FIRST SOLAR, INC. Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Securities Act of 1933, as amended (the "Securities Act"), which
are subject to risks, uncertainties, and assumptions that are difficult to
predict. All statements in this Quarterly Report on Form 10-Q, other than
statements of historical fact, are forward-looking statements. These
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
include statements, among other things, concerning: the length and severity of
the ongoing COVID-19 (novel coronavirus) outbreak, including its impacts across
our businesses on demand, manufacturing, project development, O&M, construction,
financing, and our global supply chains, actions that may be taken by
governmental authorities to contain the COVID-19 outbreak or to treat its
impacts, and the ability of our customers, suppliers, equipment vendors, and
other counterparties to fulfill their contractual obligations to us; effects
resulting from certain module manufacturing changes; 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,
currently anticipated delays in the implementation of our Copper Replacement
("CuRe") program and related estimated impacts, restructuring, product
reliability, investments, and capital expenditures; our ability to continue to
reduce the cost per watt of our solar modules; the impact of public policies,
such as tariffs or other trade remedies imposed on solar cells and modules; the
potential impact of proposed legislation intended to encourage renewable energy
investments through tax credits; effects resulting from pending litigation; our
ability to expand manufacturing capacity worldwide; our ability to reduce the
costs to develop and construct PV solar power systems; the impact of supply
chain disruptions, further exacerbated by the COVID-19 pandemic, that may affect
the procurement of raw materials used in our manufacturing process and the
distribution of our modules; research and development ("R&D") programs and our
ability to improve the wattage 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,"
"contingent," and the negative or plural of these words, and other comparable
terminology.
Forward-looking statements are only predictions based on our current
expectations and our projections about future events. All forward-looking
statements included in this Quarterly Report on Form 10-Q are based upon
information available to us as of the filing date of this Quarterly Report on
Form 10-Q and therefore speak only as of the filing date. You should not place
undue reliance on these forward-looking statements. We undertake no obligation
to update any of these forward-looking statements for any reason, whether as a
result of new information, future developments, or otherwise. These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to differ materially from those expressed or
implied by these statements. These factors include, but are not limited to, the
severity and duration of the COVID-19 pandemic, including its potential impact
on the Company's business, financial condition, and results of operations;
structural imbalances in global supply and demand for photovoltaic ("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; the impact of public policies, such as tariffs or other trade
remedies imposed on solar cells and modules; the passage of proposed legislation
intended to encourage renewable energy investments through tax credits; our
ability to execute on our long-term strategic plans; our ability to execute on
our solar module technology and cost reduction roadmaps; our ability to improve
the wattage of our solar modules; interest rate fluctuations and our customers'
ability to secure financing; the loss of any of our large customers, or the
ability of our customers and counterparties to perform under their contracts
with us; the satisfaction of conditions precedent in our sales agreements; our
ability to attract new customers and to develop and maintain existing customer
and supplier relationships; our ability to convert existing or construct
production facilities to support new product lines; general
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economic and business conditions, including those influenced by U.S. ,
international, and geopolitical events; environmental responsibility, including
with respect to 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; effects
resulting from pending litigation; future collection and recycling costs for
solar modules covered by our module collection and recycling program; supply
chain disruption, including the availability of shipping containers, port
congestion, cancelled shipments by logistic providers, and the cost of fuel, all
of which may be exacerbated by the COVID-19 pandemic; 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 research and development ("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 the matters discussed in Item 1A.
"Risk Factors" of our Annual Report on Form 10-K for the year ended December 31,
2021 , elsewhere in this Quarterly Report on Form 10-Q, and our other reports
filed with the SEC . You should carefully consider the risks and uncertainties
described in these reports.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes thereto included in this Quarterly
Report on Form 10-Q. When referring to our manufacturing capacity, total sales,
and solar module sales, the unit of electricity in watts for megawatts ("MW")
and gigawatts ("GW") is direct current ("DC" or "DC") unless otherwise noted.
When referring to our projects or systems, the unit of electricity in watts for
MW and GW is alternating current ("AC" or "AC") unless otherwise noted.
Executive Overview
We are a leading American solar technology company and global provider of PV solar energy solutions. Developed at our R&D labs inCalifornia andOhio , we manufacture and sell PV solar modules with an advanced thin film semiconductor technology that provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar modules. From raw material sourcing through end-of-life module recycling, we are committed to reducing the environmental impacts and enhancing the social and economic benefits of our products across their life cycle. We are the world's largest thin film PV solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere.
