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 September 27, 2008
or
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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
(State or other jurisdiction of
incorporation or organization)
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20-4623678
(I.R.S. Employer
Identification No.) |
350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(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 þ
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Accelerated filer o
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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 October 24, 2008 there were 81,089,850 shares of the registrants common stock, par
value $0.001, outstanding.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 27, |
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September 29, |
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September 27, |
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September 29, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
348,694 |
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$ |
159,007 |
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$ |
812,650 |
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$ |
303,179 |
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Cost of sales |
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153,251 |
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76,967 |
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368,183 |
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162,726 |
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Gross profit |
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195,443 |
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82,040 |
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444,467 |
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140,453 |
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Operating expenses: |
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Research and development |
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9,952 |
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3,854 |
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22,437 |
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10,675 |
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Selling, general and administrative |
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48,995 |
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27,082 |
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121,292 |
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58,057 |
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Production start-up |
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6,344 |
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2,805 |
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23,727 |
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12,802 |
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Total operating expenses |
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65,291 |
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33,741 |
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167,456 |
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81,534 |
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Operating income |
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130,152 |
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48,299 |
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277,011 |
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58,919 |
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Foreign currency gain (loss) |
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(1,889 |
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965 |
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(468 |
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716 |
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Interest income |
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5,323 |
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5,298 |
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16,931 |
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13,199 |
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Interest expense, net |
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(127 |
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(647 |
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(131 |
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(2,131 |
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Other income (expense), net |
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(360 |
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(266 |
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(1,179 |
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(881 |
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Income before income taxes |
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133,099 |
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53,649 |
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292,164 |
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69,822 |
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Income tax benefit (expense) |
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(33,830 |
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(7,615 |
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(76,605 |
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25,658 |
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Net income |
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$ |
99,269 |
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$ |
46,034 |
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$ |
215,559 |
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$ |
95,480 |
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Net income per share: |
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Basic |
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$ |
1.23 |
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$ |
0.61 |
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$ |
2.70 |
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$ |
1.30 |
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Diluted |
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$ |
1.20 |
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$ |
0.58 |
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$ |
2.63 |
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$ |
1.24 |
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Weighted-average number of shares
used in per share calculations: |
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Basic |
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80,430 |
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75,666 |
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79,789 |
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73,537 |
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Diluted |
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82,436 |
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79,088 |
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82,016 |
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76,856 |
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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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September 27, |
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December 29, |
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2008 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
581,779 |
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$ |
404,264 |
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Marketable securities current |
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133,371 |
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232,686 |
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Accounts receivable, net |
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41,474 |
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18,165 |
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Inventories |
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126,469 |
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40,204 |
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Deferred project costs |
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9,079 |
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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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3,716 |
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3,890 |
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Prepaid expenses and other current assets |
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65,591 |
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64,780 |
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Total current assets |
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962,376 |
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802,509 |
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Property, plant and equipment, net |
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750,477 |
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430,104 |
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Deferred tax asset, net noncurrent |
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54,852 |
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51,811 |
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Marketable securities noncurrent |
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14,272 |
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32,713 |
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Restricted investments |
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29,924 |
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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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14,120 |
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6,031 |
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Total assets |
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$ |
1,859,850 |
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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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$ |
36,691 |
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$ |
26,441 |
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Income tax payable |
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70,726 |
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24,487 |
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Accrued expenses |
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146,913 |
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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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26,691 |
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14,836 |
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Other current liabilities |
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16,610 |
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14,803 |
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Total current liabilities |
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297,631 |
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186,478 |
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Accrued collection and recycling liabilities |
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28,083 |
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13,079 |
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Long-term debt |
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140,808 |
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68,856 |
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Other liabilities noncurrent |
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8,158 |
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5,632 |
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Total liabilities |
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474,680 |
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274,045 |
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Stockholders equity: |
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Common stock, $0.001 par value per share;
500,000,000 shares authorized; 81,086,151 and
78,575,211 shares issued and outstanding at
September 27, 2008 and December 29, 2007,
respectively |
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81 |
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79 |
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Additional paid-in capital |
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1,144,678 |
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1,079,775 |
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Accumulated earnings |
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228,454 |
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12,895 |
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Accumulated other comprehensive income |
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11,957 |
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4,518 |
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Total stockholders equity |
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1,385,170 |
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1,097,267 |
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Total liabilities and stockholders equity |
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$ |
1,859,850 |
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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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Nine Months Ended |
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September 27, |
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September 29, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Cash received from customers |
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$ |
779,209 |
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$ |
309,837 |
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Cash paid to suppliers and employees |
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(513,583 |
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(172,169 |
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Interest received |
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15,306 |
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7,803 |
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Interest paid, net of amounts capitalized |
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(3,003 |
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(2,131 |
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Income tax |
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(3,202 |
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(18,191 |
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Excess tax benefit from share-based compensation arrangements |
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(13,736 |
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(18,600 |
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Other |
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(1,179 |
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(304 |
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Net cash provided by operating activities |
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259,812 |
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106,245 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(330,610 |
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(145,635 |
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Purchase of marketable securities |
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(274,262 |
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(726,581 |
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Proceeds from maturities of marketable securities |
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373,367 |
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3,450 |
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Proceeds from sales of marketable securities |
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49,450 |
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158,945 |
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Increase in restricted investments |
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(15,254 |
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(5,908 |
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Net cash used in investing activities |
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(197,309 |
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(715,729 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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14,107 |
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372,714 |
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Repayment of long-term debt |
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(34,833 |
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(29,966 |
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Proceeds from issuance of debt, net of issuance costs |
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94,090 |
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48,160 |
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Excess tax benefit from share-based compensation arrangements |
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13,736 |
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18,600 |
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Proceeds from economic development funding |
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35,661 |
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6,601 |
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Other financing activities |
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(5 |
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(3 |
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Net cash provided by financing activities |
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122,756 |
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416,106 |
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Effect of currency exchange rate changes on cash and cash equivalents |
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(7,744 |
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2,439 |
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Net increase (decrease) in cash and cash equivalents |
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177,515 |
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(190,939 |
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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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$ |
581,779 |
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$ |
117,153 |
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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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$ |
31,468 |
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$ |
16,677 |
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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)
Nine Months Ended September 27, 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 nine months ended September 27, 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 to our
condensed consolidated financial statements 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 2009. 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
6
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 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 on
September 16, 2008 of the Public Company Oversight Board amendments to remove the U.S. GAAP
hierarchy from the auditing standards. As a result, we will adopt SFAS 162 in the fourth quarter of
our fiscal year 2008. We do not expect SFAS 162 to have a material impact on our financial
position, results of operations or cash flows.
In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures About Credit
Derivatives and Certain Guarantees. FSP FAS 133-1 and FIN 45-4 is intended to improve disclosures
about credit derivatives by requiring more information about the potential adverse effects of
changes in credit risk on the financial position, financial performance and cash flows of the
sellers of credit derivatives. FSP FAS 133-1 and FIN 45-4 is effective for fiscal years beginning
after November 15, 2008. We do not expect FSP FAS 133-1 and FIN 45-4 to have a material impact on
our financial position, results of operations or cash flows.
In October 2008, the FASB issued FSP FAS 157-3, Determining Fair Value of a Financial Asset
When the Market for That Asset Is Not Active. FSP FAS 157-3 provides guidance and illustrates key
considerations for determining fair value in markets that are not active. FSP FAS 157-3 is
effective upon issuance and must be applied to all periods for which financial statements have not
been issued. The adoption of FSP FAS 157-3 did not have any 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 $33.4 million to
goodwill as of December 29, 2007, which represents the excess of the purchase price over the fair
value of the identifiable net tangible and intangible assets of Turner Renewable Energy, LLC.
The changes in the carrying amount of goodwill for the nine months ended September 27, 2008
are as follows (in thousands):
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Balance as of December 29, 2007 |
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$ |
33,449 |
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Goodwill adjustments |
|
|
380 |
|
|
|
|
|
Balance as of September 27, 2008 |
|
$ |
33,829 |
|
|
|
|
|
The goodwill adjustment of $0.4 million, which we made in the first quarter of 2008, was
primarily the result of adjustments made to the opening balance sheet for acquisition-related
intangible assets and related deferred taxes.
SFAS 142, Goodwill and Other Intangible Assets requires us to test goodwill for impairment at
least annually or sooner if events or changes in circumstances between scheduled annual tests
indicate that goodwill may be impaired. We perform our goodwill impairment tests in the fourth
fiscal quarter.
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 at the
time of acquisition and future customer contracts not yet started. We amortize these costs using
the percentage of completion method.
