FSLR June 14 10q Draft


 

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

Form 10-Q

(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2014
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from            to

Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-4623678
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ]   No [x]

As of August 1, 2014, 100,193,196 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.
 




FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014

TABLE OF CONTENTS
 
 
Page
Part I.
Financial Information (Unaudited)
 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013
 
Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 





PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
544,353

 
$
519,760

 
$
1,494,511

 
$
1,274,965

Cost of sales
 
451,628

 
379,662

 
1,165,075

 
965,541

Gross profit
 
92,725

 
140,098

 
329,436

 
309,424

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
32,659

 
30,964

 
71,432

 
60,895

Selling, general and administrative
 
57,667

 
66,265

 
116,331

 
140,730

Production start-up
 
491

 
1,392

 
491

 
2,768

Restructuring and asset impairments
 

 
2,381

 

 
4,728

Total operating expenses
 
90,817

 
101,002

 
188,254

 
209,121

Operating income
 
1,908

 
39,096

 
141,182

 
100,303

Foreign currency gain (loss)
 
21

 
(1,068
)
 
(558
)
 
550

Interest income
 
4,533

 
3,405

 
8,854

 
8,352

Interest expense, net
 
(930
)
 
(875
)
 
(1,340
)
 
(1,625
)
Other (expense) income, net
 
(3,170
)
 
504

 
(4,916
)
 
(329
)
Income before income taxes
 
2,362

 
41,062

 
143,222

 
107,251

Income tax (benefit) expense
 
(2,166
)
 
7,464

 
26,687

 
14,511

Net income
 
$
4,528

 
$
33,598

 
$
116,535

 
$
92,740

Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.05

 
$
0.38

 
$
1.17

 
$
1.05

Diluted
 
$
0.04

 
$
0.37

 
$
1.14

 
$
1.03

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
100,148

 
89,201

 
99,871

 
88,209

Diluted
 
101,814

 
91,142

 
101,820

 
90,265


See accompanying notes to these condensed consolidated financial statements.

3



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
4,528

 
$
33,598

 
$
116,535

 
$
92,740

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(1,721
)
 
1,500

 
(1,661
)
 
(1,577
)
Unrealized gain (loss) on marketable securities and restricted investments
 
18,445

 
(17,029
)
 
38,621

 
(27,370
)
Unrealized (loss) gain on derivative instruments
 
(1,410
)
 
2,909

 
(3,755
)
 
(2,937
)
Total other comprehensive income (loss), net of tax
 
15,314

 
(12,620
)
 
33,205

 
(31,884
)
Comprehensive income
 
$
19,842

 
$
20,978

 
$
149,740

 
$
60,856


See accompanying notes to these condensed consolidated financial statements.

4



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
851,346

 
$
1,325,072

Marketable securities
 
497,521

 
439,102

Accounts receivable trade, net
 
237,924

 
136,383

Accounts receivable, unbilled and retainage
 
564,887

 
521,323

Inventories
 
385,247

 
388,951

Balance of systems parts
 
58,816

 
133,731

Deferred project costs
 
312,065

 
556,957

Deferred tax assets, net
 
107,265

 
63,899

Assets held for sale
 
20,728

 
132,626

Prepaid expenses and other current assets
 
134,470

 
94,720

Total current assets
 
3,170,269

 
3,792,764

Property, plant and equipment, net
 
1,369,659

 
1,385,084

PV solar power systems, net
 
48,547

 

Project assets and deferred project costs
 
1,002,494

 
720,916

Deferred tax assets, net
 
245,080

 
296,603

Restricted cash and investments
 
370,594

 
279,441

Goodwill
 
84,985

 
84,985

Other intangible assets, net
 
116,935

 
117,416

Inventories
 
124,520

 
129,664

Other assets
 
78,932

 
76,629

Total assets
 
$
6,612,015

 
$
6,883,502

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
187,530

 
$
261,333

Income taxes payable
 
40,708

 
6,707

Accrued expenses
 
294,668

 
320,077

Current portion of long-term debt
 
60,838

 
60,543

Payments and billings for deferred project costs
 
425,654

 
642,214

Other current liabilities
 
201,845

 
297,187

Total current liabilities
 
1,211,243

 
1,588,061

Accrued solar module collection and recycling liability
 
249,990

 
225,163

Long-term debt
 
133,836

 
162,780

Other liabilities
 
348,991

 
404,381

Total liabilities
 
1,944,060

 
2,380,385

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 100,177,488 and 99,506,941 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
100

 
100

Additional paid-in capital
 
2,661,120

 
2,646,022

Accumulated earnings
 
1,999,306

 
1,882,771

Accumulated other comprehensive income (loss)
 
7,429

 
(25,776
)
Total stockholders’ equity
 
4,667,955

 
4,503,117

Total liabilities and stockholders’ equity
 
$
6,612,015

 
$
6,883,502

See accompanying notes to these condensed consolidated financial statements.

5



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Cash received from customers
 
$
1,138,461

 
$
2,050,622

Cash paid to suppliers and associates
 
(1,315,185
)
 
(1,709,914
)
Interest received
 
6,519

 
3,724

Interest paid
 
(3,791
)
 
(5,974
)
Income tax (payments) refunds
 
(7,753
)
 
5,976

Excess tax benefit from share-based compensation arrangements
 
(16,165
)
 
(55,695
)
Other operating activities
 
(1,882
)
 
89

Net cash (used in) provided by operating activities
 
(199,796
)
 
288,828

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(113,221
)
 
(156,856
)
Purchases of marketable securities
 
(226,087
)
 
(316,285
)
Proceeds from maturities and sales of marketable securities
 
164,259

 
60,766

Payments received on note receivable, affiliate
 

 
17,108

Change in restricted cash
 
(72,405
)
 
5,136

Acquisitions, net of cash acquired
 

 
(30,745
)
Purchase of equity and cost method investments
 
(910
)
 
(14,894
)
Other investing activities
 
(1,480
)
 
(1,850
)
Net cash used in investing activities
 
(249,844
)
 
(437,620
)
Cash flows from financing activities:
 
 
 
 
Repayments of long-term debt
 
(30,761
)
 
(636,147
)
Proceeds from borrowings under long-term debt, net of discount and issuance costs
 

 
335,000

Excess tax benefit from share-based compensation arrangements
 
16,165

 
55,695

Repayment of economic development funding
 

 
(8,315
)
Proceeds from equity offerings
 

 
430,368

Contingent consideration payments and other financing activities
 
(12,058
)
 
620

Net cash (used in) provided by financing activities
 
(26,654
)
 
177,221

Effect of exchange rate changes on cash and cash equivalents
 
2,568

 
(1,066
)
Net (decrease) increase in cash and cash equivalents
 
(473,726
)
 
27,363

Cash and cash equivalents, beginning of the period
 
1,325,072

 
901,294

Cash and cash equivalents, end of the period
 
$
851,346

 
$
928,657

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions currently or previously funded by liabilities
 
$
48,667

 
$
57,681

Acquisitions currently or previously funded by liabilities and contingent consideration
 
$
84,320

 
$
70,780


 See accompanying notes to these condensed consolidated financial statements.

