FIRST SOLAR, INC.
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
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[x]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 26, 2010
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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20-4623678
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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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 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):
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Large accelerated filer [x]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [ ]
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(Do not check if a smaller reporting company)
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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
July 23, 2010
there were
85,554,984
shares of the registrant's common stock, par value $0.001, outstanding.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 26, 2010
TABLE OF CONTENTS
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Page
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Part I. Financial Information (Unaudited)
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Item 1. Condensed Consolidated Financial Statements:
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Condensed Consolidated Statements of Operations for the three and six months ended June 26, 2010 and June 27, 2009
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Condensed Consolidated Balance Sheets as of June 26, 2010 and December 27, 2009
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Condensed Consolidated Statements of Cash Flows for the six months ended June 26, 2010 and June 27, 2009
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Notes to Condensed Consolidated Financial Statements
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 4. Controls and Procedures
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Part II. Other Information
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Item 1. Legal Proceedings
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Item 1A. Risk Factors
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 5. Other Information
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Item 6. Exhibits
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Signature
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Exhibit Index
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Item 1.
Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 26,
2010 |
June 27,
2009 |
June 26,
2010 |
June 27,
2009 |
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Net sales
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$
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587,854
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$
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525,876
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$
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1,155,815
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$
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944,084
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Cost of sales
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303,660
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227,780
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589,585
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410,704
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Gross profit
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284,194
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298,096
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566,230
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533,380
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Operating expenses:
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Research and development
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22,836
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18,605
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45,724
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30,309
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Selling, general and administrative
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78,597
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72,926
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145,461
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122,241
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Production start-up
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2,288
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2,524
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3,431
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8,733
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Total operating expenses
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103,721
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94,055
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194,616
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161,283
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Operating income
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180,473
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204,041
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371,614
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372,097
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Foreign currency (loss) gain
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(2,625
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)
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239
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(3,321
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)
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2,073
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Interest income
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3,035
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1,948
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8,683
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4,051
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Interest expense, net
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(6
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)
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(3,827
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)
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(6
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(4,762
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)
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Other expense, net
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(439
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)
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(1,103
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)
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(1,173
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)
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(2,429
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)
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Income before income taxes
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180,438
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201,298
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375,797
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371,030
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Income tax expense
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21,395
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20,719
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44,409
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25,856
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Net income
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$
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159,043
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$
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180,579
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$
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331,388
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$
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345,174
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Net income per share:
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Basic
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$
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1.87
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$
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2.16
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$
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3.91
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$
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4.17
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Diluted
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$
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1.84
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$
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2.11
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$
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3.84
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$
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4.10
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Weighted-average number of shares used in per share calculations:
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Basic
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84,852
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83,723
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84,679
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82,704
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Diluted
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86,401
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85,668
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86,247
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84,140
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See accompanying notes to these condensed consolidated financial statements.
1
FIRST SOLAR, INC. AND SUBSIDIARIES
(In thousands, except share data)
(Unaudited)
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June 26,
2010 |
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December 26,
2009 |
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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510,482
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$
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664,499
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Marketable securities and investments
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285,993
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120,236
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Accounts receivable trade, net
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256,344
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226,826
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Accounts receivable, unbilled
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105,333
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58
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Inventories
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194,308
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152,821
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Project assets
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109
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1,081
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Deferred tax asset, net
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19,248
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21,679
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Prepaid expenses and other current assets
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244,053
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164,071
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Total current assets
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1,615,870
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1,351,271
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Property, plant and equipment, net
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1,094,877
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988,782
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Project assets
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140,065
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131,415
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Deferred tax asset, net
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157,778
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130,515
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Marketable securities
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164,017
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329,608
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Restricted cash and investments
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81,103
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36,494
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Investment in related party
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25,000
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25,000
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Goodwill
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286,515
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286,515
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Inventories
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30,655
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21,695
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Other assets
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35,435
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48,217
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Total assets
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$
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3,631,315
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$
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3,349,512
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
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Accounts payable
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$
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68,268
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$
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75,744
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Income tax payable
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28,552
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8,740
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Accrued expenses
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183,889
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193,277
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Current portion of long-term debt
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24,465
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28,559
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Other current liabilities
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20,045
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88,607
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Total current liabilities
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325,219
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394,927
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Accrued solar module collection and recycling liability
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101,757
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92,799
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Long-term debt
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114,168
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146,399
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Other liabilities
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77,925
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62,600
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Total liabilities
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619,069
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696,725
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Stockholders' equity:
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Common stock, $0.001 par value per share; 500,000,000 shares authorized; 85,546,131 and 85,208,199 shares issued and outstanding at June 26, 2010 and December 26, 2009, respectively
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86
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85
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Additional paid-in capital
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1,694,607
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1,658,091
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Contingent consideration
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1,607
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2,844
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Accumulated earnings
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1,332,750
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1,001,363
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Accumulated other comprehensive loss
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(16,804
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)
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(9,596
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)
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Total stockholders' equity
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3,012,246
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2,652,787
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Total liabilities and stockholders' equity
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$
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3,631,315
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$
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3,349,512
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See accompanying notes to these condensed consolidated financial statements.
2
FIRST SOLAR, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
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Six Months Ended
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June 26,
2010 |
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June 27,
2009 |
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Cash flows from operating activities:
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Cash received from customers
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$
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955,086
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$
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671,786
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Cash paid to suppliers and associates
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(824,407
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)
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(506,638
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)
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Interest received
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12,560
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3,294
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Interest paid
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(2,551
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)
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(4,714
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)
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Income taxes paid, net of refunds
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(31,712
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)
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(64,597
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)
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Excess tax benefit from share-based compensation arrangements
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—
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(15,351
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)
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Other operating activities
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(1,376
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)
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(970
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)
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Net cash provided by operating activities
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107,600
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82,810
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Cash flows from investing activities:
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Purchases of property, plant and equipment
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(239,506
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)
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(145,966
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)
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Purchases of marketable securities and investments
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(267,304
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)
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(264,881
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)
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Proceeds from maturities of marketable securities and investments
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59,256
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42,000
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Proceeds from sales of marketable securities and investments
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203,903
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29,783
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Investment in notes receivable
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—
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(35,383
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)
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Payments received on notes receivables
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61,658
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—
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Increase in restricted investments
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(43,064
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)
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(42,439
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)
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Acquisitions, net of cash acquired
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—
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318
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Other investing activities
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1,308
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(1,167
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)
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Net cash used in investing activities
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(223,749
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)
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(417,735
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)
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Cash flows from financing activities:
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Proceeds from stock option exercises
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3,709
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3,820
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Repayment of long-term debt
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(14,004
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)
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(14,256
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)
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Proceeds from issuance of debt, net of issuance costs
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—
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48,622
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Excess tax benefit from share-based compensation arrangements
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—
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15,351
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Proceeds from economic development funding
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—
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615
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Other financing activities
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(2
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)
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(2
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)
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Net cash (used in) provided by financing activities
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(10,297
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)
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54,150
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Effect of exchange rate changes on cash and cash equivalents
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(27,571
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)
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(6,283
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)
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Net decrease in cash and cash equivalents
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(154,017
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)
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(287,058
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)
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Cash and cash equivalents, beginning of the period
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664,499
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716,218
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Cash and cash equivalents, end of the period
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$
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510,482
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$
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429,160
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Supplemental disclosure of noncash investing and financing activities:
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Property, plant and equipment acquisitions funded by liabilities
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$
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30,457
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$
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48,041
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See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Six Months Ended June 26, 2010
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 (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 months and six months ended
June 26, 2010
are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, or for any other period. The balance sheet at
December 26, 2009
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 financial statements and notes thereto for the year ended
December 26, 2009
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
We currently report our results of operations using a 52 or 53 week fiscal year, which ends on the Saturday on or before December 31. Our fiscal quarters end on the Saturday closest to the end of the applicable calendar quarter. As discussed in "Part II, Item 5. Other Information," of this Quarterly Report on Form 10-Q, on July 27, 2010 our board of directors changed our fiscal year to a calendar year, such that fiscal 2010 will end on December 31, 2010. In addition, effective January 1, 2011, our fiscal quarters shall be calendar quarters.
Unless expressly stated or the context otherwise requires, the terms "we," "our," "us," and "First Solar" refer to First Solar, Inc. and its subsidiaries.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and notes thereto for the year ended
December 26, 2009
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. Our significant accounting policies reflect the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 605,
Revenue Recognition - Multiple Deliverable Revenue Arrangements
, in the first quarter of 2010.
In February 2010, the FASB issued ASU 2010-09,
Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements.
This ASU removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. All the amendments in ASU 2010-09 were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of ASU 2010-09 did not have any impact on our financial position, results of operations, or cash flows.
In March 2010, the FASB issued ASU 2010-11,
Derivatives and Hedging (Topic 815) - Scope Exception Related to Embedded Credit Derivatives.
This ASU removes a scope exception, and an entity that has a beneficial interest in securitized financial assets that includes a credit derivative feature, other than in the form of the transfer of credit risk by subordination of one financial instrument to another, must evaluate that feature for bifurcation from the host financial asset in accordance with the guidance at ASC 815. ASU 2010-11 is effective at the beginning of a reporting entity's first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of an entity's first fiscal quarter beginning after March 5, 2010. The adoption of ASU 2010-11 at the beginning of our second fiscal quarter in 2010 did not have a material impact on our financial position, results of operations, or cash flows.
4
OptiSolar
On
April 3, 2009
, we completed the acquisition of the solar power project development business (the Project Business) of OptiSolar Inc. (OptiSolar), which included a multi-gigawatt project pipeline. We have integrated the acquired project pipeline of OptiSolar into our systems business, which provides a complete photovoltaic (PV) solar power system solution, including project development, EPC services, O&M services and, when required, project finance.
Pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated March 2, 2009, by and among First Solar, Inc., First Solar Acquisition Corp. (Merger Sub), OptiSolar and OptiSolar Holdings LLC (OptiSolar Holdings), Merger Sub merged with and into OptiSolar, with OptiSolar surviving as a wholly-owned subsidiary of First Solar, Inc. (the Merger). Pursuant to the Merger, all the outstanding shares of common stock of OptiSolar held by OptiSolar Holdings were exchanged for
2,972,420
shares of First Solar common stock, par value
$0.001
per share (the Merger Shares), of which
732,789
shares were issued and deposited with an escrow agent to support certain indemnification obligations of OptiSolar Holdings. On April 16, 2010,
183,197
shares of the common stock deposited with an escrow agent were released.
Also,
355,096
shares were holdback shares as further described below under “Contingent Consideration” (the “Holdback Shares”). As of
June 26, 2010
,
2,960,461
Merger Shares had been issued. The period during which claims for indemnification from the escrow fund may be initiated began on April 3, 2009 and will end on April 3, 2011.
Purchase Price Consideration
The total consideration for this acquisition, based on the closing price of our common stock on April 3, 2009 of
$134.38
per share, was
$399.4 million
.
Contingent Consideration
Pursuant to the Merger Agreement, of the
2,972,420
Merger Shares, as of April 3, 2009,
355,096
shares were Holdback Shares that were issuable to OptiSolar Holdings upon satisfaction of conditions relating to certain then-existing liabilities of OptiSolar. As of
June 26, 2010
,
343,137
Holdback Shares had been issued to OptiSolar Holdings. The estimated fair value of the
11,959
Holdback Shares remaining to be issued at
June 26, 2010
was
$1.6 million
and has been classified separately within stockholders' equity on our balance sheet.
Acquisition Related Costs
Acquisition-related costs recognized in the three and
six
months ended
June 27, 2009
, included transaction costs and integration costs, which we have classified in selling, general and administrative expense in our statement of operations. During the three and
six
months ended
June 27, 2009
, transaction costs such as legal, accounting, and other professional services were
$0.2 million
and
$1.6 million
, respectively. Integration related costs during the three and
six
months ended
June 27, 2009
were
$0.5 million
and
$0.6 million
, respectively.
Goodwill
We recorded the excess of the acquisition date fair value of consideration transferred over the estimated fair value of the net tangible assets and intangible assets acquired as goodwill. Underlying our financial rationale for the price we paid to acquire OptiSolar were synergies and economies of scale that we expected would inure to our solar module business from our having control over OptiSolar's project pipeline. Subsequent to the acquisition of OptiSolar, we adjusted goodwill downward during
2009
by
$8.5 million
as additional information relating to acquired deferred tax assets became available. We have allocated
$251.3 million
and
$1.4 million
of this goodwill to our components reporting segment and our systems segment, respectively. We allocated the majority of the goodwill from the OptiSolar acquisition to the components segment, since the systems segment functions as an "enabler" for the components segment to drive module throughput. This goodwill is not deductible for tax purposes.
5
Acquired project assets
Management engaged a third-party valuation firm to assist with the determination of the fair value of the acquired project development business. In our determination of the fair value of the project assets acquired, we considered, among other factors, three generally accepted valuation approaches: the income approach, market approach, and cost approach. We selected the approaches that are most indicative of fair value of the assets acquired. We used the income approach to calculate the fair value of the acquired project assets based on estimates and assumptions of future performance of these project assets provided by OptiSolar's and our management. We used the market approach to determine the fair value of the land acquired with those assets.
Goodwill
On
November 30, 2007
, we acquired
100%
of the outstanding membership interests of Turner Renewable Energy, LLC.
Under the purchase method of accounting, we allocated
$33.4 million
to goodwill through December 29, 2007, which represents the excess of the purchase price over the fair value of the identifiable net tangible and intangible assets of Turner Renewable Energy, LLC. All of this goodwill was allocated to our systems segment. At
June 26, 2010
and
December 26, 2009
, the carrying amount of this goodwill was
$33.8 million
.
On
April 3, 2009
we acquired the solar power project development business of OptiSolar. Under the acquisition method of accounting, we allocated
$261.1 million
to goodwill (excluding subsequent adjustments of
$8.5 million
), which primarily represents the synergies and economies of scale expected from acquiring OptiSolar's project pipeline and using our solar modules in the acquired projects.
During
2009
, we adjusted goodwill downward by
$8.5 million
as additional information relating to acquired deferred tax assets became available. We have allocated
$251.3 million
and
$1.4 million
of this goodwill to our components reporting segment and systems segment, respectively. At
June 26, 2010
and
December 26, 2009
, the carrying amount of this goodwill was
$252.7 million
. See Note 4. “Acquisitions,” to these condensed consolidated financial statements for additional information about this acquisition.
The changes in the carrying amount of goodwill for the
six
months ended
June 26, 2010
were as follows (in thousands):
|
|
Components
|
Systems
|
Consolidated
|
||||||||
|
Ending balance, December 26, 2009
|
$
|
251,275
|
|
$
|
35,240
|
|
$
|
286,515
|
|
||
|
Adjustments
|
—
|
|
—
|
|
—
|
|
|||||
|
Ending balance, June 26, 2010
|
$
|
251,275
|
|
$
|
35,240
|
|
$
|
286,515
|
|
||
ASC 350,
Intangibles - Goodwill and Other,
requires us to test goodwill for impairment at least annually, or sooner, if facts or circumstances between scheduled annual tests indicate that it is more likely than not that the fair value of a reporting unit that has goodwill might be less than its carrying value. Currently our operating segments and reporting units are identical. We determine fair value for our reporting units referring to the price that would be received to sell the unit as whole in an orderly transaction between market participants at the measurement date. For the goodwill assessment of our systems business, we believe that a typical market participant for the sale of our systems reporting unit would be a solar module manufacturer seeking to acquire a systems business with a large pipeline of utility-scale solar power plant projects, with the intent that these projects would provide a captive outlet for additional future solar module production. Therefore, we model the systems reporting unit's future performance for purposes of applying the income and cost methods of fair value measurement to include some of the profitability associated with the solar module element of the solar power plant that it builds and sells.
We performed our goodwill impairment test in the fourth fiscal quarter of the year ended
December 26, 2009
and determined that the fair value of our goodwill substantially exceeded the carrying value for each individual reporting unit. Therefore we concluded that our goodwill was not impaired. We have also concluded that there have been no changes in facts and circumstances since the date of that test that would trigger an interim goodwill impairment test.
6
Cash, cash equivalents, marketable securities, and investments consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Cash and cash equivalents:
|
|
||||||
|
Cash
|
$
|
267,366
|
|
$
|
269,068
|
|
|
|
Cash equivalents:
|
|||||||
|
Commercial paper
|
6,796
|
|
—
|
|
|||
|
Money market mutual funds
|
236,320
|
|
395,431
|
|
|||
|
Total cash and cash equivalents
|
510,482
|
|
664,499
|
|
|||
|
Marketable securities and investments:
|
|||||||
|
Asset-backed securities
|
865
|
|
5,544
|
|
|||
|
Certificates of deposit
|
10,700
|
|
—
|
|
|||
|
Commercial paper
|
10,792
|
|
—
|
|
|||
|
Corporate debt securities
|
134,022
|
|
115,248
|
|
|||
|
Federal agency debt
|
41,645
|
|
78,911
|
|
|||
|
Foreign agency debt
|
187,214
|
|
168,963
|
|
|||
|
Foreign government obligations
|
14,652
|
|
10,128
|
|
|||
|
Supranational debt
|
48,107
|
|
71,050
|
|
|||
|
U.S. government obligations
|
2,013
|
|
—
|
|
|||
|
Total marketable securities and investments
|
450,010
|
|
449,844
|
|
|||
|
Total cash, cash equivalents, marketable securities, and investments
|
$
|
960,492
|
|
$
|
1,114,343
|
|
|
We have classified our marketable securities 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. We report realized gains and losses on the sale of our marketable securities in earnings, computed using the specific identification method. During the three and
six
months ended
June 26, 2010
, we realized
$0.4 million
and
$0.7 million
in gains and
$0.4 million
and
$0.5 million
in losses on our marketable securities. During the three and
six
months ended
June 27, 2009
, we realized an immaterial amount in gains and did not realize any losses on our marketable securities. See Note 10. “Fair Value Measurement,” to these condensed consolidated financial statements for information about the fair value measurement of our marketable securities.
All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable debt security to be impaired when its fair value is less than its carrying cost, in which case we would further review the investment to determine whether it is other-than-temporarily impaired. When we evaluate an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more likely than not we will be required to sell the investment before we have recovered its cost basis. If an investment is other-than-temporarily impaired, we write it down through earnings to its impaired value and establish that as a new cost basis for the investment. We did not identify any of our marketable securities as other-than-temporarily impaired at
June 26, 2010
and
December 26, 2009
.