7
Information regarding our acquisition-related intangible assets that are being amortized is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 29, 2007 |
|
|
Gross |
|
|
|
|
|
Net |
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
|
Amount |
|
Amortization |
|
Value |
Customer contracts in progress at
the acquisition date |
|
$ |
170 |
|
|
$ |
28 |
|
|
$ |
142 |
|
Customer contracts executed after
the acquisition date |
|
|
1,620 |
|
|
|
|
|
|
|
1,620 |
|
|
|
|
Total |
|
$ |
1,790 |
|
|
$ |
28 |
|
|
$ |
1,762 |
|
|
|
|
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 September 27, 2008 |
|
|
(Unaudited) |
|
|
Gross |
|
|
|
|
|
Net |
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
|
Amount |
|
Amortization |
|
Value |
Customer contracts in progress at
the acquisition date |
|
$ |
62 |
|
|
$ |
51 |
|
|
$ |
11 |
|
Customer contracts executed after
the acquisition date |
|
|
394 |
|
|
|
56 |
|
|
|
338 |
|
|
|
|
Total |
|
$ |
456 |
|
|
$ |
107 |
|
|
$ |
349 |
|
|
|
|
Amortization expense for acquisition-related intangible assets was $22,000 for the three
months ended September 27, 2008 and $107,000 for the nine months ended September 27, 2008.
Note 5. Economic Development Funding
On July 26, 2006, we were approved to receive taxable investment incentives
(Investitionszuschüsse) of approximately 21.5 million ($31.4 million at the balance sheet close
rate on September 27, 2008 of $1.46/1.00) 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 September 27, 2008, we had
received cash payments of 20.5 million ($29.9 million at the balance sheet close rate on September
27, 2008 of $1.46/1.00) under this program, and we had accrued an additional 0.6 million ($0.9
million at the balance sheet close rate on September 27, 2008 of $1.46/1.00) that we are eligible
to receive under this program based on qualifying expenditures that we had incurred through that
date. As of September 27, 2008, there were no additional investment incentives that we were
eligible to receive under this program.
Note 6. Cash and Investments
Cash, cash equivalents and marketable securities consisted of the following at September 27,
2008 and December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
450,296 |
|
|
$ |
157,326 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
19,956 |
|
|
|
172,246 |
|
Foreign agency debt |
|
|
21,421 |
|
|
|
|
|
Corporate debt securities |
|
|
9,982 |
|
|
|
41,304 |
|
Money market mutual fund |
|
|
80,124 |
|
|
|
31,958 |
|
Municipal debt |
|
|
|
|
|
|
1,430 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
581,779 |
|
|
|
404,264 |
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
118,443 |
|
|
|
94,899 |
|
Foreign agency debt |
|
|
8,948 |
|
|
|
|
|
Corporate debt securities |
|
|
20,252 |
|
|
|
58,921 |
|
Municipal debt |
|
|
|
|
|
|
111,579 |
|
|
|
|
|
|
|
|
Total marketable securities |
|
|
147,643 |
|
|
|
265,399 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
729,422 |
|
|
$ |
669,663 |
|
|
|
|
|
|
|
|
We have classified our marketable securities as available-for-sale. Accordingly, we record
them at fair value and record net unrealized gains and losses 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 and nine months ended
September 27, 2008, we realized $0.2 million and $0.6 million, respectively, in gains and $0.3
million and $0.4 million, respectively, in losses on our marketable securities. See Note 9 to our
condensed consolidated financial statements for information about the fair value measurement of our
marketable securities.
All of our available-for-sale marketable securities are subject to a periodic impairment
review. We consider 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 September
27, 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
Federal agency debt |
|
$ |
118,452 |
|
|
$ |
43 |
|
|
$ |
52 |
|
|
$ |
118,443 |
|
Foreign agency debt |
|
|
8,979 |
|
|
|
1 |
|
|
|
32 |
|
|
|
8,948 |
|
Corporate debt securities |
|
|
20,400 |
|
|
|
7 |
|
|
|
155 |
|
|
|
20,252 |
|
|
|
|
Total |
|
$ |
147,831 |
|
|
$ |
51 |
|
|
$ |
239 |
|
|
$ |
147,643 |
|
|
|
|
Contractual maturities of our available-for-sale marketable securities as of September 27,
2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
One year or less |
|
$ |
133,478 |
|
|
$ |
33 |
|
|
$ |
140 |
|
|
$ |
133,371 |
|
One year to two years |
|
|
14,353 |
|
|
|
18 |
|
|
|
99 |
|
|
|
14,272 |
|
|
|
|
Total |
|
$ |
147,831 |
|
|
$ |
51 |
|
|
$ |
239 |
|
|
$ |
147,643 |
|
|
|
|
The net unrealized loss on our investments as of September 27, 2008 was $0.2 million. 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. The recent and unprecedented disruption in the current credit markets has had a
significant adverse impact on a number of financial institutions. However, as of September 27,
2008, the investments that we hold in our marketable securities portfolio have not been materially
impacted by the current credit environment and we do not believe that the investments that we hold
in our marketable securities portfolio will be materially impacted in the near future.
9
Note 7. Consolidated Balance Sheet Details
Accounts receivable, net
Accounts receivable, net consisted of the following at September 27, 2008 and December 29,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Accounts receivable, gross |
|
$ |
41,515 |
|
|
$ |
18,170 |
|
Allowance for doubtful accounts |
|
|
(41 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
41,474 |
|
|
$ |
18,165 |
|
|
|
|
|
|
|
|
Inventories
Inventories consisted of the following at September 27, 2008 and December 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
94,420 |
|
|
$ |
22,874 |
|
Work in process |
|
|
7,100 |
|
|
|
2,289 |
|
Finished goods |
|
|
24,949 |
|
|
|
15,041 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
126,469 |
|
|
$ |
40,204 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following at September 27, 2008 and
December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Prepaid expenses |
|
$ |
7,024 |
|
|
$ |
5,493 |
|
Prepaid supplies |
|
|
12,316 |
|
|
|
3,646 |
|
Capitalized equipment spares |
|
|
8,456 |
|
|
|
997 |
|
Prepaid taxes current |
|
|
1,025 |
|
|
|
13,042 |
|
Pending sale of marketable securities |
|
|
|
|
|
|
28,600 |
|
Derivative instruments current |
|
|
15,331 |
|
|
|
104 |
|
Costs and estimated earnings in excess of billings |
|
|
8,544 |
|
|
|
6 |
|
Other current assets |
|
|
12,895 |
|
|
|
12,892 |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
|
$ |
65,591 |
|
|
$ |
64,780 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at September 27, 2008 and
December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Buildings and improvements |
|
$ |
108,574 |
|
|
$ |
44,679 |
|
Machinery and equipment |
|
|
436,425 |
|
|
|
170,125 |
|
Office equipment and furniture |
|
|
17,795 |
|
|
|
7,365 |
|
Leasehold improvements |
|
|
11,323 |
|
|
|
4,046 |
|
|
|
|
|
|
|
|
Depreciable property, plant and equipment, gross |
|
|
574,117 |
|
|
|
226,215 |
|
Accumulated depreciation |
|
|
(82,003 |
) |
|
|
(43,134 |
) |
|
|
|
|
|
|
|
Depreciable property, plant and equipment, net |
|
|
492,114 |
|
|
|
183,081 |
|
Land |
|
|
4,944 |
|
|
|
3,046 |
|
Construction in progress |
|
|
253,419 |
|
|
|
243,977 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
750,477 |
|
|
$ |
430,104 |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment was $16.9 million and $6.6 million for the three
months ended September 27, 2008 and September 29, 2007, respectively and was $40.4 million and
$17.8 million for the nine months ended September 27, 2008 and September 29, 2007, respectively.
10
We incurred and capitalized interest cost (into our property, plant and equipment) as follows
during the three and nine months ended September 27, 2008 and September 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Interest cost incurred |
|
$ |
2,267 |
|
|
$ |
1,742 |
|
|
$ |
5,079 |
|
|
$ |
4,264 |
|
Interest capitalized |
|
|
(2,140 |
) |
|
|
(1,095 |
) |
|
|
(4,948 |
) |
|
|
(2,133 |
) |
|
|
|
Interest expense, net |
|
$ |
127 |
|
|
$ |
647 |
|
|
$ |
131 |
|
|
$ |
2,131 |
|
|
|
|
Accrued expenses
Accrued expenses consisted of the following at September 27, 2008 and December 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Product warranty liability |
|
$ |
9,858 |
|
|
$ |
7,276 |
|
Accrued compensation and benefits |
|
|
24,766 |
|
|
|
21,862 |
|
Accrued property, plant and equipment |
|
|
54,226 |
|
|
|
35,220 |
|
Accrued inventory |
|
|
28,952 |
|
|
|
4,811 |
|
Accrued subcontractor services and materials |
|
|
5,294 |
|
|
|
|
|
Accrued taxes other |
|
|
3,362 |
|
|
|
348 |
|
Other accrued expenses |
|
|
20,455 |
|
|
|
11,921 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
146,913 |
|
|
$ |
81,438 |
|
|
|
|
|
|
|
|
Other current liabilities
Other current liabilities consisted of the following at September 27, 2008 and December 29,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Derivative instruments current |
|
$ |
6,065 |
|
|
$ |
3,579 |
|
Other current liabilities |
|
|
10,545 |
|
|
|
11,224 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
16,610 |
|
|
$ |
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 the 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. Our
exposure to credit risk at any point in time is represented in the net fair value of the derivative
contracts reported as assets. Credit risk with respect to derivative instruments arises from the
potential failure of a counter party to perform according to the terms of the contract. 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 to our
condensed consolidated financial statements 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. These interest rate swap agreements are required under the credit facility
agreement. As of September 27, 2008, the total notional value of the interest rate
11
swaps was 41.4 million ($60.4 million at the balance sheet close rate on September 27, 2008
of $1.46/1.00). The weighted average interest rate for the interest rate swaps was 4.12%.