6



FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or for any other period. The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC.

Certain prior year balances have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total cash flows, total net sales, operating income, net income, total assets, total liabilities or stockholders’ equity.

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

2. Summary of Significant Accounting Policies
  
Use of Estimates. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Significant estimates in these condensed consolidated financial statements include percentage-of-completion revenue recognition, inventory valuation, recoverability of project assets, estimates of future cash flows from and the economic useful lives of long-lived assets, asset retirement obligations, certain accrued liabilities, income taxes and tax valuation allowances, reportable segment allocations, product warranties and manufacturing excursions, accrued collection and recycling expense, applying the acquisition method of accounting for business combinations and goodwill. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from these estimates and assumptions.

Revenue Recognition — Systems Business. We recognize revenue for arrangements entered into by our systems business generally using two revenue recognition models, following the guidance in Accounting Standards Codification (“ASC”) 605, Accounting for Long-term Construction Contracts or, for arrangements which include land or land rights, ASC 360, Accounting for Sales of Real Estate.

For systems business sales arrangements that do not include land or land rights and thus are accounted for under ASC 605, we use the percentage-of-completion method, as described further below, using actual costs incurred over total estimated costs to develop and construct a project (including module costs) as our standard accounting policy, unless we cannot make reasonably dependable estimates of the costs to complete the contract, in which case we would use the completed contract method.

For systems business sales arrangements that are accounted for under ASC 360 where we convey control of land or land rights, we record the sale as revenue using one of the following revenue recognition methods, based upon evaluation of the substance and form of the terms and conditions of such real estate sales arrangements:

(i) We apply the percentage-of-completion method, as further described below, to certain real estate sales arrangements where we convey control of land or land rights, when a sale has been consummated, we have transferred the usual risks and rewards of ownership to the buyer, the initial and continuing investment criteria have been met, we have the ability to estimate our costs and progress toward completion, and all other revenue recognition criteria have been met. The initial and continuing investment requirements, which demonstrate a buyer’s commitment to honor their obligations for the sales arrangement, can typically be met through the receipt of cash or an irrevocable letter of credit from a highly credit worthy lending institution. When evaluating whether the usual risks and rewards of ownership have transferred to the buyer, we consider whether we have or may be contingently required to have any prohibited forms of continuing involvement with the project. Prohibited forms of continuing involvement in a real

7



estate sales arrangement may include us retaining risks or rewards associated with the project that are not customary with the range of risks or rewards that an engineering, procurement and construction (“EPC”) contractor may assume.

(ii) Depending on whether the initial and continuing investment requirements have been met, and whether collectability from the buyer is reasonably assured, we may align our revenue recognition and release of project assets or deferred project costs to cost of sales with the receipt of payment from the buyer if the sale has been consummated and we have transferred the usual risks and rewards of ownership to the buyer.

(iii) We may also record revenue for certain sales arrangements after construction of discrete portions of a project or after the entire project is substantially complete, we have transferred the usual risks and rewards of ownership to the buyer, and we have received substantially all payments due from the buyer or the initial and continuing investment criteria have been met.

For any systems business sales arrangements containing multiple deliverables (including our solar modules) not required to be accounted for under ASC 360 (real estate) or ASC 605 (long-term construction contracts), we analyze each activity within the sales arrangement to ensure that we adhere to the separation guidelines of ASC 605 for multiple-element arrangements. We allocate revenue for any transactions involving multiple elements to each unit of accounting based on its relative selling price, and recognize revenue for each unit of accounting when all revenue recognition criteria for a unit of accounting have been met.

Revenue Recognition - Percentage-of-Completion. In applying the percentage-of-completion method, we use the actual costs incurred relative to estimated costs to complete (including module costs) in order to estimate the progress towards completion to determine the amount of revenue and profit to recognize. Incurred costs include all installed direct materials, installed solar modules, labor, subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, and tools. We recognize direct material and solar module costs as incurred costs when the direct materials and solar modules have been installed in the project. When contracts specify that title to direct materials and solar modules transfers to the customer before installation has been performed, we will not recognize revenue or associated costs until those materials are installed and have met all other revenue recognition requirements. We consider direct materials and solar modules to be installed when they are permanently placed or affixed to the solar power system as required by engineering designs. Solar modules manufactured by us that will be used in our solar power systems, which we still hold title to, remain within inventory until such modules are installed in a solar power system.

The percentage-of-completion method of revenue recognition requires us to make estimates of contract revenues and costs to complete our projects. In making such estimates, management judgments are required to evaluate significant assumptions including the cost of materials and labor, expected labor productivity, the impact of potential variances in schedule completion, the amount of net contract revenues and the impact of any penalties, claims, change orders, or performance incentives. 

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

Revenue Recognition - Components Business. Our components business sells solar modules directly to third party solar power system integrators and operators. We recognize revenue for module sales when persuasive evidence of an arrangement exists, delivery of the module has occurred and title and risk of loss have passed to the customer, the sales price is fixed or determinable, and the collectability of the resulting receivable is reasonably assured. Under this policy, we record a trade receivable for the selling price of our module and reduce inventory for the cost of goods sold when delivery occurs in accordance with the terms of the sales contracts. Our customers typically do not have extended payment terms or rights of return for our products. We account for rebates or other customer incentives as a reduction to the selling price of our solar modules at the time of sale; and therefore, as a reduction to revenue.

Revenue Recognition — Operations and Maintenance. Our operations and maintenance revenue is billed and recognized as services are performed. Costs of these revenues are expensed in the period in which they are incurred.

