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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 26, 2010
 
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from                                                         to                   
 
Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
20-4623678
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
 
(602) 414-9300
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]    No [x]
 
As of 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
 
 
 
Page
Part I. Financial Information (Unaudited)
 
Item 1. Condensed Consolidated Financial Statements:
 
Condensed Consolidated Statements of Operations for the three and six months ended June 26, 2010 and June 27, 2009
 
Condensed Consolidated Balance Sheets as of June 26, 2010 and December 27, 2009
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 26, 2010 and June 27, 2009
 
Notes to Condensed Consolidated Financial Statements
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Item 4. Controls and Procedures
 
Part II. Other Information
 
Item 1. Legal Proceedings
 
Item 1A. Risk Factors
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 5. Other Information
 
Item 6. Exhibits
 
Signature
 
Exhibit Index
 
 
 

 

PART I. FINANCIAL INFORMATION
 
Item 1. Unaudited Condensed Consolidated Financial Statements
 
FIRST SOLAR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 26,
2010
 
June 27,
2009
 
June 26,
2010
 
June 27,
2009
Net sales
$
587,854
 
 
$
525,876
 
 
$
1,155,815
 
 
$
944,084
 
Cost of sales
303,660
 
 
227,780
 
 
589,585
 
 
410,704
 
Gross profit
284,194
 
 
298,096
 
 
566,230
 
 
533,380
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
22,836
 
 
18,605
 
 
45,724
 
 
30,309
 
Selling, general and administrative
78,597
 
 
72,926
 
 
145,461
 
 
122,241
 
Production start-up
2,288
 
 
2,524
 
 
3,431
 
 
8,733
 
Total operating expenses
103,721
 
 
94,055
 
 
194,616
 
 
161,283
 
Operating income
180,473
 
 
204,041
 
 
371,614
 
 
372,097
 
Foreign currency (loss) gain
(2,625
)
 
239
 
 
(3,321
)
 
2,073
 
Interest income
3,035
 
 
1,948
 
 
8,683
 
 
4,051
 
Interest expense, net
(6
)
 
(3,827
)
 
(6
)
 
(4,762
)
Other expense, net
(439
)
 
(1,103
)
 
(1,173
)
 
(2,429
)
Income before income taxes
180,438
 
 
201,298
 
 
375,797
 
 
371,030
 
Income tax expense
21,395
 
 
20,719
 
 
44,409
 
 
25,856
 
Net income
$
159,043
 
 
$
180,579
 
 
$
331,388
 
 
$
345,174
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
1.87
 
 
$
2.16
 
 
$
3.91
 
 
$
4.17
 
Diluted
$
1.84
 
 
$
2.11
 
 
$
3.84
 
 
$
4.10
 
Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
Basic
84,852
 
 
83,723
 
 
84,679
 
 
82,704
 
Diluted
86,401
 
 
85,668
 
 
86,247
 
 
84,140
 
 
See accompanying notes to these condensed consolidated financial statements.
 

1

 

FIRST SOLAR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
June 26,
2010
 
December 26,
2009
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
510,482
 
 
$
664,499
 
Marketable securities and investments
285,993
 
 
120,236
 
Accounts receivable trade, net
256,344
 
 
226,826
 
Accounts receivable, unbilled
105,333
 
 
58
 
Inventories
194,308
 
 
152,821
 
Project assets
109
 
 
1,081
 
Deferred tax asset, net
19,248
 
 
21,679
 
Prepaid expenses and other current assets
244,053
 
 
164,071
 
Total current assets
1,615,870
 
 
1,351,271
 
Property, plant and equipment, net
1,094,877
 
 
988,782
 
Project assets
140,065
 
 
131,415
 
Deferred tax asset, net
157,778
 
 
130,515
 
Marketable securities
164,017
 
 
329,608
 
Restricted cash and investments
81,103
 
 
36,494
 
Investment in related party
25,000
 
 
25,000
 
Goodwill
286,515
 
 
286,515
 
Inventories
30,655
 
 
21,695
 
Other assets
35,435
 
 
48,217
 
Total assets
$
3,631,315
 
 
$
3,349,512
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
68,268
 
 
$
75,744
 
Income tax payable
28,552
 
 
8,740
 
Accrued expenses
183,889
 
 
193,277
 
Current portion of long-term debt
24,465
 
 
28,559
 
Other current liabilities
20,045
 
 
88,607
 
Total current liabilities
325,219
 
 
394,927
 
Accrued solar module collection and recycling liability
101,757
 
 
92,799
 
Long-term debt
114,168
 
 
146,399
 
Other liabilities
77,925
 
 
62,600
 
Total liabilities
619,069
 
 
696,725
 
Stockholders' equity:
 
