Edgar Filing: FIRST SOLAR, INC.

FSLR Sep12 10q Draft

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)



[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2012
or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number: 001-33156

First Solar, Inc.

(Exact name of registrant as specified in its charter)



Delaware	20-4623678
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

350 West Washington Street, Suite 600

Tempe, Arizona 85281

(Address of principal executive offices, including zip code)

(602) 414-9300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 October 26, 2012, 87,027,809 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.

FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS



		Page
Part I.	Financial Information (Unaudited)
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and September 30, 2011	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and September 30, 2011	4
	Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	73
Part II.	Other Information	74
Item 1.	Legal Proceedings	74
Item 1A.	Risk Factors	74
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	75
Signature		76

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						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Net sales	$	839,147		$	1,005,788		$	2,293,534		$	2,105,855
Cost of sales	600,431			626,624			1,734,332			1,272,228
Gross profit	238,716			379,164			559,202			833,627
Operating expenses:
Research and development	32,372			38,164			100,821			102,617
Selling, general and administrative	73,507			112,743			217,511			286,615
Production start-up	1,595			5,514			6,186			27,739
Restructuring	24,197			—			444,262			—
Total operating expenses	131,671			156,421			768,780			416,971
Operating income (loss)	107,045			222,743			(209,578		)	416,656
Foreign currency gain (loss)	3			(1,857		)	34			752
Interest income	3,405			3,225			9,695			9,665
Interest expense, net	(2,902		)	—			(11,194		)	—
Other income (expense), net	3,210			(1,346		)	665			656
Income (loss) before income taxes	110,761			222,765			(210,378		)	427,729
Income tax expense	22,844			26,251			40,138			54,109
Net income (loss)	$	87,917		$	196,514		$	(250,516	)	$	373,620
Net income (loss) per share:
Basic	$	1.01		$	2.28		$	(2.89	)	$	4.35
Diluted	$	1.00		$	2.25		$	(2.89	)	$	4.29
Weighted-average number of shares used in per share calculations:
Basic	86,992			86,338			86,785			85,946
Diluted	87,765			87,151			86,785			87,114

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Net income (loss)	$	87,917		$	196,514		$	(250,516	)	$	373,620
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	2,600			(25,419		)	6,314			5,170
Unrealized gain on marketable securities and restricted investments	11,009			30,371			19,571			18,897
Unrealized (loss) gain on derivative instruments	(9,879		)	55,370			(22,594		)	23,851
Other comprehensive income, net of tax	3,730			60,322			3,291			47,918
Comprehensive income (loss)	$	91,647		$	256,836		$	(247,225	)	$	421,538

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	614,699		$	605,619
Marketable securities	102,295			66,146
Accounts receivable trade, net	467,640			310,568
Accounts receivable, unbilled	398,945			533,399
Inventories	537,567			475,867
Balance of systems parts	125,012			53,784
Deferred project costs	143,392			197,702
Deferred tax assets, net	37,361			41,144
Assets held for sale	49,521			—
Note receivable affiliate	17,408			—
Prepaid expenses and other current assets	216,196			329,032
Total current assets	2,710,036			2,613,261
Property, plant and equipment, net	1,549,689			1,815,958
Project assets	250,812			374,881
Deferred project costs	374,941			122,688
Deferred tax assets, net	328,263			340,274
Marketable securities	—			116,192
Restricted cash and investments	285,573			200,550
Goodwill	65,444			65,444
Inventories	136,896			60,751
Other assets	280,075			67,615
Total assets	$	5,981,729		$	5,777,614
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	235,744		$	176,448
Income taxes payable	6,982			9,541
Accrued expenses	575,156			406,659
Current portion of long-term debt	61,398			44,505
Deferred revenue	534			41,925
Other current liabilities	260,013			294,646
Total current liabilities	1,139,827			973,724
Accrued solar module collection and recycling liability	213,407			167,378
Long-term debt	468,294			619,143
Other liabilities	702,047			373,506
Total liabilities	2,523,575			2,133,751
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 87,021,447 and 86,467,873 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	87			86
Additional paid-in capital	2,084,257			2,022,743
Accumulated earnings	1,375,555			1,626,071
Accumulated other comprehensive loss	(1,745		)	(5,037		)
Total stockholders’ equity	3,458,154			3,643,863
Total liabilities and stockholders’ equity	$	5,981,729		$	5,777,614

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	September 30, 2012			September 30, 2011
Cash flows from operating activities:
Cash received from customers	$	2,300,563		$	1,570,183
Cash paid to suppliers and associates	(1,811,748		)	(1,488,358		)
Interest received	3,644			8,287
Interest paid	(16,982		)	(7,826		)
Income tax refunds (payments), net	22,418			(44,052		)
Excess tax benefit from share-based compensation arrangements	(61,571		)	(79,741		)
Other operating activities	(1,674		)	(2,690		)
Net cash provided by (used in) operating activities	434,650			(44,197		)
Cash flows from investing activities:
Purchases of property, plant and equipment	(339,213		)	(613,861		)
Purchases of marketable securities and investments	(18,842		)	(195,819		)
Proceeds from sales and maturities of marketable securities and investments	98,857			424,967
Investment in note receivable, affiliate	(21,659		)	—
Payments received on note receivable, affiliate	4,369			—
Purchase of restricted investments	(80,667		)	(62,748		)
Change in restricted cash	20,264			(23,358		)
Acquisitions, net of cash acquired	(2,437		)	(21,105		)
Other investing activities	(5,000		)	(10,239		)
Net cash used in investing activities	(344,328		)	(502,163		)
Cash flows from financing activities:
Proceeds from stock option exercises	71			7,993
Repayments of borrowings under revolving credit facility	(780,000		)	—
Proceeds from borrowings under revolving credit facility	815,000			—
Repayments of long-term debt	(173,212		)	(327,821		)
Proceeds from borrowings under long-term debt, net of discount and issuance costs	—			694,399
Excess tax benefit from share-based compensation arrangements	61,571			79,741
(Repayment of) proceeds from economic development funding	(6,820		)	4,286
Other financing activities	(837		)	(296		)
Net cash (used in) provided by financing activities	(84,227		)	458,302
Effect of exchange rate changes on cash and cash equivalents	2,985			929
Net increase (decrease) in cash and cash equivalents	9,080			(87,129		)
Cash and cash equivalents, beginning of the period	605,619			765,689
Cash and cash equivalents, end of the period	$	614,699		$	678,560
Supplemental disclosure of noncash investing and financing activities:
Property, plant and equipment acquisitions funded by liabilities	$	56,590		$	81,579
Settlement of long-term debt	$	4,802		$	—

See accompanying notes to these condensed consolidated financial statements.

FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or for any other period. The condensed consolidated balance sheet at December 31, 2011 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 31, 2011 included in our Annual Report on Form 10-K filed with the SEC.

During the nine months ended September 30, 2012, the Company corrected certain errors that had overstated net loss by $7.8 million for the year ended December 31, 2011, with such correction having the effect of reducing net loss by $7.8 million for the nine months ended September 30, 2012. Management has determined that the errors and correction did not have a material effect on current or prior periods.

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

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

Note 2. Summary of Significant Accounting Policies

Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Significant estimates in these condensed consolidated financial statements include revenue recognition, inventory valuation, estimates of future cash flows from and the economic useful lives of long-lived assets, certain accrued liabilities, income taxes and tax valuation allowances, reportable segment allocations, accrued warranty and related expense, accrued collection and recycling expense, and fair value estimates. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from these estimates and assumptions.

Product Warranties. We provide a limited warranty against defects in materials and workmanship under normal use and service conditions for 10 years following delivery to the owners of our solar modules.

We also typically warrant to the owners of our solar modules that solar modules installed in accordance with agreed-upon specifications will produce at least 90% of their labeled power output rating during the first 10 years following their installation and at least 80% of their labeled power output rating during the following 15 years. In resolving claims under both the defects and power output warranties, we have the option of either repairing or replacing the covered solar module or, under the power output warranty, providing additional solar modules to remedy the power shortfall. We also have the option to make a payment for the then current market price for solar modules to resolve claims. Our warranties are automatically transferred from the original purchasers of our solar modules to subsequent purchasers upon resale.

As an alternative to our module power output warranty, we have offered a system level module performance warranty for a limited number of our recent system sales. This system level module performance warranty is designed for utility scale systems and provides a 25 year plant-level energy degradation protection. The system level module performance warranty is calculated as a percentage of a systems expected energy production, adjusted for certain actual site conditions, with the warranted level of performance declining each year in a linear fashion, but never falling below 80% during the term of the warranty. In resolving claims under the system level module performance warranty to restore the system to warranted performance levels, we first must validate that the root cause is due to module performance, then we typically have the option of either repairing or replacing modules, providing supplemental modules or making a cash payment. Consistent with our module power output warranty, when we elect

to satisfy a valid warranty claim by providing replacement or supplement modules under the system level module performance warranty, we do not have any labor obligation to remove or install modules.

In addition to our solar module warranty described above, for solar power plants built by our systems business, we typically provide a limited warranty on the balance of the system (“BoS”) against defects in engineering design, installation, and workmanship for a period of one to two years following the substantial completion of a phase or the entire solar power plant. In resolving claims under the engineering design, installation, and workmanship warranties, we have the option of remedying the defect through repair, or replacement.

When we recognize revenue for module or systems project sales, we accrue a liability for the estimated future costs of meeting our limited warranty obligations. We make and revise these estimates based primarily on the number of our solar modules under warranty, our historical experience with warranty claims, our monitoring of field installation sites, our internal testing of and the expected future performance of our solar modules and BoS components, and our estimated per-module replacement cost.

From time to time we have taken remediation actions in respect of affected modules beyond our limited warranty, and we may elect to do so in the future, in which case we would incur additional expenses. Such potential voluntary future remediation actions beyond our limited warranty obligation may be material to our condensed consolidated statement of operations if we commit to any such remediation actions.

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

For systems business sales arrangements that do not include land or land rights and thus are accounted for under ASC 605, we use the percentage-of-completion method using actual costs incurred over total estimated costs to construct a project (including module costs) as our standard accounting policy, unless we cannot make reasonably dependable estimates of the costs to complete the contract, in which case we would use the completed contract method. We periodically revise our contract cost, revenue, and profit estimates and we immediately recognize any losses that we identify on such contracts. Incurred costs include all installed direct materials, installed solar modules, labor, subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, and tools. We recognize direct material and solar module costs as incurred costs when the direct materials and solar modules have been installed in the project. When contracts specify that title to direct materials and solar modules transfers to the customer before installation has been performed, we will not recognize revenue or associated costs until those materials are installed and have met all other revenue recognition requirements. We consider direct materials and solar modules to be installed when they are permanently attached or fitted to the solar power systems as required by engineering designs. Solar modules used in our solar power systems, which we still hold title to, remain within inventory until such modules are installed in a solar power system.

For systems business sales arrangements that are accounted for under ASC 360, we record the sale as revenue using one of the following revenue recognition methods, based upon the substance and form of the terms and conditions of such sales arrangements:

(i) We apply the percentage-of-completion method to certain sales arrangements covered under ASC 360, when a sale has been consummated, we have transferred the usual risks and rewards of ownership to the buyer, the initial and continuing investment criteria have been met, we have the ability to estimate our costs and progress toward completion, and all other revenue recognition criteria have been met. The initial and continuing investment requirements, which demonstrate a buyer’s commitment to honor their obligations for the sales arrangement, can be met through the receipt of cash or an irrevocable letter of credit from a highly credit worthy lending institution.

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

(iii) We may also record revenue for certain sales arrangements after construction of a project is substantially complete, we have transferred the usual risks and rewards of ownership to the buyer, and we have received substantially all payments due from the buyer.

Inventories. We report our inventories at the lower of cost or market. We determine cost on a first-in, first-out basis and include both the costs of acquisition and the costs of manufacturing in our inventory costs. These costs include direct material, direct labor, and indirect manufacturing costs, including depreciation and amortization. Our capitalization of costs into inventory is based on

normal utilization of our plants. If production capacity is abnormally underutilized, the portion of our indirect manufacturing costs related to the abnormal underutilization levels is expensed as incurred.

