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 concerning, among other things: the length and severity of
the ongoing COVID-19 (novel coronavirus) outbreak, including its impacts across
our businesses on demand, manufacturing, project development, construction, O&M,
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 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, 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; 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; 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," 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 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; 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 both our and our customers' ability to secure financing; the
creditworthiness of our off-take counterparties and the ability of our off-take
counterparties to fulfill their contractual obligations to us; 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 successfully develop and complete our systems
business projects; our ability to convert existing production facilities to
support new product lines, such as Series 6 module manufacturing; general
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
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resulting from pending litigation; 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 research and development; 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, 2019 , 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 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 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 various technology innovations. We are the world's largest thin film PV solar module manufacturer and one of the world's largest PV solar module manufacturers.
Certain of our financial results and other key operational developments for the
three months ended
•Net sales for the three months endedSeptember 30, 2020 increased by 70% to$927.6 million compared to$546.8 million for the same period in 2019. The increase was primarily due to the sale of the Ishikawa, Miyagi, Anamizu, Tungabhadra, and Anantapur projects and an increase in the volume of modules sold to third parties, partially offset by the completion of substantially all construction activities at the Phoebe andSeabrook projects in 2019. •Gross profit for the three months endedSeptember 30, 2020 increased 6.3 percentage points to 31.6% from 25.3% for the same period in 2019. The increase in gross profit was primarily due to the volume and mix of higher gross profit projects sold during the period; a reduction in our module collection and recycling liability due to changes to the estimated timing of cash flows associated with capital, labor, and maintenance costs; and higher throughput at our manufacturing facilities from the successful ramp of various Series 6 manufacturing lines; partially offset by a higher benefit from reductions to our product warranty liability in the prior period; an impairment loss for certain module manufacturing equipment, and manufacturing related charges associated with the ongoing COVID-19 pandemic. •As ofSeptember 30, 2020 , we had 5.5 GWDC of total installed Series 6 nameplate production capacity across all our facilities. We produced 1.5 GWDC of solar modules during the three months endedSeptember 30, 2020 , which represented a 55% increase in Series 6 module production from the same period in 2019. The increase in Series 6 production was primarily driven by the production capacity added in 2019 at our second facility inHo Chi Minh City, Vietnam and our facility inLake Township, Ohio as well as higher throughput at various facilities. We expect to produce approximately 6 GWDC of solar modules during 2020, substantially all of which will be Series 6 modules. 45 -------------------------------------------------------------------------------- Table of Contents •In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we operate, includingthe United States ,Malaysia , andVietnam . At this time, such limitations have had a limited effect on our Series 6 manufacturing facilities. However, these orders are subject to continuous revision, and our understanding of the applicability of these orders and any potential exemptions may change at any time. To enable the continuity of our operations, we have implemented a wide range of safety measures intended to inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities. •InAugust 2020 we entered into an agreement with a subsidiary of Clairvest, pursuant to which Clairvest will acquire our North American O&M operations. The completion of the transaction is contingent on a number of closing conditions, including the receipt of certain third-party consents, a review of the transaction by theCommittee on Foreign Investment inthe United States , and other customary closing conditions. Assuming satisfaction of such closing conditions, we expect the sale to be completed in late 2020.
Market Overview
The solar industry continues to be characterized by intense pricing competition, both at the module and system levels. In particular, module average selling prices in many global markets have declined in recent years and are expected to continue to decline in the future. Furthermore, the COVID-19 pandemic has adversely affected certain purchasers of modules and systems, which may result in additional pressure on demand and average selling prices. In the aggregate, we believe manufacturers of solar cells and modules have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. Accordingly, we believe the solar industry may from time to time experience periods of structural imbalance between supply and demand (i.e., where production capacity exceeds global demand), and that such periods will also put pressure on pricing, which may be exacerbated by the current COVID-19 disruption in the global economy. Additionally, intense competition at the system level may result in an environment in which pricing falls rapidly, thereby potentially increasing demand for solar energy solutions but constraining the ability for project developers and diversified module manufacturers to sustain meaningful and consistent profitability. In light of such market realities, we continue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process, our financial viability, and the sustainability advantage of our modules and systems. Global solar markets continue to expand and develop, in part aided by demand elasticity resulting from declining average selling prices, both at the module and system levels, which have promoted the widespread adoption of solar energy. As a result of such market opportunities, we are expanding our manufacturing capacity while also developing and operating multiple solar projects around the world as we execute on our utility-scale project pipeline. See the tables under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Systems Project Pipeline" for additional information about projects within our advanced-stage pipeline. Although we expect a meaningful portion of our future consolidated net sales, operating income, and cash flows to be derived from such projects, we expect third-party module sales to continue to have a more significant impact on our operating results as we expand capacity and leverage the benefits of our Series 6 module technology. Lower industry module and system pricing is expected to contribute to diversification in global electricity generation and further demand for solar energy. Over time, however, declining average selling prices may adversely affect our results of operations to the extent we have not already entered into contracts for future module or system sales. Our results of operations could also be adversely affected if competitors reduce pricing to levels below their costs, bid aggressively low prices for module sale agreements or PPAs, or are able to operate at minimal or negative operating margins for sustained periods of time. For certain of our competitors, such actions may