Certain of our financial results and other key operational developments for the
three months ended
•Net sales for the three months endedMarch 31, 2022 decreased by 54% to$367.0 million compared to$803.4 million for the same period in 2021. The decrease was primarily driven by sales of certain projects inthe United States in the prior period, a decrease in the volume of modules sold to third parties, and a lower average selling price per watt. •Gross profit for the three months endedMarch 31, 2022 decreased 19.9 percentage points to 3.1% from 23.0% for the same period in 2021. The decrease in gross profit was primarily due to the volume of higher gross profit projects sold during the prior period, a decrease in the average selling price per watt of our modules, and an increase in sales freight, partially offset by continued module cost reductions and manufacturing related charges associated with the COVID-19 pandemic in the prior period. •As ofMarch 31, 2022 , we had 7.9 GWDC of total installed Series 6 nameplate production capacity across all our facilities. We produced 2.1 GWDC of solar modules during the three months endedMarch 31, 2022 , which represented a 19% increase in Series 6 module production from the same period in 2021. The increase in production was primarily driven by higher throughput at our manufacturing facilities. We expect to produce between 8.2 GWDC and 8.8 GWDC of Series 6 and Series 6 Plus modules during 2022. 34 -------------------------------------------------------------------------------- Table of Contents 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 decreased to levels that are competitive with or below the wholesale price of electricity in many markets. This price decline has opened new possibilities to develop systems in many locations with limited or no financial incentives, thereby promoting the widespread adoption of solar energy. As a result of such market opportunities, we are in the process of expanding our manufacturing capacity by 6.6 GWDC by constructing our third manufacturing facility in theU.S. and our first manufacturing facility inIndia . These new facilities, which we expect to produce our next generation Series 7 modules, are currently under construction and are expected to commence operations in the first half of 2023 and the second half of 2023, respectively. In the aggregate, we believe manufacturers of solar cells and modules, particularly those inChina , have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. Accordingly, we believe the solar industry may experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that excess capacity will also put pressure on pricing. In light of such market realities, we continue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process, our R&D capabilities, the sustainability advantage of our modules, and our financial stability. The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. This competition may result in an environment in which pricing falls rapidly, thereby potentially increasing demand for solar energy solutions but constraining the ability for project developers and module manufacturers to sustain meaningful and consistent profitability. Although module average selling prices in many global markets have declined for several years, recent module spot pricing has increased, in part, due to elevated commodity and freight costs. For example, the price of polysilicon has significantly increased in recent months, reaching its highest level in the last 10 years due to higher energy prices and reduced operating capacities of silicon metal production inChina and rising global demand for polysilicon. Several other commodities, including aluminum, steel, and natural gas, have experienced similar price increases in recent months. While the duration of this elevated period of pricing is uncertain, module average selling prices in global markets are expected to continue to decline in the long-term. Competitive pricing for modules and systems, relative to the cost of traditional forms of energy generation, is expected to contribute to diversification in global electricity generation and further demand for solar energy. Over time, however, declining average selling prices may adversely affect our results of operations. Our results of operations could also be adversely affected if competitors reduce pricing to levels below their costs, bid aggressively low prices for module sale agreements, or are able to operate at minimal or negative operating margins for sustained periods of time. For certain of our competitors, including many inChina , these practices may be enabled by their direct or indirect access to sovereign capital or other forms of state-owned support. Additionally, in certain markets an oversupply imbalance at the grid level may reduce short-to-medium term demand for new solar installations relative to prior years, lower pricing for power purchase agreements ("PPAs"), and lower margins on module and system sales to such markets. However, we believe the effects of such imbalance can be mitigated by modern solar power plants and energy storage solutions that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements and implementing certain other cost reduction initiatives. 35 -------------------------------------------------------------------------------- Table of Contents We face intense competition from manufacturers of crystalline silicon solar modules. Solar module manufacturers compete with one another on sales price per watt, which may be influenced by several module value attributes, including wattage (through a larger form factor or an improved conversion efficiency), energy yield, degradation, sustainability, and reliability. Sales price per watt may also be influenced by warranty terms and customer payment terms. While conventional solar modules, including the solar modules we currently produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, most module manufacturers offer bifacial modules that also capture diffuse irradiance on the back side of a module. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which could potentially lower the overall levelized cost of electricity ("LCOE") of a system when compared to systems using conventional solar modules, including the modules we currently produce. Additionally, certain module manufacturers recently introduced n-type mono-crystalline modules, such as tunnel oxide passivated contact modules, which are expected to provide certain improvements to module efficiency, temperature coefficient, and bifacial performance, and claim to provide certain degradation advantages compared to other mono-crystalline modules. We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin-film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing process (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers.