We regularly review the cost of inventory against its estimated market value and record a lower of cost or market write-down if any inventories have a cost in excess of their estimated market value. We also regularly evaluate the quantities and values of our inventories in light of current market conditions and market trends and record write-downs for any quantities in excess of demand and for any product obsolescence. This evaluation considers the use of modules in our systems business, historical usage, expected demand, anticipated sales price, desired strategic raw material requirements, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability, and other factors.

Long-Lived Assets. We account for any impairment of our long-lived tangible assets and definite-lived intangible assets in accordance with ASC 360, Property, Plant and Equipment. As a result, we assess long-lived assets classified as “held and used,” including our property, plant and equipment, for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of our long-lived assets may not be recoverable. These events and changes can include significant current period operating or cash flow losses associated with the use of a long-lived asset, or group of assets, combined with a history of such losses, significant changes in the manner of use of assets, and current expectations that, it is more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Idle Property, Plant and Equipment. For property, plant and equipment that has been placed into service, but is subsequently idled temporarily, we continue to record depreciation expense over the remaining estimated useful life of the idled property, plant and equipment.

Retainage. Certain of the engineering, procurement, and construction (“EPC”) contracts for solar power plants we build contain retainage provisions. Retainage refers to the portion of the contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. We consider whether collectability of such retainage is reasonably assured in connection with our overall assessment of the collectability of amounts due or that will become due under our EPC contracts. Retainage expected to be collected within the next 12 months is classified within accounts receivable, unbilled on the condensed consolidated balance sheet. Retainage expected to be collected after 12 months is classified within other assets on the condensed consolidated balance sheet. After we have met the EPC contract requirements to bill for retainage, we will reclassify such amounts to accounts receivable trade.

Refer to Note 2. “Summary of Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 for a complete discussion of our significant accounting policies.

Note 3. Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities, which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of their financial statements to understand the effect of those arrangements on their financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. We do not expect the adoption of ASU 2011-11 in the first quarter of 2013 to have an impact on our consolidated financial position, results of operations, or cash flows.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 gives companies an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate it is more-likely-than-not that an indefinite-lived intangible asset is impaired. If based on its qualitative assessment, a company concludes that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect the adoption of ASU 2012-02 in the first quarter of 2013 to have an impact on our consolidated financial position, results of operations, or cash flows.

Note 4. Restructuring

December 2011 Restructuring

In December 2011, executive management approved a set of restructuring initiatives intended to accelerate operating cost reductions and improve overall operating efficiency. In connection with these restructuring initiatives, we incurred total charges to operating expense of $60.4 million in the fourth quarter of 2011 and $0.3 million in the first nine months of 2012. These charges consisted of (i) $52.4 million of asset impairment and asset impairment related charges due to a significant reduction in certain research and development activities that had been focused on an alternative photovoltaic (“PV”) product, and (ii) $8.3 million in severance benefits to terminated employees as described below, most of which is expected to be paid out by the end of 2012.

We have refocused our research and development center in Santa Clara, California on the development of advanced cadmium telluride PV technologies, compared to a broader research and development effort prior to December 2011. We eliminated approximately 100 positions company-wide as part of the restructuring initiatives. The related long-lived assets were considered abandoned for accounting purposes and were impaired to their estimated salvage value as of December 31, 2011.

The following table summarizes the balance at December 31, 2011, the activity during the nine months ended September 30, 2012, and the balance at September 30, 2012 (in thousands):



December 2011 Restructuring	Asset Impairments			Asset Impairment Related Costs			Severance and Termination Related Costs			Total
Ending Balance at December 31, 2011	$	—		$	2,346		$	6,807		$	9,153
Charges to Income	—			—			1,216			1,216
Change in Estimates	—			—			—			—
Cash Payments	—			(158		)	(3,905		)	(4,063		)
Non-Cash Amounts	—			—			(166		)	(166		)
Ending Balance at March 31, 2012	—			2,188			3,952			6,140
Charges to Income	747			—			264			1,011
Change in Estimates	—			(1,933		)	—			(1,933		)
Cash Payments	—			—			(1,649		)	(1,649		)
Non-Cash Amounts	(747		)	—			(264		)	(1,011		)
Ending Balance at June 30, 2012	—			255			2,303			2,558
Charges to Income	—			—			—			—
Change in Estimates	—			—			—			—
Cash Payments	—			—			(2,094		)	(2,094		)
Non-Cash Amounts	—			—			—			—
Ending Balance at September 30, 2012	$	—		$	255		$	209		$	464

Expenses recognized for the above restructuring activities are presented in “Restructuring” on the condensed consolidated statements of operations. Substantially all expenses related to the December 2011 restructuring were related to our components segment. We do not expect to incur additional expense related to such restructuring initiatives.

February 2012 Manufacturing Restructuring

In February 2012, executive management completed an evaluation of and approved a set of manufacturing capacity and other initiatives primarily intended to adjust our previously planned manufacturing capacity expansions and global manufacturing footprint. The primary goal of these initiatives was to better align production capacity and geographic location of such capacity with expected geographic market requirements and demand. In connection with these initiatives, we incurred total charges to operating expense of $131.6 million during the nine months ended September 30, 2012. These charges consisted of (i) $99.3 million of asset impairment and asset impairment related charges due to our decision not to proceed with our 4-line manufacturing plant in Vietnam, (ii) $25.3 million of asset impairment and asset impairment related charges due to our decision to cease use of certain manufacturing machinery and equipment intended for use in the production of certain components of our solar modules, and (iii) $7.0 million of asset impairment and asset impairment related charges primarily due to our decision to cease use of certain other long-lived assets.

Based upon expected future market demand and our focus on providing utility-scale PV generation solutions primarily to sustainable geographic markets, we decided not to proceed with our previously announced 4-line plant in Vietnam. As of March 31, 2012, the plant was considered “held for sale”, and a corresponding impairment charge of $92.2 million was recorded. The

Vietnam plant is classified as assets held for sale in the condensed consolidated balance sheet. The carrying amount of the Vietnam plant represents the fair value of the plant less expected costs to sell, with fair value being determined based upon a weighted approach using both the cost and income methods of valuation using market participant assumptions based primarily on observable inputs. Such fair value measurements are considered Level 2 measurements within the fair value hierarchy.

Additionally, certain manufacturing machinery and equipment intended for use in the production of certain components of our solar modules and certain other long-lived assets were considered abandoned for accounting purposes in February 2012. As a result, we recorded impairment charges of $29.2 million.