Ventures and Variable Interest Entities. In the normal course of business we establish wholly owned project companies which may be considered variable interest entities (“VIEs”). We consolidate wholly owned variable interest entities when we are considered the primary beneficiary of such entities. Additionally, we have and may in the future form joint venture type arrangements

8



(“ventures”), including partnerships and partially owned limited liability companies or similar legal structures, with one or more third parties primarily to develop and build specific or a pipeline of solar power projects. These types of ventures are core to our business and long-term strategy related to providing solar photovoltaic (“PV”) generation solutions using our modules to sustainable geographic markets. We analyze all of our ventures and classify them into two groups: (i) ventures that must be consolidated because they are either not VIEs and we hold the majority voting interest, or because they are VIEs and we are the primary beneficiary; and (ii) ventures that do not need to be consolidated and are accounted for under either the equity or cost methods of accounting because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.

Ventures are considered VIEs if (i) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (ii) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns; or (iii) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are on behalf of the investor. Our venture agreements typically require some form of project development capital or project equity ranging from amounts necessary to obtain a power purchase agreement (or similar power off-take agreement) to a pro-rata portion of the total equity required to develop and complete construction of a project, depending upon the opportunity and the market our ventures are in. Our limited number of ventures as of June 30, 2014 and future ventures of a similar nature are typically VIEs because the total equity investment at risk is not sufficient to permit the ventures to finance their activities without additional financial support.

We are considered the primary beneficiary of and are required to consolidate a VIE if we have the power to direct the activities that most significantly impact that VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of that VIE that could potentially be significant to the VIE. If we determine that we do not have the power to direct the activities that most significantly impact the venture, then we are not the primary beneficiary of the VIE.

We account for our unconsolidated ventures using either the equity or cost methods of accounting depending upon whether we have the ability to exercise significant influence over a venture. We consider the participating and protective rights we have as well as the legal form of the venture when evaluating whether we have the ability to exercise significant influence, which requires us to apply the equity method of accounting. Income from ventures for the three months ended June 30, 2014 was immaterial to the condensed consolidated statements of operations.
Property, Plant and Equipment. We report our property, plant and equipment at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the assets, required installation costs, interest capitalized during the construction period, and any expenditure that substantially adds to the value of or substantially extends the useful life of an existing asset. We expense repair and maintenance costs at the time we incur them.

We begin depreciation for such assets when they are placed into service. We consider an asset to be placed into service when the asset is both in the location and condition for its intended use.

We compute depreciation expense using the straight-line method over the estimated useful lives of assets, as presented in the table below. We depreciate leasehold improvements over the shorter of their estimated useful lives or the remaining term of the lease. The estimated useful life of an asset is reassessed whenever applicable facts and circumstances indicate a change in the estimated useful life of such asset has occurred.

 
 
 
Useful Lives
in Years
Buildings and building improvements
 
25 – 40
Manufacturing machinery and equipment
 
5 – 7
Furniture, fixtures, computer hardware, and computer software
 
3 – 7
Leasehold improvements
 
up to 15

PV solar power systems. PV solar power systems represent solar systems that we intend to hold and operate once placed in service. We report our PV solar power systems at cost, less accumulated depreciation.

We begin depreciation for such PV solar power system assets when they are placed into service. We consider a PV solar power system to be placed into service when management determines that we will own and operate the system for a period of time. We compute depreciation expense for power generating assets using the straight-line method over the life of the lesser of the power purchase agreement (“PPA”) or the lease on the land.

9




For these systems we earn revenue associated with the energy generated by the system. For the six months ended June 30, 2014, the revenue recorded was immaterial to the condensed consolidated statement of operations.

Refer to Note 2. “Summary of Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for a more complete summary of our significant accounting policies.

3. Recent Accounting Pronouncements

In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which applies to the release of cumulative translation adjustments into net income when a parent (i) sells a part or all of its investment in a foreign entity (ii) no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity, (iii) sells part of an equity method investment of a foreign entity, or (iv) obtains control of a foreign acquiree in which such parent held an equity interest immediately before the acquisition date through a step acquisition. The adoption of ASU 2013-15 in the first quarter of 2014 did not have an impact on our consolidated financial position, results of operations, or cash flows.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. ASU No. 2013-11 provides that an entity’s unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with one exception. That exception states that, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11, in the first quarter of 2014 resulted in netting impacts on our consolidated statement of financial position. See Note 14. “Income Taxes,” for further discussion of the impacts to the consolidated statement of financial position.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard states that a strategic shift could include a disposal of: a major geographic area of operations; a major line of business; a major equity investment; or other major parts of an entity. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. We are currently analyzing the impact of ASU 2014-08, which will be effective in the first quarter of 2015, on our consolidated financial position, results of operations, or cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between US GAAP and International Financial Reporting Standards. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are currently analyzing the impact of ASU 2014-09, which will be effective in the first quarter of 2017, on our consolidated financial position, results of operations, or cash flows.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718) -Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 provides guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. ASU 2014-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2015. We do not expect the adoption of ASU 2014-12, in the first quarter of 2016, to have an impact on our consolidated financial position, results of operations, or cash flows.

4. Restructuring and Asset Impairments


10



In April 2012, our executive management approved a set of restructuring initiatives intended to reduce costs, which was done through a reduction in our European operations.

The following table summarizes the April 2012 European restructuring amounts remaining as of December 31, 2013, amounts recorded to restructuring expense during the three and six months ended June 30, 2014, and the remaining balance at June 30, 2014 (in thousands):
April 2012 European Restructuring
 
Severance and Termination Related Costs
Ending Balance at December 31, 2013
 
$
1,940

Cash Payments
 
(915
)
Non-Cash Amounts Including Foreign Exchange Impact
 
(15
)
Ending Balance at March 31, 2014
 
1,010

Charges to Income
 

Change in Estimates
 
(619
)
Cash Payments
 
(187
)
Non-Cash Amounts Including Foreign Exchange Impact
 
(2
)
Ending Balance at June 30, 2014
 
$
202

Expenses recognized for restructuring activities are presented in “Restructuring and asset impairments” on the condensed consolidated statements of operations. Substantially all expenses related to the April 2012 European restructuring were related to our components segment. We do not expect to incur any additional expenses for the April 2012 European restructuring initiatives.
Separately, as of June 30, 2014, $5.8 million remains accrued for charges related to other long-term tax liabilities and a land remediation accrual and are included within “Other Liabilities.”

5. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
 
June 30,
2014
 
December 31,
2013
Cash:
 
 
 
 
Cash
 
$
838,255

 
$
1,322,183

Cash equivalents:
 
 
 
 
Money market funds
 
3,091

 
2,889

Time deposits
 
10,000

 

Total cash and cash equivalents
 
851,346

 
1,325,072

Marketable securities:
 
  
 
 
Foreign debt
 
455,903

 
364,046

Foreign government obligations
 

 
25,115

Time deposits
 
30,000

 

U.S. debt
 
8,114

 
46,439

U.S. government obligations
 
3,504

 
3,502

Total marketable securities
 
497,521

 
439,102

Total cash, cash equivalents, and marketable securities
 
$
1,348,867

 
$
1,764,174


During the three and six months ended June 30, 2014 and 2013, we realized $0.2 million gains on the sale or maturities of our marketable securities. See Note 9. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the fair value of our marketable securities.
 
All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable security to be impaired when its fair value is less than its cost, in which case we would further review the marketable security to determine whether it is other-than-temporarily impaired. When we evaluate a marketable security for other-than-temporary

11



impairment, we review factors such as the length of time and extent to which its fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more-likely-than-not that we will be required to sell the marketable security before we have recovered its cost basis. If a marketable security were other-than-temporarily impaired, we would write it down through other income (expense), net to its impaired value and establish that as a new cost basis. We did not identify any of our marketable securities as other-than-temporarily impaired at June 30, 2014 and December 31, 2013.

The following tables summarize the unrealized gains and losses related to our marketable securities, by major security type, as of June 30, 2014 and December 31, 2013 (in thousands):
 
 
As of June 30, 2014
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign debt
 
$
456,262

 
$
69

 
$
428

 
$
455,903

Time deposits
 
30,000

 

 

 
30,000

U.S. debt
 
8,108

 
6

 

 
8,114

U.S. government obligations
 
3,499

 
5

 

 
3,504

Total
 
$
497,869

 
$
80

 
$
428

 
$
497,521


 
 
As of December 31, 2013
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign debt
 
$
364,568

 
$
127

 
$
649

 
$
364,046

Foreign government obligations
 
25,125

 

 
10

 
25,115

U.S. debt
 
46,430

 
12

 
3

 
46,439

U.S. government obligations
 
3,498

 
4

 

 
3,502

Total
 
$
439,621

 
$
143

 
$
662

 
$
439,102


Contractual maturities of our marketable securities as of June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
 
As of June 30, 2014
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
295,673

 
$
64

 
$
126

 
$
295,611

One year to two years
 
166,801

 
13

 
287

 
166,527

Two years to three years
 
35,395

 
3

 
15

 
35,383

Total
 
$
497,869

 
$
80

 
$
428

 
$
497,521


 
 
As of December 31, 2013
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
161,752

 
$
57

 
$
84

 
$
161,725

One year to two years
 
270,149

 
81

 
578

 
269,652

Two years to three years
 
7,720

 
5

 

 
7,725

Total
 
$
439,621

 
$
143

 
$
662

 
$
439,102


The net unrealized loss of $0.3 million and $0.5 million as of June 30, 2014 and December 31, 2013, respectively, on our marketable securities were primarily the result of changes in interest rates. Our investment policy requires marketable securities to be highly rated and limits the security types, issuer concentration, and duration to maturity of our marketable securities portfolio.

The following table shows gross unrealized losses and estimated fair values for those marketable securities that were in an unrealized loss position as of June 30, 2014 and December 31, 2013, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):

12



 
 
As of June 30, 2014
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Foreign debt
 
$
350,850

 
$
428

 
$

 
$

 
$
350,850

 
$
428

Total
 
$
350,850

 
$
428

 
$

 
$

 
$
350,850

 
$
428


 
 
As of December 31, 2013
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Foreign debt
 
$
212,655

 
$
649

 
$

 
$

 
$
212,655

 
$
649

Foreign government obligations
 
25,161

 
10

 

 

 
25,161

 
10

U.S. debt
 
21,465

 
3

 

 

 
21,465

 
3

Total
 
$
259,281

 
$
662

 
$

 
$

 
$
259,281

 
$
662


6. Restricted Cash and Investments

Restricted cash and investments consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
 
June 30,
2014
 
December 31,
2013
Restricted cash (1)
 
$
46,868

 
$
167

Restricted investments
 
323,726

 
279,274

Restricted cash and investments
 
$
370,594

 
$
279,441


(1)
There was $26.2 million and zero of restricted cash included within prepaid expenses and other current assets at June 30, 2014 and December 31, 2013, respectively, primarily related to required cash collateral for certain letters of credit.

At June 30, 2014, our restricted cash consisted of deposits held by various banks to secure certain of our letters of credit. See Note 12. “Commitments and Contingencies,” for further discussion of restricted cash relating to letters of credit.

At June 30, 2014 and December 31, 2013, our restricted investments consisted of long-term marketable securities that we hold through a custodial account to fund the estimated future costs of our collecting and recycling modules covered under our solar module collection and recycling program. We have classified our restricted investments as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as a part of accumulated other comprehensive income (loss). We report realized gains and losses on the maturity or sale of our restricted investments in other income (expense), net computed using the specific identification method. Restricted investments are classified as noncurrent as the underlying accrued solar module collection and recycling liability is also noncurrent in nature.

We fund the estimated collection and recycling obligations incremental to amounts already pre-funded in prior years for the cumulative module sales covered by our solar module collection and recycling program within 90 days of the end of each year, assuming for this purpose a service life of 25 years. To ensure that our collection and recycling program for covered modules is available at all times and the pre-funded amounts are accessible regardless of our financial status in the future (even in the case of our own insolvency), we have established a trust structure (the “Trust”) under which estimated required funds are put into custodial accounts with an established and reputable bank as the investment advisor in the name of the Trust, for which First Solar, Inc. (“FSI”), First Solar Malaysia Sdn. Bhd. (“FS Malaysia”), and First Solar Manufacturing GmbH are grantors. Only the trustee can distribute funds from the custodial accounts and these funds cannot be accessed for any purpose other than to cover qualified costs of module collection and recycling, either by us or a third party executing the required collection and recycling services. Investments in this custodial account must meet the criteria of the highest quality investments, such as highly rated government or agency bonds. We closely monitor our exposure to European markets and maintain holdings primarily consisting of German and French sovereign debt securities which are not currently at risk of default. Under the trust agreements, each year we determine the annual pre-funding requirement (if any) based upon the difference between the current estimated future costs of collecting and recycling all solar modules covered under our program combined with the rate of return restricted investments will earn prior to

13



being utilized to cover qualified collection and recycling costs and amounts already pre-funded in prior years. Based primarily upon reductions in the estimated future costs of collecting and recycling solar modules covered under our program combined with the cumulative amounts pre-funded since the inception of our program, we have determined that no incremental funding will be required during 2014 for all historical covered module sales through December 31, 2013.

