e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2008
or
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o |
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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)
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Delaware
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20-4623678 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrants 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
þ No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 25, 2008 there were 80,044,576 shares of the registrants common stock, par value
$0.001, outstanding.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 28, |
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June 30, |
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June 28, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
267,041 |
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$ |
77,223 |
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$ |
463,956 |
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$ |
144,172 |
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Cost of sales |
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122,341 |
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48,852 |
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214,932 |
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85,759 |
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Gross profit |
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144,700 |
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28,371 |
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249,024 |
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58,413 |
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Operating expenses: |
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Research and development |
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7,725 |
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3,763 |
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12,485 |
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6,821 |
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Selling, general and administrative |
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43,626 |
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17,285 |
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72,297 |
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30,975 |
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Production start-up |
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4,622 |
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1,523 |
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17,383 |
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9,997 |
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Total operating expenses |
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55,973 |
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22,571 |
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102,165 |
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47,793 |
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Operating income |
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88,727 |
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5,800 |
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146,859 |
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10,620 |
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Foreign currency gain (loss) |
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647 |
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21 |
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1,421 |
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(249 |
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Interest income |
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4,923 |
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3,773 |
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11,608 |
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7,900 |
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Interest expense, net |
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(1,283 |
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(4 |
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(1,484 |
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Other income (expense), net |
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(441 |
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(447 |
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(819 |
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(614 |
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Income before income taxes |
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93,856 |
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7,864 |
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159,065 |
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16,173 |
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Income tax benefit (expense) |
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(24,185 |
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36,554 |
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(42,775 |
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33,273 |
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Net income |
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$ |
69,671 |
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$ |
44,418 |
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$ |
116,290 |
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$ |
49,446 |
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Net income per share: |
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Basic |
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$ |
0.87 |
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$ |
0.61 |
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$ |
1.46 |
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$ |
0.68 |
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Diluted |
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$ |
0.85 |
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$ |
0.58 |
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$ |
1.42 |
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$ |
0.65 |
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Weighted-average number of shares used in per share calculations: |
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Basic |
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79,877 |
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72,596 |
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79,468 |
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72,472 |
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Diluted |
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82,004 |
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76,089 |
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81,806 |
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75,740 |
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See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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June 28, |
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December 29, |
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2008 |
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2007 |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
511,244 |
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$ |
404,264 |
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Marketable securities current |
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121,760 |
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232,686 |
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Accounts receivable, net |
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49,994 |
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18,165 |
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Inventories |
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106,902 |
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40,204 |
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Deferred project costs |
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1,407 |
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2,643 |
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Economic development funding receivable |
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897 |
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35,877 |
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Deferred tax asset, net current |
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14,184 |
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3,890 |
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Prepaid expenses and other current assets |
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32,185 |
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64,780 |
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Total current assets |
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838,573 |
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802,509 |
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Property, plant and equipment, net |
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674,268 |
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430,104 |
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Deferred tax asset, net noncurrent |
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55,279 |
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51,811 |
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Marketable securities noncurrent |
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28,208 |
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32,713 |
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Restricted investments |
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29,950 |
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14,695 |
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Goodwill |
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33,829 |
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33,449 |
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Other assets noncurrent |
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15,023 |
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6,031 |
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Total assets |
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$ |
1,675,130 |
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$ |
1,371,312 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
42,483 |
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$ |
26,441 |
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Income tax payable |
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51,197 |
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24,487 |
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Accrued expenses |
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120,526 |
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81,438 |
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Short-term debt |
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24,473 |
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Current portion of long-term debt |
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24,629 |
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14,836 |
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Other current liabilities |
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40,414 |
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14,803 |
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Total current liabilities |
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279,249 |
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186,478 |
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Accrued collection and recycling liabilities |
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23,567 |
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13,079 |
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Long-term debt |
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108,547 |
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68,856 |
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Other liabilities noncurrent |
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13,166 |
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5,632 |
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Total liabilities |
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424,529 |
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274,045 |
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Stockholders equity: |
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Common stock, $0.001 par value per share;
500,000,000 shares authorized; 80,037,993
and 78,575,211 shares issued and outstanding
at June 28, 2008 and December 29, 2007,
respectively |
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80 |
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79 |
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Additional paid-in capital |
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1,127,247 |
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1,079,775 |
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Accumulated earnings |
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129,185 |
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12,895 |
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Accumulated other comprehensive income (loss) |
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(5,911 |
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4,518 |
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Total stockholders equity |
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1,250,601 |
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1,097,267 |
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Total liabilities and stockholders equity |
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$ |
1,675,130 |
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$ |
1,371,312 |
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See accompanying notes to these condensed consolidated financial statements.
4
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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June 28, |
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June 30, |
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2008 |
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2007 |
Cash flows from operating activities: |
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Cash received from customers |
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$ |
429,223 |
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$ |
157,616 |
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Cash paid to suppliers and employees |
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(301,653 |
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(118,742 |
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Interest received |
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10,643 |
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7,898 |
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Interest paid, net of amounts capitalized |
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(1,523 |
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(1,485 |
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Income tax |
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571 |
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(5,227 |
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Excess tax benefit from share-based compensation arrangements |
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(13,953 |
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(14,026 |
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Other |
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(818 |
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(699 |
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Net cash provided by operating activities |
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122,490 |
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25,335 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(234,906 |
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(80,388 |
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Deposits |
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(3,229 |
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Purchase of marketable securities |
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(167,771 |
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(238,855 |
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Proceeds from maturities of marketable securities |
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34,750 |
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450 |
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Proceeds from sales of marketable securities |
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278,887 |
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39,804 |
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Increase of restricted investments |
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(14,943 |
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(5,708 |
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Net cash used in investing activities |
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(103,983 |
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(287,926 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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7,178 |
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2,836 |
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Repayment of long-term debt |
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(30,636 |
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(1,648 |
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Proceeds from issuance of debt, net of issuance costs |
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49,446 |
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41,256 |
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Excess tax benefit from share-based compensation arrangements |
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13,953 |
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14,026 |
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Proceeds from economic development funding |
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35,661 |
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4,817 |
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Other financing activities |
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(4 |
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(2 |
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Net cash provided by financing activities |
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75,598 |
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61,285 |
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Effect of exchange rate changes on cash and cash equivalents |
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12,875 |
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1,013 |
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Net increase (decrease) in cash and cash equivalents |
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106,980 |
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(200,293 |
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Cash and cash equivalents, beginning of the period |
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404,264 |
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308,092 |
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Cash and cash equivalents, end of the period |
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$ |
511,244 |
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$ |
107,799 |
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Supplemental disclosure of noncash investing and financing activities: |
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Property, plant and equipment acquisitions funded by liabilities |
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$ |
26,165 |
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$ |
7,743 |
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See accompanying notes to these condensed consolidated financial statements.
5
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Six Months Ended June 28, 2008
Note 1. Basis of Presentation
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. Accordingly, these interim financial statements do not include
all of the information and footnotes required by generally accepted accounting principles for
annual financial statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair statement have been included.
Operating results for the three and six months ended June 28, 2008 are not necessarily indicative
of the results that may be expected for the year ending December 27, 2008, or for any other period.
The balance sheet at December 29, 2007 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 29, 2007
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Fiscal periods. We 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. Fiscal 2008 will end on December 27, 2008 and will
consist of 52 weeks.
Note 2. Summary of Significant Accounting Policies
Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the
year ended December 29, 2007 filed with the Securities and Exchange Commission. Our significant
accounting policies reflect the adoption of Statement of Financial Accounting Standards No. (SFAS)
157, Fair Value Measurements in the first quarter of fiscal 2008.
On December 30, 2007, the beginning of our fiscal year 2008, we adopted SFAS 157 for our
financial assets and financial liabilities. SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting principles and expands
the financial statement disclosure requirements for fair value measurements. See Note 9 for more
information about our adoption of SFAS 157 for our financial assets and financial liabilities and
about our accounting policies related to fair value measurement. Our adoption of SFAS 157 did not
have a material impact on our financial position, results of operations or cash flows.
Note 3. Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 141R, Business
Combinations, which replaces SFAS 141. SFAS 141R requires most assets acquired and liabilities
assumed in a business combination, contingent consideration and certain acquired contingencies to
be measured at their fair value as of the date of the acquisition. SFAS 141R also requires that
acquisition-related costs and restructuring costs be recognized separately from the business
combination. SFAS 141R will be effective for us for the fiscal year 2009 and will apply to any
business combinations that we might enter into after December 27, 2008.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements. SFAS 160 amends previous accounting literature to establish new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. SFAS 160 will become effective for us as of the beginning of fiscal 2010. We have not
yet evaluated the impact, if any, that the adoption of SFAS 160 will have on our financial
position, results of operations or cash flows.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (FSP 157-2), Effective
Date of FASB Statement No. 157. FSP 157-2 deferred the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis, until fiscal years beginning after November
15, 2008. As a result of FSP 157-2, we will adopt SFAS 157 for our nonfinancial assets and
nonfinancial liabilities beginning with the
6
first interim period of our fiscal year 2009. We are currently evaluating the impact of the
adoption of SFAS 157 for our nonfinancial assets and nonfinancial liabilities on our financial
position, results of operations or cash flows.
In March 2008, the FASB issued SFAS 161, Disclosures About Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133. SFAS 161 expands quarterly disclosure
requirements in SFAS 133 about an entitys derivative instruments and hedging activities. SFAS 161
is effective for fiscal years beginning after November 15, 2008. We do not expect SFAS 161 to have
a material impact on our financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 162 identifies the sources of accounting principles and a prioritized framework
for selecting the principles to be used for preparation of the financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 replaces the
U.S. GAAP hierarchy specified in the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. SFAS 162 is effective 60 days following the SECs approval of the
Public Company Oversight Board amendments to remove the U.S. GAAP hierarchy from the auditing
standards. We do not expect SFAS 162 to have a material impact on our financial position, results
of operations or cash flows.
Note 4. Goodwill and Intangible Assets
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 $33.4 million to
goodwill as of December 29, 2007, which represents the excess of the purchase price over the fair
value of the identifiable net tangible and intangible assets of Turner Renewable Energy, LLC.
The changes in the carrying amount of goodwill for the six months ended June 28, 2008 are as
follows (in thousands):
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Balance as of December 29, 2007 |
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$ |
33,449 |
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Goodwill adjustments |
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380 |
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Balance as of June 28, 2008 |
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$ |
33,829 |
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The goodwill adjustment of $0.4 million in the first quarter of 2008 was primarily a result of
adjustments made to the opening balance sheet for acquisition-related intangible assets and related
deferred taxes.
In addition, with the acquisition of Turner Renewable Energy, LLC in November 2007, we
identified two intangible assets, which represent customer contracts already in progress and
customer contracts not yet started. We amortize these costs using the percentage of completion
method.
Information regarding our acquisition-related intangible assets that are being amortized is as
follows (in thousands):
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As of December 29, 2007 |
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Gross |
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Net |
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Carrying |
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Accumulated |
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Carrying |
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Amount |
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Amortization |
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Value |
Customer contracts in progress |
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$ |
170 |
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$ |
28 |
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$ |
142 |
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Customer contracts not started |
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1,620 |
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1,620 |
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Total |
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$ |
1,790 |
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$ |
28 |
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$ |
1,762 |
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|
During the three months ended June 28, 2008, we concluded that the carrying amount of certain
customer intangible assets would not be realized due to our not pursuing certain projects which did
not fit our overall business strategy. We recognized the resulting impairment loss of $1.1 million
in cost of sales during that period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 28, 2008 |
|
|
(Unaudited) |
|
|
Gross |
|
|
|
|
|
Net |
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
|
Amount |
|
Amortization |
|
Value |
Customer contracts in progress |
|
$ |
62 |
|
|
$ |
47 |
|
|
$ |
15 |
|
Customer contracts not started |
|
|
394 |
|
|
|
38 |
|
|
|
356 |
|
|
|
|
Total |
|
$ |
456 |
|
|
$ |
85 |
|
|
$ |
371 |
|
|
|
|
7
Amortization expense for acquisition-related intangible assets was $0.1 million for both the
three and six months ended June 28, 2008.