The following table summarizes the February 2012 manufacturing restructuring amounts recorded during the three and nine months ended September 30, 2012 and the remaining balance at September 30, 2012 (in thousands):



February 2012 Manufacturing Restructuring	Asset Impairments			Asset Impairment Related Costs			Total
Charges to Income	$	121,190		$	8,265		$	129,455
Changes in Estimates	—			—			—
Cash Payments	—			—			—
Non-Cash Amounts	(121,190		)	$	(2,877	)	(124,067		)
Ending Balance at March 31, 2012	—			5,388			5,388
Charges to Income	1,575			214			1,789
Changes in Estimates	519			(128		)	391
Cash Payments	—			(172		)	(172		)
Non-Cash Amounts	(2,094		)	235			(1,859		)
Ending Balance at June 30, 2012	—			5,537			5,537
Charges to Income	—			—			—
Changes in Estimates	—			—			—
Cash Payments	—			—			—
Non-Cash Amounts	—			(284		)	(284		)
Ending Balance at September 30, 2012	$	—		$	5,253		$	5,253

Expenses recognized for the restructuring activities above are presented in “Restructuring” on the condensed consolidated statements of operations. All expenses related to the February 2012 manufacturing restructuring were related to our components segment. We do not expect to incur any additional expense for the above restructuring initiatives.

April 2012 European Restructuring

In April 2012, executive management approved a set of restructuring initiatives intended to align the organization with our Long Term Strategic Plan including expected sustainable market opportunities and to reduce costs. As part of these initiatives, we will substantially reduce our European operations including the closure of our manufacturing operations in Frankfurt (Oder), Germany by the end of 2012. Due to the lack of policy support for utility-scale solar projects in Europe, we do not believe there is a business case for continuing manufacturing operations in Germany. Additionally, we will substantially reduce the size of our operations in Mainz, Germany and elsewhere in Europe. We also temporarily idled the capacity of four production lines at our manufacturing center in Kulim, Malaysia in May 2012. These actions, combined with additional reductions in administrative and other staff in North America, will reduce First Solar’s workforce by approximately 2,000 associates once completed. After such actions are completed, First Solar’s manufacturing operations will consist of 24 production lines in Kulim, Malaysia and four production lines in Perrysburg, Ohio, with a global workforce of approximately 6,000 associates.

The restructuring and related initiatives resulted in total charges of $312.3 million in the nine months ended September 30, 2012, including: (i) $231.0 million in asset impairments and asset impairment related charges, primarily related to the Frankfurt (Oder) plants; (ii) $50.9 million in severance and termination related costs; and (iii) $30.4 million for the required repayment of German government grants related to the second Frankfurt (Oder) plant.

Based primarily upon expected future market demand and the lack of policy support for utility-scale solar projects in Europe, we do not believe there is a business case for continuing manufacturing operations in Germany. We concluded that an impairment indicator existed as of March 31, 2012 related to our asset group that includes our manufacturing operations in Germany as it was

considered more-likely-than-not that operations for such asset group would be closed, and accordingly we performed a recoverability test in accordance with ASC 360. In performing the recoverability test, we concluded that the long-lived asset group was not recoverable after comparing the undiscounted future cash flows based on our own expected use and eventual disposition of the asset group at market value, to the asset group’s carrying value. Such recoverability test included future cash flow assumptions that contemplated the potential closure of our manufacturing operations in Germany at the end of 2012.

As the asset group was not considered recoverable, we determined the fair value of the long-lived assets in the asset group in accordance with ASC 360 and ASC 820 based primarily on the cost method of valuation for the personal property and a weighted income method of valuation for the real property. Such fair value measurements for the personal and real property are considered Level 3 and Level 2 fair value measurements in the fair value hierarchy, respectively. We recorded an impairment charge of $225.0 million primarily related to the long-lived assets at our Frankfurt (Oder) plants. As the long-lived assets for our Frankfurt (Oder) plants are considered held and used under ASC 360, we continue to record depreciation expense over the estimated useful life of such assets using the new cost basis.

The following table summarizes the April 2012 European restructuring amounts recorded during the three and nine months ended September 30, 2012 and the remaining balance at September 30, 2012 (in thousands):



April 2012 Restructuring	Asset Impairments			Asset Impairment Related Costs			Severance and Termination Related Costs			Grant Repayments			Total
Charges to Income	224,226			5,844			10,502			29,822			270,394
Change in Estimates	—			—			—			—			—
Cash Payments	—			—			—			—			—
Non-Cash Amounts	(224,226		)	—			—			(14,693		)	(238,919		)
Ending Balance at March 31, 2012	—			5,844			10,502			15,129			31,475
Charges to Income	766			—			16,812			452			18,030
Change in Estimates	—			(289		)	—			—			(289		)
Cash Payments	—			—			(5,877		)	(7,044		)	(12,921		)
Non-Cash Amounts	(766		)	—			—			—			(766		)
Ending Balance at June 30, 2012	—			5,555			21,437			8,537			35,529
Charges to Income	501			—			23,579			117			24,197
Change in Estimates	—			—			—			—			—
Cash Payments	—			—			(6,281		)	—			(6,281		)
Non-Cash Amounts	(501		)	83			(2,359		)	(583		)	(3,360		)
Ending Balance at September 30, 2012	$	—		$	5,638		$	36,376		$	8,071		$	50,085

Expenses recognized for the restructuring activities are presented in “Restructuring” on the condensed consolidated statements of operations. Substantially all expenses related to the April 2012 restructuring were related to our components segment. We expect to incur between $20 million and $40 million in additional restructuring expense through the first half of 2013 primarily related to remaining severance and termination related costs and asset impairment related costs associated with such restructuring initiatives.

Note 5. Acquisitions

Ray Tracker

On January 4, 2011, we acquired 100% of the ownership interest of Ray Tracker, Inc. (“Ray Tracker”), a tracking technology and photovoltaic balance of systems parts business in an all-cash transaction, which was not material to our condensed consolidated balance sheets and results of operations. We have included the financial results of Ray Tracker in our condensed consolidated financial statements from the date of acquisition.