The following table summarizes unrealized gains and losses related to our restricted investments by major security type as of June 30, 2014 and December 31, 2013 (in thousands):
 
 
As of June 30, 2014
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
207,555

 
$
53,803

 
$

 
$
261,358

U.S. government obligations
 
57,196

 
5,172

 

 
62,368

Total
 
$
264,751

 
$
58,975

 
$

 
$
323,726


 
 
As of December 31, 2013
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
205,484

 
$
22,295

 
$
1,489

 
$
226,290

U.S. government obligations
 
55,916

 
1,372

 
4,304

 
52,984

Total
 
$
261,400

 
$
23,667

 
$
5,793

 
$
279,274


As of June 30, 2014 and December 31, 2013, the contractual maturities of these restricted investments were between 14 years and 23 years.

7. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):

 
 
June 30,
2014
 
December 31,
2013
Accounts receivable trade, gross
 
$
246,021

 
$
148,693

Allowance for doubtful accounts
 
(8,097
)
 
(12,310
)
Accounts receivable trade, net
 
$
237,924

 
$
136,383


At June 30, 2014 and December 31, 2013, $31.5 million and $25.2 million, respectively, of our accounts receivable trade, net, were secured by letters of credit, bank guarantees or other forms of financial security issued by credit worthy financial institutions.

Accounts receivable, unbilled and retainage
 
Accounts receivable, unbilled and retainage consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Accounts receivable, unbilled
 
$
51,446

 
$
102,953

Retainage
 
513,441

 
418,370

Accounts receivable, unbilled and retainage
 
$
564,887

 
$
521,323


Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer. This is common for long-term construction contracts. For example, we recognize revenue from contracts for the construction and sale of solar

14



power systems which include the sale of project assets over the construction period using applicable accounting methods. One applicable accounting method is the percentage-of-completion method under which sales and gross profit are recognized as construction work is performed based on the relationship between actual costs incurred compared to the total estimated costs for constructing the project. Under this accounting method, revenue can be recognized in advance of billing the customer, resulting in an amount recorded to accounts receivable, unbilled and retainage. Once we meet the billing criteria under a construction contract, we bill our customers accordingly and reclassify the accounts receivable, unbilled and retainage to accounts receivable trade, net. Billing requirements vary by contract, but are generally structured around completion of certain construction milestones.
 
Also included within accounts receivable, unbilled and retainage is the current portion of retainage. Retainage refers to the portion of the contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. Retainage included within accounts receivable, unbilled and retainage is expected to be billed and collected within the next 12 months.

Inventories

Inventories consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Raw materials
 
$
160,686

 
$
165,805

Work in process
 
17,569

 
11,874

Finished goods
 
331,512

 
340,936

Inventories
 
$
509,767

 
$
518,615

Inventories — current
 
$
385,247

 
$
388,951

Inventories — noncurrent (1)
 
$
124,520

 
$
129,664


(1) We purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our operating cycle (which is 12 months). We classify the raw materials that we do not expect to be consumed within our operating cycle as noncurrent.

Balance of systems parts

Balance of systems parts, which totaled $58.8 million and $133.7 million as of June 30, 2014 and December 31, 2013, respectively, represent mounting, third-party modules, electrical and other construction parts purchased for solar power plants to be constructed or currently under construction, which we hold title to and are not yet installed in a solar power plant. These parts include posts, tilt brackets, tables, harnesses, combiner boxes, inverters, cables, tracker equipment and other parts we purchase or assemble for the solar power plants we construct. Balance of systems parts does not include any solar modules that we manufacture. We carry these parts at the lower of cost or market, with market being based primarily on recoverability through installation in a solar power system. 

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Prepaid expenses
 
$
39,640

 
$
24,572

Derivative instruments 
 
2,211

 
7,996

Deferred costs of goods sold
 

 
753

Other current assets
 
92,619

 
61,399

Prepaid expenses and other current assets
 
$
134,470

 
$
94,720


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):

15



 
 
June 30,
2014
 
December 31,
2013
Buildings and improvements
 
$
364,283

 
$
360,504

Machinery and equipment
 
1,495,305

 
1,445,939

Office equipment and furniture
 
128,568

 
124,332

Leasehold improvements
 
48,204

 
47,833

Depreciable property, plant and equipment, gross
 
2,036,360

 
1,978,608

Accumulated depreciation
 
(1,021,857
)
 
(940,730
)
Depreciable property, plant and equipment, net
 
1,014,503

 
1,037,878

Land
 
10,525

 
10,714

Construction in progress
 
146,175

 
133,223

Stored assets (1)
 
198,456

 
203,269

Property, plant and equipment, net
 
$
1,369,659

 
$
1,385,084


(1)
Consists of machinery and equipment (“stored assets”) that were originally purchased for installation in our previously planned manufacturing capacity expansions. We intend to install and place the stored assets into service when such assets are required or beneficial to our existing installed manufacturing capacity or when market demand supports additional or market specific manufacturing capacity. As the stored assets are neither in the condition or location to produce modules as intended, we will not begin depreciation until such assets are placed into service. The stored assets are evaluated for impairment under a held and used impairment model whenever events or changes in business circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of our long-lived assets may not be recoverable. We ceased the capitalization of interest on such stored assets once they were physically received from the related machinery and equipment vendors.

Depreciation of property, plant and equipment was $62.6 million and $123.4 million for the three and six months ended June 30, 2014, respectively, and was $57.8 million and $116.0 million for the three and six months ended June 30, 2013, respectively.

PV solar power systems, net

PV solar power systems, net consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):

 
 
June 30,
2014
 
December 31,
2013
PV solar power systems, gross
 
$
48,623

 
$

Accumulated depreciation
 
(76
)
 

PV solar power systems, net
 
$
48,547

 
$


Depreciation of PV solar power systems was $0.1 million for the three and six months ended June 30, 2014, respectively, and was zero for the three and six months ended June 30, 2013, respectively.