be enabled by their direct or indirect access to sovereign capital or other forms of state-owned support. In certain markets inCalifornia and elsewhere, an oversupply imbalance at the grid level may reduce short-to-medium term demand for new solar installations relative to prior years, lower PPA pricing, and lower margins on module and system sales to such markets. However, we believe the effects of such imbalance can be mitigated by modern solar power plants and 46 -------------------------------------------------------------------------------- Table of Contents energy storage solutions that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements, partnering with grid operators and utility companies, and implementing certain other cost reduction initiatives. We face intense competition from manufacturers of crystalline silicon solar modules and developers of solar power projects. Solar module manufacturers compete with one another on price and on several module value attributes, including wattage (or conversion efficiency), energy yield, and reliability, and developers of systems compete on various factors such as net present value, return on equity, and 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. Many crystalline silicon cell and wafer manufacturers have transitioned from lower efficiency Back Surface Field multi-crystalline cells (the legacy technology against which we have generally competed) to higher efficiency Passivated Emitter Rear Contact ("PERC") mono-crystalline cells at competitive cost structures. Additionally, while conventional solar modules, including the solar modules we produce, are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, certain manufacturers of mono-crystalline PERC modules are promoting bifacial modules that also capture diffuse irradiance on the back side of a module. The cost effective manufacture of bifacial PERC modules has been enabled, in part, by the expansion of inexpensive crystal growth and diamond wire saw capacity inChina . Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which, after considering the incremental BoS and other costs, could potentially lower the overall LCOE of a system when compared to systems using conventional solar modules, including the modules we produce. We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing process (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers. In terms of energy yield, in many climates our CdTe solar modules provide an energy production advantage over most monofacial 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 experience significantly lower energy generation than CdTe solar modules when shading occurs. As a result of these and other factors, our PV solar modules typically produce more annual energy in real world field conditions than conventional modules with the same nameplate capacity. Furthermore, our thin-film CdTe semiconductor technology is immune to cell cracking and its resulting power output loss, a common failure often observed in crystalline silicon modules caused by adverse manufacturing, handling, weather, or other conditions. 47 -------------------------------------------------------------------------------- Table of Contents While our modules and systems are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in further declines in the average selling prices of our modules and systems and additional margin compression. We continue to focus on enhancing the competitiveness of our solar modules and systems by accelerating progress along our module technology and cost reduction roadmaps.
Certain Trends and Uncertainties
We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties. See Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and Item 1A. of this Quarterly Report on Form 10-Q for discussions of other risks (the "Risk Factors") that may affect us. Our long-term strategic plans are focused on our goal to create long-term shareholder value through a balance of growth, profitability, and liquidity. In executing such plans, we are focusing on providing utility-scale PV solar energy solutions in key geographic markets that we believe have a compelling need for mass-scale PV solar electricity, including markets throughout theAmericas , theAsia-Pacific region ,Europe , and certain other strategic markets. While these markets are expected to exhibit strong long-term demand for solar energy, the economic disruption caused by the COVID-19 pandemic has adversely affected near-term demand for electricity at the grid level. As a result, such temporary decline in load may adversely affect demand for specific forms of generation, such as our PV solar energy solutions, depending on the severity and duration of the economic disruption. Given these market dynamics, we continue to focus on opportunities in which our PV solar energy solutions compete directly with traditional forms of energy generation on an LCOE or similar basis, or complement such generation offerings. These opportunities include the retirement and replacement of aging fossil fuel-based generation resources with utility-scale PV solar energy solutions. For example, cumulative global retirements of coal generation plants are expected to approximate 900 GWDC by 2040, representing a significant increase in the potential market for solar energy. This focus on our core module and utility-scale offerings exists within a current market environment that includes rooftop and distributed generation solar, particularly inthe United States . While it is unclear how rooftop and distributed generation solar might impact our core utility-scale based offerings over the next several years, we believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain international markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions. Our ability to provide utility-scale offerings on economically attractive terms depends, in part, on market factors outside our control, such as the availability of debt and/or equity financing (including, inthe United States , tax equity financing), interest rate fluctuations, domestic or international trade policies, and government support programs. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for such systems and limit the number of potential buyers. For example, we generally sell projects we have developed within our systems business, including projects inthe United States ,Japan , and elsewhere, to purchasers that depend on financing to fund the initial capital expenditures required to develop, build, and/or purchase a system. Although governments and central banks around the world have implemented significant measures to support capital markets, the economic disruption caused by the COVID-19 pandemic may result in a long-term tightening of the supply of capital in global financial markets (including, inthe United States , a reduction in total tax equity availability). A reduction in the supply of project debt or equity financing (including, inthe United States , tax equity financing) caused by the COVID-19 pandemic could make it difficult for our customers to secure the financing necessary to develop, build, purchase, or install systems. Similarly, purchasers of modules may cease or significantly reduce business operations, cease or delay module procurement, encounter an inability to obtain financing, including due to a reduction in the supply of project debt financing or equity investments (including, inthe United States , tax 48 -------------------------------------------------------------------------------- Table of Contents equity financing), conserve capital resources, or take other actions in response to the COVID-19 pandemic, which may reduce demand and average selling prices for our modules. In certain markets, demand for our utility-scale offerings may be affected by specific regulations or policies of governmental bodies or utility regulators. For example, inJune 2020 , the Japanese legislature enacted an amendment to the Electricity Business Law Enforcement Order for