10-Q 1 fslrseptember30201610q.htm FORM 10-Q Document

 

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

Form 10-Q

(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2016
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

fslrlogoa06.jpg
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.
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 October 28, 2016, 103,913,066 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
 



FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
688,029

 
$
1,271,245

 
$
2,470,894

 
$
2,636,671

Cost of sales
 
501,749

 
786,880

 
1,830,504

 
1,948,842

Gross profit
 
186,280

 
484,365

 
640,390

 
687,829

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
32,173

 
29,630

 
95,291

 
93,865

Selling, general and administrative
 
60,345

 
53,716

 
191,624

 
192,305

Production start-up
 
752

 
3,198

 
807

 
16,818

Restructuring and asset impairments
 
4,314

 

 
89,846

 

Total operating expenses
 
97,584

 
86,544

 
377,568

 
302,988

Operating income
 
88,696

 
397,821

 
262,822

 
384,841

Foreign currency loss, net
 
(2,296
)
 
(1,803
)
 
(8,259
)
 
(4,981
)
Interest income
 
5,894

 
5,322

 
18,829

 
16,444

Interest expense, net
 
(5,563
)
 
(1,775
)
 
(17,356
)
 
(2,795
)
Other income (expense), net
 
6,419

 
(1,678
)
 
48,725

 
(3,729
)
Income before taxes and equity in earnings of unconsolidated affiliates
 
93,150

 
397,887

 
304,761

 
389,780

Income tax benefit (expense)
 
50,522

 
(48,454
)
 
7,711

 
(9,134
)
Equity in earnings of unconsolidated affiliates, net of tax
 
10,474

 
(115
)
 
25,647

 
1,640

Net income
 
$
154,146

 
$
349,318

 
$
338,119

 
$
382,286

Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.49

 
$
3.46

 
$
3.30

 
$
3.80

Diluted
 
$
1.49

 
$
3.41

 
$
3.28

 
$
3.75

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
103,339

 
100,906

 
102,496

 
100,713

Diluted
 
103,733

 
102,299

 
103,062

 
101,845


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
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
154,146

 
$
349,318

 
$
338,119

 
$
382,286

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
1,418

 
(1,103
)
 
4,635

 
(14,001
)
Unrealized (loss) gain on marketable securities and restricted investments
 
(7,917
)
 
17,944

 
27,679

 
(4,409
)
Unrealized (loss) gain on derivative instruments
 
(276
)
 
(1,338
)
 
2,070

 
(3,239
)
Other comprehensive (loss) income, net of tax
 
(6,775
)
 
15,503

 
34,384

 
(21,649
)
Comprehensive income
 
$
147,371

 
$
364,821

 
$
372,503

 
$
360,637


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)
 
 
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,414,219

 
$
1,126,826

Marketable securities
 
675,985

 
703,454

Accounts receivable trade, net
 
323,049

 
500,629

Accounts receivable, unbilled and retainage
 
245,782

 
59,171

Inventories
 
369,086

 
380,424

Balance of systems parts
 
77,942

 
136,889

Deferred project costs
 
94,549

 
187,940

Notes receivable, affiliate
 

 
1,276

Prepaid expenses and other current assets
 
264,806

 
248,977

Total current assets
 
3,465,418

 
3,345,586

Property, plant and equipment, net
 
1,266,337

 
1,284,136

PV solar power systems, net
 
487,246

 
93,741

Project assets and deferred project costs
 
1,312,081

 
1,111,137

Deferred tax assets, net
 
347,081

 
357,693

Restricted cash and investments
 
409,640

 
333,878

Investments in unconsolidated affiliates and joint ventures
 
448,963

 
399,805

Goodwill
 
78,888

 
84,985

Other intangibles, net
 
72,386

 
110,002

Inventories
 
102,162

 
107,759

Notes receivable, affiliates
 
20,313

 
17,887

Other assets
 
77,145

 
69,722

Total assets
 
$
8,087,660

 
$
7,316,331

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
201,835

 
$
337,668

Income taxes payable
 
10,486

 
1,330

Accrued expenses
 
328,969

 
409,452

Current portion of long-term debt
 
626,026

 
38,090

Billings in excess of costs and estimated earnings
 
80,830

 
87,942

Payments and billings for deferred project costs
 
103,337

 
28,580

Other current liabilities
 
55,841

 
57,738

Total current liabilities
 
1,407,324

 
960,800

Accrued solar module collection and recycling liability
 
169,679

 
163,407

Long-term debt
 
161,131

 
251,325

Other liabilities
 
403,767

 
392,312

Total liabilities
 
2,141,901

 
1,767,844

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 103,912,069 and 101,766,797 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
104

 
102

Additional paid-in capital
 
2,767,562

 
2,742,795

Accumulated earnings
 
3,128,229

 
2,790,110

Accumulated other comprehensive income
 
49,864

 
15,480

Total stockholders’ equity
 
5,945,759

 
5,548,487

Total liabilities and stockholders’ equity
 
$
8,087,660

 
$
7,316,331


See accompanying notes to these condensed consolidated financial statements.