Note 6. Goodwill

The changes in the carrying amount of goodwill, which is generally deductible for tax purposes, for our components and systems reporting units for the nine months ended September 30, 2012 were as follows (in thousands):



	Components		Systems		Consolidated
Ending balance, December 31, 2011	$	—	$	65,444	$	65,444
Ending balance, September 30, 2012	$	—	$	65,444	$	65,444

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

In performing a goodwill impairment test under ASC 350, we may first make a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. If it is determined through the qualitative assessment that a reporting unit’s fair value is more-likely-than-not greater than its carrying value, the two-step quantitative impairment test is not required. If the qualitative assessment indicates it is more-likely-than-not that a reporting unit’s fair value is not greater than its carrying value, we must perform the two-step quantitative impairment test. We may also elect to proceed directly to the two-step impairment test without considering such qualitative factors.

During the fourth quarter of 2011, we commenced our annual goodwill impairment test for 2011 and after considering qualitative factors including the continuing reduction in our market capitalization during December 2011 and our new business strategy and 2012 outlook announced in December 2011, we concluded that a two-step goodwill quantitative impairment test was required for both of our reporting units.

In performing the first step of the two-step quantitative impairment test, we determined that the fair value of our systems reporting unit exceeded the carrying value by a significant amount indicating no impairment was necessary for the systems reporting unit in the fourth quarter of 2011.

We also performed the first and second steps of the two-step quantitative impairment test for the components reporting unit and determined that the implied fair value of goodwill in the components reporting unit was zero. As a result, we impaired all of the goodwill in the components reporting unit in the fourth quarter of 2011. As of December 31, 2011 and September 30, 2012, our gross goodwill and accumulated goodwill impairment losses were $393.4 million for our components reporting unit.

As of September 30, 2012, we made an assessment of whether it was more-likely-than-not that the systems reporting unit’s fair value was less than its carrying value to determine whether an interim goodwill impairment test should be performed. The events and circumstances that we considered in this assessment included our restructuring activities and the decline in our stock price since the date of our last annual goodwill impairment test. We expect our restructuring activities to primarily impact the components reporting unit with a limited unfavorable impact to the operating results or cash flows of our systems reporting unit. We also considered the decline in our stock price and related market capitalization since our last annual goodwill impairment test. Our assessment of whether an interim impairment test should be performed in the third quarter of 2012 also considered that the first step of our last annual goodwill impairment test indicated the fair value of our systems reporting unit exceeded the carrying value by a significant amount. Other factors that we considered included the expectation that our forecasted cash inflows related to our systems business project pipeline and related contract pricing has not changed significantly since our last annual goodwill impairment test. Based upon the weight of the positive, negative and neutral qualitative factors, we concluded it was more-likely-than-not that the fair value of our systems reporting unit was greater than its carrying value and as a result, an interim goodwill impairment test was not required as of September 30, 2012.

Note 7. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Cash:
Cash	$	602,560	$	579,241
Cash equivalents:
Commercial paper	1,500		—
Money market mutual funds	10,639		26,378
Total cash and cash equivalents	614,699		605,619
Marketable securities:
Commercial paper	3,394		9,193
Corporate debt securities	26,962		55,011
Federal agency debt	24,526		50,081
Foreign agency debt	5,916		10,928
Foreign government obligations	5,156		9,120
Supranational debt	34,335		45,991
U.S. government obligations	2,006		2,014
Total marketable securities	102,295		182,338
Total cash, cash equivalents, and marketable securities	$	716,994	$	787,957

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 other comprehensive income. We report realized gains and losses on the sale or maturity of our marketable securities in earnings, computed using the specific identification method. We may sell these securities prior to their stated maturities after consideration of our liquidity requirements. We view securities with maturities beyond 12 months as available to support current operations, and accordingly we classify all such securities as current assets under the caption marketable securities in the accompanying condensed consolidated balance sheet. During the three and nine months ended September 30, 2012, we realized an immaterial amount of gains and an immaterial amount of losses on our marketable securities. During the three and nine months ended September 30, 2011, we realized an immaterial amount and $0.9 million, respectively, of gains and an immaterial amount of losses on our marketable securities. See Note 11. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the fair value of our marketable securities.

All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable security to be impaired when its fair value is less than its cost, in which case we would further review the marketable security to determine whether it is other-than-temporarily impaired. When we evaluate a marketable security for other-than-temporary impairment, we review factors such as the length of time and extent to which its fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more-likely-than-not that we will be required to sell the marketable security before we have recovered its cost basis. If a marketable security were other-than-temporarily impaired, we would write it down through earnings to its impaired value and establish that as a new cost basis. We did not identify any of our marketable securities as other-than-temporarily impaired at September 30, 2012 and December 31, 2011.

The following tables summarize the unrealized gains and losses related to our marketable securities, by major security type, as of September 30, 2012 and December 31, 2011 (in thousands):



	As of September 30, 2012
Security Type	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Commercial paper	$	3,395	$	—	$	1	$	3,394
Corporate debt securities	26,927		35		—		26,962
Federal agency debt	24,473		53		—		24,526
Foreign agency debt	6,005		—		89		5,916
Foreign government obligations	5,149		7		—		5,156
Supranational debt	34,247		88		—		34,335
U.S. government obligations	1,999		7		—		2,006
Total	$	102,195	$	190	$	90	$	102,295



	As of December 31, 2011
Security Type	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Commercial paper	$	9,192	$	1	$	—	$	9,193
Corporate debt securities	55,150		13		152		55,011
Federal agency debt	50,035		54		8		50,081
Foreign agency debt	11,473		—		545		10,928
Foreign government obligations	9,128		1		9		9,120
Supranational debt	46,380		—		389		45,991
U.S. government obligations	1,999		15		—		2,014
Total	$	183,357	$	84	$	1,103	$	182,338

Contractual maturities of our marketable securities as of September 30, 2012 and December 31, 2011 were as follows (in thousands):



	As of September 30, 2012
Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
One year or less	$	72,379	$	73	$	90	$	72,362
One year to two years	26,897		102		—		26,999
Two years to three years	2,919		15		—		2,934
Total	$	102,195	$	190	$	90	$	102,295



	As of December 31, 2011
Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
One year or less	$	66,146	$	30	$	30	$	66,146
One year to two years	97,538		54		854		96,738
Two years to three years	19,673		—		219		19,454
Total	$	183,357	$	84	$	1,103	$	182,338

The net unrealized gain of $0.1 million and loss of $1.0 million as of September 30, 2012 and December 31, 2011, respectively, on our marketable securities were primarily the result of changes in interest rates. Our investment policy requires marketable securities to be highly rated and limits the security types, issuer concentration, and duration to maturity of our marketable securities.