theMinistry of Economy, Trade and Industry ("METI") ofJapan which, among other things, is expected to invalidate the feed-in-tariff certificates for projects that fail to achieve construction plan acceptance and/or commercial operation within a set period of time following dates specified in their respective certificates. The amendment, which becomes effective inApril 2022 , applies to all projects regardless of generation type and is intended to release grid capacity reserved for delayed projects to enable other newly developed projects to utilize such capacity at a lower cost of electricity to consumers. The deadline period by which a project must achieve construction plan acceptance and/or commercial operation will be proposed at a later date by METI. Any deadlines that precede the expected construction plan acceptance and/or commercial operation dates of our various projects inJapan could adversely affect the value of such projects and our ability to secure any related project financing. We intend to focus our resources in those markets and energy applications in which solar power can be a least-cost, best-fit energy solution, particularly in regions with significant current or projected electricity demand, relatively high existing electricity prices, strong demand for renewable energy generation, and high solar resources. As a result, we closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. We have dedicated, and intend to continue to dedicate, significant capital and human resources to reduce the total installed cost of PV solar energy and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market. Creating or maintaining a market position in certain strategically targeted markets and energy applications also requires us to adapt to new and changing market conditions. For example, we continue to monitor and adapt to the dynamics of 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. Storage solutions continue to evolve in terms of technology and cost, and cumulative global deployments of storage capacity are expected to exceed 900 GWDC by 2040, representing a significant increase in the potential market for renewable energy. We also continue to monitor and adapt to 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. For example, the emergence of utility-owned generation has increased the number of potential project buyers as such utility customers benefit from a potentially low cost of capital available through rate-based utility investments. Given their long-term ownership profile, utility-owned generation customers typically seek to partner with diversified and stable companies that can provide a broad spectrum of utility-scale generation solutions, including reliable PV solar technology, thereby mitigating their long-term ownership risks. On occasion, we may also elect to develop partially contracted or uncontracted systems for which there is a partial or no PPA with an off-taker, such as a utility, but rather an intent to sell some portion of the electricity produced by the system on an open contract basis until the system is sold. Expected revenue from projects without a PPA for the full off-take of the system is subject to greater variability and uncertainty based on market factors and is typically lower than projects with a PPA for the full off-take of the system. Furthermore, all system pricing is affected by the pricing of energy to be sold on an open contract basis following the termination of the PPA (i.e., merchant pricing curves), and changes in market assumptions regarding future open contract sales, including potential changes in energy demand caused by the COVID-19 pandemic, may also result in significant variability and uncertainty in the value of our systems projects. 49 -------------------------------------------------------------------------------- Table of Contents As previously disclosed, following an evaluation of the long-term sustainable cost structure, competitiveness, and risk-adjusted returns of ourU.S. project development business, we have determined it is in the best interest of our stockholders to explore options for this business line. This exploration may result in, among other possibilities, a partnership with a third-party who possesses complimentary competencies or a sale of all or a portion of ourU.S. project development business. These potential third-party partners or purchasers of interests in ourU.S. project development business may now, or in the future, be impacted by the global business disruption caused by the COVID-19 pandemic, and may consequently focus on their own operations and/or delay considering potential partnerships or other arrangements with respect to ourU.S. project development business. While we have previously disclosed that the exploration of options for ourU.S. project development business is not subject to any definitive timetable and there can be no assurances that this process will result in any transaction, the COVID-19 pandemic may have the effect of delaying or preventing the consummation of any such transaction. 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. During 2019, we commenced commercial production of Series 6 modules at our second manufacturing facility inHo Chi Minh City, Vietnam and our manufacturing facility inLake Township, Ohio . We are currently in the process of transitioning our legacy Series 4 manufacturing facilities inKulim, Malaysia to our Series 6 module technology and continue to expand capacity and throughput at our other existing manufacturing facilities. 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. In addition, due to contraction of the virus, or concerns about becoming ill from the virus, we may experience reductions in the availability of our operational workforce, such as our manufacturing personnel. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availability of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, project development, construction, operating or maintenance operations, or research and development activities. At this time, such limitations have had a limited effect on our manufacturing facilities and certain project construction activities, and we have implemented a wide range of safety measures intended to enable the continuity of our operations and inhibit the spread of COVID-19 at our manufacturing, administrative, and other sites and facilities, including those inthe United States ,Malaysia , andVietnam . To address the near-term business disruption caused by the COVID-19 pandemic, many governments have proposed policies or support programs intended to stimulate their respective economies. Such support programs may include additional incentives for renewable energy projects, including PV solar power systems, over several years. While we compete in many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. 50 -------------------------------------------------------------------------------- Table of Contents Systems Project Pipeline The following tables summarize, as ofOctober 27, 2020 , our approximately 1.4 GWAC advanced-stage project pipeline. The actual volume of modules installed in our projects will be greater than the project size in MWAC as module volumes required for a project are based upon MWDC, which will be greater than the MWAC size pursuant to a DC-AC ratio typically ranging from 1.1 to 1.4. Such ratio varies across different projects due to many factors, including PPA pricing and the location, design, and costs of the system. Projects are typically removed from our advanced-stage project pipeline tables below once we substantially complete construction of the project and after substantially all of the associated project revenue is recognized. A project, or a portion of a project, may also be removed from the tables below in the event the project is not able to be sold due to the changing economics of the project or other factors or we decide to temporarily own and operate the project based on strategic opportunities or market factors.