Note 5. Economic Development Funding
On July 26, 2006, we were approved to receive taxable investment incentives
(Investitionszuschüsse) of approximately 21.5 million ($34.0 million at the balance sheet
close rate on June 28, 2008 of $1.58/1.00) from the State of Brandenburg, Germany. These funds
will reimburse us for certain costs we incurred building our plant in Frankfurt/Oder, Germany,
including costs for the construction of buildings and the purchase of machinery and equipment.
Receipt of these incentives is conditional upon the State of Brandenburg having sufficient funds
allocated to this program to pay the reimbursements we claim. In addition, we are required to
operate our facility for a minimum of five years and employ a specified number of associates during
this period. Our incentive approval expires on December 31, 2009. As of June 28, 2008, we had
received cash payments of $32.3 million under this program, and we had accrued an additional $0.9
million that we are eligible to receive under this program based on qualifying expenditures that we
had incurred through that date.
We were eligible to recover up to approximately 23.8 million of expenditures related to
the construction of our plant in Frankfurt/Oder, Germany under the German Investment Grant Act of
2005 (Investitionszulagen). This act permits us to claim tax-exempt reimbursements for certain
costs we incurred building our plant in Frankfurt/Oder, Germany, including costs for the
construction of buildings and the purchase of machinery and equipment. Tangible assets subsidized
under this program have to remain in the region for at least five years. In accordance with the
administrative requirements of this act, we claimed reimbursement under the Act in conjunction with
the filing of our tax returns with the local German tax office during the third quarter of fiscal
2007. In addition, this program expired on December 31, 2006, and we can only claim reimbursement
for investments completed by that date. The majority of our buildings and structures and our
investment in machinery and equipment were completed by that date. In January 2008, we received a
cash payment of $34.2 million under this program. As of June 28, 2008, there were no additional
investment incentives that we were eligible to receive under this program.
Note 6. Marketable Securities
We have classified our marketable securities as available-for-sale. Accordingly, they are
recorded at fair value and net unrealized gains and losses are recorded as part of other
comprehensive income until realized. We report realized gains and losses on the sale of our
marketable securities in earnings, computed using the specific identification method. During the
three months ended June 28, 2008, we did not realize any gains or losses on our marketable
securities. During the six months ended June 28, 2008, we realized $0.4 million in gains and $0.1
million in losses on our marketable securities. See Note 9 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 our marketable debt securities to be impaired when a significant decline in the
issuers credit quality is likely to have a significant adverse effect on the fair value of the
investment. Investments identified as being impaired are subject to further review to determine if
the investment is other than temporarily impaired, in which case the investment is written down to
its impaired value and a new cost basis is established.
A summary of available-for-sale marketable securities by major security type as of June 28,
2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
U.S. government obligations |
|
$ |
19,439 |
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
19,447 |
|
Federal agency debt |
|
|
130,517 |
|
|
|
88 |
|
|
|
84 |
|
|
|
130,521 |
|
|
|
|
Total |
|
$ |
149,956 |
|
|
$ |
96 |
|
|
$ |
84 |
|
|
$ |
149,968 |
|
|
|
|
Contractual maturities of our available-for-sale marketable securities as of June 28, 2008
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
One year or less |
|
$ |
121,808 |
|
|
$ |
17 |
|
|
$ |
65 |
|
|
$ |
121,760 |
|
One year to two years |
|
|
28,148 |
|
|
|
79 |
|
|
|
19 |
|
|
|
28,208 |
|
|
|
|
Total |
|
$ |
149,956 |
|
|
$ |
96 |
|
|
$ |
84 |
|
|
$ |
149,968 |
|
|
|
|
8
The net unrealized gain on our investments as of June 28, 2008 was immaterial. We typically
invest in highly-rated securities with low probabilities of default. Our investment policy requires
investments to be rated single A or better, limits the types of acceptable investments, limits the
concentration as to security holder and limits the duration of the investment.
Note 7. Consolidated Balance Sheet Details
Accounts receivable, net
Accounts receivable, net consisted of the following at June 28, 2008 and December 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Accounts receivable, gross |
|
$ |
50,464 |
|
|
$ |
18,170 |
|
Allowance for doubtful accounts |
|
|
(470 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
49,994 |
|
|
$ |
18,165 |
|
|
|
|
|
|
|
|
Inventories
Inventories consisted of the following at June 28, 2008 and December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
75,843 |
|
|
$ |
22,874 |
|
Work in process |
|
|
2,842 |
|
|
|
2,289 |
|
Finished goods |
|
|
28,217 |
|
|
|
15,041 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
106,902 |
|
|
$ |
40,204 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following at June 28, 2008 and
December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Prepaid expenses |
|
$ |
3,599 |
|
|
$ |
5,493 |
|
Prepaid supplies |
|
|
11,114 |
|
|
|
4,643 |
|
Prepaid taxes current |
|
|
968 |
|
|
|
13,042 |
|
Pending sale of marketable securities |
|
|
|
|
|
|
28,600 |
|
Derivative instruments current |
|
|
1,147 |
|
|
|
104 |
|
Other current assets |
|
|
15,357 |
|
|
|
12,898 |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
|
$ |
32,185 |
|
|
$ |
64,780 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at June 28, 2008 and December
29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Buildings and improvements |
|
$ |
109,962 |
|
|
$ |
44,679 |
|
Machinery and equipment |
|
|
324,066 |
|
|
|
170,125 |
|
Office equipment and furniture |
|
|
13,524 |
|
|
|
7,365 |
|
Leasehold improvements |
|
|
11,083 |
|
|
|
4,046 |
|
|
|
|
|
|
|
|
Depreciable property, plant and equipment, gross |
|
|
458,635 |
|
|
|
226,215 |
|
Accumulated depreciation |
|
|
(66,852 |
) |
|
|
(43,134 |
) |
|
|
|
|
|
|
|
Depreciable property, plant and equipment, net |
|
|
391,783 |
|
|
|
183,081 |
|
Land |
|
|
3,712 |
|
|
|
3,046 |
|
Construction in progress |
|
|
278,773 |
|
|
|
243,977 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
674,268 |
|
|
$ |
430,104 |
|
|
|
|
|
|
|
|
9
Depreciation of property, plant and equipment was $13.4 million and $6.1 million for the three
months ended June 28, 2008 and June 30, 2007, respectively and was $23.5 million and $11.2 million
for the six months ended June 28, 2008 and June 30, 2007, respectively.
We incurred and capitalized interest cost (into our property, plant and equipment) as follows
during the three and six months ended June 28, 2008 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Interest cost incurred |
|
$ |
1,303 |
|
|
$ |
1,474 |
|
|
$ |
2,812 |
|
|
$ |
2,522 |
|
Interest capitalized |
|
|
(1,303 |
) |
|
|
(191 |
) |
|
|
(2,808 |
) |
|
|
(1,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
|
|
|
$ |
1,283 |
|
|
$ |
4 |
|
|
$ |
1,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
Accrued expenses consisted of the following at June 28, 2008 and December 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Product warranty liability |
|
$ |
10,865 |
|
|
$ |
7,276 |
|
Accrued compensation and benefits |
|
|
11,766 |
|
|
|
21,862 |
|
Accrued property, plant and equipment |
|
|
45,945 |
|
|
|
35,220 |
|
Accrued inventory |
|
|
27,580 |
|
|
|
4,811 |
|
Accrued financing fees |
|
|
4,194 |
|
|
|
|
|
Other accrued expenses |
|
|
20,176 |
|
|
|
12,269 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
120,526 |
|
|
$ |
81,438 |
|
|
|
|
|
|
|
|
Other current liabilities
Other current liabilities consisted of the following at June 28, 2008 and December 29, 2007
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Derivative instruments current |
|
$ |
29,926 |
|
|
$ |
3,579 |
|
Other current liabilities |
|
|
10,488 |
|
|
|
11,224 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
40,414 |
|
|
$ |
14,803 |
|
|
|
|
|
|
|
|
Note 8. Derivative Financial Instruments
As a global company, we are exposed in the normal course of business to interest rate risk and
foreign currency risk that could affect our net assets, financial position and results of
operations. It is our policy to use derivative financial instruments to minimize or eliminate these
risks that are associated with our operating activities and the associated financing requirements.
We use derivative financial instruments exclusively to hedge actual or forecasted transactions. We
do not use derivative financial instruments for speculative or trading purposes. Our use of
derivative financial instruments is subject to strict internal controls based on centrally defined
mechanisms and guidelines. The various risk classes and risk management systems are described
below. See Note 9 for information about the fair value measurement of our derivative financial
instruments.
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 interest rate swap agreements for
speculative or trading purposes. We have interest rate swaps with a financial institution that
effectively converts to fixed rates the floating variable rate of the Euro Interbank Offered Rate
(Euribor) on certain drawdowns taken on the term loan portion of our credit facility with a
consortium of banks led by IKB Deutsche Industriebank AG. These interest rate swap agreements are
required under the credit facility agreement. As of June 28, 2008, the total notional value of the
interest rate swaps was 43.7 million ($69.0 million at the balance sheet close rate on June 28,
2008 of $1.58/1.00).
10
The notional amounts of the interest rate swaps are scheduled to decline in accordance with
our scheduled principal payments on the hedged term loan drawdowns. These derivative financial
instruments qualified for accounting as cash flow hedges in accordance with SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, and we designated them as such. As a result, we
classified the aggregate fair value of the interest rate swap agreements, which was $1.3 million at
June 28, 2008, with other assets on our balance sheet. We record changes in that fair value in
other comprehensive income. We assessed the interest rate swap agreements as highly effective cash
flow hedges as of June 28, 2008.
Foreign Currency Exchange Risk
Cash Flow Exposure
We have forecasted future cash flows, including revenues and expenses, denominated in
currencies other than the relevant entitys functional currency. Our primary cash flow exposures
are customer collections and vendor payments. Changes in the relevant entitys functional currency
value will cause fluctuations in the cash flows we expect to receive when these cash flows are
realized or settled. We may enter into foreign exchange forward contracts or other derivatives to
hedge the value of a portion of these cash flows. We account for these foreign exchange contracts
as cash flow hedges. The effective portion of the derivatives gain or loss is initially reported
as a component of accumulated other comprehensive income (loss) and subsequently reclassified into
earnings when the hedged transaction is settled.
We purchased forward contracts to hedge the exchange risk on forecasted cash flows denominated
in euro. As of June 28, 2008, the unrealized loss of these forward contracts was $28.3 million. The
total notional value of the forward contracts was 252.0 million ($398.2 million at the balance
sheet close rate on June 28, 2008 of $1.58/1.00) on June 28, 2008. The forward exchange rates for
these contracts range between $1.44/1.00 and $1.46/1.00.
The foreign exchange contracts that hedge our forecasted future cash flows qualified for
accounting as cash flow hedges in accordance with SFAS 133, and we designated them as such. As a
result, we report the aggregate fair value on our balance sheet, and we record changes in that fair
value in other comprehensive income. We determined that these derivative financial instruments were
highly effective cash flow hedges as of June 28, 2008.