 
 
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
86
 
 
85
 
Additional paid-in capital
1,694,607
 
 
1,658,091
 
Contingent consideration
1,607
 
 
2,844
 
Accumulated earnings
1,332,750
 
 
1,001,363
 
Accumulated other comprehensive loss
(16,804
)
 
(9,596
)
Total stockholders' equity
3,012,246
 
 
2,652,787
 
Total liabilities and stockholders' equity
$
3,631,315
 
 
$
3,349,512
 
 
See accompanying notes to these condensed consolidated financial statements.
 

2

 

FIRST SOLAR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
 
 
June 26,
2010
 
June 27,
2009
Cash flows from operating activities:
 
 
 
Cash received from customers
$
955,086
 
 
$
671,786
 
Cash paid to suppliers and associates
(824,407
)
 
(506,638
)
Interest received
12,560
 
 
3,294
 
Interest paid
(2,551
)
 
(4,714
)
Income taxes paid, net of refunds
(31,712
)
 
(64,597
)
Excess tax benefit from share-based compensation arrangements
 
 
(15,351
)
Other operating activities
(1,376
)
 
(970
)
Net cash provided by operating activities
107,600
 
 
82,810
 
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(239,506
)
 
(145,966
)
Purchases of marketable securities and investments
(267,304
)
 
(264,881
)
Proceeds from maturities of marketable securities and investments
59,256
 
 
42,000
 
Proceeds from sales of marketable securities and investments
203,903
 
 
29,783
 
Investment in notes receivable
 
 
(35,383
)
Payments received on notes receivables
61,658
 
 
 
Increase in restricted investments
(43,064
)
 
(42,439
)
Acquisitions, net of cash acquired
 
 
318
 
Other investing activities
1,308
 
 
(1,167
)
Net cash used in investing activities
(223,749
)
 
(417,735
)
Cash flows from financing activities:
 
 
 
Proceeds from stock option exercises
3,709
 
 
3,820
 
Repayment of long-term debt
(14,004
)
 
(14,256
)
Proceeds from issuance of debt, net of issuance costs
 
 
48,622
 
Excess tax benefit from share-based compensation arrangements
 
 
15,351
 
Proceeds from economic development funding
 
 
615
 
Other financing activities
(2
)
 
(2
)
Net cash (used in) provided by financing activities
(10,297
)
 
54,150
 
Effect of exchange rate changes on cash and cash equivalents
(27,571
)
 
(6,283
)
Net decrease in cash and cash equivalents
(154,017
)
 
(287,058
)
Cash and cash equivalents, beginning of the period
664,499
 
 
716,218
 
Cash and cash equivalents, end of the period
$
510,482
 
 
$
429,160
 
Supplemental disclosure of noncash investing and financing activities:
 
 
 
Property, plant and equipment acquisitions funded by liabilities
$
30,457
 
 
$
48,041
 
 
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
 
Note 1. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (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.
 
 
Note 2. Summary of Significant Accounting Policies
 
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.
 
 
Note 3. Recent Accounting Pronouncements
 
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

 

Note 4. Acquisitions
 
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.
 
Note 5. Goodwill
 
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

 

Note 6. Cash, Marketable Securities, and Investments
 
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
 
 
 
Note 7. Restricted Cash and Investments
 
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.
 
 
Note 8. Consolidated Balance Sheet Details
 
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
 
 
 
Note 9. Derivative Financial Instruments
 
As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our 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.
 
 
Note 10. Fair Value Measurement
 
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.
 
 
Note 11. Related Party Transactions
 
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.
 
 
Note 12. Notes Receivable
 
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.