Projects under Sales Agreements
The following table includes uncompleted sold projects and projects under contracts subject to conditions precedent:
Expected Year % of Revenue
Revenue Recognized as of
Recognition Will September 30,
Project/Location Project Size in MWAC PPA Contracted Partner Customer Be Completed 2020
GA Solar 4, Georgia 200 Georgia Power Company Origis Energy USA 2020 96%
Seabrook, South Carolina 72 South Carolina Electric Dominion Energy 2020 98%
and Gas Company
Total 272
Projects with Executed PPAs Not under Sales Agreements
Expected or
Actual
Substantial % Complete as of
Project/Location Project Size in MWAC PPA Contracted Partner Fully Permitted Completion Year September 30, 2020
Horizon, Texas 200 (1) Yes 2023 -%
Big Plain Solar, Ohio 196 Verizon Communications No 2023 -%
Ridgely, Tennessee 177 Tennessee Valley Authority No 2023 1%
Sun Streams 2, Arizona 150 Microsoft Corporation Yes 2021 22%
Luz del Norte, Chile 141 (2) Yes 2016 100%
Rabbitbrush, California 100 (3) No 2022 5%
Oak Trail, North Carolina 100 Verizon Communications No 2023 -%
Sun Streams PVS, Arizona 65 APS Yes 2022 8%
Kyoto, Japan 38 Chubu Electric Power Company Yes 2022 33%
Total 1,167
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(1)150 MWAC of the plant's capacity is contracted with
(2)Approximately 70 MWAC of the plant's capacity is contracted under various PPAs; remaining capacity to be sold on an open contract basis
(3)Central Coast Community Energy - 60 MWAC and Silicon Valley Clean Energy - 40 MWAC
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Results of Operations
The following table sets forth our condensed consolidated statements of
operations as a percentage of net sales for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 68.4 % 74.7 % 75.2 % 87.0 %
Gross profit 31.6 % 25.3 % 24.8 % 13.0 %
Selling, general and administrative 5.4 % 9.8 % 7.6 % 9.0 %
Research and development 2.5 % 4.6 % 3.4 % 4.3 %
Production start-up 1.4 % 3.4 % 1.1 % 2.3 %
Litigation loss - % - % 0.3 % - %
Operating income (loss) 22.3 % 7.6 % 12.4 % (2.6) %
Foreign currency (loss) income, net (0.2) % 0.2 % (0.2) % 0.2 %
Interest income 0.2 % 2.1 % 0.7 % 2.4 %
Interest expense, net (1.2) % (0.9) % (1.0) % (1.4) %
Other expense, net (0.3) % (0.6) % (0.4) % (0.3) %
Income tax (expense) benefit (4.1) % (2.7) % 1.9 % (1.5) %
Equity in earnings, net of tax - % - % - % - %
Net income (loss) 16.7 % 5.6 % 13.4 % (3.3) %
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.
Net sales
Modules Business
We generally price and sell our solar modules on a per watt basis. During the three and nine months endedSeptember 30, 2020 , we sold the majority of our solar modules to integrators and operators of systems inthe United States , 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.
Systems Business
During the three and nine months endedSeptember 30, 2020 , the majority of our systems business net sales were inJapan ,the United States , andIndia , and were denominated in Japanese yen,U.S. dollars, and Indian rupee. We recognize revenue for the sale of a development project, which excludes EPC services, or for the sale of a completed system when we enter into the associated sales contract with the customer. For other sales of solar power systems and/or EPC services, we generally recognize revenue over time as our performance creates or enhances an energy generation asset controlled by the customer. Furthermore, the sale of a solar power system combined with EPC services represents a single performance obligation for the development and construction of a single generation asset. For such arrangements, we recognize revenue as work is performed using cost based input methods, which 52 -------------------------------------------------------------------------------- Table of Contents 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.
The following table shows net sales by reportable segment for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change Modules$ 422,480 $ 371,184 $ 51,296 14 %$ 1,187,679 $ 798,744 $ 388,935 49 % Systems 505,085 175,622 329,463 188 % 914,421 864,996 49,425 6 % Net sales$ 927,565 $ 546,806 $ 380,759 70 %$ 2,102,100 $ 1,663,740 $ 438,360 26 % Net sales from our modules segment increased$51.3 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to a 15% increase in the volume of watts sold, partially offset by a 1% decrease in the average selling price per watt. Net sales from our systems segment increased$329.5 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to the sale of the Ishikawa, Miyagi, Anamizu, Tungabhadra, and Anantapur projects, partially offset by the completion of substantially all construction activities at the Phoebe andSeabrook projects in 2019 and lower construction activities at the GA Solar 4 project in the current period. Net sales from our modules segment increased$388.9 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to a 48% increase in the volume of watts sold. Net sales from our systems segment increased$49.4 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to the sale of the Ishikawa, American Kings, Miyagi, Anamizu, Tungabhadra, and Anantapur projects, partially offset by the completion of substantially all construction activities at the Phoebe, Rosamond,Lake Hancock , andSeabrook projects in 2019, the sale of the Beryl,Cove Mountain , and Muscle Shoals projects in 2019, and lower construction activities at the GA Solar 4 project in the current period. Cost of sales Modules Business Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe, and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion).