The following table summarizes the unrealized gains and losses related to our investments in marketable securities designated as available-for-sale, by major security type, as of
June 26, 2010
and
December 26, 2009
(in thousands):
7
|
|
As of June 26, 2010
|
|||||||||||||||
|
Security Type
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|||||||||
|
Asset-backed securities
|
$
|
857
|
|
$
|
9
|
|
$
|
1
|
|
$
|
865
|
|
||||
|
Certificates of deposit
|
10,702
|
|
—
|
|
2
|
|
10,700
|
|
||||||||
|
Commercial paper
|
10,792
|
|
—
|
|
—
|
|
10,792
|
|
||||||||
|
Corporate debt securities
|
133,613
|
|
537
|
|
128
|
|
134,022
|
|
||||||||
|
Federal agency debt
|
41,619
|
|
26
|
|
—
|
|
41,645
|
|
||||||||
|
Foreign agency debt
|
186,908
|
|
379
|
|
73
|
|
187,214
|
|
||||||||
|
Foreign government obligations
|
14,603
|
|
58
|
|
9
|
|
14,652
|
|
||||||||
|
Supranational debt
|
47,897
|
|
210
|
|
—
|
|
48,107
|
|
||||||||
|
U.S. government obligations
|
2,008
|
|
5
|
|
—
|
|
2,013
|
|
||||||||
|
Total
|
$
|
448,999
|
|
$
|
1,224
|
|
$
|
213
|
|
$
|
450,010
|
|
||||
|
|
As of December 26, 2009
|
|||||||||||||||
|
Security Type
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|||||||||
|
Asset-backed securities
|
$
|
5,528
|
|
$
|
19
|
|
$
|
3
|
|
|
$
|
5,544
|
|
|||
|
Corporate debt securities
|
114,912
|
|
475
|
|
139
|
|
|
115,248
|
|
|||||||
|
Federal agency debt
|
78,803
|
|
108
|
|
—
|
|
|
78,911
|
|
|||||||
|
Foreign agency debt
|
168,541
|
|
588
|
|
166
|
|
|
168,963
|
|
|||||||
|
Foreign government obligations
|
10,057
|
|
71
|
|
—
|
|
|
10,128
|
|
|||||||
|
Supranational debt
|
70,807
|
|
269
|
|
26
|
|
|
71,050
|
|
|||||||
|
Total
|
$
|
448,648
|
|
$
|
1,530
|
|
$
|
334
|
|
$
|
449,844
|
|
||||
Contractual maturities of our available-for-sale marketable securities and investments as of
June 26, 2010
and
December 26, 2009
were as follows (in thousands):
|
|
As of June 26, 2010
|
|||||||||||||||
|
Maturity
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|||||||||
|
One year or less
|
$
|
285,607
|
|
$
|
563
|
|
$
|
177
|
|
|
$
|
285,993
|
|
|||
|
One year to two years
|
161,679
|
|
661
|
|
36
|
|
|
162,304
|
|
|||||||
|
Two years to three years
|
1,713
|
|
—
|
|
—
|
|
|
1,713
|
|
|||||||
|
Total
|
$
|
448,999
|
|
$
|
1,224
|
|
$
|
213
|
|
$
|
450,010
|
|
||||
|
|
As of December 26, 2009
|
|||||||||||||||
|
Maturity
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|||||||||
|
One year or less
|
$
|
119,911
|
|
$
|
327
|
|
$
|
2
|
|
|
$
|
120,236
|
|
|||
|
One year to two years
|
269,488
|
|
963
|
|
185
|
|
|
270,266
|
|
|||||||
|
Two years to three years
|
59,249
|
|
240
|
|
147
|
|
|
59,342
|
|
|||||||
|
Total
|
$
|
448,648
|
|
$
|
1,530
|
|
$
|
334
|
|
$
|
449,844
|
|
||||
The net unrealized
gain
of
$1.0 million
and
$1.2 million
as of
June 26, 2010
and
December 26, 2009
, respectively, on our available-for-sale marketable securities and investments was primarily the result of changes in interest rates. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or higher and limits the security types, issuer concentration, and duration of our investments.
8
The following table shows gross unrealized losses and estimated fair values for those investments that were in an unrealized loss position as of
June 26, 2010
and
December 26, 2009
, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
|
|
|
As of June 26, 2010
|
||||||||||||||||||||||
|
|
|
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
|
||||||||||||
|
Asset-backed securities
|
|
$
|
237
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
237
|
|
$
|
1
|
|
|||||
|
Certificates of deposit
|
|
2,000
|
|
2
|
|
—
|
|
—
|
|
2,000
|
|
2
|
|
|||||||||||
|
Corporate debt securities
|
|
58,908
|
|
128
|
|
—
|
|
—
|
|
58,908
|
|
128
|
|
|||||||||||
|
Foreign agency debt
|
|
53,580
|
|
73
|
|
—
|
|
—
|
|
53,580
|
|
73
|
|
|||||||||||
|
Foreign government obligations
|
|
4,557
|
|
9
|
|
—
|
|
—
|
|
4,557
|
|
9
|
|
|||||||||||
|
Total
|
|
$
|
119,282
|
|
$
|
213
|
|
$
|
—
|
|
$
|
—
|
|
$
|
119,282
|
|
$
|
213
|
|
|||||
|
|
|
As of December 26, 2009
|
||||||||||||||||||||||
|
|
|
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
|
||||||||||||
|
Asset-backed securities
|
|
$
|
2,868
|
|
$
|
3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,868
|
|
$
|
3
|
|
|||||
|
Corporate debt securities
|
|
32,303
|
|
139
|
|
—
|
|
—
|
|
32,303
|
|
139
|
|
|||||||||||
|
Foreign agency debt
|
|
45,329
|
|
166
|
|
—
|
|
—
|
|
45,329
|
|
166
|
|
|||||||||||
|
Supranational debt
|
|
7,201
|
|
26
|
|
—
|
|
—
|
|
7,201
|
|
26
|
|
|||||||||||
|
Total
|
|
$
|
87,701
|
|
$
|
334
|
|
$
|
—
|
|
$
|
—
|
|
$
|
87,701
|
|
$
|
334
|
|
|||||
Restricted cash and investments consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Restricted cash
|
$
|
39
|
|
|
$
|
27
|
|
|
Restricted investments
|
81,064
|
|
|
36,467
|
|
||
|
Total restricted cash and investments - noncurrent
|
$
|
81,103
|
|
$
|
36,494
|
|
|
At
June 26, 2010
and
December 26, 2009
, our restricted investments consisted of long-term marketable securities that we hold through a custodial account to fund future costs of our solar module collection and recycling program.
We pre-fund our estimated solar module collection and recycling costs at the time of module sale through a custodial account with a large bank as the investment advisor in the name of a trust, for which First Solar Inc., First Solar Malaysia Sdn. Bhd., and First Solar Manufacturing GmbH are grantors. We fund this custodial account within
60 days
of the beginning of a fiscal year for the prior year module sales, assuming for this purpose a minimum service life of
25 years
for our solar modules.
The following table summarizes unrealized gains and losses related to our restricted investments in marketable securities designated as available-for-sale by major security type as of
June 26, 2010
and
December 26, 2009
(in thousands):
9
|
|
As of June 26, 2010
|
|||||||||||||||
|
Security Type
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|||||||||
|
Foreign government obligations
|
$
|
66,571
|
|
$
|
8,387
|
|
$
|
—
|
|
$
|
74,958
|
|
||||
|
U.S. government obligations
|
5,424
|
|
682
|
|
—
|
|
6,106
|
|
||||||||
|
Total
|
$
|
71,995
|
|
$
|
9,069
|
|
$
|
—
|
|
$
|
81,064
|
|
||||
|
|
As of December 26, 2009
|
|||||||||||||||
|
Security Type
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|||||||||
|
Foreign government obligations
|
$
|
34,403
|
|
$
|
1,308
|
|
$
|
—
|
|
$
|
35,711
|
|
||||
|
U.S. government obligations
|
783
|
|
—
|
|
27
|
|
756
|
|
||||||||
|
Total
|
$
|
35,186
|
|
$
|
1,308
|
|
$
|
27
|
|
$
|
36,467
|
|
||||
As of
June 26, 2010
and
December 26, 2009
, the contractual maturities of these available-for-sale marketable securities were between
18 years
and
26 years
.
Accounts receivable trade, net
Accounts receivable trade consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Accounts receivable trade, gross
|
$
|
256,344
|
|
$
|
227,816
|
|
|
|
Allowance for doubtful accounts
|
—
|
|
(990
|
)
|
|||
|
Accounts receivable trade, net
|
$
|
256,344
|
|
$
|
226,826
|
|
|
The increase in accounts receivable trade during the
six
months ended
June 26, 2010
was mainly due to higher shipment volumes and the timing of shipments to customers during the period.
During the third quarter of 2009, we amended our Long-Term Supply Contracts with certain of our customers to implement a program which provided a price rebate to these customers for solar modules purchased from us. The intent of this program was to enable our customers to successfully compete in our core German market and to adjust for eligible customers the sale price (which was documented in framework agreements entered into several years ago) in light of current market conditions. The rebate period was originally structured to end at the end of 2010; however, we expect to extend the program into 2011 with certain modifications, including applicability to certain European geographies in addition to Germany. As was the case in 2009, the rebate amounts were and will be established so as to enable the sell-through of our products at competitive prices. The amount of rebate earned during a fiscal quarter is based on (i) the volume of solar modules shipped to a customer (measured in watts), (ii) the volume of solar modules registered for eligible projects (measured in watts), provided that those solar modules were invoiced by the buyer to an end customer, and (iii) the rebate rate. The rebate program applies a specified rebate rate to solar modules sold for solar power projects in certain geographies. Customers need to meet certain requirements in order to be eligible for and benefit from this program. As of
June 26, 2010
, we have experienced
100%
participation in this program by eligible customers.
We account for these rebates as a reduction to the selling price of our solar modules and, therefore, as a reduction in revenue at the time of sale and recognize a contra-asset within accounts receivable trade, net. No rebates granted under this program can be claimed as cash; instead, rebates may only be applied to reduce outstanding accounts receivable balances. During the three and
six
months ended
June 26, 2010
, we extended rebates to customers in the amount of
€15.6 million
and
€35.6 million
, respectively, (
$20.6 million
and
$48.4 million
at the average exchange rate of
$1.32
/€1.00 and
$1.36
/€1.00, respectively). At
June 26, 2010
, we had
€29.5 million
(
$36.6 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00) of rebate claims accrued, which reduced our accounts receivable accordingly. At December 26, 2009, we had
€54.3 million
(
$67.3 million
at the balance
10
sheet close rate on
June 26, 2010
of
$1.24
/€1.00) of rebate claims accrued.
In June 2009, we provided an allowance for doubtful accounts receivable in the amount of
$7.0 million
due to uncertainty about the collectibility of the outstanding accounts receivable from a specific customer. As of December 26, 2009, we had collected
$6.0 million
of the overdue accounts receivable from this specific customer and reduced our allowance for the doubtful account accordingly. During the three months ended March 27, 2010, we collected the remaining
$1.0 million
.
Accounts receivable, unbilled
Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer. Typically, this is common for long-term construction contracts. For example, we recognize revenue from long-term contracts for the construction and sale of solar power systems which include the sale of project assets over the contractual period under applicable accounting methods. One applicable accounting method is the percentage-of-completion method of accounting, where sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs for completing the entire contract. Under this accounting method, it is possible that revenue could be recognized under applicable revenue recognition criteria in advance of billing the customer, resulting in an amount recorded to "accounts receivable, unbilled." Once we meet the billing criteria under a contract, we bill our customer accordingly and reclassify the “accounts receivable, unbilled” to “accounts receivable trade, net.” Billing criteria vary by contract, but are generally structured around completion of certain construction milestones.
Accounts receivable, unbilled were
$105.3 million
and
$0.1 million
at
June 26, 2010
and
December 26, 2009
, respectively. The increase was primarily due to the recognition of revenue related to our systems business projects. We expect to bill and collect these amounts within the next 12 months.
Inventories
Inventories consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Raw materials
|
$
|
136,604
|
|
$
|
122,282
|
|
|
|
Work in process
|
5,858
|
|
6,248
|
|
|||
|
Finished goods
|
82,501
|
|
45,986
|
|
|||
|
Total inventories
|
$
|
224,963
|
|
$
|
174,516
|
|
|
|
Inventories - current
|
$
|
194,308
|
|
$
|
152,821
|
|
|
|
Inventories - noncurrent (1)
|
$
|
30,655
|
|
$
|
21,695
|
|
|
(1) We purchase a critical raw material that is heavily used in our core production process in quantities that anticipate confident, but long-term future demand. We classify the raw materials that we do not expect will be consumed within our operating cycle (which is 12 months), as noncurrent.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Prepaid expenses
|
$
|
31,733
|
|
$
|
33,095
|
|
|
|
Deferred project costs
|
127,277
|
|
36,670
|
|
|||
|
Notes receivable (See Note 12. "Notes Receivable")
|
—
|
|
50,531
|
|
|||
|
Derivative instruments
|
41,357
|
|
7,909
|
|
|||
|
Other current assets
|
43,686
|
|
35,866
|
|
|||
|
Total prepaid expenses and other current assets
|
$
|
244,053
|
|
$
|
164,071
|
|
|
Deferred project costs represent capitalized costs associated with revenue that we have deferred for project development or
11
project construction contracts signed with a third party, typically under an EPC agreement or other contractual arrangements, for which the revenue recognition criteria have not been met. For systems business arrangements that do not involve real estate, we generally record deferred project costs in instances in which we incur project costs prior to entering into a definitive sales arrangement or in which we are recognizing revenue based on the completed contract method and the project is not complete. For systems business arrangements that we account for as real estate transactions, we generally record deferred project costs after we have entered into a definitive sales agreement, but before we have met the criteria to recognize the sale as revenue.
Project Assets - Current and Noncurrent
Project assets - current and noncurrent consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Project assets acquired through OptiSolar
|
$
|
71,037
|
|
$
|
71,037
|
|
|
|
Project assets - land
|
14,942
|
|
1,452
|
|
|||
|
Project assets - other
|
54,195
|
|
60,007
|
|
|||
|
Total project assets
|
$
|
140,174
|
|
$
|
132,496
|
|
|
|
Total project assets - current
|
$
|
109
|
|
|
$
|
1,081
|
|
|
Total project assets - noncurrent
|
$
|
140,065
|
|
$
|
131,415
|
|
|
In connection with the acquisition of the solar power project development business of OptiSolar, we measured at fair value certain acquired project assets based on the varying development stages of each project asset on the acquisition date. Subsequent to the acquisition of OptiSolar, we incurred additional costs to further develop these projects. Once we enter into a definitive sales agreement, we reclassify these costs to deferred project costs on our balance sheet. We expense these project assets to cost of sales as each respective project asset or solar power system is sold to a customer, as the project is constructed for a customer (matching the underlying revenue recognition method), or if we determine that the project is commercially not viable.
We review projects assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable if it is anticipated to be sellable for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable, if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project will be profitable, the most notable of which are whether there are any environmental, ecological, permitting or regulatory conditions that have changed for the project since the start of development. Such changes could cause the cost of the project to increase or the selling price of the project to decrease.
Project assets consist primarily of costs relating to solar power projects in various stages of development that we capitalize prior to the sale of the solar power project to a third party for further project development or the signing of a project construction contract. These costs include costs for land and costs for developing and constructing a solar power plant. Development costs can include legal, consulting, permitting, and other similar costs. Once we enter into a definitive sales agreement, we reclassify these costs to deferred project costs on our balance sheet until we are able to recognize the sale of the project assets as revenue.
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
12
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Buildings and improvements
|
$
|
240,344
|
|
$
|
239,088
|
|
|
|
Machinery and equipment
|
818,304
|
|
813,281
|
|
|||
|
Office equipment and furniture
|
44,657
|
|
38,845
|
|
|||
|
Leasehold improvements
|
19,153
|
|
15,870
|
|
|||
|
Depreciable property, plant and equipment, gross
|
1,122,458
|
|
1,107,084
|
|
|||
|
Accumulated depreciation
|
(287,085
|
)
|
(225,790
|
)
|
|||
|
Depreciable property, plant and equipment, net
|
835,373
|
|
881,294
|
|
|||
|
Land
|
4,875
|
|
4,995
|
|
|||
|
Construction in progress
|
254,629
|
|
102,493
|
|
|||
|
Property, plant and equipment, net
|
$
|
1,094,877
|
|
$
|
988,782
|
|
|
During the
six
months ended
June 26, 2010
, we were granted a
$16.3 million
tax credit under the Advanced Energy Tax Credit program enacted by the American Reinvestment and Recovery Act of 2009 for the expansion of our Perrysburg, Ohio manufacturing facility. As a result, we reduced the acquisition cost for the expansion of this facility accordingly. Depreciation of property, plant, and equipment was
$36.2 million
and
$28.5 million
for the three months ended
June 26, 2010
and
June 27, 2009
, respectively, and was
$72.8 million
and
$54.3 million
for the
six
months ended
June 26, 2010
and
June 27, 2009
, respectively.
Capitalized Interest
We capitalized interest costs incurred into our property, plant and equipment or our project assets/deferred project costs as follows during the three and six months ended
June 26, 2010
and
June 27, 2009
(in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 26,
2010 |
June 27,
2009 |
|
June 26,
2010 |
June 27,
2009 |
||||||||||
|
Interest cost incurred
|
$
|
(1,923
|
)
|
$
|
(4,693
|
)
|
$
|
(4,198
|
)
|
$
|
(7,107
|
)
|
|||
|
Interest cost capitalized - property, plant and equipment
|
1,283
|
|
866
|
|
1,701
|
|
2,345
|
|
|||||||
|
Interest cost capitalized - project assets and deferred project costs
|
634
|
|
—
|
|
2,491
|
|
—
|
|
|||||||
|
Interest expense, net
|
$
|
(6
|
)
|
$
|
(3,827
|
)
|
$
|
(6
|
)
|
$
|
(4,762
|
)
|
|||
Accrued expenses
Accrued expenses consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Accrued compensation and benefits
|
$
|
32,397
|
|
|
$
|
53,856
|
|
|
Accrued property, plant and equipment
|
15,947
|
|
|
35,811
|
|
||
|
Accrued inventory
|
36,392
|
|
|
27,542
|
|
||
|
Product warranty liability - current
|
8,546
|
|
|
8,216
|
|
||
|
Nonrecurring expenses in excess of normal product warranty liability and related expenses
|
27,382
|
|
|
6,595
|
|
||
|
Other accrued expenses
|
63,225
|
|
|
61,257
|
|
||
|
Total accrued expenses
|
$
|
183,889
|
|
$
|
193,277
|
|
|
The above-referenced $27.4 million of accrued nonrecurring expenses in excess of normal product liability as of June 26, 2010 consists of the following, each related to the manufacturing excursion described below: (i)
$21.8 million
in estimated expenses for certain module replacement efforts voluntarily undertaken by us beyond the normal product warranty (appearing in results of operations under “cost of sales”); and (ii)
$5.6 million
in estimated nonrecurring post-sale expenses (appearing in results of operations under “selling, general and administrative”). During the period from June 2008 to June 2009, a manufacturing excursion occurred affecting less than 4% of the total product manufactured within the period. The excursion could result in possible premature power loss in the affected modules. The root cause was identified and subsequently mitigated in June 2009. On-going testing
13
confirms the corrective actions are effective. We have been working directly with impacted
customers to replace the affected modules and these efforts are well underway and, in some cases, complete. Some of these efforts go beyond our normal warranty coverage.
Other current liabilities
Other current liabilities consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Deferred revenue (1)
|
$
|
—
|
|
$
|
31,127
|
|
|
|
Derivative instruments
|
2,065
|
|
30,781
|
|
|||
|
Other current liabilities
|
17,980
|
|
26,699
|
|
|||
|
Total other current liabilities
|
$
|
20,045
|
|
$
|
88,607
|
|
|
(1) Deferred revenue will be recognized in net sales once all revenue recognition criteria have been met.