Capitalized interest

The cost of constructing facilities, equipment and project assets includes interest costs incurred during the asset’s construction period. The components of interest expense and capitalized interest are as follows during the three and six months ended June 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Interest cost incurred
 
$
(2,385
)
 
$
(3,167
)
 
$
(5,036
)
 
$
(6,442
)
Interest cost capitalized —– property, plant and equipment
 
444

 
736

 
1,022

 
1,046

Interest cost capitalized —– project assets
 
1,011

 
1,556

 
2,674

 
3,771

Interest expense, net
 
$
(930
)
 
$
(875
)
 
$
(1,340
)
 
$
(1,625
)


16



Project assets and deferred project costs

Project assets consist primarily of costs relating to solar power projects in various stages of development and construction that we capitalize prior to entering into a definitive sales agreement for the solar power project including projects that have begun commercial operation under the project PPAs. These costs include costs for land and costs for developing and constructing a PV solar power system. Development costs can include legal, consulting, permitting, interconnection, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred project costs on our condensed consolidated balance sheet until the sale is completed and we have met all of the criteria to recognize the sale as revenue, which is typically subject to real estate revenue recognition requirements. We expense project assets to cost of sales after each respective project asset is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). We classify project assets generally as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months. From time to time we may determine it necessary to hold projects based on the economics of such projects. In those cases, where we deem it necessary to hold such projects we reclassify the project assets to PV solar power systems.

Deferred project costs represent (i) costs that we capitalize as project assets for arrangements that we account for as real estate transactions after we have entered into a definitive sales arrangement, but before the sale is completed or before we have met all criteria to recognize the sale as revenue, (ii) recoverable pre-contract costs that we capitalize for arrangements accounted for as long-term construction contracts prior to entering into a definitive sales agreement, or (iii) costs that we capitalize for arrangements accounted for as long-term construction contracts after we have signed a definitive sales agreement, but before all revenue recognition criteria have been met. We classify deferred project costs as current if completion of the sale and the meeting of all revenue recognition criteria is expected within the next 12 months.

If a project asset is completed and begins commercial operation prior to entering into or the closing of a sales arrangement, the completed project will remain in project assets until the sale of such project closes or we decide to hold such project. 

Project assets and deferred project costs consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Project assets — land
 
$
9,075

 
$
4,150

Project assets — development costs including project acquisition costs
 
561,133

 
465,316

Project assets — construction costs
 
389,327

 
156,824

Project assets — projects in pre-COD operation under project PPAs
 

 
66,240

Project assets 
 
$
959,535

 
$
692,530

Deferred project costs — current
 
$
312,065

 
$
556,957

Deferred project costs — non-current
 
42,959

 
28,386

Deferred project costs
 
$
355,024

 
$
585,343

Total project assets and deferred project costs
 
$
1,314,559

 
$
1,277,873


Other assets

Other assets consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Note receivable (1)
 
$
9,541

 
$
9,655

Income taxes receivable
 
7,912

 
7,656

Deferred rent
 
20,977

 
21,175

Investments in unconsolidated affiliates and joint ventures (2)
 
16,419

 
17,321

Retainage
 

 
992

Other
 
24,083

 
19,830

Other assets
 
$
78,932

 
$
76,629


(1) On April 8, 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility replaced

17



a bridge loan that we had made to this entity. The credit facility bears interest at 8% per annum payable quarterly, with the full amount due on December 31, 2026. As of June 30, 2014 and December 31, 2013, the balance on this credit facility was €7.0 million ($9.5 million and $9.7 million, respectively).

(2) We have joint ventures or other business arrangements with strategic partners in several markets using such arrangements to expedite our penetration of those markets and establish relationships with potential customers and policymakers. Some of these business arrangements have and are expected in the future to involve significant investments or other allocations of capital on our part. Investments in unconsolidated entities over which we have significant influence are accounted for under the equity method of accounting. Investments in entities in which we do not have the ability to exert significant influence over the investees’ operating and financing activities are accounted for under the cost method of accounting. The following table summarizes our equity and cost method investments as of June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30, 2014
 
December 31,
2013
Equity method investments
 
$
10,650

 
$
12,148

Cost method investments
 
5,769

 
5,173

Investments in unconsolidated affiliates and joint ventures
 
$
16,419

 
$
17,321


Goodwill

Goodwill, summarized by relevant reporting unit, consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
Reporting Unit
 
December 31,
2013

Acquisitions

June 30, 2014
CdTe Components
 
$
403,420

 
$

 
$
403,420

Crystalline Silicon Components
 
6,097

 

 
6,097

Systems
 
68,833

 

 
68,833

Accumulated impairment losses
 
(393,365
)
 

 
(393,365
)
Total
 
$
84,985

 
$

 
$
84,985


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

Other intangible assets, net

Intangible assets includes those assets acquired primarily as part of our GE and TetraSun acquisitions and our internally-generated intangible assets, substantially all of which are patents on technologies related to our products and production processes. We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure them. We amortize intangible assets on a straight-line basis over their estimated useful lives once the intangible assets meet the criteria to be amortized. $112.8 million of the $118.6 million of intangible assets, gross as of June 30, 2014 consists of IPR&D related to assets that were acquired as part of the TetraSun and GE acquisitions. Such assets will be amortized over their estimated useful lives upon successful completion of the project or expensed earlier if impaired. The following table summarizes our intangible assets at June 30, 2014 and December 31, 2013 (in thousands):

18



 
 
Gross Intangible Assets
 
Accumulated Amortization
 
 
 
 
December 31, 2013
 
Write-off of fully amortized intangibles
 
June 30, 2014
 
December 31, 2013
 
Additions Charged to Expense
 
Write-off of fully amortized intangibles
 
June 30, 2014
 
Net Intangibles June 30, 2014
Patents
 
$
10,180

 
$
(5,086
)
 
$
5,094

 
$
(5,797
)
 
$
(306
)
 
$
5,086

 
$
(1,017
)
 
$
4,077

Trade names
 
700

 

 
700

 
(467
)
 
(175
)
 

 
(642
)
 
58

In-process research and development
 
112,800

 

 
112,800

 

 

 

 

 
112,800

Total
 
$
123,680

 
$
(5,086
)
 
$
118,594

 
$
(6,264
)
 
$
(481
)
 
$
5,086

 
$
(1,659
)
 
$
116,935


Accrued expenses

Accrued expenses consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Accrued compensation and benefits
 
$
29,195

 
$
50,148

Accrued property, plant and equipment
 
27,766

 
19,834

Accrued inventory
 
40,218

 
43,966

Accrued project assets and deferred project costs
 
66,547

 
80,528

Product warranty liability (1)
 
68,214

 
67,097

Accrued expenses in excess of normal product warranty liability and related expenses (1)
 
8,827

 
12,516

Other
 
53,901

 
45,988

Accrued expenses
 
$
294,668

 
$
320,077


(1) See Note 12. “Commitments and Contingencies,” for further discussion of “Product warranty liability” and “Accrued expenses in excess of normal product warranty liability and related expenses.”

