competition from manufacturers of crystalline silicon solar modules, as well as other thin film solar modules; if global supply exceeds global demand, it could lead to a further reduction in the average selling price for PV solar modules, which could reduce our net sales and adversely affect our results of operations.

The solar and renewable energy industries are highly competitive and are continually evolving as participants strive to distinguish themselves within their markets and compete with the larger electric power industry. Within the global PV solar industry, we face intense competition from crystalline silicon solar module manufacturers and other thin film solar module manufacturers. Existing or future solar module manufacturers might be acquired by larger companies with significant capital resources, thereby further intensifying competition with us. In addition, the introduction of a low cost disruptive technology could adversely affect our ability to compete, which could reduce our net sales and adversely affect our results of operations.

Even if demand for solar modules continues to grow, the rapid manufacturing capacity expansion undertaken by many module manufacturers, particularly manufacturers of crystalline silicon cells and modules, has created and may continue to cause periods of structural imbalance in which supply exceeds demand. See the Risk Factor entitled “Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time. An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition, and results of operations,” for additional information. In addition, we believe any significant decrease in the cost of silicon feedstock or polysilicon would reduce the manufacturing cost of crystalline silicon modules and lead to further pricing pressure for solar modules and potentially an oversupply of solar modules. We also believe many crystalline silicon cell and wafer manufacturers are transitioning from lower efficiency Back Surface Field (“BSF”) multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency Passivated Emitter Rear Contact (“PERC”) multi-crystalline and mono-crystalline cells at competitive cost structures. As a result, we expect that in the future, our primary competition might transition to multi-crystalline and mono-crystalline PERC based modules with higher conversion efficiencies. Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC solar modules are pursuing the commercialization of bifacial modules that also capture diffuse irradiance on the back side of a module. Such technology can improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications and BoS configurations, which could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce.

During any such period, our competitors could decide to reduce their sales prices in response to competition, even below their manufacturing costs, in order to generate sales, and may do so for a sustained period. Other competitors may have direct or indirect access to sovereign capital, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time. As a result, we may be unable to sell our solar modules or systems at attractive prices, or for a profit, during any period of excess supply of solar modules, which would reduce our net sales and adversely affect our results of operations. Additionally, we may decide to lower our average selling prices to certain customers in certain markets in response to competition, which could also reduce our net sales and adversely affect our results of operations.

Problems with product quality or performance, including our Series 4 modules and Series 6 modules, may cause us to incur significant and/or unexpected warranty and related expenses, damage our market reputation, and prevent us from maintaining or increasing our market share.

We perform a variety of module quality and life tests under different conditions upon which we base our assessments and warranty of module performance over the duration of the warranty. However, if our thin film solar modules,



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including our Series 4 modules and Series 6 modules, perform below expectations, we could experience significant warranty and related expenses, damage to our market reputation, and erosion of our market share. With respect to our modules, we provide a limited warranty covering defects in materials and workmanship under normal use and service conditions for approximately 10 years. We also typically warrant that modules installed in accordance with agreed-upon specifications will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by 0.5% every year thereafter throughout the approximate 25-year performance warranty period. As an alternative form of our standard limited module power output warranty, we also offer an aggregated or system-level limited module performance warranty. This system-level limited module performance warranty is designed for utility-scale systems and provides 25-year system-level energy degradation protection. This warranty represents a practical expedient to address the challenge of identifying, from the potential millions of modules installed in a utility-scale system, individual modules that may be performing below warranty thresholds by focusing on the aggregate energy generated by the system rather than the power output of individual modules. The system-level limited module performance warranty is typically calculated as a percentage of a system’s expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty. As a result of these programs, we bear the risk of product warranty claims long after we have sold our solar modules and recognized net sales.

If any of the assumptions used in estimating our module warranties prove incorrect, we could be required to accrue additional expenses, which could adversely impact our financial position, operating results, and cash flows. Although we have taken significant precautions to avoid a manufacturing excursion from occurring, any manufacturing excursions, including any commitments made by us to take remediation actions in respect of affected modules beyond our warranties, could adversely impact our reputation, financial position, operating results, and cash flows.

Although our module performance warranties extend for 25 years, our oldest solar modules manufactured during the qualification of our pilot production line have only been in use since 2001. Accordingly, our warranties are based on a variety of quality and life tests that enable predictions of durability and future performance. These predictions, however, could prove to be materially different from the actual performance during the warranty period, causing us to incur substantial expense to repair or replace defective solar modules or provide financial remuneration in the future. For example, our solar modules, including our Series 4 modules and Series 6 modules, could suffer various failure modes, including breakage, delamination, corrosion, or performance degradation in excess of expectations, and our manufacturing operations or supply chain could be subject to materials or process variations that could cause affected modules to fail or underperform compared to our expectations. These risks could be amplified as we implement design and process changes in connection with our efforts to improve our products and accelerate module conversion efficiencies as part of our long-term strategic plans and as we transition to Series 6 module manufacturing. In addition, as we increase the number of installations in extreme climates, we may experience increased failure rates due to deployment into such field conditions. Any widespread product failures may damage our market reputation, cause our net sales to decline, require us to repair or replace the defective modules or provide financial remuneration, and result in us taking voluntary remedial measures beyond those required by our standard warranty terms to enhance customer satisfaction, which could have a material adverse effect on our operating results.

In resolving claims under both the limited defect and power output warranties, we typically have the option of either repairing or replacing the covered modules or, under the limited power output warranty, providing additional modules to remedy the power shortfall or making certain cash payments; however, historical versions of our module warranty did not provide a refund remedy. Consequently, we may be obligated to repair or replace the covered modules under such historical programs. As our manufacturing process may change from time-to-time in accordance with our technology roadmap, we may elect to stop production of older versions of our modules that would constitute compatible replacement modules. In some jurisdictions, our inability to provide compatible replacement modules could potentially expose us to liabilities beyond the limitations of our module warranties, which could adversely impact our reputation, financial position, operating results, and cash flows.

For PV solar power systems we construct, we typically provide limited warranties for defects in engineering design, installation, and BoS part workmanship for a period of one to two years following the substantial completion of a



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system or a block within the system. In resolving claims under such BoS warranties, we have the option of remedying the defect through repair or replacement. As with our modules, these warranties are based on a variety of quality and life tests that enable predictions of durability and future performance. Any failures in BoS equipment or system construction beyond our expectations may also adversely impact our reputation, financial position, operating results, and cash flows.

Our failure to further refine our technology, reduce module manufacturing and BoS costs, and develop and introduce improved PV products could render our solar modules or systems uncompetitive and reduce our net sales, profitability, and/or market share.

We need to continue to invest significant financial resources in R&D to continue to improve our module conversion efficiencies, lower the LCOE of our PV solar power systems, and otherwise keep pace with technological advances in the solar industry. However, R&D activities are inherently uncertain, and we could encounter practical difficulties in commercializing our research results. We seek to continuously improve our products and processes, including, for example, our transition to Series 6 module manufacturing, and the resulting changes carry potential risks in the form of delays, performance, additional costs, or other unintended contingencies. In addition, our significant expenditures on R&D may not produce corresponding benefits. Other companies are developing a variety of competing PV technologies, including advanced multi-crystalline silicon cells, PERC or advanced p-type crystalline silicon cells, high-efficiency n-type crystalline silicon cells, copper indium gallium diselenide thin films, amorphous silicon thin films, and new emerging technologies such as hybrid perovskites, which could produce solar modules or systems that prove more cost-effective or have better performance than our solar modules or systems.

In addition, other companies could potentially develop a highly reliable renewable energy system that mitigates the intermittent power generation drawback of many renewable energy systems, or offer other value-added improvements from the perspective of utilities and other system owners, in which case such companies could compete with us even if the LCOE associated with such new systems is higher than that of our systems. As a result, our solar modules or systems may be negatively differentiated or rendered obsolete by the technological advances of our competitors, which would reduce our net sales, profitability, and/or market share. In addition, we often forward price our products and services in anticipation of future cost reductions and technology improvements, and thus, an inability to further refine our technology and execute our module technology and cost reduction roadmaps could adversely affect our operating results.

If our estimates regarding the future costs of collecting and recycling CdTe solar modules covered by our solar module collection and recycling program are incorrect, we could be required to accrue additional expenses and face a significant unplanned cash burden.

As necessary, we fund any incremental amounts for our estimated collection and recycling obligations 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. We estimate the cost of our collection and recycling obligations based on the present value of the expected probability-weighted future cost of collecting and recycling the solar modules, which includes estimates for the cost of packaging materials; the cost of freight from the solar module installation sites to a recycling center; the material, labor, capital costs; the scale of recycling centers; and an estimated third-party profit margin and return on risk for collection and recycling services. We base these estimates on (i) our experience collecting and recycling our solar modules, (ii) the expected timing of when our solar modules will be returned for recycling, and (iii) the expected economic conditions at the time the solar modules will be collected and recycled. If our estimates prove incorrect, we could be required to accrue additional expenses and could also face a significant unplanned cash burden at the time we realize our estimates are incorrect or end-users return their modules, which could adversely affect our operating results. In addition, participating end-users can return their modules covered under the collection and recycling program at any time. As a result, we could be required to collect and recycle covered CdTe solar modules earlier than we expect.




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Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

Protection of our proprietary processes, methods, and other technology is critical to our business. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies. We rely primarily on patents, trademarks, trade secrets, copyrights, and contractual restrictions to protect our intellectual property. We regularly file patent applications to protect certain inventions arising from our R&D and are currently pursuing such patent applications in various countries in accordance with our strategy for intellectual property in that jurisdiction. Our existing patents and future patents could be challenged, invalidated, circumvented, or rendered unenforceable. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not be sufficient to provide meaningful protection against competitors or against competitive technologies.

We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation, and other trade secrets to develop and maintain our competitive position. Although we generally enter into confidentiality agreements with our associates and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets, and proprietary manufacturing expertise, methods, and compounds could have a material adverse effect on our business. In addition, effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in some foreign countries, especially any developing countries into which we may expand our operations. In some countries, we have not applied for patent, trademark, or copyright protection.

Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Policing unauthorized use of proprietary technology can be difficult and expensive. Additionally, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. We cannot ensure that the outcome of such potential litigation will be in our favor, and such litigation may be costly and may divert management attention and other resources away from our business. An adverse determination in any such litigation may impair our intellectual property rights and may harm our business, prospects, and reputation. In addition, we have no insurance coverage against such litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties.

Some of our manufacturing equipment is customized and sole sourced. If our manufacturing equipment fails or if our equipment suppliers fail to perform under their contracts, we could experience production disruptions and be unable to satisfy our contractual requirements.

Some of our manufacturing equipment, including manufacturing equipment related to the production of our Series 6 modules, is customized to our production lines based on designs or specifications that we provide to equipment manufacturers, which then undertake a specialized process to manufacture the custom equipment. As a result, the equipment is not readily available from multiple vendors and would be difficult to repair or replace if it were to become delayed, damaged, or stop working. If any piece of equipment fails, production along the entire production line could be interrupted. In addition, the failure of our equipment manufacturers to supply equipment in a timely manner or on commercially reasonable terms could delay our expansion or conversion plans, otherwise disrupt our production schedule, and/or increase our manufacturing costs, all of which would adversely impact our operating results.




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Several of our key raw materials and components are either single-sourced or sourced from a limited number of third-party suppliers, and their failure to perform could cause manufacturing delays and impair our ability to deliver solar modules to customers in the required quality and quantities and at a price that is profitable to us.

Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Several of our key raw materials and components are either single-sourced or sourced from a limited number of third-party suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and adversely impact our operations. In addition, some of our suppliers are smaller companies that may be unable to supply our increasing demand for raw materials and components as we expand our business. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. A constraint on our production may result in our inability to meet our capacity plans and/or our obligations under our customer contracts, which would have an adverse impact on our business. Additionally, reductions in our production volume may put pressure on suppliers, resulting in increased material and component costs.

A disruption in our supply chain for CdTe could interrupt or impair our ability to manufacture solar modules and could adversely impact our profitability and long-term growth prospects.

A key raw material used in our module production process is a CdTe compound. Tellurium, one of the main components of CdTe, is mainly produced as a by-product of copper refining, and therefore, its supply is largely dependent upon demand for copper. Our supply of CdTe could be limited if any of our current suppliers or any of our future suppliers are unable to acquire an adequate supply of tellurium in a timely manner or at commercially reasonable prices. If our current suppliers or any of our future suppliers cannot obtain sufficient tellurium, they could substantially increase prices or be unable to perform under their contracts. Furthermore, if our competitors begin to use or increase their demand for tellurium, our requirements for tellurium increase, new applications for tellurium become available, or adverse trade laws or policies restrict our ability to obtain tellurium from foreign vendors or make doing so cost prohibitive, the supply of tellurium and related CdTe compounds could be reduced and prices could increase. As we may be unable to pass such increases in the costs of our raw materials through to our customers, a substantial increase in tellurium prices or any limitations in the supply of tellurium could adversely impact our profitability and long-term growth objectives.

If any future production lines are not built in line with our committed schedules, it may impair any future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.

If we are unable to systematically replicate our production lines as necessary over time and achieve and sustain similar operating metrics in our future production lines as we have achieved at our existing production lines, such as the future production lines at our manufacturing facility in Ho Chi Minh City, Vietnam, our manufacturing capacity could be substantially constrained, our manufacturing costs per watt could increase, and our growth could be limited. Such factors may result in lower net sales and lower net income than we anticipate. For instance, future production lines could produce solar modules that have lower conversion efficiencies, higher failure rates, and higher rates of degradation than solar modules from our existing production lines, and we could be unable to determine the cause of the lower operating metrics or develop and implement solutions to improve performance.

Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in the United States and/or foreign countries.

We have significant manufacturing, development, construction, sales, and marketing operations both within and outside the United States and expect to continue to expand our operations worldwide. As a result, we are subject to the legal, political, social, tax, and regulatory requirements, and economic conditions of many jurisdictions.




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Risks inherent to international operations include, but are not limited to, the following:

difficulty in enforcing agreements in foreign legal systems;

difficulty in forming appropriate legal entities to conduct business in foreign countries and the associated costs of forming those legal entities;

varying degrees of protection afforded to foreign investments in the countries in which we operate and irregular interpretations and enforcement of laws and regulations in such jurisdictions;

foreign countries may impose additional income and withholding taxes or otherwise tax our foreign operations, impose tariffs, or adopt other restrictions on foreign trade and investment, including currency exchange controls;

fluctuations in exchange rates may affect demand for our products and services and may adversely affect our profitability and cash flows in U.S. dollars to the extent that our net sales or our costs are denominated in a foreign currency and the cost associated with hedging the U.S. dollar equivalent of such exposures is prohibitive; the longer the duration of such foreign currency exposure, the greater the risk;

anti-corruption compliance issues, including the costs related to the mitigation of such risk;

risk of nationalization or other expropriation of private enterprises;

changes in general economic and political conditions in the countries in which we operate, including changes in government incentive provisions;

unexpected adverse changes in U.S. or foreign laws or regulatory requirements, including those with respect to environmental protection, import or export duties, and quotas;

opaque approval processes in which the lack of transparency may cause delays and increase the uncertainty of project approvals;

difficulty in staffing and managing widespread operations;

difficulty in repatriating earnings;

difficulty in negotiating a successful collective bargaining agreement in applicable foreign jurisdictions;

trade barriers such as export requirements, tariffs, taxes, local content requirements, anti-dumping regulations and requirements, and other restrictions and expenses, which could increase the effective price of our solar modules and make us less competitive in some countries; and

difficulty of, and costs relating to, compliance with the different commercial and legal requirements of the overseas countries in which we offer and sell our solar modules.

Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social, and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.




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Risks Related to Our Systems Business

Project development or construction activities may not be successful; projects under development may not receive required permits, real property rights, PPAs, interconnection, and transmission arrangements; or financing or construction may not commence or proceed as scheduled, which could increase our costs and impair our ability to recover our investments.

The development and construction of solar energy generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for land and interconnection rights, preliminary engineering, permitting, legal services, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. Success in developing a particular project is contingent upon, among other things:

obtaining financeable land rights, including land rights for the project site, transmission lines, and environmental mitigation;

entering into financeable arrangements for the purchase of the electrical output and renewable energy attributes generated by the project;

receipt from governmental agencies of required environmental, land-use, and construction and operation permits and approvals;

receipt of tribal government approvals for projects on tribal land;

receipt of governmental approvals related to the presence of any protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources;

negotiation of development agreements, public benefit agreements, and other agreements to compensate local governments for project impacts;

negotiation of state and local tax abatement and incentive agreements;

receipt of rights to interconnect the project to the electric grid or to transmit energy;

negotiation of satisfactory EPC agreements;

securing necessary rights of way for access and transmission lines;

securing necessary water rights for project construction and operation;

securing appropriate title coverage, including coverage for mineral rights, mechanics’ liens, etc.;

obtaining financing, including debt, equity, and funds associated with the monetization of tax credits and other tax benefits;

payment of PPA, interconnection, and other deposits (some of which are non-refundable);

providing required payment and performance security for the development of the project, such as through the provision of letters of credit; and

timely implementation and satisfactory completion of construction.




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Successful completion of a particular project may be adversely affected, delayed and/or rendered infeasible by numerous factors, including:

delays in obtaining and maintaining required governmental permits and approvals, including appeals of approvals obtained;

potential permit and litigation challenges from project stakeholders, including local residents, environmental organizations, labor organizations, tribes, and others who may oppose the project;

in connection with any such permit and litigation challenges, grants of injunctive relief to stop development and/or construction of a project;

discovery of unknown impacts to protected or endangered species or habitats, migratory birds, wetlands or other jurisdictional water resources, and/or cultural resources at project sites;

discovery of unknown title defects;

discovery of unknown environmental conditions;

unforeseen engineering problems;

construction delays and contractor performance shortfalls;

work stoppages;

cost over-runs;

labor, equipment, and material supply shortages, failures, or disruptions;

cost or schedule impacts arising from changes in local, state, or federal land-use or regulatory policies;

changes in electric utility procurement practices;

risks arising from transmission grid congestion issues;

project delays that could adversely impact our ability to maintain interconnection rights;

additional complexities when conducting project development or construction activities in foreign jurisdictions (either on a stand-alone basis or in collaboration with local business partners), including operating in accordance with the FCPA and applicable local laws and customs;

unfavorable tax treatment or adverse changes to tax policy;

adverse weather conditions;

water shortages;

adverse environmental and geological conditions; and

force majeure and other events out of our control.




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If we fail to complete the development of a solar energy project, fail to meet one or more agreed upon target construction milestone dates, fail to achieve system-level capacity, or fail to meet other contract terms, we may be subject to forfeiture of significant deposits under PPAs or interconnection agreements or termination of such agreements, incur significant liquidated damages, penalties, and/or other obligations under other project related agreements, and may not be able to recover our investment in the project. If we are unable to complete the development of a solar energy project, we may impair some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized.

We may be unable to acquire or lease land, obtain necessary interconnection and transmission rights, and/or obtain the approvals, licenses, permits, and electric transmission grid interconnection and transmission rights necessary to build and operate PV solar power systems in a timely and cost effective manner, and regulatory agencies, local communities, labor unions, tribes, or other third parties may delay, prevent, or increase the cost of construction and operation of the system we intend to build.

In order to construct and operate our PV solar power systems, we need to acquire or lease land and rights of way, obtain interconnection rights, negotiate agreements with affected transmission systems, and obtain all necessary local, county, state, federal, and foreign approvals, licenses, and permits, as well as rights to interconnect the systems to the transmission grid and transmit energy generated from the system. We may be unable to acquire the land or lease interests needed, may not obtain or maintain satisfactory interconnection rights, may have difficulty reaching agreements with affected transmission systems and/or incur unexpected network upgrade costs, may not receive or retain the requisite approvals, permits, licenses, and interconnection and transmission rights, or may encounter other problems that could delay or prevent us from successfully constructing and operating such systems.

Many of our proposed projects are located on or require access through public lands administered by state and federal agencies pursuant to competitive public leasing and right-of-way procedures and processes. Our projects may also be located on tribal land pursuant to land agreements that must be approved by tribal governments and federal agencies. The authorization for the use, construction, and operation of systems and associated transmission facilities on federal, tribal, state, and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way, and other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and other local, state, federal, and tribal approvals, and any excessive delays in obtaining such permits and approvals due, for example, to litigation or third-party appeals, could potentially prevent us from successfully constructing and operating such systems in a timely manner and could result in the potential forfeiture of any deposit we have made with respect to a given project. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project. Changing regulatory requirements and the discovery of unknown site conditions could also affect the financial success of a given project.

In addition, local labor unions may increase the cost of project development in California and elsewhere. We may also be subject to labor unavailability and/or increased union labor requirements due to multiple simultaneous projects in a geographic region.

Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations.

The significant decline in PV solar module prices over the last several years continues to create a challenging environment for module manufacturers, but it has also helped drive demand for solar electricity worldwide. Aided by such lower module prices, our customers and potential customers have in many cases been willing and able to bid aggressively for new projects and PPAs, using low cost assumptions for modules, BoS parts, installation, maintenance, and other costs as the basis for such bids. Relatively low barriers to entry for solar project developers and EPC companies, including those we compete with, have led to, depending on the market and other factors, intense competition at the system level, which may result in an environment in which system-level pricing falls rapidly, thereby further increasing demand for solar energy solutions but constraining the ability for project developers, EPC companies, and vertically-



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integrated solar companies such as First Solar to sustain meaningful and consistent profitability. Accordingly, while we believe our system offerings and experience are positively differentiated in many cases from that of our competitors, we may fail to correctly identify our competitive position, we may be unable to develop or maintain a sufficient magnitude of new system projects worldwide at economically attractive rates of return, and we may not otherwise be able to achieve meaningful profitability under our long-term strategic plans.

Depending on the market opportunity, we may be at a disadvantage compared to potential system-level competitors. For example, certain of our competitors may have a stronger and/or more established localized business presence in a particular geographic region. Certain of our competitors may be larger entities that have greater financial resources and greater overall brand name recognition than we do and, as a result, may be better positioned to impact customer behavior or adapt to changes in the industry or the economy as a whole. Certain competitors may also have direct or indirect access to sovereign capital and/or other incentives, which could enable such competitors to operate at minimal or negative operating margins for sustained periods of time.

Additionally, large-scale solar systems are still in their relatively early stages of existence, and, depending on the geographic area, certain potential customers may still be in the process of educating themselves about the points of differentiation among various available providers of PV solar energy solutions, including a company’s proven overall experience and bankability, system design and optimization expertise, grid interconnection and stabilization expertise, and proven O&M capabilities. If we are unable over time to meaningfully differentiate our offerings at scale, or if available competitive pricing is prioritized over the value we believe is added through our system offerings and experience, from the viewpoint of our potential customer base, our business, financial condition, and results of operations could be adversely affected.