Other liabilities
Other liabilities consisted of the following at
June 26, 2010
and
December 26, 2009
(in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Other taxes payable
|
$
|
38,634
|
|
$
|
28,889
|
|
|
|
Other noncurrent liabilities
|
39,291
|
|
33,711
|
|
|||
|
Total other liabilities
|
$
|
77,925
|
|
$
|
62,600
|
|
|
As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our net assets, financial position, results of operations, and cash flows. We use derivative instruments to hedge against certain risks, such as these, and we only hold derivative instruments for hedging purposes, not for speculative or trading purposes. Our use of derivative instruments is subject to strict internal controls based on centrally defined, performed, and controlled policies and procedures.
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 point in time. As required by ASC 815,
Derivatives and Hedging
, we report all of our derivative instruments that are within the scope of that accounting standard at fair value on our balance sheet. Depending on the substance of the hedging purpose for our derivative instruments, we account for changes in the fair value of some of them using cash-flow-hedge accounting pursuant to ASC 815 and of others by recording the changes in fair value directly to current earnings (so-called “economic hedges”). These accounting approaches and the various classes of risk that we are exposed to in our business and the risk management systems using derivative instruments that we apply to these risks are described below. See Note 10. “Fair Value Measurement,” to these 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 consolidated balance sheet as of
June 26, 2010
and
December 26, 2009
(in thousands):
14
|
June 26, 2010
|
|||||||||||||||
|
Other Assets -
Current
|
Other Assets -
Noncurrent
|
Other
Liabilities -
Current
|
Other
Liabilities -
Noncurrent
|
||||||||||||
|
Derivatives designated as hedging instruments under ASC 815:
|
|||||||||||||||
|
Foreign exchange forward contracts
|
$
|
37,824
|
|
$
|
1,236
|
|
$
|
4
|
|
$
|
44
|
|
|||
|
Interest rate swap contracts
|
—
|
|
—
|
|
340
|
|
1,564
|
|
|||||||
|
Total derivatives designated as hedging instruments
|
37,824
|
|
1,236
|
|
344
|
|
1,608
|
|
|||||||
|
|
|||||||||||||||
|
Derivatives not designated as hedging instruments under ASC 815:
|
|||||||||||||||
|
Foreign exchange forward contracts
|
3,533
|
|
—
|
|
1,721
|
|
—
|
|
|||||||
|
Total derivatives not designated as hedging instruments
|
3,533
|
|
—
|
|
1,721
|
|
—
|
|
|||||||
|
|
|||||||||||||||
|
Total derivative instruments
|
$
|
41,357
|
|
$
|
1,236
|
|
$
|
2,065
|
|
$
|
1,608
|
|
|||
|
December 26, 2009
|
|||||||||||||||
|
Other Assets -
Current
|
Other Assets -
Noncurrent
|
Other
Liabilities -
Current
|
Other
Liabilities -
Noncurrent
|
||||||||||||
|
Derivatives designated as hedging instruments under ASC 815:
|
|||||||||||||||
|
Foreign exchange forward contracts
|
$
|
3,781
|
|
$
|
—
|
|
$
|
19,723
|
|
$
|
—
|
|
|||
|
Interest rate swap contracts
|
—
|
|
—
|
|
178
|
|
905
|
|
|||||||
|
Total derivatives designated as hedging instruments
|
3,781
|
|
—
|
|
19,901
|
|
905
|
|
|||||||
|
|
|||||||||||||||
|
Derivatives not designated as hedging instruments under ASC 815:
|
|||||||||||||||
|
Foreign exchange forward contracts
|
4,128
|
|
—
|
|
10,880
|
|
—
|
|
|||||||
|
Total derivatives not designated as hedging instruments
|
4,128
|
|
—
|
|
10,880
|
|
—
|
|
|||||||
|
|
|||||||||||||||
|
Total derivative instruments
|
$
|
7,909
|
|
$
|
—
|
|
$
|
30,781
|
|
$
|
905
|
|
|||
The following tables present the amounts related to derivative instruments affecting our consolidated statement of operations for the three and
six
months ended
June 26, 2010
and
June 27, 2009
(in thousands):
|
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
|
||||||||||||||||
|
Three Months Ended
|
Six Months Ended
|
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
Derivative Type
|
June 26, 2010
|
June 26, 2010
|
June 26, 2010
|
June 26, 2010
|
||||||||||||||
|
Derivatives designated as cash flow hedges under ASC 815:
|
||||||||||||||||||
|
Foreign exchange forward contracts
|
$
|
18,055
|
|
$
|
54,954
|
|
Net sales
|
$
|
27,938
|
|
$
|
29,233
|
|
|||||
|
Interest rate swaps
|
(366
|
)
|
(821
|
)
|
Interest income (expense)
|
(314
|
)
|
(633
|
)
|
|||||||||
|
Total derivatives designated as cash flow hedges
|
$
|
17,689
|
|
$
|
54,133
|
|
|
$
|
27,624
|
|
$
|
28,600
|
|
|||||
15
|
|
Amount of Gain (Loss) on Derivatives Recognized in Income
|
|
||||||||
|
Three Months Ended
|
Six Months Ended
|
Location of Gain (Loss) Recognized in Income on Derivatives
|
||||||||
|
Derivative Type
|
June 26, 2010
|
|
June 26, 2010
|
|||||||
|
Derivatives designated as cash flow hedges under ASC 815:
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
27,938
|
|
$
|
29,233
|
|
Net sales
|
|||
|
Interest rate swaps
|
$
|
(314
|
)
|
$
|
(633
|
)
|
Interest income (expense)
|
|||
|
|
||||||||||
|
Derivatives not designated as hedging instruments under ASC 815:
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
(4,958
|
)
|
$
|
(10,521
|
)
|
Other income (expense)
|
|||
|
Foreign exchange forward contracts
|
$
|
(2,714
|
)
|
$
|
(7,228
|
)
|
Cost of sales
|
|||
|
Foreign exchange forward contracts
|
$
|
340
|
|
$
|
—
|
|
Net sales
|
|||
|
|
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
|
|||||||||||||||
|
Three Months Ended
|
Six Months Ended
|
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
Derivative Type
|
|
June 27, 2009
|
|
June 27, 2009
|
June 27, 2009
|
|
June 27, 2009
|
|||||||||||
|
Derivatives designated as cash flow hedges under ASC 815:
|
||||||||||||||||||
|
Foreign exchange forward contracts
|
|
$
|
(50,987
|
)
|
$
|
(27,111
|
)
|
Net sales
|
$
|
9,634
|
|
$
|
31,824
|
|
||||
|
Interest rate swaps
|
|
1,870
|
|
1,093
|
|
Interest income (expense)
|
(2,391
|
)
|
(2,525
|
)
|
||||||||
|
Total derivatives designated as cash flow hedges
|
|
$
|
(49,117
|
)
|
$
|
(26,018
|
)
|
|
$
|
7,243
|
|
$
|
29,299
|
|
||||
|
|
Amount of Gain (Loss) on Derivatives Recognized in Income
|
|
||||||||
|
Three Months Ended
|
Six Months Ended
|
Location of Gain (Loss) Recognized in Income on Derivatives
|
||||||||
|
Derivative Type
|
June 27, 2009
|
|
June 27, 2009
|
|||||||
|
Derivatives designated as cash flow hedges under ASC 815:
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
9,634
|
|
$
|
31,824
|
|
Net sales
|
|||
|
Interest rate swaps
|
$
|
(2,391
|
)
|
$
|
(2,525
|
)
|
Interest income (expense)
|
|||
|
|
||||||||||
|
Derivatives not designated as hedging instruments under ASC 815:
|
||||||||||
|
Foreign exchange forward contracts
|
$
|
(42
|
)
|
$
|
(4,931
|
)
|
Other income (expense)
|
|||
|
Foreign exchange forward contracts
|
$
|
2,524
|
|
$
|
1,069
|
|
Cost of sales
|
|||
|
Credit default swaps
|
$
|
(459
|
)
|
$
|
(1,459
|
)
|
Other income (expense)
|
|||
Interest Rate Risk
We use interest rate swap agreements to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use such swap agreements for speculative or trading purposes. 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 a notional value of
€57.3 million
(
$71.1 million
at the balance sheet close rate on
June 26, 2010
of $
1.24
/€1.00) and pursuant to which we are entitled to receive a six-month floating interest rate, the Euro Interbank Offered Rate (Euribor), and 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 26, 2010
, the notional value of this interest rate swap contract was
€52.6 million
(
$65.2 million
at the balance sheet close rate on
June 26, 2010
of $
1.24
/€1.00). This derivative instrument qualifies for accounting as a cash flow hedge in accordance with FASB ASC 815 and we designated it as
16
such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at
June 26, 2010
.
Foreign Currency Exchange Risk
Cash Flow Exposure
We expect many of the components of our business to have material future cash flows, including revenues and expenses that will be denominated in currencies other than the component's functional currency. Our primary cash flow exposures are customer collections and vendor payments. Changes in the exchange rates between our components' functional currencies and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge the value of a portion of these forecasted cash flows. As of
June 26, 2010
, these foreign exchange contracts hedge our forecasted future cash flows for up to
18 months
. These foreign exchange contracts qualified 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 derivative's gain or loss in “Accumulated other comprehensive income (loss)” and subsequently reclassify amounts into earnings when the hedged transaction is settled. We determined that these derivative financial instruments were highly effective as cash flow hedges at
June 26, 2010
. In addition, during the
six
months ended
June 26, 2010
, we did not discontinue any cash flow hedges because a hedging relationship was no longer highly effective or it was probable that a forecasted transaction would not occur.
During the
six
months ended
June 26, 2010
, we purchased foreign exchange forward contracts to hedge the exchange risk on forecasted cash flows denominated in euro. As of
June 26, 2010
, the unrealized
gain
on these contracts was
$39.0 million
and the total notional value of the contracts was
€402.0 million
(
$498.5 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00). The weighted average forward exchange rate for these contracts was
$1.34
/€1.00 at
June 26, 2010
.
In the following 12 months, we expect to reclassify to earnings
$37.8 million
of net unrealized
gains
related to these forward contracts that are included in accumulated other comprehensive loss at
June 26, 2010
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 transaction. During the three and
six
months ended
June 26, 2010
, we realized a
gain
of
$27.6 million
and
$28.6 million
, respectively, related to our cash flow hedges.
Transaction Exposure
Many components of our business have assets and liabilities (primarily receivables, investments, accounts payable, debt, solar module collection and recycling liabilities, and inter-company transactions) that are denominated in currencies other than the relevant entity's functional currencies. Changes in the exchange rates between our components' functional currencies and the currencies in which these assets and liabilities are denominated can create fluctuations in our reported consolidated financial position, results of operations, and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to hedge assets and liabilities against the short-term effects of currency exchange rate fluctuations. The gains and losses on the foreign exchange forward contracts will offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency assets and liabilities.
During the
six
months ended
June 26, 2010
, we purchased foreign exchange forward contracts to hedge balance sheet exposures related to transactions with third parties. We recognize gains or losses from the fluctuation in foreign exchange rates and the valuation of these derivative contracts in cost of sales and foreign currency gain (loss) on our consolidated statements of operations, depending on where the gain or loss from the hedged item is classified on our consolidated statement of operations. As of
June 26, 2010
, the total unrealized
gain
on our foreign exchange forward contracts was
$1.8 million
. These contracts have maturities of
less than two months
.
As of
June 26, 2010
, the notional values of our foreign exchange forward contracts were as follows (notional amounts and U.S. dollar equivalents in millions):
17
|
Balance sheet close rate on
|
||||||||
|
Transaction
|
Currency
|
Notional Amount
|
U.S. Equivalent
|
June 26, 2010
|
||||
|
Purchase
|
Euro
|
€ 242.5
|
$300.7
|
$1.24/€1.00
|
||||
|
Sell
|
Euro
|
€ 121.1
|
$150.2
|
$1.24/€1.00
|
||||
|
Purchase
|
Malaysian ringgits
|
MYR 154.5
|
$47.9
|
$0.31/MYR1.00
|
||||
|
Sell
|
Malaysian ringgits
|
MYR 54.3
|
$16.8
|
$0.31/MYR1.00
|
||||
|
Purchase
|
Japanese yen
|
JPY 200.0
|
$2.0
|
$0.01/JPY1.00
|
||||
|
Sell
|
Japanese yen
|
JPY 30.0
|
$0.3
|
$0.01/JPY1.00
|
||||
|
Purchase
|
Canadian dollar
|
CAD 6.2
|
$6.0
|
$0.97/CAD1.00
|
||||
|
Sell
|
Canadian dollar
|
CAD 15.0
|
$14.6
|
$0.97/CAD1.00
|
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, investments, trade accounts receivable, interest rate swap contracts, and foreign exchange forward contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, investments, interest rate swap contracts, and foreign exchange forward contracts with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty financial institutions.
ASC 820,
Fair Value Measurements and Disclosures,
defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and provides financial statement disclosure requirements for fair value measurements. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
•
Level 1 - Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
•
Level 2 - Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
•
Level 3 - Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use to price an asset or liability.
When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates. 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 or on a one-time basis:
•
Cash equivalents.
At
June 26, 2010
, our cash equivalents consisted of commercial paper and money market mutual 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. We value our commercial paper cash equivalents using quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2.
•
Marketable securities and investments.
At
June 26, 2010
, our marketable securities and investments consisted of
18
asset-backed securities, certificates of deposit, commercial paper, corporate debt securities, federal and foreign agency debt, U.S. and foreign government obligations, and supranational debt. We value our marketable securities using quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2. We also consider the effect of our counterparties' credit standings in these fair value measurements.
•
Derivative assets and liabilities.
At
June 26, 2010
, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies and interest rate swap contracts involving benchmark interest rates. Since our derivative assets and liabilities are not traded on an exchange, we value them using industry standard valuation models. Where applicable, these models project future cash flows and discount the future 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 terms of the instruments we hold, and accordingly, we classify these valuation techniques as Level 2. We consider the effect of our own credit standing and that of our counterparties in our valuations of our derivative assets and liabilities.
•
Solar module collection and recycling liability.
We account for our obligation to collect and recycle the solar modules that we sell in a similar manner to the accounting for asset retirement obligations that is prescribed by ASC 410,
Asset Retirement and Environmental Obligations
. When we sell solar modules, we initially record our liability for collecting and recycling those particular solar modules at the fair value of this liability, and then in subsequent periods, we accrete this fair value to the estimated future cost of collecting and recycling the solar modules. Therefore, this is a one-time nonrecurring fair value measurement of the collection and recycling liability associated with each particular solar module sold.
Since there is not an established market for collecting and recycling our solar modules, we value our liability using a valuation model (an income approach). This fair value measurement requires us to use significant unobservable inputs, which are primarily estimates of collection and recycling process costs and estimates of future changes in costs due to inflation and future currency exchange rates. Accordingly, we classify these valuation techniques as Level 3. We estimate collection and recycling process costs based on analyses of the collection and recycling technologies that we are currently developing; we estimate future inflation costs based on analysis of historical trends; and we estimate future currency exchange rates based on current rate information. We consider the effect of our own credit standing in our measurement of the fair value of this liability.
At
June 26, 2010
and
December 26, 2009
, information about inputs into the fair value measurements of our assets and liabilities that we make on a recurring basis was as follows (in thousands):
19
|
|
As of June 26, 2010
|
||||||||||||||
|
|
|
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:
|
|||||||||||||||
|
Cash equivalents:
|
|||||||||||||||
|
Commercial paper
|
$
|
6,796
|
|
$
|
—
|
|
$
|
6,796
|
|
$
|
—
|
|
|||
|
Money market mutual fund
|
236,320
|
|
236,320
|
|
—
|
|
—
|
|
|||||||
|
Marketable securities and investments:
|
|||||||||||||||
|
Asset-backed securities
|
865
|
|
—
|
|
865
|
|
—
|
|
|||||||
|
Certificates of deposit
|
10,700
|
|
—
|
|
10,700
|
|
—
|
|
|||||||
|
Commercial paper
|
10,792
|
|
—
|
|
10,792
|
|
—
|
|
|||||||
|
Corporate debt securities
|
134,022
|
|
—
|
|
134,022
|
|
—
|
|
|||||||
|
Federal agency debt
|
41,645
|
|
—
|
|
41,645
|
|
—
|
|
|||||||
|
Foreign agency debt
|
187,214
|
|
—
|
|
187,214
|
|
—
|
|
|||||||
|
Foreign government obligations
|
14,652
|
|
—
|
|
14,652
|
|
—
|
|
|||||||
|
Supranational debt
|
48,107
|
|
—
|
|
48,107
|
|
—
|
|
|||||||
|
U.S. government obligations
|
2,013
|
|
—
|
|
2,013
|
|
—
|
|
|||||||
|
Derivative assets
|
42,593
|
|
—
|
|
42,593
|
|
—
|
|
|||||||
|
Total assets
|
$
|
735,719
|
|
$
|
236,320
|
|
$
|
499,399
|
|
$
|
—
|
|
|||
|
Liabilities:
|
|||||||||||||||
|
Derivative liabilities
|
$
|
3,673
|
|
$
|
—
|
|
$
|
3,673
|
|
$
|
—
|
|
|||
|
|
As of December 26, 2009
|
||||||||||||||
|
|
|
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:
|
|||||||||||||||
|
Cash equivalents:
|
|||||||||||||||
|
Money market mutual funds
|
$
|
395,431
|
|
$
|
395,431
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Marketable securities and investments:
|
|||||||||||||||
|
Asset backed securities
|
5,544
|
|
—
|
|
5,544
|
|
—
|
|
|||||||
|
Corporate debt securities
|
115,248
|
|
—
|
|
115,248
|
|
—
|
|
|||||||
|
Federal agency debt
|
78,911
|
|
—
|
|
78,911
|
|
—
|
|
|||||||
|
Foreign agency debt
|
168,963
|
|
—
|
|
168,963
|
|
—
|
|
|||||||
|
Foreign government obligations
|
10,128
|
|
—
|
|
10,128
|
|
—
|
|
|||||||
|
Supranational debt
|
71,050
|
|
—
|
|
71,050
|
|
—
|
|
|||||||
|
Derivative assets
|
7,909
|
|
—
|
|
7,909
|
|
—
|
|
|||||||
|
Total assets
|
$
|
853,184
|
|
$
|
395,431
|
|
$
|
457,753
|
|
$
|
—
|
|
|||
|
Liabilities:
|
|||||||||||||||
|
Derivative liabilities
|
$
|
31,686
|
|
$
|
—
|
|
$
|
31,686
|
|
$
|
—
|
|
|||
Fair Value of Financial Instruments
The carrying values and fair values of our financial instruments at
June 26, 2010
and
December 26, 2009
were as follows (in
20
thousands):
|
|
June 26, 2010
|
December 26, 2009
|
|||||||||||||
|
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||
|
Assets:
|
|||||||||||||||
|
Marketable securities, current and noncurrent
|
$
|
439,310
|
|
$
|
439,310
|
|
$
|
449,844
|
|
$
|
449,844
|
|
|||
|
Investments, current
|
$
|
10,700
|
|
$
|
10,700
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Notes receivable - current
|
$
|
—
|
|
$
|
—
|
|
$
|
50,531
|
|
$
|
50,531
|
|
|||
|
Foreign exchange forward contract assets
|
$
|
42,593
|
|
$
|
42,593
|
|
$
|
7,909
|
|
$
|
7,909
|
|
|||
|
Restricted investments (excluding restricted cash)
|
$
|
81,064
|
|
$
|
81,064
|
|
$
|
36,467
|
|
$
|
36,467
|
|
|||
|
Investment in related party
|
$
|
25,000
|
|
$
|
25,000
|
|
$
|
25,000
|
|
$
|
25,000
|
|
|||
|
Notes receivable - noncurrent
|
$
|
8,654
|
|
$
|
7,853
|
|
$
|
25,241
|
|
$
|
25,332
|
|
|||
|
Liabilities:
|
|||||||||||||||
|
Long-term debt, including current maturities
|
$
|
138,633
|
|
$
|
143,888
|
|
$
|
174,958
|
|
$
|
178,900
|
|
|||
|
Interest rate swaps
|
$
|
1,904
|
|
$
|
1,904
|
|
$
|
1,083
|
|
$
|
1,083
|
|
|||
|
Foreign exchange forward contract liabilities
|
$
|
1,769
|
|
$
|
1,769
|
|
$
|
30,603
|
|
$
|
30,603
|
|
|||
The carrying values on our balance sheet of our cash and cash equivalents, accounts receivable, restricted cash, accounts payable, income tax payable, and accrued expenses approximate their fair values due to their short maturities; therefore, we exclude them from the foregoing table.