The following table shows gross unrealized losses and estimated fair values for those marketable securities and investments that were in an unrealized loss position as of September 30, 2012 and December 31, 2011, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):



	As of September 30, 2012
	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
Commercial Paper	$	1,695	$	1	$	—	$	—	$	1,695	$	1
Foreign agency debt	5,916		89		—		—		5,916		89
Total	$	7,611	$	90	$	—	$	—	$	7,611	$	90



	As of December 31, 2011
	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
Corporate debt securities	$	47,763	$	152	$	—	$	—	$	47,763	$	152
Federal agency debt	6,744		8		—		—		6,744		8
Foreign agency debt	8,176		545		—		—		8,176		545
Foreign government obligations	6,361		9		—		—		6,361		9
Supranational debt	45,991		389		—		—		45,991		389
Total	$	115,035	$	1,103	$	—	$	—	$	115,035	$	1,103

Note 8. Restricted Cash and Investments

Restricted cash and investments consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Restricted cash, noncurrent	$	179	$	21,735
Restricted investments, noncurrent	285,394		178,815
Restricted cash and investments, noncurrent (1)	$	285,573	$	200,550


(1)	There is $1.0 million of restricted cash included within prepaid expenses and other current assets.

On May 18, 2011, in connection with the plant expansion at our German manufacturing center, First Solar Manufacturing GmbH (“FSM GmbH”), our indirect wholly owned subsidiary, entered into a credit facility agreement (“German Facility Agreement”). Pursuant to the German Facility Agreement, FSM GmbH was required to maintain a euro-denominated debt service reserve account in the amount of €16.6 million ($21.6 million at the balance sheet close rate on December 31, 2011 of $1.30/€1.00) pledged in favor of the lenders. The account was available solely to pay any outstanding interest and principal payments owed under the German Facility Agreement and was a component of our “restricted cash” balance at December 31, 2011. In April 2012, we repaid the entire balance outstanding under the German Facility Agreement and the restriction on the cash related to such debt service reserve account was removed. The restricted cash attributable to the debt service reserve account was reclassified to cash and cash equivalents. See Note 14. “Debt,” for further information.

At September 30, 2012 and December 31, 2011, our restricted investments consisted of long-term marketable securities that we hold through a custodial account to fund the estimated future costs of our solar module collection and recycling program obligations. We have classified our restricted investments as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as a part of accumulated other comprehensive income. We report realized gains and losses on the maturity or sale of our restricted investments in earnings, computed using the specific identification method.

We annually fund the estimated future collection and recycling cost for the prior year’s module shipments covered by our recycling program, within approximately 90 days from the end of each calendar year, assuming for this purpose a minimum service life of 25 years for our solar modules. To ensure that our collection and recycling program is available for covered modules at all times and the pre-funded amounts are accessible regardless of our financial status in the future (even in the case of our own insolvency), we have established a trust structure under which funds are put into custodial accounts with a large bank as the investment advisor in the name of a trust, for which First Solar, Inc. (“FSI”), First Solar Malaysia Sdn. Bhd. (“FS Malaysia”), and FSM GmbH are grantors. Only the trustee can distribute funds from the custodial accounts and these funds cannot be accessed for any purpose other than for administering our solar module collection and recycling program. Future collection and recycling activities will be performed either by us or a third party. Cash invested in this custodial account must be invested in highly rated securities, such as highly rated government or agency bonds. We closely monitor our exposure to European markets and maintain holdings of German and French sovereign debt securities which are not currently at risk of default.

The following table summarizes unrealized gains and losses related to our restricted investments by major security type as of September 30, 2012 and December 31, 2011 (in thousands):



	As of September 30, 2012
Security Type	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Foreign government obligations	$	181,580	$	38,213	$	—	$	219,793
U.S. government obligations	52,813		12,788		—		65,601
Total	$	234,393	$	51,001	$	—	$	285,394



	As of December 31, 2011
Security Type	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Foreign government obligations	$	132,734	$	23,102	$	—	$	155,836
U.S. government obligations	15,825		7,154		—		22,979
Total	$	148,559	$	30,256	$	—	$	178,815

As of September 30, 2012, the contractual maturities of these restricted investments were between 15 years and 24 years. As of December 31, 2011, the contractual maturities of these restricted investments were between 16 years and 24 years.

Note 9. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012			December 31, 2011
Accounts receivable trade, gross	$	480,575		$	320,600
Allowance for doubtful accounts	(12,935		)	(10,032		)
Accounts receivable trade, net	$	467,640		$	310,568

At September 30, 2012, $71.9 million of our Accounts receivable trade, net were secured by letters of credit, bank guarantees or other forms of financial security issued by credit worthy financial institutions.

Accounts receivable, unbilled

Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer. This is common for construction contracts. For example, we recognize revenue from contracts for the construction and sale of solar power systems which include the sale of project assets over the construction period using applicable accounting methods. One applicable accounting method is the percentage-of-completion method under which sales and gross profit are recognized as construction work is performed based on the relationship between actual costs incurred compared to the total estimated costs for constructing the project. Under this accounting method, revenue can be recognized in advance of billing the customer, resulting in an amount recorded to Accounts receivable, unbilled. Once we meet the billing criteria under a construction contract, we bill our customer accordingly and reclassify the Accounts receivable, unbilled to Accounts receivable trade, net. Billing requirements vary by contract but are generally structured around completion of certain construction milestones.

Included within Accounts receivable, unbilled is the current portion of retainage. Retainage refers to the portion of the contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones.

Accounts receivable, unbilled were $398.9 million (including $17.0 million of retainage) and $533.4 million (including $35.4 million of retainage) at September 30, 2012 and December 31, 2011, respectively.