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

Obtaining long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to us is essential for obtaining financing and commencing construction of our projects. We must compete for PPAs against other developers of solar and renewable energy projects. This intense competition for PPAs has resulted in downward pressure on PPA pricing for newly contracted projects. In addition, we believe the solar industry may experience periods of structural imbalance between supply and demand that put downward pressure on module pricing. This downward pressure on module pricing would also create downward pressure on PPA pricing for newly contracted projects. See the Risk Factor entitled “Competition at the system level can be intense, thereby potentially exerting downward pressure on system-level profit margins industry-wide, which could reduce our profitability and adversely affect our results of operations” for additional information. If falling PPA pricing results in forecasted project revenue that is insufficient to generate returns anticipated to be demanded in the project sale market, our business, financial condition, and results of operations could be adversely affected.

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



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electricity prices relating to any such project were to decline in an unexpected manner, such project may decline in value and our results of operations could otherwise be adversely affected.

Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other systems constraints could significantly impact our ability to build PV solar power systems and generate solar electricity power sales.

In order to deliver electricity from our PV solar power systems to our customers, our projects generally need to connect to the transmission grid. The lack of available capacity on the transmission grid could substantially impact our projects and cause reductions in project size, delays in project implementation, increases in costs from transmission upgrades, and potential forfeitures of any deposit we have made with respect to a given project. In addition, there could be unexpected costs required to complete transmission and network upgrades that adversely impact the economic viability of our PV solar power systems. These transmission and network issues and costs, as well as issues relating to the availability of large equipment such as transformers and switchgear, could significantly impact our ability to interconnect our systems to the transmission grid, build such systems, and generate solar electricity sales.

Our systems business is largely dependent on us and third parties arranging financing from various sources, which may not be available or may only be available on unfavorable terms or in insufficient amounts.

The construction of large utility-scale solar power projects in many cases requires project financing, including non-recourse project specific debt financing in the bank loan market and institutional debt capital markets. Uncertainties exist as to whether our planned projects will be able to access the debt markets in a magnitude sufficient to finance their construction. If we are unable to arrange such financing or if it is only available on unfavorable terms, we may be unable to fully execute our systems business plan. In addition, we generally expect to sell interests in our projects by raising project equity capital from tax-oriented, strategic industry, and other equity investors. Such equity sources may not be available or may only be available in insufficient amounts or on unfavorable terms, in which case our ability to sell interests in our projects may be delayed or limited, and our business, financial condition, and results of operations may be adversely affected. Uncertainty in or adverse changes to tax policy, including the amount of ITC, accelerated depreciation, expensing, and the reduction of the U.S. corporate income tax rate to 21% for tax years beginning after December 31, 2017 under the Tax Act (which could reduce the value of these tax related incentives) may reduce project value or negatively affect our ability to timely secure equity investment for our projects. Even if such financing sources are available, the counterparty to many of our fixed-price EPC contracts, which own the projects we are constructing, are often special purpose vehicles that do not have significant assets other than their interests in the project and have pledged all or substantially all of these assets to secure the project-related debt and certain other sources of financing. If the owner defaults on its payments or other obligations to us, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended or committed to be expended to purchase equipment or supplies (including intercompany purchases of modules), or for termination payments we are entitled to under the terms of the related EPC contract. If we are unable to collect the amounts owed to us, or are unable to complete the project because of an owner default, we may be required to record a charge against earnings related to the project, which could result in a material loss.

In addition, for projects to which we provide EPC services but are not the project developer, our EPC activities are in many cases dependent on the ability of third parties to finance their system projects on acceptable terms. Depending on prevailing conditions in the credit markets, interest rates and other factors, such financing may not be available or may only be available on unfavorable terms or in insufficient amounts. If third parties are limited in their ability to access financing to support their purchase of system construction services from us, we may not realize the cash flows that we expect from such sales, which could adversely affect our ability to invest in our business and/or generate revenue. See also the Risk Factor above entitled “An increase in interest rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for customers to finance the cost of a PV solar power system and could reduce the demand for our modules or systems and/or lead to a reduction in the average selling price for such offerings.




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Developing solar power projects may require significant upfront investment prior to the signing of an EPC contract and commencing construction, which could adversely affect our business and results of operations.

Our solar power project development cycles, which span the time between the identification of a site location and the construction of a system, vary substantially and can take years to mature. As a result of these long project development cycles, we may need to make significant up-front investments of resources (including, for example, payments for land rights, large transmission and PPA deposits, or other payments, which may be non-refundable) in advance of the signing of EPC contracts, commencing construction, receiving cash proceeds, or recognizing any revenue, which may not be recognized for several additional months or years following contract signing. Our potential inability to enter into sales contracts with customers on favorable terms after making such upfront investments could cause us to forfeit certain nonrefundable payments or otherwise adversely affect our business and results of operations. Furthermore, we may become constrained in our ability to simultaneously fund our other business operations and these systems investments through our long project development cycles.

Our liquidity may also be adversely affected to the extent the project sales market weakens and we are unable to sell interests in our solar projects on pricing, timing, and other terms commercially acceptable to us. In such a scenario, we may choose to continue to temporarily own and operate certain solar projects for a period of time, after which interests in the projects may be sold to third parties.

We may be unable to accurately estimate costs under fixed-price EPC agreements in which we act as the general contractor for our customers in connection with the construction and installation of their PV solar power systems.

We may enter into fixed-price EPC contracts in which we act as the general contractor for our customers in connection with the installation of their PV solar power systems. All essential costs are estimated at the time of entering into the EPC contract for a particular project, and these are reflected in the overall fixed-price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the subcontractors, suppliers, and other parties to the project. In addition, we require qualified, licensed subcontractors to install many of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should actual results prove different from our estimates (including those due to unexpected increases in inflation, commodity prices, or labor costs) or we experience delays in execution and we are unable to commensurately increase the EPC sales price, we may not achieve our expected margins or we may be required to record a loss in the relevant fiscal period.

We may be subject to unforeseen costs, liabilities, or obligations when providing O&M services. In addition, certain of our O&M agreements include provisions permitting the counterparty to terminate the agreement without cause.

We may provide ongoing O&M services to system owners under separate service agreements, pursuant to which we generally perform standard activities associated with operating a PV solar power system, including 24/7 monitoring and control, compliance activities, energy forecasting, and scheduled and unscheduled maintenance. Our costs to perform these services are estimated at the time of entering into the O&M agreement for a particular project, and these are reflected in the price we charge our customers, including certain agreements which feature fixed pricing. Should our estimates of O&M costs prove inaccurate (including any unexpected serial defects, unavailability of parts, or increases in inflation, labor, or BoS costs), our growth strategy and results of operations could be adversely affected. Because of the potentially long-term nature of these O&M agreements, the adverse impacts on our results of operations could be significant, particularly if our costs are not capped under the terms of the agreements. In addition, certain of our O&M agreements include provisions permitting the counterparty to terminate the agreement without cause or for convenience. The exercise of such termination rights, or the use of such rights as leverage to re-negotiate terms and conditions of the O&M agreement, including pricing terms, could adversely impact our results of operations. We may also be subject to substantial costs in the event we do not achieve certain thresholds under the effective availability guarantees included in our O&M agreements.




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Our systems business is subject to regulatory oversight and liability if we fail to operate PV solar power systems in compliance with electric reliability rules.

The ongoing O&M services that we provide for system owners may subject us to regulation by the NERC, or its designated regional representative, as a “generator operator,” or “GOP,” under electric reliability rules filed with FERC. Our failure to comply with the reliability rules applicable to GOPs could subject us to substantial fines by NERC, subject to FERC’s review. In addition, the system owners that receive our O&M services may be regulated by NERC as “generator owners,” or “GOs,” and we may incur liability for GO violations and fines levied by NERC, subject to FERC’s review, based on the terms of our O&M agreements. Finally, as a system owner and operator, we may in the future be subject to regulation by NERC as a GO.

Risks Related to Regulations

Existing regulations and policies, changes thereto, and new regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of PV products or systems, which may significantly reduce demand for our modules, systems, or services.

The market for electricity generation products is heavily influenced by local, state, federal, and foreign government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of PV products or systems and investment in the R&D of PV solar technology. For example, without a mandated regulatory exception for PV solar power systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. If these interconnection standby fees were applicable to PV solar power systems, it is likely that they would increase the cost of using such systems for end-users, which could make the systems less desirable, thereby adversely affecting our business, financial condition, and results of operations. In addition, with respect to utilities that utilize a peak-hour pricing policy or time-of-use pricing methods whereby the price of electricity is adjusted based on electricity supply and demand, electricity generated by PV solar power systems currently benefits from competing primarily with expensive peak-hour electricity, rather than the less expensive average price of electricity. Modifications to the peak-hour pricing policies of utilities, such as to a flat rate for all times of the day, would require PV solar power systems to achieve lower prices in order to compete with the price of electricity from other sources and would adversely impact our operating results.

Our modules, systems, and services (such as O&M) are subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering, and other matters, and tracking the requirements of individual jurisdictions is complex. Any new government regulations or utility policies pertaining to our modules, systems, or services may result in significant additional expenses to us or our customers and, as a result, could cause a significant reduction in demand for our modules, systems, or services. In addition, any regulatory compliance failure could result in significant management distraction, unplanned costs, and/or reputational damage.

We could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act, and other foreign anti-bribery laws.

The FCPA generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities, and others (e.g., the FCPA and the U.K. Bribery Act) extend their application to activities outside of their country of origin. Our policies mandate compliance with all applicable anti-bribery laws. We currently operate in, and pursuant to our long-term strategic plans may further expand into, key parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with



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local customs and practices. In addition, due to the level of regulation in our industry, our operations in certain jurisdictions, including India, China, South America, and the Middle East, require substantial government contact, either directly by us or through intermediaries over whom we have less direct control, such as subcontractors, agents, and partners (such as joint venture partners), where norms can differ from U.S. standards. Although we have implemented policies, procedures, and, in certain cases, contractual arrangements designed to facilitate compliance with these anti-bribery laws, our officers, directors, associates, subcontractors, agents, and partners may take actions in violation of our policies, procedures, contractual arrangements, and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us and such persons to criminal and/or civil penalties or other sanctions potentially by government prosecutors from more than one country, which could have a material adverse effect on our business, financial condition, cash flows, and reputation.

Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and results of operations.

Our operations involve the use, handling, generation, processing, storage, transportation, and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the local, state, national, and international levels. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, the cleanup of contaminated sites, and occupational health and safety. As we execute our long-term strategic plans and expand our business into foreign jurisdictions worldwide, our environmental compliance burden may continue to increase both in terms of magnitude and complexity. We have incurred and may continue to incur significant costs in complying with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third-party property damage or personal injury claims, cleanup costs, or other costs. Such solutions could also result in substantial delay or termination of projects under construction within our systems business, which could adversely impact our results of operations. While we believe we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, financial condition, and results of operations.