We estimated the fair value of our long-term debt in accordance with ASC 820 using a discounted cash flows approach (an income approach), and we incorporated the credit risk of our counterparty for all asset fair value measurements and our credit risk for all liability fair value measurements.
During 2008, we entered into a long-term solar module supply agreement with a company based in the United States that supplies and installs solar power systems to commercial and residential customers and that also qualifies as a related party. During the three months ended
June 26, 2010
, we did not have any net sales to this related party and during the
six
months ended
June 26, 2010
, we recognized
$9.6 million
in net sales to this related party. At
June 26, 2010
, we did not have any accounts receivable from this related party.
On
April 8, 2009
, we entered into a credit facility agreement with a solar project entity of one of our customers for an available amount of
€17.5 million
(
$21.7 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00) to provide financing for a photovoltaic power generation facility. The credit facility replaced a bridge loan that we had made to this entity. The credit facility bears interest at
8%
per annum and is due on
December 31, 2026
. As of
June 26, 2010
and
December 26, 2009
, the balance on this credit facility was
€7.0 million
and
€17.5 million
, respectively (
$8.7 million
and
$21.7 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00). The outstanding amount of this credit facility is included within
“Other assets”
on our consolidated balance sheets.
On
April 21, 2009
, we entered into a revolving VAT financing facility agreement for an available amount of
€9.0 million
(
$11.2 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00) with the same solar project entity with which we entered into the credit facility agreement on April 8, 2009. The VAT facility agreement pre-financed the amounts of German value added tax (VAT) and any other tax obligations of similar nature during the construction phase of the photovoltaic power generation facility. Borrowings under this facility were short-term in nature, since the facility was to be repaid when VAT amounts were reimbursed by the government. The VAT facility agreement bore interest at the rate of
Euribor plus 1.2%
and matures on
December 31, 2010
. As of
June 26, 2010
, the facility was fully repaid, including interest, and there was no balance outstanding. As of
December 26, 2009
, the balance on this financing agreement was
€1.4 million
(
$1.7 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00). The outstanding amount of this financing agreement was included within
“Prepaid expenses and other current assets”
on our consolidated balance sheets during the year ended
December 26, 2009
.
21
In October 2009, we entered into a fixed rate note with a solar power project entity to finance construction and start-up costs of a photovoltaic facility in Germany. This note provided funding in the amount of
€19.2 million
(
$23.8 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00). The fixed rate note was due on May 31, 2010 and bore interest at
7%
per annum. The fixed rate note was collateralized by a bank account pledge agreement, a security assignment agreement, a partnership interest pledge agreement, and a share pledge agreement. As of
June 26, 2010
, the fixed rate note was fully repaid, including interest, and there was no balance outstanding. As of
December 26, 2009
, the full available amount under this fixed rate note was outstanding. The outstanding amount of this fixed rate note was included within
“Prepaid expenses and other current assets”
on our consolidated balance sheets during the year ended
December 26, 2009
.
In October 2009, we entered into a fixed rate note with another solar power project entity to finance construction and start-up costs of a photovoltaic facility in Germany. This note provided funding in the amount of
€14.5 million
(
$18.0 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00). The fixed rate note was due on May 31, 2010 and bore interest at
7%
per annum. This fixed rate note was collateralized by a bank account pledge agreement, a security assignment agreement, a guarantee agreement, and share pledge agreement. As of
June 26, 2010
, the fixed rate note was fully repaid, including interest, and there was no balance outstanding. As of
December 26, 2009
, the full available amount under this fixed rate note was outstanding. The outstanding amount of this fixed rate note was included within
“Prepaid expenses and other current assets”
on our consolidated balance sheets during the year ended
December 26, 2009
.
Our long-term debt at
June 26, 2010
and
December 26, 2009
consisted of the following (in thousands):
|
Type
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Malaysian Facility Agreement - Fixed rate term loan
|
|
$
|
66,314
|
|
$
|
84,166
|
|
|
|
Malaysian Facility Agreement - Floating rate term loan (1)
|
|
66,314
|
|
84,166
|
|
|||
|
Director of Development of the State of Ohio
|
|
8,986
|
|
9,994
|
|
|||
|
Director of Development of the State of Ohio
|
|
—
|
|
139
|
|
|||
|
Capital lease obligations
|
|
—
|
|
2
|
|
|||
|
|
|
141,614
|
|
178,467
|
|
|||
|
Less unamortized discount
|
|
(2,981
|
)
|
(3,509
|
)
|
|||
|
Total long-term debt
|
|
138,633
|
|
174,958
|
|
|||
|
Less current portion
|
|
24,465
|
|
28,559
|
|
|||
|
Noncurrent portion
|
|
$
|
114,168
|
|
|
$
|
146,399
|
|
(1) We entered into an interest rate swap contract related to this loan. See Note 9. "Derivative Instruments," to these condensed consolidated financial statements.
We did not have any short-term debt at
June 26, 2010
and
December 26, 2009
.
Revolving Credit Facility
On September 4, 2009, we entered into a revolving credit facility pursuant to a credit agreement among First Solar, Inc., certain designated Borrowing Subsidiaries (consisting of First Solar Manufacturing GmbH, a German subsidiary, and other subsidiaries of our Company who may in the future be designated as borrowers pursuant to the credit agreement), and several lenders. JPMorgan Chase Bank, N.A. and Bank of America served as Joint-Lead Arrangers and Bookrunners, with JPMorgan also acting as Administrative Agent. The credit agreement provides First Solar, Inc. and the Borrowing Subsidiaries with a senior secured three-year revolving credit facility in an aggregate available amount of
$300.0 million
, a portion of which is available for letters of credit and swingline loans. Subject to certain conditions, we have the right to request an increase in the aggregate commitments under the credit facility up to
$400.0 million
. In connection with the credit agreement, we also entered into a guarantee and collateral agreement and foreign security agreements.
Borrowings under the credit agreement currently bear interest at (i) London Interbank Offered Rate (LIBOR) (adjusted for eurocurrency reserve requirements) plus a margin of 2.75% or (ii) a base rate as defined in the credit agreement plus a margin of
22
1.75%, depending on the type of borrowing requested
by us. These margins are subject to adjustments depending on our consolidated leverage ratio and the credit rating of the facility provided by Moody's Investors Service, Inc. and Standard and Poor's Rating Services.
At
June 26, 2010
, we had no borrowings outstanding and
$53.1 million
in letters of credit drawn on the revolving credit facility, leaving approximately
$246.9 million
in capacity available under the revolving credit facility,
$21.9 million
of which may be used for letters of credit. As of
June 26, 2010
, based on applicable indices, the all-in effective three month LIBOR borrowing rate was
3.76%
. At December 26, 2009, we had no borrowings outstanding and
$46.0 million
in letters of credit drawn on the revolving credit facility, leaving approximately
$254.0 million
in capacity available under the revolving credit facility,
$29.0 million
of which may have been used for letters of credit.
In addition to paying interest on outstanding principal under the credit agreement, we are required to pay a commitment fee, currently at the rate of
0.375%
per annum, to the lenders based on the average daily unused commitments under the facility. The commitment fee may also be adjusted due to changes in our consolidated leverage ratio.
We also pay a letter of credit fee equal to the applicable margin for eurocurrency revolving loans on the face amount of each letter of credit and a fronting fee. Proceeds from the credit facility may be used for working capital and other general corporate purposes.
In connection with our revolving credit facility, we entered into a guarantee and collateral agreement and various foreign security agreements. Loans made to First Solar Manufacturing GmbH (a borrowing subsidiary under the credit facility) are (i) guaranteed by First Solar, Inc. pursuant to the guarantee and collateral agreement, (ii) guaranteed by certain of First Solar, Inc.'s direct and indirect subsidiaries organized under the laws of Germany, pursuant to a German guarantee agreement, (iii) secured by share pledge agreements, (iv) secured by a security interest in intercompany receivables held by First Solar Holdings GmbH, First Solar GmbH, and First Solar Manufacturing GmbH, pursuant to assignment agreements, and (v) subject to a security trust agreement, which sets forth additional terms regarding the foregoing German security documents and arrangements.
The credit agreement contains various financial condition covenants with which we must comply, including a debt to EBITDA ratio covenant, a minimum EBITDA covenant, and a minimum liquidity covenant. Under the credit agreement, we are also subject to customary non-financial covenants, including limitations in secured indebtedness and limitations on dividends and other restricted payments. We were in compliance with these covenants at
June 26, 2010
.
Malaysian Facility Agreement
On May 6, 2008, in connection with the plant expansion at our Malaysian manufacturing center, First Solar Malaysia Sdn. Bhd. (FS Malaysia), our indirect wholly owned subsidiary, entered into an export financing facility agreement (Malaysian Facility Agreement) with a consortium of banks. The total available loan amount was
€134.0 million
(
$166.2 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00). Pursuant to the Malaysian Facility Agreement, we began semi-annual repayments of the principal balances of these credit facilities during 2008. Amounts repaid under this credit facility cannot be re-borrowed. These credit facilities consisted of the following (in thousands):
|
Outstanding at
|
||||||||
|
Malaysian Borrowings
|
Denomination
|
Interest Rate
|
|
Maturity
|
June 26, 2010
|
|||
|
Fixed-rate euro-denominated term loan
|
EUR
|
4.54%
|
2016
|
$
|
66,314
|
|
||
|
Floating-rate euro-denominated term loan
|
EUR
|
Euribor plus 0.55%
|
2016
|
66,314
|
|
|||
|
Total (1)
|
|
|
|
|
$
|
132,628
|
|
|
(1)
€106.9 million
outstanding at
June 26, 2010
(
$132.6 million
at the balance sheet close rate on
June 26, 2010
of
$1.24
/€1.00).
These credit facilities were used by FS Malaysia for the purpose of (1) partially financing the purchase of certain equipment to be used at our Malaysian manufacturing center and (2) financing fees to be paid to Euler-Hermes Kreditversicherungs-AG (Euler-Hermes), the German Export Credit Agency of Hamburg, Federal Republic of Germany, which guarantees 95% of FS Malaysia's obligations related to the Malaysian credit facilities (Hermes Guaranty).
In addition to paying interest on outstanding principal under the facility, FS Malaysia is obligated to pay annual agency fees and security agency fees.
23
In connection with the Malaysian credit facilities, First Solar, Inc. entered into a first demand guaranty agreement dated May 6, 2008 in favor of the lenders. Thereby FS Malaysia's obligations related to the Malaysian Facility Agreement are guaranteed, on an unsecured basis, by First Solar, Inc.
In connection with the Malaysian credit facilities, all of FS Malaysia's obligations are secured by a first party, first legal charge over the equipment financed by the Malaysian credit facilities and the other documents, contracts, and agreements related to that equipment. Also in connection with the Malaysian credit facilities, any payment claims of First Solar, Inc. against FS Malaysia are subordinated to the claims of the lenders.
The Malaysian Facility Agreement contains various financial covenants with which we must comply, such as debt-to-equity ratios, total leverage ratios, interest coverage ratios, and debt service coverage ratios. The Malaysian Facility Agreement also contains various customary non-financial covenants with which FS Malaysia must comply, including submitting various financial reports and business forecasts to the lenders, maintaining adequate insurance, complying with applicable laws and regulations, and restrictions on FS Malaysia's ability to sell or encumber assets, or make loan guarantees to third parties. We were in compliance with these covenants at
June 26, 2010
.
Certain of our indebtedness under the Malaysian credit facilities bears interest at rates based on the Euro Interbank Offered Rate (Euribor). Euribor is the primary interbank lending rate within the Euro zone, with maturities ranging from one week to one year. A disruption of the credit environment could negatively impact interbank lending and, therefore, negatively impact the Euribor rate. An increase in the Euribor rate would not impact our cost of borrowing under the Malaysian Facility Agreement since we entered into an interest rate swap agreement to mitigate such risk.
State of Ohio Loans
During the years ended December 25, 2004 and December 31, 2005, we received the following loans from the Director of Development of the State of Ohio (in thousands):
|
Original Loan
|
Outstanding at
|
|||||||||||
|
Ohio Borrowings
|
|
Amount
|
|
Denomination
|
Interest Rate
|
Maturity
|
|
June 26, 2010
|
||||
|
Director of Development of the State of Ohio
|
|
$
|
15,000
|
|
USD
|
2.25%
|
2015
|
$
|
8,986
|
|
||
|
Director of Development of the State of Ohio
|
|
5,000
|
|
USD
|
0.25% — 3.25%
|
2009
|
—
|
|
||||
|
Total
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
8,986
|
|
France Facility Agreement
On March 30, 2010, in connection with the construction of our planned manufacturing facility in Blanquefort, France, First Solar France Manufacturing SAS (FS France), our indirect wholly owned subsidiary, entered into a facility agreement with EDF Energies Nouvelles SA (EDF-EN) for the purpose of partially financing the construction of the manufacturing facility. The total available loan amount under the non-revolving credit facility is a maximum principal amount of
€50.0 million
(
$62.0 million
at the balance sheet close rate on June 26, 2010 of $1.24/€1.00). Pursuant to the terms and conditions set forth in the facility agreement, advances will be made available commencing on the start of construction of the French plant and ending June 15, 2012. Advances must be repaid in quarterly installments through the tenth anniversary of the first commercial shipments from the French plant, subject to accelerated mandatory prepayment in the event of a default under the facility, or the termination of the related venture agreement or off-take agreement with EDF-EN and affiliated entities. Amounts repaid under this credit facility cannot be re-borrowed. The borrowings will bear interest at a rate of
4%
. Any advances drawn under this facility will be unsecured. As of June 26, 2010, there have been no borrowings under this facility.
Financial guarantees
In the normal course of business, we occasionally enter into agreements with third parties under which we guarantee the performance of our subsidiaries related to certain service contracts, which may include services such as development, engineering, procurement of permits and equipment, construction management, and monitoring and maintenance related to solar power plants. These agreements meet the definition of a guarantee according to ASC 460,
Guarantees
. As of
June 26, 2010
, none of these guarantees were material to our financial position.
24
Loan guarantees
At
June 26, 2010
our only loan guarantees were guarantees of our own debt, as disclosed in Note 13. "Debt,” to these condensed consolidated financial statements.
Commercial commitments
During the normal course of business, we enter into commercial commitments in the form of letters of credit and bank guarantees to provide financial and performance assurance to third parties. Our revolving credit facility provides us the capacity to issue up to
$75.0 million
in letters of credit at a fee equal to the applicable margin for eurocurrency revolving loans and a fronting fee. As of
June 26, 2010
we had issued
$53.1 million
in letters of credit under the revolving credit facility, the majority of which were related to supporting our systems business. This leaves approximately
$21.9 million
of availability for issuance of additional letters of credit as of
June 26, 2010
.
Product warranties
We offer warranties on our products and record an estimate of the associated liability based on the number of solar modules under warranty at customer locations, our historical experience with warranty claims, our monitoring of field installation sites, our in-house testing of our solar modules, and our estimated per-module replacement cost.
Product warranty activity during the three and six months ended
June 26, 2010
and
June 27, 2009
was as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 26,
2010 |
June 27,
2009 |
|
June 26,
2010 |
June 27,
2009 |
||||||||||
|
Product warranty liability, beginning of period
|
$
|
23,375
|
|
$
|
13,557
|
|
$
|
22,583
|
|
$
|
11,905
|
|
|||
|
Accruals for new warranties issued (warranty expense)
|
3,865
|
|
3,898
|
|
7,672
|
|
6,989
|
|
|||||||
|
Settlements
|
(3,123
|
)
|
(146
|
)
|
(8,973
|
)
|
(354
|
)
|
|||||||
|
Change in estimate of warranty liability
|
(255
|
)
|
104
|
|
2,580
|
|
(1,127
|
)
|
|||||||
|
Product warranty liability, end of period
|
$
|
23,862
|
|
$
|
17,413
|
|
$
|
23,862
|
|
$
|
17,413
|
|
|||
|
Current portion of warranty liability
|
$
|
8,546
|
|
$
|
6,517
|
|
|||||||||
|
Noncurrent portion of warranty liability
|
$
|
15,316
|
|
$
|
10,896
|
|
|||||||||
We measure share-based compensation cost at the grant date based on the fair value of the award and recognize this cost as an expense over the grant recipients' requisite service periods, in accordance with ASC 718,
Compensation-Stock Compensation
. The share-based compensation expense that we recognized in our consolidated statements of operations for the three and
six
months ended
June 26, 2010
and
June 27, 2009
was as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 26,
2010 |
June 27,
2009 |
|
June 26,
2010 |
June 27,
2009 |
||||||||||
|
Share-based compensation expense included in:
|
|||||||||||||||
|
Cost of sales
|
$
|
5,566
|
|
$
|
3,483
|
|
$
|
10,724
|
|
$
|
6,502
|
|
|||
|
Research and development
|
2,957
|
|
2,100
|
|
5,038
|
|
3,919
|
|
|||||||
|
Selling, general and administrative
|
16,029
|
|
11,854
|
|
27,930
|
|
21,728
|
|
|||||||
|
Production start-up
|
490
|
|
320
|
|
824
|
|
792
|
|
|||||||
|
Total share-based compensation expense
|
$
|
25,042
|
|
$
|
17,757
|
|
$
|
44,516
|
|
$
|
32,941
|
|
|||
The increase in share-based compensation expense was primarily the result of new awards.