Transaction Exposure
We have certain assets and liabilities, primarily receivables, investments and accounts
payable (including inter-company transactions) that are denominated in currencies other than the
relevant entitys functional currency. In certain circumstances, changes in the functional currency
value of these assets and liabilities create fluctuations in our reported consolidated financial
position, results of operations and cash flows. We may enter into foreign exchange forward
contracts or other instruments to minimize the short-term foreign currency fluctuations on these
assets and liabilities. The gains and losses on the foreign exchange forward contracts offset all
or part of the transaction gains and losses that we recognize in earnings on the related foreign
currency receivables, investments and payables.
In 2007 and during the six months ended June 28, 2008, we purchased forward foreign exchange
contracts to hedge certain foreign currency denominated long-term debt. We recognize gains or
losses from the fluctuation in foreign exchange rates and the valuation of these hedging contracts
in foreign currency gain (loss) on our consolidated statements of operations. As of June 28, 2008,
we had the following two outstanding foreign exchange hedge contracts:
|
|
|
Sell 20.0 million ($26.8 million at a fixed exchange rate of $1.34/1.00). Unrealized
mark-to-market losses recorded on this contract as of June 28, 2008 were $4.2 million. The
contract is scheduled to settle on February 27, 2009. |
|
|
|
|
Purchase 32.4 million ($50.2 million at a fixed exchange rate of $1.55/1.00).
Unrealized mark-to-market gains recorded on this contract as of June 28, 2008 were $0.9
million. The contract settled on July 3, 2008. |
Note 9. Fair Value Measurement
On December 30, 2007, the beginning of our fiscal year 2008, we adopted SFAS 157. SFAS 157
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles and expands financial statement disclosure requirements for fair value measurements. Our adoption of SFAS 157 was limited to our financial assets and financial
11
liabilities, as permitted by FSP 157-2. We do not have any nonfinancial assets or nonfinancial
liabilities that are recognized or disclosed at fair value in our financial statements on a recurring basis. The implementation
of the fair value measurement guidance of SFAS 157 did not result in any changes to the carrying
values of our financial instruments on our opening balance sheet on December 30, 2007 for fiscal
year 2008.
SFAS 157 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. SFAS 157 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 from markets that are not active for assets or liabilities
that are identical or similar to the assets or liabilities being measured. 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 in
pricing 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 will 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. 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 on our balance sheet at fair value on a recurring basis:
|
|
|
Marketable securities. As of June 28, 2008, our marketable securities consisted primarily
of U.S. government obligations and federal agency debt. Our marketable securities are valued
using quoted prices for securities with similar characteristics and other observable inputs
(such as interest rates observable at commonly quoted intervals), and accordingly, we
classify the valuation techniques that use these inputs as Level 2. We consider the effect
of our counterparties credit standing in our valuations of our marketable securities
holdings. |
|
|
|
|
Derivative assets and liabilities. Our derivative assets and liabilities consist of
foreign exchange forward contracts involving major currencies and interest rate swaps
involving a benchmark interest rate. Since our derivative assets and liabilities are not
traded on an exchange, they are valued using valuation models. Interest rate yield curves
and foreign exchange rates are the significant inputs into these valuation models. 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 in the hierarchy. We consider
the effect of our own credit standing and that of our counterparties in our valuations of
our derivative financial instruments. |
As of June 28, 2008, information about inputs into the fair value measurements of our assets
and liabilities that are measured at fair value on a recurring basis in periods subsequent to their
initial recognition is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
|
|
|
Date Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
Total Fair |
|
in Active |
|
Significant |
|
|
|
|
Value and |
|
Markets for |
|
Other |
|
Significant |
|
|
Carrying |
|
Identical |
|
Observable |
|
Unobservable |
|
|
Value on Our |
|
Assets |
|
Inputs |
|
Inputs |
Description |
|
Balance Sheet |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
149,968 |
|
|
$ |
|
|
|
$ |
149,968 |
|
|
$ |
|
|
Derivative assets |
|
|
2,201 |
|
|
|
|
|
|
|
2,201 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
152,169 |
|
|
$ |
|
|
|
$ |
152,169 |
|
|
$ |
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
32,459 |
|
|
$ |
|
|
|
$ |
32,459 |
|
|
$ |
|
|
|
|
|
Note 10. Debt
12
Our long-term debt at June 28, 2008 and December 29, 2007 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Euro denominated loan, variable interest Euribor plus 1.6%, due 2008 through 2012 |
|
$ |
68,914 |
|
|
$ |
67,761 |
|
2.25% loan, due 2006 through 2015 |
|
|
12,394 |
|
|
|
13,226 |
|
0.25% 3.25% loan, due 2007 through 2009 |
|
|
2,501 |
|
|
|
3,334 |
|
Euro denominated loan, variable interest Euribor plus 0.55%, due 2008 through 2015 |
|
|
25,548 |
|
|
|
|
|
Euro denominated 4.54% loan, due 2008 through 2015 |
|
|
25,548 |
|
|
|
|
|
Capital lease obligations |
|
|
7 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
134,912 |
|
|
|
84,330 |
|
Less unamortized discount |
|
|
(1,736 |
) |
|
|
(638 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
|
133,176 |
|
|
|
83,692 |
|
Less current portion |
|
|
(24,629 |
) |
|
|
(14,836 |
) |
|
|
|
|
|
|
|
Noncurrent portion |
|
$ |
108,547 |
|
|
$ |
68,856 |
|
|
|
|
|
|
|
|
We had outstanding borrowings of $24.5 million at December 29, 2007, which we classified as
short-term debt. In February 2008, we repaid the full amount of our short-term debt, which related
to our bridge loan with a consortium of banks led by IKB Deutsche Industriebank AG.
On May 6, 2008, in connection with the plant expansion at our Malaysian manufacturing center,
First Solar Malaysia Sdn. Bhd. (FS Malaysia), our indirect wholly owned subsidiary entered into
an export financing facility agreement (Facility Agreement) with IKB Deutsche Industriebank AG
(IKB) as arranger NATIXIS Zweigniederlassung Deutschland (NZD) as facility agent and original
lender, AKA Ausfuhrkredit-Gesellschaft mbH (AKA), as original lender and NATIXIS Labuan Branch
(NLB) as security agent. Pursuant to the terms of the Facility Agreement, the lenders will
furnish up to approximately 134.0 million ($211.7 million at the balance sheet close rate on June
28, 2008 of $1.58/1.00) of credit facilities consisting of the following:
(1) Five fixed-rate euro-denominated term loan facilities, which have the following maximum
aggregate amounts:
|
a) |
|
16.9 million ($26.7 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
b) |
|
16.3 million ($25.8 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
c) |
|
16.3 million ($25.8 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
d) |
|
16.3 million ($25.8 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
e) |
|
1.2 million ($1.9 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); and |
(2) Five floating-rate euro-denominated term loan facilities, which have the following maximum
aggregate amounts:
|
a) |
|
16.9 million ($26.7 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
b) |
|
16.3 million ($25.8 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
c) |
|
16.3 million ($25.8 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); |
|
|
d) |
|
16.3 million ($25.8 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00); and |
|
|
e) |
|
1.2 million ($1.9 million at the balance sheet close rate on June 28, 2008 of
$1.58/1.00). |
The loans under the fixed rate credit facilities will bear interest on the outstanding unpaid
principal amount at an annual rate of 4.54%. The loans under the floating rate credit facilities
will bear interest on the outstanding unpaid principal amount at Euribor plus a margin of 0.55%.
These credit facilities are intended to be used by FS Malaysia for the purpose of (1)
partially financing the purchase of certain equipment to be used at our Malaysian manufacturing
center and (2) financing fees to be paid to Euler Hermes Kreditversicherungs-AG (Euler-Hermes),
the German Export Credit Agency of Hamburg, Federal Republic of Germany, which will guaranty 95% of
FS Malaysias obligations related to the Facility Agreement (Hermes Guaranty). In addition, FS
Malaysias obligations related to the Facility Agreement are guaranteed, on an unsecured basis, by
First Solar, Inc., pursuant to a guaranty agreement described below.
The Facility Agreement requires FS Malaysia to make 14 equal semi-annual repayments of the
total principal borrowed under each of the credit facilities listed above. The first of these
repayments commence on the earlier of (1) the day that is six months after the date that the
Malaysian manufacturing center plant to which the credit facility relates becomes ready for
operation and (2) a date specified for each credit facility, the earliest of which is September 30,
2008 for the credit facilities listed as (1) a) and (2) a) above.
13
FS Malaysia may voluntarily cancel commitments of the credit facilities and may make
prepayments of amounts outstanding under the credit facilities, in whole or in part, subject to
minimum prepayment requirements and the payment of break costs. Subject to a limited exception, in
the event that the Euler-Hermes Guaranty is (1) fully or partially withdrawn, or otherwise ceases
to be in full force and effect or (2) repudiated by Euler-Hermes (or its intention to repudiate is
evidenced in writing), or if any of the obligations of Euler-Hermes under the Euler-Hermes Guaranty
ceases to be legal, valid, binding or in full force and effect, the loans made by any lender under
any of the credit facilities may, at the direction of the lender, be declared immediately due and
payable.
FS Malaysia is obligated to pay commitment fees at an annual rate of 0.375% on the unused
portions of the fixed rate credit facilities and at an annual rate of 0.350% on the unused portions
of the floating rate credit facilities. In addition, FS Malaysia is obligated to pay certain
underwriting, management and agency fees in connection with the credit facilities.
In connection with the Facility Agreement, First Solar, Inc. entered into a first demand
guaranty agreement dated May 6, 2008 in favor of IKB, NZD, NLB and the other lenders under the
Facility Agreement. As stated above, FS Malaysias obligations related to the Facility Agreement
are guaranteed, on an unsecured basis, by First Solar pursuant to this guaranty agreement.
In connection with the Facility Agreement, all of FS Malaysias obligations related to the
Facility Agreement are secured by a first party, first legal charge over the equipment financed by
the credit facilities and the other documents, contracts and agreements related to that equipment.
Also in connection with the Facility Agreement, any payment claims of First Solar, Inc. against FS
Malaysia are subordinated to the claims of IKB, NZD, NLB and the other lenders under the Facility
Agreement.
The
Facility Agreement contains various financial covenants with which we must comply with,
such as debt to equity ratios, total leverage ratios, interest coverage ratios and debt
service coverage ratios. The Facility Agreement also contains various customary non-financial
covenants which FS Malaysia must comply with, including, submitting various financial reports
and business forecasts to the lenders, maintaining adequate insurance, complying with applicable
laws and regulations, restrictions on FS Malaysias ability to sell or encumber assets and make
loan guarantees to third parties.
As of June 28, 2008, we had outstanding borrowings of 32.4 million ($51.2 million at the
balance sheet close rate on June 28, 2008 of $1.58/1.00) under the Facility Agreement.
Note 11. Commitments and Contingencies
Product warranties
We offer warranties on our products and record an estimate of the associated liability based
on the number of solar modules under warranty at customer locations, our historical experience with
warranty claims, our monitoring of field installation sites, our in-house testing of our solar
modules and our estimated per-module replacement cost.