Our solar modules contain CdTe and other semiconductor materials. Elemental cadmium and certain of its compounds are regulated as hazardous materials due to the adverse health effects that may arise from human exposure. Based on existing research, the risks of exposure to CdTe are not believed to be as serious as those relating to exposure to elemental cadmium. In our manufacturing operations, we maintain engineering controls to minimize our associates’ exposure to cadmium or cadmium compounds and require our associates who handle cadmium compounds to follow certain safety procedures, including the use of personal protective equipment such as respirators, chemical goggles, and protective clothing. Relevant studies and third-party peer review of our technology have concluded that the risk of exposure to cadmium or cadmium compounds from our end-products is negligible. In addition, the risk of exposure is further minimized by the encapsulated nature of these materials in our products, the physical properties of cadmium compounds used in our products, and the recycling or responsible disposal of our modules. While we believe that these factors and procedures are sufficient to protect our associates, end-users, and the general public from adverse health effects that may arise from cadmium exposure, we cannot ensure that human or environmental exposure to cadmium or cadmium compounds used in our products will not occur. Any such exposure could result in future third-party claims against us, damage to our reputation, and heightened regulatory scrutiny, which could limit or impair our ability to sell and distribute our products. The occurrence of future events such as these could have a material adverse effect on our business, financial condition, and results of operations.

The use of cadmium or cadmium compounds in various products is also coming under increasingly stringent governmental regulation. Future regulation in this area could impact the manufacturing, sale, collection, and recycling of solar modules and could require us to make unforeseen environmental expenditures or limit our ability to sell and distribute our products. For example, European Union Directive 2011/65/EU on the Restriction of the Use of Hazardous



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Substances in electrical and electronic equipment (recast RoHS Directive) restricts the use of certain hazardous substances, including cadmium and its compounds, in specified products. Other jurisdictions, such as China, have adopted similar legislation or are considering doing so. Currently, PV solar modules are explicitly excluded from the scope of recast RoHS (Article 2), as adopted by the European Parliament and the Council in June 2011. The next general review of the RoHS Directive is scheduled for 2021, involving a broader discussion of the existing scope. A scope review focusing on additional exclusions was proposed by the European Commission in 2017 under the EU’s co-decision process which allows the European Parliament and the European Council to amend the European Commission’s proposal on exclusions. The co-decision procedure was completed in 2017 and the existing exclusion of PV modules was maintained. If PV modules were to be included in the scope of future RoHS revisions without an exemption or exclusion, we would be required to redesign our solar modules to reduce cadmium and other affected hazardous substances to the maximum allowable concentration thresholds in the RoHS Directive in order to continue to offer them for sale within the EU. As such actions would be impractical, this type of regulatory development would effectively close the EU market to us, which could have a material adverse effect on our business, financial condition, and results of operations.

As an owner and operator of PV solar power systems that deliver electricity to the grid, certain of our affiliated entities may be regulated as public utilities under U.S. federal and state law, which could adversely affect the cost of doing business and limit our growth.

As an owner and operator of PV solar power systems that deliver electricity to the grid, certain of our affiliated entities may be considered public utilities for purposes of the Federal Power Act, as amended (the “FPA”), and public utility companies for purposes of the Public Utility Holding Company Act of 2005 (“PUHCA 2005”), and are subject to regulation by the FERC, as well as various local and state regulatory bodies.

Some of our affiliated entities may be exempt wholesale generators or qualifying facilities under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”), and as such are exempt from regulation under PUHCA 2005. In addition, our affiliated entities may be exempt from most provisions of the FPA, as well as state laws regarding the financial or organizational regulation of public utilities. We are not directly subject to FERC regulation under the FPA. However, we are considered to be a “holding company” for purposes of Section 203 of the FPA, which regulates certain transactions involving public utilities, and such regulation could adversely affect our ability to grow the business through acquisitions. Likewise, investors seeking to acquire our public utility subsidiaries or acquire ownership interests in our securities sufficient to give them control over us and our public utility subsidiaries may require prior FERC approval to do so. Such approval could result in transaction delays or uncertainties.

Public utilities under the FPA are required to obtain FERC acceptance of their rate schedules for wholesale sales of electricity and to comply with various regulations. The FERC may grant our affiliated entities the authority to sell electricity at market-based rates and may also grant them certain regulatory waivers, such as waivers from compliance with FERC’s accounting regulations. These FERC orders reserve the right to revoke or revise market-based sales authority if the FERC subsequently determines that our affiliated entities can exercise market power in the sale of generation products, the provision of transmission services, or if it finds that any of the entities can create barriers to entry by competitors. In addition, if the entities fail to comply with certain reporting obligations, the FERC may revoke their power sales tariffs. Finally, if the entities were deemed to have engaged in manipulative or deceptive practices concerning their power sales transactions, they would be subject to potential fines, disgorgement of profits, and/or suspension or revocation of their market-based rate authority. If our affiliated entities were to lose their market-based rate authority, such companies would be required to obtain the FERC’s acceptance of a cost-of-service rate schedule and could become subject to the accounting, record-keeping, and reporting requirements that are imposed on utilities with cost-based rate schedules, which would impose cost and compliance burdens on us and have an adverse effect on our results of operations. In addition to the risks described above, we may be subject to additional regulatory regimes at state or foreign levels to the extent we own and operate PV solar power systems in such jurisdictions.




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Other Risks

We may not realize the anticipated benefits of past or future business combinations or acquisition transactions, and integration of business combinations may disrupt our business and management.

We have made several acquisitions in prior years and in the future we may acquire additional companies, project pipelines, products, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of such business combinations or acquisitions, and each transaction has numerous risks. The risks associated with such transactions may include the following:

difficulty in assimilating the operations and personnel of the acquired or partner company;

difficulty in effectively integrating the acquired products or technologies with our current products or technologies;

difficulty in achieving profitable commercial scale from acquired technologies;

difficulty in maintaining controls, procedures, and policies during the transition and integration;

disruption of our ongoing business and distraction of our management and associates from other opportunities and challenges due to integration issues;

difficulty integrating the acquired or partner company’s accounting, management information, and other administrative systems;

difficulty managing joint ventures with our partners, potential litigation with joint venture partners, and reliance upon joint ventures that we do not control; for example, our ability to effectively manage 8point3 Energy Partners, LP (the “YieldCo” or the “Partnership”), the limited partnership formed with SunPower Corporation (“SunPower” and together with First Solar, the “Sponsors”);

inability to retain key technical and managerial personnel of the acquired business;

inability to retain key customers, vendors, and other business partners of the acquired business;

inability to achieve the financial and strategic goals for the acquired and combined businesses, as a result of insufficient capital resources or otherwise;

incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

potential impairment of our relationships with our associates, customers, partners, distributors, or third-party providers of products or technologies;

potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things;

potential inability to assert that internal controls over financial reporting are effective;

potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and

potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings.



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Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations. In addition, we may seek to dispose of our interests in acquired companies, project pipelines, products, or technologies. We may not recover our initial investment in such interests, in part or at all, which could adversely affect our business, financial condition, or results of operations.

We may be unable to complete the sale of our interests in 8point3 Energy Partners LP on the terms and in the timeframe anticipated, or at all, and if we are unable to complete such sale, we may continue to hold the interests and may not be able to achieve the full strategic and financial benefits expected to result from the formation of the Partnership, or the sale could result in shareholder litigation.

In June 2015, the Partnership formed by the Sponsors completed its initial public offering (the “IPO”). The YieldCo is a joint venture vehicle into which we and SunPower each contributed a portfolio of selected solar generation assets from our existing portfolios of assets. Since the formation of the Partnership, we and SunPower have, from time to time, sold interests in solar projects to the Partnership. We launched the YieldCo to enable a competitive cost of capital and greater optionality in the project sales process for a portion of our future project sales.

In February 2018, we entered into an agreement (the “Merger Agreement”) with CD Clean Energy and Infrastructure V JV, LLC, an equity fund managed by Capital Dynamics and certain other co-investors and certain other parties, pursuant to which such parties agreed to acquire our interests in the Partnership and its subsidiaries (the “Transaction”). The closing of the Transaction is subject to various conditions, including, among others, approval by the YieldCo’s shareholders, and the receipt of consents from third parties and governmental approvals, including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, FERC Section 203 approval, and the approval of the Committee on Foreign Investment in the United States. Known and unknown risks, uncertainties, and other factors could impact the satisfaction of these conditions and therefore the expected timing and likelihood of completion of the Transaction. Failure or delay to satisfy these or other conditions may have adverse consequences, including that the market price of the YieldCo’s shares may decline, to the extent that their current market price reflects a market assumption that the Transaction will be completed, certain costs relating to the Transaction, such as certain financial advisor and legal fees, must be paid even if the Transaction is not completed, and our business, financial condition, and results of operations could be materially adversely affected. The YieldCo and Capital Dynamics also have the ability to terminate the Merger Agreement in certain circumstances. If we are unable to close the Transaction, we may continue to hold the interests and may not be able to realize the strategic and financial benefits that we expect to derive from our YieldCo strategy and our investment in the Yieldco. If the Transaction is not completed, we will have to reassess our long-term strategy with respect to our continued ownership of our interests in the YieldCo.

In addition, we may be subject to class action lawsuits relating to the Transaction, and other additional lawsuits that may be filed. Such litigation is common in connection with acquisitions of public companies, regardless of any merits related to the underlying acquisition. While we will evaluate and defend against any actions vigorously, the costs of the defense of such lawsuits and other effects of such litigation could have an adverse effect on our business, financial condition, and operating results.

The viability of the YieldCo strategy and the Transaction are also subject to the risks described in the YieldCo’s Annual Report on Form 10-K. In addition, due to the joint venture nature of the YieldCo, we do not exercise control over the YieldCo in the same manner that we could over our wholly-owned subsidiaries, and, as such, the viability of the YieldCo strategy and the Transaction also depend, in part, on our ability to effectively manage our business relationships with SunPower. If we are unable to achieve the strategic and financial benefits expected to result from the YieldCo strategy and the Transaction, our business, financial condition, and results of operations could be materially adversely affected. See Note 12. “Investments in Unconsolidated Affiliates and Joint Ventures” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding the Partnership.




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We are subject to litigation risks, including securities class actions and stockholder derivative actions, which may be costly to defend and the outcome of which is uncertain.

From time to time, we are subject to legal claims, with and without merit, that may be costly and which may divert the attention of our management and our resources in general. In addition, our projects may be subject to litigation or other adverse proceedings that may adversely impact our ability to proceed with construction or sell a given project, which may adversely affect our ability to recognize revenue with respect to such project. The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. Certain of these lawsuits assert types of claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of one or more of these lawsuits, or any future lawsuits, may result in a significant monetary judgment or award against us or a significant monetary payment by us, and could have a material adverse effect on our business, financial condition, or results of operations. Even if these lawsuits, or any future lawsuits, are not resolved against us, the costs of defending such lawsuits may be significant and may not be covered by our insurance policies. Because the price of our common stock has been, and may continue to be, volatile, we can provide no assurance that additional securities or other litigation will not be filed against us in the future. See Note 15. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements included in this Annual Report on Form 10-K for more information on our legal proceedings, including our securities class action and derivative actions.

Our future success depends on our ability to retain our key associates and to successfully integrate them into our management team.

We are dependent on the services of our executive officers and other members of our senior management team. The loss of one or more of these key associates or any other member of our senior management team could have a material adverse effect on our business. We may not be able to retain or replace these key associates and may not have adequate succession plans in place. Several of our current key associates including our executive officers are subject to employment conditions or arrangements that contain post-employment non-competition provisions. However, these arrangements permit the associates to terminate their employment with us upon little or no notice and the enforceability of the non-competition provisions in certain jurisdictions is uncertain.