The notional amounts of the interest rate swaps are scheduled to decline in correspondence to
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 $0.8 million at
September 27, 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 September 27, 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 September 27, 2008, the unrealized gain of these forward contracts was $12.9
million. As of September 27, 2008, the total notional value of the forward contracts was 346.6 million ($506.0 million at
the balance sheet close rate on September 27, 2008 of $1.46/1.00). The
weighted average forward exchange rate for these contracts is $1.50/1.00.
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 September 27, 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 three months ended September 27, 2008, we purchased forward foreign
exchange contracts to hedge balance sheet exposure related to transactions with third parties. 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 September 27, 2008, the total notional value of foreign exchange contracts to purchase Euros
with U.S. dollars was 82.9 million ($121.0 million at the balance sheet close rate on September
27, 2008 of $1.46/1.00) and the total notional value of foreign exchange contracts to sell Euros
for U.S. dollars was 45.0 million ($65.7 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00). As of September 27, 2008, the unrealized loss of these forward contracts was
$6.1 million. These foreign exchange forward contracts have maturities of 24 months or less.
12
Credit Risk
We have certain financial and derivative instruments that potentially subject us to credit
risk. These consist primarily of cash, cash
equivalents, marketable securities, interest swap agreements and forward foreign exchange
contracts. We are exposed to credit losses in the event of nonperformance by the counter parties to
our financial and derivative instruments. We place cash, cash equivalents, marketable securities,
interest rate swap agreements and forward foreign exchange contracts with various high-quality
financial institutions, and exposure is limited at any one institution. We continuously evaluate
the credit standing of our counter party financial institutions.
In addition, we have certain restricted investments, which are exposed to credit risk. These
consist primarily of restricted investments, which are held by a financial services company to fund
our estimated future product collection and recycling costs. As of September 27, 2008 our
restricted investments with a subsidiary of this financial services company were $25.0 million. In
October 2008, we entered into a credit default swap (CDS) with J.P. Morgan Chase NA, New York to
protect our investment from a significant pre-defined credit event related to the parent financial
services company. Under a CDS, a third party assumes for a fee, a portion of the credit risk
related to the investment. The CDS we entered into provides protection for losses in the event of a
pre-defined credit event of the parent financial services company in the amount of $25.0 million.
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
liabilities, as permitted by FSP 157-2. We do not have any nonfinancial assets or nonfinancial
liabilities that we recognize or disclose 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 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:
|
|
|
Cash Equivalents. As of September 27, 2008, our cash equivalents consisted of federal
and foreign agency debt, corporate debt securities and money market mutual funds. We value
our cash equivalents using observable inputs that reflect quoted prices for securities
with identical characteristics, and accordingly, we classify the valuation techniques that
use these inputs as Level 1 or Level 2. We consider the effect of our counterparties
credit standings in our valuations of our marketable securities holdings. |
|
|
|
|
Marketable securities. As of September 27, 2008, our marketable securities consisted
of federal and foreign agency debt and corporate debt securities. We value our marketable
securities using quoted prices for securities with similar characteristics |
13
|
|
|
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 standings 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, we value them 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 September 27, 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 |
|
|
Balance Sheet |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency debt |
|
$ |
19,956 |
|
|
$ |
|
|
|
$ |
19,956 |
|
|
$ |
|
|
Foreign agency debt |
|
|
21,421 |
|
|
|
|
|
|
|
21,421 |
|
|
|
|
|
Corporate debt securities |
|
|
9,982 |
|
|
|
|
|
|
|
9,982 |
|
|
|
|
|
Money market mutual funds |
|
|
80,124 |
|
|
|
80,124 |
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
118,443 |
|
|
|
|
|
|
|
118,443 |
|
|
|
|
|
Foreign agency debt |
|
|
8,948 |
|
|
|
|
|
|
|
8,948 |
|
|
|
|
|
Corporate debt securities |
|
|
20,252 |
|
|
|
|
|
|
|
20,252 |
|
|
|
|
|
Derivative assets |
|
|
15,971 |
|
|
|
|
|
|
|
15,971 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
295,097 |
|
|
$ |
80,124 |
|
|
$ |
214,973 |
|
|
$ |
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
6,065 |
|
|
$ |
|
|
|
$ |
6,065 |
|
|
$ |
|
|
|
|
|
Note 10. Debt
Our long-term debt at September 27, 2008 and December 29, 2007 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 29, |
|
|
|
2008 |
|
|
2007 |
|
Euro denominated loan, variable interest Euribor plus 1.6%, due 2008 through 2012 |
|
$ |
60,633 |
|
|
$ |
67,761 |
|
2.25% loan, due 2006 through 2015 |
|
|
12,115 |
|
|
|
13,226 |
|
0.25% 3.25% loan, due 2007 through 2009 |
|
|
1,945 |
|
|
|
3,334 |
|
Euro denominated loan, variable interest Euribor plus 0.55%, due 2008 through 2015 |
|
|
47,761 |
|
|
|
|
|
Euro denominated 4.54% loan, due 2008 through 2015 |
|
|
47,761 |
|
|
|
|
|
Capital lease obligations |
|
|
6 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
170,221 |
|
|
|
84,330 |
|
Less unamortized discount |
|
|
(2,722 |
) |
|
|
(638 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
|
167,499 |
|
|
|
83,692 |
|
Less current portion |
|
|
(26,691 |
) |
|
|
(14,836 |
) |
|
|
|
|
|
|
|
Noncurrent portion |
|
$ |
140,808 |
|
|
$ |
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.
14
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 ($195.6 million at the balance sheet close rate on
September 27, 2008 of $1.46/1.00) 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 ($24.7 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
b) |
|
16.3 million ($23.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
c) |
|
16.3 million ($23.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
d) |
|
16.3 million ($23.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
e) |
|
1.2 million ($1.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); and |
(2) Five floating-rate euro-denominated term loan facilities, which have the following maximum
aggregate amounts:
|
a) |
|
16.9 million ($24.7 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
b) |
|
16.3 million ($23.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
c) |
|
16.3 million ($23.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); |
|
|
d) |
|
16.3 million ($23.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00); and |
|
|
e) |
|
1.2 million ($1.8 million at the balance sheet close rate on September 27,
2008 of $1.46/1.00). |
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 commences on the earlier of (1) the day that is nine 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.
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.
15
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 September 27, 2008, we had outstanding borrowings of 65.3 million ($95.3 million at the
balance sheet close rate on September 27, 2008 of $1.46/1.00) under the Facility Agreement.
Our debt-financing agreements bear interest at the Euro Interbank Offered Rate (Euribor).
Euribor is the primary interbank lending rate within the Euro zone, with maturities ranging from
one week to one year. A disruption of the credit environment as currently experienced could
negatively impact interbank lending and therefore negatively impact the Euribor rate. An increase
in the Euribor rate would increase our cost of borrowing.
Note 11. Commitments and Contingencies
Financial guarantees
In the normal course of business, we occasionally enter into agreements with third parties
where we guarantee the performance of our subsidiaries related to certain service contracts, which
may include services such as development, engineering, procurement of permits and equipment,
construction management and monitoring and maintenance. These agreements meet the definition of a
guarantee according to FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other. As of
September 27, 2008, none of these guarantees are material to our financial position.