The following table presents our share-based compensation expense by type of award for the three and
six
months ended
25
June 26, 2010
and
June 27, 2009
(in thousands):
|
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||
|
|
June 26,
2010 |
June 27,
2009 |
June 26,
2010 |
June 27,
2009 |
|||||||||||
|
Stock options
|
$
|
577
|
|
$
|
1,754
|
|
$
|
1,555
|
|
$
|
3,808
|
|
|||
|
Restricted stock units
|
26,646
|
|
16,998
|
|
44,872
|
|
30,241
|
|
|||||||
|
Unrestricted stock
|
157
|
|
112
|
|
307
|
|
225
|
|
|||||||
|
Net amount absorbed into inventory
|
(2,338
|
)
|
(1,107
|
)
|
(2,218
|
)
|
(1,333
|
)
|
|||||||
|
Total share-based compensation expense
|
$
|
25,042
|
|
$
|
17,757
|
|
$
|
44,516
|
|
$
|
32,941
|
|
|||
Share-based compensation cost capitalized in our inventory was
$3.2 million
and
$1.0 million
at
June 26, 2010
and
December 26, 2009
, respectively. As of
June 26, 2010
, we had
$1.8 million
of unrecognized share-based compensation cost related to unvested stock option awards, which we expect to recognize as an expense over a weighted-average period of approximately
0.5
years, and
$173.6 million
of unrecognized share-based compensation cost related to unvested restricted stock units, which we expect to recognize as an expense over a weighted-average period of approximately
2.1
years.
Our Malaysian subsidiary has been granted a tax holiday for a period of
16.5 years
, which was originally scheduled to commence on January 1, 2009. The tax holiday, which generally provides for a
100% exemption from Malaysian income tax
, is conditional upon our continued compliance in meeting certain employment and investment thresholds. On January 9, 2009, we received formal approval granting our request to pull forward this previously approved tax holiday by one year; the result of which was an
$11.5 million
reduction in the amount of income taxes previously accrued during the year ended December 27, 2008. As a result, we recognized an income tax benefit of
$11.5 million
during the six months ended June 27, 2009. In January 2010, in connection with the expansion of our Malaysian manufacturing operations, we were granted an extension of the previously approved tax holiday by three years, contingent upon meeting additional investment requirements.
Our effective tax rates were
11.9%
and
11.8%
for the three and
six
months ended
June 26, 2010
, respectively, and were
10.3%
and
7.0%
for the three and
six
months ended
June 27, 2009
, respectively. Without the
$11.5 million
tax benefit discussed above, our effective tax rate would have been
10.1%
for the
six
months ended
June 27, 2009
. Our estimated annual effective tax rate was higher during the six months ended June 26, 2010 compared with the six months ended June 27, 2009 mainly due to a greater percentage of profits earned in jurisdictions with higher tax rates and the reversal of previously recorded tax expense of
$11.5 million
during the six months ended June 27, 2009. Without the beneficial impact of the Malaysian tax holiday on operations for the
six
months ended
June 26, 2010
and
June 27, 2009
, our effective tax rates would have been
27.6%
and
26.0%
, respectively. The provision for income taxes differs from the amount computed by applying the statutory U.S. federal rate primarily due to the benefit associated with foreign income taxed at lower rates and the beneficial impact of the Malaysian tax holiday.
During 2009, we applied for a federal renewable energy manufacturing tax credit in the amount of
$16.3 million
that was enacted under the American Recovery and Reinvestment Act of 2009. The tax credit request related to the recent expansion of our module manufacturing facility in Perrysburg, Ohio. In January 2010, the U.S. Department of the Treasury accepted our application and approved the
$16.3 million
credit request. At March 27, 2010, we recorded the tax credit as a reduction to the acquisition cost of our Perrysburg, Ohio manufacturing expansion.
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potential dilutive common stock, including employee stock options and restricted stock units.
The calculation of basic and diluted net income per share for the three and
six
months ended
June 26, 2010
and
June 27, 2009
was as follows (in thousands, except per share amounts):
26
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 26,
2010 |
|
June 27,
2009 |
|
June 26,
2010 |
|
June 27,
2009 |
||||||||
|
Basic net income per share
|
|
|
|
||||||||||||
|
Numerator:
|
|
|
|
||||||||||||
|
Net income
|
$
|
159,043
|
|
$
|
180,579
|
|
$
|
331,388
|
|
$
|
345,174
|
|
|||
|
Denominator:
|
|
|
|
|
|
|
|
||||||||
|
Weighted-average common stock outstanding
|
84,852
|
|
83,723
|
|
84,679
|
|
82,704
|
|
|||||||
|
Diluted net income per share
|
|
|
|
|
|
|
|
||||||||
|
Denominator:
|
|
|
|
|
|
|
|
||||||||
|
Weighted-average common stock outstanding
|
84,852
|
|
83,723
|
|
84,679
|
|
82,704
|
|
|||||||
|
Effect of stock options, restricted stock units outstanding, and contingent issuable shares
|
1,549
|
|
1,945
|
|
1,568
|
|
1,436
|
|
|||||||
|
Weighted-average shares used in computing diluted net income per share
|
86,401
|
|
|
85,668
|
|
|
86,247
|
|
|
84,140
|
|
||||
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 26,
2010 |
|
June 27,
2009 |
|
June 26,
2010 |
|
June 27,
2009 |
||||||||
|
Per share information - basic:
|
|||||||||||||||
|
Net income per share
|
$
|
1.87
|
|
$
|
2.16
|
|
$
|
3.91
|
|
$
|
4.17
|
|
|||
|
|
|||||||||||||||
|
Per share information - diluted:
|
|||||||||||||||
|
Net income per share
|
$
|
1.84
|
|
$
|
2.11
|
|
$
|
3.84
|
|
$
|
4.10
|
|
|||
The following number of outstanding employee stock options and restricted stock units were excluded from the computation of diluted net income per share for the three and
six
months ended
June 26, 2010
and
June 27, 2009
as they would have had an antidilutive effect (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||
|
|
June 26,
2010 |
|
June 27,
2009 |
|
June 26,
2010 |
|
June 27,
2009 |
||||
|
Restricted stock units and options to purchase common stock
|
75
|
|
158
|
|
157
|
|
210
|
|
|||
Comprehensive income, which includes foreign currency translation adjustments, unrealized gains and losses on derivative instruments designated and qualifying as cash flow hedges, and unrealized gains and losses on available-for-sale securities, the impact of which has been excluded from net income and reflected as components of stockholders' equity, was as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 26,
2010 |
|
June 27,
2009 |
|
June 26,
2010 |
|
June 27,
2009 |
||||||||
|
Net income
|
$
|
159,043
|
|
$
|
180,579
|
|
$
|
331,388
|
|
$
|
345,174
|
|
|||
|
Foreign currency translation adjustments
|
(35,884
|
)
|
18,899
|
|
(68,118
|
)
|
5,013
|
|
|||||||
|
Change in unrealized gain on marketable securities, net of tax
|
5,680
|
|
268
|
|
6,777
|
|
371
|
|
|||||||
|
Change in unrealized gain (loss) on derivative instruments, net of tax
|
17,689
|
|
(49,732
|
)
|
54,133
|
|
(26,082
|
)
|
|||||||
|
Comprehensive income
|
$
|
146,528
|
|
$
|
150,014
|
|
$
|
324,180
|
|
$
|
324,476
|
|
|||
27
Components of accumulated other comprehensive loss were as follows (in thousands):
|
|
June 26,
2010 |
|
December 26,
2009 |
||||
|
Foreign currency translation adjustments
|
$
|
(62,640
|
)
|
$
|
5,478
|
|
|
|
Unrealized gain on marketable securities, net of tax
|
8,728
|
|
1,951
|
|
|||
|
Unrealized gain (loss) on derivative instruments, net of tax
|
37,108
|
|
(17,025
|
)
|
|||
|
Accumulated other comprehensive loss
|
$
|
(16,804
|
)
|
$
|
(9,596
|
)
|
|
The following table presents a reconciliation of net income to net cash provided by operating activities for the
six
months ended
June 26, 2010
and
June 27, 2009
(in thousands):
|
|
Six Months Ended
|
||||||
|
|
June 26,
2010 |
June 27,
2009 |
|||||
|
Net income
|
$
|
331,388
|
|
$
|
345,174
|
|
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|||||||
|
Depreciation and amortization
|
77,747
|
|
56,113
|
|
|||
|
Impairment of fixed assets
|
2,071
|
|
—
|
|
|||
|
Impairment of project assets
|
638
|
|
—
|
|
|||
|
Share-based compensation
|
44,516
|
|
32,941
|
|
|||
|
Remeasurement of monetary assets and liabilities
|
3,510
|
|
280
|
|
|||
|
Deferred income taxes
|
(6,877
|
)
|
(12,098
|
)
|
|||
|
Excess tax benefits from share-based compensation arrangements
|
—
|
|
(15,351
|
)
|
|||
|
Loss on disposal of property and equipment
|
1,409
|
|
4,426
|
|
|||
|
Provision for doubtful accounts receivable
|
(990
|
)
|
6,990
|
|
|||
|
Inventory reserve
|
—
|
|
2,432
|
|
|||
|
Gain on sales of investments, net
|
(203
|
)
|
(7
|
)
|
|||
|
Other operating activities
|
(736
|
)
|
—
|
|
|||
|
Changes in operating assets and liabilities:
|
|||||||
|
Accounts receivable, trade
|
(54,211
|
)
|
(282,609
|
)
|
|||
|
Accounts receivable, unbilled
|
(105,657
|
)
|
183
|
|
|||
|
Inventories
|
(49,921
|
)
|
(48,385
|
)
|
|||
|
Project assets
|
(11,126
|
)
|
(3,470
|
)
|
|||
|
Deferred project costs
|
(90,607
|
)
|
(667
|
)
|
|||
|
Prepaid expenses and other current assets
|
(36,015
|
)
|
14,194
|
|
|||
|
Other assets
|
(4,818
|
)
|
(1,773
|
)
|
|||
|
Billings in excess of costs and estimated earnings
|
6,418
|
|
(1,186
|
)
|
|||
|
Accounts payable and accrued expenses
|
36,478
|
|
(18,535
|
)
|
|||
|
Deferred revenue - current
|
(35,414
|
)
|
4,158
|
|
|||
|
Total adjustments
|
(223,788
|
)
|
(262,364
|
)
|
|||
|
Net cash provided by operating activities
|
$
|
107,600
|
|
$
|
82,810
|
|
|
28
ASC 280,
Segment Reporting
, establishes standards for companies to report in their financial statements information about operating segments, products, services, geographic areas, and major customers. The method of determining what information to report is generally based on the way that management organizes the operating segments within the company for making operating decisions and assessing financial performance.
We operate our business in two segments. Our components segment is our principal business and involves the design, manufacture, and sale of solar modules which convert sunlight into electricity. Customers of our components segment include project developers, system integrators, and operators of renewable energy projects.
Through our fully integrated systems business, we provide a complete PV solar power system, which includes project development, engineering, procurement and construction (EPC) services, operating and maintenance (O&M) services, and, when required, project finance. Our systems segment sells solar power systems directly to investor owned utilities, independent power developers and producers, commercial and industrial companies, and other system owners who purchase completed solar power plants, EPC services, and/or O&M services from us.
Our Chief Operating Decision Maker (CODM), consisting of senior executive staff, views the sale of solar modules from the components segment as the core driver of our profitability, return on net assets, and cash throughput; and as a result, we view our systems segment as an enabler to drive module throughput. Therefore, we operate our systems segment with the objective to achieve break-even results before income taxes. In our operating segment financial disclosures, we include the sale of our solar modules manufactured by our components segment and installed in projects sold by our systems segment in “net sales” of our components business.
After we have determined the amount of revenue earned for each transaction following the applicable guidance for the underlying arrangement, we allocate revenue between the components and systems segments based on how our CODM strategically views these segments. We determine the amount of revenue to be allocated between the systems business and the components business based on the principle that the systems business is an enabler operating at break-even results to drive module throughput for the components business. The amount of revenue allocated to the components segment for modules used in the system business arrangement is equal to the cost of the solar module plus the earned margin (or estimated margin in the case of percentage-of-completion accounting) for a particular project for the period.
We also allocate the cost of sale value recognized for the solar modules in the system business arrangements to the components business. The cost of solar modules is composed of inventory cost without any inter-company profit. We have allocated corporate costs to the components segment, since this segment currently benefits the most from the corporate functions.
In the event gross profit from our systems segment (excluding solar module sales) is less than operating expenses in a given fiscal period, the components segment will compensate the systems segment for the temporary shortfall. A typical shortfall can result from (i) the timing of revenue recognition in comparison to the amount of fixed costs incurred in a given period or (ii) a larger amount of other-than-temporary project asset impairment in any given period.
Repayment of prior quarter compensation by the systems segment to our components segment during the three and
six
months ended
June 26, 2010
was
$11.4 million
and
$2.5 million
. Compensation by the components segment to our systems segment during the three and six months ended
June 27, 2009
was
$7.5 million
and
$11.4 million
, respectively.
Reported net sales, gross profit (loss), income before income taxes, and total assets for the three and
six
months ended
June 27, 2009
, have been reclassified to conform to the revised presentation of segment information.
Financial information about our segments was as follows (in thousands):
29
|
|
Three Months Ended
|
Three Months Ended
|
|||||||||||||||||||||
|
|
June 26, 2010
|
June 27, 2009
|
|||||||||||||||||||||
|
|
Components
|
Systems
|
Total
|
Components
|
Systems
|
Total
|
|||||||||||||||||
|
Net sales
|
$
|
500,940
|
|
$
|
86,914
|
|
$
|
587,854
|
|
$
|
523,734
|
|
$
|
2,142
|
|
$
|
525,876
|
|
|||||
|
Gross profit (loss)
|
$
|
261,656
|
|
$
|
22,538
|
|
$
|
284,194
|
|
$
|
299,635
|
|
$
|
(1,539
|
)
|
$
|
298,096
|
|
|||||
|
Income before income taxes
|
$
|
180,438
|
|
$
|
—
|
|
$
|
180,438
|
|
$
|
201,298
|
|
$
|
—
|
|
$
|
201,298
|
|
|||||
|
Goodwill
|
$
|
251,275
|
|
$
|
35,240
|
|
$
|
286,515
|
|
$
|
259,722
|
|
$
|
35,240
|
|
$
|
294,962
|
|
|||||
|
Total assets
|
$
|
3,172,912
|
|
$
|
458,403
|
|
$
|
3,631,315
|
|
$
|
2,743,623
|
|
$
|
166,556
|
|
$
|
2,910,179
|
|
|||||
|
|
Six Months Ended
|
Six Months Ended
|
|||||||||||||||||||||
|
|
June 26, 2010
|
June 27, 2009
|
|||||||||||||||||||||
|
|
Components
|
Systems
|
Total
|
Components
|
Systems
|
Total
|
|||||||||||||||||
|
Net sales
|
$
|
1,030,208
|
|
$
|
125,607
|
|
$
|
1,155,815
|
|
$
|
939,731
|
|
$
|
4,353
|
|
$
|
944,084
|
|
|||||
|
Gross profit (loss)
|
$
|
539,307
|
|
$
|
26,923
|
|
$
|
566,230
|
|
$
|
535,632
|
|
$
|
(2,252
|
)
|
$
|
533,380
|
|
|||||
|
Income before income taxes
|
$
|
375,797
|
|
$
|
—
|
|
$
|
375,797
|
|
$
|
371,030
|
|
$
|
—
|
|
$
|
371,030
|
|
|||||
|
Goodwill
|
$
|
251,275
|
|
$
|
35,240
|
|
$
|
286,515
|
|
$
|
259,722
|
|
$
|
35,240
|
|
$
|
294,962
|
|
|||||
|
Total assets
|
$
|
3,172,912
|
|
$
|
458,403
|
|
$
|
3,631,315
|
|
$
|
2,743,623
|
|
$
|
166,556
|
|
$
|
2,910,179
|
|
|||||
Product Revenue
The following table sets forth the total amounts of solar modules and solar power systems revenue recognized for the three and six months ended June 26, 2010 and June 27, 2009. For the purposes of the following table, (a) "solar modules" is composed of total revenues from the sale of solar modules to third parties, and (b) "solar power systems" is composed of total revenues from the sale of complete solar power systems and related services.
|
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
June 26,
2010 |
June 27,
2009 |
|||||||||||
|
Solar module revenue
|
$
|
476,061
|
|
$
|
520,543
|
|
$
|
1,004,939
|
|
$
|
933,875
|
|
|||
|
Solar power system revenue
|
111,793
|
|
5,333
|
|
150,876
|
|
10,209
|
|
|||||||
|
Total net sales
|
$
|
587,854
|
|
$
|
525,876
|
|
$
|
1,155,815
|
|
$
|
944,084
|
|
|||
On
July 12, 2010
we completed the acquisition of NextLight Renewable Power, LLC, a leading developer of utility-scale solar projects in the southwestern United States, in an all-cash transaction for approximately
$297.0 million
, subject to finalization of the estimated closing date adjustments.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate (including the expansion of our project development business); future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules and the overall cost of photovoltaic solar power systems; research and development programs and our ability to improve the conversion
30
efficiency of our solar modules; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue” the negative or plural of these words and other comparable terminology. Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the matters discussed in the section entitled “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. You should carefully consider the risks and uncertainties described under this section.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” and “First Solar” refer to First Solar, Inc. and its subsidiaries.
Overview
We manufacture and sell solar modules with an advanced thin film semiconductor technology, and we design, construct, and sell photovoltaic (PV) solar power systems.
In furtherance of our goal of delivering the lowest cost of solar energy and achieving price parity with conventional fossil-fuel based peak electricity generation, we are continually focused on reducing PV solar system costs in three primary areas: module manufacturing, balance-of-system (BoS) costs (consisting of costs of components of a solar power system other than the solar modules, including inverters, mounting hardware, grid interconnection equipment, wiring and other devices, and installation labor costs), and cost of capital. First, with respect to our module manufacturing costs, our advanced technology has allowed us to reduce our average module manufacturing costs to the lowest in the world, based on publicly available information. In the three months ended
June 26, 2010
, our total average manufacturing costs were
$0.76
per watt, which we believe is significantly less than those of traditional crystalline silicon solar module manufacturers. By continuing to improve conversion efficiency and line throughput, lower material cost, and drive volume scale to further decrease overhead costs, we believe that we can further reduce our manufacturing costs per watt and maintain our cost advantage over traditional crystalline silicon solar module manufacturers. Second, by continuing to improve conversion efficiency, leverage volume procurement around standardized hardware platforms, and accelerate installation time, we believe we can continue to make substantial reductions in BoS costs, which represent over half of all costs associated with a typical utility-scale PV solar power system. Finally, we believe that continuing to strengthen our financial position, including our balance sheet and credit profile, will enable us to continue to lower the cost of capital associated with our solar power systems, thereby further enhancing the economic viability of our projects and lowering the cost of electricity generated by solar power systems that incorporate our modules and technology.
We believe that combining our reliable, low cost module manufacturing capability with our systems business enables us to more rapidly reduce the price of solar electricity, to accelerate the adoption of our technology in large scale systems, and to further our mission to create enduring value by enabling a world powered by clean, affordable solar electricity.