If we are unable to attract, train, and retain key personnel, our business may be materially and adversely affected; any regulatory compliance failure with respect to applicable labor laws and regulations, including the Davis-Bacon and Related Acts, could have an adverse effect on us.

Our future success depends, to a significant extent, on our ability to attract, train, and retain management, operations, sales, training, and technical personnel, including personnel in foreign jurisdictions. Recruiting and retaining capable personnel, particularly those with expertise in the PV solar industry across a variety of technologies, are vital to our success. There is substantial competition for qualified technical personnel, and while we continue to benchmark our organization against the broad spectrum of business in our market space to remain economically competitive, there can be no assurances that we will be able to attract and retain our technical personnel. If we are unable to attract and retain qualified associates, or otherwise experience unexpected labor disruptions within our business, we may be materially and adversely affected.

Labor used on some of our job sites may be subject to the Davis-Bacon and Related Acts (collectively, “Davis-Bacon”). Davis-Bacon requires that personnel assigned to the project be paid at least the prevailing wage and fringe benefits, as established by and in accordance with the regulations promulgated by the U.S. Department of Labor (“DOL”). We have an established policy pursuant to which we evaluate Davis-Bacon requirements in conjunction with our subcontractors and ensure our collective compliance with these requirements. If it is determined that any person working under Davis-Bacon requirements on First Solar projects is not properly classified, is being paid the incorrect prevailing wage, or has not been paid fringe benefits to which he or she was entitled, we could incur additional liability with respect to such worker or be exposed to other adverse outcomes.



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We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards or prohibit us from the manufacture and sale of our solar modules or the use of our technology.

Our success depends largely on our ability to use and develop our technology and know-how without infringing or misappropriating the intellectual property rights of third parties. The validity and scope of claims relating to PV solar technology patents involve complex scientific, legal, and factual considerations and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, which may not be available on reasonable terms, or at all, or pay ongoing royalties, require us to redesign our solar modules, or subject us to injunctions prohibiting the manufacture and sale of our solar modules or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our solar modules until the resolution of such litigation.

Currency translation and transaction risk may negatively affect our results of operations.

Although our reporting currency is the U.S. dollar, we conduct certain business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. For example, certain of our net sales in 2017 were denominated in foreign currencies, such as Euros and Indian rupees, and we expect to continue to have net sales denominated in foreign currencies in the future. Joint ventures or other business arrangements with strategic partners outside of the United States have involved, and in the future may involve, significant investments denominated in local currencies. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our results of operations and result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.

We could also expand our business into emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such emerging markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds.

Our ability to hedge foreign currency exposure is dependent on our credit profile with the banks that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposures; and therefore, result in exchange gains or losses.

Our largest stockholder has significant influence over us and his interests may conflict with or differ from interests of other stockholders.

Our largest stockholder, Lukas T. Walton (the “Significant Stockholder”), owned approximately 22% of our outstanding common stock as of December 31, 2017. As a result, the Significant Stockholder has substantial influence over all matters requiring stockholder approval, including the election of our directors and the approval of significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets. The interests of the Significant Stockholder could conflict with or differ from interests of other stockholders. For example, the concentration of ownership held by the Significant Stockholder could delay, defer, or prevent a change of control of our company or impede a merger, takeover, or other business combination, which other stockholders may view favorably.




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If our long-lived assets or project related assets become impaired, we may be required to record significant charges to earnings.

We may be required to record significant charges to earnings should we determine that our long-lived assets or project related assets are impaired. Such charges may have a material impact on our financial position and results of operations. We review long-lived and project related assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets 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 or if the expected operating cash flows from future power generation exceed the cost basis of the asset. If our projects are not considered commercially viable, we would be required to impair the respective assets.

Unanticipated changes in our tax provisions, the enactment of new tax legislation, or exposure to additional income tax liabilities could affect our profitability.

We are subject to income taxes in the jurisdictions in which we operate. In December 2017, the U.S. government enacted the Tax Act. The changes included in the Tax Act are broad and complex, and the final effects of the Tax Act, including those related to the mandatory one-time transition tax on certain accumulated earnings and profits of foreign corporate subsidiaries that may electively be paid over eight years, may differ from the estimates provided elsewhere in this Annual Report on Form 10-K, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to estimates utilized to calculate provisional amounts, or actions we may take as a result of the Tax Act. Additionally, longstanding international tax laws that determine each country’s jurisdictional tax rights in cross-border international trade are evolving as a result of the base erosion and profit shifting reporting requirements recommended by the Organisation for Economic Co-operation and Development. As these and other tax laws and regulations change, our business, financial condition, and results of operations could be adversely affected.

We are subject to potential tax examinations in various jurisdictions, and taxing authorities may disagree with our interpretations of U.S. and foreign tax laws and may assess additional taxes. We regularly assess the likely outcomes of these examinations in order to determine the appropriateness of our tax provision; however, the outcome of tax examinations cannot be predicted with certainty. Therefore, the amounts ultimately paid upon resolution of such examinations could be materially different from the amounts previously included in our income tax provision, which could have a material impact on our results of operations and cash flows.

In addition, our future effective tax rate could be adversely affected by changes to our operating structure, losses of tax holidays, changes in the jurisdictional mix of earnings among countries with tax holidays or differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. Any changes in our effective tax rate may materially and adversely impact our results of operations.

Cyber-attacks or other breaches of our information systems, or those of third parties with which we do business, could have a material adverse effect on our financial condition and results of operations.

Our operations rely on our computer systems, hardware, software, and networks, as well as those of the third parties with which we do business, to securely process, store, and transmit proprietary, confidential, and other information, including intellectual property. Such information systems may be compromised by cyber-attacks, computer viruses, and other events that could be materially disruptive to our business operations and could put the security of our information, and that of the third parties with which we do business, at risk of misappropriation or destruction. In recent years, such cyber incidents have become increasingly frequent and sophisticated, targeting or otherwise affecting a wide range of companies. While we have instituted security measures to minimize the likelihood and impact of a cyber incident, there is no assurance that these measures, or those of the third parties with which we do business, will be adequate in the future. If these measures fail, valuable information may be lost; our manufacturing, development,



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construction, O&M, and other operations may be disrupted; and our reputation may suffer. We may also be subject to litigation, regulatory action, remedial expenses, and financial losses beyond the scope or limits of our insurance coverage. These consequences of a failure of security measures could, individually or in the aggregate, have a material adverse effect on our financial condition and results of operations.

Changes in, or any failure to comply with, privacy laws, regulations, and standards may adversely affect our business.

Personal privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions in which we operate. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. For example, in 2015 the Court of Justice of the European Union ruled that the U.S.-EU Safe Harbor framework, which provided U.S. companies with a streamlined means of complying with the EU’s Data Protection Directive regarding the treatment of customers’ and employees’ personal information and other privacy matters, and upon which we relied for the transfer of personal data from the EU to the U.S., was invalid. As a result of such invalidation, we have implemented data transfer agreements between certain of our U.S. and EU based entities. Furthermore, state, federal, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy, all of which may be subject to invalidation by relevant foreign judicial bodies. Industry organizations also regularly adopt and advocate for new standards in this area.

In the United States, these include rules and regulations promulgated under the authority of federal agencies and state attorneys general and legislatures and consumer protection agencies. Internationally, many jurisdictions in which we operate have established their own data security and privacy legal framework with which we or our customers must comply, including but not limited to, the Data Protection Directive established in the EU and data protection legislation of the individual member states subject to such directive. The Data Protection Directive will be replaced in May 2018 by the pending European General Data Protection Regulation, a broad-based data privacy regime that will impose additional obligations, penalties, and risk upon our business. In many jurisdictions, enforcement actions and consequences for noncompliance are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Any inability or perceived inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business.

Our credit agreements contain covenant restrictions that may limit our ability to operate our business.

We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, and obtain additional financing, if needed, because the senior secured credit facility made available under our amended and restated credit agreement with several financial institutions as lenders and JPMorgan Chase Bank, N.A. as administrative agent (the “Revolving Credit Facility”) and certain of our project financing arrangements contain, and other future debt agreements may contain, covenant restrictions that limit our ability to, among other things:

incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;

create liens;

enter into certain transactions with our affiliates;

sell certain assets; and

declare or pay dividends, make other distributions to stockholders, or make other restricted payments.




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Under our Revolving Credit Facility and certain of our project financing arrangements, we are also subject to certain financial covenants. Our ability to comply with covenants under our credit agreements is dependent on our future performance or the performance of specifically financed projects, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under these agreements and any of our other future debt agreements, which if not cured or waived, could permit the holders thereof to accelerate such debt and could cause cross-defaults under our other facility agreements and the possible acceleration of debt under such agreements, as well as cross-defaults under certain of our key project and operational agreements and could also result in requirements to post additional security instruments to secure future obligations. In addition, we cannot assure you that events that occur within the Company, or in the industry or the economy as a whole, will not constitute material adverse effects under these agreements. If it is determined that a material adverse effect has occurred, the lenders can, under certain circumstances, restrict future borrowings or accelerate the due date of outstanding amounts. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt and may experience cross-defaults under our other debt or operational agreements, which could materially and adversely affect our business, financial condition, and results of operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

As of December 31, 2017, our principal properties consisted of the following:
Nature
 
Primary Segment(s) Using Property
 
Location
 
Held
Corporate headquarters
 
Modules & Systems
 
Tempe, Arizona, United States
 
Lease
Manufacturing plant, R&D facility, and administrative offices
 
Modules
 
Perrysburg, Ohio, United States
 
Own
Administrative offices
 
Systems
 
San Francisco, California, United States
 
Lease
R&D facility
 
Modules & Systems
 
Santa Clara, California, United States
 
Lease
Manufacturing plant and administrative offices
 
Modules
 
Kulim, Kedah, Malaysia
 
Lease land, own buildings
Administrative offices
 
Modules & Systems
 
Georgetown, Penang, Malaysia
 
Lease
Manufacturing plant (1)
 
Modules
 
Ho Chi Minh City, Vietnam
 
Lease land, own buildings
Manufacturing plant (2)
 
Modules
 
Frankfurt/Oder, Germany
 
Own
——————————
(1)
In July 2017, we announced our plans to utilize our manufacturing plant in Vietnam for production of our next generation Series 6 module technology.

(2)
In December 2012, we ceased manufacturing at our German plant. Since its closure, we have continued to market such property for sale.

In addition, we lease small amounts of office and warehouse space in several other U.S. and international locations.

Item 3. Legal Proceedings

See Note 15. “Commitments and Contingencies – Legal Proceedings” to our consolidated financial statements included in this Annual Report on Form 10-K for information regarding legal proceedings and related matters.

Item 4. Mine Safety Disclosures

None.



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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock is listed on NASDAQ under the symbol FSLR. The following table sets forth the range of high and low closing prices per share as reported on NASDAQ for the periods indicated:
 
 
High
 
Low
2017
 
 
 
 
First quarter
 
$
37.90

 
$
27.10

Second quarter
 
40.49

 
26.33

Third quarter
 
51.41

 
38.67

Fourth quarter
 
70.63

 
46.91

2016
 
 

 
 

First quarter
 
$
73.21

 
$
60.99

Second quarter
 
67.48

 
44.23

Third quarter
 
49.24

 
34.00

Fourth quarter
 
42.25

 
29.21


The closing price of our common stock on NASDAQ was $65.85 per share on February 16, 2018. As of February 16, 2018, there were 48 record holders of our common stock, which does not reflect the beneficial ownership of shares held in nominee names.