5


FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
338,119

 
$
382,286

Adjustments to reconcile net income to cash used in operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
172,221

 
193,923

Impairment of long-lived assets, intangible assets and goodwill
 
85,251

 
8,307

Share-based compensation
 
24,467

 
33,146

Equity in earnings of unconsolidated affiliates, net of tax
 
(25,647
)
 
(1,640
)
Remeasurement of monetary assets and liabilities
 
(4,054
)
 
(10,341
)
Deferred income taxes
 
(5,399
)
 
(7,050
)
Excess tax benefits from share-based compensation arrangements
 
(18,169
)
 
(23,333
)
Gain on sales of marketable securities and restricted investments
 
(38,101
)
 

Other, net
 
2,481

 
473

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, trade, unbilled and retainage
 
(22,791
)
 
(351,320
)
Prepaid expenses and other current assets
 
(47,300
)
 
(37,282
)
Inventories and balance of systems parts
 
75,308

 
147,271

Project assets and deferred project costs
 
(469,988
)
 
(642,835
)
Other assets
 
(11,234
)
 
(2,299
)
Accounts payable
 
(143,663
)
 
108,742

Income taxes payable
 
(14,798
)
 
(19,169
)
Accrued expenses and other liabilities
 
(2,812
)
 
(113,905
)
Accrued solar module collection and recycling liability
 
5,536

 
(78,990
)
Net cash used in operating activities
 
(100,573
)
 
(414,016
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(175,868
)
 
(139,270
)
Purchases of marketable securities and restricted investments
 
(422,607
)
 
(429,352
)
Proceeds from sales and maturities of marketable securities and restricted investments
 
448,354

 
313,359

Distributions received from equity method investments
 
1,502

 
238,980

Investments in notes receivable, affiliates
 
(4,760
)
 
(53,199
)
Payments received on notes receivable, affiliate
 
1,089

 
57,866

Change in restricted cash
 
44,171

 
21,360

Other investing activities
 
(11,484
)
 
(12,149
)
Net cash used in investing activities
 
(119,603
)
 
(2,405
)
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings under revolving credit facility
 
550,000

 

Repayment of long-term debt
 
(86,250
)
 
(42,332
)
Proceeds from borrowings under long-term debt, net of discounts and issuance costs
 
23,361

 
138,639

Repayment of sale-leaseback financing
 
(4,294
)
 
(2,708
)
Proceeds from sale-leaseback financing
 

 
44,718

Excess tax benefits from share-based compensation arrangements
 
18,169

 
23,333

Contingent consideration payments and other financing activities
 
(159
)
 
(19,155
)
Net cash provided by financing activities
 
500,827

 
142,495

Effect of exchange rate changes on cash and cash equivalents
 
6,742

 
(18,425
)
Net increase (decrease) in cash and cash equivalents
 
287,393

 
(292,351
)
Cash and cash equivalents, beginning of the period
 
1,126,826

 
1,482,054

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

 
$
1,189,703

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Equity interests retained from the partial sale of project assets
 
$
(3,304
)
 
$
270,799

Property, plant and equipment acquisitions funded by liabilities
 
$
29,341

 
$
24,266

Acquisitions currently or previously funded by liabilities and contingent consideration
 
$
23,942

 
$
11,367


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 First Solar management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or for any other period. The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015 included in our Annual Report on Form 10-K, which has been filed with the SEC.

Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the interim financial statements.

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. On an ongoing basis, we evaluate our estimates, including those related to percentage-of-completion revenue recognition, inventory valuation, recoverability of project assets and photovoltaic (“PV”) solar power systems, 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, solar module collection and recycling liabilities, and 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 either Accounting Standards Codification (“ASC”) 605-35, Construction-Type and Production-Type Contracts, or ASC 360-20, Real Estate Sales, for arrangements which include land or land rights.

Systems business sales arrangements in which we construct a PV solar power system for a specific customer on land that is controlled by the customer, and has not been previously controlled by First Solar, are accounted for under ASC 605-35. For such sales arrangements, we use the percentage-of-completion method, as described further below, using actual costs incurred over total estimated costs to develop and construct the system (including module costs) as our standard accounting policy.

Systems business sales arrangements in which we convey control of land or land rights as part of the transaction are accounted for under ASC 360-20. Accordingly, we use one of the following revenue recognition methods, based upon an evaluation of the substance and form of the terms and conditions of such real estate sales:


7


(i)
We apply the percentage-of-completion method, as further described below, to certain real estate sales arrangements in which 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. 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 pursuant to ASC 360-20. The initial and continuing investment requirements, which demonstrate a buyer’s commitment to honor its obligations for the sales arrangement, can typically be met through the receipt of cash or an irrevocable letter of credit from a highly creditworthy lending institution.

(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.

For any systems business sales arrangements containing multiple deliverables not required to be accounted for under ASC 605-35 (long-term construction contracts) or ASC 360-20 (real estate sales), we analyze each activity within the sales arrangement to adhere to the separation guidelines of ASC 605-25 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 the total estimated costs (including module costs) in order to determine the progress towards completion and calculate the corresponding amount of revenue and profit to recognize. Costs incurred include solar modules, direct materials, labor, subcontractor costs, and those indirect costs related to contract performance, such as indirect labor and supplies. We recognize solar module and direct material costs as incurred when such items have been installed in a system. When contracts specify that title to solar modules and direct materials transfers to the customer before installation has been performed, we will not recognize revenue or the associated costs until those materials are installed and have met all other revenue recognition requirements. We consider solar modules and direct materials to be installed when they are permanently placed or affixed to a PV solar power system as required by engineering designs. Solar modules manufactured and owned by us that will be used in our systems remain within inventory until such modules are installed in a system.

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

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

Revenue Recognition – Operations and Maintenance. Our operations and maintenance (“O&M”) revenue is billed and recognized as services are performed. Costs of these revenues are expensed in the period in which they are incurred.

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 modules 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 contract. Our customers typically do not have extended payment terms or rights of return for our products.


8


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 VIEs when we are considered the primary beneficiary of such entities. Additionally, we have, and may in the future form, joint venture type arrangements, including partnerships and partially owned limited liability companies or similar legal structures, with one or more third parties primarily to develop, construct, own, and/or sell solar power projects. These types of ventures are core to our business and long-term strategy related to providing PV solar generation solutions using our modules to key 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 a 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 cost or equity method 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 subordinated 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 conducted on behalf of that investor. Our venture agreements typically require us to fund some form of capital for the development and construction of a project, depending upon the opportunity and the market in which our ventures are located.