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 nine months ended September 27, 2008 and
September 29, 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Product warranty liability, beginning of period |
|
$ |
10,865 |
|
|
$ |
4,050 |
|
|
$ |
7,276 |
|
|
$ |
2,764 |
|
Accruals for new warranties issued (warranty expense) |
|
|
1,776 |
|
|
|
1,554 |
|
|
|
5,619 |
|
|
|
3,103 |
|
Settlements |
|
|
(45 |
) |
|
|
(176 |
) |
|
|
(53 |
) |
|
|
(188 |
) |
Change in estimate of warranty liability |
|
|
(2,738 |
) |
|
|
68 |
|
|
|
(2,984 |
) |
|
|
(183 |
) |
|
|
|
Product warranty liability, end of period |
|
$ |
9,858 |
|
|
$ |
5,496 |
|
|
$ |
9,858 |
|
|
$ |
5,496 |
|
|
|
|
16
Commitments
As of September 27, 2008, we had the following four outstanding commercial commitments in the
form of letters of credit and bank guarantees: MYR 4.0 million dated June 2008 for an energy supply
agreement ($1.2 million at the balance sheet close rate on September 27, 2008 of $0.29/MYR1.00);
MYR 3.0 million dated September 2008 for Malaysian custom and excise tax ($0.9 million at the
balance sheet close rate on September 27, 2008 of $0.29/MYR1.00); MYR 2.2 million dated December
2007 for an energy supply agreement ($0.6 million at the balance sheet close rate on September 27,
2008 of $0.29/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 nine months ended September 27, 2008 and
September 29, 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Share-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
3,776 |
|
|
$ |
2,585 |
|
|
$ |
9,146 |
|
|
$ |
6,505 |
|
Research and development |
|
|
1,688 |
|
|
|
940 |
|
|
|
4,154 |
|
|
|
3,593 |
|
Selling, general and administrative |
|
|
11,289 |
|
|
|
12,472 |
|
|
|
28,968 |
|
|
|
18,210 |
|
Production start-up |
|
|
558 |
|
|
|
433 |
|
|
|
1,359 |
|
|
|
898 |
|
|
|
|
Total share-based compensation expense |
|
$ |
17,311 |
|
|
$ |
16,430 |
|
|
$ |
43,627 |
|
|
$ |
29,206 |
|
|
|
|
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 nine months ended September 27, 2008 and September 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Stock options |
|
$ |
3,819 |
|
|
$ |
5,940 |
|
|
$ |
13,554 |
|
|
$ |
18,600 |
|
Restricted stock units |
|
|
13,564 |
|
|
|
10,657 |
|
|
|
30,009 |
|
|
|
10,699 |
|
Unrestricted stock |
|
|
81 |
|
|
|
58 |
|
|
|
244 |
|
|
|
216 |
|
Net amount absorbed into inventory |
|
|
(153 |
) |
|
|
(225 |
) |
|
|
(180 |
) |
|
|
(309 |
) |
|
|
|
Total share-based compensation expense |
|
$ |
17,311 |
|
|
$ |
16,430 |
|
|
$ |
43,627 |
|
|
$ |
29,206 |
|
|
|
|
Share-based compensation cost capitalized in our inventory was $0.8 million at September 27,
2008 and $0.6 million at December 29, 2007. As of September 27, 2008, we had $15.3 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 $102.6
million of unrecognized share-based compensation cost related to unvested restricted stock units,
which we expect to recognize as an expense over a weighted-average period of approximately 2 years.
Note 13. Income Taxes
On December 31, 2006, we adopted the provisions of FASB Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes, 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 an enterprise 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
17
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.
The following table reflects changes in unrecognized tax benefits for the nine months ended
September 27, 2008 (in thousands):
|
|
|
|
|
Unrecognized tax benefits, beginning of period |
|
$ |
2,465 |
|
Increases
related to prior year tax positions |
|
|
777 |
|
Decreases related to prior year tax positions |
|
|
(1,884 |
) |
Increases
related to current year tax positions |
|
|
2,055 |
|
|
|
|
|
Unrecognized tax benefits, end of period |
|
$ |
3,413 |
|
|
|
|
|
Of the decrease in unrecognized tax benefits of $1.9 million related to reassessments of prior
year tax positions based on new information available to us, $0.2 million impacted our effective
tax rate. The increase in unrecognized tax benefits for the prior and current year
tax positions is $0.8 million and $2.1 million, respectively, all of which would impact the effective tax rate if recognized. Over the next twelve months, our
estimated current year tax positions will continue to generate an increase in liabilities for
unrecognized tax benefits. We do not believe it is reasonably possible our unrecognized tax
benefits will significantly change within the next twelve months for tax positions not related to
the current year. 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.
We are subject to filing requirements for income tax returns in the U.S. federal and various
state jurisdictions as well as Germany, Malaysia. We are presently completing an examination by the
German taxing authorities but do not anticipate a material change to our liability for unrecognized
tax benefits. 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 provision for income
taxes, our deferred tax assets and liabilities and our future taxable income for purposes of
assessing our likelihood of using 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 we will realize the deferred tax assets. 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 used in future periods. Therefore, based upon our assessment of the
available evidence at March 29, 2008, we reversed the $0.6 million of valuation allowances
established that we had 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 we anticipate will 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.
18
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 |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Basic net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
99,269 |
|
|
$ |
46,034 |
|
|
$ |
215,559 |
|
|
$ |
95,480 |
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income
per share |
|
|
80,430 |
|
|
|
75,666 |
|
|
|
79,789 |
|
|
|
73,537 |
|
|
|
|
Diluted net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income
per share |
|
|
80,430 |
|
|
|
75,666 |
|
|
|
79,789 |
|
|
|
73,537 |
|
Effect of stock options and restricted stock units outstanding |
|
|
2,006 |
|
|
|
3,422 |
|
|
|
2,227 |
|
|
|
3,319 |
|
|
|
|
Weighted-average shares used in computing diluted net income
per share |
|
|
82,436 |
|
|
|
79,088 |
|
|
|
82,016 |
|
|
|
76,856 |
|
|
|
|
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 |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Options to purchase common stock and restricted stock units |
|
|
108 |
|
|
|
201 |
|
|
|
113 |
|
|
|
338 |
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Net income |
|
$ |
99,269 |
|
|
$ |
46,034 |
|
|
$ |
215,559 |
|
|
$ |
95,480 |
|
Foreign currency translation adjustments |
|
|
(16,010 |
) |
|
|
2,203 |
|
|
|
(6,567 |
) |
|
|
2,543 |
|
Change in unrealized gain (loss) on
marketable securities, net of tax of
$67 and $75 for the three and nine
months ended 2008, respectively |
|
|
(134 |
) |
|
|
22 |
|
|
|
(149 |
) |
|
|
21 |
|
Change in unrealized gain (loss) on
derivative instruments, net of tax of
$(1,145) and $3,368 for the three and
nine months ended 2008, respectively |
|
|
34,012 |
|
|
|
(558 |
) |
|
|
14,155 |
|
|
|
278 |
|
|
|
|
Comprehensive income |
|
$ |
117,137 |
|
|
$ |
47,701 |
|
|
$ |
222,998 |
|
|
$ |
98,322 |
|
|
|
|
Components of accumulated other comprehensive income (loss) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
December 29, |
|
|
2008 |
|
2007 |
|
|
|
Foreign currency translation adjustments |
|
$ |
(449 |
) |
|
$ |
6,118 |
|
Unrealized gain (loss) on marketable securities, net of tax of $60 for 2008 and $(15) for 2007 |
|
|
(121 |
) |
|
|
28 |
|
Unrealized gain (loss) on derivative instruments, net of tax of $4,321 for 2008 and $952 for 2007 |
|
|
12,527 |
|
|
|
(1,628 |
) |
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
11,957 |
|
|
$ |
4,518 |
|
|
|
|
19
Note 16. Statement of Cash Flows
Following is a reconciliation of net income to net cash provided by operating activities for
the nine months ended September 27, 2008 and September 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
|
|
Net income |
|
$ |
215,559 |
|
|
$ |
95,480 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
38,667 |
|
|
|
17,681 |
|
Intangible Impairment |
|
|
1,335 |
|
|
|
|
|
Share-based compensation |
|
|
43,627 |
|
|
|
29,206 |
|
Remeasurement of debt |
|
|
(318 |
) |
|
|
|
|
Deferred income taxes |
|
|
930 |
|
|
|
(49,031 |
) |
Excess tax benefits from share-based compensation arrangements |
|
|
(13,736 |
) |
|
|
(18,600 |
) |
Loss (gain) on disposal of property and equipment |
|
|
941 |
|
|
|
299 |
|
Non-cash interest |
|
|
|
|
|
|
(3 |
) |
Provision for doubtful accounts receivable |
|
|
36 |
|
|
|
|
|
Gain on sales of investments, net |
|
|
(191 |
) |
|
|
|
|
Provision for excess and obsolete inventories |
|
|
1,540 |
|
|
|
278 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(23,705 |
) |
|
|
6,256 |
|
Inventories |
|
|
(87,743 |
) |
|
|
(14,455 |
) |
Deferred project costs |
|
|
(6,436 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
(20,138 |
) |
|
|
(6,030 |
) |
Costs and estimated earnings in excess of billings |
|
|
(8,538 |
) |
|
|
|
|
Other noncurrent assets |
|
|
(3,239 |
) |
|
|
(2,211 |
) |
Billings in excess of costs and estimated earnings |
|
|
(307 |
) |
|
|
|
|
Accounts payable and accrued expenses |
|
|
121,528 |
|
|
|
47,375 |
|
|
|
|
Total adjustments |
|
|
44,253 |
|
|
|
10,765 |
|
|
|
|
Net cash provided by operating activities |
|
$ |
259,812 |
|
|
$ |
106,245 |
|
|
|
|
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 components
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,
with which we have long term supply contracts. These customers include project developers, system
integrators and operators of renewable energy projects.