Dividend Policy

We have never paid, and it is our present intention for the foreseeable future not to pay, dividends on our common stock. Our Revolving Credit Facility imposes restrictions on our ability to declare or pay dividends. The declaration and payment of dividends is subject to the discretion of our board of directors and depends on various factors, including the continued applicability of the above-referenced restrictions under our Revolving Credit Facility, our net income, financial condition, cash requirements, future prospects, and other factors considered relevant by our board of directors. We expect to prioritize our working capital requirements, capacity expansion and other capital expenditure needs, project development and construction, and merger and acquisition opportunities prior to returning capital to our shareholders.

Stock Price Performance Graph

The following graph compares the five-year cumulative total return on our common stock relative to the cumulative total returns of the S&P 500 Index and the Guggenheim Solar ETF, which represents a peer group of solar companies. In the stock price performance graph included below, an investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, the S&P 500 Index, and the Guggenheim Solar ETF on December 31, 2012, and its relative performance is tracked through December 31, 2017. This performance graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof, and irrespective of any general incorporation language in any such filing. The stock price performance shown on the graph represents past performance and should not be considered an indication of future price performance.



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COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among First Solar, the S&P 500 Index,
and the Guggenheim Solar ETF

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12078276&doc=14
——————————
*
$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends. Index calculated on a month-end basis.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliate Purchases

None.

Item 6. Selected Financial Data

The following tables set forth our selected financial data for the periods and at the dates indicated. The selected financial data from the consolidated statements of operations and consolidated statements of cash flows for the years ended December 31, 2017, 2016, and 2015 and the selected financial data from the consolidated balance sheets as of December 31, 2017 and 2016 have been derived from the audited consolidated financial statements included in this Annual Report on Form 10-K. The selected financial data from the consolidated statements of operations and consolidated statements of cash flows for the years ended December 31, 2014 and 2013 and the selected financial data from the consolidated balance sheets as of December 31, 2015, 2014, and 2013 have been derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The information presented below should also be read in conjunction with our consolidated financial statements and the related notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”




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For the years ended December 31, 2016 and 2015, we have recast certain of the following financial data as a result of the adoption of ASU 2014-09. See Note 3. “Recent Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K for further information regarding these changes.
 
 
Years Ended
 
 
 
December 31,
2017
 
December 31,
2016
 
December 31,
2015
 
December 31,
2014
 
December 31,
2013
 
 
(In thousands, except per share amounts)
Net sales
 
$
2,941,324

 
$
2,904,563

 
$
4,112,650

 
$
3,391,187

 
$
3,309,616

Gross profit
 
548,947

 
638,418

 
1,132,762

 
824,941

 
864,632

Operating income (loss)
 
177,851

 
(568,151
)
 
730,159

 
421,999

 
370,407

Net (loss) income
 
(165,615
)
 
(416,112
)
 
593,406

 
395,964

 
350,718

Net (loss) income per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
(1.59
)
 
$
(4.05
)
 
$
5.88

 
$
3.96

 
$
3.74

Diluted
 
$
(1.59
)
 
$
(4.05
)
 
$
5.83

 
$
3.90

 
$
3.67

Cash dividends declared per common share
 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
1,340,677

 
$
206,753

 
$
(325,209
)
 
$
735,516

 
$
856,126

Net cash (used in) provided by investing activities
 
(626,802
)
 
144,520

 
(156,177
)
 
(387,818
)
 
(537,106
)
Net cash provided by (used in) financing activities
 
192,045

 
(136,393
)
 
101,207

 
(46,907
)
 
101,164

 
 
 
December 31,
2017
 
December 31,
2016
 
December 31,
2015
 
December 31,
2014
 
December 31,
2013
 
 
(In thousands)
Cash and cash equivalents
 
$
2,268,534

 
$
1,347,155

 
$
1,126,826

 
$
1,482,054

 
$
1,325,072

Marketable securities
 
720,379

 
607,991

 
703,454

 
509,032

 
439,102

Total assets
 
6,864,501

 
6,824,368

 
7,360,392

 
6,720,991

 
6,876,586

Total long-term debt
 
393,540

 
188,388

 
289,415

 
213,473

 
223,323

Total liabilities
 
1,765,804

 
1,606,019

 
1,741,996

 
1,729,504

 
2,408,516

Total stockholders’ equity
 
5,098,697

 
5,218,349

 
5,618,396

 
4,991,487

 
4,468,070


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the “Note Regarding Forward-Looking Statements” that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under Item 1A. “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.




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Executive Overview

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

Certain highlights of our financial results and other key operational developments for the year ended December 31, 2017 include the following:

Net sales in 2017 were $2.9 billion, which was consistent with net sales in 2016. Such results were primarily driven by the sale of the Moapa, California Flats, Switch Station, and Cuyama projects in 2017, together with an increase in third-party module sales in 2017 compared to 2016, offset by the completion of substantially all construction activities on a number of projects in 2016, including the Desert Stateline, Astoria, Taylor, East Pecos, Silver State South, Butler, and McCoy projects.

Gross profit decreased 3.3 percentage points to 18.7% during 2017 from 22.0% during 2016 primarily due to a mix of lower gross profit projects sold and under construction during the period and reductions in the average selling price per watt of our modules sold directly to third parties, partially offset by reductions in our product warranty liability and our module collection and recycling liability.

As of December 31, 2017, we had 18 installed production lines at our manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia. We produced 2.3 GW of solar modules during 2017, which represented a 26% decrease from 2016. The decrease in production was primarily driven by our previously announced plans to ramp down production of our Series 4 modules and transition to Series 6 module manufacturing over the next several years. We expect to produce approximately 3.1 GW of solar modules during 2018, including approximately 1 GW of Series 6 modules.

In November 2017, we produced our initial Series 6 modules at our manufacturing facility in Perrysburg, Ohio. We continue to qualify such modules for commercial production and expect the Ohio facility to begin commercial production in early 2018. In late 2017, we also began installing Series 6 production lines at our facility in Kulim, Malaysia.

During 2017, we ran our manufacturing facilities at approximately 99% capacity utilization, which represented a 2.0 percentage point increase from 2016.

The average conversion efficiency of our modules produced in 2017 was 16.9%, which represented an improvement of 0.5 percentage points from our average conversion efficiency of 16.4% in 2016.

Market Overview

The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. In particular, module average selling prices in the United States and several other key markets have experienced an accelerated decline in recent years, and module average selling prices are expected to continue to decline globally to some degree in the future. In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. We believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will put pressure on pricing. Additionally, intense competition at the system level may result in an environment in which pricing falls rapidly, thereby further



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increasing demand for solar energy solutions but constraining the ability for project developers, EPC companies, and vertically-integrated solar companies such as First Solar to sustain meaningful and consistent profitability. In light of such market realities, we are focusing on our strategies and points of differentiation, which include our advanced module and system technologies, our manufacturing process, our vertically-integrated business model, our financial viability, and the sustainability of our modules and systems.

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

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

We face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects. Solar module manufacturers compete with one another on price and on several module value attributes, including conversion efficiency, energy yield, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and LCOE. As noted above, competition on the basis of selling price per watt has intensified in recent years, which has contributed to declines in module average selling prices in several key markets. Many crystalline silicon cell and wafer manufacturers are transitioning from lower efficiency BSF multi-crystalline cells (the legacy technology against which we have generally competed in our markets) to higher efficiency PERC multi-crystalline and mono-crystalline cells at competitive cost structures. Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC solar modules are pursuing the commercialization of bifacial modules that also capture diffuse irradiance on the back side of a module. We believe the cost effective manufacture of bifacial PERC modules is being enabled by the expansion of inexpensive crystal growth and diamond wire saw capacity in China. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology can improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications and BoS configurations, which could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce.

We believe we are among the lowest cost PV module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and fully integrated PV solar power systems is highly competitive. Our cost competitiveness is based in large part on our module conversion efficiency, proprietary manufacturing technology (which enables us to



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produce a CdTe module in less than 3.5 hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture traditional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. Polysilicon costs have had periods of decline over the past several years, and polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, contributing to a decline in our relative manufacturing cost competitiveness over traditional crystalline silicon module manufacturers.

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

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

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

Certain Trends and Uncertainties

We believe that our operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations. See Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K for a discussion of other risks that may affect our financial condition and results of operations.

Our long-term strategic plans are focused on our goal to create long-term shareholder value through a balance of growth, profitability, and liquidity. In executing such plans, we are focusing on providing utility-scale PV solar energy solutions using our modules in key geographic markets that we believe have a compelling need for mass-scale PV electricity, including markets throughout the Americas, the Asia-Pacific region, and certain other strategic markets. Additionally,



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we are focusing on opportunities in which our PV solar energy solutions can compete directly with traditional forms of energy generation on an LCOE or similar basis, or complement such generation offerings. Such focus on our core module and utility-scale offerings exists within a current market environment that includes rooftop and distributed generation solar, particularly in the United States. While it is unclear how rooftop and distributed generation solar might impact our core utility-scale based offerings in the next several years, we believe that utility-scale solar will continue to be a compelling solar offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. Additionally, our ability to provide utility-scale offerings on economically attractive terms depends, in part, on certain market factors outside of our control, such as interest rate fluctuations, domestic or international trade policies, and government support programs. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for such systems and limit the number of potential buyers.

We are closely evaluating and managing the appropriate level of resources required as we pursue the most advantageous and cost effective projects and partnerships in our key markets. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy, to optimize the design and logistics around our PV solar energy solutions, and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. We expect that, over time, the majority of our consolidated net sales, operating income, and cash flows will come from solar offerings in the key geographic markets described above. The timing, execution, and financial impacts of our long-term strategic plans are subject to risks and uncertainties, as described in Item 1A. “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. We are focusing our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with significant current or projected electricity demand, relatively high existing electricity prices, strong demand for renewable energy generation, and high solar resources.

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

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



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We continually evaluate forecasted global demand, competition, and our addressable market, and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. In July 2017, we announced our plans to utilize our idled Vietnamese manufacturing plant for production of our next generation Series 6 module technology. This decision is expected to provide us with several operational benefits, including (i) the ability to add additional Series 6 production lines without ramping down current Series 4 production, (ii) flexibility in production capacity during our Series 6 transition period, and (iii) installing Series 6 production lines in a facility that is substantially identical to our Malaysian manufacturing plant where such lines are currently being installed, which is expected to accelerate and facilitate a cost-effective installation. Our Vietnamese plant, including the recently announced expansion of a second Series 6 production line at the facility, and any other potential investments to add or otherwise modify our manufacturing capacity in response to market demand and competition may require significant internal and possibly external sources of liquidity and may be subject to certain risks and uncertainties described in Item 1A. “Risk Factors,” including those described under the headings “Our future success depends on our ability to effectively balance manufacturing production with market demand, convert existing production facilities to support new product lines, such as our transition to Series 6 module manufacturing, and, when necessary, continue to build new manufacturing plants over time in response to such demand and add production lines in a cost-effective manner, all of which are subject to risks and uncertainties” and “If any future production lines are not built in line with our committed schedules, it may impair any future growth plans. If any future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.