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

Cost and Equity Method Investments. We account for our unconsolidated ventures using either the cost or equity method of accounting depending upon whether we have the ability to exercise significant influence over the venture. As part of this evaluation, we consider our participating and protective rights in the venture as well as its legal form. We use the cost method of accounting for our investments when we do not have the ability to significantly influence the operations or financial activities of the investee. We record our cost method investments at their historical cost and subsequently record any distributions received from the net accumulated earnings of such investments as income. Distributions received from our cost method investments in excess of their earnings are considered returns of investment and are recorded as reductions in the cost of the investments. We use the equity method of accounting for our investments when we have the ability to significantly influence, but not control, the operations or financial activities of the investee. We record our equity method investments at cost and subsequently adjust their carrying amount each period for our share of the earnings or losses of the investee and other adjustments required by the equity method of accounting. Distributions received from our equity method investments are recorded as reductions in the carrying value of such investments and are classified on the condensed consolidated statements of cash flows pursuant to the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and are classified as cash inflows from operating activities unless our cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our cumulative equity in earnings recognized from the investment. When such an excess occurs, the current period distributions up to this excess are considered returns of investment and are classified as cash inflows from investing activities.

We monitor our investments, which are included in “Investments in unconsolidated affiliates and joint ventures” in the accompanying condensed consolidated balance sheets, for impairment and record reductions in their carrying values if the carrying amount of an investment exceeds its fair value. An impairment charge is recorded when such impairment is deemed to be other-than-temporary. To determine whether an impairment is other-than-temporary, we consider our ability and intent to hold the investment until the carrying amount is fully recovered. Circumstances that indicate an other-than-temporary impairment may have occurred include factors such as decreases in quoted market prices or declines in the operations of the investee. The evaluation of an investment for potential impairment requires us to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. We recorded no impairment losses related to our cost and equity method investments during the three and nine months ended September 30, 2016 and 2015.

See Note 2. “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a more complete summary of our significant accounting policies.


9


3. Recent Accounting Pronouncements

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

An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented (the “full retrospective method”) 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, 2017, and early adoption is permitted for periods beginning after December 15, 2016. We expect to adopt ASU 2014-09 in the first quarter of 2017 using the full retrospective method. However, our ability to early adopt using the full retrospective method is subject to the completion of our analysis of certain matters, including sales arrangements accounted for as partial sales of real estate, and obtaining the information necessary to restate prior periods.

We expect this adoption to primarily affect our systems business sales arrangements currently accounted for under ASC 360-20, which requires us to evaluate whether such arrangements have any forms of continuing involvement that may affect the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement requiring us to reduce the potential profit on a project sale by our maximum exposure to loss. We anticipate that ASU 2014-09, which supersedes the real estate sales guidance under ASC 360-20, will require us to recognize revenue and profit from our systems business sales arrangements earlier and in a more linear fashion than our historical practice under ASC 360-20, including the estimation of certain profits that would otherwise have been deferred. We expect revenue recognition for our other sales arrangements, including sales of solar modules and operation and maintenance services, to remain materially consistent.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis. ASU 2015-02 modifies existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of variable interests for fees paid to decision makers or service providers, (iii) the effect of fee arrangements and related parties on the primary beneficiary determination, and (iv) certain investment funds. These changes are expected to limit the number of consolidation models and place more emphasis on risk of loss when determining a controlling financial interest. The adoption of ASU 2015-02 in the first quarter of 2016 did not have a significant impact on our consolidated financial statements and associated disclosures.

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

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements and associated disclosures.


10


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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the classification of certain cash receipts and cash payments in the statement of cash flows with the objective of reducing the existing diversity in practice related to such classifications. As a result of the adoption of ASU 2016-15 in the third quarter of 2016, we will continue to classify distributions received from our equity method investments pursuant to the cumulative earnings approach. See Note 2. “Summary of Significant Accounting Policies” to our condensed consolidated financial statements for additional information on this policy.

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

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

In connection with these restructuring activities, we incurred charges of $84.6 million during the three months ended June 30, 2016, which included (i) $35.5 million of impairment charges related to certain crystalline silicon module manufacturing equipment considered abandoned for accounting purposes; (ii) $35.8 million of impairment charges for developed technology intangible assets associated with our crystalline silicon module technology; (iii) $6.1 million of goodwill impairment charges from the disposal of our crystalline silicon components reporting unit; and (iv) $7.2 million of miscellaneous charges related to certain contract manufacturing agreements and the write-off of operating supplies. During the three months ended September 30, 2016, we incurred additional charges of $1.4 million for contract manufacturing agreements and long-lived asset impairments. All amounts associated with these charges related to our components segment and were classified as “Restructuring and asset impairments” on our condensed consolidated statements of operations. We expect to incur up to $5.0 million of additional charges related to the end of our crystalline silicon module production as we complete these restructuring activities during the remainder of 2016.

During the three and nine months ended September 30, 2016, we also incurred charges of $2.9 million and $3.8 million, respectively, for severance benefits to terminated employees and certain other actions associated with restructuring activities unrelated to the end of our crystalline silicon module production.


11


5. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
September 30,
2016
 
December 31,
2015
Cash and cash equivalents:
 
 
 
 
Cash
 
$
1,414,219

 
$
1,126,496

Cash equivalents:
 
 
 
 
Money market funds
 

 
330

Total cash and cash equivalents
 
1,414,219

 
1,126,826

Marketable securities:
 
  
 
 
Foreign debt
 
635,985

 
663,454

Time deposits
 
40,000

 
40,000

Total marketable securities
 
675,985

 
703,454

Total cash, cash equivalents, and marketable securities
 
$
2,090,204

 
$
1,830,280


We classify our marketable securities as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as part of “Accumulated other comprehensive income” until realized. We record realized gains and losses on the sale of our marketable securities in “Other income (expense), net” computed using the specific identification method. During the three and nine months ended September 30, 2016, we realized gains of $0.3 million on the sale of our marketable securities. During the three and nine months ended September 30, 2015, we realized no gains or losses on the sale 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.