In terms of performance, in many climates our solar modules provide certain energy production advantages relative to competing crystalline silicon solar modules. For example, our CdTe solar technology provides:
•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);
•a superior spectral response in humid environments where atmospheric moisture
alters the solar spectrum relative to standard test conditions;
•a better partial shading response than competing crystalline silicon
technologies, which may experience significantly lower energy generation than
CdTe solar modules when partial shading occurs; and
•an immunity to cell cracking and its resulting power output loss, a common
failure often observed in crystalline silicon modules caused by poor
manufacturing, handling, weather, or other conditions.
In addition to these technological advantages, we also warrant that our solar
modules will produce at least 98% of their labeled power output rating during
the first year, with the warranty coverage reducing by a degradation factor
between 0.3% and 0.5%, depending on the module series, every year thereafter
throughout the limited power output warranty period of up to 30 years. As a
result of these and other factors, our solar modules can produce more annual
energy in real world operating conditions than conventional crystalline silicon
modules with the same nameplate capacity.
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While our modules are generally competitive in cost, reliability, and
performance attributes, there can be no guarantee such competitiveness will
continue to exist in the future to the same extent or at all. Any declines in
the competitiveness of our products could result in further declines in the
average selling prices of our modules and additional margin compression. We
continue to focus on enhancing the competitiveness of our solar modules by
accelerating progress along our module technology and cost reduction roadmaps.
Certain Trends and Uncertainties
We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties. See Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 for discussions of other risks (the "Risk Factors") that may affect us. Our business is evolving worldwide and is shaped by the varying ways in which our offerings can be compelling and economically viable solutions to energy needs in various markets. In addressing electricity demands, we are focused on providing utility-scale module offerings in key geographic markets that we believe have a compelling need for mass-scale PV solar electricity, including markets throughoutthe United States ,India ,Europe , andJapan . We closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. When deployed in utility-scale applications, our modules provide energy at a lower LCOE compared to traditional forms of energy generation, making them an attractive alternative to or replacement for aging fossil fuel-based generation resources. Based on publicly available information, retirements of coal generation plants inthe United States alone are expected to approximate 50 GWDC over the next ten years, representing a significant increase in the potential market for solar energy. This focus on utility-scale module offerings exists within a current market environment that includes rooftop and distributed generation solar, particularly inthe United States . While it is unclear how rooftop and distributed generation solar might impact our core offerings over the next several years, we believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions. Demand for our solar energy solutions depends, in part, on market factors outside our control, such as the availability of debt and/or equity financing (including, inthe United States , tax equity financing), interest rate fluctuations, domestic or international trade policies, government regulations, and government support programs. Many governments have proposed policies or support programs intended to encourage renewable energy investments. Such support programs may include additional incentives over several years for renewable energy projects or manufacturers of renewable energy products. For example, during 2021 legislation was introduced in theU.S. Congress to incentivize domestic solar manufacturing and accelerate the transition to clean energy by providing tax credits forU.S. solar manufacturers and project developers. Among other things, such proposed legislation is expected to (i) extend the investment tax credit up to 40% for 10 years for solar projects that satisfy certain domestic content, labor, and wage requirements; (ii) introduce certain refundable tax credits for solar module components manufactured in theU.S. ; (iii) revive certain tax credits for capital investments in the manufacturing of solar module components; and (iv) expand the scope of production tax credits for energy storage projects. At this time, it is unclear whether and to what extent such measures will be enacted into law. If such legislation is successfully signed into law, or other similar policies or support programs are enacted, it could positively impact our business, financial condition, and results of operations. While we compete in many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for our solar modules. 