8point3 Energy Partners LP

In June 2015, the 8point Energy Partners LP or “the Partnership” completed its IPO. As part of the offering, we contributed interests in various projects to a subsidiary of the Partnership in exchange for an ownership interest in the entity. Since the formation of the Partnership, the Sponsors have, from time to time, sold interests in solar projects to the Partnership, which owns and operates a portfolio of solar energy generation projects.

In February 2018, we entered into an agreement with CD Clean Energy and Infrastructure V JV, LLC, an equity fund managed by Capital Dynamics and certain other co-investors and certain other parties, pursuant to which such parties agreed to acquire our interests in the Partnership and its subsidiaries. In connection with the Transaction, we entered into an agreement with Capital Dynamics and certain other parties, whereby we and SunPower have agreed, among other things, to vote to approve the Merger Agreement at any meeting of shareholders of the Partnership for such purpose, as shareholders of the Partnership and holders of equity units in OpCo.

For additional information on the Partnership, see Item 1A. “Risk Factors – We may be unable to complete the sale of our interests in 8point3 Energy Partners LP on the terms and in the timeframe anticipated, or at all, and if we are unable to complete such sale, we may continue to hold the interests and may not be able to achieve the full strategic and financial benefits expected to result from the formation of the Partnership, or the sale could result in shareholder litigation” and Note 12. “Investments in Unconsolidated Affiliates and Joint Ventures – 8point3 Energy Partners LP” to our consolidated financial statements included in this Annual Report on Form 10-K.

Systems Project Pipeline

The following tables summarize, as of February 22, 2018, our approximately 2.2 GW advanced-stage project pipeline. The actual volume of modules installed in our projects will be greater than the project size in MWAC as module volumes required for a project are based upon MWDC, which will be greater than the MWAC size pursuant to a DC-AC ratio typically ranging from 1.2 to 1.3. Such ratio varies across different projects due to various system design factors. Projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized. Projects, or portions of projects, may also be removed from the tables below in the event an EPC-contracted or partner-developed project does not obtain permitting or financing, a project is not able to be sold due to the changing economics of the project or other factors, or we decide to temporarily own and operate, or retain interests in, such projects based on strategic opportunities or market factors.



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Projects under Sales Agreements
(Includes uncompleted sold projects, projects under sales contracts subject to conditions precedent, and EPC agreements, including partner developed projects that we will be or are constructing.)
Project/Location
 
Project Size in MWAC
 
PPA Contracted Partner
 
EPC Contract/Partner Developed Project
 
Expected Year Revenue Recognition Will Be Completed
 
% of Revenue Recognized as of December 31, 2017
California Flats, California
 
280

 
PG&E / Apple (1)
 
Capital Dynamics
 
2018
 
69%
Florida (multiple locations)
 
206

 
(2)
 
Tampa Electric Company
 
2018/2019
 
—%
India (multiple locations)
 
155

 
(3)
 
(5)
 
2018
 
—%
Cuyama, California
 
40

 
PG&E
 
D.E. Shaw Renewable Investments
 
2018
 
98%
Japan (multiple locations)
 
15

 
(4)
 
(6)
 
2018
 
—%
Total
 
696

 
 
 
 
 
 
 
 

Projects with Executed PPA Not under Sales Agreements
Project/Location
 
Project Size in MWAC
 
PPA Contracted Partner
 
Fully Permitted
 
Expected or Actual Substantial Completion Year
 
% Complete as of December 31, 2017
Twiggs County Solar, Georgia
 
200

 
Georgia Power Company
 
No
 
2019/2020
 
5%
Rosamond, California
 
150

 
SCE
 
Yes
 
2018
 
15%
Sun Streams, Arizona
 
150

 
SCE
 
Yes
 
2019
 
10%
Southwestern U.S.
 
150

 
(6)
 
Yes
 
2020/2021
 
4%
Luz del Norte, Chile
 
141

 
(7)
 
Yes
 
2016
 
100%
American Kings Solar, California
 
123

 
SCE
 
No
 
2020
 
16%
Willow Springs, California
 
100

 
SCE
 
Yes
 
2018
 
21%
Sunshine Valley, Nevada
 
100

 
SCE
 
Yes
 
2019
 
3%
Sun Streams 3, Arizona
 
65

 
APS
 
Yes
 
2020
 
—%
Beryl, Australia
 
61

 
(6)
 
Yes
 
2019
 
2%
Ishikawa, Japan
 
59

 
Hokuriku Electric Power Company
 
Yes
 
2018
 
62%
Japan (multiple locations)
 
84

 
(8)
 
No
 
2020
 
18%
Manildra, Australia
 
49

 
EnergyAustralia
 
Yes
 
2018
 
29%
Little Bear, California
 
40

 
Marin Clean Energy (9)
 
No
 
2020
 
5%
Miyagi, Japan
 
40

 
Tohoku Electric Power Company
 
No
 
2020
 
12%
India (multiple locations)
 
40

 
(10)
 
Yes
 
2017
 
100%
Total
 
1,552

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

(2)
Utility-owned generation

(3)
Southern Power Distribution Company of Telangana State Ltd – 75 MWAC and Andhra Pradesh Southern Power Distribution Company Ltd – 80 MWAC 

(4)
Hokuriku Electric Power Company, Tokyo Electric Power Company, and Tohoku Electric Power Company

(5)
Vector Green Energy Private Limited and India Infrastructure Fund II



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(6)
Contracted but not specified

(7)
PPAs executed for approximately 70 MWAC; remaining electricity to be sold on an open contract basis

(8)
Hokuriku Electric Power Company and Tokyo Electric Power Company

(9)
Expandable to 160 MWAC, subject to satisfaction of certain PPA contract conditions

(10)
Gulbarga Electricity Supply Co. – 20 MWAC and Chamundeshwari Electricity Supply Co. – 20 MWAC 

Results of Operations

The following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
81.3
 %
 
78.0
 %
 
72.5
 %
Gross profit
 
18.7
 %
 
22.0
 %
 
27.5
 %
Selling, general and administrative
 
6.9
 %
 
9.0
 %
 
6.2
 %
Research and development
 
3.0
 %
 
4.3
 %
 
3.2
 %
Production start-up
 
1.4
 %
 
 %
 
0.4
 %
Restructuring and asset impairments
 
1.3
 %
 
25.6
 %
 
 %
Goodwill impairment
 
 %
 
2.6
 %
 
 %
Operating income (loss)
 
6.0
 %
 
(19.6
)%
 
17.8
 %
Foreign currency loss, net
 
(0.3
)%
 
(0.5
)%
 
(0.2
)%
Interest income
 
1.2
 %
 
0.9
 %
 
0.5
 %
Interest expense, net
 
(0.9
)%
 
(0.7
)%
 
(0.2
)%
Other income (expense), net
 
0.8
 %
 
1.4
 %
 
(0.1
)%
Income tax expense
 
(12.6
)%
 
(0.8
)%
 
(0.8
)%
Equity in earnings of unconsolidated affiliates, net of tax
 
0.1
 %
 
5.0
 %
 
(2.6
)%
Net (loss) income
 
(5.6
)%
 
(14.3
)%
 
14.4
 %

Segment Overview
We operate our business in two segments. Our modules segment involves the design, manufacture, and sale of CdTe solar modules to third parties, and our systems segment includes the development, construction, operation, maintenance, and sale of PV solar power systems, including any modules installed in such systems and any revenue from energy generated by such systems. See Note 22. “Segment and Geographical Information to our consolidated financial statements included in this Annual Report on Form 10-K for more information on our operating segments. See also Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Systems Project Pipeline” for a description of the system projects in our advanced-stage project pipeline.

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



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Net sales

Modules Business

We generally price and sell our solar modules per watt of nameplate power. During 2017, Zorlu Enerji and RCR O’Donnell Griffin Pty, Ltd each accounted for more than 10% of our modules business net sales, and the majority of our solar modules were sold to integrators and operators of systems in the United States, India, and Turkey. Substantially all of our modules business net sales during 2017 were denominated in U.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. The revenue recognition policies for module sales are further described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K.

Systems Business

Through our fully integrated systems business, we provide complete turn-key PV solar power systems, or solar solutions, that draw upon our capabilities, which include (i) project development, (ii) EPC services, and (iii) O&M services. Additionally within our systems segment, we may temporarily own and operate certain of our systems for a period of time based on strategic opportunities or market factors. We typically recognize revenue for sales of solar power systems using cost based input methods, which result in revenue being recognized as work is performed based on the relationship between actual costs incurred compared to the total estimated costs for a given contract. We may also recognize revenue for the sale of a system after the project has been completed due to the timing of when we enter into the associated sales contract with the customer. The revenue recognition policies for our systems business are further described in Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K.

During 2017, the majority of our systems business net sales were in North America, and the principal customer of our systems business was Capital Dynamics, which accounted for more than 10% of our systems business net sales.

The following table shows net sales by reportable segment for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Modules
 
$
806,398

 
$
675,452

 
$
227,461

 
$
130,946

 
19
 %
 
$
447,991

 
197
 %
Systems
 
2,134,926

 
2,229,111

 
3,885,189

 
(94,185
)
 
(4
)%
 
(1,656,078
)
 
(43
)%
Net sales
 
$
2,941,324

 
$
2,904,563

 
$
4,112,650

 
$
36,761

 
1
 %
 
$
(1,208,087
)
 
(29
)%

Net sales from our modules segment increased by $130.9 million in 2017 primarily due to a 68% increase in the volume of watts sold, partially offset by a 29% decrease in the average selling price per watt. Net sales from our systems segment decreased by $94.2 million in 2017 primarily as a result of the completion of substantially all construction activities on a number of projects in 2016, including the Desert Stateline, Astoria, Taylor, East Pecos, Silver State South, Butler, and McCoy projects, partially offset by the sale of the Moapa, California Flats, Switch Station, and Cuyama projects in 2017.

Net sales from our modules segment increased by $448.0 million in 2016 primarily due to a 211% increase in the volume of watts sold, partially offset by a 5% decrease in the average selling price per watt. Net sales from our systems segment decreased by $1.7 billion in 2016 primarily from the sale of majority interests in the Desert Stateline, North Star, and Lost Hills projects in 2015, the completion of substantially all construction activities on the Imperial Solar Energy Center West and Decatur projects in 2015, the completion of substantially all construction activities on the Silver State South and McCoy projects in the first half of 2016, and lower module plus sales transactions. This decrease in revenue was partially offset by higher revenue from the commencement of construction on the Taylor and Butler projects in late 2015, the commencement of construction on the East Pecos project in early 2016, and completion of substantially all construction activities on the Astoria project.



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Table of Contents

Cost of sales

Modules Business

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

Systems Business

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

The following table shows cost of sales by reportable segment for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Modules
 
$
694,060

 
$
564,942

 
$
175,530

 
$
129,118

 
23
 %
 
$
389,412

 
222
 %
Systems
 
1,698,317

 
1,701,203

 
2,804,358

 
(2,886
)
 
 %
 
(1,103,155
)
 
(39
)%
Cost of sales
 
$
2,392,377

 
$
2,266,145

 
$
2,979,888

 
$
126,232

 
6
 %
 
$
(713,743
)
 
(24
)%
% of net sales
 
81.3
%
 
78.0
%
 
72.5
%
 
 

 
 
 
 
 
 

Cost of sales increased $126.2 million, or 6%, and increased 3.3 percentage points as a percent of net sales when comparing 2017 with 2016. The increase in cost of sales was driven by a $129.1 million increase in our modules segment cost of sales primarily due to higher costs of $366.2 million from the increased volume of modules sold directly to third parties, partially offset by continued cost reductions in the cost per watt of our solar modules, which decreased cost of sales by $182.4 million, a reduction in our product warranty liability of $31.3 million due to lower estimated module replacement costs, a reduction in our module collection and recycling liability of $13.5 million from updates to several valuation assumptions, including a decrease in certain inflation rates, and lower inventory write-downs of $9.2 million.