As of September 30, 2016, we identified three investments totaling $51.4 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of less than $0.1 million. As of December 31, 2015, we identified two investments totaling $31.5 million that had been in a loss position for a period of time greater than 12 months with unrealized losses of less than $0.1 million. The unrealized losses were primarily due to increases in interest rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell these securities prior to the recovery of our cost basis. Therefore, we did not consider these securities to be other-than-temporarily impaired. All of our available-for-sale marketable securities are subject to a periodic impairment review. We did not identify any of our marketable securities as other-than-temporarily impaired as of September 30, 2016 and December 31, 2015.

The following tables summarize the unrealized gains and losses related to our available-for-sale marketable securities, by major security type, as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
As of September 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign debt
 
$
636,179

 
$
770

 
$
964

 
$
635,985

Time deposits
 
40,000

 

 

 
40,000

Total
 
$
676,179

 
$
770

 
$
964

 
$
675,985

 
 
As of December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign debt
 
$
665,900

 
$
9

 
$
2,455

 
$
663,454

Time deposits
 
40,000

 

 

 
40,000

Total
 
$
705,900

 
$
9

 
$
2,455

 
$
703,454



12


The contractual maturities of our marketable securities as of September 30, 2016 and December 31, 2015 were as follows (in thousands):
 
 
As of September 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
300,421

 
$
9

 
$
212

 
$
300,218

One year to two years
 
148,578

 
203

 
94

 
148,687

Two years to three years
 
227,180

 
558

 
658

 
227,080

Total
 
$
676,179

 
$
770

 
$
964

 
$
675,985

 
 
As of December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
290,377

 
$
9

 
$
406

 
$
289,980

One year to two years
 
228,492

 

 
1,183

 
227,309

Two years to three years
 
187,031

 

 
866

 
186,165

Total
 
$
705,900

 
$
9

 
$
2,455

 
$
703,454


The net unrealized losses of $0.2 million and $2.4 million on our marketable securities as of September 30, 2016 and December 31, 2015, respectively, were primarily the result of changes in interest rates relative to rates at the time of purchase. 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 tables show gross unrealized losses and estimated fair values for those marketable securities that were in an unrealized loss position as of September 30, 2016 and December 31, 2015, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
 
 
As of September 30, 2016
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Foreign debt
 
$
318,445

 
$
875

 
$
51,405

 
$
89

 
$
369,850

 
$
964

Total
 
$
318,445

 
$
875

 
$
51,405

 
$
89

 
$
369,850

 
$
964

 
 
As of December 31, 2015
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Foreign debt
 
$
629,033

 
$
2,386

 
$
31,491

 
$
69

 
$
660,524

 
$
2,455

Total
 
$
629,033

 
$
2,386

 
$
31,491

 
$
69

 
$
660,524

 
$
2,455


6. Restricted Cash and Investments

Restricted cash and investments consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
September 30,
2016
 
December 31,
2015
Restricted cash
 
$
3,022

 
$
7,764

Restricted investments
 
406,618

 
326,114

Total restricted cash and investments (1)
 
$
409,640

 
$
333,878


(1)
There was an additional $33.4 million and $72.5 million of restricted cash included within prepaid expenses and other current assets at September 30, 2016 and December 31, 2015, respectively.

13


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

At September 30, 2016 and December 31, 2015, our restricted investments consisted of long-term marketable securities that were held in custodial accounts to fund the estimated future costs of collecting and recycling modules covered under our solar module collection and recycling program. We classify our restricted investments as available-for-sale. Accordingly, we record them at fair value and account for the net unrealized gains and losses as a part of “Accumulated other comprehensive income” until realized. We record realized gains and losses on the sale of our restricted investments in “Other income (expense), net” computed using the specific identification method. During the three months ended September 30, 2016, we realized no gains on the sale of our restricted investments. During the nine months ended September 30, 2016, we realized gains of $37.8 million on the sale of certain restricted investments as part of an effort to align the currencies of the investments with those of the corresponding collection and recycling liabilities. Restricted investments are classified as noncurrent as the underlying accrued solar module collection and recycling liabilities are also noncurrent in nature. See Note 9. “Fair Value Measurements” to our condensed consolidated financial statements for information about the fair value of our restricted investments.

As necessary, we fund any incremental amounts for our estimated collection and recycling obligations within 90 days of the end of each year. We determine the funding requirement, if any, based on estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted investments, and an estimated solar module life of 25 years less amounts already funded in prior years. No incremental funding was required in 2016 for covered module sales in 2015. To ensure that these funds will be available in the future regardless of any potential adverse changes in our financial condition (even in the case of our own insolvency), we have established a trust under which estimated funds are put into custodial accounts with an established and reputable bank, for which First Solar, Inc. (“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 performing the required collection and recycling services. Investments in these custodial accounts must meet certain investment quality criteria comparable to 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 that are not currently at risk of default.

The following tables summarize the unrealized gains and losses related to our restricted investments, by major security type, as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
As of September 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
119,103

 
$
88,412

 
$

 
$
207,515

U.S. government obligations
 
171,204

 
27,899

 

 
199,103

Total
 
$
290,307

 
$
116,311

 
$

 
$
406,618

 
 
As of December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
177,507

 
$
75,670

 
$

 
$
253,177

U.S. government obligations
 
61,228

 
11,709

 

 
72,937

Total
 
$
238,735

 
$
87,379

 
$

 
$
326,114


As of September 30, 2016 , the contractual maturities of our restricted investments were between 11 years and 20 years. As of December 31, 2015, the contractual maturities of our restricted investments were between 12 years and 21 years.