Systems Business
For our systems business, project-related costs include development costs
(legal, consulting, transmission upgrade, interconnection, permitting, and other
similar costs), EPC costs (consisting primarily of solar modules, inverters,
electrical and mounting hardware, project management and engineering, and
construction labor), and site specific costs.
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The following table shows cost of sales by reportable segment for the three and
nine months ended September 30, 2020 and 2019:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Modules $ 297,658 $ 223,378 $ 74,280 33 % $ 907,564 $ 664,451 $ 243,113 37 %
Systems 336,892 185,065 151,827 82 % 673,723 783,632 (109,909) (14) %
Total cost of sales $ 634,550 $ 408,443 $ 226,107 55 % $ 1,581,287 $ 1,448,083 $ 133,204 9 %
% of net sales 68.4 % 74.7 % 75.2 % 87.0 %
Our cost of sales increased $226.1 million , or 55%, and decreased 6.3 percentage
points as a percent of net sales for the three months ended September 30, 2020
compared to the three months ended September 30, 2019 . The increase in cost of
sales was driven by a $151.8 million increase in our systems segment cost of
sales primarily due to the timing of when revenue recognition criteria were met
for project sales, partially offset by the lower volume of projects under
construction during the period. The increase in cost of sales was also driven by
a $74.3 million increase in our modules segment cost of sales primarily as a
result of the following:
•higher costs of $45.2 million from an increase in the volume of modules sold;
•an impairment loss of $17.4 million for certain module manufacturing equipment,
including framing and assembly tools, which were no longer compatible with our
long-term module technology roadmap;
•manufacturing related charges of $3.5 million associated with the ongoing
COVID-19 pandemic; and
•a reduction to our product warranty liability of $80.0 million in 2019 due to
revised module return rates; partially offset by
•a reduction to our product warranty liability of $19.7 million in 2020 due to
lower-than-expected settlements for our older series of module technology and
revisions to projected settlements;
•a reduction in our module collection and recycling liability of $18.9 million
primarily due to changes to the estimated timing of cash flows associated with
capital, labor, and maintenance costs and updates to certain valuation
assumptions; and
•continued module cost reductions, which decreased cost of sales by $38.8
million .
Our cost of sales increased $133.2 million , or 9%, and decreased 11.8 percentage
points as a percent of net sales for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019 . The increase in cost of
sales was primarily driven by a $243.1 million increase in our modules segment
cost of sales primarily as a result of the following:
•higher costs of $327.0 million from an increase in the volume of modules sold;
•the aforementioned impairment loss of $17.4 million for certain module
manufacturing equipment;
•manufacturing related charges of $12.3 million associated with the ongoing
COVID-19 pandemic; and
•the reduction to our product warranty liability of $80.0 million in 2019
described above; partially offset by
•the reduction to our product warranty liability of $19.7 million described
above;
•lower under-utilization and certain other charges associated with the initial
ramp of certain Series 6 manufacturing lines, which decreased cost of sales by
$48.9 million compared to 2019;
•the reduction in our module collection and recycling liability of $18.9 million
described above; and
•continued module cost reductions, which decreased cost of sales by $137.2
million .
Such increase in our modules segment cost of sales was partially offset by a
$109.9 million decrease in our systems segment cost of sales primarily due to
the lower volume of projects under construction during the period, partially
offset by the size of projects sold and the timing of when revenue recognition
criteria were met.
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Gross profit
Gross profit may be affected by numerous factors, including the selling prices
of our modules and systems, our manufacturing costs, project development costs,
BoS costs, the capacity utilization of our manufacturing facilities, and foreign
exchange rates. Gross profit may also be affected by the mix of net sales from
our modules and systems businesses.
The following table shows gross profit for the three and nine months ended
September 30, 2020 and 2019:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change Gross profit$ 293,015 $ 138,363 $ 154,652 112 %$ 520,813 $ 215,657 $ 305,156 142 % % of net sales 31.6 % 25.3 % 24.8 % 13.0 % Gross profit increased 6.3 percentage points to 31.6% during the three months endedSeptember 30, 2020 from 25.3% during the three months endedSeptember 30, 2019 primarily due to the volume and mix of higher gross profit projects sold during the period, the reduction in our module collection and recycling liability described above, and improved throughput at our manufacturing facilities from the successful ramp of various Series 6 manufacturing lines. These increases were partially offset by the lower benefit from reductions to our product warranty liability described above, the impairment loss for certain module manufacturing equipment described above, and manufacturing related charges associated with the ongoing COVID-19 pandemic. Gross profit increased 11.8 percentage points to 24.8% during the nine months endedSeptember 30, 2020 from 13.0% during the nine months endedSeptember 30, 2019 primarily due to a mix of higher gross profit projects sold during the period, higher gross profit on third-party module sales, and improved throughput of our manufacturing facilities from the successful ramp of various Series 6 manufacturing lines, partially offset by the lower benefit from reductions to our product warranty liability and the impairment loss for certain module manufacturing equipment described above.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.