37 -------------------------------------------------------------------------------- Table of Contents Our ability to provide solar modules on economically attractive terms is also affected by the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules. For example, the cost of ocean freight throughout many parts of the world has continued to increase due to the limited availability of shipping containers, increased port congestion, an increase in cancellations of shipments by logistics providers, and elevated fuel costs. Such factors may disrupt our supply chain and adversely impact our manufacturing operations as several of our key raw materials and components are either single-sourced or sourced from a limited number of international suppliers. In response to these disruptions, we have accommodated certain requests for delayed shipments to customers in an effort to manage our shipping routes and mitigate our exposure to uncontracted freight rates. Additionally, due to ongoing schedule reliability issues with many ships, we are adjusting our shipping plans to include additional lead time (in many cases, longer than 30 days) for module deliveries and utilizing ourU.S. distribution network to better meet our customer commitments. For certain contracts with customers, we have also started employing module contract structures that provide additional consideration to us if the cost of logistics services exceeds a defined threshold. Additionally, our manufacturing capacity expansions in theU.S. andIndia are expected to bring manufacturing activities closer to customer demand, further mitigating our exposure to the cost of ocean freight. While it is currently unclear how long these issues will persist, they may be further exacerbated by the disruption of major shipping routes or other economic disruptions caused by the COVID-19 pandemic. We generally price and sell our solar modules on a per watt basis. As ofMarch 31, 2022 , we had entered into contracts with customers for the future sale of 25.4 GWDC of solar modules for an aggregate transaction price of$6.9 billion , which we expect to recognize as revenue through 2025 as we transfer control of the modules to the customers. Such volume includes contracts for the sale of 9.8 GWDC of solar modules that include transaction price adjustments associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Based on these potential technology improvements, the contracted module volumes as ofMarch 31, 2022 , and the expected timing of module deliveries, such adjustments, if realized, could result in additional revenue of up to$0.3 billion , the majority of which would be recognized in 2023 and 2024. In addition to these price adjustments, certain of our contracts with customers may also include favorable price adjustments for the proposed extension of theU.S. investment tax credit and sales freight described above. Such contracts may also include price adjustments related to potential changes to certain commodity prices. We continue to invest significant financial resources in R&D initiatives, including efforts to enhance module performance such as our CuRe program, which replaces copper with certain other elements that are expected to enhance module performance. However, the implementation of our CuRe program has been delayed as a result of certain challenges, including in achieving full module performance entitlement in high volume manufacturing conditions and COVID-19 related travel restrictions, quarantine requirements, and government orders impacting our ability to upgrade tooling to support our CuRe program at our manufacturing facilities inMalaysia andVietnam . In addition to these factors, we have elected to prioritize other aspects of our technology roadmap in the near term, which will further delay our CuRe program beyond 2022. The revised implementation timeline will be based on our ability to improve upon our manufacturing process capabilities in respect of the CuRe program and the outcome of additional production tests, which will inform our lead line implementation timing and subsequent fleet-wide replication schedule. In connection with the aforementioned challenges, we have amended or will endeavor to amend certain customer contracts for modules utilizing CuRe technology, including by potentially making certain price concessions and substituting our other modules for the modules with CuRe technology that were expected to be delivered under the terms of the original customer contracts. 38 -------------------------------------------------------------------------------- Table of Contents On occasion, we have elected to temporarily own and operate certain PV solar power systems with the intention to sell them at a later date. As ofMarch 31, 2022 andDecember 31, 2021 , the recoverability of our Luz del Norte PV solar power plant was based, in part, on the likelihood of our continued ownership and operation of the system. However, it is reasonably possible that our intent to hold the asset may change in the near term due to our evaluation of strategic sale opportunities for the system. The pursuit of such opportunities, which require coordination with the system's lenders, may result in a determination that the carrying value of the system is not recoverable based on the probability-weighted undiscounted future cash flows, which in turn could result in a possible impairment of the system in future periods. Accordingly, any changes in our expected use of the asset or its disposition may result in impairment charges that could be material to our condensed consolidated financial statements and have a significant adverse impact on our results of operations. We continually evaluate forecasted global demand, competition, and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. Additionally, we are in the process of expanding our manufacturing capacity by 6.6 GWDC by constructing our third manufacturing facility in theU.S. and our first manufacturing facility inIndia . Such additional capacity, and any other potential investments to add or otherwise modify our existing manufacturing capacity in response to market demand and competition, may require significant internal and possibly external sources of capital, and may be subject to certain risks and uncertainties described in the Risk Factors. In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availability of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, R&D activities, the implementation of our technology roadmap (such as certain Series 6 Plus manufacturing upgrades), or construction activities associated with our expanding manufacturing capacity. At this time, such limitations have had a minimal effect on our manufacturing facilities, with the exception of the aforementioned technology roadmap delays, and we have implemented a wide range of safety measures intended to enable the continuity of our operations and inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities. While we continue to work with relevant government agencies inMalaysia andVietnam to allow the essential travel of personnel that support the implementation of our technology roadmap, such implementation may be delayed due to travel restrictions, quarantine requirements, other government orders, or increases in COVID-19 infection rates. Refer to the Risk Factors for more information related to impacts of COVID-19 on our business. 