14


7. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Accounts receivable trade, gross
 
$
323,049

 
$
500,631

Allowance for doubtful accounts
 

 
(2
)
Accounts receivable trade, net
 
$
323,049

 
$
500,629


At September 30, 2016 and December 31, 2015, $43.7 million and $21.5 million, respectively, of our accounts receivable trade, net were secured by letters of credit, bank guarantees, or other forms of financial security issued by creditworthy financial institutions.

Accounts receivable, unbilled and retainage
 
Accounts receivable, unbilled and retainage consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Accounts receivable, unbilled
 
$
224,219

 
$
40,205

Retainage
 
21,563

 
18,966

Accounts receivable, unbilled and retainage
 
$
245,782

 
$
59,171

 
Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. For example, we recognize revenue from contracts for the construction and sale of PV solar power systems, which include the sale of such assets over the construction period using applicable accounting methods. One such method is the percentage-of-completion method, which recognizes revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Under this accounting method, revenue could be recognized under applicable revenue recognition criteria 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 customer accordingly and reclassify the “Accounts receivable, unbilled and retainage” to “Accounts receivable trade, net.” Billing requirements vary by contract but are generally structured around completion of certain construction milestones. 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 September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Raw materials
 
$
155,591

 
$
159,078

Work in process
 
22,916

 
19,736

Finished goods
 
292,741

 
309,369

Inventories
 
$
471,248

 
$
488,183

Inventories – current
 
$
369,086

 
$
380,424

Inventories – noncurrent (1)
 
$
102,162

 
$
107,759


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


15


Balance of systems parts

Balance of systems parts were $77.9 million and $136.9 million as of September 30, 2016 and December 31, 2015, respectively, and represented mounting, electrical, and other construction parts purchased for PV solar power systems to be constructed or currently under construction, which we held title to and were not yet installed in a system. Such construction parts included items such as posts, tilt brackets, tables, harnesses, combiner boxes, inverters, cables, tracker equipment, and other parts we may purchase or assemble for the systems we construct. We carry these parts at the lower of cost or net realizable value, with such value being based primarily on recoverability through installation in a system or recoverability through a sales agreement. Balance of systems parts do not include any solar modules that we manufacture.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Value added tax receivables
 
$
69,423

 
$
51,473

Prepaid expenses
 
60,223

 
74,990

Derivative instruments 
 
472

 
2,691

Restricted cash
 
33,440

 
72,526

Other current assets
 
101,248

 
47,297

Prepaid expenses and other current assets
 
$
264,806

 
$
248,977


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Land
 
$
8,752

 
$
12,063

Buildings and improvements
 
411,990

 
410,898

Machinery and equipment
 
1,829,887

 
1,824,717

Office equipment and furniture
 
153,871

 
144,773

Leasehold improvements
 
56,988

 
50,546

Construction in progress
 
148,923

 
37,734

Stored assets (1)
 
138,667

 
138,954

Property, plant and equipment, gross
 
2,749,078

 
2,619,685

Less: accumulated depreciation
 
(1,482,741
)
 
(1,335,549
)
Property, plant and equipment, net
 
$
1,266,337

 
$
1,284,136


(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 in 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. During the nine months ended September 30, 2016, we transferred $0.3 million of stored assets to our manufacturing facility in Perrysburg, Ohio for use in the production of solar modules. As the remaining stored assets are neither in the condition nor location to produce modules as intended, we will not begin depreciation until such assets are placed in service. We ceased the capitalization of interest on our stored assets once they were physically received from the related machinery and equipment vendors.

We evaluate our property, plant, and equipment, including our stored assets, for impairment under a held and used impairment model whenever events or changes in business circumstances arise that may indicate that the carrying amount of the assets may not be recoverable. Such events and changes include consideration of technological obsolescence, significant changes in the manner of use of the assets, and expectations that the assets may be sold or otherwise disposed of before the end of their useful lives. As of September 30, 2016, the recoverability of the property, plant, and equipment of our components segment was based on the continued use of our current module technologies. However, it is reasonably possible that the continued use of such technologies may be affected by potential near-term changes to our module technology development plans, which if adopted may result in

16


certain manufacturing equipment and stored assets being sold or otherwise disposed of before the end of their previously estimated useful lives, which in turn could result in a decrease in the value, and possible impairment, of such manufacturing equipment and stored assets. Accordingly, any such changes to our technology development plans could be material to our condensed consolidated financial statements and have a significant adverse impact on our results of operations.

Depreciation of property, plant and equipment was $51.6 million and $158.6 million for the three and nine months ended September 30, 2016, respectively, and $61.3 million and $185.4 million for the three and nine months ended September 30, 2015, respectively.

PV solar power systems, net

PV solar power systems, net consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
PV solar power systems, gross
 
$
498,332

 
$
97,991

Accumulated depreciation
 
(11,086
)
 
(4,250
)
PV solar power systems, net
 
$
487,246

 
$
93,741


During the nine months ended September 30, 2016, we placed $399.3 million of projects in service, including certain projects in Chile and India. Depreciation of PV solar power systems was $4.4 million and $6.8 million for the three and nine months ended September 30, 2016, respectively, and $0.6 million and $1.8 million for the three and nine months ended September 30, 2015, respectively.

Capitalized interest

The cost of constructing facilities, equipment, and project assets includes interest costs incurred during the assets’ construction period. The components of interest expense and capitalized interest were as follows during the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Interest cost incurred
 
$
(5,998
)
 
$
(5,697
)
 
$
(20,365
)
 
$
(13,923
)
Interest cost capitalized – property, plant and equipment
 
314

 
290

 
1,381

 
1,152

Interest cost capitalized – project assets
 
121

 
3,632

 
1,628

 
9,976

Interest expense, net
 
$
(5,563
)
 
$
(1,775
)
 
$
(17,356
)
 
$
(2,795
)

Project assets and deferred project costs

Project assets primarily consist of costs related to solar power projects in various stages of development that are capitalized prior to entering into a definitive sales agreement for the projects, including projects that may have begun commercial operation under power purchase agreements (“PPAs”) and are actively marketed and intended to be sold. These project related costs include costs for land, development, and construction of a PV solar power system. Development costs may include legal, consulting, permitting, transmission upgrade, interconnection, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred project costs on our condensed consolidated balance sheets 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 and deferred project costs to cost of sales after each respective project is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). In addition, we present all expenditures related to the development and construction of project assets or deferred project costs, whether fully or partially owned, as a component of cash flows from operating activities. We classify project assets as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months.