Product warranty activity during the three and six months ended June 28, 2008 and June 30,
2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Product warranty liability, beginning of period |
|
$ |
9,261 |
|
|
$ |
3,355 |
|
|
$ |
7,276 |
|
|
$ |
2,764 |
|
Accruals for new warranties issued (warranty expense) |
|
|
1,851 |
|
|
|
820 |
|
|
|
3,843 |
|
|
|
1,549 |
|
Settlements |
|
|
|
|
|
|
(12 |
) |
|
|
(8 |
) |
|
|
(12 |
) |
Change in estimate of warranty liability |
|
|
(247 |
) |
|
|
(113 |
) |
|
|
(246 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product warranty liability, end of period |
|
$ |
10,865 |
|
|
$ |
4,050 |
|
|
$ |
10,865 |
|
|
$ |
4,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
As of June 28, 2008, we had the following four outstanding commercial commitments in the form
of letters of credit and bank guarantees: MYR 4.0 million dated September 2007 for an energy supply
agreement ($1.2 million at the balance sheet close rate on June 28, 2008 of $0.31/MYR1.00); MYR 4.0
million dated October 2007 for Malaysian custom and excise tax ($1.2 million at the balance sheet
close rate on June 28, 2008 of $0.31/MYR1.00); MYR 2.2 million dated December 2007 for an energy
supply
14
agreement ($0.7 million at the balance sheet close rate on June 28, 2008 of $0.31/MYR1.00);
and $1.3 million dated January 2008 for a sales and purchase agreement.
Note 12. Share-Based Compensation
We measure share-based compensation cost at the grant date based on the fair value of the
award and recognize this cost as an expense over the grant recipients requisite service periods,
in accordance with SFAS 123(R). The share-based compensation expense that we recognized in our
consolidated statements of operations for the three and six months ended June 28, 2008 and June 30,
2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Share-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
3,162 |
|
|
$ |
2,425 |
|
|
$ |
5,370 |
|
|
$ |
3,920 |
|
Research and development |
|
|
1,501 |
|
|
|
1,495 |
|
|
|
2,466 |
|
|
|
2,653 |
|
Selling, general and administrative |
|
|
10,279 |
|
|
|
2,870 |
|
|
|
17,679 |
|
|
|
5,738 |
|
Production start-up |
|
|
515 |
|
|
|
210 |
|
|
|
801 |
|
|
|
465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
15,457 |
|
|
$ |
7,000 |
|
|
$ |
26,316 |
|
|
$ |
12,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in share-based compensation expense was primarily the result of new awards.
The following table presents our share-based compensation expense by type of award for the
three and six months ended June 28, 2008 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Stock options |
|
$ |
4,675 |
|
|
$ |
6,980 |
|
|
$ |
9,735 |
|
|
$ |
12,660 |
|
Restricted stock units |
|
|
10,917 |
|
|
|
42 |
|
|
|
16,445 |
|
|
|
42 |
|
Unrestricted stock |
|
|
82 |
|
|
|
56 |
|
|
|
163 |
|
|
|
158 |
|
Net amount absorbed into inventory |
|
|
(217 |
) |
|
|
(78 |
) |
|
|
(27 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
15,457 |
|
|
$ |
7,000 |
|
|
$ |
26,316 |
|
|
$ |
12,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation cost capitalized in our inventory was $0.6 million at June 28, 2008
and December 29, 2007. As of June 28, 2008, we had $17.6 million of unrecognized share-based
compensation cost related to unvested stock option awards, which we expect to recognize as an
expense over a weighted-average period of approximately 2 years,
and $94.9 million of unrecognized
share-based compensation cost related to unvested restricted stock units, which we expect to
recognize as an expense over a weighted-average period of approximately 2 years.
Note 13. Income Taxes
On December 31, 2006, we adopted the provisions of FASB Interpretation No. (FIN) 48, which is
an interpretation of SFAS 109, Accounting for Income Taxes. Tax law is subject to significant and
varied interpretation, so an enterprise may be uncertain whether a tax position that it has taken
will ultimately be sustained when it files its tax return. FIN 48 establishes a
more-likely-than-not threshold that must be met before a tax benefit can be recognized in the
financial statements and, for those benefits that may be recognized, stipulates that enterprises
should recognize the largest amount of the tax benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the taxing authority. FIN 48 also
addresses changes in judgments about the realizability of tax benefits, accrual of interest and
penalties on unrecognized tax benefits, classification of liabilities for unrecognized tax benefits
and related financial statement disclosures.
During the six months ended June 28, 2008, unrecognized tax benefits increased by
approximately $2.8 million, all of which would impact the effective tax rate if recognized.
Although there were no reductions to unrecognized tax benefits during the six months ended June 28,
2008 due to settlements, the lapse of applicable statutes of limitations or reassessments of tax
positions, it is reasonably possible the Company will settle certain ongoing examinations within
the next twelve months resulting in a reduction to unrecognized tax benefits of approximately $0.5 million. We operate in multiple jurisdictions
throughout the world, and our tax returns are periodically audited or subject to review by both
domestic and foreign tax authorities.
15
We are subject to filing requirements for income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. We are presently undergoing an examination by the
German taxing authorities. Additionally, our tax years going back to 2003 are subject to
examination in all tax jurisdictions in which we operate.
At each period end, we exercise significant judgment in determining our provisions for income
taxes, our deferred tax assets and liabilities and our future taxable income for purposes of
assessing our likelihood of utilizing any future tax benefit from our deferred tax assets. The
ultimate realization of deferred tax assets depends on the generation of sufficient taxable income
of the appropriate character and in the appropriate taxing jurisdictions during the future periods
in which the underlying tax-deductible temporary differences become deductible. We determined the
valuation allowance on our deferred tax assets in accordance with the provisions of SFAS 109, which
require us to weigh both positive and negative evidence in order to ascertain whether it is more
likely than not that deferred tax assets will be realized. We evaluated all significant available
positive and negative evidence, including the existence of cumulative net losses, benefits that
could be realized from available tax strategies and forecasts of future taxable income, in
determining the need for a valuation allowance on our deferred tax assets.
As of March 29, 2008, we concluded that it was more-likely-than-not that the net deferred tax
assets in Malaysia would be utilized in future periods. Therefore, based upon managements
assessment of the available evidence at March 29, 2008, we reversed the $0.6 million of valuation
allowances established during fiscal 2007.
Our subsidiary in Malaysia has been granted a tax holiday for a period of 16 1/2 years beginning
on January 1, 2009 and running through June 30, 2025. The tax holiday provides for an income tax
exemption of 100% on statutory income provided that certain criteria are met. We have derived a
benefit in the current year from the deferred tax impact of taxable temporary differences,
primarily attributable to accelerated tax depreciation, that are anticipated to reverse in a
tax-free manner during the tax holiday.
Note 14. Net Income per Share
Basic net income per share is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted net income per share is computed giving effect
to all potential dilutive common stock, including employee stock options and restricted stock
units.
The reconciliation of the numerator and denominator used in the calculation of basic and
diluted net income per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Basic net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
69,671 |
|
|
$ |
44,418 |
|
|
$ |
116,290 |
|
|
$ |
49,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income per share |
|
|
79,877 |
|
|
|
72,596 |
|
|
|
79,468 |
|
|
|
72,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income per share |
|
|
79,877 |
|
|
|
72,596 |
|
|
|
79,468 |
|
|
|
72,472 |
|
Effect of stock options and restricted stock units outstanding |
|
|
2,127 |
|
|
|
3,493 |
|
|
|
2,338 |
|
|
|
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing diluted net income per share |
|
|
82,004 |
|
|
|
76,089 |
|
|
|
81,806 |
|
|
|
75,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following number of outstanding employee stock options and restricted stock units were
excluded from the computation of diluted net income per share as it would have had an antidilutive
effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 28, |
|
June 30, |
|
June 28, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Options to purchase common stock and restricted stock units |
|
|
101 |
|
|
|
166 |
|
|
|
116 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Comprehensive Income
Comprehensive income, which includes foreign currency translation adjustments, unrealized
gains and losses on derivative instruments designated and qualifying as cash flow hedges and
unrealized gains and losses on available-for-sale securities, the impact of which has been excluded
from net income and reflected as components of stockholders equity, is as follows (in thousands):
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
69,671 |
|
|
$ |
44,418 |
|
|
$ |
116,290 |
|
|
$ |
49,446 |
|
Foreign currency translation adjustments |
|
|
1 |
|
|
|
179 |
|
|
|
9,443 |
|
|
|
340 |
|
Change in unrealized gain (loss) on
marketable securities, net of tax of
$167 and $8 for the three and six
months ended 2008, respectively |
|
|
(303 |
) |
|
|
(1 |
) |
|
|
(15 |
) |
|
|
(1 |
) |
Change in unrealized (loss) gain on
derivative instruments, net of tax of
$(1,972) and $4,513 for 2008 for the
three and six months ended 2008,
respectively |
|
|
3,441 |
|
|
|
817 |
|
|
|
(19,857 |
) |
|
|
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
72,810 |
|
|
$ |
45,413 |
|
|
$ |
105,861 |
|
|
$ |
50,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive income (loss) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Foreign currency translation adjustments |
|
$ |
15,561 |
|
|
$ |
6,118 |
|
Unrealized gain on marketable securities, net of tax of $(7) for 2008 and $(15) for 2007 |
|
|
13 |
|
|
|
28 |
|
Unrealized loss on derivative instruments, net of tax of $5,465 for 2008 and $952 for 2007 |
|
|
(21,485 |
) |
|
|
(1,628 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
(5,911 |
) |
|
$ |
4,518 |
|
|
|
|
|
|
|
|
Note 16. Statement of Cash Flows
Following is a reconciliation of net income to net cash provided by operating activities for
the six months ended June 28, 2008 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
116,290 |
|
|
$ |
49,446 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
21,869 |
|
|
|
11,150 |
|
Intangible Impairment |
|
|
1,334 |
|
|
|
|
|
Share-based compensation |
|
|
26,316 |
|
|
|
12,776 |
|
Deferred income taxes |
|
|
(6,113 |
) |
|
|
(39,218 |
) |
Excess tax benefits from share-based compensation arrangements |
|
|
(13,953 |
) |
|
|
(14,026 |
) |
Loss (gain) on disposal of property and equipment |
|
|
133 |
|
|
|
(2 |
) |
Provision for doubtful accounts receivable |
|
|
465 |
|
|
|
|
|
Gain on sales of investments, net |
|
|
(280 |
) |
|
|
|
|
Provision for excess and obsolete inventories |
|
|
483 |
|
|
|
(83 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(34,753 |
) |
|
|
13,518 |
|
Inventories |
|
|
(65,827 |
) |
|
|
(10,139 |
) |
Deferred project costs |
|
|
1,235 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
(4,802 |
) |
|
|
(11,093 |
) |
Costs and estimated earnings in excess of billings |
|
|
6 |
|
|
|
|
|
Other noncurrent assets |
|
|
(3,340 |
) |
|
|
(319 |
) |
Billings in excess of costs and estimated earnings |
|
|
(969 |
) |
|
|
|
|
Accounts payable and accrued expenses |
|
|
84,396 |
|
|
|
13,325 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
6,200 |
|
|
|
(24,111 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
122,490 |
|
|
$ |
25,335 |
|
|
|
|
|
|
|
|
Note 17. Segment Reporting
SFAS 131, Disclosure about Segments of an Enterprise and Related Information, establishes
standards for companies to report in their financial statements information about operating
segments, products, services, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes
the operating segments within the company for making operating decisions and assessing financial
performance. The component segment, which is our principal business, is the design, manufacture and
sale of solar modules, which convert sunlight to electricity. We sell our solar modules to thirteen
principal customers, which we have long term supply contracts with. These customers include project
developers, system integrators and operators of renewable energy projects.