Inventories

Inventories consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Raw materials	$	188,845	$	230,675
Work in process	7,244		28,817
Finished goods	478,374		277,126
Inventories	$	674,463	$	536,618
Inventories — current	$	537,567	$	475,867
Inventories — noncurrent (1)	$	136,896	$	60,751

(1) We purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our operating cycle (which is 12 months). We classify the raw materials that we do not expect to be consumed within our operating cycle as noncurrent. The increase in our noncurrent inventories was primarily the result of a decrease in the amount of such critical raw material we anticipate consuming in our next operating cycle. Such decrease resulted from a combination of the planned reduction in our manufacturing capacity and the amount of critical raw material for our next operating cycle that is required to be sourced through vendor supply agreements.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Prepaid expenses	$	36,313	$	151,630
Derivative instruments	2,842		63,673
Deferred costs of goods sold	95,940		1,152
Other assets — current	81,101		112,577
Prepaid expenses and other current assets	$	216,196	$	329,032

Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012			December 31, 2011
Buildings and improvements	$	438,672		$	393,676
Machinery and equipment	1,367,752			1,453,293
Office equipment and furniture	115,616			110,936
Leasehold improvements	54,299			48,374
Depreciable property, plant and equipment, gross	1,976,339			2,006,279
Accumulated depreciation	(777,044		)	(617,787		)
Depreciable property, plant and equipment, net	1,199,295			1,388,492
Land	22,348			8,065
Construction in progress (1)	328,046			419,401
Property, plant and equipment, net	$	1,549,689		$	1,815,958

(1)

Included within construction in progress as of September 30, 2012 is $222.8 million of machinery and equipment (“stored assets”) that was originally purchased for installation in our previously planned manufacturing capacity expansions. We intend to install and place the stored assets into service once market demand supports such additional manufacturing capacity. As the stored assets are neither in the condition or location to produce modules as intended, we will not begin depreciation until the assets are placed into service. The stored assets are evaluated for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of the stored assets may not be recoverable.

See Note 12. “Economic Development Funding,” to our condensed consolidated financial statements for further information about grants recorded as a reduction to the carrying value of the property, plant and equipment related to the expansion of our manufacturing plant in Frankfurt (Oder), Germany.

Depreciation of property, plant and equipment was $65.6 million and $60.8 million for the three months ended September 30, 2012 and September 30, 2011, respectively, and was $202.3 million and $162.3 million for the nine months ended September 30, 2012 and September 30, 2011, respectively.

In December 2011, February 2012, and April 2012, we announced a series of restructuring initiatives. As part of those initiatives, certain property, plant and equipment were determined to be impaired and impairment charges were recorded. See Note 4. “Restructuring,” for more information on the long-lived asset impairments related to these restructuring initiatives.

Capitalized interest

We capitalized interest costs incurred into property, plant and equipment or project assets as follows during the three and nine months ended September 30, 2012 and September 30, 2011 (in thousands):



	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Interest cost incurred	$	(4,254	)	$	(4,847	)	$	(20,304	)	$	(8,638	)
Interest cost capitalized —– property, plant and equipment	715			1,442			3,538			4,553
Interest cost capitalized —– project assets	637			3,405			5,572			4,085
Interest expense, net	$	(2,902	)	$	—		$	(11,194	)	$	—

Project assets

Project assets consist primarily of costs relating to solar power projects in various stages of development that we capitalize prior to entering into a definitive sales agreement for the solar power project. These costs include costs for land and costs for developing and constructing a PV solar power plant. Development costs can include legal, consulting, permitting, interconnect, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred project costs on our condensed consolidated balance sheet until the sale is completed and we have met all of the criteria to recognize the sale as revenue. We expense project assets to cost of sales after each respective project asset is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). We classify project assets generally as noncurrent due to the nature of a solar power project and the time required to complete all activities to sell a specific project, which is typically longer than 12 months.

Project assets consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Project assets — land	$	8,900	$	13,704
Project assets — development costs	142,848		136,251
Project assets — construction costs	99,064		224,926
Project assets	$	250,812	$	374,881

We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable 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 recoverable, the most notable of which include whether there are any changes in environmental, ecological, permitting, market pricing or regulatory conditions that impact the project. Such changes could cause the cost of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project assets and adjust the carrying value to the estimated recoverable amount, with the resulting impairment recorded within operations.

Deferred project costs

Deferred project costs represent (i) costs that we capitalize as project assets for arrangements that we account for as real estate transactions after we have entered into a definitive sales arrangement, but before the sale is completed and we have met all criteria to recognize the sale as revenue, (ii) recoverable pre-contract costs that we capitalize for arrangements accounted for as long-term construction contracts prior to entering into a definitive sales agreement, or (iii) costs that we capitalize for arrangements accounted for as long-term construction contracts after we have signed a definitive sales agreement, but before all revenue recognition criteria have been met. As of September 30, 2012, deferred project costs were $518.3 million, of which, $143.4 million was classified as current and $374.9 million was classified as noncurrent. As of December 31, 2011, our deferred project costs were $320.4 million, of which $197.7 million was classified as current and $122.7 million was classified as noncurrent. We classify deferred project costs as current if completion of the sale and the meeting of all revenue recognition criteria is expected within the next 12 months.

Note 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 ($22.6 million at the balance sheet close rate on September 30, 2012 of $1.29/€1.00) to provide financing for a PV 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 September 30, 2012 and December 31, 2011, the balance on this credit facility was €7.0 million ($9.0 million at the balance sheet close rate on September 30, 2012 of $1.29/€1.00). The outstanding amount of this credit facility is included within “Other assets” on our condensed consolidated balance sheets.

Other Assets

Other assets consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Retainage (1)	$	225,483	$	—
Other assets - noncurrent	54,592		67,615
Other assets	$	280,075	$	67,615

(1)

Certain of the EPC contracts for solar power plants we build contain retainage provisions. Retainage refers to the portion of the EPC contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. We consider whether collectability of such retainage is reasonably assured in connection with our overall assessment of the collectability of amounts due or that will become due under our EPC contracts. Retainage expected to be collected within the next 12 months is classified within Accounts receivable, unbilled on the condensed consolidated balance sheet. After we have met the EPC contract requirements to bill for retainage, we will reclassify such amounts to Accounts receivable trade, net. Amounts are expected to be collected in 2013 through 2015, after certain construction milestones have been met.