Cost of sales decreased $713.7 million, or 24%, and increased 5.5 percentage points as a percentage of net sales when comparing 2016 with 2015. The decrease in cost of sales was primarily the result of a $1.1 billion decrease in our systems segment cost of sales primarily due to the volume of projects under construction and the timing of when all revenue recognition criteria were met. This net decrease was partially offset by a $389.4 million increase in our modules segment cost of sales primarily due to higher costs of $510.8 million associated with the increased volume of modules sold directly to third parties, a reduction in our module collection and recycling liability of $69.6 million in 2015 resulting from certain recycling technology advancements, which significantly increased the throughput of modules able to be recycled at a point in time, along with other material and labor cost reductions, and higher inventory write-downs of $22.3 million primarily related to our remaining crystalline silicon module inventories, partially offset by continued cost reductions in the cost per watt of our solar modules, which decreased our cost of sales by $217.3 million.



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Table of Contents

Gross profit

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

The following table shows gross profit for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Gross profit
 
$
548,947

 
$
638,418

 
$
1,132,762

 
$
(89,471
)
 
(14
)%
 
$
(494,344
)
 
(44
)%
% of net sales
 
18.7
%
 
22.0
%
 
27.5
%
 
 
 
 
 
 

 
 


Gross profit decreased 3.3 percentage points to 18.7% during 2017 from 22.0% during 2016 primarily due to a mix of lower gross profit projects sold and under construction during the period and reductions in the average selling price per watt of our modules sold directly to third parties, partially offset by the reductions in our product warranty liability and our module collection and recycling liability as described above.

Gross profit decreased 5.5 percentage points to 22.0% during 2016 from 27.5% during 2015 primarily as a result of a mix of lower gross profit projects sold and under construction, the reduction in our module collection and recycling liability in 2015 as described above, and higher inventory write-downs, partially offset by continued cost reductions in the cost per watt of our solar modules.

Selling, general and administrative

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

The following table shows selling, general and administrative expense for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Selling, general and administrative
 
$
202,699

 
$
261,994

 
$
255,192

 
$
(59,295
)
 
(23
)%
 
$
6,802

 
3
%
% of net sales
 
6.9
%
 
9.0
%
 
6.2
%
 
 

 
 

 
 
 
 

Selling, general and administrative expense in 2017 decreased compared to 2016 primarily due to higher impairments of certain project assets in 2016, lower employee compensation expense due to various restructuring activities, lower professional fees, lower infrastructure related expenses, and lower business development expenses. Selling, general and administrative expense in 2016 increased compared to 2015 primarily from higher development costs for early-stage projects and impairments of certain project assets, partially offset by lower employee compensation expense due to various restructuring activities, and lower professional fees associated with the formation and IPO of the Partnership.

Research and development

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




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Table of Contents

The following table shows research and development expense for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Research and development
 
$
88,573

 
$
124,762

 
$
130,593

 
$
(36,189
)
 
(29
)%
 
$
(5,831
)
 
(4
)%
% of net sales
 
3.0
%
 
4.3
%
 
3.2
%
 
 

 
 

 
 
 
 

Research and development expense in 2017 decreased compared to 2016 primarily due to lower costs for third-party contracted services, reduced material and module testing costs, the termination of certain R&D programs for legacy module technologies, and lower employee compensation expense resulting from reductions to our R&D headcount as part of various restructuring activities. During 2017, the average conversion efficiency of our CdTe solar modules produced was 16.9% compared to 16.4% in 2016. Research and development expense in 2016 decreased compared to 2015 primarily due to reductions in our R&D headcount and employee compensation expense resulting from various restructuring activities. During 2016, the average conversion efficiency of our CdTe solar modules was 16.4% compared to 15.6% in 2015.

Production start-up

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

The following table shows production start-up expense for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Production start-up
 
$
42,643

 
$
1,021

 
$
16,818

 
$
41,622

 
4,077
%
 
$
(15,797
)
 
(94
)%
% of net sales
 
1.4
%
 
%
 
0.4
%
 
 

 
 

 
 
 
 

During 2017 and 2016, we primarily incurred production start-up expense for the transition to Series 6 module manufacturing at our facilities in Perrysburg, Ohio and Kulim, Malaysia. Production start-up expense for 2015 was primarily driven by our previous crystalline silicon module manufacturing operations, which we ended in 2016 as further described in Note 4. “Restructuring and Asset Impairments” to our consolidated financial statements included in this Annual Report on Form 10-K.

Restructuring and asset impairments

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




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Table of Contents

The following table shows restructuring and asset impairments for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Restructuring and asset impairments
 
$
37,181

 
$
743,862

 
$

 
$
(706,681
)
 
(95
)%
 
$
743,862

 
100
%
% of net sales
 
1.3
%
 
25.6
%
 
%
 
 

 
 

 
 
 
 

In November 2016, our board of directors approved a set of initiatives to accelerate our transition to Series 6 module manufacturing and restructure our operations. In June 2016, we ended production of our crystalline silicon modules to focus on our core CdTe module and utility-scale systems. As a result of these decisions, we recorded restructuring and asset impairment charges of $41.8 million and $743.9 million during 2017 and 2016, respectively. In 2017, we also reversed a customs tax liability associated with a prior restructuring activity, which reduced our restructuring charges by $4.7 million during the period. See Note 4. “Restructuring and Asset Impairments” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information on these matters.

Goodwill impairment

The following table shows goodwill impairments for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Goodwill impairment
 
$

 
$
74,930

 
$

 
$
(74,930
)
 
(100
)%
 
$
74,930

 
100
%
% of net sales
 
%
 
2.6
%
 
%
 
 

 
 

 
 
 
 

As a result of our annual impairment analysis in the fourth quarter of 2016, we impaired the remaining $68.8 million of goodwill of our systems reporting unit primarily due to a strategic shift in the mix of our module and system net sales, which was approved by our board of directors in November 2016 as part of the restructuring activities described above. This shift involved an expected reduction in the annual megawatts sold through systems business projects. Other factors that contributed to the impairment included our reduced market capitalization and the challenging conditions within the solar industry as of the date of our testing. In June 2016, we also impaired the remaining $6.1 million of goodwill associated with our crystalline silicon modules reporting unit due to the decision to end the related manufacturing operations as described above. See Note 6. “Goodwill and Intangible Assets” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.

Foreign currency loss, net

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

The following table shows foreign currency loss, net for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Foreign currency loss, net
 
$
(9,640
)
 
$
(14,007
)
 
$
(6,868
)
 
$
4,367

 
(31
)%
 
$
(7,139
)
 
104
%

Foreign currency loss, net decreased in 2017 compared to 2016 primarily as a result of lower costs associated with hedging activities related to our subsidiaries in India, the weakening of the U.S. dollar relative to certain foreign currencies, and differences between our economic hedge positions and the underlying exposures. Foreign currency loss, net increased in 2016 compared to 2015 primarily due to higher costs for hedging activities related to our subsidiaries in India, differences between our economic hedge positions and the underlying exposures, and changes in certain foreign currency rates.




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Table of Contents

Interest income

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

The following table shows interest income for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Interest income
 
$
35,704

 
$
25,193

 
$
22,516

 
$
10,511

 
42
%
 
$
2,677

 
12
%

Interest income during 2017 increased compared to 2016 primarily due to higher cash balances during the period, higher interest rates associated with such cash balances, and a promissory note with an affiliate issued in late 2016. Interest income during 2016 increased compared to 2015 primarily due to higher interest rates on our marketable securities.

Interest expense, net

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

The following table shows interest expense, net for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Interest expense, net
 
$
(25,765
)
 
$
(20,538
)
 
$
(6,975
)
 
$
(5,227
)
 
25
%
 
$
(13,563
)
 
194
%

Interest expense, net increased in 2017 compared to 2016 primarily due to changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting and higher levels of project specific debt financings, partially offset by lower interest expense associated with certain Malaysian credit facilities that were fully repaid in 2016. Interest expense, net increased in 2016 compared to 2015 primarily as a result of lower interest costs capitalized to certain projects that were substantially completed in 2016 and higher levels of project specific debt financings outstanding during the period.

Other income (expense), net

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

The following table shows other income (expense), net for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Other income (expense), net
 
$
23,965

 
$
40,252

 
$
(5,502
)
 
$
(16,287
)
 
(40
)%
 
$
45,754

 
832
%

Other income (expense), net decreased in 2017 compared to 2016 primarily due to realized gains of $41.3 million in 2016 from the sale of certain restricted investments driven by an effort to align the currencies of the investments with those of the corresponding collection and recycling liabilities and a $7.4 million reversal of the outstanding contingent consideration associated with our TetraSun acquisition as the result of our crystalline silicon module manufacturing restructuring in 2016, partially offset by an incremental settlement in 2017 for the resolution of an outstanding matter with a former customer. The increase in other income (expense), net in 2016 compared to 2015 was primarily attributable to the transactions described above, partially offset by the impairment of a cost method investment in 2016.



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Table of Contents

Income tax expense

In December 2017, the U.S. President signed into law the Tax Act, which significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing a mandatory one-time transition tax on certain accumulated earnings and profits of foreign corporate subsidiaries (the “transition tax”) that may electively be paid over eight years, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Tax Act also includes many new provisions, such as changes to bonus depreciation, changes to deductions for executive compensation, net operating loss deduction limitations, a tax on global intangible low-taxed income (“GILTI”) earned by foreign corporate subsidiaries, a base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). Many of these provisions, including the tax on GILTI, the BEAT, and the deduction for FDII, are not applicable to us until 2018, and we continue to evaluate the impact of such provisions of the Tax Act.

During the year ended December 31, 2017, we recognized an aggregate provisional tax expense of $408.1 million, which included an amount for the transition tax of $401.5 million and a net deferred tax expense of $6.6 million for the remeasurement of deferred tax assets and liabilities taking into account the lower U.S. corporate income tax rate of 21%. The final effects of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to estimates utilized to calculate provisional amounts, or actions we may take as a result of the Tax Act. The associated accounting for the Tax Act is expected to be completed when our 2017 U.S. corporate income tax return is filed in 2018.

Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions in which we operate, principally Australia, India, and Malaysia. Significant judgments and estimates are required in determining our consolidated income tax expense. The statutory federal corporate income tax rate in the U.S. will decrease from 35% to 21% beginning in January 2018, while the tax rates in Australia, India, and Malaysia are 30%, 34.6%, and 24%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax.

The following table shows income tax expense for the years ended December 31, 2017, 2016, and 2015:
 
 
Years Ended
 
Change
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2017 over 2016
 
2016 over 2015
Income tax expense
 
$
(371,996
)
 
$
(23,167
)
 
$
(32,329
)
 
$
(348,829
)
 
1,506
%
 
$
9,162

 
(28
)%
Effective tax rate
 
184.1
%
 
(4.3
)%
 
4.4
%
 
 

 
 

 
 
 
 

Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. The rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period. Income tax expense increased by $348.8 million during 2017 compared to 2016 primarily due to provisional tax expense of $408.1 million related to the Tax Act as described above, higher pretax income, a $35.4 millio