17
We also sell solar power systems comprised of our solar modules and balance of system
components procured from third parties directly to system owners. This may include services such as
development, engineering, procurement of permits and equipment, construction management, monitoring
and maintenance. For the three and six months ended June 28, 2008, we have not sold solar power
systems using our solar modules, as we continued to sell third party solar modules acquired through
the acquisition of Turner Renewable Energy, LLC consummated on November 30, 2007. These operations
do not currently meet the quantitative criteria for segments and therefore are reflected in the
Other category in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
|
|
Components |
|
Other |
|
Total |
|
Components |
|
Other |
|
Total |
Net sales |
|
$ |
265,101 |
|
|
$ |
1,940 |
|
|
$ |
267,041 |
|
|
$ |
77,223 |
|
|
$ |
|
|
|
$ |
77,223 |
|
Income (loss) before income taxes |
|
$ |
98,890 |
|
|
|
($5,034 |
) |
|
$ |
93,856 |
|
|
$ |
7,864 |
|
|
$ |
|
|
|
$ |
7,864 |
|
Goodwill |
|
$ |
|
|
|
$ |
33,829 |
|
|
$ |
33,829 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total Assets |
|
$ |
1,626,614 |
|
|
$ |
48,516 |
|
|
$ |
1,675,130 |
|
|
$ |
723,212 |
|
|
$ |
|
|
|
$ |
723,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
|
|
Components |
|
Other |
|
Total |
|
Components |
|
Other |
|
Total |
Net sales |
|
$ |
458,963 |
|
|
$ |
4,993 |
|
|
$ |
463,956 |
|
|
$ |
144,172 |
|
|
$ |
|
|
|
$ |
144,172 |
|
Income (loss) before income taxes |
|
$ |
167,006 |
|
|
|
($7,941 |
) |
|
$ |
159,065 |
|
|
$ |
16,173 |
|
|
$ |
|
|
|
$ |
16,173 |
|
Goodwill |
|
$ |
|
|
|
$ |
33,829 |
|
|
$ |
33,829 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total Assets |
|
$ |
1,626,614 |
|
|
$ |
48,516 |
|
|
$ |
1,675,130 |
|
|
$ |
723,212 |
|
|
$ |
|
|
|
$ |
723,212 |
|
Note 18. Subsequent Events
On July 11, 2008, we borrowed an additional 2.4 million ($3.7 million) under our Malaysia
Facility Agreement. These funds have been used to cover financing fees to be paid to Euler Hermes
Kreditversicherungs AG.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks,
uncertainties and assumptions that are difficult to predict. All statements in this Quarterly
Report on Form 10-Q, other than statements of historical fact, are forward-looking statements.
These forward-looking statements are made pursuant to safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among
other things, concerning our business strategy, including anticipated trends and developments in
and management plans for our business and the markets in which we operate; future financial
results, operating results, revenues, gross margin, operating expenses, products, projected costs
and capital expenditures; research and development programs; sales and marketing initiatives; and
competition. In some cases, you can identify these statements by forward-looking words, such as
estimate, objective, expect, anticipate, project, plan, intend, believe,
forecast, foresee, likely, may, should, goal, target, might, will, could,
predict and continue, the negative or plural of these words and other comparable terminology.
Forward-looking statements are only predictions based on our current expectations and our
projections about future events. All forward-looking statements included in this Quarterly Report
on Form 10-Q are based upon information available to us as of the filing date of this Quarterly
Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We
undertake no obligation to update any of these forward-looking statements for any reason. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance, or achievements to differ materially
from those expressed or implied by these statements. These factors include the matters discussed in
the section entitled Risk Factors elsewhere in this Quarterly Report on Form 10-Q. You should
carefully consider the risks and uncertainties described under this section.
The following discussion and analysis should be read in conjunction with our Condensed
Consolidated Financial Statements and the accompanying notes contained in this Quarterly Report on
Form 10-Q. Unless expressly stated or the context otherwise requires, the terms we, our, us
and First Solar refer to First Solar, Inc. and its subsidiaries.
Overview
We design and manufacture solar modules using a proprietary thin film semiconductor technology
that has allowed us to reduce our average solar module manufacturing costs to among the lowest in
the world. Each solar module uses a thin layer of cadmium telluride semiconductor material to
convert sunlight into electricity. We manufacture our solar modules on high-throughput production
18
lines and we perform all manufacturing steps ourselves in an automated, proprietary, continuous
process. In 2007 and the six months ended June 28, 2008, we sold most of our solar modules to solar
project developers and system integrators headquartered in Germany, France and Spain.
First Solar was founded in 1999 to bring an advanced thin film semiconductor process into
commercial production through the acquisition of predecessor technologies and the initiation of a
research, development and production program that allowed us to improve upon the predecessor
technologies and launch commercial operations in January 2002. Currently, we manufacture our solar
modules at our Perrysburg, Ohio, Frankfurt/Oder, Germany and Kulim, Malaysia manufacturing
facilities and conduct our research and development activities at our Perrysburg, Ohio
manufacturing facility. Our objective is to become, by 2010, the first solar module manufacturer to
offer a solar electricity solution that generates electricity on a non-subsidized basis at a price
equal to the price of retail electricity in key markets in North America, Europe and Asia.
On January 24, 2007 we entered into a land lease agreement for a manufacturing center site in
the Kulim Hi-Tech Park in the State of Kedah, Malaysia. The Malaysia site accommodates up to four
plants, each with four productions lines. In April 2007, we began construction of plant one of our
Malaysian manufacturing center. In the third and fourth quarters of 2007, we began construction of
plants two and three respectively, and in the first quarter of 2008, we began construction of plant
four. During the three months ended June 28, 2008, we commenced production at plant one, and we
expect plant one to reach its full capacity in the second half of 2008; we expect plant two to
reach its full capacity in the first half of 2009 and plants three and four to reach full capacity
in the second half of 2009. After plant four of our Malaysian manufacturing center reaches its full
capacity we will have 23 production lines and an annual global manufacturing capacity of
approximately 1.1GW based on the second quarter of 2008 average run rate at our existing plants.
On November 30, 2007, we completed the acquisition of Turner Renewable Energy, LLC, a
privately held company which designed and deployed commercial solar projects for utilities and
Fortune 500 companies in the United States. We have integrated the operations from this acquisition
into our solar power systems and project development business.
On February 22, 2006, we were incorporated as a Delaware corporation. Prior to that date, we
operated as a Delaware limited liability company.
Net Sales
We generate substantially all of our net sales from the sale of solar modules. Over the past
four years and the six months ended June 28, 2008, the main constraint limiting our sales has been
production capacity as customer demand has exceeded the number of solar modules we could produce.
We price and sell our solar modules per watt of power. As a result, our net sales can fluctuate
based on our output of sellable watts. We currently sell almost all of our solar modules to solar
project developers and system integrators headquartered in Germany, France and Spain, which then
resell our solar modules to end-users who receive government subsidies. The majority of our sales
are denominated in foreign currency and subject to the fluctuation of the exchange rate between the
euro and U.S. dollar. Our net sales could be negatively impacted if legislation reduces the current
subsidy programs in Europe, North America or Asia or if interest rates increase, which could impact
our end-users ability to either meet their target return on investment or finance their projects.
Under our customer contracts, starting in April 2006, we transfer title and risk of loss to
the customer and recognize revenue upon shipment. Under our customer contracts in effect prior to
April 1, 2006, we did not transfer title or risk of loss, or recognize revenue, until the solar
modules were received by our customers. Our customers do not have extended payment terms or rights
of return under these contracts.
Under our long-term solar module supply contracts (Long Term Supply Contracts) with our
customers, we have the right to terminate certain contracts upon 12 months notice and a payment of
a termination fee, if we determine that certain material adverse changes have occurred, including,
depending on the contract, one or more of the following: new laws; rules or regulations with
respect to our production, distribution, installation or collection and recycling program which
have a substantial adverse impact on our business; unanticipated technical or operational issues
which result in our experiencing widespread, persistent quality problems or the inability to
achieve stable conversion efficiencies at planned levels; or extraordinary events beyond our
control which substantially increase the cost of our labor, materials or utility expenses or
significantly reduce our throughput.
Our customers are entitled to certain remedies in the event of missed deliveries of kilowatt
volume. These delivery commitments are established through rolling four quarter forecasts that are
agreed to with each of the customers within the parameters established in
19
the Long Term Supply Contracts and define the specific quantities to be purchased on a
quarterly basis and the schedules of the individual shipments to be made to the customers. In the
case of a late delivery, certain of our customers are entitled to a maximum charge representing a
percentage of the value of the delinquent delivery. If we do not meet our annual minimum volume
shipments, our customers also have the right to terminate these contracts on a prospective basis.
With our acquisition of Turner Renewable Energy, LLC on November 30, 2007, we began accounting
for a small portion of our revenues using the percentage of completion method of accounting.
Revenues for our solar power systems and project development business for the six months ended June
28, 2008 were $5.0 million and not material to our consolidated results of operations.
No single customer accounted for more than 21% of our net sales in the six months ended June
28, 2008.
Cost of sales
Our cost of sales includes the cost of raw materials and components, such as tempered back
glass, transparent conductive oxide (TCO) coated front glass, cadmium telluride, laminate,
connector assemblies, laminate edge seal and others. Other items contributing to our cost of sales
are direct labor and manufacturing overhead such as engineering expense, equipment maintenance,
environmental health and safety, quality and production control and procurement. Cost of sales also
includes depreciation of manufacturing plant and equipment and facility related expenses. In
addition, we accrue warranty and solar module end-of-life collection and recycling expenses to our
cost of sales.
We implemented a program in 2005 to collect and recycle our solar modules after their use.
Under our collection and recycling program, we enter into an agreement with the end-users of the
photovoltaic systems that use our solar modules. In the agreement, we commit, at our expense, to
remove the solar modules from the installation site at the end of their life and transport them to
a processing center where the solar module materials and components will be either refurbished and
resold as used panels or recycled to recover some of the raw materials. In return, the owner agrees
not to dispose of the solar modules except through our end-of-life collection and recycling program
or another program that we approve, and the photovoltaic system owner is responsible for
disassembling the solar modules and packaging them in containers that we provide. At the time we
sell a solar module, we record an expense in cost of sales equal to the present value of the
estimated future end-of-life collection and recycling obligation. We subsequently record the
accretion expense on this future obligation to selling, general and administrative expense.
Overall, we expect our cost of sales per watt to decrease over the next several years due to
an increase of sellable watts per solar module, an increase in unit output per line, geographic
diversification into lower-cost manufacturing regions and more efficient absorption of fixed costs
driven by economies of scale.
Gross profit
Gross profit is affected by numerous factors, including our average selling prices, foreign
exchange rates, our manufacturing costs and the effective utilization of our production facilities.
For example, our Long Term Supply Contracts specify a sales price per watt that declines
approximately 6.5% at the beginning of each year. Another factor impacting gross profits is the
ramp of production on new plants due to a reduced ability to absorb fixed costs until full
production volumes are reached. As a result, gross profits may vary from quarter to quarter and
year to year.
Research and development
Research and development expense consists primarily of salaries and personnel-related costs
and the cost of products, materials and outside services used in our process and product research
and development activities. We continuously add equipment for further process developments and
record the depreciation of such equipment as research and development expense.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other
personnel-related costs, professional fees, insurance costs, travel expense and other selling
expenses. We expect these expenses to increase in the near term, both in absolute dollars and as a
percentage of net sales, in order to support the growth of our business as we expand our sales and
marketing efforts, improve our information processes and systems and implement the financial
reporting, compliance and other infrastructure required for a public company. Over time, we expect
selling, general and administrative expense to decline as a percentage of net sales and on a cost
per watt basis as our net sales and our total watts produced increase.