39 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 96.9 % 77.0 % Gross profit 3.1 % 23.0 % Selling, general and administrative 10.0 % 6.5 % Research and development 7.4 % 2.5 % Production start-up 2.0 % 1.4 % Gain on sales of businesses, net 0.5 % 18.8 % Operating (loss) income (15.7) % 31.4 % Foreign currency loss, net (1.1) % (0.3) % Interest income 0.6 % 0.1 % Interest expense, net (0.8) % (0.4) % Other (expense) income, net (0.1) % 1.1 % Income tax benefit (expense) 5.3 % (5.8) % Net (loss) income (11.8) % 26.1 % Segment Overview Our primary segment is our modules business, which involves the design, manufacture, and sale of CdTe solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include developers and operators of PV solar power systems. Our residual business operations include certain project development activities and O&M services, which are primarily concentrated inJapan , as well as the results of operations from PV solar power systems we own and operate in certain international regions. For the year endedDecember 31, 2021 , we changed our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. Following this change, our modules business represents our only reportable segment. We previously operated our business in two segments, which included our modules and systems businesses. Systems business activities primarily involved (i) project development, (ii) EPC services, and (iii) O&M services, which now comprise our residual business operations and are categorized as "Other" in the tables below. All prior year balances were revised to conform to the current year presentation.
Net sales
We generally price and sell our solar modules on a per watt basis. During the three months endedMarch 31, 2022 , we sold the majority of our solar modules to developers and operators of systems inthe United States andIndia , and substantially all of our modules business net sales were denominated inU.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Net sales from our residual business operations primarily consists of revenue recognized for sales of development projects or completed systems, including any modules installed in such systems and any revenue from energy generated by such systems. In certain prior periods, our residual business operations also included EPC services we provided to third parties. 40 -------------------------------------------------------------------------------- Table of Contents The following table shows net sales by reportable segment for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, (Dollars in thousands) 2022 2021 Three Month Change Modules$ 354,881 $ 534,670 $ (179,789) (34) % Other 12,159 268,704 (256,545) (95) % Net sales$ 367,040 $ 803,374 $ (436,334) (54) % Net sales from our modules segment decreased$179.8 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 primarily due to a 22% decrease in the volume of watts sold and a 15% decrease in the average selling price per watt. Net sales from our residual business operations decreased$256.5 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 primarily due to sales of certain projects inthe United States in the prior period.
Cost of sales
Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion). Cost of sales for our residual business operations primarily consists of project-related costs, such as development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPC costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering, and construction labor), and site specific costs.
The following table shows cost of sales by reportable segment for the three
months ended
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Modules $ 343,692 $ 434,230 $ (90,538) (21) %
Other 11,885 184,377 (172,492) (94) %
Total cost of sales $ 355,577 $ 618,607 $ (263,030) (43) %
% of net sales 96.9 % 77.0 %
Cost of sales decreased $263.0 million , or 43%, and increased 19.9 percentage
points as a percent of net sales for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 . The decrease in cost of sales
was driven by a $172.5 million decrease in our residual business operations cost
of sales primarily due to the higher volume of projects sold during the prior
period. The decrease in cost of sales was also driven by a $90.5 million
decrease in our modules segment cost of sales primarily due to lower costs of
$90.2 million from a decrease in the volume of modules sold; continued module
cost reductions, which decreased cost of sales by $14.7 million ; and
manufacturing related charges of $5.3 million in the prior period associated
with the ongoing COVID-19 pandemic; partially offset by higher sales freight of
$19.1 million .
Gross profit
Gross profit may be affected by numerous factors, including the selling prices
of our modules and the selling prices of projects and services included in our
residual business operations, our manufacturing costs, project development
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 business and residual business operations.
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The following table shows gross profit for the three months ended March 31, 2022
and 2021:
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Gross profit $ 11,463 $ 184,767 $ (173,304) (94) %
% of net sales 3.1 % 23.0 %
Gross profit decreased 19.9 percentage points to 3.1% during the three months
ended March 31, 2022 from 23.0% during the three months ended March 31, 2021
primarily due to the volume of higher gross profit projects sold during the
prior period, a decrease in the average selling price per watt of our modules,
and an increase in sales freight, partially offset by continued module cost
reductions and manufacturing related charges associated with the COVID-19
pandemic in the prior period.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.