Other current liabilities

Other current liabilities consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Deferred revenue
 
$
522

 
$
1,193

Derivative instruments 
 
8,201

 
8,096

Deferred tax liabilities
 
229

 
138

Billings in excess of costs and estimated earnings (1)
 
127,342

 
117,766

Contingent consideration (2)
 
29,965

 
37,775

Other (3)
 
35,586

 
132,219

Other current liabilities
 
$
201,845

 
$
297,187


(1) Billings in excess of costs and estimated earnings represents billings made or payments received in excess of revenue recognized on contracts accounted for under the percentage-of-completion method. Typically, billings are made based on the completion of certain construction milestones as provided for in the sales arrangement and the timing of revenue recognition may be different from when we can bill or collect from a customer.

(2) See Note 12. “Commitments and Contingencies,” for further discussion on “Contingent consideration.”

(3) December 31, 2013 balance consists primarily of proceeds received for our Mesa facility that were classified as “Assets held for sale” on the condensed consolidated balance sheet. Due to our continuing involvement with the Mesa facility, we deferred recognition of the sale transaction until certain risks and rewards of ownership were fully transferred to the buyer, which occurred in the first quarter of 2014.


19



Other liabilities

Other liabilities consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Product warranty liability (1)
 
$
142,613

 
$
130,944

Other taxes payable
 
66,221

 
119,124

Contingent consideration (1)
 
54,115

 
58,969

Liability in excess of normal product warranty liability and related expenses (1)
 
36,771

 
39,565

Other (1)
 
49,271

 
55,779

Other liabilities
 
$
348,991

 
$
404,381


(1) See Note 12. “Commitments and Contingencies,” for further discussion on “Product warranty liability,” “Contingent consideration,” “Energy test guarantees,” and “Liability in excess of normal product warranty liability and related expenses.”

Payments and billings for deferred project costs

Payments and billings for deferred project costs - current totaling $425.7 million and $642.2 million at June 30, 2014 and December 31, 2013, respectively, represent customer payments received or customer billings made under the terms of solar power project related sales contracts for which all revenue recognition criteria for real estate transactions have not yet been met. The associated solar power project related costs are included as deferred project costs. We classify such amounts as current or noncurrent depending upon when all revenue recognition criteria are expected to be met, consistent with the classification of the associated deferred project costs.

8. Derivative Financial Instruments

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

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular consolidated balance sheet date. We report all of our derivative instruments at fair value and we account for changes in the fair value of derivative instruments within accumulated other comprehensive income (loss) if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. See Note 9. “Fair Value Measurements,” for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013 (in thousands):

20



 
 
June 30, 2014
 
 
Prepaid Expenses and Other Current Assets
 
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
 
$
3,269

 
$

Cross-currency swap contract
 

 
 
1,239

 
4,338

Interest rate swap contracts
 

 
 
275

 
165

Total derivatives designated as hedging instruments
 
$

 
 
$
4,783

 
$
4,503

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 

 
 

Foreign exchange forward contracts
 
$
2,211

 
 
$
3,418

 
$

Total derivatives not designated as hedging instruments
 
$
2,211

 
 
$
3,418

 
$

Total derivative instruments
 
$
2,211

 
 
$
8,201

 
$
4,503


 
 
December 31, 2013
 
 
Prepaid Expenses and Other Current Assets
 
Other Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
2,357

 
$
282

 
$

 
$

Cross-currency swap contract
 

 

 
1,934

 
7,739

Interest rate swap contracts
 

 

 
334

 
369

Total derivatives designated as hedging instruments
 
$
2,357

 
$
282

 
$
2,268

 
$
8,108

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 

Foreign exchange forward contracts
 
$
5,639

 
$

 
$
5,828

 
$

Total derivatives not designated as hedging instruments
 
$
5,639

 
$

 
$
5,828

 
$

Total derivative instruments
 
$
7,996

 
$
282

 
$
8,096

 
$
8,108


The impact of offsetting balances associated with derivative instruments designated as hedging instruments is shown below (in thousands):
 
 
June 30, 2014
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in Consolidated Balance Sheet
 
 
 
 
Gross Asset (Liability)
 
Gross Offset in Consolidated Balance Sheet
 
Net Amount Recognized in Financial Statements
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Foreign exchange forward contracts
 
$
(3,269
)
 

 
(3,269
)
 

 

 
$
(3,269
)
Cross-currency swap contracts
 
$
(5,577
)
 

 
(5,577
)
 

 

 
$
(5,577
)
Interest rate swap contracts
 
$
(440
)
 

 
(440
)
 

 

 
$
(440
)


21



 
 
December 31, 2013
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in Consolidated Balance Sheet
 
 
 
 
Gross Asset (Liability)
 
Gross Offset in Consolidated Balance Sheet
 
Net Amount Recognized in Financial Statements
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Foreign exchange forward contracts
 
$
2,639

 

 
2,639

 

 

 
$
2,639

Cross-currency swap contracts
 
$
(9,673
)
 

 
(9,673
)
 

 

 
$
(9,673
)
Interest rate swap contracts
 
$
(703
)
 

 
(703
)
 

 

 
$
(703
)

The following tables present the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income (loss) before tax and our condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contract
 
Cross Currency Swap Contract
 
Total
Balance in other comprehensive income (loss) at December 31, 2013
 
$
4,351

 
$
(703
)
 
$
(5,820
)
 
$
(2,172
)
Amounts recognized in other comprehensive income (loss)
 
(4,878
)
 
(8
)
 
1,552

 
(3,334
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency gain
 

 

 
(732
)
 
(732
)
Interest expense
 

 
164

 
95

 
259

Balance in other comprehensive income (loss) at March 31, 2014
 
$
(527
)
 
$
(547
)
 
$
(4,905
)
 