We also sell solar power systems directly to system owners. These sales include both our solar
modules and balance of system components that we procure from third parties. These sales may also
include services such as development, engineering, procurement of permits and equipment,
construction management, monitoring and maintenance. These operations do not currently meet the
quantitative criteria for segments and therefore we classify them in the Other category in the
following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
September 27, 2008 |
|
September 29, 2007 |
|
|
Components |
|
Other |
|
Consolidated |
|
Components |
|
Other |
|
Consolidated |
|
|
|
Net sales |
|
$ |
333,085 |
|
|
$ |
15,609 |
|
|
$ |
348,694 |
|
|
$ |
159,007 |
|
|
$ |
|
|
|
$ |
159,007 |
|
Income
(loss) before income taxes |
|
$ |
141,113 |
|
|
$ |
(8,014 |
) |
|
$ |
133,099 |
|
|
$ |
53,649 |
|
|
$ |
|
|
|
$ |
53,649 |
|
Goodwill |
|
$ |
|
|
|
$ |
33,829 |
|
|
$ |
33,829 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total Assets |
|
$ |
1,790,006 |
|
|
$ |
69,844 |
|
|
$ |
1,859,850 |
|
|
$ |
1,177,156 |
|
|
$ |
|
|
|
$ |
1,177,156 |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
September 27, 2008 |
|
September 29, 2007 |
|
|
Components |
|
Other |
|
Consolidated |
|
Components |
|
Other |
|
Consolidated |
|
|
|
Net sales |
|
$ |
792,049 |
|
|
$ |
20,601 |
|
|
$ |
812,650 |
|
|
$ |
303,179 |
|
|
$ |
|
|
|
$ |
303,179 |
|
Income
(loss) before income taxes |
|
$ |
308,119 |
|
|
$ |
(15,955 |
) |
|
$ |
292,164 |
|
|
$ |
69,822 |
|
|
$ |
|
|
|
$ |
69,822 |
|
Goodwill |
|
$ |
|
|
|
$ |
33,829 |
|
|
$ |
33,829 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total Assets |
|
$ |
1,790,006 |
|
|
$ |
69,844 |
|
|
$ |
1,859,850 |
|
|
$ |
1,177,156 |
|
|
$ |
|
|
|
$ |
1,177,156 |
|
Note 18. Subsequent Events
In October 2008, we entered into a credit default swap (CDS) with J.P. Morgan Chase NA, New
York in relation to a financial services company, a subsidiary of which holds our restricted
investment of $25.0 million to fund our estimated future product collection and recycling costs.
Under the CDS, a third party assumes, for a fee, a portion of the credit risk in the event of a
pre-defined credit event related to the parent financial services company. The CDS we entered into
provides protection for losses in the event of a pre-defined credit event of the parent financial
services company in the amount of $25.0 million.
On October 28, 2008, the Company entered into an agreement to invest $25 million in
preferred shares of SolarCity, Corporation (SolarCity), representing approximately 10%
of the stock equity of SolarCity. The Company and SolarCity also entered into a
framework agreement for the supply of 100 MW of the Companys modules to SolarCity
between 2009 and 2013 for installation in solar power systems in the United States of
America.
On October 29, 2008, First Solar Electric, LLC (FSE) entered into a
Framework Agreement (the Agreement) with Edison Mission Energy (Mission),
pursuant to which FSE and Mission agree to work together to develop solar power projects
within the United States for identified customers. Under the
Agreement, FSE will agree to provide design, engineering, procurement and construction services
for such projects, subject to the satisfaction of certain contingencies and
entering into definitive agreements for these services for each project.
On October 29, 2008, we announced entering into new long-term module supply
agreements with Sorgenia Solar S.r.l., a developer of large-scale, grid-connected
solar power plants in Italy and extended module supply agreements with several of
First Solars existing customers including EDF EN Development, Ecostream
Switzerland GmbH, juwi solar GmbH and Phoenix Solar AG. These new agreements together
with the new framework agreement with SolarCity expand contracted module volume by
a total of 625 Megawatts, allowing for additional sales of approximately $1,030 million at
an assumed exchange rate of $1.15/1.00
over the period of 2009 to 2013. These agreements are structured on terms similar to
First Solars existing long-term module supply agreements.
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
lines and we perform all manufacturing steps ourselves in an automated, proprietary, continuous
process. In 2007 and the nine months ended September 27, 2008, we sold most of our solar modules to
solar project developers and system integrators headquartered in Germany, France and Spain.
21
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.
We
expect to have an annual global manufacturing capacity of approximately 1.1 GW by the end
of fiscal 2009 (based on run rates for the third quarter of 2008).
We completed construction at plant one and two at our Malaysian manufacturing center and
are currently constructing plants three and four, which will
reach full capacity at various dates in fiscal 2009. In addition, we began
construction to expand our existing manufacturing facility in Perrysburg, Ohio.
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 nine months ended September 27, 2008, the main constraint limiting our sales has
been our production capacity since customer demand has exceeded the number of solar modules we can
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 adversely 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 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.
22
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 nine months ended
September 27, 2008 were $20.6 million and were not material to our consolidated results of
operations.
No single customer accounted for more than 22% of our net sales in the nine months ended
September 27, 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 plants and equipment and facility-related expenses. In
addition, we accrue warranty and solar module end-of-life collection and recycling costs 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
solar power 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 of, and the solar power 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 accretion
expense on this future obligation, which we classify with 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 continually add equipment for general use in further process
developments and record the depreciation of this 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.
23
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 nine months ended
September 27, 2008, was $23.7 million relating to the planning and preparation of our plants at the
Malaysian manufacturing center.