We operate our business in two segments. Our components segment designs, manufactures, and sells solar modules to solar project developers and system integrators. Through our systems segment, we have the capability to provide a complete PV solar power system for utility-scale or large commercial systems, which includes project development, engineering, procurement and construction (EPC), operating and maintenance (O&M), and, when required, project finance. We view the sale of solar modules from the components segment as the core driver of our profitability, return on net assets, and cash throughput. We view our systems segment as an enabler to drive module throughput for our components business with the objective of achieving break-even results before income taxes for our systems segment. See also Note 20.”Segment Reporting” to the consolidated financial statements included in this quarterly report on Form 10-Q.
Market Overview
In addressing a growing global need for PV solar electricity, we target markets with varying approaches depending on the underlying economics, market requirements, and distribution channels. In subsidized feed-in tariff markets, such as Germany, we have historically sold most of our solar modules to solar project developers, system integrators, and independent power producers. In other markets, such as the United States, the demand for solar has been primarily driven by renewable portfolio standards requiring regulated utilities to supply a portion of their total electricity from renewable energy sources such as solar power. To meet the
31
needs of these markets and enable balance-of-system cost reductions, we have developed a fully integrated systems business that can provide a low-cost, turn-key, utility-scale PV system solution for system owners and low cost electricity to utility end-users. By building a fully integrated systems business, we believe we are in a position to expand our business in transitional and eventually economically sustainable markets (in which subsidies or incentives are minimal) that are expected to develop in areas with abundant solar resources and sizable electricity demand, such as the United States, China, India, Australia, and parts of Europe. In the long-term, we plan to compete on an economic basis with conventional fossil fuel-based peaking power generation.
Net sales for the second quarter of 2010 were primarily driven by strong German installations, which resulted from a combination of market-wide anticipation of mid-year German feed-in tariff (FiT) reductions in 2010, customer participation in our rebate program, and improving project finance and overall corporate finance conditions.
During the first half of
2010
, uncertainty around second half 2010 German feed-in tariffs, among other things, drove a significant increase in demand for modules in the first half of the year. In July 2010, the anticipated German FiT reductions were approved, taking effect in stages on July 1, 2010 and October 1, 2010, and with varying impacts on FiTs for rooftop, agricultural land free field, non-agricultural land free field and conversion land applications. The FiT for agricultural land free field applications going forward has been eliminated, and such FiT can only be obtained if permit requirements are met and the PV system is commissioned by the end of 2010. In the second half of 2010, the German FiT reductions could have the effect of significantly reducing industry-wide module demand and/or price levels (particularly with respect to agricultural land free field applications in Germany), and our results of operations could be adversely affected. In such an environment, it is uncertain whether growing demand from France, Italy, Spain, and other markets could absorb industry-wide module supply without significant inventory buildup or price reductions.
During
2010
, we have continued to expand into certain key transition markets, such as the United States, within which affordable solar electricity solutions could be developed and ultimately evolve into economically sustainable markets. In January 2010, we completed the acquisition of certain assets from Edison Mission Group's solar project development pipeline consisting of utility-scale solar projects located primarily on private land in California and the southwestern United States. In July 2010, we completed the acquisition of NextLight Renewable Power, LLC, another leading developer of utility-scale solar projects in the southwestern United States.
In the PV module segment, we continue to face intense competition from manufacturers of crystalline silicon solar modules and other types of solar modules and photovoltaic systems. Solar module manufacturers compete with one another in several product performance attributes, including reliability and module cost per watt, and, with respect to solar power systems, return on equity (ROE) and levelized cost of electricity (LCOE), meaning the net present value of total life cycle costs of the solar power project divided by the quantity of energy which is expected to be produced over the system's life. The ability to expand manufacturing capacity quickly is another source of differentiation among solar module manufacturers, and certain of our competitors may have a faster response time to capacity expansion than we do. We are the lowest cost PV module manufacturer in the solar industry, based on publicly available information, as evidenced by the further reduction in our average manufacturing cost per watt from
$0.87
during the three months ended
June 27, 2009
to
$0.76
during the three months ended
June 26, 2010
. This cost advantage is reflected in the price at which we sell our modules or fully integrated systems and enables our systems to compete favorably in respect of their ROE or LCOE. Our cost competitiveness is based in large part on our proprietary technology (which enables conversion efficiency improvements and permits a continuous and highly automated industrial manufacturing process), our scale, and our operational excellence. In addition, our modules use approximately 1% of the amount of semiconductor material that is used to manufacture traditional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules. The current spot market price of polysilicon between approximately
$50
and
$55
per kilogram (Kg) enables us to remain one of the lowest cost module manufacturers in the solar industry. However, the timing and rate of decrease in the cost of silicon feedstock could lead to pricing pressure for solar modules. Although we are not a crystalline silicon module manufacturer, we estimate, based on industry research and public disclosures of our competitors, that a $10 per Kg increase or decrease in the price of polysilicon could increase or decrease, respectively, our competitors' manufacturing cost per watt by approximately $0.06 to
$0.07
. Given the lower conversion efficiency of our modules compared to crystalline silicon modules, there are higher balance-of-system costs associated with systems using our modules. Thus, to compete effectively on the basis of LCOE, our modules may need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules. Our cost reduction roadmap anticipates manufacturing cost per watt reductions for our modules of 10% per year. During the three months ended
June 26, 2010
, we reduced our manufacturing cost per watt by
13%
from our cost per watt in the three months ended
June 27, 2009
.
While our modules currently enjoy competitive advantages in these product performance attributes, there can be no guarantee that these advantages will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in margin compression, a decline in average selling prices of our solar modules, erosion in our market share
32
for modules, a decrease in the rate of revenue growth, and/or a decline in overall revenues. We have taken, and continue to take, several actions to mitigate the potential impact resulting from competitive pressures, including adjusting our pricing policies as necessary in core market segments to drive module volumes, continuously making progress along our cost reduction roadmap, and focusing our research and development on increasing the conversion efficiency of our solar modules.
As we expand our systems business into transition and sustainable markets, we can offer value beyond the PV module, reduce our exposure to module-only competition, and provide comprehensive utility-scale photovoltaic systems solutions that significantly reduce solar electricity costs. Thus, our systems business allows us to play a more active role than many of our competitors in managing the demand for and manufacturing throughput of our solar modules. Finally, we seek to form and develop strong partner relationships with our customers and continue to develop our range of offerings, including EPC capabilities and operating and maintenance services, in order to enhance the competitiveness of systems using our solar modules.
Manufacturing Capacity
As of
June 26, 2010
, we operated
24
production lines with an annual global manufacturing capacity of approximately
1.4
GW (based on the
second
quarter of
2010
average per line run rate at our existing plants) at our manufacturing plants in Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia. We expect to increase our manufacturing capacity to 38 production lines by 2012, with an annual global manufacturing capacity of approximately
2.2
GW (based on the
second
quarter of
2010
average per line run rate at our existing plants).
Financial Operations Overview
The following describes certain line items in our statement of operations and some of the factors that affect our operating results.
Net Sales
Components Business
Currently, the majority of our net sales is generated from the sale of solar modules. We presently price and sell our solar modules per watt of power. As a result, our net sales can fluctuate based on our output of sellable watts or price. During the
six
months ended
June 26, 2010
, we sold almost all of our solar modules to solar power system project developers, system integrators, and operators headquartered in Germany, France, Spain, Italy, and the United States, which either resell our solar modules to end-users or integrate them into power plants that they own, operate, or sell.
As of
June 26, 2010
, we had long-term supply contracts for the sale of solar modules expiring at the end of 2012 with fourteen European solar power system project developers and system integrators (Long-Term Supply Contracts). We also have an agreement expiring in 2013 with a solar power system project developer and system integrator in the United States, which is a related party. These contracts account for a significant portion of our planned production over the period from 2010 through 2012 and, therefore, will significantly affect our overall financial performance.
Our sales prices under the Long-Term Supply Contracts are denominated in euro, exposing us to risks from currency exchange rate fluctuations. During the three and six months ended
June 26, 2010
,
81%
and
84%
, respectively, of our sales were denominated in euro and subject to fluctuation in the exchange rate between the euro and U.S. dollar.
We have in the past amended pricing and other terms in our Long-Term Supply Contracts in order to remain competitive, and we may decide in the future to further amend these contracts in order to address the highly competitive environment. For example, during the three months ended March 28, 2009, we amended our Long-Term Supply Contracts with certain customers to further reduce the sales price per watt under these contracts in 2009 and 2010 in exchange for increases in the volume of solar modules to be delivered under the contracts. We also extended the payment terms for certain customers under these contracts from net 10 days to net 45 days to increase liquidity in our sales channel and to reflect longer module shipment times from our manufacturing plants in Malaysia.
During the third quarter of 2009, we amended our Long-Term Supply Contracts with certain of our customers to implement a program which provided a price rebate to these customers for solar modules purchased from us. The intent of this program was to enable our customers to successfully compete in our core German market and to adjust for eligible customers the sale price (which was documented in framework agreements entered into several years ago) in light of current market conditions. The rebate period was originally structured to end at the end of 2010; however, we expect to extend the program into 2011 with certain modifications, including applicability to certain European geographies in addition to Germany. As was the case in 2009, the rebate
33
amounts were and will be established so as to enable the sell-through of our products at competitive prices. The rebate program applies a specified rebate rate to solar modules sold for solar power projects in certain geographies. Customers need to meet certain requirements in order to be eligible for and benefit from this program. As of
June 26, 2010
, we have experienced 100% participation in this program by eligible customers.
We account for these rebates as a reduction to the selling price of our solar modules and, therefore, as a reduction in revenue at the time of sale. No rebates granted under this program can be claimed in cash; instead, rebates may only be applied to reduce outstanding accounts receivable balances. During the three and
six
months ended
June 26, 2010
, we extended rebates to customers in the amount of
€15.6 million
and
€35.6 million
, respectively (
$20.6 million
and
$48.4 million
at the average exchange rates of
$1.32
/€1.00 and
$1.36
/€1.00, respectively).
We also enter into one-time module sales agreements with customers for specific projects.
Under our customer contracts, we transfer title and risk of loss to the customer and recognize revenue upon shipment. Our customers do not have extended payment terms or rights of return under these contracts.
Systems Business
Through our fully integrated systems business, we provide a complete solar power system solution, which includes project development, EPC services, O&M services, and when required, project finance.
Net sales from our systems segment are composed of the following types of transactions:
|
Transaction
|
|
Description
|
|
Engineer and Procure (EP) Contract
|
|
Design of a solar electricity generation system for a customer that uses our solar modules; includes the procurement of all balance-of-system (BOS) components from third party suppliers.
|
|
|
|
|
|
Engineer, Procure and Construct (EPC) Contract
|
|
Design and construction for a customer of a turnkey solar electricity generation system that uses our solar modules; includes the procurement of all BOS components from third party suppliers.
|
|
|
|
|
|
Sale of Project Assets
|
|
Sale of project assets to a customer at various stages of development. This generally includes a single project consisting of costs incurred for permits, land or land rights, and/or power off-take agreements.
|
|
|
|
|
|
Operating and Maintenance (O&M) Agreement
|
|
Typically a fixed-priced long-term services agreement.
|
Net sales from our systems business during the three months ended June 26, 2010 resulted primarily from the percentage-of-completion revenue recognition from utility-scale solar power projects in the United States.
Net sales from our systems segment are impacted by numerous factors, including the magnitude and effectiveness of renewable portfolio standards, economic incentives (such as European feed-in tariffs or the federal investment tax credit in the United States), and other PV system demand drivers.
For a given solar power project, we recognize revenue for our systems business either after execution of an EPC agreement with a third party, specifying the terms and conditions of the construction of the solar power plant; by applying the provisions for real estate accounting; by applying the percentage-of-completion method of accounting; or upon the sale of the complete system solution, choosing a particular one of these methods as appropriate for the specific facts and circumstances related to each project and its sale.
At any given point in time, aggregate contracted sales amounts with respect to the systems segment generally consist of the uncompleted portion of contracted projects for which we have entered into a definitive EPC agreement with the customer.
The following tables summarize our 2.2 GW North American utility systems advanced project pipeline after giving effect to our July 12, 2010 acquisition of NextLight Renewable Power, LLC:
34
Projects under contract by First Solar
|
Project/Location
|
Project Size in
MW AC
|
Contract
|
||
|
Topaz, California
|
550
|
PPA* - PG&E
|
||
|
Sunlight, California
|
300
|
PPA - PG&E
|
||
|
Sunlight, California
|
250
|
PPA - Southern California Edison
|
||
|
Stateline, California
|
300
|
PPA - Southern California Edison
|
||
|
Agua Caliente, Arizona
|
290
|
PPA - PG&E
|
||
|
AV Solar Ranch 1, California
|
230
|
PPA - PG&E
|
||
|
Silver State North, Nevada
|
50
|
PPA - NV Energy
|
||
|
PNM, New Mexico
|
22
|
EPC - (Utility-owned generation)
|
||
|
St. Clair, Ontario, Canada
|
40
|
Ontario RESOP Program
|
||
|
Walpole, Ontario, Canada
|
20
|
Ontario RESOP Program
|
||
|
Belmont, Ontario, Canada
|
20
|
Ontario RESOP Program
|
||
|
Amherstburg, Ontario, Canada
|
10
|
Ontario RESOP Program
|
||
|
Tilbury, Ontario, Canada
|
5
|
Ontario RESOP Program
|
||
|
Total
|
2,087
|
*
PPA - Power Purchase Agreement
Projects under construction by First Solar for third parties
|
Project/Location
|
Project Size in
MW AC
|
Power Purchase Agreement
(PPA)
|
Owner
|
|||
|
Sarnia, Ontario
|
60
|
Ontario RESOP Program
|
Enbridge
|
|||
|
Copper Mountain, Nevada
|
48
|
PG&E
|
Sempra
|
|||
|
Cimarron, New Mexico
|
30
|
Tri-State
|
Southern
|
|||
|
Total
|
138
|
Cost of sales
Components Business
Our cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as tempered back glass, transparent conductive oxide coated front glass, cadmium telluride, laminate, connector assemblies, laminate edge seal, and other items. Our cost of sales also includes direct labor for the manufacturing of solar modules and manufacturing overhead such as engineering expense, equipment maintenance, environmental health and safety expenses, quality and production control, and procurement. Cost of sales also includes depreciation of manufacturing plant and equipment and facility-related expenses. In addition, we accrue warranty and solar module collection and recycling costs to our cost of sales.
Overall, we expect our cost of sales per watt to decrease over the next several years due to an increase in sellable watts per solar module, an increase in unit output per production line, continued geographic expansion into lower-cost manufacturing regions, and more efficient absorption of fixed costs driven by economies of scale.
Systems Business
Within our systems business, project-related costs include standard EPC costs (consisting primarily of balance-of-system costs for inverters, electrical and mounting hardware, project management and engineering costs, and installation labor costs), site specific costs, and development costs (including transmission upgrade costs, interconnection fees, and permitting costs). As further described in Note 20. “Segment Reporting,” at the time when the revenue recognition criteria are met, we include the sale of our solar modules manufactured by our components business and used by our systems business as net sales of our components business. Therefore, the related cost of sales are also included within our components business.
Deferred project costs represent capitalized costs related to the deferred revenue for project development or project construction activities sold to a third party, typically under an EPC agreement, for which the revenue recognition criteria have not been met.
35
We recognize these costs as we recognize the revenue for these projects. Deferred project costs capitalized on our balance sheet at
June 26, 2010
and
December 26, 2009
were
$127.3 million
and
$36.7 million
, respectively.
Gross profit
Gross profit is affected by numerous factors, including our module average selling prices, foreign exchange rates, our manufacturing costs, balance of system costs, development costs and the effective utilization of our production facilities. Gross profit is also subject to competitive pressures, and we have in the past and may in the future decide to amend our Long-Term Supply Contracts, which specify our sales price per watt. Other factors impacting gross profits are the ramp of production on new plants due to a reduced ability to absorb fixed costs until full production volumes are reached and the mix of net sales generated by our components and systems businesses, coupled with a geographic factor. Gross profit margin is affected by our systems business, which generally operates at a lower gross profit margin due to the pass-through nature of certain balance-of-system components procured from third parties. Gross profit for our systems business excludes the sales and cost of sales for solar modules that are included in the gross profit of our components business.
Research and development
Research and development expense consists primarily of salaries and personnel-related costs and the cost of products, materials, and outside services used in our process and product research and development activities. We acquire equipment for general use in further process developments and record the depreciation of this equipment as research and development expense. We expect our research and development expense to increase in absolute terms in the future as we increase personnel and research and development activity. Research and development expenses are attributable to our components segments.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expense, and other selling expenses. We expect these expenses to increase in the near term, both in absolute dollars and as a percentage of net sales, in order to support the growth of our business as we expand our sales and marketing efforts, improve our information processes and systems, and implement the financial reporting, compliance, and other infrastructure required for an expanding public company. Over time, we expect selling, general and administrative expense to decline as a percentage of net sales and on a cost per watt basis as our net sales and our total watts produced increase.
Our systems business has certain of its own dedicated administrative key functions, such as accounting, legal, finance, project finance, HR, procurement and marketing. Costs for such functions are recorded and included within selling, general and administrative costs for our systems segment. Our corporate key functions consist primarily of company-wide corporate tax, corporate treasury, corporate accounting/finance, corporate legal, investor relations, corporate communications, and executive management functions. Currently our components business benefits the most from these functions and therefore we have allocated these costs to this segment as part of selling, general, and administrative costs.
Production start-up
Production start-up expense consists primarily of salaries and personnel-related costs and the cost of operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase. It also includes all expenses related to the selection of a new site and the related legal and regulatory costs and the costs to maintain our plant replication program, to the extent we cannot capitalize these expenditures. In general, we expect production start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition of new production lines at an existing manufacturing facility, primarily due to the additional infrastructure investment required when building an entirely new facility. Over time, we expect production start-up expense to decline as a percentage of net sales and on a cost per watt basis as a result of economies of scale. Production start-up expense is attributable to our components segment.
Foreign currency (loss) gain
Foreign currency (loss) gain consists of losses and gains resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our functional currencies.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest
36
income also includes interest received from note receivables and interest collected for late customer payments.
Interest expense, net
Interest expense, net of amounts capitalized, is incurred on various debt financings. We capitalize interest expense into our property, plant and equipment and project assets/deferred project costs-.
Income tax expense
Income taxes are imposed on our income by the taxing authorities in the various jurisdictions in which we operate, principally the United States, Germany, and Malaysia. The statutory federal tax rate in the United States is
35.0%
while the tax rates in Germany and Malaysia are approximately
28.7%
and
25.0%
, respectively. In Malaysia we have been granted a long-term tax holiday, pursuant to which substantially all our income earned in Malaysia is exempt from income tax.