The following table shows selling, general and administrative expense for the
three months ended
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Selling, general and administrative $ 36,728 $ 52,087 $ (15,359) (29) %
% of net sales 10.0 % 6.5 %
Selling, general and administrative expense for the three months ended March 31,
2022 decreased compared to the three months ended March 31, 2021 primarily due
to a decrease in employee compensation expense driven by reductions in headcount
from the sales of our North American O&M operations and U.S. project development
business in the prior period, lower expected credit losses for our accounts
receivable, higher charges for impairments of certain project assets in the
prior period, and lower professional fees.
Research and development
Research and development expense consists primarily of salaries and other personnel-related costs; the cost of products, materials, and outside services used in our R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules.
The following table shows research and development expense for the three months
ended
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Research and development $ 27,108 $ 19,873 $ 7,235 36 %
% of net sales 7.4 % 2.5 %
Research and development expense for the three months ended March 31, 2022
increased compared to the three months ended March 31, 2021 primarily due to
increased material and module testing costs and lower share-based compensation
expense in the prior period driven by the forfeiture of unvested shares by our
former Chief Technology Officer, who retired in March 2021 .
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Production start-up
Production start-up expense consists of costs associated with operating a
production line before it is qualified for commercial production, including the
cost of raw materials for solar modules run through the production line during
the qualification phase, employee compensation for individuals supporting
production start-up activities, and applicable facility related costs.
Production start-up expense also includes costs related to the selection of a
new site and implementation costs for manufacturing process improvements to the
extent we cannot capitalize these expenditures.
The following table shows production start-up expense for the three months ended
March 31, 2022 and 2021:
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Production start-up $ 7,338 $ 11,354 $ (4,016) (35) %
% of net sales 2.0 % 1.4 %
During the three months ended March 31, 2022 , we incurred production start-up
expense primarily for our third manufacturing facility in the U.S. and for
certain manufacturing upgrades at our Malaysian facilities. During the three
months ended March 31, 2021 , we incurred production start-up expense primarily
for the transition to Series 6 module manufacturing at our second facility in
Kulim, Malaysia , which commenced commercial production in early 2021.
Gain on sales of businesses, net
The following table shows gain on sales of businesses, net for the three months
ended
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Gain on sales of businesses, net $ 1,907 $ 150,895 $ (148,988) (99) %
% of net sales 0.5 % 18.8 %
In January 2022 , we completed the sale of certain international O&M operations
to a subsidiary of Clairvest for consideration of $1.9 million . As a result of
this transaction, we recognized a gain of $1.9 million , net of transaction costs
and post-closing adjustments, during the three months ended March 31, 2022 .
In August 2020 , we entered into an agreement with a separate subsidiary of
Clairvest for the sale of our North American O&M operations. In March 2021 , we
completed the transaction and received initial consideration of $146.0 million .
As a result of this transaction, we recognized a gain of $119.2 million , net of
transaction costs, during the three months ended March 31 , 2021.In January 2021 ,
we entered into an agreement with Leeward for the sale of our U.S. project
development business. In March 2021 , we completed the transaction and received
consideration of $151.4 million for the sale of such business. As a result of
this transaction, we recognized a gain of $31.8 million , net of transaction
costs, during the three months ended March 31, 2021 .
See Note 2. "Sales of Businesses" to our condensed consolidated financial statements for further information related to these transactions.
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Foreign currency loss, net
Foreign currency loss, net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries' functional currencies.
The following table shows foreign currency loss, net for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, (Dollars in thousands) 2022 2021 Three Month Change Foreign currency loss, net$ (4,198) $ (2,595) $ (1,603) 62 % Foreign currency loss, net for the three months endedMarch 31, 2022 increased compared to the three months endedMarch 31, 2021 primarily due to higher costs associated with hedging activities related to our subsidiaries inIndia .
Interest income
Interest income is earned on our cash, marketable securities, restricted cash, and restricted marketable securities. Interest income also includes interest earned from late customer payments. The following table shows interest income for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, (Dollars in thousands) 2022 2021 Three Month Change Interest income$ 2,325 $ 956 $ 1,369 143 % Interest income for the three months endedMarch 31, 2022 increased compared to the three months endedMarch 31, 2021 primarily due to higher interest rates on restricted marketable securities and time deposits, partially offset by lower average balances associated with marketable securities.