The following table shows selling, general and administrative expense for the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Selling, general and
administrative $ 49,861 $ 53,542 $ (3,681) (7) % $ 160,218 $ 149,828 $ 10,390 7 %
% of net sales 5.4 % 9.8 % 7.6 % 9.0 %
Selling, general and administrative expense for the three months ended
Selling, general and administrative expense for the nine months endedSeptember 30, 2020 increased compared to the nine months endedSeptember 30, 2019 primarily due to an increase in professional fees; higher charges for impairments of certain project assets; and higher expected credit losses for our accounts receivable due to the current economic conditions resulting from the COVID-19 pandemic. See Note 5. "Consolidated Balance Sheet Details" for further information about the allowance for credit losses associated with our accounts receivable. 55 -------------------------------------------------------------------------------- Table of Contents 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 and
nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Research and development $ 22,972 $ 24,912 $ (1,940) (8) % $ 71,068 $ 71,184 $ (116) - %
% of net sales 2.5 % 4.6 % 3.4 % 4.3 %
Research and development expense for the three months ended September 30, 2020
decreased compared to the three months ended September 30, 2019 primarily as a
result of lower employee compensation expense due to reductions in R&D headcount
for our systems business. Research and development expense for the nine months
ended September 30, 2020 was consistent with the nine months ended September 30,
2019 .
Production start-up
Production start-up expense consists primarily of employee compensation and
other costs associated with operating a production line before it is qualified
for full production, including the cost of raw materials for solar modules run
through the production line during the qualification phase and applicable
facility related costs. Costs related to equipment upgrades and implementation
of manufacturing process improvements are also included in production start-up
expense as well as costs related to the selection of a new site, related legal
and regulatory costs, and costs to maintain our plant replication program to the
extent we cannot capitalize these expenditures. In general, we expect production
start-up expense per production line to be higher when we build an entirely new
manufacturing facility compared with the addition or replacement of production
lines at an existing manufacturing facility, primarily due to the additional
infrastructure investment required when building an entirely new facility.
The following table shows production start-up expense for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Production start-up $ 13,019 $ 18,605 $ (5,586) (30) % $ 23,812 $ 38,564 $ (14,752) (38) %
% of net sales 1.4 % 3.4 % 1.1 % 2.3 %
During the three and nine months ended September 30, 2020 , we incurred
production start-up expense for the transition to Series 6 module manufacturing
at our second facility in Kulim, Malaysia and the capacity expansion of our
manufacturing facility in Perrysburg, Ohio . During the three and nine months
ended September 30, 2019 , we incurred production start-up expense at our
facility in Lake Township, Ohio , and our second facility in Ho Chi Minh City,
Vietnam , which commenced commercial production in early 2019.
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Litigation loss
The following table shows litigation loss for the three and nine months ended
September 30, 2020 and 2019:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Litigation loss $ - $ - $ - - % $ 6,000 $ - $ 6,000 100 %
% of net sales - % - % 0.3 % - %
In June 2020 , we entered into an agreement in principle to settle the claims in
the Opt-Out Action filed in 2015 in the Arizona District Court by putative
stockholders that opted out of the Class Action. On July 17, 2020 , the parties
executed a definitive settlement agreement pursuant to which we agreed to pay a
total of $19 million in exchange for mutual releases and a dismissal with
prejudice of the Opt-Out Action. The agreement contains no admission of
liability, wrongdoing, or responsibility by any of the parties. On July 30,
2020 , First Solar funded the settlement, and on July 31, 2020 , the parties filed
a joint stipulation of dismissal. On September 10, 2020 , the Arizona District
Court entered an order dismissing the case with prejudice.
As of December 31, 2019 , we had accrued $13 million of estimated losses for this
action. As a result of the settlement, we accrued an incremental $6 million
litigation loss during the nine months ended September 30, 2020 . See Note 10.
"Commitments and Contingencies" for further information about the Opt-Out
Action.
Foreign currency (loss) income, net
Foreign currency (loss) income, net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries' functional currencies.
The following table shows foreign currency (loss) income, net for the three and
nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Foreign currency (loss)
income, net $ (1,852) $ 1,209 $ (3,061) 253 % $ (3,549) $ 3,107 $ (6,656) 214 %
Foreign currency loss for the three and nine months ended September 30, 2020
increased compared to the three and nine months ended September 30, 2019
primarily due to higher costs associated with hedging activities related to our
subsidiaries in Europe and Japan and differences between our economic hedge
positions and the underlying exposures.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, restricted cash, and restricted marketable securities. Interest income also includes interest earned from notes receivable and late customer payments.
The following table shows interest income for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change Interest income$ 2,109 $ 11,454 $ (9,345) (82) %$ 15,113 $ 39,223 $ (24,110) (61) % 57
-------------------------------------------------------------------------------- Table of Contents Interest income for the three and nine months endedSeptember 30, 2020 decreased compared to the three and nine months endedSeptember 30, 2019 primarily due to lower interest rates on cash and cash equivalents and lower average balances and interest rates associated with time deposits and marketable securities.
Interest expense, net
Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with 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 and nine months
ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Interest expense, net $ (10,975) $ (4,976) $ (5,999) 121 % $ (21,018) $ (24,018) $ 3,000 (12) %
Interest expense, net for the three months ended September 30, 2020 increased
compared to the three months ended September 30, 2019 primarily due to changes
in the fair value of interest rate swap contracts, which do not qualify for
hedge accounting. Interest expense, net for the nine months ended September 30,
2020 decreased compared to the nine months ended September 30, 2019 primarily
due to lower interest expense associated with project debt and changes in the
fair value of interest rate swap contracts, which do not qualify for hedge
accounting, partially offset by higher amortization of debt discounts and
issuance costs and a decrease in capitalized interest.
Other expense, net
Other expense, 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, net for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Other expense, net $ (3,236) $ (3,399) $ 163 (5) % $ (8,653) $ (4,328) $ (4,325) 100 %
Other expense, net for the three months ended September 30, 2020 was consistent
with the three months ended September 30, 2019 . Other expense, net for the nine
months ended September 30, 2020 increased compared to the nine months ended
September 30, 2019 primarily due to expected credit losses associated with
certain notes receivable, partially offset by prior period charges associated
with certain letter of credit arrangements and the impairment of a strategic
investment. See Note 5. "Consolidated Balance Sheet Details" for further
information about the allowance for credit losses for our notes receivable.
Income tax (expense) benefit
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 boththe United States and numerous foreign jurisdictions in which we operate, principallyAustralia ,Japan , andMalaysia . 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 inAustralia ,Japan , andMalaysia are 30%, 30.6%, and 24%, respectively. InMalaysia , we have been granted a long-term tax holiday, scheduled to expire in 58 -------------------------------------------------------------------------------- Table of Contents 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. The following table shows income tax benefit for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change Income tax (expense) benefit$ (38,107) $ (15,035) $ (23,072) 153 %$ 40,894 $ (25,385) $ 66,279 (261) % Effective tax rate 19.7 % 33.0 % (16.9) % (84.8) % 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$23.1 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to higher pretax income. Income tax benefit increased by$66.3 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to a discrete tax benefit from the effect of tax law changes associated with the CARES Act and lower discrete tax expenses associated with filing a return in a foreign jurisdiction, partially offset by higher pretax income.
Equity in earnings, net of tax
Equity in earnings, net of tax represents our proportionate share of the earnings or losses from equity method investments as well as any gains or losses on the sale or disposal of such investments.
The following table shows equity in earnings, net of tax for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 Three Month Change 2020 2019 Nine Month Change
Equity in earnings, net
of tax $ (65) $ 65 $ (130) (200) % $ 150 $ (205) $ 355 173 %
Equity in earnings, net of tax for the three and nine months ended
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in conformity withU.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 over time revenue recognition, 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 endedDecember 31, 2019 . There have been no material changes to our accounting policies during the nine months endedSeptember 30, 2020 with the exception of certain changes to our allowance for credit losses 59 -------------------------------------------------------------------------------- Table of Contents accounting policies as part of the adoption of ASU 2016-13 as described in Note 2. "Recent Accounting Pronouncements" to our condensed consolidated financial statements.
Recent Accounting Pronouncements
See Note 2. "Recent Accounting Pronouncements" to our condensed consolidated financial statements for a summary of recent accounting pronouncements.
Liquidity and Capital Resources
As ofSeptember 30, 2020 , we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, contracts with customers for the future sale of solar modules, and advanced-stage project pipeline will be sufficient to meet our working capital, systems project investment, and capital expenditure needs for at least the next 12 months. As needed, 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 our operations, such as systems project development activities in certain international regions. However, our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to company-specific, industry-wide, or broader market concerns, such as a tightening of the supply of capital due to the COVID-19 pandemic and related containment measures. Any incremental debt financings could result in increased debt service expenses and/or restrictive covenants, which could limit our ability to pursue our strategic plans. As ofSeptember 30, 2020 , we had$1.6 billion of cash, cash equivalents, and marketable securities compared to$2.2 billion as ofDecember 31, 2019 . The decrease in cash, cash equivalents, and marketable securities was primarily driven by the$350 million settlement payment associated with our prior class action lawsuit; purchases of property, plant and equipment; the timing of cash receipts from certain third-party module sales, for which proceeds were received in late 2019 prior to the step down in theU.S. investment tax credit; and other operating expenditures; partially offset by cash proceeds from the sale and construction of systems projects. As ofSeptember 30, 2020 ,$1.0 billion of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based inU.S. dollar, Japanese yen, and Indian rupee denominated holdings. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations 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 inAustralia ,Canada , 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 liquidity and capital resources. Our systems business requires significant liquidity and is expected to continue to have significant liquidity requirements in the future. The net amount of our project assets and related portion of deferred revenue, which approximates our net capital investment in the development and construction of systems projects, was$359.6 million as ofSeptember 30, 2020 . Solar power project development cycles, which span the time between the identification of a site location and the commercial operation of a system, vary substantially and can take many years to mature. As a result of these long project cycles and strategic decisions to finance the development of certain projects using our working capital, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale of such projects. Delays in construction or in completing the sale of our systems projects that we are self-financing may also impact our liquidity. In certain circumstances, we may need to finance construction costs exclusively using working capital, if project financing becomes unavailable due to regional, market-wide, or other concerns. 60 -------------------------------------------------------------------------------- Table of Contents From time to time, we may develop projects in certain markets around the world where we may hold all or a significant portion of the equity in a project for several years. Given the duration of these investments and the currency risk relative to theU.S. dollar in some of these markets, we continue to explore local financing alternatives. Should these financing alternatives be unavailable or too cost prohibitive, we could be exposed to significant currency risk and our liquidity could be adversely impacted. Additionally, we may elect to retain an ownership interest in certain systems projects after they become operational if we determine it would be of economic and strategic benefit to do so. If, for example, we cannot sell a system at economics that are attractive to us or potential customers are unwilling to assume the risks and rewards typical of system ownership, we may instead elect to temporarily own and operate such system until we can sell it on economically attractive terms. The decision to retain ownership of a system impacts our liquidity depending upon the size and cost of the project. As ofSeptember 30, 2020 , we had$257.4 million of net PV solar power systems that had been placed in service, primarily in international markets. We have elected, and may in the future elect, to enter into temporary or long-term project financing to reduce the impact on our liquidity and working capital with regard to such systems.