Use of estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP for interim financial information. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, net sales, and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contingencies and litigation, solar module collection and recycling liability, warranty obligations, goodwill, income taxes, derivative instrument valuation, intangible assets, inventories, marketable securities valuation, and share-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of net sales for the periods indicated:
|
|
Three Months Ended
|
Six Months Ended
|
|||||||||
|
|
June 26,
2010 |
June 27,
2009 |
June 26,
2010 |
June 27,
2009 |
|||||||
|
Net sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||
|
Cost of sales
|
51.7
|
%
|
43.3
|
%
|
51.0
|
%
|
43.5
|
%
|
|||
|
Gross profit
|
48.3
|
%
|
56.7
|
%
|
49.0
|
%
|
56.5
|
%
|
|||
|
Research and development
|
3.9
|
%
|
3.5
|
%
|
4.0
|
%
|
3.2
|
%
|
|||
|
Selling, general and administrative
|
13.4
|
%
|
13.9
|
%
|
12.6
|
%
|
12.9
|
%
|
|||
|
Production start-up
|
0.4
|
%
|
0.5
|
%
|
0.3
|
%
|
0.9
|
%
|
|||
|
Operating income
|
30.6
|
%
|
38.8
|
%
|
32.1
|
%
|
39.5
|
%
|
|||
|
Foreign currency (loss) gain
|
(0.4
|
)%
|
—
|
%
|
(0.3
|
)%
|
0.2
|
%
|
|||
|
Interest income
|
0.5
|
%
|
0.4
|
%
|
0.8
|
%
|
0.4
|
%
|
|||
|
Interest expense, net
|
—
|
%
|
(0.7
|
)%
|
—
|
%
|
(0.5
|
)%
|
|||
|
Other expense, net
|
(0.1
|
)%
|
(0.2
|
)%
|
(0.1
|
)%
|
(0.3
|
)%
|
|||
|
Income tax expense
|
3.6
|
%
|
3.9
|
%
|
3.8
|
%
|
2.7
|
%
|
|||
|
Net income
|
27.0
|
%
|
34.4
|
%
|
28.7
|
%
|
36.6
|
%
|
|||
Three Months Ended
June 26, 2010
and
June 27, 2009
Net sales
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Net sales
|
$
|
587,854
|
|
|
$
|
525,876
|
|
|
$
|
61,978
|
|
|
12
|
%
|
37
The increase in net sales was primarily driven by strong demand from German customers in anticipation of reduced subsidies later in the year, an increase in production volume resulting from our manufacturing expansions in Kulim, Malaysia and Perrysburg, Ohio, continued improvements to our manufacturing processes resulting in a 16% increase in the MW volume of solar modules sold during the three months ended June 26, 2010 compared with the three months ended June 27, 2009, and an increase in revenue recognized by our systems business, partially offset by a decrease in our module average selling prices. Revenue recognized by our systems business during the three months ended June 26, 2010 was $86.9 million and resulted primarily from the sale of one utility-scale solar power system in Europe and from two utility-scale solar power systems in the United States. The increase in the MW volume of solar modules sold was attributable to the full production ramp of our four-plant Malaysian manufacturing center, full production ramp of our Perrysburg, Ohio expansion, continued improvements to our manufacturing process, and growth in our systems business. In addition, we increased the average conversion efficiency of our modules by approximately 3% during the three months ended June 26, 2010 compared with the three months ended June 27, 2009. Our module average selling price decreased by approximately 15% during the three months ended June 26, 2010 compared with the three months ended June 27, 2009. The decline in our module average selling price was attributable to the following: an 8% decrease due to competitive pressure (including the commencement of a customer rebate program in the third quarter of 2009), a 6% decrease due to annual contractual agreements, and a 2% decrease due to a decline in the foreign exchange rate between the U.S. dollar and the euro, partially offset by a 1% increase due to a shift in customer mix. During the three months ended June 26, 2010 and June 27, 2009,
50%
and 71%, respectively, of our net sales resulted from sales of solar modules to customers headquartered in Germany.
Cost of sales
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Cost of sales
|
$
|
303,660
|
|
|
$
|
227,780
|
|
|
$
|
75,880
|
|
|
33
|
%
|
|
% of net sales
|
51.7
|
%
|
|
43.3
|
%
|
|||||||||
The increase in cost of sales was primarily due to higher production and sales volumes, which resulted from the full production ramp of the first four-plants of our Malaysian manufacturing center, full production ramp of our Perrysburg, Ohio expansion, and an increase in business activity associated with our systems business. The increased production and sales volumes in our components business and increased volume sold through our systems business had the following effects: a $46.3 million increase in direct material expense, a $16.0 million increase in other costs, a $9.0 million increase in manufacturing overhead costs, and a $4.7 million increase in sales freight, partially offset by a $0.1 million decrease in warranty expense and accruals for the estimated future costs associated with the collection and recycling of our solar modules. The $9.0 million increase in manufacturing overhead costs for the three months ended June 26, 2010 was due to a $6.4 million increase in salaries and personnel-related expenses (including a
$2.1 million
increase in share-based compensation expense) and a $5.2 million increase in depreciation and equipment expenses, partially offset by a $1.4 million decrease in facility and related expenses and a $1.2 million decrease in other expenses. Each of these manufacturing overhead cost increases primarily resulted from increased infrastructure associated with the build-out of our Malaysian and Perrysburg, Ohio manufacturing centers and start-up of our systems business. The $16.0 million increase in other costs for the three months ended June 26, 2010 was due to an increase in estimated expenses for certain module replacement efforts beyond normal warranty. During the period from June 2008 to June 2009, a manufacturing excursion occurred affecting less than 4% of the total product manufactured within the period. The excursion could result in possible premature power loss in the affected modules. The root cause was identified and subsequently mitigated in June 2009. On-going testing confirms the corrective actions are effective. We have been working directly with impacted
customers to replace the affected modules and these efforts are well underway and, in some cases, complete. Some of these efforts go beyond our normal warranty coverage. Accordingly, we have accrued additional expenses of $17.8 million in the second quarter of 2010 and $29.5 million in total to date to cover the replacement of the anticipated affected module population in the field.
Our average manufacturing cost per watt declined by $0.11 per watt, or
13%
, from
$0.87
in the three months ended
June 27, 2009
to
$0.76
in the three months ended
June 26, 2010
and included $0.02 of non-cash stock based compensation.
Gross profit
38
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Gross profit
|
$
|
284,194
|
|
|
$
|
298,096
|
|
|
$
|
(13,902
|
)
|
|
(5
|
)%
|
|
% of net sales
|
48.3
|
%
|
56.7
|
%
|
||||||||||
Gross profit as a percentage of net sales decreased by
8.4
percentage points in the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
. This decrease was attributable to the following: a 6.2% reduction due to a decline in our module average selling prices, a 4.6% reduction due to product mix between our components and systems businesses, a 3.1% reduction relating to the manufacturing excursion discussed above under "Cost of sales," and a 0.5% reduction due to the decline in the exchange rate between the U.S. dollar and the euro, partially offset by a 6.0% margin improvement attributable to continued manufacturing scale and reductions in our manufacturing cost per watt. We expect that gross profit will be impacted in future periods by the volatility of the exchange rate between the U.S. dollar and the euro and product mix between our components and systems businesses.
Research and development
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Research and development
|
$
|
22,836
|
|
|
$
|
18,605
|
|
$
|
4,231
|
|
|
23
|
%
|
|
|
% of net sales
|
3.9
|
%
|
3.5
|
%
|
||||||||||
The increase in research and development expense was due to a $2.6 million increase in personnel-related expenses (including a
$0.9 million
increase in share-based compensation expense) resulting from increased headcount. In addition, testing and qualification material costs increased by $4.6 million, partially offset by a $2.4 million decrease in consulting and other expenses and a $0.6 million decrease in facilities and utilities spending. During the three months ended
June 26, 2010
, we continued the development of solar modules with increased efficiencies at converting sunlight into electricity and increased the conversion efficiency of our modules by approximately 3% compared with the three months ended
June 27, 2009
.
Selling, general and administrative
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Selling, general and administrative
|
$
|
78,597
|
|
|
$
|
72,926
|
|
$
|
5,671
|
|
|
8
|
%
|
|
|
% of net sales
|
13.4
|
%
|
|
13.9
|
%
|
|||||||||
The increase in selling, general and administrative expense was due to $5.6 million in estimated nonrecurring certain post-sale expenses relating to the manufacturing excursion discussed above under "Cost of Sales," a $3.1 million increase in salaries and personnel-related expenses (including a
$4.2 million
increase in share-based compensation expense, partially offset by a $1.1 million decrease in other compensation), a $1.4 million increase in non-capitalizable development expenses related to our systems business, and a $1.1 million increase in legal and professional service fees, partially offset by a $5.5 million decrease in other expenses. During the three months ended June 27, 2009, we incurred a one-time allowance in the amount of $7.0 million related to an outstanding accounts receivable with a specific customer.
Production start-up
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Production start-up
|
$
|
2,288
|
|
|
$
|
2,524
|
|
$
|
(236
|
)
|
|
(9
|
)%
|
|
|
% of net sales
|
0.4
|
%
|
0.5
|
%
|
||||||||||
During the three months ended
June 26, 2010
, we incurred
$2.3 million
of production start-up expenses for our eight-line
39
Malaysian and two-line Blanquefort, France manufacturing expansions, including legal, regulatory and personnel costs, compared with
$2.5 million
of production start-up expenses for our Malaysian and Perrysburg, Ohio manufacturing expansions during the three months ended
June 27, 2009
. Production start-up expenses are composed of the cost of labor and material and depreciation expense to run and qualify the production lines, related facility expenses, management of our replication process, and legal and regulatory costs.
Foreign currency (loss) gain
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Foreign currency (loss) gain
|
$
|
(2,625
|
)
|
|
$
|
239
|
|
$
|
(2,864
|
)
|
|
(1,198
|
)%
|
|
Foreign exchange gain decreased during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, due to an increase in our net foreign currency denominated assets and liabilities and significant volatility during the three months ended
June 26, 2010
.
Interest income
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Interest income
|
$
|
3,035
|
|
|
$
|
1,948
|
|
$
|
1,087
|
|
|
56
|
%
|
|
Interest income increased by
$1.1 million
during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, primarily as a result of interest earned from notes receivable and higher average duration on our fixed income portfolio during the three months ended
June 26, 2010
.
Interest expense, net
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Interest expense, net
|
$
|
(6
|
)
|
|
$
|
(3,827
|
)
|
$
|
3,821
|
|
|
(100
|
)%
|
|
Interest expense, net of amounts capitalized, decreased by
$3.8 million
during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, as a result of higher amounts of interest expense capitalized during the three months ended
June 26, 2010
.
Other expense, net
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Other expense, net
|
$
|
(439
|
)
|
|
$
|
(1,103
|
)
|
$
|
664
|
|
|
(60
|
)%
|
|
Other expense, net, decreased by
$0.7 million
during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, primarily due to nonrecurring expenses associated with our credit default swaps during the three months ended
June 27, 2009
.
Income tax expense
40
|
|
Three Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Three Month Period Change
|
||||||||||
|
Income tax expense
|
$
|
21,395
|
|
|
$
|
20,719
|
|
$
|
676
|
|
|
3
|
%
|
|
|
Effective tax rate (%)
|
11.9
|
%
|
10.3
|
%
|
||||||||||
Income tax expense increased by
$0.7 million
during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, substantially all of which relates to a greater percentage of profits earned in higher tax jurisdictions, offset by a decrease in pre-tax income of $20.9 million. See Note 16. “Income Taxes,” to the condensed consolidated financial statements included with this quarterly report on Form 10-Q for additional information.
S
ix Months Ended
June 26, 2010
and
June 27, 2009
Net sales
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Net sales
|
$
|
1,155,815
|
|
|
$
|
944,084
|
|
|
$
|
211,731
|
|
|
22
|
%
|
The increase in net sales was primarily driven by strong demand from German customers in anticipation of reduced subsidies later in the year, an increase in revenue recognized by our systems business, and an increase in production volume as a result of bringing additional manufacturing lines into full production, resulting in a 32% increase in the MW volume of solar modules sold during the six months ended
June 26, 2010
compared with the six months ended
June 27, 2009
. These increases were partially offset by a decrease in our module average selling price. Revenue recognized by our systems business during the six months ended
June 26, 2010
was $125.6 million and resulted primarily from the sale of two utility-scale solar power systems in Europe and from two utility-scale solar power systems in the United States. The increase in the MW volume of solar modules sold was attributable to the full production ramp of our four-plant Malaysian manufacturing center, full production ramp of our Perrysburg, Ohio expansion, continued improvements to our manufacturing process, and growth in our systems business. In addition, we increased the average conversion efficiency of our modules by approximately 2% during the six months ended
June 26, 2010
compared with the six months ended
June 27, 2009
. Our module average selling price decreased by approximately 16% during the six months ended
June 26, 2010
compared with the six months ended
June 27, 2009
. The decline in our module average selling price was attributable to the following: an 11% decrease due to competitive pressure (including the commencement of a customer rebate program in the third quarter of 2009), a 5% decrease due to annual contractual agreements, and a 1% decrease due to a decline in the foreign exchange rate between the U.S. dollar and the euro, partially offset by a 1% increase due to a shift in customer mix. During the six months ended
June 26, 2010
and
June 27, 2009
,
54%
and 67%, respectively, of our net sales resulted from sales of solar modules to customers headquartered in Germany.
Cost of sales
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Cost of sales
|
$
|
589,585
|
|
|
$
|
410,704
|
|
|
$
|
178,881
|
|
|
44
|
%
|
|
% of net sales
|
51.0
|
%
|
|
43.5
|
%
|
|||||||||
The increase in cost of sales was due to higher production and sales volumes, which resulted from the full production ramp of our the first four plants at our Malaysian manufacturing center, production ramp of our Perrysburg, Ohio expansion, and an increase in business activity associated with our systems business. The increased production and sales volumes in our components business and increased volume sold through our systems business had the following effects: a $109.6 million increase in direct material expense, a $33.1 million increase in manufacturing overhead costs, a $20.5 million increase in other costs, a $10.2 million increase in sales freight, and a $5.5 million increase in warranty expense and accruals for the estimated future costs associated with the collection and recycling of our solar modules. The $33.1 million increase in manufacturing overhead costs for the six months ended
June 26, 2010
was due to a $16.5 million increase in salaries and personnel-related expenses (including a
$4.2 million
increase in share-based compensation expense), a $16.3 million increase in depreciation and equipment expenses, and a
41
$0.9 million increase in facility and related expenses, partially offset by a $0.6 million decrease in other expenses. Each of these manufacturing overhead cost increases primarily resulted from increased infrastructure associated with the build-out of our Malaysian manufacturing center, expansion of our Perrysburg, Ohio plant, and start-up of our systems business. The $20.5 million increase in other costs for the six months ended
June 26, 2010
was due to an increase in estimated expenses for certain module replacement efforts beyond normal warranty. During the period from June 2008 to June 2009, a manufacturing excursion occurred affecting less than 4% of the total product manufactured within the period. The excursion could result in possible premature power loss in the affected modules. The root cause was identified and subsequently mitigated in June 2009. On-going testing confirms the corrective actions are effective. We have been working directly with impacted
customers to replace the affected modules and these efforts are well underway and, in some cases, complete. Some of these efforts go beyond our normal warranty coverage. Accordingly, we have accrued additional expenses of $22.4 million in the first half of 2010 and $29.5 million in total to date to cover the replacement of the anticipated affected module population in the field.
Our average manufacturing cost per watt declined by $0.10 per watt, or 11%, from $0.89 in the six months ended
June 27, 2009
to $0.79 in the six months ended
June 26, 2010
and included $0.02 of non-cash stock based compensation.
Gross profit
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Gross profit
|
$
|
566,230
|
|
|
$
|
533,380
|
|
|
$
|
32,850
|
|
|
6
|
%
|
|
% of net sales
|
49.0
|
%
|
|
56.5
|
%
|
|||||||||
Gross profit as a percentage of net sales decreased by
7.5
percentage points in the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
. This decrease was attributable to the following: a 6.9% reduction due to a decline in our module average selling prices, a 3.4% reduction due to product mix between our components and systems businesses, and a 2.2% reduction relating to the manufacturing excursion discussed above under "Cost of sales," partially offset by a 5.2% margin improvement attributable to continued manufacturing scale and reductions in our manufacturing cost per watt. Further, the decline in the exchange rate between the U.S. dollar and the euro adversely impacted our gross profit by 0.2%. We expect that gross profit will be impacted in future periods by the volatility of the exchange rate between the U.S. dollar and the euro and product mix between our components and systems businesses.
Research and development
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Research and development
|
$
|
45,724
|
|
|
$
|
30,309
|
|
|
$
|
15,415
|
|
|
51
|
%
|
|
% of net sales
|
4.0
|
%
|
|
3.2
|
%
|
|||||||||
The increase in research and development expense was due to a $5.2 million increase in personnel-related expenses (including a
$1.1 million
increase in share-based compensation expense) resulting from increased headcount. In addition, testing and qualification material costs increased by $10.6 million, facilities and utilities spending increased by $0.8 million, partially offset by a $1.2 million decrease in consulting and other expenses. During the six months ended
June 26, 2010
, we continued the development of solar modules with increased efficiencies at converting sunlight into electricity and increased the conversion efficiency of our modules by approximately 2% compared with the
six
months ended
June 27, 2009
.
Selling, general and administrative
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Selling, general and administrative
|
$
|
145,461
|
|
|
$
|
122,241
|
|
|
$
|
23,220
|
|
|
19
|
%
|
|
% of net sales
|
12.6
|
%
|
|
12.9
|
%
|
|||||||||
42
The increase in selling, general and administrative expense was due to a $13.4 million increase in salaries and personnel-related expenses (including a
$6.2 million
increase in share-based compensation expense), a $5.9 million increase in non-capitalizable development expenses related to our systems business, a $5.6 million increase in estimated nonrecurring certain post-sale expenses relating to the manufacturing excursion discussed above under "Cost of Sales," and a $2.0 million increase in legal and professional service fees, partially offset by a decrease of $3.7 million in other expenses. During the
six
months ended
June 27, 2009
, we incurred a one-time allowance in the amount of
$7.0 million
related to an outstanding accounts receivable with a specific customer.
Production start-up
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Production start-up
|
$
|
3,431
|
|
|
$
|
8,733
|
|
|
$
|
(5,302
|
)
|
|
(61
|
)%
|
|
% of net sales
|
0.3
|
%
|
|
0.9
|
%
|
|||||||||
During the
six
months ended
June 26, 2010
, we incurred
$3.4 million
of production start-up expenses for our eight-line Malaysian, one-line Perrysburg, Ohio, and two-line Blanquefort, France manufacturing expansions, including legal, regulatory and personnel costs, compared with
$8.7 million
of production start-up expenses for our Malaysian and Perrysburg, Ohio manufacturing expansions during the
six
months ended
June 27, 2009
. Production start-up expenses are composed of the cost of labor and material and depreciation expense to run and qualify the production lines, related facility expenses, management of our replication process, and legal and regulatory costs.
Foreign currency (loss) gain
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Foreign currency (loss) gain
|
$
|
(3,321
|
)
|
|
$
|
2,073
|
|
|
$
|
(5,394
|
)
|
|
(260
|
)%
|
Foreign exchange gain decreased during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, due to an increase in our net foreign currency denominated assets and liabilities and significant volatility during the
six
months ended
June 26, 2010
.
Interest income
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Interest income
|
$
|
8,683
|
|
|
$
|
4,051
|
|
|
$
|
4,632
|
|
|
114
|
%
|
Interest income increased by
$4.6 million
during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, primarily as a result of interest earned from notes receivable, interest received on late customer payments, and higher average duration on our fixed income portfolio during the
six
months ended
June 26, 2010
.