Interest expense, net
Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with ASC 815. We may capitalize interest expense to our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period. The following table shows interest expense, net for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, (Dollars in thousands) 2022 2021 Three Month Change Interest expense, net$ (2,865) $ (2,996) $ 131 (4) %
Interest expense, net for the three months ended
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Other (expense) income, net
Other (expense) income, net is primarily comprised of miscellaneous items and
realized gains and losses on the sale of marketable securities and restricted
marketable securities.
The following table shows other (expense) income, net for the three months ended
March 31, 2022 and 2021:
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 Three Month Change
Other (expense) income, net $ (212) $ 8,448 $ (8,660) (103) %
Other income, net for the three months ended March 31, 2022 decreased compared
to the three months ended March 31, 2021 primarily due to higher realized gains
from sales of restricted marketable securities in the prior period.
Income tax benefit (expense)
Income tax benefit or expense, 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 boththe United States and numerous foreign jurisdictions in which we operate, principallyJapan ,Malaysia , andVietnam . Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate inthe United States is 21%, and the tax rates inJapan ,Malaysia , andVietnam are 30.6%, 24%, and 20%, respectively. InMalaysia , we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned inMalaysia is exempt from income tax, conditional upon our continued compliance with certain employment and investment thresholds. InVietnam , we have been granted a tax incentive, scheduled to expire at the end of 2025, pursuant to which income earned inVietnam is subject to reduced annual tax rates.
The following table shows income tax benefit (expense) for the three months
ended
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021
Three Month Change
Income tax benefit (expense)
(142) %
Effective tax rate 31.1 % 18.1 %
Our tax rate is affected by recurring items, such as tax rates in foreign
jurisdictions and the relative amounts of income we earn in those jurisdictions.
The rate is also affected by discrete items that may occur in any given period,
but are not consistent from period to period. Income tax benefit increased by
$66.0 million during the three months ended March 31, 2022 compared to the three
months ended March 31, 2021 primarily due to our pretax loss in the current
period.
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Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in conformity with
U.S. GAAP, we make estimates and assumptions that affect the amounts of reported
assets, liabilities, revenues, and expenses, as well as the disclosure of
contingent liabilities. Some of our accounting policies require the application
of significant judgment in the selection of the appropriate assumptions for
making these estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty. We base our judgments and estimates on our
historical experience, our forecasts, and other available information as
appropriate. We believe the judgments and estimates involved in accrued solar
module collection and recycling, product warranties, accounting for income
taxes, and long-lived asset impairments have the greatest potential impact on
our condensed consolidated financial statements. The actual results experienced
by us may differ materially and adversely from our estimates. To the extent
there are material differences between our estimates and the actual results, our
future results of operations will be affected. For a description of the
accounting policies that require the most significant judgment and estimates in
the preparation of our condensed consolidated financial statements, refer to our
Annual Report on Form 10-K for the year ended December 31, 2021 . There have been
no material changes to our accounting policies during the three months ended
March 31, 2022 .
Recent Accounting Pronouncements
None.