17


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 are expected within the next 12 months.

If a project 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 or deferred project costs until the earliest of the closing of the sale of such project, our decision to temporarily hold such project, or one year from the project’s commercial operations date. Any income generated by a project while it remains within project assets or deferred project costs is accounted for as a reduction to our basis in the project, which at the time of sale and meeting all revenue recognition criteria will be recorded within cost of sales.

Project assets and deferred project costs consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Project assets – development costs, including project acquisition and land costs
 
$
407,107

 
$
436,375

Project assets – construction costs
 
866,174

 
674,762

Project assets 
 
1,273,281

 
1,111,137

Deferred project costs – current
 
94,549

 
187,940

Deferred project costs – noncurrent
 
38,800

 

Deferred project costs
 
133,349

 
187,940

Total project assets and deferred project costs
 
$
1,406,630

 
$
1,299,077


Other assets

Other assets consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Notes receivable (1)
 
$
7,851

 
$
12,648

Income taxes receivable
 
4,231

 
4,071

Deferred rent
 
32,832

 
23,317

Other
 
32,231

 
29,686

Other assets
 
$
77,145

 
$
69,722


(1)
In April 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility replaced a bridge loan that we had made to this entity. The credit facility bears interest at 8.0% per annum payable quarterly with the full amount due in December 2026. As of September 30, 2016 and December 31, 2015, the balance on the credit facility was €7.0 million ($7.9 million and $7.6 million, respectively, at the balance sheet dates). In February 2014, we entered into a convertible loan agreement with a strategic entity for an available amount of up to $5.0 million. As of December 31, 2015, the balance outstanding on the convertible loan was $5.0 million, which we converted into an equity interest in the entity in January 2016.

18


Goodwill

Goodwill, summarized by relevant reporting unit, consisted of the following as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
December 31,
2015

Acquisitions (Impairments)

September 30, 2016
CdTe components
 
$
403,420

 
$

 
$
403,420

Crystalline silicon components
 
6,097

 

 
6,097

Systems
 
68,833

 

 
68,833

Accumulated impairment losses
 
(393,365
)
 
(6,097
)
 
(399,462
)
Total
 
$
84,985

 
$
(6,097
)
 
$
78,888


Goodwill represents the excess of the purchase price of acquired businesses 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. If necessary, we would record any impairment in accordance with ASC 350, Intangibles – Goodwill and Other. We perform impairment tests between scheduled annual tests in the fourth quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. During the three months ended June 30, 2016, we impaired $6.1 million of goodwill associated with our crystalline silicon components reporting unit as a result of the decision to end the related manufacturing operations. See Note 4. “Restructuring and Asset Impairments” to our condensed consolidated financial statements for further discussion relating to these restructuring activities.

Other intangibles, net

Other intangibles, net consisted of intangible assets acquired as part of our General Electric and TetraSun acquisitions, certain power purchase agreements acquired after the associated PV solar power systems were placed in service, and our internally-generated intangible assets, substantially all of which were 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.

The following tables summarize our intangible assets at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Accumulated Impairments
 
Net Amount
Developed technology
 
$
114,612

 
$
(16,365
)
 
$
(36,215
)
 
$
62,032

Power purchase agreements
 
6,644

 

 

 
6,644

Patents
 
6,070

 
(2,360
)
 
$

 
$
3,710

Total
 
$
127,326

 
$
(18,725
)
 
$
(36,215
)
 
$
72,386

 
 
December 31, 2015
 
 
Gross Amount
 
Accumulated Amortization
 
Accumulated Impairments
 
Net Amount
Developed technology
 
114,565

 
$
(8,809
)
 
$

 
$
105,756

Patents
 
6,070

 
(1,824
)
 

 
4,246

Total
 
$
120,635

 
$
(10,633
)
 
$

 
$
110,002


During the three months ended June 30, 2016, we impaired $35.8 million of developed technology intangible assets acquired in our TetraSun acquisition as a result of the decision to end the related crystalline silicon manufacturing operations. See Note 4. “Restructuring and Asset Impairments” to our condensed consolidated financial statements for further discussion relating to these restructuring activities. Amortization expense for our intangible assets was $2.1 million and $8.1 million for the three and nine months ended September 30, 2016, respectively, and $3.0 million and $6.3 million for the three and nine months ended September 30, 2015, respectively.


19


Accrued expenses

Accrued expenses consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Accrued compensation and benefits
 
$
49,981

 
$
63,699

Accrued property, plant and equipment
 
11,174

 
7,808

Accrued inventory and balance of systems parts
 
30,033

 
53,542

Accrued project assets and deferred project costs
 
115,159

 
145,695

Product warranty liability (1)
 
37,552

 
38,468

Accrued expenses in excess of normal product warranty liability and related expenses (1)
 
3,977

 
5,040

Other
 
81,093

 
95,200

Accrued expenses
 
$
328,969

 
$
409,452


(1)
See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for further discussion of “Product warranty liability” and “Accrued expenses in excess of normal product warranty liability and related expenses.”

Billings in excess of costs and estimated earnings

Billings in excess of costs and estimated earnings was $80.8 million and $87.9 million at September 30, 2016 and December 31, 2015, respectively, and represented 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.

Payments and billings for deferred project costs

Payments and billings for deferred project costs was $103.3 million and $28.6 million at September 30, 2016 and December 31, 2015, respectively, and represented 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 costs are included within deferred project costs. We classify such amounts as current if all revenue recognition criteria are expected to be met within the next 12 months, consistent with the classification of the associated deferred project costs.