$
(5,979
)
Amounts recognized in other comprehensive income (loss)
 
(1,689
)
 
(18
)
 
2,073

 
366

Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency loss
 

 

 
(2,016
)
 
(2,016
)
Interest expense
 

 
124

 
65

 
189

Balance in other comprehensive income (loss) at June 30, 2014
 
$
(2,216
)
 
$
(441
)
 
$
(4,783
)
 
$
(7,440
)

 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contracts
 
Cross Currency Swap Contract
 
Total
Balance in other comprehensive income (loss) at December 31, 2012
 
$
8,980

 
$
(1,467
)
 
$
(8,031
)
 
$
(518
)
Amounts recognized in other comprehensive income (loss)
 
4,135

 
100

 
(1,604
)
 
2,631

Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring
 
(13,115
)
 
$

 

 
(13,115
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency loss
 

 

 
1,974

 
1,974

Interest expense
 

 
209

 
85

 
294

Balance in other comprehensive income (loss) at March 31, 2013
 
$

 
$
(1,158
)
 
$
(7,576
)
 
$
(8,734
)
Amounts recognized in other comprehensive income (loss)
 

 
2

 
(313
)
 
(311
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency loss
 

 

 
2,912

 
2,912

Interest expense
 

 
196

 
106

 
302

Balance in other comprehensive income (loss) at June 30, 2013
 
$

 
$
(960
)
 
$
(4,871
)
 
$
(5,831
)

We recorded immaterial amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three and six months ended June 30, 2014 and 2013 directly to other income (expense), net. In addition, we recognized unrealized gains of $0.2 million and $0.1 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within other income (expense), net during the three and six months ended

22



June 30, 2014, respectively. We recognized unrealized losses of $0.4 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within other income (expense), net during the three and six months ended June 30, 2013, respectively.

The following table presents the amounts related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivatives not designated as hedging instruments under ASC 815:
Location of Gain (Loss) Recognized in Income on Derivatives
 
2014
 
2013
 
2014
 
2013
Foreign exchange forward contracts
Foreign currency gain (loss)
 
$
(2,371
)
 
$
746

 
$
(3,040
)
 
$
1,863

Foreign exchange forward contracts
Cost of sales
 
$
840

 
$
(685
)
 
$
1,343

 
$
(773
)
Foreign exchange forward contracts
Net Sales
 
$

 
$
5,666

 
$

 
$
5,666


Interest Rate Risk

We use cross-currency swap and interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use such swap contracts for speculative or trading purposes.

On September 30, 2011, we entered into a cross-currency swap contract to hedge the floating rate foreign currency denominated loan under our Malaysian Ringgit Facility Agreement. This swap had an initial notional value of Malaysian Ringgit (“MYR”) MYR 465.0 million and entitles us to receive a three-month floating Kuala Lumpur Interbank Offered Rate (“KLIBOR”) interest rate, and requires us to pay a U.S. dollar fixed rate of 3.495%. Additionally, this swap hedges the foreign currency risk of the Malaysian Ringgit denominated principal and interest payments as we make swap payments in U.S. dollars and receive swap payments in Malaysian Ringgits at a fixed exchange rate 3.19 MYR to USD. The notional amount of the swap is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. As of June 30, 2014 and December 31, 2013, the notional value of this cross-currency swap agreement was MYR 348.8 million and MYR 387.5 million, respectively. This swap is a derivative instrument that qualifies for accounting as a cash flow hedge in accordance with ASC 815 and we designated it as such. We determined that this swap was highly effective as a cash flow hedge at June 30, 2014 and December 31, 2013. For the three and six months ended June 30, 2014 and 2013, there were immaterial amounts of ineffectiveness from this cash flow hedge.

On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our Malaysian Credit Facility, which became effective on September 30, 2009 with an initial notional value of €57.3 million and pursuant to which we are entitled to receive a six month floating Euro Interbank Offered Rate (“EURIBOR”) interest rate, and are required to pay a fixed rate of 2.80%. The notional amount of the interest rate swap contract is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. As of June 30, 2014 and December 31, 2013, the notional value of this interest rate swap contract was €15.0 million and €19.7 million, respectively. This derivative instrument qualifies for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at June 30, 2014 and December 31, 2013. For the three and six months ended June 30, 2014 and 2013, there were immaterial amounts of ineffectiveness from this cash flow hedge.

In the following 12 months, we expect to reclassify to earnings $1.5 million of net unrealized losses related to swap contracts that are included in accumulated other comprehensive income (loss) at June 30, 2014 as we realize the earnings effect of the underlying loans. The amount we ultimately record to earnings will depend on the actual interest rates and foreign exchange rate when we realize the earnings effect of the underlying loans.

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect many of the subsidiaries of our business to have material future cash flows, including net sales and expenses that will be denominated in currencies other than a subsidiary’s functional currency. Our primary cash flow exposures are net sales and expenses. Changes in the exchange rates between the functional currency of our subsidiaries and the other currencies in which

23



they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of June 30, 2014 and December 31, 2013, these foreign exchange forward contracts hedged our forecasted cash flows for up to 12 and 18 months, respectively. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of the derivatives unrealized gain or loss in accumulated other comprehensive income (loss) and subsequently reclassify amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges at June 30, 2014 and at December 31, 2013. During the six months ended June 30, 2014 and 2013, we did not discontinue any cash flow hedges because a hedging relationship was no longer highly effective.

During the three months ended June 30, 2014 we purchased foreign exchange forward contracts to hedge the exchange risk on forecasted cash flows denominated in Australian dollars. As of June 30, 2014 and December 31, 2013, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):
June 30, 2014
Currency
 
Notional Amount
 
USD Equivalent
Australian dollar
 
AUD 113.0
 
$106.3

December 31, 2013
Currency
 
Notional Amount
 
USD Equivalent
Australian dollar
 
AUD 148.9
 
$132.4

As of June 30, 2014, the net unrealized loss on these contracts was $2.2 million. As of December 31, 2013, the net unrealized gain on these contracts was $4.4 million.

In the following 12 months, we expect to reclassify to earnings $2.2 million of net unrealized losses related to these forward contracts that are included in accumulated other comprehensive income (loss) at June 30, 2014 as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rate when we realize the related forecasted transactions.

Transaction Exposure and Economic Hedging

Many subsidiaries of our business have assets and liabilities (primarily receivables, marketable securities and investments, accounts payable, debt, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between our subsi