20
Production start-up
Production start-up expense consists primarily of salaries and personnel-related costs and the
cost of operating a production line before it has been qualified for full production, including the
cost of raw materials for solar modules run through the production line during the qualification
phase. It also includes all expenses related to the selection of a new site and the related legal
and regulatory costs and the costs to maintain our plant replication program, to the extent we
cannot capitalize these expenditures. We incurred production start-up expense of $16.9 million
during 2007 in connection with the qualification of the German plant and the planning and
preparation of our plants at our Malaysian manufacturing center. Production start-up expense for
the six months ended June 28, 2008, was $17.4 million relating to the planning and preparation of
our plants at the Malaysian manufacturing center. We expect to incur significant production
start-up expense in fiscal year 2008 in connection with our plants at the Malaysian manufacturing
center. In general, we expect production start-up expense per production line to be higher when we
build an entirely new manufacturing facility compared with the addition of new production lines at
an existing manufacturing facility, primarily due to the additional infrastructure investment
required when building an entirely new facility. Over time, we expect production start-up expense
to decline as a percentage of net sales and on a cost per watt basis as a result of economies of
scale.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities and restricted
cash.
Interest expense, net
Interest expense, net of amounts capitalized, is incurred on various debt financings.
Foreign currency gain (loss)
Foreign currency gain (loss) consists of gains and losses resulting from holding assets and
liabilities and conducting transactions denominated in currencies other than the functional
currency of the respective subsidiaries.
Use of estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with U.S. GAAP for interim financial information. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amount of assets,
liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to inventories, intangible
assets, income taxes, warranty obligations, marketable securities valuation, derivative financial
instrument valuation, end-of-life collection and recycling, contingencies and litigation and
share-based compensation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources.
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of
net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 28, |
|
June 30, |
|
June 28, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
45.8 |
% |
|
|
63.3 |
% |
|
|
46.3 |
% |
|
|
59.5 |
% |
Gross profit |
|
|
54.2 |
% |
|
|
36.7 |
% |
|
|
53.7 |
% |
|
|
40.5 |
% |
Research and development |
|
|
2.9 |
% |
|
|
4.9 |
% |
|
|
2.7 |
% |
|
|
4.7 |
% |
Selling, general and administrative |
|
|
16.3 |
% |
|
|
22.4 |
% |
|
|
15.6 |
% |
|
|
21.5 |
% |
Production start-up |
|
|
1.7 |
% |
|
|
2.0 |
% |
|
|
3.7 |
% |
|
|
6.9 |
% |
Operating income |
|
|
33.2 |
% |
|
|
7.4 |
% |
|
|
31.7 |
% |
|
|
7.4 |
% |
Foreign currency gain (loss) |
|
|
0.2 |
% |
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
(0.2 |
)% |
Interest income |
|
|
1.8 |
% |
|
|
4.9 |
% |
|
|
2.5 |
% |
|
|
5.5 |
% |
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 28, |
|
June 30, |
|
June 28, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Interest expense, net |
|
|
0.0 |
% |
|
|
1.6 |
% |
|
|
0.0 |
% |
|
|
1.1 |
% |
Other income (expense), net |
|
|
(0.2 |
)% |
|
|
(0.6 |
)% |
|
|
(0.2 |
)% |
|
|
(0.4 |
)% |
Income tax benefit (expense) |
|
|
(9.1 |
)% |
|
|
47.3 |
% |
|
|
(9.2 |
)% |
|
|
23.1 |
% |
Net income |
|
|
26.1 |
% |
|
|
57.4 |
% |
|
|
25.1 |
% |
|
|
34.3 |
% |
Three Months Ended June 28, 2008 and June 30, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Net sales |
|
$ |
267,041 |
|
|
$ |
77,223 |
|
|
$ |
189,818 |
|
|
|
245.8 |
% |
Net sales increased by $189.8 million from $77.2 million in the three months ended June 30,
2007 to $267.0 million in the three months ended June 28, 2008, primarily as a result of a 216%
increase in the MW volume of solar modules sold. The increase in the MW volume of solar modules
sold was due to commencement of production at our first Malaysian facility, full production of our
German facility, and continued improvements to our overall production throughput. In addition, the
average number of sellable watts per solar module increased by 6% and the average selling price
increased to $2.57 in the three months ended June 28, 2008 from $2.37 in the three months ended
June 30, 2007. Our average selling price was positively impacted by $0.32 due to a favorable
foreign exchange rate between the U.S. dollar and the euro; which was partially offset by a price
decline of $0.12. During the three months ended June 28, 2008 and June 30, 2007, approximately 84%
and 100%, respectively, of our net sales resulted from sales of solar modules to customers
headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Cost of sales |
|
$ |
122,341 |
|
|
$ |
48,852 |
|
|
$ |
73,489 |
|
|
|
150.4 |
% |
% of net sales |
|
|
45.8 |
% |
|
|
63.3 |
% |
|
|
|
|
|
|
|
|
Cost of sales increased by $73.5 million from $48.9 million in the three months ended June 30,
2007 to $122.3 million in the three months ended June 28, 2008, primarily as a result of higher
production and sales volumes resulting from the full production ramp of our German facility and
initial production at our first Malaysian facility. These factors caused a $42.5 million increase
in direct material expense, a $4.8 million increase in warranty costs and end-of-life costs
relating to the collection and recycling of our solar modules, a $1.8 million increase in sales
freight and other costs and a $24.4 million increase in manufacturing overhead costs. The increase
in manufacturing overhead costs was due to a $10.9 million increase in salaries and
personnel-related expenses, including a $0.7 million increase in share-based compensation expense,
a $7.0 million of increase in facility and related expenses, and a $6.5 million increase in
depreciation expense, in each case primarily resulting from increased infrastructure associated
with our German and Malaysian facilities.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Gross profit |
|
$ |
144,700 |
|
|
$ |
28,371 |
|
|
$ |
116,329 |
|
|
|
410.0 |
% |
% of net sales |
|
|
54.2 |
% |
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $116.3 million from $28.4 million in the three months ended June 30,
2007 to $144.7 million in the three months ended June 28, 2008, reflecting an increase in net
sales. For the three months ended June 28, 2008 foreign exchange gains contributed approximately
3.1 percentage points to our gross margin. As a percentage of net sales, gross profit increased
17.5 percentage points from 36.7% to 54.2%, representing increased leverage of our fixed cost
infrastructure and scalability associated with our German and Malaysian expansions, which drove a
216% increase in the number of MW sold over the same time period. Additionally, we incurred $6.4
million of cost associated with the ramp of our first Malaysian facility in the three months ended
June 28, 2008 compared with $7.6 million of costs associated with the ramp of our German facility
in the three months ended June 28, 2007.
Research and development
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Research and development |
|
$ |
7,725 |
|
|
$ |
3,763 |
|
|
$ |
3,962 |
|
|
|
105.3 |
% |
% of net sales |
|
|
2.9 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
Research and development expense increased by $4.0 million from $3.8 million in the three
months ended June 30, 2007 to $7.7 million in the three months ended June 28, 2008, primarily as a
result of an increase in headcount, which resulted in a $2.4 million increase in personnel-related
expense, while share-based compensation expense remained unchanged. In addition, depreciation,
equipment and lab supply expenses increased by $1.7 million, which was partially offset by a $0.2
million decrease in consulting expense.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Selling, general and administrative |
|
$ |
43,626 |
|
|
$ |
17,285 |
|
|
$ |
26,341 |
|
|
|
152.4 |
% |
% of net sales |
|
|
16.3 |
% |
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by $26.3 million from $17.3 million in
the three months ended June 30, 2007 to $43.6 million in the three months ended June 28, 2008,
primarily as a result of an increase in headcount, which resulted in a $19.2 million increase in
personnel-related expense including a $7.4 million increase in share-based compensation expense. In
addition, legal and professional service fees expense increased by $3.7 million and all other
expenses increased by $3.4 million, primarily as a result of infrastructure build out related to
our continued expansion and increased compliance costs associated with being a public company.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Production start-up |
|
$ |
4,622 |
|
|
$ |
1,523 |
|
|
$ |
3,099 |
|
|
|
203.5 |
% |
% of net sales |
|
|
1.7 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
In the three months ended June 28, 2008, we incurred $4.6 million of production start-up
expense related to our sixteen line Malaysian expansion, which included related legal and
regulatory costs, compared with $1.5 million of production start-up expense related to the ramp and
qualification of our four line German plant during the three months ended June 30, 2007. Production
start-up expense is primarily attributable to the cost of labor and material and depreciation
expense to run and qualify the line prior to production, related facility expenses, management of
our replication process and third party expenses.
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Foreign currency gain |
|
$ |
647 |
|
|
$ |
21 |
|
|
$ |
626 |
|
|
|
N.M. |
|
Foreign currency gain increased by $0.6 million in the three months ended June 28, 2008
compared with the three months ended June 30, 2007, primarily as a result of a significant increase
in the amount of our euro exposure in the three months ended June 28, 2008 compared with the three
months ended June 30, 2007 and the relative increase in the volatility of the U.S. dollar to the
euro exchange rate for the three months ended June 28, 2008.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Interest income |
|
$ |
4,923 |
|
|
$ |
3,773 |
|
|
$ |
1,150 |
|
|
|
30.5 |
% |
Interest income increased by approximately $1.2 million from $3.8 million in the three months
ended June 30, 2007 to $4.9 million in the three months ended June 28, 2008, primarily as a result
of higher cash, cash equivalents and marketable securities balances in the three months ended June
28, 2008, partially offset by a decline in interest rates.
23
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Interest expense, net
|
|
$
|
|
$ |
(1,283 |
) |
|
$ |
1,283 |
|
|
|
100.0 |
% |
Interest expense, net of amounts capitalized, decreased by $1.3 million during the three
months ended June 28, 2008 compared with the three months ended June 30, 2007, primarily as a
result of higher amounts of interest expense capitalized.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Other income (expense), net |
|
$ |
(441 |
) |
|
$ |
(447 |
) |
|
$ |
6 |
|
|
|
1.3 |
% |
Other income (expense), net decreased by an immaterial amount in the three months ended June
28, 2008 compared with the three months ended June 30, 2007. Other expense consists mainly of
financing fees related to our credit facility with a consortium of banks led by IKB Deutsche
Industriebank AG and our export financing Facility Agreement.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Three Month Period Change |
Income tax benefit (expense)
|
|
$ |
(24,185 |
) |
|
$ |
36,554 |
|
|
$ |
(60,739 |
) |
|
|
(166.2 |
)% |
Income tax expense increased by $60.7 million from a tax benefit of $36.6 million in the three
months ended June 30, 2007 to a tax expense of $24.2 million in the three months ended June 28,
2008. Our effective tax rate was 25.8% for the three months ended June 28, 2008. The provision for
income taxes differs from the amount computed by applying the statutory U.S. federal rate primarily
due to the benefit associated with foreign income taxed at lower rates and the beneficial impact of
a Malaysian tax holiday effective in 2009 on Malaysian deferred taxes, partially offset by an
anticipated tax return to tax provision true-up and non-deductible expenses that increase the
effective tax rate.
The beneficial impact of the Malaysian tax holiday effective in 2009 to our effective tax rate was
5% for the three months ended June 28, 2008.
The income tax benefit of $36.6 million in the three months ended June 30, 2007
is mainly due to the reversal of valuation allowances of $39.2 million against previously
established U.S. deferred income tax assets, offset by $2.6 million in current income tax
provision.