The following additional considerations have impacted or may impact our liquidity for 2020 and beyond:
•We expect to spend$450 million to$550 million for capital expenditures, including amounts related to the transition of our second manufacturing facility inKulim, Malaysia from Series 4 to Series 6 module technology and upgrades to other machinery and equipment, which we believe will further increase our module wattage and expand capacity and throughput at our other manufacturing facilities. •InJanuary 2020 , we entered into an MOU to settle a class action lawsuit filed in theArizona District Court . Pursuant to the MOU, among other things, we agreed to pay a total of$350 million to settle the claims in the lawsuit in exchange for mutual releases and dismissal with prejudice of the complaint upon court approval of the settlement. InFebruary 2020 , we subsequently entered into a Stipulation and Agreement of Settlement (the "Settlement Agreement") with certain named plaintiffs on terms and conditions that were consistent with the MOU. Pursuant to the Settlement Agreement, among other things, (i) we contributed$350 million in cash to a settlement fund that will be used to pay all settlement fees and expenses, attorneys' fees and expenses, and cash payments to members of the settlement class and (ii) the settlement class has agreed to release us, the other defendants named in the class action, and certain of their respective related parties from any and all claims concerning, based on, arising out of, or in connection with the class action. The Settlement Agreement contained no admission of liability, wrongdoing, or responsibility by any of the parties. OnJune 30, 2020 , theArizona District Court entered an order granting final approval of the settlement and dismissed the Class Action with prejudice. •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 actual purchases under these supply agreements are expected to be approximately$2.4 billion of substrate glass and$500 million of cover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which are up to$430 million in the aggregate and decline over time during the respective supply periods). •The balance of our solar module inventories and BoS parts was$457.0 million as ofSeptember 30, 2020 . As we continue to develop our advanced-stage project pipeline, we must produce solar modules in volumes sufficient to support our planned construction schedules. As part of this development and construction cycle, we typically produce these inventories in advance of receiving payment for such materials, which 61 -------------------------------------------------------------------------------- Table of Contents may temporarily reduce our liquidity. Once solar modules and BoS parts are installed in a project, they are classified as either project assets, PV solar power systems, or cost of sales depending on whether the project is subject to a definitive sales contract and whether other revenue recognition criteria have been met. We also produce significant volumes of modules for sale directly to third-parties, which requires us to carry inventories at levels sufficient to satisfy the demand of our customers and the needs of their projects, which may also temporarily reduce our liquidity. •We may commit significant working capital over the next several years to advance the construction of variousU.S. systems projects or procure the associated modules or BoS parts, by specified dates, for such projects to qualify for certain federal investment tax credits ("ITC"). Among other requirements, such credits require projects to have commenced construction in 2020, which may be achieved by certain qualifying procurement activities, to receive a 26% investment tax credit. The credit will step down to 22% for projects that commence construction in 2021, and will further step down to 10% for projects that commence construction thereafter.
Cash Flows
The following table summarizes key cash flow activity for the nine months ended
Nine Months Ended
September 30,
2020 2019
Net cash used in operating activities $ (149,198) $ (607,492)
Net cash provided by (used in) investing activities 116,322 (54,635)
Net cash (used in) provided by financing activities (98,196) 81,742
Effect of exchange rate changes on cash, cash equivalents and restricted cash
1,251 (6,732)
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 proceeds from the sale of systems projects inJapan andthe United States , partially offset by the$350 million settlement payment associated with our prior class action lawsuit as described above and the timing of cash receipts from certain third-party module sales, for which proceeds were received in late 2019 prior to the step down in theU.S. investment tax credit.
Investing Activities
The increase in net cash provided by investing activities was primarily due to lower purchases of property, plant and equipment.
Financing Activities
The increase in net cash used in financing activities was primarily due to the repayment of the Ishikawa Credit Agreement, partially offset by proceeds from borrowings under project specific debt financings associated with the construction of certain projects inJapan . 62 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our contractual obligations have not materially changed sinceDecember 31, 2019 with the exception of borrowings under project specific debt financings and other changes in the ordinary course of business. See Note 9. "Debt" to our condensed consolidated financial statements for more information related to the changes in our long-term debt. See also our Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding our contractual obligations.
Off-Balance Sheet Arrangements
As of
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