We expect to continue to incur significant production start-up
costs in the fourth quarter of fiscal 2008 related to our plants at the
Malaysian manufacturing center, consistent with prior fiscal
quarters. 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. We also expect to incur production start-up expenses in fiscal
year 2009 related to our expansion of our Perrysburg, Ohio manufacturing 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 we have 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 |
|
Nine Months Ended |
|
|
September 27, |
|
September 29, |
|
September 27, |
|
September 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
43.9 |
% |
|
|
48.4 |
% |
|
|
45.3 |
% |
|
|
53.7 |
% |
Gross profit |
|
|
56.1 |
% |
|
|
51.6 |
% |
|
|
54.7 |
% |
|
|
46.3 |
% |
Research and development |
|
|
2.9 |
% |
|
|
2.4 |
% |
|
|
2.8 |
% |
|
|
3.5 |
% |
Selling, general and administrative |
|
|
14.1 |
% |
|
|
17.0 |
% |
|
|
14.9 |
% |
|
|
19.1 |
% |
Production start-up |
|
|
1.8 |
% |
|
|
1.8 |
% |
|
|
2.9 |
% |
|
|
4.3 |
% |
Operating income |
|
|
37.3 |
% |
|
|
30.4 |
% |
|
|
34.1 |
% |
|
|
19.4 |
% |
Foreign currency gain (loss) |
|
|
(0.5 |
)% |
|
|
0.6 |
% |
|
|
(0.1 |
)% |
|
|
0.2 |
% |
Interest income |
|
|
1.5 |
% |
|
|
3.3 |
% |
|
|
2.1 |
% |
|
|
4.4 |
% |
Interest expense, net |
|
|
0.0 |
% |
|
|
(0.4 |
)% |
|
|
0.0 |
% |
|
|
(0.7 |
)% |
Other income (expense), net |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
(0.3 |
)% |
Income tax benefit (expense) |
|
|
(9.7 |
)% |
|
|
(4.8 |
)% |
|
|
(9.4 |
)% |
|
|
8.5 |
% |
Net income |
|
|
28.5 |
% |
|
|
29.0 |
% |
|
|
26.6 |
% |
|
|
31.5 |
% |
24
Three Months Ended September 27, 2008 and September 29, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Net sales |
|
$ |
348,694 |
|
|
$ |
159,007 |
|
|
$ |
189,687 |
|
|
|
119.3 |
% |
Net sales increased by $189.7 million from $159.0 million in the three months ended September
29, 2007 to $348.7 million in the three months ended September 27, 2008, primarily as a result of a
114% increase in the MW volume of solar modules sold. The increase in the MW volume of solar
modules sold under our long term contracts was due to the ramp of production at our first Malaysian
factory, full production of our German factory, and continued improvements to our overall
production throughput. In addition, the average number of sellable watts per solar module increased
by 3% and the average selling price increased to $2.53 in the three months ended September 27, 2008
from $2.48 in the three months ended September 29, 2007. Our average selling price was positively
impacted by $0.21 due to a favorable foreign exchange rate between the U.S. dollar and the euro of
$1.51/1.00 in the three months ended September 27, 2008 vs. $1.37/1.00 in the three months ended
September 29, 2007, which was partially offset by a contractual price decline of $0.16. During the
three months ended September 27, 2008 and September 29, 2007, approximately 66% and 88%,
respectively, of our net module sales resulted from sales of solar modules to customers
headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Cost of sales |
|
$ |
153,251 |
|
|
$ |
76,967 |
|
|
$ |
76,284 |
|
|
|
99.1 |
% |
% of net sales |
|
|
43.9 |
% |
|
|
48.4 |
% |
|
|
|
|
|
|
|
|
Cost of sales increased by $76.3 million from $77.0 million in the three months ended
September 29, 2007 to $153.3 million in the three months ended September 27, 2008, primarily as a
result of higher production and sales volumes resulting from the full production ramp of our German
factory and production ramp at our first Malaysian factory. These factors caused a $44.7 million
increase in direct material expense, a $3.9 million increase in sales freight and other costs and a
$27.7 million increase in manufacturing overhead costs. The increase in manufacturing overhead
costs was due to a $12.1 million increase in salaries and personnel-related expenses, including a
$1.2 million increase in share-based compensation expense, a $7.2 million increase in facility and
related expenses, and an $8.4 million increase in depreciation expense, in each case primarily
resulting from increased infrastructure associated with our German and Malaysian factories. Cost of
sales in the three months ended September 27, 2008 reflects a benefit of $2.0 million, or
0.6% of revenue, due to a change in the estimated amount of our warranty obligation.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Gross profit |
|
$ |
195,443 |
|
|
$ |
82,040 |
|
|
$ |
113,403 |
|
|
|
138.2 |
% |
% of net sales |
|
|
56.1 |
% |
|
|
51.6 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $113.4 million from $82.0 million in the three months ended
September 29, 2007 to $195.4 million in the three months ended September 27, 2008, due to the
increase in net sales. For the three months ended September 27, 2008, foreign exchange gains
contributed approximately 2.5 percentage points to our gross margin, as compared to the three
months ended September 29, 2007. As a percentage of net sales, gross profit increased 4.5
percentage points from 51.6% to 56.1%, representing increased leverage of our fixed cost
infrastructure and scalability associated with our German and Malaysian expansions, which drove
25
a
114% increase in the number of MW sold over the same time period. Additionally, we incurred $6.2
million of cost associated with the ramp of our Malaysian facility in the three months ended
September 27, 2008 compared with $7.6 million of costs associated with the ramp of our German
facility in the three months ended September 27, 2007.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Research and development |
|
|
$9,952 |
|
|
|
$3,854 |
|
|
|
$6,098 |
|
|
|
158.2 |
% |
% of net sales |
|
|
2.9 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
Research and development expense increased by $6.1 million from $3.9 million in the three
months ended September 29, 2007 to $10.0 million in the three months ended September 27, 2008,
primarily as a result of an increase in headcount, which resulted in a $4.9 million increase in
personnel-related expense, including a $0.7 million increase in share-based compensation expense.
In addition, depreciation, equipment and lab supply expenses, and consulting expenses increased by
$0.9 million offset by a decline in grant revenue of $0.3 million.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Selling, general and administrative |
|
|
$48,995 |
|
|
|
$27,082 |
|
|
|
$21,913 |
|
|
|
80.9 |
% |
% of net sales |
|
|
14.1 |
% |
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by $21.9 million from $27.1 million in
the three months ended September 29, 2007 to $49.0 million in the three months ended September 27,
2008, primarily as a result of an increase in headcount, which resulted in a $12.5 million increase
in personnel-related expense, including a $1.2 million decrease in share-based compensation
expense. In addition, legal and professional service fees increased by $5.0 million and all other
expenses increased by $4.4 million, primarily as a result of infrastructure build out related to
our continued plant and market expansion.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Production start-up |
|
|
$6,344 |
|
|
|
$2,805 |
|
|
|
$3,539 |
|
|
|
126.2 |
% |
% of net sales |
|
|
1.8 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
In the three months ended September 27, 2008, we incurred $6.3 million of production start-up
expense related to our sixteen line Malaysian expansion compared with $2.8 million of production
start-up expense related to the ramp and qualification of our four line German plant during the
three months ended September 29, 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) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Foreign currency gain (loss)
|
|
$ |
(1,889 |
) |
|
$ |
965 |
|
|
$ |
(2,854 |
) |
|
|
(295.8 |
)% |
Foreign currency loss for the three months ended September 27, 2008 was $1.9 million compared
with a foreign currency gain of $1.0 million for the three months ended September 29, 2007. This
was primarily the result of a significant increase in the value of the U.S. dollar to the euro
exchange rate during the three months ended September 27, 2008 compared with the three months ended
September 29, 2007 and an increase in the amount of our euro exposure in the three months ended
September 27, 2008.
26
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Interest income |
|
|
$5,323 |
|
|
|
$5,298 |
|
|
|
$25 |
|
|
|
N.M. |
|
Interest income remained flat during the three months ended September 27, 2008 compared with
the three months ended September 29, 2007, primarily as a result of higher cash, cash equivalents
and marketable securities balances in the three months ended September 27, 2008, offset by a
decline in interest rates.
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Interest expense, net |
|
|
$(127 |
) |
|
|
$(647 |
) |
|
|
$520 |
|
|
|
(80.4 |
)% |
Interest expense, net of amounts capitalized, decreased by $0.5 million during the three
months ended September 27, 2008 compared with the three months ended September 29, 2007, primarily
as a result of higher amounts of interest expense capitalized.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Other income (expense), net |
|
|
$(360 |
) |
|
|
$(266 |
) |
|
|
$(94 |
) |
|
|
35.3 |
% |
Other expense, net increased by $0.1 million during the three months ended September 27, 2008
compared with the three months ended September 29, 2007. Other expense consists mainly of financing
fees related to our credit facilities.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Three Month Period Change |
|
|
|
Income tax benefit (expense)
|
|
$ |
(33,830 |
) |
|
$ |
(7,615 |
) |
|
$ |
(26,215 |
) |
|
|
344.3 |
% |
Income tax expense increased by $26.2 million from $7.6 million in the three months ended
September 29, 2007 to $33.8 million in the three months ended September 27, 2008. Our effective tax
rate was 25.4% for the three months ended September 27, 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
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 3.0% for the three months
ended September 27, 2008. The income tax expense of $7.6 million in the three months ended
September 29, 2007 includes the reversal of valuation allowances of $7.5 million against previously
established German deferred income tax assets, offset by $15.1 million in current income tax
provision. We expect an effective tax rate of approximately 26% for fiscal 2008.