Six Months Ended June 28, 2008 and June 30, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Net sales |
|
$ |
463,956 |
|
|
$ |
144,172 |
|
|
$ |
319,784 |
|
|
|
221.8 |
% |
Net sales increased by $319.8 million from $144.2 million in the six months ended June 30,
2007 to $464.0 million in the six months ended June 28, 2008, primarily as a result of a 196%
increase in the MW volume of solar modules sold. The increase in the MW volume of solar modules
sold was due to the full production ramp of our German facility and commencement of production at
our first Malaysian facility and continued improvements to our overall production throughput. In
addition, the average number of sellable watts per solar module increased by 7% in the six months
ended June 28, 2008 and the average selling price increased to $2.52 in the six months ended June
28, 2008 from $2.35 in the six months ended June 30, 2007. Our average selling price was positively
impacted by $0.30 due to a favorable foreign exchange rate between the U.S. dollar and the euro;
which was partially offset by a price decline of $0.13. During the six months ended June 28, 2008
and June 30, 2007, approximately 85% and 99%, respectively, of our net sales resulted from sales of
solar modules to customers headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Cost of sales |
|
$ |
214,932 |
|
|
$ |
85,759 |
|
|
$ |
129,173 |
|
|
|
150.6 |
% |
% of net sales |
|
|
46.3 |
% |
|
|
59.5 |
% |
|
|
|
|
|
|
|
|
24
Cost of sales increased by $129.2 million from $85.8 million in the six months ended June 30,
2007 to $214.9 million in the six months ended June 28, 2008, primarily as a result of higher
production and sales volumes resulting from the full production ramp of our German facility and
initial production at our first Malaysian plant. These factors caused a $74.2 million increase in
direct material expense, a $9.3 million increase in warranty costs and end-of-life costs relating
to the collection and recycling of our solar modules, a $2.9 million increase in sales freight and
other costs and a $42.8 million increase in manufacturing overhead costs. The increase in
manufacturing overhead costs was due to a $20.8 million increase in salaries and personnel-related
expenses as a result of increased head count, including a $1.5 million increase in share-based
compensation expense, a $12.6 million increase in facility and related expenses and a $9.4 million
increase in depreciation expense. In each case the increased manufacturing overhead was primarily
associated from infrastructure associated with our German and Malaysian build-outs.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Gross profit |
|
$ |
249,024 |
|
|
$ |
58,413 |
|
|
$ |
190,611 |
|
|
|
326.3 |
% |
% of net sales |
|
|
53.7 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $190.6 million from $58.4 million in the six months ended June 30,
2007 to $249.0 million in the six months ended June 28, 2008, reflecting an increase in net sales.
For the six months ended June 28, 2008 foreign exchange gains resulting in higher average selling
prices contributed approximately 2.7 percentage points to our gross margin. As a percentage of net
sales, gross profit increased 13.2 percentage points from 40.5% to 53.7%, representing increased
leverage of our fixed cost infrastructure and scalability associated with our plant expansions,
which drove a 196% increase in the number of MW sold over the same time period. Additionally, we
incurred $6.4 million of cost associated with the ramp of our first Malaysian facility in the six
months ended June 28, 2008 compared with $7.6 million of costs associated with the ramp of our
German facility in the six months ended June 30, 2007.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Research and development |
|
$ |
12,485 |
|
|
$ |
6,821 |
|
|
$ |
5,664 |
|
|
|
83.0 |
% |
% of net sales |
|
|
2.7 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
Research and development expense increased by $5.7 million from $6.8 million in the six months
ended June 30, 2007 to $12.5 million in the six months ended June 28, 2008, primarily as a result
of an increase in headcount, which resulted in a $3.8 million increase in personnel-related
expense, including a $0.2 million decrease in share-based compensation expense. In addition,
depreciation, equipment and lab supply expenses increased by $2.4 million, which was partially
offset by a $0.5 million decrease in consulting expense.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Selling, general and administrative |
|
$ |
72,297 |
|
|
$ |
30,975 |
|
|
$ |
41,322 |
|
|
|
133.4 |
% |
% of net sales |
|
|
15.6 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by $41.3 million from $31.0 million in
the six months ended June 30, 2007 to $72.3 million in the six months ended June 28, 2008,
primarily as a result of an increase in headcount, which resulted in a $29.4 million increase in
personnel-related expense including a $11.9 million increase in share-based compensation expense. In addition, legal and professional service fees expense increased by
$6.3 million and all other expenses increased by $5.6 million, primarily as a result of
infrastructure build out related to our continued expansion and increased compliance cost
associated with being a public company.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Production start-up |
|
$ |
17,383 |
|
|
$ |
9,997 |
|
|
$ |
7,386 |
|
|
|
73.9 |
% |
% of net sales |
|
|
3.7 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
25
In the six months ended June 28, 2008, we incurred $17.4 million of production start-up
expense related to our sixteen line Malaysian expansion, which included related legal and
regulatory costs, compared with $10.0 million of production start-up expense related to the ramp
and qualification of our four line German plant during the six months ended June 30, 2007.
Production start-up expense is primarily attributable to the cost of labor and material and
depreciation expense to run and qualify the line prior to production, related facility expenses,
management of our replication process and third party expenses.
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Foreign currency gain (loss)
|
|
$ |
1,421 |
|
|
$ |
(249 |
) |
|
$ |
1,670 |
|
|
N.M. |
Foreign currency gain for six months ended June 28, 2008 was $1.4 million compared with a
foreign currency loss of $0.2 million for the six months ended June 30, 2007. This was primarily as
a result of a significant increase in the amount of our euro exposure in the six months ended June
28, 2008 compared with the six months ended June 30, 2007 and the relative increase in the
volatility of the U.S. dollar to the euro exchange rate for the six months ended June 28, 2008.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Interest income |
|
$ |
11,608 |
|
|
$ |
7,900 |
|
|
$ |
3,708 |
|
|
|
46.9 |
% |
Interest income increased by $3.7 million from $7.9 million in the six months ended June 30,
2007 to $11.6 million in the six months ended June 28, 2008, primarily as a result of higher cash,
cash equivalents and marketable securities balances in the six months ended June 28, 2008,
partially offset by a decline in interest rates.
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Interest expense, net |
|
$ |
(4 |
) |
|
$ |
(1,484 |
) |
|
$ |
1,480 |
|
|
|
99.7 |
% |
Interest
expense, net of amounts capitalized, decreased by $1.5 million during the six months
ended June 28, 2008 compared with the six months ended June 30, 2007, primarily as a result of
higher amounts of interest expense capitalized.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Other income (expense), net |
|
$ |
(819 |
) |
|
$ |
(614 |
) |
|
$ |
(205 |
) |
|
|
(33.4 |
)% |
Other income (expense), net increased by $0.2 million during the six months ended June 28,
2008 compared with the six months ended June 30, 2007. Other expense consists mainly of financing
fees related to our credit facility with a consortium of banks led by IKB Deutsche Industriebank AG
and our export financing Facility Agreement.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
Six Month Period Change |
Income tax benefit (expense)
|
|
$ |
(42,775 |
) |
|
$ |
33,273 |
|
|
$ |
(76,048 |
) |
|
|
(228.6 |
)% |
Income tax expense increased by $76.0 million from a tax benefit of $33.3 million in the six
months ended June 30, 2007 to a tax expense of $42.8 million in the six months ended June 28, 2008.
Our effective tax rate was 26.9% for the six months ended June 28, 2008. The provision for income
taxes differs from the amount computed by applying the statutory U.S. federal rate primarily due to
26
the benefit associated with foreign income taxed at lower rates and the beneficial impact of a
Malaysian tax holiday effective in 2009 on Malaysian deferred taxes, partially offset by an
anticipated tax return to tax provision true-up and non-deductible expenses that increase the
effective tax rate.
The beneficial impact of the Malaysian tax holiday effective in 2009 to our effective tax rate was
2.9% for the six months ended June 28, 2008.
The income tax benefit of $33.3 million in the six months ended June 30, 2007
is mainly due to the reversal of valuation allowances of $39.2 million against previously
established U.S. deferred income tax assets, offset by $6.0 million in current income tax
provision.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that affect our more significant
judgments and estimates used in the preparation of our condensed consolidated financial statements,
refer to our Annual Report on Form 10-K for the year ended December 29, 2007 filed with the
Securities and Exchange Commission. There have been no changes to our critical accounting policies
since December 29, 2007, with the exception of our adoption of SFAS 157, Fair Value Measurements,
effective December 30, 2007, the first day of our fiscal year 2008. SFAS 157 establishes a
framework for the fair value measurement of our marketable securities and derivative instruments.
Recent Accounting Pronouncements
See Note 3 for a summary of recent accounting pronouncements.
Liquidity and Capital Resources
As of June 28, 2008, we had $661.2 million in cash, cash equivalents and marketable securities
compared with $669.7 million at December 29, 2007.
Operating Activities
Cash provided by operating activities was $122.5 million in the six months ended June 28, 2008
compared with $25.3 million in the six months ended June 30, 2007. Cash received from customers
increased to $429.2 million during the six months ended June 28, 2008 from $157.6 million during
the six months ended June 30, 2007 primarily due to an increase in net sales. This increase was
partially offset by cash paid to suppliers and employees of $301.7 million in the six months ended
June 28, 2008 compared with cash paid to suppliers and employees of $118.7 million in the six
months ended June 30, 2007, mainly due to an increase in raw material and component purchases, an
increase in personnel-related costs due to higher headcount and other costs supporting our global
expansion.
Investing Activities
Cash used in investing activities was $104.0 million in the six months ended June 28, 2008
compared with cash used of $287.9 million in the six months ended June 30, 2007. Capital
expenditures were $234.9 million during the six months ended June 28, 2008 and $80.4 million in the
six months ended June 30, 2007. The increase in capital expenditures was primarily due to our
investments related to the construction of our new plants in Malaysia. Cash provided by investing
activities resulted primarily from the net proceeds of marketable securities of $145.9 million in
the six months ended June 28, 2008. In addition, we placed $14.9 million of cash in restricted
accounts to fund our solar module collection and recycling program in the six months ended June 28,
2008.
Financing Activities
Cash provided by financing activities was $75.6 million in the six months ended June 28, 2008
compared with $61.3 million in the six months ended June 30, 2007. Cash provided by financing
activities for the six months ended June 28, 2008 resulted primarily from an increase in investment
incentives related to the construction of our plant in Frankfurt/Oder, Germany of $35.7 million and
proceeds from the issuance of debt, net of issuance cost, of $49.4 million related to the equipment
export facility agreement for our Malaysian manufacturing center. See Note 10 for more information
about these new credit facilities. This increase was partially offset by the repayment of long-term
debt of $30.6 million in the six months ended June 28, 2008. In the six months ended June 30, 2007
we received $41.3 million from additional drawings under our credit facilities with a consortium of
banks led by IKB Deutsche Industriebank AG related to the financing of our German manufacturing
facility. Proceeds from the issuance of common stock for the six months ended June 28, 2008 were
$7.2 million compared with $2.8 million for the six months ended June 30, 2007 mainly due to
proceeds received from the exercise of employee stock options.
27
Contractual Obligations
Our contractual obligations other than in the ordinary course of business have not materially
changed since the end of our fiscal year 2007 with the exception of our export financing agreement
for First Solar Malaysia (see Note 10). See also our Annual Report on Form 10-K for the fiscal year
ended December 29, 2007, for additional information regarding our contractual obligations.