Liquidity and Capital Resources
As ofMarch 31, 2022 , we believe that our cash, marketable securities, cash flows from operating activities, and contracts with customers for the future sale of solar modules will be sufficient to meet our working capital, capital expenditure, and project asset investment needs for at least the next 12 months. As necessary, we also believe we will have adequate access to the capital markets. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally. We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, such as construction activities and purchases of manufacturing equipment for our recently announced manufacturing facility inIndia and ongoing development activities for certain projects inJapan . However, our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to company-specific, industry-wide, or broader market concerns. Any incremental debt financings could result in increased debt service expenses and/or restrictive covenants, which could limit our ability to pursue our strategic plans. Additionally, given the duration of these and other capital investments and the currency risk relative to theU.S. dollar in certain international markets in which we operate, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted. As ofMarch 31, 2022 , we had$1.5 billion in cash and marketable securities compared to$1.8 billion as ofDecember 31, 2021 . The decrease in cash and marketable securities was primarily driven by purchases of property, plant and equipment; expenditures for the construction of certain projects inJapan ; and other operating expenditures; partially offset by net proceeds from the sales and maturities of marketable securities; and cash receipts from module sales. As ofMarch 31, 2022 ,$0.7 billion of our cash and marketable securities was held by our foreign subsidiaries and was primarily based inU.S. dollar, Japanese yen, and Indian rupee denominated holdings. 46 -------------------------------------------------------------------------------- Table of Contents We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations inthe United States , we may be required to accrue and pay certainU.S. and foreign taxes to repatriate such funds. We maintain the intent and ability to permanently reinvest our accumulated earnings outsidethe United States , with the exception of our subsidiaries inCanada andGermany . In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources. We continually evaluate forecasted global demand and seek to balance our manufacturing capacity with such demand. We recently announced our plans to invest approximately$1.4 billion to expand our solar manufacturing capacity by 6.6 GWDC by constructing our third manufacturing facility in theU.S. and our first manufacturing facility inIndia . These new facilities are currently under construction and are expected to commence operations in the first half of 2023 and the second half of 2023, respectively. In addition, we continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. During 2022, we expect to spend$0.9 billion to$1.1 billion for capital expenditures, including the new facilities mentioned above and upgrades to machinery and equipment that we believe will further increase our module wattage and expand capacity and throughput at our manufacturing facilities. We also expect to commit significant working capital to purchase various raw materials used in our module manufacturing process. Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Accordingly, we may enter into long-term supply agreements to mitigate potential risks related to the procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules. Our remaining purchases under these supply agreements are expected to be approximately$1.6 billion of substrate glass and approximately$359 million of cover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which, in aggregate, are up to$307 million as ofMarch 31, 2022 and decline over the remaining supply periods). We have also committed certain financial resources to fulfill our solar module collection and recycling obligations, and have established a trust under which these funds are put into custodial accounts with an established and reputable bank. As ofMarch 31, 2022 , such funds were comprised of restricted marketable securities of$220.2 million and restricted cash balances of$3.5 million . As ofMarch 31, 2022 , our module collection and recycling liability was$137.5 million . Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. As necessary, we adjust the funded amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years. Our residual business operations include certain project development activities and O&M services, which are primarily concentrated inJapan . Solar power project development cycles, which span the time between the identification of a site location and the commercial operation of a system, vary substantially and can take many years to mature. As a result of these long project cycles and strategic decisions to finance the development of certain projects using our working capital, we may need to make significant investments of resources in advance of the receipt of any cash from the sale of such projects. In late 2021, we received an offer to purchase our project development and O&M services businesses inJapan and determined it was in the best interest of our stockholders to pursue this transaction. As a result, we expect to complete the sale of these businesses in the first half of 2022. To the extent the sale is not completed in the near term, our residual business operations may continue to have 47 -------------------------------------------------------------------------------- Table of Contents significant liquidity requirements in the future for project development and construction costs, commitments under land lease arrangements associated with project sites, and commitments under certain project debt arrangements. The net amount of our project assets and related portions of long-term debt and deferred revenue, which approximates our net capital investment in the development and construction of solar power projects, was$306.1 million as ofMarch 31, 2022 . Additionally, from time to time we have elected to retain an ownership interest in certain PV solar power systems after they became operational. The decision to retain ownership of a system impacts our liquidity depending upon the size and cost of the project. The net amount of our PV solar power systems and related portions of long-term debt, which approximates our net capital investment in our operating power plants, was$31.3 million as ofMarch 31, 2022 . As ofMarch 31, 2022 , we had no off-balance sheet debt or similar obligations, other than financial assurance related instruments, which are not classified as debt. We do not guarantee any third-party debt. See Note 10. "Commitments and Contingencies" to our condensed consolidated financial statements for further information about our financial assurance related instruments.
Cash Flows
The following table summarizes key cash flow activity for the three months ended
Three Months Ended
March 31,
2022 2021
Net cash used in operating activities $ (138,839) $ (279,478)
Net cash (used in) provided by investing activities (2,944) 271,838
Net cash provided by (used in) financing activities 5,764 (31,451)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
15,162 (652)
Net decrease in cash, cash equivalents and restricted cash Operating Activities
The decrease in net cash used in operating activities was primarily driven by higher cash receipts from module sales and higher operating expenditures in the prior period, partially offset by certain advance payments for raw materials in the current period. Investing Activities The increase in net cash used in investing activities was primarily due to proceeds from the sale of our North American O&M operations andU.S. project development business in the prior period, lower net sales and maturities of marketable securities and restricted marketable securities, and higher purchases of property, plant and equipment.
Financing Activities
The increase in net cash provided by financing activities was primarily due to the repayment of the Tochigi credit agreement in the prior period.
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