Interest expense, net
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Interest expense, net
|
$
|
(6
|
)
|
|
$
|
(4,762
|
)
|
|
$
|
4,756
|
|
|
(100
|
)%
|
Interest expense, net of amounts capitalized, decreased by
$4.8 million
during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, as a result of higher amounts of interest expense capitalized during the
six
months ended
June 26, 2010
.
43
Other expense, net
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Other expense, net
|
$
|
(1,173
|
)
|
|
$
|
(2,429
|
)
|
|
$
|
1,256
|
|
|
(52
|
)%
|
Other expense, net, decreased by
$1.3 million
during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, primarily due to nonrecurring expenses associated with our credit default swaps during the
six
months ended
June 27, 2009
.
Income tax expense
|
|
Six Months Ended
|
|
||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
|
Six Month Period Change
|
||||||||||
|
Income tax expense
|
$
|
44,409
|
|
|
$
|
25,856
|
|
|
$
|
18,553
|
|
|
72
|
%
|
|
Effective tax rate (%)
|
11.8
|
%
|
|
7.0
|
%
|
|||||||||
Income tax expense increased by
$18.6 million
during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, substantially all of which relates to a $4.8 million increase in pre-tax income, a greater percentage of profits earned in higher tax jurisdictions, and a previously recorded tax expense of
$11.5 million
reversed during the six months ended June 27, 2009 upon approval of our request to pull forward the previously approved Malaysian tax holiday to 2008. See Note 16. “Income Taxes,” to the condensed consolidated financial statements included with this quarterly report on Form 10-Q for additional information.
Business Segment Review
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
% Change
|
|
June 26,
2010 |
June 27,
2009 |
% Change
|
||||||||||||||
|
Net sales
|
|||||||||||||||||||||
|
Components
|
$
|
500,940
|
|
$
|
523,734
|
|
(4
|
)%
|
$
|
1,030,208
|
|
$
|
939,731
|
|
10
|
%
|
|||||
|
Systems
|
86,914
|
|
2,142
|
|
N.M
|
125,607
|
|
4,353
|
|
N.M
|
|||||||||||
|
Total
|
$
|
587,854
|
|
$
|
525,876
|
|
12
|
%
|
$
|
1,155,815
|
|
$
|
944,084
|
|
22
|
%
|
|||||
|
Income before income taxes (Segment profit)
|
|||||||||||||||||||||
|
Components
|
$
|
180,438
|
|
$
|
201,298
|
|
(10
|
)%
|
$
|
375,797
|
|
$
|
371,030
|
|
1
|
%
|
|||||
|
Systems
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Total
|
$
|
180,438
|
|
$
|
201,298
|
|
(10
|
)%
|
$
|
375,797
|
|
$
|
371,030
|
|
1
|
%
|
|||||
Our Chief Operating Decision Maker, consisting of senior executive staff, views the sale of solar modules from the components segment as the core driver of our profitability, return on net assets, and cash throughput; and as a result, we view our systems segment as an enabler to drive module throughput. Therefore, we operate our systems segment with the objective to achieve break-even results before income taxes. We include the sale of our solar modules manufactured by the components segment and installed in projects sold by our systems segment in “net sales” of our components business. See Note 20. ”Segment Reporting,” to the consolidated financial statements included with this quarterly report on Form 10-Q for additional information.
Components Segment
44
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
% Change
|
|
June 26,
2010 |
June 27,
2009 |
% Change
|
||||||||||||||
|
Net Sales
|
$
|
500,940
|
|
$
|
523,734
|
|
(4
|
)%
|
$
|
1,030,208
|
|
$
|
939,731
|
|
10
|
%
|
|||||
|
Income before income taxes (Segment profit)
|
$
|
180,438
|
|
$
|
201,298
|
|
(10
|
)%
|
$
|
375,797
|
|
$
|
371,030
|
|
1
|
%
|
|||||
Components segment net sales decreased by 4% during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, primarily due to a decrease in our module average selling price, partially offset by strong demand from German customers in anticipation of reduced subsidies later in the year, an increase in production volume resulting from our manufacturing expansions in Kulim, Malaysia and Perrysburg, Ohio, and continued improvements to our manufacturing processes. Our module average selling price decreased by approximately 15% during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
. The decline in our module average selling price was attributable to the following: an 8% decrease due to competitive pressure (including the commencement of a customer rebate program in the third quarter of 2009), a 6% decrease due to annual contractual agreements, and a 2% decrease due to a decline in the foreign exchange rate between the U.S. dollar and the euro, partially offset by a 1% increase due to a shift in customer mix.
Components segment net sales increased by 10% during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, primarily due to strong demand from German customers in anticipation of reduced subsidies later in the year and an increase in production volume as a result of bringing additional manufacturing lines into full production, resulting in a 32% increase in the MW volume of solar modules sold during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, partially offset by a decrease in our module average selling price. The increase in the MW volume of solar modules sold was attributable to the full production ramp of our four-plant Malaysian manufacturing center, full production ramp of our Perrysburg, Ohio expansion, continued improvements to our manufacturing process, and growth in our systems business.
Components segment profit decreased by 10% during the three months ended
June 26, 2010
compared with the three months ended
June 27, 2009
, primarily due to a decline in our module average selling price and certain one-time expenses, partially offset by reductions in our manufacturing cost per watt and by increased throughput and overhead absorption.
Components segment profit increased by 1% during the
six
months ended
June 26, 2010
compared with the
six
months ended
June 27, 2009
, primarily due to increased throughput and manufacturing cost per watt reductions, partially offset by a decline in our module average selling price and certain one-time expenses.
Systems Segment
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
% Change
|
|
June 26,
2010 |
June 27,
2009 |
% Change
|
||||||||||||||
|
Net sales
|
$
|
86,914
|
|
$
|
2,142
|
|
N.M.
|
$
|
125,607
|
|
$
|
4,353
|
|
N.M.
|
|||||||
|
Income before income taxes (Segment profit)
|
$
|
—
|
|
$
|
—
|
|
—
|
%
|
$
|
—
|
|
$
|
—
|
|
—
|
%
|
|||||
Systems segment net sales increased from a de minimis amount during the three months ended
June 27, 2009
to $86.9 million during the three months ended
June 26, 2010
, reflecting primarily the sale of one utility-scale solar power system in Europe and from two utility-scale solar power systems in the United States.
Systems segment net sales increased from a de minimis amount during the
six
months ended
June 27, 2009
to $125.6 million during the
six
months ended
June 26, 2010
, reflecting primarily the sale of two utility-scale solar power systems in Europe and from two utility-scale solar power systems in the United States.
Systems segment profit was zero for the three and
six
months ended
June 26, 2010
and
June 27, 2009
. As stated above, we operate our systems segment with the objective to achieve breakeven results before income taxes. See Note 20. ”Segment Reporting,” to the consolidated financial statements included with this quarterly report on Form 10-Q for additional information.
Product Revenue
45
The following table sets forth the total amounts of solar modules and solar power systems revenue recognized for the three and six months ended June 26, 2010 and June 27, 2009. For the purposes of the following table, (a) "solar modules" is composed of total revenues from the sale of solar modules to third parties, and (b) "solar power systems" is composed of total revenues from the sale of complete solar power systems and related services.
|
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||
|
(Dollars in thousands)
|
June 26,
2010 |
June 27,
2009 |
June 26,
2010 |
June 27,
2009 |
|||||||||||
|
Solar module revenue
|
$
|
476,061
|
|
$
|
520,543
|
|
$
|
1,004,939
|
|
$
|
933,875
|
|
|||
|
Solar power system revenue
|
111,793
|
|
5,333
|
|
150,876
|
|
10,209
|
|
|||||||
|
Total net sales
|
$
|
587,854
|
|
$
|
525,876
|
|
$
|
1,155,815
|
|
$
|
944,084
|
|
|||
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended
December 26, 2009
filed with the Securities and Exchange Commission. Our critical accounting policies reflect the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 605,
Revenue Recognition - Multiple Deliverable Revenue Arrangements
, in the first quarter of 2010.
Recent Accounting Pronouncements
See Note 3. “Recent Accounting Pronouncements,” to the condensed consolidated financial statements included with this quarterly report on Form 10-Q for a summary of recent accounting pronouncements.
Liquidity and Capital Resources
As of
June 26, 2010
, we had
$960.5 million
in cash, cash equivalents and marketable securities, compared with
$1,114.3 million
as of
December 26, 2009
. We believe that our current cash, cash equivalents, marketable securities, cash flows from operating activities, our revolving credit facility, and access to the capital markets will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, if our financial results or operating plans change from our current assumptions, we may not have sufficient resources to support our business plan.
Our expanding systems business is expected to have increasing liquidity requirements in the future. Solar power project development cycles, which span the time between the identification of land and the commercial operation of a photovoltaic power plant, vary substantially and can take many months or years to mature. As a result of these long project cycles, we may need to make significant up-front investments of resources in advance of the signing of power purchase agreements and EPC contracts and the receipt of any revenue. These amounts include payment of interconnection and other deposits (some of which are non-refundable), entering into of letters of credit, and the incurrence of preliminary engineering, permitting, legal, and other expenses. We have historically financed these up-front investments primarily using working capital and cash on hand. In the future, we may also engage in one or more debt or equity financings. Such financings could result in increased expenses or dilution to our existing stockholders. If we are unable to obtain debt or equity financing on reasonable terms, we may be unable to execute our expansion strategy.
Cash Flows
The following table summarizes the key cash flow metrics for the
six
months ended
June 26, 2010
and
June 27, 2009
(in thousands):
46
|
|
Six Months Ended
|
||||||
|
|
June 26,
2010 |
|
June 27,
2009 |
||||
|
Net cash provided by operating activities
|
$
|
107,600
|
|
|
$
|
82,810
|
|
|
Net cash used in investing activities
|
(223,749
|
)
|
|
(417,735
|
)
|
||
|
Net cash (used in) provided by financing activities
|
(10,297
|
)
|
|
54,150
|
|
||
|
Effect of exchange rates on cash and cash equivalents
|
(27,571
|
)
|
|
(6,283
|
)
|
||
|
Net decrease in cash and cash equivalents
|
$
|
(154,017
|
)
|
|
$
|
(287,058
|
)
|
Operating Activities
Cash provided by operating activities was
$107.6 million
during the
six
months ended
June 26, 2010
, compared with
$82.8 million
during the
six
months ended
June 27, 2009
. The increase in operating cash flows during the six months ended June 26, 2010 was primarily due to an increase in cash received from customers and a decrease in income taxes paid and excess tax benefits recorded, offset by an increase in payments to suppliers and associates.
Cash received from customers increased to
$955.1 million
during the
six
months ended
June 26, 2010
compared with
$671.8 million
during the
six
months ended
June 27, 2009
, primarily due to an increase in net sales from
$944.1 million
during the
six
months ended
June 27, 2009
to
$1,155.8 million
during the
six
months ended
June 26, 2010
. The increase in cash received from customers was offset by an increase in cash paid to suppliers and associates to
$824.4 million
during the
six
months ended
June 26, 2010
from
$506.6 million
during the
six
months ended
June 27, 2009
, mainly due to an increase in raw material and component purchases, an increase in personnel-related costs due to higher headcount, and other costs supporting our growth.
Investing Activities
Cash used in investing activities was
$223.7 million
during the
six
months ended
June 26, 2010
, compared with
$417.7 million
during the
six
months ended
June 27, 2009
. Cash used in investing activities during the
six
months ended
June 26, 2010
included capital expenditures of
$239.5 million
, which increased by
$93.5 million
from
$146.0 million
during the
six
months ended
June 27, 2009
. The increase in capital expenditures was primarily due to construction of two new plants adjacent to our existing plants in Malaysia and the expansion of our plant in Perrysburg, Ohio. Also, during the six months ended June 26, 2010, we used cash to increase our investment in marketable securities by
$4.1 million
and to fund
$43.1 million
for estimated future end-of-life collection and recycling costs of solar modules that we sold during fiscal 2009. Amounts that we set aside for future solar module collection and recycling costs are deposited in a custodial account, under the name of a trust, with a large bank as investment advisor. Amounts in this account are invested in long-term marketable securities, which we classify as restricted investments on our balance sheet. During the
six
months ended
June 26, 2010
, cash provided by investing activities included principal payments of
$61.7 million
received on our notes receivable.
Cash used in investing activities during the
six
months ended
June 27, 2009
resulted primarily from capital expenditures of
$146.0 million
, the net purchase of marketable securities of
$193.1 million
, investments in notes receivable of
$35.4 million
, and an increase in our restricted cash and investments of
$42.4 million
. The increase in capital expenditures was primarily due to the construction of our new plants in Malaysia and the expansion of our plant in Perrysburg, Ohio. The increase in our restricted cash and investments was primarily due to the repayment our term loan with IKB Deutsche Industriebank AG subsequent to
June 27, 2009
. Based on the loan agreement, the amount to be repaid was transferred into a restricted account and was included in our restricted investments as of
June 27, 2009
.
Financing Activities
Cash used in financing activities was
$10.3 million
during the
six
months ended
June 26, 2010
compared with cash provided by financing activities of
$54.2 million
during the
six
months ended
June 27, 2009
. Cash used in financing activities during the
six
months ended
June 26, 2010
resulted primarily from the repayment of long-term debt of
$14.0 million
. This cash usage was partially offset by cash received from stock option exercise proceeds of
$3.7 million
. We did not record any excess tax benefits from share-based compensation arrangements during the six months ended June 26, 2010.
Cash provided by financing activities during the
six
months ended
June 27, 2009
resulted primarily from proceeds from the issuance of debt, net of issuance costs, of
$48.6 million
related to the equipment export financing agreement for our Malaysian manufacturing center. These cash proceeds were partially offset by the repayment of long-term debt of
$14.3 million
. Proceeds from the issuance of common stock during the
six
months ended
June 27, 2009
were
$3.8 million
, mainly due to proceeds received
47
from the exercise of employee stock options. Excess tax benefits from share-based compensation arrangements during the
six
months ended
June 27, 2009
were
$15.4 million
.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of
June 26, 2010
.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the information previously provided under Item 7A of our Annual Report on Form 10-K for the fiscal year ended
December 26, 2009
.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of
June 26, 2010
of the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of
June 26, 2010
our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the fiscal quarter ended
June 26, 2010
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes in our internal control over financial reporting during the fiscal quarter ended
June 26, 2010
.
We are in the process of converting to a new enterprise resource planning (ERP) system. Implementation of the new ERP system is scheduled to occur in phases and we completed Phase I of this implementation on June 27, 2010, the first day of our third fiscal quarter of 2010. For a discussion of risks relating to the implementation of a new ERP system, please see the risk factor entitled “
Implementing a new enterprise resource planning system could interfere with our business or operations and could adversely impact our financial position, results of operations and cash flows
.” in “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 26, 2009.
CEO and CFO Certifications
We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4 be read in conjunction with those certifications for a more complete understanding of the subject matter presented.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems' objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
48
Item 1.
Legal Proceedings
General
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations, and claims, including, but not limited to, routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows, or financial condition.
Item 1A.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended
December 26, 2009
, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. There have been no material changes in the risk factors contained in our Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
During the three months ended June 26, 2010, 9,205 Holdback Shares (as defined below) were issued to OptiSolar Holdings LLC. As previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2009, on April 3, 2009, we completed the acquisition of the solar power project development business (the “Project Business”) of OptiSolar Inc., a Delaware corporation (“OptiSolar”). Pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of March 2, 2009 by and among First Solar, First Solar Acquisition Corp., a Delaware corporation (“Merger Sub”), OptiSolar and OptiSolar Holdings LLC, a Delaware limited liability company (“OptiSolar Holdings”), Merger Sub merged with and into OptiSolar, with OptiSolar surviving as a wholly-owned subsidiary of First Solar (the “Merger”). Pursuant to the Merger, all the outstanding shares of common stock of OptiSolar held by OptiSolar Holdings were exchanged for the Merger Shares. The Merger Shares consisted of 2,972,420 shares of First Solar common stock, par value $0.001 per share, including (i) 732,789 shares that have been issued and deposited with an escrow agent to support certain indemnification obligations of OptiSolar Holdings, and (ii) 355,096 shares that were issuable upon satisfaction of conditions relating to the satisfaction of certain then existing liabilities of OptiSolar (the “Holdback Shares”). The Merger Shares and certain Holdback Shares were issued, and any remaining Holdback Shares will be issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. First Solar has prepared and filed with the Securities and Exchange Commission a registration statement under the Securities Act covering the resale of 2,801,435 of the Merger Shares.
As of June 26, 2010, 343,137 Holdback Shares had been issued to OptiSolar Holdings in the aggregate.
Item 5.
Other Information
On July 27, 2010, the Company's board of directors approved a change in the Company's fiscal year from a 52 or 53 week fiscal year (ending on the Saturday on or before December 31 of each year) to a calendar year. This change to the calendar year reporting cycle will be effective as of the end of the 2010 fiscal year. As a result, the Company's 2010 fiscal year, which began on December 27, 2009, will end on December 31, 2010 instead of December 25, 2010. Because the change in fiscal year is from a 52-53 week fiscal year to a calendar year commencing within seven days of the prior fiscal year end, a transition report covering the period from December 26, 2010 through December 31, 2010 will not be filed pursuant to SEC Release No. 34-26589. In addition, effective January 1, 2011, the Company's fiscal quarters will also change to calendar quarters.
49
Item 6.
Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
|
Exhibit
|
|
|
Number
|
Exhibit Description
|
|
31.01
|
Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.02
|
Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.01*
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS**
|
XBRL Instance Document
|
|
101.SCH**
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF**
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB**
|
XBRL Taxonomy Label Linkbase Document
|
|
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
** Furnished herewith.
50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
FIRST SOLAR, INC.
|
|
By: /s/ JAMES ZHU
|
|
James Zhu
|
|
Principal Accounting Officer
|
July 30, 2010
51
EXHIBIT INDEX
|
Exhibit
|
|
|
Number
|
Exhibit Description
|
|
31.01
|
Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.02
|
Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.01*
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS**
|
XBRL Instance Document
|
|
101.SCH**
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF**
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB**
|
XBRL Taxonomy Label Linkbase Document
|
|
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
** Furnished herewith.
52
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Unaudited Condensed Consolidated Financial StatementsNote 1. Basis Of PresentationNote 2. Summary Of Significant Accounting PoliciesNote 3. Recent Accounting PronouncementsNote 4. AcquisitionsNote 5. GoodwillNote 6. Cash, Marketable Securities, and InvestmentsNote 7. Restricted Cash and InvestmentsNote 8. Consolidated Balance Sheet DetailsNote 9. Derivative Financial InstrumentsNote 10. Fair Value MeasurementNote 11. Related Party TransactionsNote 12. Notes ReceivableNote 13. DebtNote 14. Commitments and ContingenciesNote 15. Share-based CompensationNote 16. Income TaxesNote 17. Net Income Per ShareNote 18. Comprehensive IncomeNote 19. Statement Of Cash FlowsNote 20. Segment ReportingNote 21. Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 5. Other InformationItem 6. Exhibits