Accrued expenses

Accrued expenses consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Accrued compensation, benefits and severance	$	97,128	$	57,480
Accrued property, plant and equipment	27,979		41,015
Accrued inventory	61,063		46,028
Accrued project assets and deferred project costs	97,880		34,837
Product warranty liability (Note 15)	82,795		78,637
Accrued expenses in excess of normal product warranty liability and related expenses (1)	116,655		89,893
Other accrued expenses	91,656		58,769
Accrued expenses	$	575,156	$	406,659

(1) $100.9 million of accrued expenses in excess of normal product warranty liability and related expenses as of September 30, 2012 consisted primarily of commitments to certain customers, each related to the manufacturing excursion occurring

during the period between June 2008 to June 2009 (“2008-2009 manufacturing excursion”), whereby certain modules manufactured during that time period may experience premature power loss once installed in the field. The accrued expense as of September 30, 2012 included the following commitments to certain customers, each related to the 2008-2009 manufacturing excursion and our related remediation program: (i) $61.9 million in estimated expenses for remediation efforts related to module removal, replacement and logistical services committed to by us beyond the normal product warranty; and (ii) $37.8 million in estimated compensation payments to customers, under certain circumstances, for power lost prior to remediation of the customer’s system under our remediation program.

$15.8 million of accrued expenses in excess of normal product warranty liability and related expenses as of September 30, 2012 consisted of commitments to certain customers related to a workmanship issue potentially affecting a limited number of solar modules manufactured between October 2008 to June 2009. A limited number of the modules manufactured during that time utilized a new material and process to attach the cord plate (junction box) to the module which may not adhere securely over time. We know the serial numbers of the affected modules and are proactively contacting the system owners to repair or replace the potentially impaired modules currently in service in a manner consistent with our normal workmanship warranty. For roof-mounted systems, we will also remove and replace the affected modules at no cost to the system owner, which remediation is in excess of our limited workmanship warranty obligation.

Our best estimate for such remediation programs is based on evaluation and consideration of currently available information, including the estimated number of potentially affected modules in the field, historical experience related to our remediation efforts, customer-provided data related to potentially affected systems, the estimated costs of performing the removal, replacement and logistical services and the post-sale expenses covered under our remediation program. If any of our estimates prove incorrect, we could be required to accrue additional expenses.

Deferred Revenue

We recognize deferred revenue as net sales only after all revenue recognition criteria are met. We expect to recognize these amounts as revenue within the next 12 months.

Other current liabilities

Other current liabilities consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Derivative instruments	$	10,427	$	37,342
Deferred tax liabilities	1,898		6,612
Payments and billings for deferred project costs and deferred cost of sales (1)	224,759		192,440
Other liabilities — current	22,929		58,252
Other current liabilities	$	260,013	$	294,646

(1)

Payments and billings for deferred project costs and deferred cost of sales represent customer payments received or customer billings made under the terms of certain solar power project related sales contracts for which all revenue recognition criteria for real estate transactions under ASC 360 have not yet been met. Such solar power project related costs are included as current deferred project costs or other current assets.

Other liabilities

Other liabilities consisted of the following at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Product warranty liability	$	94,419	$	79,105
Other taxes payable	96,481		73,054
Payments and billings for deferred project costs and deferred cost of sales (1)	468,562		167,374
Other liabilities — noncurrent	42,585		53,973
Other liabilities	$	702,047	$	373,506

(1)

Note 10. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our consolidated net assets, financial position, results of operations, and cash flows. We use derivative instruments to hedge against 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 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 balance sheet date. 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. We account for changes in the fair value of derivative instruments within accumulated other comprehensive income (loss) if the derivative instruments qualify for hedge accounting under ASC 815. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. These accounting approaches, the various risks that we are exposed to in our business and our use of derivative instruments to manage these risks are described below. See Note 11. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair value of derivative instruments included in our condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange forward contracts	$	315	$	9,000	$	—
Cross-currency swap contract	—		227		2,502
Interest rate swap contracts	—		516		1,084
Total derivatives designated as hedging instruments	$	315	$	9,743	$	3,586

Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange forward contracts	$	2,527	$	684	$	—
Total derivatives not designated as hedging instruments	$	2,527	$	684	$	—
Total derivative instruments	$	2,842	$	10,427	$	3,586



	December 31, 2011
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange forward contract	$	28,415	$	—	$	—
Cross-currency swap contracts	—		—		4,943
Interest rate swap contracts	—		444		2,127
Total derivatives designated as hedging instruments	$	28,415	$	444	$	7,070

Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange forward contracts	$	35,258	$	36,898	$	—
Total derivatives not designated as hedging instruments	$	35,258	$	36,898	$	—
Total derivative instruments	$	63,673	$	37,342	$	7,070

The following tables present the amounts related to derivative instruments designated as cash flow hedges under ASC 815 affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and September 30, 2011 (in thousands):



	Foreign Exchange Forward Contracts			Interest Rate Swap Contracts			Cross Currency Swap Contract			Total
Balance in other comprehensive income (loss) at December 31, 2011	$	33,751		$	(2,571	)	$	(5,899	)	$	25,281
Amounts recognized in other comprehensive (loss) income	(11,341		)	(914		)	4,347			(7,908		)
Amounts reclassified to earnings impacting:
Net sales	(6,710		)	—			—			(6,710		)
Foreign currency gain	—			—			(5,003		)	(5,003		)
Interest expense	—			244			71			315
Balance in other comprehensive income (loss) at March 31, 2012	15,700			(3,241		)	(6,484		)	5,975
Amounts recognized in other comprehensive income (loss)	5,825			(334		)	(5,989		)	(498		)
Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring	(3,385		)	—			—			(3,385		)
Amounts reclassified to earnings impacting:
Foreign currency loss	—			—			5,382			5,382
Interest expense	—			2,084			131			2,215
Balance in other comprehensive income (loss) at June 30, 2012	18,140			(1,491		)	(6,960		)	9,689
Amounts recognized in other comprehensive (loss) income	(7,002		)	(301		)	3,568			(3,735		)
Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring	$	(987	)	$	—		$	—		$	(987	)
Amounts reclassified to earnings impacting:
Net Sales	(1,593		)	—			—			(1,593		)
Foreign currency gain	—			—			(5,654		)	(5,654		)
Interest expense	—			192			85			277
Balance in other comprehensive income (loss) at September 30, 2012	$	8,558		$	(1,600	)	$	(8,961	)	$	(2,003	)