Nine Months Ended September 27, 2008 and September 29, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Net sales |
|
|
$812,650 |
|
|
|
$303,179 |
|
|
|
$509,471 |
|
|
|
168.0 |
% |
Net sales increased by $509.5 million from $303.2 million in the nine months ended September
29, 2007 to $812.7 million in the nine months ended September 27, 2008, primarily as a result of a
154% increase in the MW volume of solar modules sold. The
27
increase in the MW volume of solar
modules sold under our long term contracts was due to the full production ramp of our German
facility, commencement of production at our Malaysian facility, and continued improvements to our
overall production throughput. In addition, the average number of sellable watts per solar module
increased by 5% in the nine months ended September 27, 2008 and the average selling price increased
to $2.53 in the nine months ended September 27, 2008 from $2.41 in the nine months ended September
29, 2007. Our average selling price was positively impacted by $0.26 due to a favorable foreign
exchange rate between the U.S. dollar
and the euro; which was partially offset by a contractual price decline of $0.14. During the
nine months ended September 27, 2008 and September 29, 2007, approximately 75% and 94%,
respectively, of our net sales resulted from sales of solar modules to customers headquartered in
Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Cost of sales |
|
|
$368,183 |
|
|
|
$162,726 |
|
|
|
$205,457 |
|
|
|
126.3 |
% |
% of net sales |
|
|
45.3 |
% |
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
Cost of sales increased by $205.5 million from $162.7 million in the nine months ended
September 29, 2007 to $368.2 million in the nine months ended September 27, 2008, primarily as a
result of higher production and sales volumes resulting from the full production ramp of our German
factory and initial production at our first Malaysian plant. These factors caused a $119.0 million
increase in direct material expense, a $9.2 million increase in warranty costs and costs relating
to the collection and recycling of our solar modules, partially offset by a $2.0 million
benefit due to a change in our warranty obligation that we made in the three months ended September
27, 2008, a $6.8 million increase in sales freight and other costs and a $70.5 million increase in
manufacturing overhead costs. The increase in manufacturing overhead costs was due to a $32.9
million increase in salaries and personnel-related expenses as a result of increased head count,
including a $2.6 million increase in share-based compensation expense, a $19.7 million increase in
facility and related expenses and a $17.9 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Gross profit |
|
|
$444,467 |
|
|
|
$140,453 |
|
|
|
$304,014 |
|
|
|
216.5 |
% |
% of net sales |
|
|
54.7 |
% |
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $304.0 million from $140.5 million in the nine months ended
September 29, 2007 to $444.5 million in the nine months ended September 27, 2008, due to an
increase in net sales. For the nine months ended September 27, 2008, foreign exchange gains
resulting in higher average selling prices contributed approximately 2.8 percentage points to our
gross margin. As a percentage of net sales, gross profit increased 8.4 percentage points from 46.3%
to 54.7%, representing increased leverage of our fixed cost infrastructure and scalability
associated with our plant expansions, which drove a 154% increase in the number of MW sold over the
same time period. Additionally, we incurred $12.6 million of cost associated with the ramp of our
Malaysian facility in the nine months ended September 27, 2008 compared with $7.6 million of costs
associated with the ramp of our German facility in the nine months ended September 29, 2007.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Research and development |
|
|
$22,437 |
|
|
|
$10,675 |
|
|
|
$11,762 |
|
|
|
110.2 |
% |
% of net sales |
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
Research and development expense increased by $11.7 million from $10.7 million in the nine
months ended September 29, 2007 to $22.4 million in the nine months ended September 27, 2008,
primarily as a result of an increase in headcount, which resulted in a $8.6 million increase in
personnel-related expense, including a $0.6 million increase in share-based compensation expense.
In
28
addition, depreciation, equipment and lab supply expenses increased by $3.3 million, which was
partially offset by a $0.5 million decrease in consulting expense, and grant revenue decreased by
$0.3 million.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Selling, general and administrative |
|
|
$121,292 |
|
|
|
$58,057 |
|
|
|
$63,235 |
|
|
|
108.9 |
% |
% of net sales |
|
|
14.9 |
% |
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by $63.2 million from $58.1 million in
the nine months ended September 29, 2007 to $121.3 million in the nine months ended September 27,
2008, primarily as a result of an increase in headcount, which resulted in a $41.3 million increase
in personnel-related expense, including a $10.8 million increase in share-based compensation
expense. In addition, legal and professional service fees expense increased by $11.1 million and
all other expenses increased by $10.8 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Production start-up |
|
|
$23,727 |
|
|
|
$12,802 |
|
|
|
$10,925 |
|
|
|
85.3 |
% |
% of net sales |
|
|
2.9 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
In the nine months ended September 27, 2008, we incurred $23.7 million of production start-up
expense related to our sixteen line Malaysian expansion, which included related legal and
regulatory costs, compared with $12.8 million of production start-up expense related to the ramp
and qualification of our four line German plant during the nine months ended September 29, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Foreign currency gain (loss)
|
|
$ |
(468 |
) |
|
$ |
716 |
|
|
$ |
(1,184 |
) |
|
|
(165.4 |
)% |
Foreign currency loss for the nine months ended September 27, 2008 was $0.5 million compared
with a foreign currency gain of $0.7 million for the nine months ended September 29, 2007. This was
primarily as a result of an increase in the volatility of the U.S. dollar to the euro exchange rate
during the nine months ended September 27, 2008 and a significant increase in the amount of our
euro exposure in the nine months ended September 27, 2008 compared with the nine months ended
September 29, 2007.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Interest income |
|
|
$16,931 |
|
|
|
$13,199 |
|
|
|
$3,732 |
|
|
|
28.3 |
% |
Interest income increased by $3.7 million from $13.2 million in the nine months ended
September 29, 2007 to $16.9 million in the nine months ended September 27, 2008, primarily as a
result of higher cash, cash equivalents and marketable securities balances in the nine months ended
September 27, 2008, partially offset by a decline in interest rates.
29
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Interest expense, net |
|
|
$(131 |
) |
|
|
$(2,131 |
) |
|
$ |
2,000 |
|
|
|
(93.9 |
)% |
Interest expense, net of amounts capitalized, decreased by $2.0 million during the nine months
ended September 27, 2008 compared with the nine months ended September 29, 2007, primarily as a
result of higher amounts of interest expense capitalized.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Other income (expense), net |
|
|
$(1,179 |
) |
|
|
$(881 |
) |
|
|
$(298 |
) |
|
|
33.8 |
% |
Other expense, net increased by $0.3 million during the nine months ended September 27, 2008
compared with the nine months ended September 29, 2007. Other expense consists mainly of financing
fees related to our credit facilities.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 27, 2008 |
|
September 29, 2007 |
|
Nine Month Period Change |
|
|
|
Income tax benefit (expense)
|
|
$ |
(76,605 |
) |
|
$ |
25,658 |
|
|
$ |
(102,263 |
) |
|
|
N.M. |
|
Income tax expense increased by $102.3 million from a tax benefit of $25.7 million in the nine
months ended September 29, 2007 to a tax expense of $76.6 million in the nine months ended
September 27, 2008. Our effective tax rate was 26.2% for the nine months ended September 27, 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 2.9% for the nine months ended September 27, 2008. The income
tax benefit of $25.7 million in the nine months ended September 29, 2007 is mainly due to the
reversal of valuation allowances of $43.1 million against previously established U.S. and German
deferred income tax assets, offset by $17.4 million in current income tax provision. We expect an
effective tax rate of approximately 26% for fiscal 2008.
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,
but does not require us to perform any additional fair value measurements. Our adoption of SFAS 157
did not have a material impact on our financial position, results of operations or cash flows.
Recent Accounting Pronouncements
See Note 3 to our condensed consolidated financial statements for a summary of recent
accounting pronouncements.
Liquidity and Capital Resources
As
of September 27, 2008, we had $729.4 million in cash, cash equivalents and marketable
securities compared with $669.7 million at December 29, 2007.
30
Operating Activities
Cash provided by operating activities was $259.8 million in the nine months ended September
27, 2008 compared with $106.2 million in the nine months ended September 29, 2007. Net cash
provided by operating activities for the nine months ended September 27, 2008 resulted primarily
from an increase in net income, accounts payable and accrued expenses in this period as well as the
impact of non-cash items that were recorded on the statements of income, primarily depreciation and
amortization expense and stock-based compensation expense, offset by investments in accounts
receivable and inventories to support growth.
Cash received from customers increased to $779.2 million during the nine months ended
September 27, 2008 from $309.8 million during the nine months ended September 29, 2007 primarily
due to an increase in net sales. This increase was partially offset by cash paid to suppliers and
employees of $513.6 million in the nine months ended September 27, 2008 compared with cash paid to
suppliers and employees of $172.2 million in the nine months ended September 29, 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 $197.3 million in the nine months ended September 27,
2008 compared with cash used of $715.7 million in the nine months ended September 29, 2007. Capital
expenditures were $330.6 million during the nine months ended September 27, 2008 and $145.6 million
in the nine months ended September 29, 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 $148.6
million in the nine months ended September 27, 2008. In addition, during the nine months ended
September 27, 2008, we placed $15.3 million of cash in restricted accounts to fund our solar module
collection and recycling program.
Financing Activities
Cash provided by financing activities was $122.8 million in the nine months ended September
27, 2008 compared with $416.1 million in the nine months ended September 29, 2007. Cash provided by
financing activities for the nine months ended September 27, 2008 resulted primarily from
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 costs, of $94.1 million related to
the equipment export facility agreement for our Malaysian manufacturing center. See Note 10 to our
condensed consolidated financial statements for more information about these new credit facilities.
These cash proceeds were partially offset by the repayment of long-term debt of $34.8 million in
the nine months ended September 27, 2008. In the nine months ended September 29, 2007 we received
$48.2 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 nine months ended September 27, 2008 were $14.1
million mainly due to proceeds received from the exercise of employee stock options. Proceeds from
the issuance of common stock for the nine months ended September 29, 2007 were $372.7 million
mainly due to the receipt of $366.0 million in net proceeds from the issuance of our common stock
as a result of our follow-on offering and $6.7 million of proceeds received from the exercise of
employee stock options.