Other current liabilities

Other current liabilities consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Deferred revenue
 
$
8,482

 
$
17,957

Derivative instruments 
 
6,387

 
16,450

Contingent consideration (1)
 
16,954

 
9,233

Financing liability (2)
 
5,231

 
5,277

Other
 
18,787

 
8,821

Other current liabilities
 
$
55,841

 
$
57,738


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

(2)
See Note 10. “Investments in Unconsolidated Affiliates and Joint Ventures” to our condensed consolidated financial statements for further discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.


20


Other liabilities

Other liabilities consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Product warranty liability (1)
 
$
217,332

 
$
193,283

Other taxes payable
 
24,215

 
66,549

Contingent consideration (1)
 
6,987

 
8,756

Liability in excess of normal product warranty liability and related expenses (1)
 
15,174

 
19,565

Financing liability (2)
 
33,842

 
36,706

Other
 
106,217

 
67,453

Other liabilities
 
$
403,767

 
$
392,312


(1)
See Note 13. “Commitments and Contingencies” to our condensed consolidated financial statements for further discussion on “Product warranty liability,” “Contingent consideration,” and “Liability in excess of normal product warranty liability and related expenses.”

(2)
See Note 10. “Investments in Unconsolidated Affiliates and Joint Ventures” to our condensed consolidated financial statements for further discussion of the financing liabilities associated with our leaseback of the Maryland Solar project.

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 financial position, results of operations, and cash flows. We use derivative instruments to hedge against these risks and only hold such instruments for hedging purposes, not for speculative or trading purposes.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive income” 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” to our condensed consolidated financial statements 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 September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30, 2016
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
357

 
$
358

Total derivatives designated as hedging instruments
 
$

 
$
357

 
$
358

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange forward contracts
 
$
472

 
$
6,030

 
$

Total derivatives not designated as hedging instruments
 
$
472

 
$
6,030

 
$

Total derivative instruments
 
$
472

 
$
6,387

 
$
358


21


 
 
December 31, 2015
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
132

 
$
285

Cross-currency swap contract
 

 
6,909

 
13,835

Interest rate swap contract
 

 
16

 

Total derivatives designated as hedging instruments
 
$

 
$
7,057

 
$
14,120

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange forward contracts
 
$
2,691

 
$
9,393

 
$

Total derivatives not designated as hedging instruments
 
$
2,691

 
$
9,393

 
$

Total derivative instruments
 
$
2,691

 
$
16,450

 
$
14,120


The impact of offsetting balances associated with derivative instruments designated as hedging instruments is shown below (in thousands):
 
 
September 30, 2016
 
 
 
 
 
 
 
 
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
 
$
(715
)
 

 
(715
)
 

 

 
$
(715
)
 
 
December 31, 2015
 
 
 
 
 
 
 
 
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
 
$
(417
)
 

 
(417
)
 

 

 
$
(417
)
Cross-currency swap contract
 
$
(20,744
)
 

 
(20,744
)
 

 

 
$
(20,744
)
Interest rate swap contract
 
$
(16
)
 

 
(16
)
 

 

 
$
(16
)


22


The following tables present the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the nine months ended September 30, 2016 and 2015 (in thousands):
 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contract
 
Cross Currency Swap Contract
 
Total
Balance in accumulated other comprehensive income (loss) at December 31, 2015
 
$
162

 
$
(16
)
 
$
(2,017
)
 
$
(1,871
)
Amounts recognized in other comprehensive income (loss)
 
37

 
(2
)
 
5,108

 
5,143

Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency loss, net
 

 

 
(4,896
)
 
(4,896
)
Interest expense, net
 

 
18

 
1,805

 
1,823

Balance in accumulated other comprehensive income (loss) at September 30, 2016
 
$
199

 
$

 
$

 
$
199

 
 
 
 
 
 
 
 
 
Balance in accumulated other comprehensive income (loss) at December 31, 2014
 
$
6,621

 
$
(210
)
 
$
(3,399
)
 
$
3,012

Amounts recognized in other comprehensive income (loss)
 
703

 
22

 
(11,373
)
 
(10,648
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Net sales
 
(1,782
)
 

 

 
(1,782
)
Cost of sales
 
(5,509
)
 

 

 
(5,509
)
Foreign currency loss, net
 

 

 
12,126

 
12,126

Interest expense, net
 

 
153

 
327

 
480

Balance in accumulated other comprehensive income (loss) at September 30, 2015
 
$
33

 
$
(35
)
 
$
(2,319
)
 
$
(2,321
)

We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three and nine months ended September 30, 2016 and 2015. We recognized unrealized losses of $0.2 million and $0.6 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 nine months ended September 30, 2016, respectively. We recognized unrealized losses of $0.2 million and unrealized gains of $0.3 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 nine months ended September 30, 2015, respectively.

The following table presents amounts related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized in Income
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
Income Statement Line Items
 
2016
 
2015
 
2016
 
2015
Foreign exchange forward contracts
 
Foreign currency loss, net
 
$
(6,763
)
 
$
9,527

 
$
(29,740
)
 
$
1,543

Foreign exchange forward contracts
 
Cost of sales
 
$

 
$
(2,232
)
 
$

 
$
7,731


23


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 entitled us to receive a three-month floating Kuala Lumpur Interbank Offered Rate (“KLIBOR”) interest rate while requiring us to pay a U.S. dollar fixed rate of 3.495%. Additionally, this swap hedged the foreign currency risk of the Malaysian ringgit denominated principal and interest payments as we made swap payments in U.S. dollars and received swap payments in Malaysian ringgits at a fixed exchange rate of 3.19 MYR to USD. This swap qualified for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. The notional amount of the swap declined in line with our scheduled principal payments on the underlying hedged debt. In June 2016, we paid the remaining principal on the Malaysian Ringgit Facility Agreement and closed the corresponding cross-currency swap contract. As of December 31, 2015, the notional value of this cross-currency swap contract was MYR 232.6 million ($54.2 million).