We believe that our current cash and cash equivalents, marketable securities, cash flows from
operating activities and low interest debt financings for our German plant and our Malaysian plants
under the facility agreement will be sufficient to meet our working capital and capital expenditure
needs for at least the next 12 months. However, if our financial results or operating plans change
from our current assumptions, we may not have sufficient resources to support our business plan. As
a result, we may engage in one or more debt or equity financings in the future that could result in
increased expenses or dilution to our existing stockholders. If we are unable to obtain debt or
equity financing on reasonable terms, we may be unable to execute our expansion strategy.
On December 30, 2007, the beginning of our fiscal year 2008, we adopted SFAS 157. Our adoption
of SFAS 157 was limited to our financial assets and financial liabilities, as permitted by FSP
157-2. We do not have any nonfinancial assets or nonfinancial liabilities that are recognized or
disclosed at fair value in our financial statements on a recurring basis. Our adoption of SFAS 157
did not have a material effect on our financial position and results of operations, and our fair
value models do not make material use of unobservable inputs. See Note 9 for further information
about our adoption of SFAS 157.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 28, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Our international operations accounted for approximately 98.9% of our net sales in the six
months ended June 28, 2008 and 100.0% of our net sales in the six months ended June 30, 2007; all
of which were denominated in euros. As a result, we have exposure to foreign exchange risk with
respect to almost all of our net sales. Fluctuations in exchange rates, particularly in the U.S.
dollar to euro exchange rate, affect our gross and net profit margins and could result in foreign
exchange and operating losses. Historically, most of our exposure to foreign exchange risk has
related to currency gains and losses between the times we sign and settle our sales contracts. For
example, our Long Term Supply Contracts obligate us to deliver solar modules at a fixed price in
euros per watt and do not adjust for fluctuations in the U.S. dollar to euro exchange rate. In the
six months ended June 28, 2008, a 10% change in the euro exchange rates would have impacted our net
sales by $46.4 million. With the expansion of our manufacturing operations into Germany and the
current expansion into Malaysia, many of our operating expenses for the plants in these countries
will be denominated in the local currency.
In the past, currency exchange rate fluctuations have had an impact on our business and
results of operations. For example, currency exchange rate fluctuations positively impacted our
cash flows by $12.9 million in the six months ended June 28, 2008 and positively impacted our cash
flows by $1.0 million in the six months ended June 30, 2007. Although we cannot predict the impact
of future currency exchange rate fluctuations on our business or results of operations, we believe
that we may have increased risk associated with currency exchange rate fluctuations in the future.
As of June 28, 2008, we had two outstanding foreign exchange forward contracts to sell
20.0 million ($26.8 million at a fixed exchange rate of $1.34/1.00) and purchase 32.4
million ($50.2 million at a fixed exchange rate of $1.55/1.00). The first contract is due to
settle on February 27, 2009 and the second contract settled on July 3, 2008. These currency forward
contracts hedge an intercompany loan and third party balance sheet exposure.
Most of our German plants operating expenses are denominated in euros, creating natural
hedges against the currency risk in our net sales. In addition, we purchased forward contracts to
hedge the exchange risk on forecasted cash flows denominated in euro. The total notional value of
the forward contracts was 252.0 million ($398.2 million at the balance sheet close rate on June
28, 2008 of $1.58/1.00) on June 28, 2008.
Interest Rate Risk
28
We are exposed to interest rate risk because many of our end-users depend on debt and tax
equity financing to purchase and install a solar electricity generation system. Although the useful
life of a solar electricity generation system is approximately 25 years, end-users of our solar
modules must pay the entire cost of the system at the time of installation. As a result, many of
our end-users rely on debt financing to fund their up-front capital expenditure and final project.
An increase in interest rates could make it difficult for our end-users to secure the financing
necessary to purchase and install a system on favorable terms, or at all, and thus lower demand for
our solar modules and system development services and reduce our net sales. In addition, we believe
that a significant percentage of our end-users install solar electricity generation systems as an
investment, funding the initial capital expenditure through a combination of equity and debt. An
increase in interest rates could lower an investors return on investment in a system or make
alternative investments more attractive relative to solar electricity generation systems, which, in
each case, could cause these end-users to seek alternative investments that promise higher returns.
During 2006, we entered into a credit facility with a consortium of banks led by IKB Deutsche
Industriebank AG, which bears interest at Euribor plus 1.6% for a term loan, Euribor plus 2.0% for
a bridge loan and Euribor plus 1.8% for a revolving credit facility.
During May of 2008, we entered into the Facility Agreement with IKB, Natixis, Natixis Labuan
Branch and Ausfuhrkredit-Gesellschaft mbH which is denominated in euro. The loans under fixed-rate
credit facility will bear interest on the outstanding unpaid principal balance at an annual rate of
4.54%. The loans under the floating-rate credit facility will bear interest on the outstanding
unpaid principal balance at Euribor plus a margin of 0.55%.
As of June 28, 2008, we hedged our exposure to changes in Euribor using interest rate swaps
with a combined notional value of 43.7 million ($69.0 million at the balance sheet close rate
on June 28, 2008 of $1.58/1.00).
In addition, we invest some of our cash in debt securities, which exposes us to interest rate
risk. The primary objective of our investment activities is to preserve principal and provide
liquidity on demand, while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities in which we invest may be subject to
market risk. This means that a change in prevailing interest rates may cause the principal amount
of the investment to fluctuate. For example, if we hold a security that was issued with an interest
rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the value of
our investment will probably decline. To minimize this risk, we maintain our portfolio of cash
equivalents and marketable securities in a variety of securities, including money market funds,
government and non-government debt securities and certificates of deposit. As of June 28, 2008, our
fixed-income investments earned a pretax yield of approximately 2.3%, with a weighted average
maturity of 3 months. If interest rates were to instantaneously increase (decrease) by 100 basis
points, the fair market value of our total investment portfolio could decrease (increase) by
approximately $0.9 million. The direct risk to us associated with fluctuating interest rates is
limited to our investment portfolio and we do not believe that a 10% change in interest rates will
have a significant impact on our financial position, results of operations or cash flows. As of
June 28, 2008, all of our investments were in money market accounts or U.S. government securities
and federal agency debt.
Commodity and Component Risk
We are exposed to price risks for the raw materials, components and energy costs used in the
manufacture and transportation of our solar modules. Also, some of our raw materials and components
are sourced from a limited number of suppliers or a sole supplier. We endeavor to qualify multiple
suppliers, a process which could take up to 12 months if successful, but some suppliers are unique
and it may not be feasible to qualify second source suppliers. In some cases, we also enter into
long term supply contracts for raw materials and components, but these arrangements are normally of
shorter duration than the term of our Long Term Supply Contracts with our customers. As a result,
we remain exposed to price changes in the raw materials and components used in our modules. In
addition, a failure by a key supplier could disrupt our supply chain which could result in higher
prices for our raw materials and components and even a disruption in our manufacturing process.
Since our selling price under our Long Term Supply Contracts does not adjust in the event of price
changes in our underlying raw material or component and require minimum deliveries of our products
during their term, we are unable to pass along changes in the cost of the raw materials and
components for our products and may be in default of our delivery obligations if we experience a
manufacturing disruption.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted
an evaluation as of June 28, 2008 of the effectiveness of our disclosure controls and procedures
as defined in Exchange Act Rule 13a-15(e). Based on that evaluation,
29
our Chief Executive Officer and Chief Financial Officer concluded that as of June 28, 2008,
our disclosure controls and procedures were effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in rules and forms of the SEC and is
accumulated and communicated to our management as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of our internal control over financial reporting as defined in Exchange Act Rule
13a-15(f) to determine whether any changes in our internal control over financial reporting
occurred during the six months ended June 28, 2008 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. Based on that
evaluation, there have been no such changes in our internal control over financial reporting during
the six months ended June 28, 2008.
CEO and CFO Certifications
We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our
Chief Executive Officer and Chief Financial Officer, which are required in accordance with the
Exchange Act. We recommend that this Item 4 be read in conjunction with those certifications for a
more complete understanding of the subject matter presented.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives are being met. Further, the design of any
control systems must reflect the fact that there are resource constraints, and the benefits of all
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Control systems can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations
and claims, including, but not limited to, routine employment matters. Although we cannot predict
with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us,
we do not believe that any currently pending legal proceeding to which we are a party will have a
material adverse effect on our business, results of operations, cash flows or financial condition.
In accordance with SFAS 5, Accounting for Contingencies, we record a liability when it is
both probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. We review these liabilities at least quarterly and adjust them to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and other information and events
pertaining to a particular case.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A: Risk Factors in our Annual Report on Form 10-K for the
year ended December 29, 2007 and our registration statement on Form S-1/A filed on August 3, 2007,
which could materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K and our registration statement on Form S1/A are not the
only risks facing our company. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our business, financial
condition or future results. The risk factors included in our Annual Report on Form 10-K for the
year ended December 29, 2007 and our registration statement on Form S-1/A filed on August 3, 2007,
have not materially changed.
30
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2008 Annual Meeting of Stockholders on May 23, 2008. At the meeting, our
stockholders voted on the following two proposals and cast their votes as follows to approve such
proposals:
Proposal 1: To elect the following eight nominees to First Solars board of directors, each to
serve on our board of directors until the next annual meeting of stockholders or until his
successor has been elected and qualified:
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
Withheld |
Michael J. Ahearn |
|
|
71,816,155 |
|
|
|
1,229,894 |
|
Craig Kennedy |
|
|
72,639,315 |
|
|
|
406,734 |
|
James F. Nolan |
|
|
70,976,925 |
|
|
|
2,069,124 |
|
J. Thomas Presby |
|
|
71,065,583 |
|
|
|
1,980,466 |
|
Bruce Sohn |
|
|
72,230,057 |
|
|
|
815,992 |
|
Paul H. Stebbins |
|
|
72,230,610 |
|
|
|
815,439 |
|
Michael Sweeney |
|
|
72,562,256 |
|
|
|
483,793 |
|
José H. Villarreal |
|
|
71,947,090 |
|
|
|
1,098,959 |
|
Proposal 2: To ratify the appointment of PricewaterhouseCoopers, LLP as First Solars
independent registered public accounting firm for the fiscal year ending December 27, 2008:
|
|
|
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
72,971,909 |
|
|
55,738 |
|
|
|
18,402 |
|
31
Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
Incorporated by Reference |
|
|
|
Filed |
Number |
|
Exhibit Description |
|
Form |
|
Date of First Filing |
|
File Number |
|
Exhibit Number |
|
Herewith |
10.1
|
|
Employment Agreement dated May 5, 2008
between First Solar, Inc. and John
Carrington.
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries of First Solar, Inc. |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.01
|
|
Certification of Chief Executive Officer
pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
32.02
|
|
Certification of Chief Financial Officer
pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
32.01*
|
|
Certification of Chief Executive Officer
and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
* |
|
This exhibit shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective
of any general incorporation language in any filings. |
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FIRST SOLAR, INC.
|
|
|
By: |
/s/ JENS MEYERHOFF
|
|
|
|
Jens Meyerhoff |
|
|
|
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer) |
|
|
July 31, 2008
33
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
Incorporated by Reference |
|
|
|
Filed |
Number |
|
Exhibit Description |
|
Form |
|
Date of First Filing |
|
File Number |
|
Exhibit Number |
|
Herewith |
10.1
|
|
Employment Agreement dated May 5, 2008
between First Solar, Inc. and John
Carrington.
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries of First Solar, Inc.
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.01
|
|
Certification of Chief Executive Officer
pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.02
|
|
Certification of Chief Financial Officer
pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
32.01*
|
|
Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
* |
|
This exhibit shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective
of any general incorporation language in any filings. |
34