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 to our condensed consolidated financial statements). 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
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.
The recent and unprecedented disruption in the current credit markets has had a significant
adverse impact on a number of financial institutions. As of September 27, 2008, our liquidity and
investments have not been materially adversely impacted by the
31
current credit environment and we
believe that they will not be materially adversely impacted in the near future. We will continue to
closely monitor our liquidity and the credit markets. However, we cannot predict with any certainty
the impact to us of any further disruption in the credit environment.
Our debt-financing agreements bear interest at the Euro Interbank Offered Rate (Euribor).
Euribor is the primary interbank lending rate within the Euro zone, with maturities ranging from
one week to one year. A disruption of the credit environment as
currently experienced could negatively impact interbank lending and therefore negatively
impact the Euribor rate. An increase in the Euribor rate would increase our cost of borrowing.
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 we recognize or
disclose 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 to our condensed
consolidated financial statements for further information about our adoption of SFAS 157.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 27, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Our international operations accounted for approximately 97.0% of our net sales in the nine
months ended September 27, 2008 and 100.0% of our net sales in the nine months ended September 29,
2007; all of these international sales 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. In the past, 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 nine months ended September 27, 2008, a 10% change in the euro exchange rates
would have impacted our net sales by $81.3 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 negatively impacted our
cash flows by $7.7 million in the nine months ended September 27, 2008 and positively impacted our
cash flows by $2.4 million in the nine months ended September 29, 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 September 27, 2008, the total notional value of foreign exchange contracts to purchase
Euros with U.S. dollars was 82.9 million ($121.0 million at the balance sheet close rate on
September 27, 2008 of $1.46/1.00) and the total notional value of foreign exchange contracts to
sell Euros for U.S. dollars was 45.0 million ($65.7 million at the balance sheet close rate on
September 27, 2008 of $1.46/1.00). As of September 27, 2008, the unrealized loss of these forward
contracts was $6.1 million. These foreign exchange forward contracts have maturities of 24 months
or less. These currency forward contracts hedge 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 346.6 million ($506.0 million at the balance sheet close rate on
September 27, 2008 of $1.46/1.00) on September 27, 2008.
32
Interest Rate Risk
We are exposed to interest rate risk because many of our customers depend on debt and 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
customers rely on debt financing to fund their up-front capital expenditure. An increase in
interest rates could make it difficult for our end-users to secure the financing necessary to
purchase and install a system. This could 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, which bears
interest at Euribor plus 1.6%. As of September 27, 2008, we hedged our exposure to changes in
Euribor using interest rate swaps with a combined notional value of 41.4 million ($60.4 million at
the balance sheet close rate on September 27, 2008 of $1.46/1.00).
During May of 2008, we entered into a credit facility 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%.
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 market value 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 market
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 September
27, 2008, our fixed-income investments earned a pretax yield of approximately 1.8%, with a weighted
average maturity of 2.6 months. If interest rates were to instantaneously increase (decrease) by
100 basis points, the market value of our total investment portfolio could decrease (increase) by
approximately $0.6 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
September 27, 2008, all of our investments were in money market accounts or federal and foreign
agency debt and corporate debt securities.
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 materials or components and since our Long Term Supply Contracts
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.
Credit Risk
We have certain financial and derivative instruments that potentially subject us to credit
risk. These consist primarily of cash, cash equivalents, marketable securities, interest swap
agreements and forward foreign exchange contracts. We are exposed to credit losses in the event of
nonperformance by the counter parties to our financial and derivative instruments. We place cash,
cash equivalents,
33
marketable securities, interest rate swap agreements and forward foreign exchange
contracts with various high-quality financial institutions, and exposure is limited at any one
institution. We continuously evaluate the credit standing of our counter party financial
institutions.
In addition, we have certain restricted investments, which are exposed to credit risk. These
consist primarily of restricted investments, which are held by a subsidiary of a financial services
company to fund our estimated future product collection and
recycling costs. As of September 27, 2008 our restricted investments with this financial
services company were $25.0 million. In October 2008 we entered into a credit default swap (CDS)
against the parent company of this financial services company to protect our investment from a
significant pre-defined credit event to our counter party. Under a CDS, a third party assumes for a
fee, a portion of the credit risk related to the investment. The CDS we entered into provides
protection for losses in the event of a pre-defined credit event of the parent company of the
financial services company in the amount of $25.0 million.
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 September 27, 2008 of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as of September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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.
34
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.
We have updated these risk factors to reflect changes in the third
quarter of fiscal 2008 for the period ending September 27, 2008.
An increase in interest
rates or tightening of the supply of capital by Global Financial Markets could make it difficult
for end-users to finance the cost of a photovoltaic system and could reduce the demand
for our solar modules.
Many of our end-users depend on
debt financing to fund the initial capital expenditure required to purchase and install a photovoltaic system.
As a result, an increase in interest rates could make it difficult for our end-users to
secure the financing necessary to purchase and install a photovoltaic (PV) system on
favorable terms, or at all, and thus lower demand for our solar modules and reduce our
net sales. Due to the overall economic outlook, our end-users may change their decision or change the timing of their decision to purchase and install a photovoltaic system. In addition, we believe that a significant percentage of our end-users install PV
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 PV system, or make alternative investments more attractive relative to PV systems, and,
in each case, could cause these end-users to seek alternative investments. A reduction in
the supply of non-recourse project debt financing or tax equity investments could reduce the number of
solar projects that receive financing and thus lower demand for
solar modules.
We currently sell a substantial portion
of our solar modules under Long Term Supply Contracts, and we allocate
a significant amount of our production to satisfy our obligations under
these contracts. The loss of any of our large customers, their inability to
perform under their contracts, or their default in payment could significantly reduce our net sales and adversely impact
our operating results. These customers buy our modules with the expectation that they
will be able to resell them in connection with the development of PV systems. As discussed
above, many of these projects depend on the availability of debt and equity financing. A
prolonged, material disruption to the supply of project finance could adversely affect
our customers ability to perform under these agreements. In the
event of default by one or more of these customers, we may be unable
to sell these modules at the prices specified in our Long Term Contracts, especially if
demand for photovoltaic systems softens or supplies of solar modules increase.
Item 5. Other Information
The Company amended and restated the
employment agreements and change in control agreements with certain executive officers, to be
effective as of November 3, 2008, primarily to comply with Section 409A of the Internal
Revenue Code of 1986. With the exception of Mr. Carringtons Agreement, which had
this provision, the amended and restated employment agreements were also amended to
provide for one year of acceleration of outstanding equity awards for the executive
in the event of death, disability or termination of employment without cause. Prior
to these amendments, outstanding equity awards continued to vest for one year
only in the event of termination of employment without cause. The foregoing description of
the amended and restated employment agreements and change in control agreements does not
purport to be complete, and is qualified in its entirety by the full text
of the amended and restated employment agreements and change in control agreements, which are filed
as exhibits hereto and incorporated herein by reference. The Company
entered into amended and restated employment agreements and change in control agreements
with Michael J. Ahearn, Chief Executive Officer and John Carrington, Executive Vice President,
Global Marketing and Business Development. The Company expects to
enter into similar agreements with its other executive officers.
Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
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Exhibit |
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Incorporated by Reference |
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Filed |
Number |
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Exhibit Description |
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Form |
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Date of First Filing |
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File Number |
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Exhibit Number |
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Herewith |
10.01 |
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Amended and Restated Employment Agreement and
Amended and Restated Change in Control Agreement dated November 3,
2008 between First Solar, Inc. and Michael J. Ahearn. |
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X |
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10.02 |
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Amended and Restated Employment Agreement and Amended
and Restated Change in Control Agreement dated November 3, 2008 between
First Solar, Inc. and John Carrington. |
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X |
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31.01
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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
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X |
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31.02
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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
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X |
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32.01*
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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
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X |
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* |
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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. |
35
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.
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FIRST SOLAR, INC.
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By: |
/s/ JENS MEYERHOFF
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Jens Meyerhoff |
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Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer) |
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October 30, 2008
36
EXHIBIT INDEX
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Exhibit |
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Incorporated by Reference |
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Filed |
Number |
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Exhibit Description |
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Form |
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Date of First Filing |
|
File Number |
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Exhibit Number |
|
Herewith |
10.01 |
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Amended and Restated Employment Agreement and
Amended and Restated Change in Control Agreement dated November 3,
2008 between First Solar, Inc. and Michael J. Ahearn. |
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X |
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10.02 |
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Amended and Restated Employment Agreement and Amended
and Restated Change in Control Agreement dated November 3, 2008 between
First Solar, Inc. and John Carrington. |
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X |
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31.01
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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
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X |
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31.02
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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
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X |
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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
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|
X |
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* |
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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. |
37