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 were entitled to receive a six-month floating Euro Interbank Offered Rate (“EURIBOR”) interest rate while being required to pay a fixed rate of 2.80%. The derivative instrument qualified for accounting as a cash flow hedge in accordance with ASC 815, and we designated it as such. The notional amount of the interest rate swap contract declined in line with our scheduled principal payments on the underlying hedged debt. In March 2016, we paid the remaining principal on the Malaysian Credit Facility and closed the corresponding interest rate swap contract. As of December 31, 2015, the notional value of the interest rate swap contract was €2.2 million ($2.4 million).

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which 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 September 30, 2016 and December 31, 2015, these foreign exchange forward contracts hedged our forecasted cash flows for 24 months and 33 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 a derivatives unrealized gain or loss in “Accumulated other comprehensive income” 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 as of September 30, 2016 and December 31, 2015. As of September 30, 2016 and December 31, 2015, 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):
 
 
September 30, 2016
Currency
 
Notional Amount
 
USD Equivalent
Indian rupee
 
INR 860.0
 
$12.9
 
 
December 31, 2015
Currency
 
Notional Amount
 
USD Equivalent
Indian rupee
 
INR 1,290.0
 
$19.4

In the following 12 months, we expect to reclassify to earnings $0.1 million of net unrealized gains related to these forward contracts that are included in “Accumulated other comprehensive income” at September 30, 2016 as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rates when we realize the related forecasted transactions.


24


Transaction Exposure and Economic Hedging

Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, payables, 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 the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported condensed consolidated statements of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on such foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.

We enter into foreign exchange forward contracts to economically hedge balance sheet and other exposures related to transactions between certain of our subsidiaries and transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting. Accordingly, we recognize gains or losses from the fluctuations in foreign exchange rates and the fair value of these derivative contracts in “Foreign currency loss, net” on our condensed consolidated statements of operations. As of September 30, 2016 and December 31, 2015, the total net unrealized loss on our economic hedge foreign exchange forward contracts was $5.6 million and $6.7 million, respectively. These contracts mature at various dates within the next 2.0 years.

As of September 30, 2016 and December 31, 2015, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
September 30, 2016
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Euro
 
€61.9
 
$69.4
Sell
 
Euro
 
€116.2
 
$130.3
Sell
 
Australian dollar
 
AUD 14.5
 
$11.1
Sell
 
Malaysian ringgit
 
MYR 24.5
 
$5.9
Sell
 
Canadian dollar
 
CAD 19.1
 
$14.6
Purchase
 
Chilean peso
 
CLP 10,780.6
 
$16.4
Purchase
 
Chinese yuan
 
CNY 20.5
 
$3.1
Sell
 
Japanese yen
 
JPY 9,446.2
 
$93.0
Sell
 
British pound
 
GBP 1.9
 
$2.5
Purchase
 
Indian rupee
 
INR 121.2
 
$1.8
Sell
 
Indian rupee
 
INR 12,889.1
 
$192.8
Sell
 
South African rand
 
ZAR 54.2
 
$3.9
 
 
December 31, 2015
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
Purchase
 
Euro
 
€42.0
 
$45.9
Sell
 
Euro
 
€150.1
 
$164.0
Purchase
 
Australian dollar
 
AUD 41.1
 
$29.9
Sell
 
Australian dollar
 
AUD 89.0
 
$64.8
Purchase
 
Malaysian ringgit
 
MYR 61.4
 
$14.3
Sell
 
Malaysian ringgit
 
MYR 80.7
 
$18.8
Sell
 
Canadian dollar
 
CAD 4.5
 
$3.2
Sell
 
Japanese yen
 
JPY 8,448.7
 
$70.1
Purchase
 
British pound
 
GBP 11.1
 
$16.5
Sell
 
British pound
 
GBP 16.0
 
$23.7
Sell
 
Indian rupee
 
INR 8,939.0
 
$134.6
Purchase
 
South African rand
 
ZAR 41.1
 
$2.7
Sell
 
South African rand
 
ZAR 81.5
 
$5.3


25


9. Fair Value Measurements

The following is a description of the valuation techniques that we use to measure the fair value of assets and liabilities that we measure and report at fair value on a recurring basis:

Cash equivalents. At December 31, 2015, our cash equivalents consisted of money market funds. We value our money market cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.

Marketable securities and restricted investments. At September 30, 2016 and December 31, 2015, our marketable securities consisted of foreign debt and time deposits, and our restricted investments consisted of foreign and U.S. government obligations. We value our marketable securities and restricted investments using observable inputs that reflect quoted prices for securities with identical characteristics or quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals). Accordingly, we classify the valuation techniques that use these inputs as either Level 1 or Level 2 depending on the inputs used. We also consider the effect of our counterparties’ credit standings in these fair value measurements.

Derivative assets and liabilities. At September 30, 2016 and December 31, 2015, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies. At December 31, 2015, our derivative assets and liabilities also consisted of a cross-currency swap contract involving certain currencies and interest rates and an interest rate swap. Since our derivative assets and liabilities are not traded on an exchange, we value them using standard industry valuation models. Where applicable, these models project future cash flows and discount the amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. In evaluating credit risk, we consider the effect of our counterparties’ and our own credit standing in the fair value measurements of our derivative assets and liabilities, respectively.

At September 30, 2016 and December 31, 2015, the fair value measurements of our assets and liabilities that we measure on a recurring basis were as follows (in thousands):
 
 
September 30, 2016
 
 
 
 
Fair Value Measurements at Reporting
Date Using
 
 
 
 
 
 
 
Total Fair
Value and
Carrying
Value on Our
Balance Sheet
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
Assets: